Energizer Holdings' CEO Discusses F2Q12 Results - Earnings Call Transcript

| About: Energizer Holdings, (ENR)

Energizer Holdings, Inc (NYSE:ENR)

F2Q12 Earnings Call

May 2, 2012 10:00 pm ET

Executives

Jackie Burwitz - VP, IR

Ward Klein - CEO

Dan Sescleifer - EVP & CFO

Analysts

Wendy Nicholson - Citi Research

Chris Ferrara - Bank of America

Bill Chappell - SunTrust

Nik Modi - UBS

Ali Dibadj - Bernstein

Alice Longley - Buckingham Research

Bill Schmitz - Deutsche Bank

Jason Gere - RBC Capital Markets

Connie Maneaty - BMO Capital Markets

John Faucher - JPMorgan

Operator

Good morning, my name is Stacey and I will be your conference operator for today. I’d like to welcome everyone to the Energizer Holdings Incorporated Fiscal 2012 first quarter earnings results conference call. (Operator Instructions)

I’d now like to turn the conference call over to Jackie Burwitz, Vice President, Investor Relations. You may now begin your conference.

Jackie Burwitz

Thank you, Stacey and good morning, everyone. Thank you for joining us on Energizer’s second quarter fiscal 2012 earnings conference call. With me this morning are Ward Klein, Chief Executive Officer; and Dan Sescleifer, Chief Financial Officer. This call is being recorded and will be available for replay via our website energizerholdings.com.

During our prepared comments and the question-and-answer session that follows, we may make statements expressing the beliefs and expectations of management regarding our future plans and performance including future results or events, future earnings, investment or spending initiatives, future advertising and promotional spending, cost savings related to our restructurings and working capital projects, the impact of certain price increases, currency fluctuations, the impact of inflation, raw material and commodity costs; and category value and future volume and sales; future plans for return of capital to shareholders and future growth in our businesses.

Any such statements are forward-looking statements, which reflect our current views with respect to future events and are based on assumptions, and therefore are subject to risks and uncertainties. These risks, uncertainties, and other factors may cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements.

These risks and uncertainties include, without limitations, those described under the caption Risk Factors in our Annual Report on Form 10-K filed November 22, 2011. We do not undertake or plan to update these forward-looking statements even though our situation may change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is shown in the press release issued earlier today which is available in the Investor Relations section of our website, energizerholdings.com. Management believes these non-GAAP measures provide investors valuable information on the underlying growth trends of the business.

With that, I’d like to turn the call over to Ward.

Ward Klein

Good morning and welcome to Energizer's second quarter fiscal 2012 earnings call. As you may have noticed from our three press releases this morning we have a lot of news to report today. First Dan Heinrich has been named to our Board of Directors. Many of you may know the Mr. Heinrich, the retired Chief Financial Officer of Clorox. His extensive experience in the consumer products industry and broad-based financial expertise will provide additional insight and perspective to our board discussions.

We are very pleased to have someone with Dan's background and financial expertise on our board. In addition, we also announced that our Board of Directors has authorized the initiation of a dividend program, the first in Energizer's 12 year existence as a publicly held company.

Dividends under this program are subject to a declaration of a dividend by the Board of Directors. Subject to this declaration, a quarterly dividend of $0.40 per share would be paid in September 2012 and implies an annual dividend rate of $1.60 per share. On an annual basis, this represents a cash outflow of over $100 million dollars resulting in a payout ratio of approximately 25% of our expected fiscal 2012 net earnings. This level represents a payout ratio of over 40% of the roughly $250 million per year of US cash flow that we generate. And we believe this is a prudent level of which to initiate such a policy.

We believe that initiating a dividend at this level will be meaningful to our shareholders and provides sufficient financial possibility to continue making opportunistic share repurchases and bolt-on acquisitions. Accordingly our board has also approved a share repurchase authorization of 10 million shares. The decision to initiate a dividend and the payout level was given careful consideration. We listen to our shareholders in order to better understand their review of Energizer and how we can best deliver their value back to them.

As you know capital allocation policy is an important element in delivering value and historically we have relied solely on an opportunistic repurchases in this regard. We believe that now is the appropriate time to augment our share buyback program with a dividend in order to enhance the overall value delivered to our shareholders. This will provide an element of yield and certainty of return which is highly valued by our investors today. Now I will turn the call over to Dan.

Dan Sescleifer

Thanks Ward. Before reviewing the second quarter results I would like to first highlight an important internal initiative that is underway. Over the past year we conducted a study to evaluate our networking capital levels and identifying opportunities for improvement. Historically our working capital metrics have not compared favorably with many companies in our peer group. There are a number of structural reasons why our working capital is higher than other HPC companies.

Global versus domestic footprint, worldwide manufacturing centers of excellence versus local and market production and products such as batteries and sun care which have highly seasonal demand patterns. Despite these structural reasons we believe that there are opportunities to improve our working capital performance. However there have been other priorities such as major product launches, restructuring projects and the integration of acquisitions where we have focused resources.

Now with the launch of men's Hydro in a more mature stage, the 2011 restructuring of the battery manufacturing footprint is mostly complete and integration of American Safety Razor almost complete, we believe that the time is right to place a higher priority on working capital improvement.

We have identified opportunities to improve our working capital investment in all three major working capital categories, day sales outstanding, days in inventory and days payable outstanding. We have established the following targets as a result of our analysis. In improvement, working capital as a percent of net sales in excess of 400 basis points defined as trailing-12 month average of accounts receivable plus inventory minus accounts payable over annualized net sales.

Based on fiscal 2011 totals, this would equate to a targeted working capital reduction in excess of $200 million. The steps needed to achieve the objectives in each working capital area are varied, but we anticipate immediate progress and expect to have all necessary changes in place by the end of fiscal 2013 allowing us to see the full benefits on a trailing-12 month basis by the end of fiscal 2014.

There will be investments required to achieve this improvement but we do not believe that such investments will be operationally material. We have also decided to make our financial statements more transparent so that our working capital levels can be more easily understood and monitored by investors. When you read our 10-Q filing, you will see that we have made certain balance sheet reclassifications that impact reported trade receivables with equal and offsetting changes to other balance sheet items.

The reclassifications are not part of the working capital improvement and cash savings noted as they are just balance sheet location. We have adjusted our baseline measures to reflect this go-forward reporting methodology to ensure our targets are focused on real cash savings. We are in the early stages of this important initiative and we will keep our investors and analysts apprised of our progress.

Now onto second quarter results. Earnings per share were $1.17 versus $0.55 in the second quarter of fiscal 2011. Excluding unusual items earnings per share were $1.22 in the second quarter of fiscal 2012 versus $1.04 in the second quarter of 2011. Net sales for the quarter increased $67 million or over 6% driven by organic growth in both personal care and household products.

The gross margin for the quarter was up 140 basis points at 46.9% percent due to favorable product mix and lower household products trade spending. Advertising and promotion as a percent of net sales was up slightly at 10.1% versus 9.7% last year. A&P spending increased $11 million in the current quarter due to the new product launches in wet shave and the timing of other A&P initiatives. Selling, general and administrative expenses increased $15.4 million versus last year's second quarter due to higher costs resulting from an increase in underlying market value of certain unfunded deferred compensation liabilities which was driven by the appreciation of the financial markets during the quarter, higher amortization of stock awards and higher actuarial pension expense driven by lower market discount rates.

Now turning to divisional results. In personal care, organic sales growth was a very strong 6.9% driven by higher sales in wets shave which increased 11%. The organic sales growth was driven by the launches of Schick Hydro Silk women's systems and Schick Hydro Power Select men's razors. Higher Schick men's Hydro men's blade refill sales, lower promotional spending low and higher shipments of Edge and Skintimate.

Legacy men’s and women’s systems sales declined as expected and disposable sales were relatively flat behind higher volume of Xtreme3 and Quattro disposable, which is mostly offset with higher promotional spend. Outside of our Wet Shave segment, net sales in skin caring increased 4% on significantly higher volume due primarily to the timing our shipments in the early stages of the skin care season, partially offset by hair promotional and trade spending.

Infant care sales decreased 11% due to category softness, heightened competitive activity and timing of shipments. Fem care sales were relatively flat, as higher volumes were offset by higher promotional spending and unfavorable product mix. Segment profit grew 3.6% operationally reflecting higher gross margin on the wet shave sales growth partially offset by increased A&P behind the launch of Schick Hydro Silk and increased overhead spending.

We expect A&P spending for the remainder of the year to increase as compared to the first half of 2012, most notably in the third quarter when spending should be in line with prior year quarter due to the support of Schick Hydro Silk and Schick Hydro Power Select launches. Turning to household products, net sales increased 6% for the second fiscal quarter versus a year ago driven by the previously announced price increase in the US, the timing of shipments of selected retailers increased inventory levels ahead of this price increase and a comparatively soft prior year quarter which included elevated retailer trade spending which is not repeated in the second fiscal quarter of 2012. Segment profit for the quarter was $59.1 million, up $16.9 million or 32.4% versus the same quarter of last year.

Operationally, segment profit improved $19 million or 36.4% due primarily to the top line gains noted above. On a year-to-date basis household products net sales decreased almost 1% with about half of the impact due to unfavorable currencies. The organic sales decline of 0.4% was due primarily to a slow start to the fiscal year in the first quarter as net sale were adversely impacted by a shift in the timing of holiday deliveries and a de-load of unused hurricane response inventories shipped in the prior year, in the US.

Segment profit for the six months increased approximately 2.4 million or 1.2%. First quarter declines, due to top line softness were offset by pricing gains and reduced retailer trade spending realized during the second quarter. With that overview of the quarter, I will now turn the call back over to Ward.

Ward Klein

Thank you, Danny. No I will walk you through each of our businesses and the key factors that are impacting them. In Personal Care, a key focus this quarter has been the launch of Schick Hydro Silk and Schick Hydro 5 Power Select. Schick Hydro Silk was launched in North America and Japan and Power Select was launched in North America, Japan, Australia and Taiwan.

While we are still early to launch Hydro silk, we are very pleased with the results today. In store execution has been excellent due to strong support from our trade partners, distribution is building in line with our aggressive expectations and the launch has been highly incremental to our women’s business in the category this quarter.

We do, however, anticipate a fair share of cannibalization as to trial and repeat grow later in the fiscal year. Similarly, Schick Hydro 5 Power Select is off to a strong start in all markets where we have launched and its help drive incremental refill blades sales. For the hydro franchise, refill volume sales continue to grow double-digit across all markets where we have launched. Consumer satisfaction continues to be very high and consumers who try the product are converting at record rates.

Now Hydro trends are positive, legacy men brands are under pressure due to both anticipated cannibalization and highly competitive activity in the category. For the quarter and year-to-date, the Hydro men’s franchise has driven solid profitable growth, delivering the return on our 2011 investments as planned. At the same time, we are continuing to invest behind the brand to further drive trial awareness and conversion to refills through line extensions and effective advertising and promotion which we believe will drive sales and profit growth going forward.

Our shave-prep sales grew in the quarter with solid shipment growth across all three major brands Edge, Skintimate and Hydro. Volume shipments increased this quarter behind strong commercial campaigns including the Skintimate limited edition cross promotion with Hydro Silk launch in US and Hydro Gel cross promotion with a Power Select launch in Japan.

Moving on to other categories we are well positioned in Sun Care as the key consumption season nears. Due to Easter time and planogram changes, shipments shifted more into the second quarter of this year versus last year. Initial consumption data in our new products such as the Hawaii Tropics Silk Hydration and Banana Boat Cool Zone is encouraging as this is our really season market share. International sales also grew year-over-year across all areas.

In fem care, we unveiled the new Playtex Play On advertising campaign with three new sport ads in February. Sales were relatively stable reflecting strong volume growth on our sport tampon brand, flat growth in general volume offset by higher promotional spending in some unfavorable mix. The actual plan we developed last year included a new packaging restage, a new advertising campaign, [RV] executed as planned in our delivering results we expected. While competitive activity has increased recently, we continue to support these brands.

Finally in infant care, we experienced sales declines across all our product categories in the quarter. The category remains in decline behind macro economic trends and lower birth rates. Competitive activities also remains heightened in new product launches and higher spend levels. Turning to our house hold products division, we rebounded from soft start to the year in the first quarter with strong second quarter performance. Net sales were up 6%, non-operating profit was $16.9 million above prior year. These gains resulted in year-to-date operating profit increasing $2.4 million or 1%. Although the overall household battery category continues to experience volume softness, we continue to see positive signs where overall category values are stabilizing. Category value was nearly flat versus a year ago as a result of higher retail pricing and less promotional activity.

In North America, top line sales were strong due to recent pricing actions, timing of shipments, increased inventory levels of selected retailers and an overall soft prior year quarter comparison. Top line gains flow through to the bottom line and drove most of the divisions operating profit upside for the quarter.

In addition, total category value improved versus a year ago level as the overall level of promotional spending decreased. Our previously announced 6.7% (inaudible) currency price increase has been successfully executed and we have seen retail price points increase at key retailers with category average unit prices up 9%. We did however experience a moderate share loss during the quarter. We understood that leading pricing could result in some share shifts. Nevertheless, we remain confident in our strategies.

Turning to Asia, we continue to experience top line softness in some of our key markets. Although our share position remains strong, our shipments have been negatively impacted by overall battery category declines in certain markets. In addition, the competitive environment continues to be fierce which has led to some pricing declines. We anticipate that balance of the year will be challenger in Asia as we (inaudible) strong prior year results but we aim to return to a growth trajectory as we leverage our very strong Energizer and Everready brand equities. We capitalize on overall favorable economic trends. We are in the best position in lead battery category growth across key Asian markets. In Europe, top line results have stabilized. We have remained focused on reducing on cost of promotional spending and these efforts are beginning to positively impact the revenue line. In addition to share growth and selected key markets has offset declines in other markets most negatively impacted by the economic crisis.

Finally trends in Latin America have remained relatively unchanged as we are able to offset inflationary increases with pricing gains. Looking forward as noted in our release this morning we reaffirm our fiscal 2012 earnings guidance of $6 to $6.20 per share. We expect earnings per share for the third fiscal quarter to be lower than the prior year quarter due primarily to the timing of advertise and promotional spending behind our new wet shape product launches as well as some expected retail battery inventory deload due this quarter to purchases made prior to the price increase that went into effect February 1.

Now Dan and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Wendy Nicholson with Citi Research.

Wendy Nicholson - Citi Research

My question has just go to the conversation about working capital which I think is so exciting because I know for a long times you guys have been challenged on your relatively high levels of working capital but I wanted to ask. first of all, on why now, why the change I think in the past you've been fairly defensive and straightforward about saying hey our working capital levels are where they are for a reason. So what's given you sort of the fresh perspective that hey there's this big opportunity for change and along with that as you in particular on the inventory side, skinny down those inventory levels, is there going to be inventory draw down that affects your capacity utilization and therefore your margins on any other particular businesses over the next couple of quarters?

Ward Klein

Let me maybe start answering that and then I’ll turn it over to Dan if can’t Wendy. From a timing point of view, we’ve been pretty transparent about our working capital position, probably worst in class and we don’t say that proudly. But we have had a other priorities before say over the last three years and it may sound odd, but really the focus last year in terms of both resizing the battery production footprint along with nailing the launches of Hydro along with integrating the American safety razor. We just had a lot in our plate.

And as each of those sort of activities sum up, this is the project that we’ve been mindful of and wanted to tackle. And it’s not that we are sitting on our hands Dan and the team brought in some outside consultants with a fresh perspective on how we look at things. And really I think as a result of internal work and some of that external work a pretty exciting opportunity is before us and to that I’ll turn it over to Dan.

Dan Sescleifer

Yeah, Wendy on your question about we anticipate capacity utilization issues, I think no, I mean if you will see when we’ll file the Q, which will be in the next couple of days that we’re brining inventories down; we have increased those last year in anticipation of closing the manufacturing facility on the battery side.

We just expect to keep those lower you know going forward and I guess the worst point about now the timing is best simply because we don’t have a product launch which is increasing our inventories or our restructuring project. We also felt that it was very difficult internally to analyze what are proper terms would be internationally; what are inventory days should be internationally as well with our global footprint.

And so we brought somebody into to do some very perspective analysis and look really closely at kind of with a lot what our peers are doing and what was standard in the industry and there were some good learning out of that and we are putting those in place and that’s going to be part of reason we are going to get the savings.

Wendy Nicholson - Citi Research

Is there more opportunity on the personal care side or on the household side just looking at working capital in totality?

Ward Klein

You know I am not sure there is that big of a difference between the two of them. If you think there is an opportunity within sun care because of highly seasonable business and we have some promotion skews every year that we know we had opportunities, but batteries are highly seasonal as well as we have opportunities there.

If you think about that it in markets outside of US are really combined commercial entity so these opportunities with terms to customers are probably equal for both and on the payable side, we are really centralizing that and going to more of a global standard on payable. So I would say they are probably equal, but you know overall between the two.

Operator

Your next question comes from line Chris Ferrara with Bank of America. Please proceed.

Chris Ferrara - Bank of America

I wanted to ask about battery pricing, I mean you sound pretty good you know that the 6% to 7% price increase has been executed. Can you talk a little bit about I guess it looks like Rayovac position not to follow that and you know they have talked against pretty aggressively and maybe think of a share in Wal-Mart, can you confirm or can you confirm that flush out a little bit and what has been the impact I guess of that price spread not following relative to your total execution of pricing in the category?

Ward Klein

You know obviously we don’t ever talk about specific customers and in the case of Rayovac what they are doing on pricing and revert back to you talking to them about what they are doing on pricing. You know as we have reiterated, we successfully got the pricing through in all our customers, I mean all our customers; Duracell followed on all those customers and so the two premium brands which typically 70% of value category have implemented the price increase. We think it’s a right think from category. We think it’s a right thing even for our retail customers those who care about things for sales growth and improving their gross margins.

And obviously it was done in response to the cost pressures we've been facing in the past 18 months, so we think it stopped. We’re happy with where it’s at; what some of the smaller competitors are doing is something really you kind of need to talk to them about.

Chris Ferrara - Bank of America

And I guess from the blades and razors perspective, I was just wondering does your guidance contemplate actions that P&G is kind of hinting at taking to give on the last conference call by saying, I guess they think they are responding to what they see as unprecedented levels of promotion in the blades and razors category. I mean how do you respond to that and does your guidance contemplate that you are going to see heightened competition from those guys in blades and razors?

Ward Klein

When it comes to heightened competition, I think its kind of our bread and butter in that category. I will say this, we are a little perplexed on some of the comments and I guess for a couple of reasons one, we just got done implementing our price increase in March on our razor and blade line of between 4% to 10% including a price increase ranging from 3% to 7% on Hydro. So that price increase which was announced I think this past summer, we've implemented or done with it in March. So the comments are kind of in the face of that.

In terms of promotional levels and maybe that was where the concern was, our promotion levels on retails right now are down versus a year ago by about 61% of our deal done to 42% and a lot of that is just financial cadence as you work off of the new product launch activity to a more of an ongoing promotional approach which you know we look to data that's certainly what we’ve been doing.

There is a some high promotion activity going on right now on the new items, you know whether its are hydro power launch or their trimmer kind of launch, but that’s just kind of the normal course of thing. You will see it also on Hydro Silk for women, but its kind of natural curve when you introduce some new product and SKU and you spend a lot up front in terms of generating trial and awareness (inaudible) overtime and that tapering down overtime is not only SKUs that we implement that go in the original Hydro launch. So it is something that we’re watching; we are obviously the (inaudible) grower in the marketplace it strikes us as it is a little bit odd based on the facts I just shares with you, but we’ll be prepared to do we have to do.

Operator

Your next question comes from the line of Bill Chappell with SunTrust. Please proceed.

Bill Chappell - SunTrust

Can you maybe just give us a little more update on commodity pressures you are seeing now and just kind of how that change over the past few months that you’ve talk about price increases on wet shave side; didn’t know if there is anything else driving those price increases or things are starting to look more steady?

Dan Sescleifer

Yeah, Bill this is Dan. We’re really not seeing a whole lot in the commodity side; you know we’ve had some un-favorability within household through the first two quarters of about $8 million unfavorable and we expect it to be relatively flat year remaining and nothing of note on the personal care side.

Bill Chappell - SunTrust

And I kind of missed, tell us what the headwind or tailwind on currency is for the remainder of the year and how that’s changed?

Dan Sescleifer

Its been trailing negligible for the first two months; we’re expecting it to be about $23 million; this is on segment profit level for both of the businesses for the latter half of the year.

Bill Chappell - SunTrust

And then finally just kind of on the use of cash for the dividend and share repurchase. Can you reason why there was no share repurchases in the quarter and then in does this all kind of cited, you’re really not as focused on acquisitions unless something really opportunistic comes along?

Ward Klein

You know in terms of share purchase in the quarter again as you know from our long term history, it’s pretty much opportunistic and so we just look at a lot of different factors and those factors comes first to buy more share this past 90 days basically.

And you know as for acquisitions, this gives us still plenty of dry powder both for share and the dividend. It still gives plenty of our count four opportunistic share repurchase go forward but also bolt-on acquisitions. You know I think obviously it will get more problematic, you are talking about something going $1 billion plus kind of range, but frankly we are just not seeing anything out there; it’s been fairly quite in our space and kind of products that we won’t look at and so from a bolt-on point of view we still feel we have flexibility in that regard for the right deal, right country, right time.

Operator

(Operator Instructions) Your next question comes from the line of Nik Modi with UBS.

Nik Modi - UBS

Just a quick, Ward I know you don’t want to comment on specific customers and Rayovac, but I just want to make sure that I have this right. My understanding is that they did follow in many retailers just not one very large retailer; is that true and I just have a quick follow-up?

Ward Klein

Maybe I would characterize it as it looks like they have followed in some and not others.

Nik Modi - UBS

And then the second question, I guess more for Dan, now that you have more bandwidth and you're looking into this working capital I just wonder if perhaps there are initiatives going on or you will be looking at maybe areas to this save more on the SG&A side or other parts of your cost structure if you can provide any context there?

Dan Sescleifer

You know on SG&A we really do always look at them and I think one of the elements of our SG&A which can be characterized as relatively high versus peers is the domestic versus international footprint. So if you think about half of our sales are in the US or we have two affiliates. So there is a lot of scale benefits from that and we have 48 affiliates outside of North America which just have smaller footprints. They are justified, they are profitable and that makes sense, they have brick and mortar affiliates. But it's just the scale issue when you go internationally and so just very roughly you know within the US, in Canada it's about 10% of sales at the divisional levels, our SG&A and when you get outside of North America, it's around 20%. Now some of that is going to be high social costs in Europe or just you now more expensive to do business, but a lot of it is just really a scale factor with the sizes of the affiliates.

Operator

Your next question comes from the line of Ali Dibadj with Bernstein.

Ali Dibadj - Bernstein

So Ward, I know you weren't a huge fan of a reporter who wrote a few weeks -- a few years ago actually by now. I mean other pushing and calling for changes in Energizer, but I got to say we really you know applaud a lot of the changes that you made. The restructuring, the dividend, the buybacks this reducing working capital piece, the new board member is great, better communication et cetera, but I guess you also know it by now and we are always looking for a little bit more and so I'm just try to get a sense of two things in that context of improving what you do for shareholders.

One is what your thoughts are on the progress of the dividend going forward. So are you believing that it should grow with earnings you know keeping the payout ratio the same or how you think about that going forward and secondly if you see feminine care and infant care as best serving shareholders as part of the company or is being sold outside the company?

Ward Klein

You know two good questions. On the dividend strategy, obviously we believe the dividend level that we have initiated is meaningful and a good starting point and I think our focus for going forward will be kind of payout ratio of cash earnings. But we are not in a position to having just started dividend for the first time in our company's history really to talk about where is it going to go from here. So we are happy with what we are starting out and obviously a lot depends on a lot of factors as you go forward both in terms of our net earnings growth, other uses of cash being bolt-on acquisitions, share repurchases that are opportunistic. So we rather kind of just leave what we have done as it is. And so on the second question, maybe I will let Dan.

Well fem care and infant care they are not bad businesses, they are just not as big or as material to our overall portfolio. In that sense what is the best role for those businesses from a shareholder point of view. Right now they do generate positive earnings, they do generate positive cash flow, they do have pretty strong market share positions in the markets in which they compete. Fem care has had some challenges in the past and based on what we are seeing and the actions we have taken is improving actually.

Infant care was actually held up quite well during the great recession. And now we are seeing some residual weaknesses as growth rates have gone down and there is a lot of barriers to entry in that category, so there is some short-term competitive activity. We are prepared to keep those businesses and manage them for cash and earnings and grow where appropriate. You know as with anything you always look at your opportunities going forward, but to do something else with them you always have to value tax leakage and breakage.

And in the end it really is kind of a numerical exercise and what's the best value for shareholders. Right now the best value for shareholders is to manage them the way we are and to grow them as best we can.

Ali Dibadj - Bernstein

Two quick just more housekeeping questions. One is if you can give a sense maybe Dan it is for you about what the impact was of sell-in in the quarter for batteries both top line and bottom line and the other was just a very quick clarification on your Q3 guidance "being below last year", is that on adjusted basis, on a reported basis that's going to be below last year?

Dan Sescleifer

Hey Ali, the second question, it's on an adjusted basis versus a year ago and then on sell-in, our estimate is, it's about $10 million of sales and about $5 million gross margin was the sell-in just ahead of the price increase.

Operator

(Operator Instructions). Your next question from the line of Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

My question is mainly on batteries as well. Can you tell us how much the battery category you think grew in value in volume terms in the US, Europe and globally?

Dan Sescleifer

Yeah I can. You know globally I'll start with maybe globally on terms of the battery category and right now what you're seeing based on our data, the most recent 12-week, with the 12-week data is globally household batteries is basically flat, actually up you know 2/10ths of 1% in terms of value. Units are down 2.2% and if you break that out to the different areas you know we kind of look at North America and North America as a value is up 1.7%, that be both US and Canada of course and a lot of that had been driven by over 2% value growth just in the US based on all the pricing initiatives we've taken over the past 18 months. The units are still down but they are down I think around 8% or so for North America.

A lot of that is we are just starting to now annualize out of that pack up size in (inaudible) which was obviously heavily impacted on units. So I think that will get to a more normalized level as we annualize through that. Asia, we called out Asia last couple of calls, the category we are seeing, the value actually down slightly like 1% unit basically flat. That's unusual for Asia. We normally like to see value growth out of Asia.

So that speaks to a few of the markets where we've seen some recent softness about six months. Europe obviously challenged with value down but interestingly really only down about half a point and just get off to revalue data in Latin America, the markets we covered we were showing up 1% in value. So kind of hit and miss but not outrageous growth by any means but certainly more healthy and stable than what we've seen over the past four years.

Alice Longley - Buckingham Research

What do you think that unit growth for the industry in North America normalizes at?

Ward Klein

I would hope flat but to be realistic maybe flat to down to would be an expectation but so based on a lot of factors.

Alice Longley - Buckingham Research

And when do we start seeing that when in the June or September quarter?

Ward Klein

Well, I think I would hope you would start seeing, you getting closer to that in the next couple of quarters as we like I said annualize through the pack up size and that would be our expectation.

Alice Longley - Buckingham Research

And then one other question. Was there any forward buy-in blades ahead of the pricing there?

Dan Sescleifer

Not materially, not as much as we see, we think we saw on battery side.

Operator

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Can you just give a little bit more granularity on our third quarter guidance, for instance do you think reported sales would be down in a quarter just because the comparison are a little bit tougher.

Dan Sescleifer

You know (inaudible) I am sure we are going to give sales guidance. It’s really more a function of just the higher A&P versus really the first two quarters of the year in support of the product launches in wet shave. What's interesting is just kind of little maybe a little commentary on the phasing of A&P because for the full year, we expect to be below a year ago, because a year ago we stated before as the year of investment but its very much lower in Q1 and Q4 but when you look at Q2 and Q3, its actually equal or above and so its really just punching the A&P in the middle part of the year that's really kind of driving what's going on in Q3.

Bill Schmitz - Deutsche Bank

So when you said the A&P was going to be flat, that wasn't just for the Personal Care business. That's a company wide number.

Ward Klein

That’s just total. So we basically, the best comparison if you just look at Q3 in 2011, it’s going to be really similar to that.

Bill Schmitz - Deutsche Bank

Ratio or?

Ward Klein

Dollars.

Bill Schmitz - Deutsche Bank

Dollars, okay. And then in terms of like the commodity, I know the question was already asked but a commodity exposure in the back half of the year. It seems like I think it’s still kind of rolling over. So why won't there be a little bit of a commodity benefit as we it through into the back half.

Ward Klein

If you recall, especially with zinc, we have a hedging program where we kind of dollar cost average over 16 to 18 months and what's really happened is just the spot prices and the average prices have really conversed just based with our hedging program what you are seeing in the market.

Operator

Your next question comes from the line of Jason Gere with RBC Capital Markets. Please proceed.

Jason Gere - RBC Capital Markets

Good morning. I guess it’s like a combination of some of the question from before but obviously with the third quarter EPS down your setting yourself up again for the fourth of this year to be pretty significant like over 30% to kind of get to the mid point of range on top of 30% last year. So I know you kind of talked about some of the puts and takes here, I mean is it going to be the lower advertising or do you see really the high and accelerating organic sales. Is really the driver that gets you there? The comfort level with keeping the guidance of 6 to 620. So if you can maybe kind of sum it up with a lot of that short answers that you’ve give before, but how you kind of get there because its just seems again, fourth quarter sets you up for another really strong comparison. Thank you.

Dan Sescleifer

Jason that’s exactly right I mean it really not driven by topline sales. It’s really driven by spending on the A&P line.

Jason Gere - RBC Capital Markets

So when think about the A&P is it going to be down significantly versus the prior year? I think you were saying that full year would be 10.5. So I am just trying to think about that?

Dan Sescleifer

The most specifically you want to get it is on the full year guidance. You know we reaffirm 6 to 620 range but we didn’t want to provide just some direction on Q3 and Q4 and that’s really our wanted to do at this point is it just lower in Q3 and higher in Q4, really driven much the A&P facing.

Jason Gere - RBC Capital Markets

Okay, and just lastly. I mean would some of that shifted again on the promotional side maybe as a little bit more defensive if, you know, your largest competitor does get a bit more aggressive and you start to see a little bit of softness on the wet shaving side. Did that give you that question?

Ward Klein

I am not sure I would characterize it that way. What we are kind of showing with you is really what are plan spending is based on new product launches, seasonality of the categories and the opportunities before us and obviously we tweak that weekly, monthly and quarterly based on the realities in the marketplace, I think I’ll just leave at there.

Operator

Your next question comes from the line of Connie Maneaty with BMO market. Please proceed.

Connie Maneaty - BMO Capital Markets

I read a column in the 10K that came out at the end of last fiscal year. For the first time you gave what you thought was a long-term outlook for the earnings per share growth and if memory serves it was mid-to-high single digits. And what I would like to know is do you still believe that that is the most likely growth rate for the company given what could be a positive gross margin impact over the longer-term from more efficient working capital?

Dan Sescleifer

You know Connie I think what you are referring to is the proxy where we talk about the comp plan where we targeted 7% EPS growth. I don’t believe we disclosed anything in the K. And yeah, we expect to see some benefits clearly from the working capital program. Those are going to be one-time benefits recurring once we reduce the working capital. We intend to keep it there, but it’s going to be a one-time impact. But I don’t think we provided any guidance on earnings growth for sure.

Operator

Our final question comes from the line of John Faucher with JPMorgan. Please proceed.

John Faucher - JPMorgan

Just want to follow-up a little bit on the dividend; when you talk about it earlier on the conference call you talked about it as a percentage of net earnings but also as a percentage of free cash flow. And so you’re talking about improving working capital which again is great.

So as we look at that should we track the dividend more on a traditional payout ratio versus net income or are you looking at this as a percentage of free cash flow and say if you have great working capital performance you might consider potentially growing the dividend faster than net income? Thanks.

Ward Klein

Obviously with the capital project, other opportunities growing faster than we planned all play a part in future dividend payout decisions. But as I said earlier, we don't want to really speculate on that. I think one of -- and I will turn over to Dan maybe in a moment here, but I think one of the key other factors to consider is how much of our cash flow is US based versus how much is overseas; because under current tax law as you know the overseas cash is trapped.

And so we have to look at what percent of US cash flow we think is a prudent amount to go in dividend along with the other opportunities we have before us. Again share repurchase also having to come out of US cash flow, interest expense and debt pay down, mostly US debt came down in US cash flow, so these are just some of the considerations as we said. Dan you want to….?

Dan Sescleifer

The only thing to add to that is John it’s really a function of payout, but if you look historically our cash flow conversion has been fairly close to 100%. So cash flow and earnings for us we are talking the same thing, but it’s really payout would be the metric that we would focus on.

John Faucher - JPMorgan

And then one quick follow-up here. You talked about the international versus domestic cash issue and I apologize if you said this before, I didn't pick-up on it. In terms of the working capital improvement what percentage do you think is US and what percentage is international?

Ward Klein

I am not sure we can answer that other than about half our business is overseas and half of it is US. So we think it would be 50-50 but…

John Faucher - JPMorgan

Well, there's nothing you look overseas and you say, oh my god we've got this massive working capital problem here…..

Ward Klein

No, it’s not like that.

John Faucher - JPMorgan

An opportunity across the entirety of the business.

Ward Klein

So it’s more systematic.

Operator

And that was our final question. I will now turn the call back over to Ward Klein for closing comment.

Ward Klein

Okay. We just like to thank everyone for joining us today and I think that concludes our call. Thank you.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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