Good morning. My name is Sharon, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Energizer's Second Quarter Fiscal 2018 Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to Ms. Jackie Burwitz, Vice President, Investor Relations. Madam, you may begin your conference.

Good morning and thank you for joining us. During the call, we will discuss our results for the second quarter of fiscal 2018 and our outlook for the remainder of the year, and update you on our acquisition of Spectrum Brands battery and lighting product business. With me this morning are Alan Hoskins, Chief Executive Officer; Tim Gorman, Chief Financial Officer; and Mark LaVigne, Chief Operating Officer. This call is being recorded and will be available for replay via our website, energizerholdings.com. During the call, we may make statements about our expectations for future plans and financial and operating performance. Any such statements are forward-looking statements which reflect our current views with respect to future events. We also refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in the press release issued earlier today which is available in the Investor Relations section of our website, energizerholdings.com. During our prepared remarks, we will refer to the acquisition of Spectrum's global battery and portable lighting products business as the Spectrum acquisition or the acquisition of the Spectrum business. Information concerning our category and market share discussed on this call relates to markets where we compete and are based on estimates using Energizer's internal data, data from industry analysis, and adjustments that we believe to be reasonable. Investors should review the risk factors in our Form 10-K, 10-Q and other SEC filings for a description of the key factors affecting our business. These risks may cause actual results to differ materially from our forward-looking statements. We do not undertake to update these forward-looking statements. With that, I'd like to turn the call over to Alan.

Thanks, Jackie, and good morning, everyone. In the quarter, Energizer continued to execute well and we made progress toward closing our acquisition of the Spectrum business. Planning is underway between both teams for a smooth integration. As announced in our earnings release this morning, our team delivered solid results in the second quarter, continuing our momentum from the start of the year. Adjusted earnings per share of $0.45 reflects the benefits of our portfolio optimization pricing actions around the globe, offset by ongoing investments in our continuous improvement initiatives, for which the benefits will start to materialize in the back half fiscal 2018. Organic revenue was up 1.8% as the carryover benefits of portfolio optimization and favorable pricing were partially offset by the divestiture of ASI. Excluding the impact of the ASI divestiture, revenue grew by 2.7% on a like-for-like basis. Gross margins, excluding unusuals, declined 180 basis points versus the prior year. This was due to unfavorable year-over-year overhead absorption associated with the inventory build in preparation for our launch of innovation in late fiscal 2017, unfavorable product mix driven by portfolio optimization, and higher commodity costs. A&P spending was up versus prior years. We returned to more normalized seasonal investment level. SG&A, excluding unusual items, was down $3.5 million versus the prior year, reflecting in part the continued benefit of our ongoing cost control efforts. And adjusted free cash flow in the quarter was $17 million, a decrease of almost $30 million versus the prior year, primarily due to investments in working capital in the current quarter and lapping the $19 million gain on the sale of real estate in the prior year. However, on a year-to-date basis, adjusted free cash flow was $15 million above the prior year, primarily due to improvements in working capital during the…

Thanks, Alan, and good morning, everyone. I'll discuss the financial results for the second quarter, including providing detail on net sales and gross margins in the second quarter. I'll also walk through the details of our income statement and other metrics. Finally, I'll provide an update to our outlook for fiscal year 2018. Before I get into the numbers, I wanted to call attention to a change made to our segments. Our earnings release now discloses two segments: Americas and International. This change was brought about by international organizational changes made during the quarter as part of our continuous improvement initiatives. For the quarter, adjusted earnings per share was $0.45 versus $0.50 in the prior year second quarter. The current year quarter benefited from a strong top-line performance, improved overhead, the benefit of a lower tax rate, and favorable tailwinds from currency. Total net sales for the quarter increased $15.4 million or 4.3% to $374 million. Excluding favorable currency of approximately $9 million, organic revenue was up 1.8%. The increase in organic sales was attributable to the following components: 1.3% from investments in our portfolio optimization made in the back half of fiscal 2017, and 1.2% from favorable pricing action across several markets. These amounts were partially offset by the May 2017 divestiture of the ASI business that was part of our auto care acquisition. Looking at revenues by segment, in the Americas, organic net revenues were up 2.9%, due primarily to favorable net impact from our portfolio optimization, with our lithium sales and volume up approximately 65% and 119%, respectively, and favorable pricing in a number of markets. These amounts were offset by retailer merchandising changes and the sale of the non-core promotional sales business. International organic net revenues were essentially flat as new distribution was partially offset by…

Thanks, Tim. With strong execution of results for the first half of fiscal 2018, we continue to build a strong foundation for continued success. As we continue to work towards the closing and integration of Spectrum's battery and portable lighting product business, we are confident that the Rayovac and VARTA brands will complement the Energizer and Eveready brands to build an even stronger foundation going forward. We're excited about the opportunities ahead of us and we remain focused on delivering value for our shareholders. Operator, we can now open it up for Q&A.

Thank you, sir. The first question is from Mr. Bill Chappell of SunTrust. Please go ahead, sir.

Thanks. Good morning.

Good morning, Bill.

Good morning, Bill.

Just circling back to the Spectrum deal – and I understand there's still a lot of moving parts, but to close in the second half kind of gives a nice wide six-month window. Any more kind of clarity there. I guess in particular questions we've had is on Germany or any other country that you might be getting pushed back or second notices or anything that might delay that. And then also, is the company prepared if it's as early as July, which would technically be in the second half, to close and start executing on it from there?

Bill, this is Mark. I'll cover that. We are in active discussions with all of the regulators and the markets that we mentioned. We've gotten clearance, as you know, in three of them, but then we continue to have discussions in the UK, Germany, Australia and others. I don't want to speculate in terms of the tone or tenor of those discussions because they tend to just ask questions and we continue to run the process with them. We expect to close in the second half of the year. It's a wide range because these discussions with regulators are uncertain in terms of when it's going to be closed out and when the time periods are going to run. For your questions in term of readiness, we're working very diligently with our Spectrum counterparts on integration. We just had a discussion with them last week, where we had a large working group meeting. We're going to be prepared to close in the second half whenever that arises. So, as soon as we have clearance and are able to close, we're going to be ready to do so. And that's our goal. So, I wouldn't worry that if we get clearance we won't be ready because the teams are working hard to make sure that that's not the case.

Okay. And then, back to the U.S. market in the lithium strategy. I think we're coming up on lapping that first real expansion. Can you give us just an update on how that's gone in terms of the market share versus what you expected? And then, kind of as we move into year two of that, should we expect a further expansion? Would you cut it back? How do I look at that going forward?

So, Bill, it's Mark again. On the repositioning of the Ultimate Lithium product and to remind everyone, what we did is expand the accessibility and availability of that product in our U.S. retailers. It was very well-received by both customers and consumers. Overall, net sales were up 64% in Q2, 58% year-to-date of Ultimate Lithium. We've achieved the two value share of the category, so it's been very successful. When you look at the latest 13 weeks in consumption, value is up 64% and volume is up 134% because – and as a result it has really been well-received. We would expect our teams to continue to leverage that success with our customers. We are not going to stop there and pull back. We're going to push for more and more as the quarters continue. So, I would not expect it to pull back from there.

The next question is from Olivia Tong of Bank of America. Please go ahead, madam.

Hi, everyone. This is Chris Carey on for Olivia. Thanks for taking our question.

Hi, Chris.

So – how are you? So, just on the productivity initiatives that you guys have and you mentioned moving the production facility to Singapore and the sort of cost savings that you expect there. Like how many of those do you have waiting in the wings, so to speak, if you need to offset some of these cost headwinds that you foresee on the horizon? Like how deep is that potential of projects that are there that you can pull on if you need to?

Yeah. As we've mentioned, historically, the project transformers was a major restructuring. As we move forward, we have identified a number of initiatives and a pipeline of continuous improvement both in our integrated supply chain, as well as our corporate overhead. Specifically, on the integrated supply chain, we have the move from Singapore, but there are a number of initiatives that are baked into our pipeline. And we'll balance those initiatives against our integration activities with Spectrum as we look at the sequencing of events. But we're confident in our ability to offset the volatility that we have going forward.

Okay. Thanks. And then, just I think you mentioned that category value was up nearly 4%, correct me if I'm wrong, with volumes up a little bit less than that. And it just strikes me that growth in the industry has been consistently better than this maybe secular headwind thesis. And I just wonder if you could comment, on the latest, your views on sort of the longer-term trends for category value and volume.

Yeah. Hi, Chris, Alan. It's a great question. So you're spot on. Value in the most current quarter was up just around 3.9% and that was really driven by growth in the premium price and specialty segments which is consistent with what we've seen in previous periods. The value also reflects the pricing action that was taken in several markets around the globe. So, that would be the bigger headline on the current quarter. As you look ahead, our outlook for the category – we've been pretty consistent around flat to down low-single digits. Certainly over the past several reporting periods, you've seen volume flat to slightly up. We will continue to monitor a number of trends that might provide potential upside to our outlook. And we'll continue to look at that and if warranted may make adjustments to our overall outlook. At this time, we're currently holding it. To give a little bit more color for you on why we believe there may be potential to the outlook. So, first, you're seeing a stabilization in the device universe. So, both the number of devices owned and consumption are steady and you're also seeing the conversion to battery onboard nearing maturity. Second, the Internet of Things continues to create a whole new class of devices specifically in the smart home, smart health connected device population. Many of those take smaller, more powerful batteries like AA, AAA and specialty. If you take smart home just as an example, over 50% of those connected devices require household batteries. The third thing is really just the continued miniaturization of devices. So, when you look at what's happening there in both developed and developing markets, AAA and specialty are growing as a result of powering those types of devices which means you're going to see an increase both in share of devices and share of consumption going forward. And then, finally, demographic shifts and I've alluded to this in prior calls. We know that with an aging population, greater adoption rate of hearing aid usage, more binaural usage which means you have a hearing aid in both ears, bodes well for growth of the hearing aid sub-segment within the overall category. So, if you factor those four things in around the device universe and the correlation directly to what we're seeing in volume, there is potential upside to that outlook.

The next question is from Faiza Alwy of Deutsche Bank. Please go ahead.

Yes. Hi. Good morning.

Good morning.

Good morning.

Hi. So, I just want to talk a little bit about what you're seeing in terms of the pricing environment. So, I think you had three points of positive impact from pricing last quarter. And so it's lowered a little bit this quarter. So, I just wanted to see if there was any change. And then as you see just the rise in commodities and transportation cost, what is your outlook on just the ability to take any incremental pricing sort of later in the year?

Yeah. Hi. It's Alan, and I'll ask Tim to also provide part of the answer for you. So, when we look at the pricing, over the last periods, we benefited from pricing action in over 17 markets around the globe, particularly the U.S. And that's been behind the introduction of new product innovation. It's helped us offset commodity inflation and it reflects the changes that we're currently seeing in currency rates. As a result of the pricing actions, we've been able to see overall improvement in category value, particularly in the U.S. As you look at the impact of pricing, there's really a couple of headlines around that. So first, you're seeing average unit prices to consumers actually increase as a result of the pricing in markets. That is a good thing. We've seen that hold consistent over the past several reporting periods. And from a promotional standpoint, the promotion environment, if you look at the most current quarter in the U.S., continues to remain stable. So, the percent of sales coming from promotion is relatively flat. We are seeing an increase in full price displays which is actually a good thing for the category, and the percent of batteries that are sold with some level of price decrease is actually declining. So, if you take the combination of everyday shelf pricing improving and going up and a stable promotional environment, we're very comfortable overall with where pricing is. In terms of future pricing – and then I'll hand it over to Tim to talk a little bit more about commodities – when you think about future pricing, any decisions we take on pricing, we certainly do independently. And we take a number of variables into consideration, everything from macroeconomic conditions, product inputs, category dynamics, what we're seeing around new technology and innovative products that we bring to market, certainly changes in currency rates. Anyway, we look at all of our markets for both pricing and promotion and we use that information to take any decisions on pricing that are in the best interest of Energizer. We will continue to do that based on what we're seeing around commodity inflation, what we're seeing around transportation costs. And then certainly as we bring new innovation to market, we'll also evaluate pricing of that as well. So overall, we feel we're in a relatively good place. And I'll let Tim maybe speak a little bit more to some of the commodity inflation that we're seeing.

Yes. With respect to both commodities, as well as fuel and transportation, and now the evolution of potential tariff impacts, we look at all those. And first on the commodities, as I mentioned in my prepared remarks, we do look to lock in forward commitments in the 12 to 18-month range. For the current year, we're fully locked and 25% locked for next year. Obviously, these have been headwinds in the current year. They are expected to be headwinds in fiscal 2019. So, we look at the continuous improvement initiatives that we have and the one that we called out this year is moving our manufacturing from China to Singapore, which had two benefits: one, it mitigated potential impacts from tariffs and, two, we just have better utilization at the Singapore facilities. So, those benefits will occur in the future. And so, we look at those continuous improvement initiatives to offset the volatility that we have in those cost categories moving forward. And as Alan pointed out, additionally, those would be factors that likewise come into play in our decision factors of potential pricing actions in the future. In particular, I'd indicate with tariffs, that would be a consideration of potential future pricing actions as well. And then likewise, we'll look at potential sourcing changes as the tariffs become finalized and we have a clear view of what those will be in the future. But again, our focus is really on driving productivity to reduce our operating costs to offset the volatility that comes from those factors.

Great. Thank you. And then, just one other thing on the Spectrum transaction. So, first of all, congratulations on getting approved in the U.S.

Thank you.

Can you talk about what you – like was there a specific model that you'd maybe propose to the FTC? Sort of how are you envisioning running these two brands along with private labels sort of in the U.S.?

So, I think what we presented in the U.S. was just why we believe that this transaction is beneficial to both our customers and our consumers. And as they analyzed it and they dug into the details themselves and asked clarifying questions, they ultimately arrived at that decision. I don't want to speak for the regulators in terms of why they ultimately cleared the transaction. In terms of modeling of what we're going to do with these businesses going forward, we'll leave that to subsequent discussions when we actually own the business and can provide our strategic outlook for it. But we are excited to have the manufacturing capacity that Spectrum has. We're excited about the Rayovac and VARTA brands and what we can do with them.

The next question is from Mr. Kevin Grundy of Jefferies. Please go ahead, sir.

Thanks. Good morning, guys.

Good morning, Kevin.

Good morning, Kevin.

Two questions, the first one more detail-oriented. Tim, can you help us – so your guidance implies some material improvement in gross margins in the back half of the year. Can you help us with some of the key drivers there? So, commodities and freight higher than you had expected before. You should get some benefit from pricing. It sounds like productivity will be a bigger contributor than it was, at least in the quarter, if not in the first half of the year. You're looking to drive favorable mix, and then there's going to be some FX in there. But I just want to make sure I'm thinking about this appropriately in terms of the magnitude of the improvement that's implied in your guidance and how you get there, given the larger headwind from commodity and freight. And then, I have a follow-up.

Sure. So, Kevin, as the year kind of unfolds, as you'll recall, last year, we began implementing the portfolio changes. And so, we made investments beginning in the latter half of the year. So, as we look at moving forward in Q3 and Q4, we'll be lapping those investments that were made in the back half of the year. The one, obviously, headwind that we have is lapping the hurricane activity. But that will be a significant benefit as we have the benefits of lapping that investment and the portfolio optimization. We're also getting the benefits of pricing actions that were taken. As you recall, the majority of the U.S. occurred beginning in the fourth quarter of last year and really lapping over into Q1 of fiscal year 2018. So, that'll be a tailwind for us as well. And then likewise, we have identified the benefits of currency that are a tailwind for us in fiscal year 2018.

Okay. Is there anything you can quantify for us, Tim? Commodities and freight are going to be X-basis-point headwind offset by pricing of X basis points. So, you don't carry particularly that level of detail on the call.

Yeah. We don't really get into that level of detail.

Okay.

This concludes the question-and-answer portion of the call. I would now like to turn the conference back over to Mr. Alan Hoskins for any closing remarks.

Thank you, operator, and thank you for everyone joining us on the call today and for your continued interest in Energizer.

Ladies and gentlemen, thank you for joining. You may now disconnect your telephones.