Energizer Holdings, Inc.

Good morning, my name is Vaishnavi, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's third quarter fiscal year 2021 conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, please press star then two. Please limit yourself to one question and one follow-up. If you have a question, you can rejoin the queue. As a reminder, this call is being recorded. I would now like to turn the conference call over to Jackie Burwitz, Vice President and Investor Relations.

Please go ahead. Good morning and welcome to Energizer's third quarter fiscal 2021 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, Tim Gorman, Chief Financial Officer, and John Drobik, Corporate 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 this 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 those 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 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 in 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 limited to our business as total category 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 year pertaining to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2020. With that, I would like to turn the call over to Mark.

Thanks, Jackie, and good morning, everyone. It's great to be with you today to share the results from another solid quarter. Before jumping into the results, I want to focus on a few bigger picture headlines. First, our categories remain very healthy. In fact, each of our categories is showing solid growth when compared to pre-pandemic levels. And we expect that consumer behaviors driving that demand will continue for the foreseeable future. Second, Operating costs have risen rapidly and we are laser focused on offsetting those headwinds through cost reduction initiatives and pricing. And finally, global supply chain networks continue to be stressed and are prone to disruption. As a result, we have built inventory to service our customers with excellence and minimize supply chain disruptions as we approach the critical holiday season. In a few minutes, I'll talk in more detail about each of these areas. But before we get to that, let's turn to the quarter where the benefit of our diversified portfolio and global footprint has shown through. Our top line grew nearly 10% from strong growth globally in our auto care business, solid growth in our international battery business, and currency tailwinds. These were partially offset by anticipated declines in our North America battery business. The top line growth combined with cost management synergy realization, and interest savings translated into solid adjusted EPS and EBITDA growth. Headlines for the quarter. We maintained top-line momentum with organic sales growth of 5.8%, including growth of more than 25% in our auto care business. In addition, we saw our international markets produce strong growth across all categories. Our gross margin was lower than last year by 160 basis points, as synergies and favorable currency impacts did not fully offset rising industry-wide input costs that accelerated in the back half of the quarter. The change in overall margin also reflects the strong growth of our auto care business, which has a lower margin profile than our battery business. Our adjusted EPS was 74 cents, an increase of nearly 50% versus the prior year. Given the strong top-line performance to date, we are increasing our full fiscal year outlook for net sales to 8% to 9% growth and reaffirming our outlook for adjusted earnings per share and EBITDA. In addition to third quarter earnings, we also announced today that we intend to repurchase $75 million of our stock through an accelerated share repurchase program. We anticipate that this will result in the repurchase of roughly 1.8 million shares or approximately 2.5% of our fully diluted outstanding shares. We have a high degree of confidence in our strategies and believe that this will prove to be a prudent allocation of capital. Upon completion of the stock for purchase program, we expect to have ample remaining financial capacity to support our ongoing capital allocation priorities of investing in our business to drive growth, returning cash to shareholders through our dividend and additional share purchases, executing strategic M&A, and debt reduction. Before Tim and John provide more details on the quarter, I want to provide some additional details on the rising cost environment and our recent pricing actions, the measures we have taken to ensure that we will operate with excellence in an uncertain environment, and the promising long-term growth prospects in our categories. First, the profitability of our business. I mentioned earlier that we have seen operating costs, including labor, transportation, and commodities, rise rapidly over the past few months. This is a trend we expect to continue. We will manage these pressures by reducing costs in other areas, pricing actions, and improve mix management. The price increases we took in auto care recently have gone into effect. and the previously announced price increase in North America for batteries should be fully realized by the second half of fiscal 2022. Similar efforts are underway across all categories in international markets. We have also proactively taken steps to bolster the resiliency of our supply chain. First, with the uncertainty around product sourcing, transportation delays, and labor shortages, we are investing in inventory to maintain high service levels through the remainder of the auto care season and throughout the peak holiday season for batteries. Second, we are increasing production of key products and component parts where demand continues to exceed our ability to supply, including alkaline and lithium batteries, auto care wipes, and trigger formats. We are expanding our internal production capacity as well as expanding our network of third-party partners, including those with packaging capabilities. And third, we are executing our plan to transform our global product supply organization by enhancing our use of data and analytics to enable us to respond to changing market dynamics much faster and more efficiently. Finally, and most importantly, I wanted to provide some insight on the health of our categories. During this quarter, and for a few more to follow, we will see consumption trends versus the prior year, which are a bit skewed by the peaks and valleys from COVID-19 related demand. which could be very different by category, geography, and time period. However, we remain very encouraged by the consumer trends underpinning our categories. Our analysis reflects healthy and stable underlying growth drivers, and as we compare to 2019, it is clear that our current category trends remain elevated. This growth is driven by sustained changes in consumer behaviors, which we believe bode well for long-term category growth. The following consumption trends should help provide some support for that confidence. And as a quick reminder, this data excludes e-commerce. In looking at the battery category for the quarter, consumption through May was down 11.6% versus a year ago. However, against that same period in 2019, consumption was up 9.5%. There are two drivers behind this growth. Devices owned per household are up mid-single digits in the U.S., and an increase in the amount of time those devices are being used. As a result, consumers are replacing batteries more frequently, and their buying behavior reflects these trends with an increase in purchase frequency and greater spending per trip. Our brands outpaced the category, resulting in a 2.8 sharepoint gain versus last year as we increased distribution and visibility, particularly in the U.S. The auto care category experienced even stronger growth trends, up 19% versus last year, as the category lapped soft consumption from the shelter-in-place orders in March and April of 2020. More impressive, it was up 21% versus two years ago due to the following factors. Consumers increased their do-it-yourself behaviors that were established during the pandemic, including higher levels of cleaning and renewed interest in car care as a hobby. Also, the number of miles driven returned to the pre-pandemic levels. And third, there is a tailwind from the increasing age of the fleet, given the shortage of new vehicles. In looking at our auto care business, we are proud to be the market leader in this fast-growing category. Not only are we the market leader, but we are accelerating that leadership by outpacing category growth through the strength of our innovations and brand-building investments. This quarter, our ArmorAll innovation, which had four of the top 10 new products during the quarter, was a key contributor to our growth. We are also growing the business by expanding into international markets, which grew 29% through increased distribution in existing markets, as well as entry into new ones. While the information we just provided did not include e-commerce, we do want to provide some color on how we are performing now. While we do not have full category data for pure play e-commerce, our consumption trends demonstrate that we are capturing consumers as they shop online more often. Batteries were down 29% versus a year ago. However, on a two-year comparison, they were up 80%. In auto care, we grew 57% versus a year ago and over 400% versus two years ago. As you can see, the underlying trends for our business are promising. and we expect those drivers to remain healthy. The actions we are taking will position us to win for both the remainder of the pandemic and beyond. Before I turn the call over to Tim and John, I wanted to talk about the CFO succession plan that we announced in June. After nearly 40 years in finance and four years as CFO of Energizer, Tim has decided to retire. During Tim's tenure, we have all seen firsthand his passion for the business, which has been integral to Energizer becoming the leading global household products company it is today. I am personally grateful and I am confident that I speak for the entire organization in thanking Tim for all that he has contributed to Energizer. We were all better for having the opportunity to work side by side with him, and he will be missed. Effective October 1st, John Drabik, currently our Senior Vice President, Corporate Controller, and Chief Accounting Officer, will become our CFO. John has been a vital part of our team and has a deep understanding of our business with nearly two decades in the Energizer Finance and Controllership Organization. Most recently, he led the work to transform the Finance and Controllership Organization. And over the coming months, Tim, John, and I will work closely together to ensure a smooth transition. On behalf of the entire organization, I want to congratulate Tim on his retirement and John as he moves into his new role. With that, I'll turn it over to Tim.

Good morning, everyone. And thanks, Mark, for the kind words regarding my retirement. It's been both a privilege and a pleasure to be part of the Energizer team through this transformative period, beginning with our spinoff from Edgewell in 2015 and the acquisitions we've made since. With the acquisitions essentially fully integrated, now is the right time to hand the baton to John Drabek. Many of you have had the opportunity to meet with John over the past year, He is an outstanding financial leader with 20 years of well-rounded experience as part of Energizer's finance team. I am confident he will be a great CFO. Now turning to our results. In addition to the earnings release we issued this morning, a slide deck is included on our website highlighting additional key financial metrics. I will cover the results for the quarter and then turn the call over to John for an update on our outlook for fiscal year 2021. Our organic revenue growth of 5.8% combined with synergy realization, lower interest expense, and favorable currency tailwinds resulted in strong adjusted earnings per share of 74 cents, up 48% versus the prior year third quarter, and adjusted EBITDA of $144 million, up 7% compared to the prior year. Taking a deeper look at organic revenue growth, our Americas and international segments grew 4.7% and 9.1%, respectively. In the Americas, auto care had strong double-digit growth due to elevated demand and distribution gains. This was partially offset by an expected decline in our U.S. battery business as we continued to lap elevated COVID-related activity in the prior year. This battery trend is expected to continue over the next three quarters. In our international segment, battery sales were strong due to increased demand and replenishment versus last year when sales were down 5% in the third quarter, as many of the international markets were on strict lockdowns. Auto care grew 29% organically as we focus on expanding our products into new and existing markets. Adjusted gross margin decreased 160 basis points versus the prior year to 39.2%, primarily due to higher labor, tariffs, and transportation costs, consistent with ongoing inflationary trends in the global market. These cost pressures rose quickly and are expected to continue over the balance of the fiscal year. Additionally, gross margin was negatively impacted by the lower margin profile of our auto care and lights businesses, which experienced strong organic growth in the quarter. Synergies of $14 million and the favorable impact from currency exchange rates partially offset these negative impacts. A&P as a percent of sales was 6.1%, up 40 basis points, or $6.8 million on an absolute dollar basis, as we continue to support our brands and innovation. This includes increased support for our international auto care expansions. Excluding acquisition and integration costs, SG&A as a percent of net sales was 14.8% versus 16.2% in the prior year, primarily the result of levering our cost structure against the higher sales achieved in the current quarter, coupled with SG&A in absolute dollars being essentially flat as we continue to effectively manage our cost. We realized nearly $15 million in synergies this quarter, bringing the total thus far in 2021 to $55 million. Since our battery and auto care acquisitions, we have recognized approximately $124 million of synergies, exceeding our initial targets. We are now in the final stages of integration and expect to close out the program at the end of this calendar year. Interest expense was $12.2 million lower than the prior year quarter, as we have taken advantage of favorable debt markets and refinanced essentially all of our debt over the past 15 months. At the end of the quarter, our net debt was approximately $3.3 billion, or five times net debt credit-defined EBITDA, with nearly 85% at fixed interest rates, no near-term maturities, and an all-in cost of debt of below 4%. Our adjusted free cash flow through the end of June stood at $43 million, well below the level achieved in the prior year. The decline in adjusted free cash flow primarily reflects working capital investments to support the balance of our auto care peak season and our upcoming holiday activity as we are conscious of potential supply disruption from the pandemic. Finally, I wanted to highlight some key performance metrics achieved through the first nine months of the year. Net sales grew 14%, including organic sales up 10%, Adjusted gross margin dollars grew 10%. Adjusted earnings per share increased 55%. Adjusted EBITDA increased 15%. And finally, interest expense, benefiting from significant refinance activity, decreased $20 million. We achieved this balanced growth across our key metrics while managing through the challenges brought about by the pandemic. Now I would like to turn the call over to John for an update on our outlook for fiscal 2021.

Thanks, Tim, and good morning, everyone. Looking at our fiscal 2021 outlook, we are increasing our net sales outlook range to 8% to 9% growth. This increase is driven by the better than expected growth in our auto care business and the impact of favorable currencies. Gross margin is now expected to be down 80 to 110 basis points. Our previous gross margin outlook was flat year over year. However, inflationary pressures which rose rapidly in May and June, along with the mixed impact of the growth of our auto care business, will have a negative impact. Adjusted earnings per share outlook remains unchanged at 330 to 350 and represents significant earnings growth over the $2.31 delivered in the prior year. We also expect adjusted EBITDA of $620 to $640 million, which is unchanged from last quarter and is an increase of 10 to 14% above the $562 million in 2020. Our year-to-date cash earnings are up roughly 30% versus the same period last year. However, as Tim discussed, we expect our working capital levels to remain elevated through the balance of the fiscal year. Anticipating that, we are revising our outlook for adjusted free cash flow to exceed $225 million. This is a direct result of our decision to invest in inventory to support the upcoming peak battery season and to ensure we maintain high service levels for our customers. The steps we are taking are prudent ones, giving ongoing disruptions that persist in the global supply network. Our combined two-year average for fiscal 20 and 21 is closer to 11% of net sales and is in line with our expected long-term outlook. We also view this investment as short-term in nature and fully expect our inventory and free cash flow to normalize as the volatility and macro impacts of the pandemic abate. Now I will turn the call back over to Mark for closing remarks.

Thank you, John. Through three quarters, we delivered strong top line growth with solid adjusted earnings per share and EBITDA results. Looking ahead, we are well positioned in the marketplace, a position anchored by our strong brands and innovation. Our focus today and moving forward will be to offset the cost headwinds while ensuring our products are available to consumers around the world. We have complete confidence in our team's ability to operate with excellence, drive productivity, and accelerate the momentum in our business despite any challenges which may come our way. With that, I will open the call for questions.

We will now begin the question and answer session.

To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning. Good morning, Bill. Good morning, Bill. Just want to talk a little bit more about the kind of pricing offsets. I think you said you should be fully covered as you move in kind of the back half of next year. But obviously with the battery business, majority of the earnings come in that first quarter. So just trying to understand, you know, are you fairly prepared for that? Or are we talking about more of a, you know, a kind of a negative tailwind to gross margins through the key parts of the year?

I think, Bill, I'll start that and then turn it over to John because I think as we start to answer that question, we do think it's important to provide a little bit of insight about 22, and I think we can start to shape that a little bit for you. On the pricing dynamic, as we mentioned in the prepared remarks, auto care has gone into effect, and we're going to start to see that benefit in August. In batteries, that price increase is still in process. We're committed to seeing that one through and getting it across the line. As we talked about before, I think we're going to expect to see minimal benefit in Q1, increasing benefit as you get through Q2 with a full impact in the back half of 22, which will help offset some of these headwinds that we're experiencing. But obviously, there could be some delayed impact. And John, why don't you kind of walk through a little bit of that?

Yeah, maybe a little bit of composition. We've called the rest of this year down 80 to 110 basis points, and that's really from an incremental $20 to $25 million in costs this year. Half of that's going to come from transportation, which we've seen go up pretty significantly. We've seen container rates go up from something like $2,500 a container to almost $4,600. We've also seen pretty significant inflation in labor rates, and then tariffs we've also got hitting us with headwinds. And then I think we talked about this last quarter, but it's not a significant driver this quarter, but commodities have really gone up, continue to go up. We've been hedged and will be hedged through the remainder of this year. But as we look out into 22, obviously we'll start dollar averaging into those higher costs. And so that will be a headwind for us. One of the things that we've decided not to do, or we continue to do, is we hedge, but we've done it at a slower rate, opting not to lock into some of these costs at the highs, hopefully. So As we go into 22, it probably makes a little bit of sense to give some more color as there are a number of moving parts. So maybe to that point, you know, we're going to provide guidance in November on our normal calendar, but it's obviously a very volatile environment. So we're going to give a couple of thoughts on the road ahead. As we've talked about throughout the year and began to see this quarter, you know, we're going to have difficult comparisons against the elevated sales levels that we saw during the COVID in the U.S. last year. So we're expecting year over year decline to many of our categories over the next three quarters or so. Although we do expect those to be up versus 2019 levels. So very strong categories. Specific to our results, we also expect to have benefit from expanded distribution and pricing activity that we've already announced that Mark talked about. On gross margin, as we've talked about, those inflationary pressures are going to carry over. We expect some of those to continue to impact 22. So we've got the pricing offsets that'll come in, but if current spot rates were to continue for the duration of the coming year, and with the expectation that some of that pricing would have to come in over time, we would project our gross margin rate in 2022 would be down roughly 100 basis points versus our full 2021 results. So, you know, our objective will be to perform better than this through a combination of productivity and revenue improvement measures, but we do expect to see some impact. Two other known aspects that we have for 22 that we'll just call out quickly. You know, we do expect to have incremental reduction in interest expense from all of our refinancing this year, so that should be about $50 to $20 million of tailwinds. And then we also are going to have the benefit of the share repurchase, which we announced earlier today. So we expect that that should take out outstanding shares by roughly 2.5%. And again, we'll provide a follow-up in November, but wanted to give some of that color.

No, that's extremely helpful. So thanks for the color. I guess one follow-up, as you look at auto care, and I guess especially as the comparisons for next year, I mean, the thought is the auto care season is largely behind us, or maybe we have a couple months left at most. Do you consider this like a above-peak year in terms of consumers out on the road driving more than expected favorable conditions? Do you consider this kind of normal, more what you had kind of expected back to 2019? Now, how do we look at it, especially from a comparison standpoint going into next year? Is there more growth on top of this, or is this really, you know, probably better than you would have expected?

I think the trends have persisted this year a little longer than perhaps we would have expected because we had some strong comparison. Now remember, last March and April, that channel was essentially shut down. So you have some easy comps that you're cycling through this quarter. But as you get through the summer and into the fall, that was where you saw elevated demand coming out of some of the lockdowns. So we'll continue to see those tough comps. But I mean, there are consumer behaviors which are continuing around cleaning, particularly on the interior of the car. You've had an extraordinarily hot summer, which has been a benefit to our refrigerant business. You've also had a lot more miles driven this summer than last, so the performance chemical business has been elevated. So you will go through some tough comps for the next several quarters on auto care, similar to batteries. But I believe the long-term health of that category is still very encouraging.

Great. Thanks, and congratulations, Tim and John. Talk to you soon.

Thanks.

Our next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning, everyone. I want to talk a little bit about reinvestment. It was great to see spending on advertising this quarter coming in, as you guys had planned, actually higher than what I had expected. But as we look into whether it's 22 or just call it the next couple of quarters, I was curious about reinvestment in SG&A and in light of things that you discussed earlier this year and mentioned again today about reinvesting in data capabilities, visibility into the supply chain, and so on. And it sounds like from the decision to proactively manage inventory, your visibility has improved versus this time last year. But I'd love to hear, I guess, one, progress made on that front, and two, cost to get there and the degree to which that is a further headwind in the P&L, certainly contemplated in your guidance, but something that we should probably be thinking about as well. Thanks.

Lauren, I'll start and then let Tim and John add on where they think appropriate. I do think any of our current reinvestment plans have been built into the outlook we've provided for the balance of the year. Any 22 investments, I think we'll get into detail of that in November. But let me take a step back on the supply chain question, which was really the second part of your question. When you're talking about supply chain in today's environment, there's really two different elements. The first one's around consistency and predictability of supply chain networks. And the second's around cost, which John touched on a few seconds ago. There's been a lot of disruptions in our supply chain and supply chains globally. And, you know, you've got the Suez Canal, the Texas freeze, you've got the recent typhoon in China. All of these events create delays in availability of raw materials and component parts. In addition, in the U.S., you have labor issues. I mean, to give you some data points, you know, transportation from China to the U.S. was previously pre-pandemic around 40 days. As of May, it was 75 days. At times, it's reached 90. There are restrictions on carrier availability. with frequent delays in inbound and outbound, and ports are congested. So I think all of these cause delays. As a result, we made the decision to invest in inventory. To your point, we saw that coming. We've anticipated it. Our visibility has greatly improved from where it was last year. And the way for us to manage less efficient and less reliable supply chain situation is to invest in inventory to ensure that we can meet the demands of our customers. So we think it is a prudent investment. We think it's a short-term investment, and as John mentioned, we think it's going to normalize as we get into next year. I don't think you're going to see, as you get into 22, outsized investments in some of these data and analytics capabilities that we've talked about. We've built them into a lot of the work we've done this year, and you're going to see the benefit of that really starting to come to life in 22.

Okay, that's great. That's super helpful. And then as you've also, the other mention, all in this vein that you made on investing in internal capacity as well as third party, just thoughts on CapEx spending. Obviously, you've got flexibility on your balance sheet with the decision to do the ASR, but I was just curious about CapEx additions. And again, also on capacity, you know, if we're You're adding to, I guess, what is the underlying category size assumption? I know you're not going to give me a number, but just in terms of that consumption in auto and in batteries is to what degree higher today or in your vision of what steady state looks like versus what you might have predicted back in 2018 or 2019?

That's a great question, Lauren. I mean, at the base of your question, I think, is are we going to end up with too much capacity on the other side of what may be elevated demand? And we are confident that the answer to that is no. And that's in part because we have had a multifaceted approach to production. We insource and we outsource, and we make sure that we balance prudently in between those two. We have started to bring some more capacity in-house. And we will retain the ability to flex up and flex down both internally and externally so that we make sure that we don't end up with an absorption issue and increase costs as a result of that. We bought a plant in Indonesia, as you know, last year. We've increased the productivity of that plant in excess of 20%. We've added a couple lines we've talked about in Fenimore and Asheboro. You can flex up and down. And then we've added Weitz lines in Dayton as well as in the UK. That's going to allow us to bring outsourced product in-house, but we're still going to continue to use third-party providers as well to make sure that we can flex capacity and not have too much internal capacity that would have to be idle in the event that demand drops.

Okay, that's great. Thank you so much. I'll pass it on.

The next question comes from Andrea Teixeira with J.P. Morgan. Please go ahead.

Thank you. Good morning. Thanks for sharing some of the proofs and takes into fiscal 22. So I wanted to perhaps dig a little bit more on the cadence of the cut line because you did mention to be careful with, you know, sales being probably negative over the next couple of quarters. I just wanted to find out what you were embedding in this guidance from the proofs and takes that you gave us on margin, how we should be thinking on the cut lines.

Andre, I think I picked up your question, but it was a little tough to hear you. I think in terms of the top line cadence, I mean, we're not going to yet get into the 22 guidance, but I think if you think about just Q4, I mean, at this point, it's essentially, you know, just math. I think you would expect auto care and batteries to be flat to slightly down.

Yeah, it's about negative 5% is what we're looking for the fourth quarter.

Yeah, no, no, for sure. Now, this is understandable, obviously, but I was thinking more and I apologize for the for the bad sound quality, but probably like more into, as you said, the fiscal 22, like more from a consumption perspective, how you're seeing as you get into the into the peak of the season, what are your retailers telling you in terms of consumption?

Well, consumption has been strong. We aren't seeing inventory levels elevated in any meaningful way across retailers. I think what you're going to have to do is you're going to have to cycle through the elevated costs, particularly in batteries, over the next three quarters. So I think you'll continue to see negative category trends, but that's when it'll be important to continue to look at it against 19. I think you're consistently seeing consumers, about a third of consumers tell us that they're buying batteries today. and then they continue to expect to buy additional batteries in the future. 90% of them are using them for immediate usage. Purchase frequency is up 2% versus the prior year, and the spend per trip is up 9% against the previous year. So you're continuing to see healthy consumption trends out of consumers, particularly in the battery category.

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

The next question comes from Jason English with Goldman Sachs. Please go ahead.

Hey, good morning, folks. Excuse me, a couple other questions. Good morning, Jason. Good morning. So to build off the earlier CapEx question, I noticed you've lowered your CapEx expectations this year. What drove that? Is that just a deferral into next year? And you mentioned that you're on track to complete the integration program this year.

how should we or what should we be expecting in terms of capex levels going forward once that falls out yeah it's a good question jason we've kind of looked at our capex needs you know as we go forward we've historically run at about one and a half to two percent of net sales i think what we're viewing as we complete the program and kind of get into our normal run rate at some of those investments that we talked about in technology as well as into our plants We'd probably be towards the higher end of that, but still kind of within our normal long-term range. So more around that 2%.

Okay, that's helpful. And then you mentioned the accumulation of inventory this year. Is that just raw materials or is it finished goods? And what sort of gross margin benefit are you seeing in terms of leverage of your plants, if that's the case?

Yeah, a lot of what we've built incremental over the last quarter has been raw material and width. And so we've kind of built up, as Mark said, we're seeing, you know, some potential volatility out there in the global supply chain. So we've built up some of our ability to continue to turn that into finished goods next quarter, and then we'd see that kind of sell through in 22. So I would say, you know, there's not a significant impact to our gross margin from what we've done. It's kind of in line with sort of our normal, but we have stockpiled a bit.

Got it. Helpful. Thanks. I'll pass it on.

As a reminder, if you have a question, please press star, then 1 to be joined into the queue. The next question comes from Rob Oppenstein with Evercore. Please go ahead.

Great. Thank you very much. Just to start off, I just wanted to ask you a little bit about your share buyback program. Certainly, I can understand wanting to buy back stock where it's so undervalued as it is today. But you don't usually see that with the kind of leverage that you guys have, particularly in a tough, uncertain, general macro environment. I'm wondering if you can just give us a little bit more details behind the share buyback program and any signals that we should be getting from that in terms of future capital allocation.

Yeah, Rob, I mean, I think the first thing we'd say is that we've spent a lot of time over the last 12 months refinancing our debt capital structure. So we feel very comfortable with where that is right now. We've got, you know, basically our all-in coupons are below 4%. We've got very limited maturities over the next six years or so. So it frees us up a bit to make, you know, capital allocations where we think we can get the best return. I'd say the second main point is that we expect significant cash flow generation over this quarter and as we go forward, kind of back to a normalized level. So the ASR that we're talking about, we think we can fund with those cash flows pretty comfortably along with our dividends that we'll continue to pay. Share repo has been an important component of our capital allocation strategy all along. So I think we've got confidence in our strategy and future growth prospects and really believe that this is a prudent investment to make. you know, given the value proposition that you talked about.

Absolutely. Great. Thank you. And then second, can you talk maybe just a little bit more about, and this on the battery side, about the competitive environment that you're seeing? You mentioned that you've been gaining share. Who are you gaining share from? Is it related to particular price points, particular channels? What's the consumer doing in terms of private label? Any thoughts along those tangents? Thank you.

Sure, Robert. From a private label standpoint, you're seeing small upticks in the U.S., but nothing significant, and I wouldn't say nothing that's overly concerning. A lot of our distribution gains recently have come from Duracell. We are gaining share as as you've seen in the recent data set. And we expect to continue to gain some distribution through the balance of Q4 as well and into 22. So a lot of great work from the team standpoint. I would say overall, the competitive dynamic is healthy. Both we and our competitors are competing on innovation, on brand building, and advertising spend, which is a great place to be. It's creating a nice, healthy category. And, you know, I think right now our teams are competing well. You're seeing that in the measure data. And we expect that to continue.

Terrific. Thank you very much.

This concludes our question and answer session.

I would like to turn the conference back over to Mark Levine for any closing remarks.

Thanks for your time this morning and once again for joining our call and your ongoing interest in Energizer.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.