Prestige Brands Holdings' (PBH) CEO Ronald Lombardi on Q3 2018 Results - Earnings Call Transcript

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About: Prestige Brands Holdings, Inc. (PBH)
by: SA Transcripts

Prestige Brands Holdings, Inc. (NYSE:PBH) Q3 2018 Earnings Conference Call February 1, 2018 8:30 AM ET

Executives

Phil Terpolilli - Director of Investor Relations

Ronald Lombardi - Chairman, President and Chief Executive Officer

Christine Sacco - Chief Financial Officer

Analysts

Joe Altobello - Raymond James

Jon Andersen - William Blair

Jason Gere - Keybanc Capital Market

Linda Bolton Weiser - D.A. Davidson

Frank Camma - Sidoti

Carla Casella - J.P. Morgan

Operator

Good day, ladies and gentlemen and welcome to the Prestige Brands Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host, Mr. Phil Terpolilli, Director of Investor Relations. Sir, please go ahead.

Phil Terpolilli

Thank you, operator, and good morning to everyone on the phone. Joining me on the call today are Ron Lombardi, our Chairman, President and CEO; and Christine Sacco, our CFO. On today's call, we'll cover highlights of our fiscal 2018 third quarter, review the financial results, and provide an update to our full year outlook and then take questions from analysts.

There's a slide presentation which accompanies today's call that can be accessed by visiting prestigebrands.com, clicking on the Investor link, and then on today's webcast and presentation. Please remember, some of the information contained in this presentation today includes non-GAAP financial measures. Reconciliations between adjusted and reported financial measures are included in today's earnings release and slide presentation.

Also remember, during today's call, management may make forward-looking statements. All forward-looking statements involve risk and uncertainties, which we detail on the complete Safe Harbor on Page 2 of the slide presentation accompanying the call.

Additional information concerning the factors that could cause results to differ materially from those in the forward-looking statements are contained under the heading, Risk Factors, in the company's annual report on Form 10-K, for the fiscal year ended March 31, 2017 and quarterly reports on Form 10-Q filed with the SEC.

With that, please turn to our earnings presentation, where I'll turn it over to our CEO, Ron Lombardi, to walk through the highlights of Q3. Ron?

Ronald Lombardi

Thanks, Phil, and good morning, everyone. Let's begin on page 5 of our presentation. In the third quarter, our revenue performance was underpinned by strong consumption trends in line with our long term objective. Solid consumption growth and market share gains in both Q3 and year-to-date are continued evidence that our long-term strategy is working despite retailer destocking headwinds.

Q3 financial results were impacted by certain growth margin pressures from adjusted cost, which we'll discuss in detail later on, but our strong top line and healthy overall margin profile enabled us to meet our EPS and cash flow expectations for the quarter.

In Q3, we recorded a large one time gain associated with recent tax reform. Chris will go into detail later in our presentation, but the key take away is that we expect tax reform to have a positive impact for both our tax rate and cash flow and provide us the potential opportunity to increase investments behind our long-term brand building initiative.

Let's turn to slide 6 and walk through a more detailed review of our Q3 results. Starting with revenues, we experienced a net sales increase of approximately 25% to $270.6 million in the third quarter. Pro forma for Fleet revenue growth in Q3 was 2%, which included the recognition of about $8 million from customer delivery timing from Q2 as expected. We were pleased with total company consumption of 2.4%, which is evidence that our long-term brand building strategy continues to drive results.

Moving to earnings, we reported adjusted EPS of $0.70 during the quarter compared to $0.61 last year. Gross margin in Q3 was 54.6%, which was impacted by higher freight and warehouse costs. We expect these higher costs to persistent to Q4 and Chris will provide additional detail later on.

Adjusted free cash flow came in at approximately $545 million in the quarter. This continues to be driven by our industry leading EBITDA margin, low capital spending and low cash tax rate. Lastly as a reminder, last week marked the one year anniversary of our Fleet ownership. The acquisition continues to perform in line with our expectations and our focus has fully shifted towards our long-term brand building strategy.

Now let's turn to slide 7 to discuss year-to-date highlights. Our December year-to-date results display impressive performance particularly in light of a challenging retail environment. Total revenues were up over 22% year-to-date Fleet the prior year. Pro forma revenue growth was up 1.5% for the year-to-date, trailing consumption trends by over a percentage point. This disconnect speaks to continued retailer destocking efforts over the last few years that have ranged in sales impact from an estimate of half a point in fiscal 2017 to upwards of 200 basis points in fiscal 2016.

The disconnect that we're presently seeing between consumption and order rates accelerated in late December through the first few weeks in January. This destocking headwind is at the high end of what we would have expected for the year. Adjusted EPS grew approximately 8% to $1.97, for December year-to-date.

Cash flow remained strong with adjusted free cash flow of over $156 million, which was used to reduce debt by $145 million year-to-date. So, to recap, we continue to generate solid revenue and earnings growth while experiencing strong consumption trends consistent with long-term outlook. We continue to position our company to be successful on challenging environment through our leading brands and focused efforts around long-term brand building.

With that, let's turn to page 8 and discuss new product innovation. Innovation is one of the many tools utilized to grow our top line as we leverage our strong new product innovation team to understand and fill unmet consumer needs in a variety of ways. The goal is to enhance brand building efforts by developing new products that help grow both our brand and the category. Let's look at a few examples of recent innovations that do this.

On the left, we have two what we call big eyes or larger scale innovations that use technology advances to improve brand efficacy. CompoundW COMPLETE utilizes a unique formula to treat works faster and more effectively, while Nix ULTRA is effective, it can supervise using a proprietary formula. On the right, we have three examples of innovations that enhance connections with consumers in different ways.

SIMPLY by Summer's Eve, appeals to the millennial consumers desire with simple ingredients that are free of harsh chemicals. Luden's new flavor introductions like Red Hot Cinnamon met consumer insight, works around exiting flavor profile. And last we have BC SINUS and CONGESTION, which extend a brand known for its deal of relief into the Sinus Congestion and Pain category. To summarize, our consistent pipeline of new products helps differentiate our brands in the market place and drive category growth, which is important for both us and our retail partners.

Now let's turn to slide 9. Here on slide 9, we provide a bigger picture view of our brand building efforts and success of our brands over the last five years. When you look at the slide, it's clear our strategy to invest behind brands is yielding results. Our strong and diverse portfolio allows us to use a wide variety of brand building approaches. With number one market share brands representing approximately 60% of our sales, we're focused on the end goal of driving category growth.

Our brand building methods are wide ranging and we apply any number from tool kit to drive growth. Items shown on the left of the slide make up our approach and include understanding consumer insights, leveraging brand heritage, focusing on innovation and channel development. All of our efforts are showing results. Driven by brand building over the last five years our core brand portfolio had outpaced category growth by over a 100 basis points, while private label has been essentially flat during this time frame. Again, this graph is on the right side of the slide.

It's a clear reminder of the power of brands and the benefits that they can have to retailers. As many retailers continue to struggle to generate revenue growth, our brand strategy offers infinite driven high range and innovative products. This adds incremental foot traffic and basket size at our wins both for Prestige and retailers.

With that let me turn the call over to Chris, who will take us through the financials for the quarter.

Christine Sacco

Thanks, Ron. Good morning, everyone. I'll walk through our third quarter results in greater detail and updated you on h our outlook on tax, following recent reforms.

On slide 11, we have our high level third quarter performance. Total revenue growth was 24.8% for the third quarter fiscal 2018, while adjusted EPS increased approximately 15% in the third quarter Fleet the prior year.

As Ron touched on earlier, our Q3 revenues included a return to normal average shipment time Fleet the second quarter and were underpinned by solid consumption trends. Results were impacted by retailer inventory management efforts and our most challenging growth comparison of the prior year.

Moving on to slide 12, we have our abbreviated P&L for the fiscal third quarter ended December 31, 2017. As a reminder, the information in today's presentation includes adjusted results that are reconciled in our earnings release.

Our revenues increased 24.8% in Q3. Fleet contributed $54.1 million of incremental revenue during the quarter and continues to grow in the mid single digit plus range on a consumption basis. Strategic divestitures executed last fiscal year totaled approximately $6 million, which as of December we have fully left. Pro forma Fleet, third quarter revenue increased 2%, which compares to consumption growth of 2.4%.

Moving down to P&L, adjusted gross margin of 54.6% was below our expectations and prior year owing to multiple factors. First, similar to the first half of fiscal '18, gross margin reflected the addition of the higher growth Fleet portfolio. Second, we incurred higher freight cost in the third quarter as we expanded our pool of freight partners to maintain our service levels.

Third, we experienced high turnover levels at our warehouse that resulted in the use of an experienced higher cost third party workforce. We expect these increases in freight and warehousing expenses to continue into Q4 as we continue to prioritize our service levels to our customers.

In terms of A&P, we came in at 13.2% of revenue in Q3 and 14.3% year-to-date. A&P expense grew in dollars Fleet the prior year attributable to a shifting mix of business towards invests for growth trends. As we've highlighted previously, there could be some variability A&P from quarter-to-quarter, but we continue to invest behind the long-term brand building efforts Ron discussed earlier.

Our adjusted G&A spending came in at 7.4% of total revenues for Q3. G&A was $8.3 million in the quarter, approximately $1.2 million of which was associated with cost of sales depreciation and is netted to arrive at gross profit. Finally, our adjusted EPS of $0.70 compared to $0.61 in the prior year.

Turning to slide 13, we highlight our cash flow for the third quarter fiscal 2018. In Q3, we generated $44.8 million of adjusted free cash flow, down from $49.6 million a year ago, owing primarily to the timing of capital expenditures Fleet prior year.

For the first nine months of fiscal '18, we generated strong free cash flow of $156.2 or $2.92 per share, primarily attributable to our industry leading financial profile, low CapEx requirement, and cash tax benefits associated with previous asset structured acquisition deals.

Our primary use of cash flow has been debt reduction and we paid down $145 million in borrowings year-to-date. We finished Q3 with net debt of $2 billion and a leverage ratio of 5.4 times at quarter end. For full year of fiscal '18, our adjusted free cash flow outlook remains unchanged, calling for $205 million or more along with our strategy to put proceeds towards debt pay down.

With that, let's turn to slide 14 to walk through the implications of recent domestic tax reforms. As you're all aware, the Tax Cuts and Jobs Act was signed into law in late December and became effective January 1. The principle impact to our business is that it meaningfully lowers our ongoing tax rates and will generate incremental cash flow in fiscal '19 and beyond.

In the third quarter, we realized $278 million non-cash income tax gain resulting primarily from the revaluation of our differed tax liability. Moving into Q4, we expect the effects of legislation to be a negligible benefit to our Q4 results.

For fiscal 2019, we expect an effective tax rate of approximately 26% Fleet our pre legislation rates of 36.5%. We expect our annual cash flow to increase $10 million to $15 million per year, beginning in fiscal '19 due to the reduced federal rates.

Cash flow proceeds could be used in a variety of ways, including paying down debt more rapidly or reinvesting behind our long-term brand building strategy. We're currently evaluating the best uses of the incremental cash flow and will provide an update on our May earnings call.

With that I'll turn it back to Ron.

Ronald Lombardi

Thanks, Chris. Let me wrap up with some closing remarks and I'll give an update on our 2018 outlook on slide 16. Our consumption expectation for the full year is unchanged. Year-to-date, we experienced continued solid consumption growth in the 2% to 3% range for our business. Our diverse new phased portfolio is winning share in the market place and it's well positioned to continue growth.

When we provided our original fiscal 2018 outlook range, it contemplated a wide range of variables including retailers destocking efforts. This destocking headwind is coming in at the higher end of our original expectations and we're therefore narrowing our fiscal 2018 guidance metrics to the low point of the range, specifically the revenues. We now expect revenue growth 18% or $1.4 billion in revenue.

On earnings, we now expect adjusted EPS growth of plus 9% or $2.58 of adjusted EPS for the year. For free cash flow, we continue to anticipate $205 million or more, equating to $3.83 or more on a per share basis. Our long-term performance has been driven by our three-pronged strategy that starts with the focus on growing our business by winning with consumers.

From there we take our strong cash generation to reinvest behind brand building and use the remainder for strategic M&A. We continued to make progress on this strategy in the past, growing our base business consumption, paying down debt with our cash flow and acquired Fleet. We'll continue to execute against our strategy as we move forward in fiscal 2018 and beyond to create value for all of our stakeholders.

With that, let me turn the call over to the operator who will open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Joe Altobello with Raymond James. Your line is now open.

Joe Altobello

Thanks. Hey guys, good morning. So, first question I want to start on the higher logistics cost and pressures you saw this quarter. When did you start to see that and two, maybe a little more color on what's causing it? I know you mentioned higher turnover in some of your warehouses, but want to get little more insight into what is exactly causing that?

Ronald Lombardi

Sure, really the driver of it is our focus on service in meeting our retailer's requirements show. So we started to see that at the beginning of the third quarter and really there's two components, the first is the warehousing cost. We saw turnover and as we supported our highest quarter ever in sales, we brought in a third-party workforce that's at a higher cost compared to normal employees, to ensure that we had the skills and the amount of people on hand to meet the sales expectations for the quarter. And then in terms of freight cost, as we said on last quarter's call, we started to expand the number of freight carriers that we were using to make sure that we had the capacity needed. And that has initially come at a higher cost. So we are going to continue focus on meeting high service levels in Q4, so we anticipate keeping and incurring that higher level of cost through the fourth quarter. But obviously we are planning on trying to get back to a more historic level of cost associated with those activities overtime.

Joe Altobello

And, overtime is that couple of quarters or?

Ronald Lombardi

So, right now we are just looking out to the fourth quarter. Obviously we'd like to get back to that as soon as possible. But, we don't want to disrupt our service levels, so we are going to take a measured approach at transitioning back to the more legacy arrangements we have.

Joe Altobello

Okay. And my second question was on Fleet. If you look at Fleet this quarter, you mentioned consumption still pretty strong, mid-single digits plus. Fleet sales were down 1% this quarter; they were up 3% year-to-date. And, if you look at your day sales outstanding, I think they are up eight days since you acquired Fleet, may be talk about those two items. You know, why Fleet –shipments are down, why destocking is so acute at Fleet and what you can do to take those DSO's down? Thanks.

Ronald Lombardi

Okay, let me let Chris address the questions first on - let me comment on Fleet consumptions first, that continues about the same level we've seen since we owned the business in the high single digit areas, so it's been consistent. Chris, why don't you address sales and DSO question for Joe?

Christine Sacco

Yeah, so from a sales perspective for Fleet, US sales continued to be stronger. The International belt where we primarily we worked with distributed business and, we see sales varying ability with distributed businesses from quarter-to-quarter on a regular basis. And so, again that's why we take it back to the mid to high single digit consumption trends with Fleet overall, which we feel comfortable with. From a DSO perspective, really just timing related. No change in terms of customers or asks from retailers in that regard.

Joe Altobello

Okay, thank you guys.

Ronald Lombardi

Thanks, Joe.

Operator

Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Jon Andersen

Hey, good morning everybody.

Ronald Lombardi

Good morning, Jon.

Jon Andersen

What should we make of the inventory destocking that you're experiencing right now. It looks like the gap between your shipments and consumption widened to maybe 300, 400 basis points in the quarter, if you account for the $8 million of shipment timing that flipped from Q2 to Q3? Do you have any kind of - to what extent do you have visibility into this recent gap and where do you think you and major retail customers are in kind of re-establishing kind of the target pipeline inventory levels?

Ronald Lombardi

Okay, so I guess were a number of questions in there. First, let me start with the consumption versus sales differences for the last couple of quarters. It's tough to compare just the third quarter sales Fleet consumption because as you just noted we had a shift in recognizing sales in Q3 Fleet Q2. So, we actually looked at the two quarters together and we actually saw a bit of disconnect between the two beginning late in Q2 and into Q3. So, even though we had our highest level of sales ever in the third quarter at over 270 million, we were impacted by inventory destocking at retailers in the quarter. So, we might have seen an even better level performance across the third quarter and the combination of the two quarters, if we didn't have that impact.

Again we go back to focus on consumption, the business continues to have great momentum. In terms of getting insight into it, we said earlier in the prepared remarks, we saw a slowdown in order rates in the second half of December and it continued into January, which is why we updated our full year outlook, with one quarter to go. So, we have a little bit of an expectation, of what we are going to realize going into the fourth quarter. But, the driver of it is ultimately same store growth and the retailers getting top line growth and bottom-line growth, it's a challenge for them out there. They've got just a few levers that they can pull to help drive their performance and reducing inventory is one of them. So, we continue to expect that it will continue out there until the retailer environment changes. As, I mentioned earlier, it's been happening for a long time, it adds in flows, on average it finished about a half a point, but it's just been as much as two points. A little bit out of our control and all we can do is really focus on building our brands, growing our share and winning with consumers, that's how we think about it Jon.

Jon Andersen

Okay and coming back to Joe's question around logistics, is there - what other levers, if any, can you pull if you - may be not in the fourth quarter, but if you look out in the fiscal '19 to help maybe offset or absorb some of those incremental costs and get back to more of a historical margin rate? Is pricing a lever that you can pull or are you able to have those discussions with retailers? Are there other areas that you feel like you can make some adjustments to kind of accommodate that?

Ronald Lombardi

Sure, and we are always working on these things. We don't sit around waiting for problems to pop-up and react to them. But, for the logistic side of things, right, we are continuing to work with our 3PL provider who manages the warehouse for us in the logistics efforts and we've actually augmented that by bringing in some additional resources on the freight side of things to help us overtime work on negotiating better freight costs is one part of it.

The second is, but we don't talk about it a lot. We have a really well refined cost improvement gross margin improvement plan here that we execute against. It takes a long time, as long as two years or more to make a change in OTC supply chain, but we are constantly focusing on working on it.

And then in terms of a price, it's something we're constantly monitoring. The fact of the matter is, it's a tough environment to try to push through any price increases. Many retailers have already come from ahead of us, as they've looked to address their P&L. But that doesn't mean there are opportunities for us more importantly as we think about new products and innovation that gives us another opportunity to come in and address our margins long term. So, like many issues, there's lots of different ways for us to work at this Jon and we are focused on it over the long term.

Jon Andersen

Okay, and on Fleet, was the US - were the US shipments for Fleet consistent with kind of the mid single digit consumption that you quoted? Was this simply a function of changes in the International portion of business in the quarter and kind of what are your expectations for the Fleet business in aggregate as you look to Q4 and beyond?

Christine Sacco

Yeah Jon, it's Chris. So obviously for Fleet a tough comp in Q3, right. This is the last period in which the private business has been out there putting the business up for sale, so tough comp to begin with, but yes, the US business for Fleet was up, did see some destocking not as high as consumption, but it is the International business that is down and we are talking about the distributor nature of that business.

Jon Andersen

Okay, and last one for me. Where do you expect to be from a leverage perspective, I guess bank defined by your end and thoughts on use of cash kind of M&A kind of capacity, going forward thanks.

Christine Sacco

Yeah so Jon, we talked about $145 million of pay-down year-to-date on our debt this year, we'll continue with free cash flow expectations for the year of 205 or more in Q4 to use that towards our debt pay-down. And, as we talked about with the cash tax savings, we'll look to continue to evaluate the uses of that incremental cash going forward. As we think about our leverage, going to continue again to pay down our debt and might come in slightly above f the five times but, we feel well positioned as we head into fiscal '19.

Jon Andersen

Okay, thank you.

Operator

Our next question comes from the line of Jason Gere with Keybanc Capital Market. Your line is now open.

Jason Gere

Okay, thanks good morning. May be first question, can you just go back to the destocking and I guess if you could put some historical spend on this like- when you experience some of this in the past and may be not to the magnitude have you seen, typically, what's been the turnaround time before you start to see kind of the gap between consumption and shipment start to narrow. And, within the same context of destocking, I was just wondering if you could talk a bit more mass related versus drug? Can you talk about which channels may be we are looking at obviously not by their name, but just trying to parcel out where you might be seeing some of that pressures?

Ronald Lombardi

Good morning, Jason. Your first question there, when might we expect this to even out a little bit, if you go back to look over the last four years and this has been happening for quite a while now. We've seen kind of a slow drip impact, and we've seen giant spikes with most of the years impact concentrated in a single quarter, for that I didn't get the first fiscal 2016. So, it happens in lots of different ways, you know this one is a little bit more of in between, there is a slow drip and concentrated in one quarter. It seems to be getting us over a couple of quarters here. A concentrated up leash, is what we can see now in concentrated in a couple of quarters. And, then what we've seen historically these kind of go back to the normal order patterns that we see in-between the events. So, that's the first part of it,. In terms of channels, really we are seeing it across all kinds of different channels, a bit more concentrated in Drug in mass, as they get caught up to the business objectives.

Jason Gere

And, I mean within I guess I was just going to ask on the, I am losing my train of thought here. Actually, now let me just move into the next question, so I just lost my train of thought. One thing I was actually kind of curious is that, this quarter you didn't really see much of a pickup in the curbing cost, out in the December quarter, but obviously flew with that kind of all-time high. I was just wondering, what you're seeing, because you do have good exposure to that category. Just wondering what your expectations are for the March, and how that kind of plays into again the shipment versus consumption kind of outgrowth on that out there?

Ronald Lombardi

Sure, first as a reminder our business is nowhere near concentrated, or impacted by cost code flu like it used to be. We are close to the 5% of our portfolio, really being tied into the cost code flu kind of category. It's the first comment. The second is, not every type of component of that cost code flu index really impacts us. If you look at it flu is up almost 200% up last year, and the hit number of influences of flu but the cost in-depth is actually down 2% and that actually better aligned with our portfolio which is concentrated around core accepted [indiscernible]. Now, people who have flu may also have a sore throat but in general, we are closer tied into that. So, although the index being up is helpful to us, it doesn't move the needle for our business when it's a bad year like it was last year. We didn't really see any meaningful impact on our business, and we are not expecting any meaningful impact on the business this year although it's nice to have someone on that standpoint.

Jason Gere

Okay, and I remembered my train of thoughts from before. Just on the destocking is there anything structural that we think about with online or privately, but I know you said in the last five years Hydralyte was really not going to be an issue. But, can you talk about where the trends have been over the last 3-6 months, I'm just wondering is there anything within some of these destocking that's related to people starting to buy little bit more online and you know that's why the retailers are managing those inventories or if there's seeing a little bit more private label, I know we've heard rumors out there about other clients trying to get into OTC. I'm just wondering if you could just provide some context and how that kind of relates or doesn't relate to the de-stock issue that you're facing? Thanks.

Ronald Lombardi

Sure. Now, I can only comment on our part of the store. These comments are specific to the categories in the States that we compete in versus what you may be hearing from other CPG and other spaces in the store. You know for us our business doesn't continue to be impacted by online like other parts of the store and other sections of retail. Right, again I'll go back to need base to wake up, somebody in your household is sick, the shoppers may be going online to get information but they are generally going to the store, because the general and immediate for that product. So, we don't feel we are being impacted by; the destocking is not a result of shoppers moving from brick and wall to online. And then in terms of our skew, offering is consistent out there. We are not seeing a lot of distribution. We are not seeing an impact of a shifting competitive situation, so we are not being impacted, by those factors. Again, if you go back to that slide in today's spec, to look at our core business, we're winning. We are growing the category, as a result growing our share and both the other branded, where there are branded competitors and certainly private labeled is losing share in our categories as we successfully build our brand and grow our business.

Jason Gere

Okay and I am just squeezing this one last one. A&P in the quarter was up in dollars, down in percentage sales and I think the expectation was that it will be a little bit higher in the third quarter and then there will be lighter percentage of sales in the fourth quarter. Was there any shift that went on there that you saw actually been thinking about the fourth quarter and just how shall we be thinking about A&P in longer term? Is this I think going back to one of the prior questions about the near term benefits, is this one of the areas were you might lean on a little bit more? You know, it's kind of offset some of the, I guess, warehousing issues, that pricing is not an option?

Christine Sacco

Yeah Jason, this is Chris. I guess I'll adjust the quarter in the near term and turn it around for the longer term view. You were calling in Q2, we had almost $49 million spend on A&P, so you heard it exactly right. We spent A&P dollars, that's how we look at it, and so, I would say A&P for Q3, was in-line with our expectations. We see varying ability in quarter that we talked about based on programs and the like and as I think about Q4, we've talked about expecting continued margin growth, margin pressure to persisting Q4 and guided our EPS for the year 258. May be Ron you can comment on the longer term.

Ronald Lombardi

Yes, again Jason, our long term strategy is to continue to increasing investment behind our brands. Again, referring back to that slide, that's, it's using results and we've taken our reluctant in A&P from 10% to sales in nearly 14% in sales over the last five or six years. And, its discipline, measured approach and we're getting our return on it. The other, I made the comment in my prepared remarks that the change in the tax code is going to add to our already fantastic financial profile and pre-cash flow and we are going to take a look at whether we have some opportunity or options to take some of that windfall and increase cash flow from the results of it, the tax change to see, if we can further increase the investment going forward. So, we'll evaluate that and when we give our F1 '19 outlook, we'll have some comments on that. But, you know we are committed to continue to invest on long term brain block building.

Jason Gere

Okay, great, thank you guys.

Operator

Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Your line is now open.

Linda Bolton Weiser

Hi, so first on the issue with the inventory reductions by retailers, it's really a secular thing going on and it has to do with the shift from Bricks and Mortars to e-commerce and some consumer product companies say that the inventory level or retail in an e-commerce more fully penetrated world the past of what the inventory would be in a brick and mortar world? So, this is a very secular issue, that's going on and I just wonder if you need to rethink that 25 to 3% long-term organic growth target. Because your consumptions very well may hold up, but in terms of these secular headwinds, it just seems to me that may be the 2% to 3% is overstating things a little bit. So, is that something you're giving some thought to, may be you can just comment on the very long term in terms of that targeted growth rate?

Ronald Lombardi

Yeah, so again for us Linda versus other CPG companies, we are not seeing the big shift to online verses brick and mortar, right. It was 1% of our sales last year, it starts growing, we expect over the very long term that consumers will continue to move there but at the end of the day, there's a need stays an immediate stays component that we think is a big different for our big categories verses others. So, you know, we'll continue to evaluate at long term but as we sit here today, we think that what we are seeing from inventory reductions is more about brick and mortar becoming more efficient and managing their inventories in better ways rather than them having to reduce inventory because their business is migrating away from them to online. Right, this is like diapers and other categories in the shaving side of things that are having a big dynamic shift, it's a bit different than that. So, for now, we continue to feel good about that.

Linda Bolton Weiser

Okay, and then on the cost front, I'm listening to my other pier analysts that I work with about the trucking industry and some of those things going on there. And, when you really talk to them, you know, there's been a lot of under investment in that industry during the recession sand there's been changes in the worker requirements for the truck, there's shortage of drivers. It's just seems that, what I'm hearing is that is an incredibly big inflation thing going with regard to trucking rates? And, one of my other companies that reported yesterday experienced a f55% year-over-year increase in trucking rates. So, it seems, can this could be more of a longer term issue, that's something not going to dissipate in just a quarter or two. So, again I'm just kind of wondering, you know, sometimes going to the warmer to the world and talking about these macro things is the way that you get price increase from the retailers. So, are you kind of laying your sights on that? And, what we do think about if you can maintain that flat operating margin like you normally try to do to outline '19, is that something you think you can do, given the inflation area pressures?

Ronald Lombardi

Yeah, so first of all in terms of '19, we'll talk about that at the May call, but, for your specific questions and I'm talking on fright right, we made decisions to expand the trucking firms that we are working with. That could in the September into the quarter ended December to ensure that we have plenty of capacity to meet our service needs and support our largest quarter ever in sales. So, you know a big driver in the cost pressure is both for warehousing and logistics were based on decisions that we made in partnership with our 3PL and our logistics provider. So, you know, we start with service and then our job is to manage, you know, work backwards and manage the cost and the effectives. And then, again as I described earlier we have broad reaching growth margin improvement plan that have been in place for a long time, that include price and a number of other things to try to manage this over the long term. Right, that's our job, is to manage the P&L for the long term and react and be proactive to the things that happen, and things do happen Linda.

Linda Bolton Weiser

Okay, and then sorry, if I didn't catch up, but did you just give a P&L packs rate normalized going forward that we should use this on a go forward basis including the tax reforms?

Christine Sacco

Sure Linda, so we talk about, again in the current quarter the normalized rate was at 36.5% negligible impact to Q4 and going forward we talk about a 10 basis, to put it better, 10 point reduction in our effective cash rates, about 26%.

Linda Bolton Weiser

Thank you.

Operator

Our next question comes from the line of Frank Camma with Sidoti. Your line is now open.

Frank Camma

Good morning guys. Thanks for the questions. A couple of quick things, what is this on A&P, how do you think about that from a mixed perspective? What I mean is the Fleet acquisition, I mean obviously you are spending more dollars here; percentage is down, I know you can't look at quarter-quarter? But, Summer's Eve to me seems like more commercial than Fleet for example. So I wonder if you can talk about that a little bit, and whether that is in fact the case?

Ronald Lombardi

Yes, so Summer's Eve can be a bit more promotional, the company has that history and we did this under the ownership of doing promotions around for example Valentine's day and long weekends. So, its higher growth a bit more, a bit different than our other brands that we have. So, we would expect to have a higher level of A&P support for that business compared to some of the other core brands that we have especially the smaller core brands.

Frank Camma

Okay, and staying on Fleet for a second, it's clearly seems to be fully integrated, but can you talk about through the operational synergies and I know it would takes a while for the supply contracts to revise etcetera, can you talk a little bit about that and whatever opportunities you may have uncovered in the last year?

Ronald Lombardi

Sure, so over the last year, we consolidated their business from an ordered to cash stand point. So, we've consolidated their finished warehouse into our facility in St. Louis. And, the retailers now give us one order that includes the free products as low as the Prestige legacy products and consolidated their back room functions and eliminated the free organizations and moved them here to our New York camp quarters. And then we moved to other supply chain opportunities as you just mentioned, it takes time, and we do have the longer term view of sell the factory there, that we continue to work on and will have updates on as we make progress overtime. So, you know, it's a long term project to affect changes in OTC supply chain.

Frank Camma

Okay, my last question is related to the CapEx, could you, it's pretty much the higher slow life seen, is that related to Fleet? And, is that sort of a one-time item? Can you talk about that?

Christine Sacco

Sure, it's primarily related to Fleet. Your initial cost for about 10 million of CapEx, we were little late in the forecast, so Q3 is in line with our expectations just timing related.

Frank Camma

Okay. Sorry go ahead.

Ronald Lombardi

And, initial outlook for the year was 10 million or so capital, you know plus you might have a couple of million dollars. We're talking about spending $10 or $15 million on a billion dollars in revenue and so it's I think you probably ever seen in one quarter [indiscernible] to the revenue.

Frank Camma

Great, alright, thanks guys.

Operator

[Operator Instructions] Our next question comes from the line of Carla Casella with J.P. Morgan. Your line is now open.

Carla Casella

Hi, just one question on your organic growth. Can you give us those rates by segmenting US and international?

Christine Sacco

Yeah, so in our part of discussed our 2% pro forma organic growth breakdown, our North American OTC segment was up a little over 2.5%, our International up about 6% which is consistent with our expectations and the strong performance anchored around our care business in Australia. And, our Household business was down almost 9% this quarter, which is consistent actually with year-to-date performance for household as we often talk, we expect household to be down declining as much as the high single digits, so other than the destocking pretty much in line with the expectations.

Ronald Lombardi

In that profile the US business growing, 2.5 plus percent, International 6%, Household down high single digit, is kind of consistent with the long term expectations we would have for each of those buckets. So, that comes out to be 2.5 plus percent, which is right in the middle of our long-term outlook. So it's not out aligned with what we might expect over the long-term on average, Carla.

Carla Casella

Okay, great. And then on the freight side, is that purely a US issue or are you starting to see anything of that internationally?

Ronald Lombardi

It's exclusively US.

Carla Casella

Okay, great. Thank you.

Operator

I'm not showing any further questions in queue at this time. I'd turn the call back to company for closing remarks.

Ronald Lombardi

I'd like to thank everybody for joining us today and have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.