Energizer Holdings, Inc.

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's second quarter fiscal year 2021 conference call. After the speaker's remarks, there will be a question and answer session. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, you may press star, then two. As a reminder, this call is being recorded. I would now like to turn the conference over to Ms. Jackie Berwitz, Vice President, Investor Relations. Ms. Berwitz, the floor is yours, ma'am.

Thank you. Good morning, and welcome to Energizer's second quarter fiscal 2021 conference call. Joining me today on the call are Mark Levine, President and Chief Executive Officer, Tim Gorman, Chief Financial Officer, and John Drabik, our Controller and Chief Accounting Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. In addition, a slide deck providing detailed financial results for the quarter is also posted on our website. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risk and uncertainties, including those resulting from the ongoing COVID-19 pandemic, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in the reports we file with the SEC. We also refer in our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and market share discussed on this call relates to markets where we compete and is based on Energizer's internal data, data from industry analysis, and estimates we believe to be reasonable. This quarter, e-commerce data is not included in our category overview as the data is not currently available. It is uncertain when that data will become available in the future. Unless otherwise noted, all comments regarding the quarter and the year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2020. With that, I'd like to turn the call over to Mark.

Thanks, Jackie, and good morning, everyone. Today, I am pleased to share our second quarter 2021 results, which build on the momentum from our first quarter as we benefited from elevated demand, expanded distribution, and strong execution, all of which led to robust earnings growth. As we look specifically at the results for the quarter, We maintain top line momentum with organic sales of 12.7%, with strong sales across categories and markets around the globe. We were able to meet that demand while also demonstrating improved cost control and delivering synergies, which partially offset the inflationary headwinds from transportation, tariffs, and product input costs. Our adjusted earnings per share were 77 cents, more than double the prior year. driven by strong organic sales growth, synergy realization, favorable currencies, and lower interest expense. Given our performance in the first half, we are increasing our full fiscal year outlook to the following. Net sales growth to 5% to 7%, adjusted earnings per share to a new range of $3.30 to $3.50, and adjusted EBITDA to a new range of $620 million to $640 million. Tim will provide more information on both the quarterly results and the revised outlook in a moment. Turning to category trends, consumer demand in our categories remains elevated. As a reminder, the category data I'm about to provide does not include e-commerce, as Jackie indicated in her opening comments. Starting with batteries, two changes in consumer behavior that have emerged since the beginning of COVID drove the battery category globally. First, an increase in the number of devices owned per household, and second, an increase in the amount of time devices are being used, which has led to more frequent battery replacement. During the three months ending February, our brands grew faster than the category and we gained 2.1 SharePoints globally as we benefited from the previously discussed distribution gains. In the most recent four weeks through March, in markets like the US, Australia, and the UK, the category experience year-over-year declines as we lap the initial spike in COVID-related buying. We anticipated these year-over-year declines, including a 13.9% decline in the US during that four-week timeframe. However, if you look at those same markets on a two-year basis, there is robust growth when compared to the pre-pandemic levels. In the U.S., for example, the category was up 14.1% for that four-week period when you compare 2019 to 2021. Across both the most recent four weeks and the two-year basis, Energizer significantly outpaced the category. Looking at the U.S. auto care category, in the 13 weeks through February, we saw healthy category growth of 7.4%. as the category experienced both an increase in household penetration and existing consumers spending more on cleaning and maintaining their cars. Given the seasonality of our portfolio, the cold weather, and the short-term constraints on our wipe supply, which have recently been resolved, Energizer lagged category growth in the U.S. Similar to batteries, we are seeing category growth in the latest four weeks and on a two-year basis with Energizer outpacing the category. Finally, while we don't have e-commerce category data this quarter, our net sales have increased 70% across our combined portfolio, a reflection of our investments and ongoing focus, which are paying off and positioning us to leap well into the future. The environment remains dynamic, and we can't predict the impact of vaccines, the virus variants, or the resulting consumer habits. However, in surveys with consumers, many expect their pandemic influence habits to continue, including the increased use of devices such as home health and home office equipment, as well as increased focus on their auto cleaning habits. During the quarter, we faced inflationary headwinds from transportation, tariffs, and input costs. However, we were able to offset a significant portion of these through the delivery of synergies. As we look to the future, we do not believe that these costs are transitory and have initiated productivity and revenue management efforts to offset them. Our revenue management efforts are focused in three main areas, channel and mix management across our markets, brands, and pack sizes, including leveraging the breadth of our strong battery brands from premium to value, resetting our promotional framework, including the frequency and depth of promotion, and price increases based on a longer-term outlook of product input costs, our innovation pipeline and currency impacts. As an example of this work, we recently announced price increases in the U.S. in our auto care portfolio to offset the headwinds we are experiencing. Going forward, we will evaluate a number of factors, including macroeconomic conditions, product input costs, transportation costs, market dynamics, innovation, and currency to assess the need for additional pricing actions across the balance of our portfolio. Our internal initiatives designed to reshape our organization and to ensure we are poised for future growth are all progressing well. Specifically, we are on track to deliver over $120 million in synergies by the end of fiscal 2021, a portion of which is being reinvested in the business through innovation and brand building activities. We have significantly increased production in the Indonesian plant that we acquired in the first quarter, which provides us with a source of high-quality products at lower costs. We have built an impressive innovation pipeline for our auto care business and have advanced our international growth plans, with international auto care organic growth for the second quarter at 24%. Our global product supply team has made significant strides in reshaping our network, which we expect will result in greater efficiency, effectiveness, and supply chain resiliency. And finally, we have launched projects to advance our organization's data and analytics capabilities. Creating a seamless data flow which starts with the consumer and weaves its way through our organization in a more automated manner will ensure that we are positioned to meet the demands of consumers in a rapidly changing operating environment. With that, I will now turn things over to Tim, who will dive deeper into our financial performance for the quarter and provide more details about our updated outlook for the fiscal year.

Tim? Thanks, Mark, and good morning, everyone. In addition to the earnings release we issued this morning, a slide deck included on our website highlights additional key financial metrics. As Mark touched on, as we cross the halfway mark for the fiscal year, we are pleased with our continued momentum. Our organic revenue growth of 12.7%, combined with synergy realization, cost controls, lower interest expense, and favorable currency headwinds, resulted in strong adjusted earnings per share of $0.07, up more than double the prior year's second quarter, and adjusted EBITDA of $148 million, up 20% compared to the prior year. Taking a deeper look at the organic revenue growth, we maintained our top line momentum with strong sales across all of our categories and geographies. Both of our segments showed organic growth, with the Americas up nearly 16% and international up 6%. And our battery and auto care businesses grew, benefiting from elevated demand and distribution gains that began last summer. Adjusted gross margin decreased 110 basis points versus the prior year to 40.5%, in line with our adjusted gross margin reported in the first quarter. This was impacted primarily by increased operating costs that resulted from higher tariffs associated with source product to meet elevated demand, transportation, labor, and product input costs, all consistent with inflationary trends in the global market. Additionally, our gross margin was negatively impacted by the lower margin profile associated with recent distribution gains and acquisitions. Synergies of $14.2 million and favorable impacts from currency exchange rates partially offset these negative impacts. As Mark mentioned, we do expect inflationary headwinds over the balance of the current year and into next year. At the present time, we are essentially fully hedged our commodity costs for fiscal year 2021. Looking beyond this year, we will continue to take actions to offset the impact of these headwinds through continuous improvement efforts and pricing actions. A&P, as a percent of sales, was 4%, relatively flat compared with the prior year's second quarter. Consistent with our priorities, we invested on an absolute dollar basis in A&P to support our brands and innovation. with total A&P spending of $4 million or 19% over the prior year. Excluding acquisition and integration costs, SG&A as a percent of net sales was 16.7% versus 18.4% in the prior year, primarily the result of elevated sales experienced in the current year. On an absolute dollar basis, adjusted SG&A increased $6 million in part because of the higher overheads associated with our top-line sales growth and foreign exchange rate impacts. We realized nearly $20 million in synergies this quarter, bringing the total for that first half of 2021 to $40 million. Since our battery and auto care acquisitions were completed, we have recognized approximately $109 million of synergies, exceeding our initial targets, and we expect to realize an additional $10 to $15 million over the balance of the year. As I mentioned last quarter, we've taken advantage of favorable debt markets and refinanced a significant portion of our debt over the last 12 months. We expect these refinancings to contribute to a $30 million reduction in our 2021 interest expense, of which $8 million was realized in the second quarter. At the end of the quarter, our total debt was approximately $3.5 billion, or 4.8 times net debt to credit-defined EBITDA, with nearly 85% at fixed interest rates and an all-in cost of debt of 4.2%. As a result of our strong organic growth in the first half of the fiscal year, we are updating our full-year fiscal 2021 outlook for the following key metrics. Net sales growth is now expected to be between 5% to 7%, owing in large part to a prolonged elevated battery demand in North America and favorable currency impacts. Adjusted gross margin rate is expected to be essentially flat on a year-over-year basis in line with our previously provided outlook. Adjusted earnings per share is now expected to be in the range of $3.30 to $3.50. Adjusted EBITDA is expected to be in the range of $620 to $640 million. And finally, adjusted free cash flow is expected to be at the low end of our previously provided range of $325 to $350 million due to working capital requirements, mostly related to inventory as we look to rebuild safety stocks. The revised net sales outlook provided for the full year reflects a low single digit decline over the balance of the year consistent with our prior outlook. We began lapping elevated COVID-related battery demand late in the second quarter, and we will lap the favorable impacts of weather on our auto care business, particularly in refrigerants, in the third and fourth quarter. With respect to gross margin rates, we expect them to remain roughly flat throughout the balance of the year as synergies in the impacts of favorable currency offset inflationary cost pressures and mixed shifts. We will also benefit over the rest of the year as our gross margin in the third and fourth quarter of 2020 was burdened with one time COVID related cost of $9 million and $19 million respectively. As we turn to the second half of the year, we expect to build on the momentum from the strong first half by executing on our strategic priorities to deliver the full year outlook. Now, I would like to turn the call back over to Mark for some closing comments.

Thank you, Tim. We have had a great first half of fiscal 2021, which is a testament to the efforts of our colleagues around the world to make, ship, and deliver the products that our consumers need during this time. We are focused on winning the day by staying focused on the consumer and delivering for our customers, all while building the foundation to win in the future. With that, I will open the call for questions.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then 1 on a touch-tone phone. If you're using a speakerphone, please pick up your headset before pressing the keys. If any time a question has been addressed and you'd like to withdraw your question, please press star, then 2. Again, it is star, then 1 to ask a question. At this time, we will just pause momentarily to assume our roster. And the first question we have will come from Bill Chappell of Truist Securities. Please go ahead.

Thanks. Good morning. Morning, Bill. Morning, Bill. Hey, just first question, just maybe talk a little bit more on gross margin and your commodity kind of outlook. I guess one, you know, where are you in terms of hedging into fiscal 22? I know you do more than four or five months out, so I imagine you're in decent shape. And then second, maybe give us some more examples or more color in what you're doing in terms of revenue management pricing on the battery side. Appreciate the commentary on auto care, but I assume you're, I don't know if you're looking at price increases or just timing on promotions, just any color there would be great. Sure, Bill.

Why don't I start with the second question and then I'll have John cover the gross margin impacts in Q2 as well as the bridge for the balance of the year. When we analyze gross margin headwinds and the levers that we're going to pull in order to address them, we really focus on four buckets. And first and foremost, the first thing we need to do is make sure that we've done everything we can do internally to control our costs. That's something that we do exceptionally well, and it's an ongoing discipline that we need to make sure that we continue to activate to ensure we've done everything we can to control the costs within our four walls. On mixed management, we proactively manage brands, pack sizes, and source across channels, across customers to drive margin improvement. So that's an ongoing discipline. We have dedicated teams who do that on a daily basis. And then promotional activity, we look hard at the depth and frequency of promotion. Again, that's something we do day in, day out anyway. But when you're facing inflationary headwinds, that filter needs to be a little bit tighter, and that's something that we've we've begun to implement over the last couple of quarters is tighter promotional activity. And then really finally, once you've optimized those, we'll take a look at pricing actions like we did in auto care this past quarter. And as you've heard in the past, we base that on a number of factors, inflationary headwinds, currencies, what's the market dynamic, innovation, investments, and we'll continue to do that. During the first part of this fiscal year, we have seen inflationary pressures, and we anticipate that they're going to continue for the balance of the year. We've been able to mitigate those really through proactive management of all the areas that I just mentioned. We also have the benefit of synergies. And as you mentioned, we also have a hedging program, which helps smooth out some of the impacts that we feel and gives us a forward look so that we can take these headwinds into account as we're planning all of those activities. John, why don't you cover kind of the bridge on gross margins?

Yeah, sure. It maybe did the first question on hedging. So we're fully hedged for commodities for the rest of 2021, and we're about 25% hedged for 2022. You know, this quarter we did see about 310 basis points of incremental input costs. And as you mentioned, Mark, it was really tariffs related to sourcing more product from China to meet that elevated demand. Increased transportation costs, you know, half of that that we've seen is really related to increased volumes. But we've also seen increased freight rates. And then higher labor rates at a number of our production locations, especially in North America. So, you know, we have seen higher commodity spot rates, but as, you know, we've discussed, we are fully hedged for this year. So the impact this quarter was modest. As we look at the back half of the year, we're calling for gross margin to be relatively flat with the first half. And that's despite $25 to $35 million incremental into the costs, driven by the same issues such as tariffs, freight, and labor. as well as we're seeing about 25% of that amount due to commodity inflation. More than offsetting those costs for the rest of the year will be about 10 to 15 million of incremental synergies and roughly $29 million of one-time COVID costs that we incurred last year that don't expect to repeat this year.

And next we have Dara Messina of Morgan Stanley.

Hey, guys. Two questions. First, just on the battery side, thinking about category trends going forward, can you give us a bit of detail on what you're assuming for category growth in the back half of the fiscal year in batteries? I'm just wondering how much of that halo of the higher devices per household as well as greater usage in the household, you know, are you assuming that fully dissipates, mostly dissipates? How would you characterize that? And then also just longer-term thoughts on the sustainability of this higher category volume scenario. as you look out over the next couple of years. So a longer term look at that also. Thanks.

I think over the next four quarters, it's likely that we're going to see or that we do have some tough comps over the next four quarters because of the elevated demand. But I think let me take the longer term view because I think that's more important. And we feel like we're extremely well positioned coming out of the pandemic. There's no doubt we're going to have some tough comps that we're going to have to cycle through. But that really doesn't dampen our enthusiasm at all for how we're feeling about the battery category at the moment. And let me explain why. Consumers are in a different place coming out of the pandemic than where they were going in. And a lot of the habits that they've implemented are going to have some staying power. And if you look at some of the consumer data that we've seen, consumers, we mentioned in the prepared remarks, have purchased more devices. In the U.S., the number of battery-powered devices has increased roughly mid single digits for households in 2020. And that equates to roughly about one and a half devices more per household than what they had previously. Also encouraging is that they're using those devices more. And their purchase frequency is up 6% versus the prior year. And when they do buy, they're buying more. That's up 10%. All of those factors are driving very healthy category dynamics at the moment. And it's not pantry loading. The consumer research that we've engaged in tells us that 90% of consumers who are buying batteries today are buying them for immediate use. They're not stuffing their pantries and we're going to have a big deload. Roughly a third of those consumers expect to continue to use more batteries in the future than they have in the past. And what you're seeing is it's really playing out in the data. I mean, the three-month period for the end of February, Now, the category was up globally 14% with Energizer up 20%. And then if you look at more recent four-week data, which has negative category trends, but what I would say is if you look at sort of the April data, the 2019 to 2021, the categories of, you know, nearly 16% with Energizer up 18%. So there's a lot of noise in the numbers. You are going to have to deal with comps against some extreme demands. But we believe coming out of the pandemic, it's going to be a very healthy category. And I think what we want to do is see some of these trends continue to have the staying power that we believe they do. And I think at that point, that'd be an appropriate time for us to take a look at our long-term growth expectations for the category. But we like what we're seeing so far.

Great. That's helpful. And if I could just follow up on Bill's question on pricing. In auto care, can you give us a sense of what percent of the portfolio you're taking pricing up, a bit better sense for magnitude, and just help me understand the decision to take pricing there versus not announcing anything in terms of price increases and batteries? Obviously, very different commodities underlying that, but just help me sort of understand that decision conceptually.

Thanks. Yeah, you pointed to a couple of the factors right there in your question. One is we don't have the hedging benefits in auto that we do in batteries. You also have some seasonality in the business, which made the timing of it a little more critical than it is in some of our other categories. And then in terms of the price increase itself, we don't speak publicly about the level of percentage increases. It was broad-based across the category. And certainly we always look to offset the inflationary headwinds that we're experiencing from the input cost perspective.

Next we have Lauren Laberman of Barclays.

Great, thanks. First thing I wanted to ask about was just the way that you talked about the cost inflation not being transitory. I understand that obviously the current inflationary picture on inputs But I was curious if there was something embedded in there on your overall global supply chain, just knowing some of the elevated costs that you experienced over the last 12 months, the degree to which that's being baked in as being not transitory, or if we're really talking about more the current inflation that we're all reading about day to day. Thanks.

There's nothing more to read into that other than the current inflation that we're all reading about day to day.

Okay, perfect. Good, good, simple answer. And then I was looking for also an update on auto care innovation. I think this is the time when sort of the Energizer-owned pipeline would start coming to market. So I was curious if you could talk a little bit about that or if any of that activity has been slowed down or delayed until next year, just given COVID and overall mobility trends. or if some of that's been launching in and what the read has been from retailers.

I'm very excited about the innovation we have showing up in stores. We haven't slowed anything down based on the pandemic. In fact, we've sped several things up. You've seen a disinfectant product that we were able to launch in a very rapid timeframe for the ArmorAll products, as well as we've also introduced ceramic products, which you're going to see more broadly in the market today. early days in the auto care season right now, so I wouldn't want to, you know, declare a victory at the moment, but very promising. We've seen in the latest four weeks, the period ending the end of April, you know, value for the category was up nearly 31% with Energizer, nearly 35%. If you look at that on a two-year basis, you know, versus the same time period in 19, it's up 7.5%. In the category with Energizer, up 15%. Very healthy growth. Right now, we're going to have to cycle through a period of time when, in particular, the auto retailers were shut down. So you're going to see some category data that's going to look really healthy based on that experience last spring. But as of now, again, early in the season, but very promising results. We have seen in the latest data that we have that we have four of the top – eight top-growing SKUs out there with wipes. and some of our upholstery cleaner, wheel cleaner, and very excited about what AutoCare has to bring.

The next question we have comes from Nick Modai of RBC Capital Markets. Actually, I do apologize. It looks like that question was withdrawn. So, we will go ahead to Rob Autostein of Evercore. Please go ahead, sir.

Great. Thank you very much. A couple of questions. First, on batteries, can you talk a little bit about the new distribution that you're getting and why that's lower margin? And then moving over on the automotive side, international is very strong. Any more details there? And in general, on the automotive side, you know, you had talked a year or so ago that the brands were somewhat underinvested in Where are you in terms of building the brand equity on the auto side? Thank you.

On the battery side, from the distribution standpoint, we were talking about that for a great deal last fiscal year, and that was really broad-based distribution gains. You saw expanded space in mass. We had an improved presence online, home center. We were able to get back into the club channel, and that may have been driving some of the margin headwinds that you're referring to. Similar story in auto care where we've been able to expand both in auto retailers, get additional space, improved presence online, as well as in home center. We've been able to launch some distribution at home center where the auto care business wasn't previously. International, off a low base, but impressive growth rates, seeing some wins in Australia and Mexico, as well as some nice wins in the European markets with our fragrance business. You know, we've invested in the brands, both from an advertising and A&P perspective. We've launched new creative. But most importantly, we've been able to really, you know, rejuvenate that innovation pipeline. And so what we're able to go and present to retailers is as strong as it's ever been.

Thank you.

And next we have Nick Modai of RBC Capital Markets.

Yeah, thanks. Good morning, everyone.

Good morning, Nick.

I just wanted to follow up on the last question that Robert just asked about distribution gains. I mean, it's been many, many years, and it's been very good. Almost every year you guys have been a separate company from Edgewell. And I'm just curious, how should we think about the runway of further distribution gains? Is there any way to quantify it, any way to provide a framework on how we should think about it?

You know, this is something that the teams constantly battle day in, day out for. We're constantly looking for additional space, expanded space, more preferential space across all of our categories. For the balance of 21, while we're going to cycle off some of the big distribution gains, and so you'll see the new distribution, taper off because of some of the fills and big distribution, particularly in club, that we were able to gain last year. Those are going to start to taper off in the June-July timeframe. But for the balance of the year, distribution continues to be a tailwind for us. So it's going to have a positive impact all the way through September.

And just thinking about it longer term, you know, are there certain channels or certain geographies where you still believe you're way under index relative to where you should be?

That's going to differ market to market around the world. We'll analyze our footprint. In the U.S., obviously, we have fairly mature and robust distribution, but there's always an opportunity for us to get more space or new space. We have to do it the right way, and we have to invest and drive the category growth for the retailers and allow our brands to carry the day while doing that. But it isn't a discipline that we ever pull the throttle back, Nick. We're going to continue to fight for more. And right now, what you're seeing is really a renewed emphasis across the board, both on pure play digital as well as omni-channel. And that's going to be an area of significant investment, and we would expect significant growth over the next couple of years.

Next, we have Kevin Grundy of Jefferies.

Great. Thanks. Morning, everyone. A couple questions, if I could. First one for Tim and the second one for Mark. Tim, with respect to cost synergies and productivity, clearly a heightened emphasis here, I guess, given the commodity cost environment and the company's done a good job with cost synergies exceeding the initial target. Can you talk about other areas of opportunity where you're particularly focused right now as an organization and how large that opportunity can be as we sort of think about profitability, not just this year, but into next. And then for Mark, I know that there's a limitation with the online data. Can you just, but given the importance and the growth that the category is seeing, can you give us perhaps even a little bit more color to the extent that you have it around industry growth, around how your share trends are holding up, particularly relative to Amazon Basics and Duracell? So that would be appreciated. Thank you both.

Yeah, Kevin, relative to synergies and continuous improvement, as you know, before the battery and auto care acquisitions, we've always been focused on continuous improvement. As you indicated, we have over-delivered on the synergy expectations that we had for battery and auto care, and that'll continue through the balance of this year. And then as we move into next year, we continue to see areas for improvement in our global product supply chain to take out costs And, you know, as market indicated, as we go up against these inflationary pressures, that's the first thing that we're going to look to do is to offset those costs and then, as necessary, take any pricing actions that we deem appropriate. So it's both in cost as well as overhead. So, you know, as we look to make investments in technology, that also will provide an opportunity for us as we move forward.

And, Kevin, I know on the – The e-commerce front is important, and in the past we've provided that category information, but we're just not receiving that information, and many of the retailers are not providing it. So we're a little bit unable to do that with any degree of precision. So what we can provide you, and we mentioned in the prepared remarks, are what our sales are doing online. We talked about roughly a 70% growth rate. I would say batteries is a little bit higher than that. Auto care a little bit lower than that and our lights businesses is right around there So healthy growth of what we're seeing online. We have no reason to believe based on you know, are the insights were able to gather That on the battery side that our share position has meaningfully changed from where it was but you know again, that's that's more of a More of an opinion I think than it is based on a database factual information, which we used to get I would say is We're holding our own. You're continuing to see the consolidation online that was trending for the last year or so. Auto care, we also believe that we're trending ahead of category growth rates and are gaining share. And we hope that the information starts to flow from those data sources, and as soon as they do, we can provide updated category information.

Next, we have Andrea Teixeira of J.P.

Morgan.

Thank you. Good morning. And just going back to the puts and takes that lead to your flat second half fiscal sales guidance at the high end, you left, of course, tough comparisons in the U.S., but easier internationally. So you mentioned some of the gains in auto care abroad. So can you please elaborate more on batteries internationally, how you're tracking there? And also as a follow-up on your e-commerce growth that you just mentioned now, are you seeing international e-commerce in the same pace or even accelerating given that it's relatively low penetration?

Thanks. On the last question there, Andrea, I think the growth is more robust internationally just because it's off of a lower base. But we are seeing nice growth in our international markets where we are – taking our efforts in the U.S. and applying to them to international markets. In terms of the international markets on the battery side, we've seen in the latest three months the category continues to respond very well. We're in markets like France, you're up nearly 11%, and this is through February of 21. Australia, which has been one of the first markets that I think has been on the other side of the pandemic, up 7%. And then a market like Germany, you know, 18.5%. So the battery category internationally is healthy as well, and we're seeing those results in our business as well.

And since that's super helpful, and since you've seen places where consumers have the reopening has been ahead of us, is there any earlier read on how consumption habits may have changed?

It's an interesting read, and it's something that we're watching as you've got markets like Australia and New Zealand who are coming out of the pandemic a little bit earlier, and they certainly have some markets around the world where we are where they're right in the middle of it. And so we are watching that. We're watching the consumer information, the POS data, and the category data out of those markets to see if there's any leading indications. Leading indications that we have thus far coming out of markets like Australia and New Zealand is that there is some staying power to the health of the categories that we're in. We expect that to continue, and we're going to lean into it.

All right. Thank you so much.

Next we have Jason English of Goldman Sachs.

Hey, good morning, folks. Congrats on another strong quarter.

Thank you. A couple quick questions. Thank you for the slightly different bridges this quarter in terms of how you build out on EBITDA, et cetera. Looking at the organic drop-through, organic sales growth of 75 million, but leading to only 9.5 million of EBITDA with a variable margin of 12.7. It struck me as very low. Can you give us some context around why that flow-through is not more robust? John?

Yeah. So, look, you know, we expect the full year and second half improvement EBITDA and EBS to really be driven by a couple of things. Strong operating performance. Synergy realization of $50 to $55 million. We've got some positive currency impacts as well as we're confident in the $29 million in COVID costs. Offsetting that, some of the things that you're seeing are incremental SG&A that's related to the sales volumes, sort of like we saw in this quarter. We're doing some additional investment in A&P as well. And so you are seeing slightly less EBITDA accretion relative to the sales growth.

Okay. Okay. Um, and investors we talk with, they continuously kind of come back with one key question that is, um, whether or not your hedges, your hedge cost is materially below the spot rates out there and whether we should be expecting a bit of a cost cliff as we roll into next year. Is there any context or color you can give to, um, to either validate or ease those concerns?

Yeah, Jason, I mean, we did call out. So if you look at this quarter, $16 million in incremental costs. For the nine months, we're talking about $40 to $50 million of incremental, and that's related to the tariffs, transportation, and labor, as well as a little bit of commodities, about 15% of those commodities, but we're 100% fixed. So we're rolling into some of those higher costs, but not as big an impact in 2021. we will see those hedges start to roll off. And so as we get out further out, you'll start to see some inflation come through on the commodity side as well. So as we look at our top four commodities, and those account for about 15% of our COGS, we're seeing spot prices relative to our average cost in 21 up 15 to 20%. So that's a bit of the inflation that we're seeing come through. And our expectation is that we're going to address those through continuous improvement efforts to take costs out, as Tim mentioned, as well as some of the revenue management that Mark was talking about.

Okay. Thank you. That's helpful. I'll pass it on.

And next we have William Reuter of Bank of America.

Good morning. Good morning. So I know you were not interested in sharing the details of the percentage price increases in auto, but were the price increases you pushed through enough to offset the raw materials? And was this on a dollar-for-dollar basis or on a margin basis?

The price increases we pushed through were sufficient to offset the inflationary pressures we were experiencing in auto.

Okay. And then my second question, with regard to pushing through additional price increases in battery, I guess how frequently are mid-season price increases pushed through on battery, or do you typically wait for more of a larger discussion around shelf space resets to push those through?

What we'll do is pull together the information, and what we've done in the past is when we're experiencing headwinds in transportation, labor, terrorist commodities like we are now, We go through those exercises, internal costs, revenue management activities, and then as a last resort, move on to pricing. I think what we have to do is have enough of a handle on the permanency, the impact, and have enough data to be able to go into customers and have a fact-based discussion about the pressures that we're feeling. And whenever that time is in the cycle is the right time to have that. And as soon as we have that information pulled together, feel like we have a fulsome story to present and justify a price increase, that's when we're going to go in. But there's no sort of magic window of when we'll go in or when we won't. We're just going to do it when we feel like we have all the facts to justify it and have that discussion. And that's the way we've approached it in the past, and I would expect that's the way we're going to approach it in the future as well.

Perfect. Very helpful. Thank you.

Well, at this time, I'm sure no further questions. We'll go ahead and conclude our question and answer session. Alan, I'd like to turn the conference call back over to Mr. Mark Levine for any closing remarks. Sir?

Thanks, everyone, for your time and for joining us today and your ongoing interest in Energizer.

All right. And we thank you also, sir, and to the rest of the management team for your time also. Again, the conference call is now concluded. At this time, you may disconnect your lines, everyone. Take care and have a wonderful day. Thank you.