Energizer Holdings, Inc.

Good morning. My name is Anthony. I will be your conference operator today. At this time, I'd like to welcome everyone to Energizer's first quarter fiscal year 2022 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 your telephone keypad. To withdraw your question, please press star then two. As a reminder, this call is being recorded. I would now like to turn the conference call over to Jackie Berwert, Vice President of Investor Relations You may begin your conference.

Good morning, and welcome to Energizer's first quarter fiscal 2022 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, and John Dravik, Chief Financial Officer. A replay of this call will be available on the investor relations section of our website, energizerholdings.com. 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 uncertainty, 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 reports we filed 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 estimated market share discussed on this call relates to categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. This quarter, the battery category information includes both brick-and-mortar and e-commerce retail sales. 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 2021. With that, I would like to turn the call over to Mark.

Thanks, Jackie, and good morning, everyone. I am pleased to be here this morning to share our first quarter's 2022 results. In our first quarter, strong demand, expanded distribution, and execution in the holiday season led to a solid start to our fiscal year. While the operating environment remains challenging, our first quarter results are a testament to our team's preparation, resilience, and commitment. Before I go into detail on the quarter, there are three key points to take away from our call today. First, our team delivered in the critical holiday season, and our categories remain strong. Second, we continued to manage through a very challenging cost environment with increases in transportation, commodity, and labor costs, as well as ongoing supply chain disruption. And third, as a result of our additional pricing actions and cost containment measures, we are reaffirming our outlook for net sales, adjusted earnings per share, and adjusted EBITDA for the full year. As we look specifically at the results for the quarter, we maintain strength in our top line, delivering revenue of $846 million. This was roughly flat the prior year on an organic basis. Global price increases and expanded distribution in the battery business were offset by an expected decline in volumes as we comp elevated COVID demand from the prior year. Adjusted gross margin decreased 320 basis points as increased input costs were partially offset by price increases, synergies, and the comping of prior year COVID costs. On a sequential basis, gross margin was roughly flat for the prior quarter. consistent with our view for the start of the year. With our solid top line performance and lower interest expense, we partially offset the gross margin decline and delivered adjusted earnings per share of $1.03 in the quarter. Before John provides more details on the quarter, I want to provide some additional color on the performance of our categories, the rising cost environment, the resiliency of our supply chain, and other actions we have taken to operate with excellence in an uncertain environment. First, our categories remain healthy, with both battery and auto care showing robust demand versus pre-pandemic levels. Specifically, the battery category benefited from two drivers, the increase in devices owned per household and an increase in usage of those devices, resulting in higher battery replacement frequency. These trends have resulted in consumers using more batteries. On a two-year stacked basis, the global battery category has grown by 9.7% in value and 7.8% in volume. As anticipated, we saw the category decline in the three months ending November 2021, which was down 3.5% in value and 8.4% in volume. This was due to comping elevated demand in the prior year. As we look to the long term, we anticipate category value to experience flat to low single-digit growth off a higher base, as the category has increased in size due to consumers' behavior during the pandemic. Our iconic brands outpaced the category, resulting in a 1.2 sharepoint gain versus last year, with expanded distribution in the U.S. being the key driver. As we turn to the auto care category, in the latest 13 weeks, Category value was up 9% versus a year ago and 20.6% on a two-year stack basis. As with batteries, the growth is being driven by changing consumer behavior, including do-it-yourself habits, which were established during the pandemic, such as higher levels of cleaning and renewed interest in car care as a hobby, a higher number of cars in the car park, and an increase in the age of vehicles given the shortage of new vehicles. and a recovery in miles driven given the increase in personal travel by car. As we look ahead, we anticipate that auto care category value will grow at low single digits once it has cycled through the COVID-related demand. Energizer continues to be a leader in the auto care category through our strong portfolio of brands, specifically in appearance, the largest subsegment in which we compete. Our Armor All brand outpaced the category in the U.S. due to distribution gains and the strength of our innovation. In addition, our international auto care growth plan has resulted in growth ahead of the category in key markets, including Australia, Germany, New Zealand, the U.K., and Mexico. While our categories are healthy, the macro environment in which we are operating remains difficult. This leads me to the next important topic, operating costs. Commodities, transportation, and labor costs continue to rise, resulting in increased cost pressures that are incremental to the outlook we provided in November. We have moved quickly to offset these pressures through additional pricing actions, cost reduction initiatives, and improved mix management. Pricing actions in both our segments were announced within the last couple of weeks and are incremental to the increases discussed in November. They will become effective late in the second quarter for North America and in the third quarter for international markets. We expect the cumulative effect of these actions to offset the inflationary cost pressures on a dollar basis. In addition to inflationary pressures, the global supply chain network remains stressed from pandemic-related disruptions, which includes port congestion and transportation delays, as well as availability challenges with respect to labor, source product, and raw materials. As a result of this dynamic, we took a proactive approach by investing in incremental inventory in the prior year and also in the current quarter. This decision paid dividends as we were positioned to meet our customers' and consumers' needs and deliver a successful first quarter. We expect to operate with elevated safety stock for the foreseeable future while we monitor the supply network, for signs of stability. As you can see, the business is operating on solid footing and the underpinnings of our categories remain healthy and in a stronger position than before the pandemic. Even with the difficulties we experienced, we delivered strong results and are on track to deliver another successful year. Now let me turn the call over to John to provide additional details about our financial performance in the quarter.

Good morning, everyone. Before expanding on the financial highlights, I would like to point out that our segment reporting has changed from two geographical segments to two product line segments. Going forward, our two segments will be battery and lighting products and auto care, more accurately reflecting how we manage the operations. The press release issued earlier today recast the prior year first quarter to align with this new segment reporting. Now, turning to our results, reported and organic revenues were both essentially flat. In battery and lights, Strong demand and solid execution resulted in a modest decline in organic sales, while AutoCare continued its strong performance with organic growth of 1.3%. Pricing actions globally delivered roughly 2% growth, and additional distribution contributed another 1%. Offsetting these gains was a decrease in replenishment volumes driven by the timing of COVID-related demand in the prior year. As a reminder, we executed price increases in our battery segment in the first quarter of this year and we have taken pricing in auto care in both the second and third quarters of the prior year. The impact of these pricing actions was reflected in our initial outlook for this year. As Mark mentioned, we experienced significant incremental cost pressures during the first quarter and moved quickly to implement additional pricing that will benefit the second half of fiscal 2022. Sequentially, adjusted gross margin was roughly flat versus the fourth quarter of fiscal 2020, as we expected. However, adjusted gross margin decreased 320 basis points to 37.5% versus the first quarter of 2021 as pricing, lower COVID-related costs, and synergies were offset by more than 700 basis points of margin erosion from inflationary cost pressures. This quarter also marks the conclusion of the integration of our battery and auto acquisitions. The successful integration positions us well to focus on continuous improvement initiatives to offset inflationary pressures going forward. A&P as a percent of sales was 6.1% versus 5.8% in the prior year as a result of planned increased spending. We remain committed to investing in our brands for the long-term health of our businesses. Excluding acquisition and integration costs, SG&A as a percentage of net sales was roughly flat at 13.2%, but declined $2 million on an absolute basis as lower compensation expense was partially offset by increased travel and higher IT spending related to our digital transformation. Looking at segment profit, both battery and lights and auto care benefited from continued strong demand, pricing actions, and distribution gains. However, the inflationary input cost pressures more than offset the stronger than expected top line performance. This impact flowed through to the bottom line for each business, resulting in a segment profit decline of $12 million for battery and $18 million in auto care. Interest expense was $37 million, or $10.3 million lower than the prior year, reflecting the benefits of significant refinancing activity of our debt capital structure over the past year. We expect a similar quarterly run rate for interest expense over the remainder of the year. I would also like to point out changes to our shares outstanding for the quarter and the remainder of the year. In the first quarter, we completed the accelerated share repurchase program that was announced last August. The total number of shares purchased under this program was nearly 2 million. Additionally, on January 18th, our mandatory convertible preferred stock converted to approximately 4.7 million common shares. Absent any additional share repurchase, weighted average shares outstanding for the remainder of the year will be approximately 72 million. As we look at our outlook for 2022, we are facing a number of gross margin hedges. We continue to experience significant cost pressures in transportation, driven primarily by the global backlog of ocean freight. In addition, labor availability is a major challenge across most U.S. sites, pressuring rates. And finally, many commodity markets remain at all-time highs, impacting our raw material costs. Through a combination of pricing actions, improved mix management, and cost reduction efforts, We expect to offset the absolute dollar amount of these rising costs. However, due to the lag in timing between the recognition of these higher costs and the successful rollout of our pricing actions and cost reduction efforts, we expect as much as 50 basis points of additional gross margin pressure to impact us for the full year 2022. This is incremental to the 150 basis points provided in our outlook in November. We expect to see the most significant impact of gross margin in our second fiscal quarter as we will absorb the full effect of these costs without the offset from our incremental pricing initiatives. With the benefit of the actions we are taking now, we expect gross margin to recover in the back half of the year. Given the continued strength of demand in our categories and our efforts to offset the majority of these headwinds through pricing and cost reduction initiatives, we are maintaining our fiscal 2022 outlook for roughly flat net sales, adjusted earnings per share in the range of $3 to $3.30, and adjusted EBITDA of $560 to $590 million. Now I would like to turn the call back to Mark for closing remarks.

Thanks, John. As I mentioned at the beginning of the call, our team delivered well in the critical holiday season, and our categories performed well globally. Like many companies, we also continue to face a rising cost environment and supply chain disruption. Given these conditions, we are taking aggressive action to offset the most recent cost escalation, including an additional recently announced pricing action in North America Battery and AutoCare. We remain confident in our outlook for the year, reflected in our reaffirmation of our guidance for net sales, adjusted earnings per share, and adjusted EBITDA. I am incredibly proud of our team who continue to operate with excellence and deliver on our priorities and commitments. 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 telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow up. At this time, we'll pause momentarily to assemble our roster. At this time, we'll take Lauren Lieberman with Barclays. You may now go ahead.

Great. Thanks. Good morning. Hey, so, John, you gave us some great color already on gross margin and are very clear on the pricing catching up with cost in dollar terms. But I was just curious a little bit more about how to think about progression of gross margin through the year, because I would think there should also be some incremental pricing that shows up in the second quarter by virtue of timing of some of the battery pricing really showing up on shelf that's already, you know, been making its way to the market. And then also knowing what you've offered on incremental costs, you know, how front half weighted that is. And when we think about recovery in the back half, is it, you know, up just in the fourth quarter? What should be our benchmark for what level we're kind of able to be marching towards? Any further color would be great. Thanks.

Well, John and I will tag team this one. I'll kick it off, and then John will give some detail on how the year we expect to play out and the pressures we're feeling. If you recall, in November, we were already experiencing inflation and made the assumption on our last call that it would last for all of fiscal 22. At that time, we had already engaged in a number of cost reduction activities as well as pricing that we executed in the marketplace. Since then, You know, the inflationary environment has gotten worse, but we were more aggressive this time. We've executed additional price increases in January in our U.S. battery business. We've executed last week on the auto care business. We're also revisiting the international increases where in certain markets we'll go back a second time and other markets we'll just take larger increases on the first round. All of these increases, you know, most of them will be effective at the end of Q2. So as we enter into Q3, we should have the benefit of these price increases, but we will have to work through some of the cost pressures that we'll experience in Q2. And, John, you want to walk through maybe some additional details?

Yeah, Lauren, let me decompose and kind of start at the beginning because, you know, there was a fair amount coming into the year, and then as we go through the rest of it, there's a fair amount of incremental costs. So, you know, what I talked about last quarter was 500 basis points of incremental costs. that we expected to negatively impact our results. And that's a lot of the pricing and cost saving issues that Mark said we took going into the year. On a run rate basis, we did anticipate that we would roughly offset the dollars. And then the net impact for the year would be about 150 basis point decline in gross margin. So the first quarter really went well for us. It played out as we expected. But as the quarter progressed, we continued to experience significant additional inflation. Some of the items that we've seen, zinc has gone up around 10% just since November. Over that same time, EMD is almost up 20%. Lithium is up even higher percentage. And in the auto category, we've also seen significant increases in things like silicone and R134A gas. So, When you combine that with the continued elevated transportation costs that we're seeing, what we're calling for for the full year is another incremental 400 basis points of headwinds. And so as Mark talked about the pricing that we've just announced and continue to expect to impact the year, that should give us the benefit on the pricing side in the back half of the year. But what we're seeing about 400 basis points of incremental headwinds for the full year. So similar to the dynamic that we saw coming into the year, Gross margin rate, we're expecting 50 basis points of incremental headwinds, mostly because of timing and the fact that we're not margining up. So we're passing through the cost but not raising rates. So our expectation is that the pricing and cost actions that we have moved quickly to take this quarter will get us close to our original full-year view on gross margin. We delivered first quarter roughly in line with our expectations. We expect to see a dip in the second quarter. And then with the pricing coming in, we'll see continued improvement in the back half of the year.

Okay, great. Thanks. And then I had a more strategic question because one of the things that was most interesting to me last quarter was the more detail you were beginning to share on some of the price pack realignment work that you've been putting in market. Okay. Just any updates there on what you're seeing in terms of shelf sets, how much more widely that might be in place if you've seen competition follow suit in any way, so kind of on-shelf look and feel is frankly what I'm asking about. Thanks.

Laura, we did execute the price increase that went into effect on October 1st. We did take a more progressive nature of that price increase with larger pack sizes, executing higher percentage increases. For purposes of the price increase that we executed in January, we did not double down on that strategy. And it's not because we didn't believe it was a good one. It was just ease and simplicity of execution in this environment. Because we were moving faster and, frankly, because the execution timeframe, we're striving for 60 days. Simply going with a straight percentage increase made more sense to us at this time. We have seen, you know, the pricing realignment show up on shelves similar to what we did in our first round, and that's encouraging, and it's certainly something we'll continue to look at in the future.

Great. Thanks so much.

Thanks, Mark.

Our next question comes from Nick Mody with RBC Capital Markets. You may now go ahead.

Yeah, thank you. Good morning, everyone. So, John, maybe you could just talk about the top line. I mean, obviously, very good results, but you're holding your guide for the full year. So just wanted to understand the puts and takes on that standpoint. And then just more broadly, if you could just share what you're seeing from a competitive standpoint in terms of pricing. Has everyone pretty much taken price in the category to the same degree? Thanks.

I can start with that second one, Nick. I think from a competitive activity, I mean, as we look at the retail landscape, we are seeing category movement across all of our categories where you're seeing not just Energizer products, but competitive products, private label, generally move up as everyone's experiencing the inflation that we've talked about. So I think that as long as those price gaps stay roughly consistent with historical norms, then that won't introduce a different dynamic other than just higher pricing across the category. In terms of the top line, we obviously had a great Q1. In terms of the outlook for the balance of the year, we're one quarter in in a fairly dynamic environment right now. It didn't feel prudent to try and change our outlook for the overall year. Instead, we're just going to continue to execute. The price increases that we've talked about continue to execute supply chain growth. excellence throughout the organization and really drive to deliver the outlook we provided in November.

I mean, Nick, obviously it was a good quarter. We saw the pricing start to take hold, but we also are anticipating that there would be some volume impact. We're also comping very big first half of last year. So as we kind of look out, as Mark said, it's first quarter. We're going to stick with our outlook at this point.

Excellent. And if I could just follow up on just a quick labor question. I mean, are Are you guys seeing things start to improve at all? I mean, is there any loosening of the market? Any thoughts around that?

I would say that tends to be very location-specific in terms of labor availability and the rate that you have to pay, you know, particularly for temp labor, which many of our facilities utilize. I would say there's been some mild improvement in certain areas, but it's not consistent enough yet to call it a trend.

Great.

I'll pass it on.

Thanks, everyone.

Our next question comes from Andrea with JP Morgan. You may now go ahead.

Thank you. Good morning. My question is on the distribution side, and obviously you had an impressive increase in distribution last year. I was wondering if you can comment how you're positioning into the spring shelf resets and how you're seeing private label. Part of the conversation during this earnings season by peers has been, potentially the normalization of private label availability. Of course, you've been gaining a lot of share over the past few years. Just curious if you were seeing your retailers starting to bring that conversation just to barbell the pricing and the pricing actions you've taken. Thank you.

Andrea, I would say the discussions that we're having across both of our main categories are roughly consistent with what they've been in the past. I think private labels has been a part of, for instance, the battery category for a long time. We have seen private label price increase moving at the same, roughly at the same rate that we've seen branded products, but private label will always be part of the discussion. From a distribution gain, we had a very healthy distribution gain year in 21, and that's going to continue to benefit us into 22. We expect distribution gains positively impact top line really in the Q3 and as a result of some of the great work from the commercial team. But private label, if you look at globally as well as in the U.S., has declined over the last reporting period. I do think as we get into uncertain economic environments in the future, that's certainly important. You can tend to see some softening and trade down in a private label. It's something we've experienced in the past, but it's obviously something we'll watch and make sure we manage appropriately.

And that's super helpful. And then on the pricing, just a clarification, you're saying the additional pricing would be mid-single, and is that an international? That includes global, or that's mostly U.S.? ?

That's a great question, Andrea. Let me see if I can just level set pricing of kind of where we are, because there's so many different moving pieces that we've executed. Let me go back to fiscal 21. We took our first round of pricing in auto care, which was effective August 1st. We took another round in refrigerants only that was effective December 1st. If you recall, last summer, we also announced our first round of battery pricing in the U.S., which was effective October 1st. And that was all executed in fiscal 21. As we got into November and the inflationary pressures that both John and I have talked about, we recognized the need for additional pricing. We executed an additional round of battery pricing on January 15th with a 60-day effective date. We've also announced on February 1st additional auto care pricing with an effective date around April 1st. So there's multiple rounds of pricing. If you get into the international markets, very difficult to provide a quick summary of that, and it would take probably too much time. But what I would say is we're taking pricing across many, if not all, of our international markets in some form or fashion. Some of them will experience higher one-time increases. Others, depending upon where they were in the price increase cycle, will get a second round in the future. So it's All in, what I would say is about 95% of the portfolio will experience price increases, some of them multiple times, and all the pricing should be in place and executed, or most of it should be executed by April 1st.

That's super helpful. And you're leading pricing in many ways, and you're seeing your branded competitor come through, or there's still some delay there? Yeah.

I would say that's just not how we look at it. I would say we're taking pricing that we need for our business, and we're managing it appropriately and executing when we think it's justified, and how competition does that with respect to their business will lead to them.

Okay, that's fair. Thank you so much for passing on. Congrats again.

Thank you.

Our next question comes from Wendy Nicholson with Citi. You may now go ahead.

Hi. I wanted to focus more on the capital allocation side. I know you said that you're largely finished with the integration of the acquisition. So does that sort of make you feel maybe more confident as you look ahead about looking for other acquisitions? I know M&A has kind of taken a backseat for a lot of companies during COVID. Does that become more of a priority for you? And now that you've exhausted the share repurchase program, what's the plan going forward? Do you expect to re-up that and open up a new one? Any color on that would be great.

I would say, Wendy, initially our focus is on gross margin recovery, and I think that's the focus of the organization primarily. When it comes to capital allocation, what I would say is M&A is of a reduced interest at the moment just because of our leverage levels, and there is an enhanced interest, you know, on our part to de-lever a little bit before engaging in any meaningful M&A activity.

Yeah, maybe to add a little bit to that, you know, we've invested a fair amount of working capital, Wendy, so we probably got a half a turn that we're, you know, financing right now in working capital. And I would say that as free cash flow normalizes, we would look to probably pay down some debt. And then to Mark's point, M&A would be after that.

Got it. Got it. And then just on the auto side, more just from a demand perspective, do you have a sense – I mean, obviously, people's habits have changed in terms of how much they're commuting or whether they're using their car for vacations. I mean, do you have any sense for kind of going into the spring, summer, the big sort of auto demand car cycle, however you want to – define it, but do you have a sense for kind of what demand will look like? Will more people be in their cars this summer compared to last? Will more people be going on planes and traveling? Anything that you have from sort of a sentiment perspective on the demand side of the auto care side? Thanks.

Wendy, I think the demand in the auto care segment is very healthy. I think if you look at the primary drivers of the category, the size of the car park, which is increasing, the age of vehicles, which is increasing because of the difficulty that people are having buying new cars, as well as the number of miles driven as people get back to a more normalized level of travel. All of those are trending in a positive direction. You're seeing it play out with very healthy category growth. I mean, if you look at a two-year stack basis on the auto care segment, it's about 20%. Our results have followed. I mean, we're calling for the auto care to be up 2% this year, and that's off a growth of 16% last year. We have We're off to a great start in our international auto care growth. We're gaining share, particularly in appearance, in many of our major international markets. So from an overall consumer sentiment, I would say consumers seem to be resilient. Our brands are certainly strong. And as a result, you're seeing an increased interest in the category. I do think if you hit economic downturns, one of the interesting things about this is you may You may have some consumers who walk away from purchasing the product, but you also have an offset, a natural offset, where people will go from do it for me to do it yourself. So we have a natural hedge built in as the economic cycle sort of ebb and flow.

Got it. Fair enough. Thanks so much for the color.

Thanks, Wendy. Thanks.

Our next question comes from Kevin Grundy with Jefferies. You may now go ahead.

Great. Thanks. Morning, everyone. A couple of questions on the guidance, one near term, one longer term. Just on the input cost, maybe just comment on some of your key assumptions for some of your larger exposures. Are you embedding any moderation? Are you holding current spot rates flat? How much are you hedged? Because, John, as you mentioned, you've seen a number of your input costs move higher, I think sharply higher in the case of lithium. So maybe you could just comment on that. And then as a consequence of the 50 basis point additional drag you're anticipating on gross margin and some of the timing mismatch, is it fair to say that you are a lower point in your guidance than you were previously? Are you thinking more lower end? Are you thinking more midpoint, et cetera? I think that would be helpful for folks. And then I'll just squeeze in one last one now. Just longer term, the ambition is – and I know you guys are very focused on gross margin recovery – To your best estimate today, what does that path look like to get back to mid-20% EBITDA margins? Is it three years? Do you think it's closer to five years? And I know there's a tremendous amount of uncertainty, but just in terms of your current planning, there's a lot of focus from a Wall Street perspective, obviously, just on the cadence to getting back to normalized margins. So thank you for all that.

Backed a lot in there. John, why don't you take the inflation assumption?

Right, Kevin. So a couple things I'd say – As far as our modeling and the outlook, we are marking the market and holding spot as we go forward. So there's no expected improvement in there. We also aren't projecting anything getting worse. So similar to what we did last quarter, that's what we're doing go forward. As far as fixing things up, we've got about 25% to 30% of our costs fixed for the remainder of the year. The only additional color I'd give on that is the ability to go longer term with a lot of our vendors has become more difficult in this environment. So, you know, we're doing everything we can to fix that up, but we probably won't be able to push things out as far as we may have done historically.

On the overall recovery, Kevin, I mean, rather than speak to specific timeframes or specific milestones, which I'm sure you can appreciate is difficult to pin down in this environment, you know, I think what The way we've laid it out today is the price increases and the cost reduction activities make us dollar whole from a gross margin standpoint for the balance of this fiscal year. We need to continue to execute pricing. We also need to continue to engage in the productivity programs that you've heard a lot from us in the past. We have an ongoing pipeline of initiatives. Given the environment, we've pulled together an integrated cross-functional team, which is focused on driving gross margin improvement. This is not a separate program. This is within the ordinary course of the business. But we're really looking at short, medium, and long-term initiatives as you look across. On the short-term side of things, it's mixed management. It's pricing and revenue management. It's cost reduction. It's opportunities and skew optimization. And then on the other end of that spectrum, network opportunities, automation opportunities? Can we continue to lean in with other suppliers? All that's going to be connected to our digital transformation efforts, which is an effort to improve the insight, the availability of data and insights, which is going to allow us to make better business decisions on all of those different components. So from that perspective, we're going to execute that while we're executing pricing and continue to manage through that and get the gross margin and ultimately the the margin structure of this business back to where we think it should be. In terms of pinning down a specific timeframe, I think there's too many variables outside of our control for us to be able to do that with any degree of precision right now. Very good. Thank you, guys. Good luck.

Thank you.

Our next question comes from Robert Otenstein with Evercore. You may now go ahead.

Great, thank you very much. You talked about in a fair amount of detail the timing of some of the price increases and I think we all understand it's a very fluid environment, early days on some of those increases. I was wondering if you had started to see any kind of sense of consumer response, whether it is going from one channel to another or different pack sizes. And you also mentioned, I think, in your opening statement that you were now discussing in terms of the markets, both brick and mortar and e-commerce. So perhaps you could give us an update on what your e-commerce business is looking like, the growth there, the percent of sales, and whether you're still category agnostic. Thank you.

I can answer the last question first, Robert. I think we are still channel agnostic as consumers migrate brick and mortar to online. I would say your first part of the question was a good one and a general one around the state of the consumer and what's happening as some of these prices are increasing both on our products but also across the store. What we've seen is our brands have really been resilient and have been able to carry the additional pricing quite well. Consumers have been resilient. With the price increases that we executed last year over the holiday season, we assumed historical elasticities would hold, and they held up much better than we anticipated. That's both due to the strength of the consumer, but frankly also the strength of our brands and the execution by our teams in the marketplace. As we've launched these additional price increases, We are assuming historical elasticities also will hold going forward. We did not assume that the elasticities that we saw on holiday would continue. But I would say when you look at the underlying drivers of the category for both auto care, and we talked a little bit about that with Wendy, but let's touch on batteries for a minute. I mean, batteries are driven by devices, disasters, and demographics. They really focus on devices. And From that perspective, and devices may be a bit of an antiquated word to use. I mean, what this is about for consumers right now is connected homes, connected health, connected work. All of these tools that they use to stay connected throughout all parts of their lives, many of them take our batteries. And as a result, you're seeing a battery category that is healthier than it has been in years. You are certainly coming out of the other end of this pandemic in a healthier spot than you did going into it. You know, you've seen devices in the home go up about 7.5% over the last two years. So when you look at the battery category and the auto care category, our consumers are healthy, our brands are strong, and the underlying drivers for category demand is better than it's been in several years. I think the underlying health of both of our businesses is tremendous. It's just simply a question right now of executing pricing, managing cost reduction opportunities within your business, and driving gross margin improvements.

Great. And can you break out what percentage of your U.S. business is e-commerce?

We have not broken that out specifically. I will tell you, if you look at the battery category across all of e-commerce, you know, again, not just Amazon, you're looking at about 17% of the category goes through online. Great. Thank you very much.

Our next question comes from Bill L. Chapel with Tour Securities. You may now go ahead.

Thanks. Good morning. Can you talk a little bit just about the trends at Rayovac and kind of what that does in terms of elasticity, in terms of retailers' willingness to have more price points or better price points if you've got any distribution gains there, and anything that maybe kind of helps us understand how that franchise is progressing?

That's been a tremendous addition to our portfolio, Bill. I think particularly as you head into environments like we're in right now, having that strong value brand in the portfolio just adds a level of defense to your portfolio that we didn't have before in the U.S. Rayovac distribution in the U.S. is a little bit limited in terms of one large mass customer and then the main customers being at home center, but that brand plays a very key role in their offering to their shoppers. I think our emphasis as a selling organization, as a company, is always going to be on the Energizer brand, but not to the detriment of Rayovac. We just want to make sure that we use Rayovac in the value offering space and where we can trade those consumers up to Energizer. But it will be a very important tool to us as we move forward. The distribution gains on that should not I don't think I would expect seismic distribution shifts from a Rayovac standpoint. I think we're going to continue to use it as a tool that we have in the portfolio to fill a need with specific customers.

Thanks. I guess I'm trying to figure out what we've seen in other CPG over the past year is kind of a trade up to the more premium stuff away from value. And I guess it's too early for the consumers to trade back. But I didn't know if you've seen that. it's tougher to track the DIY channel for us. And so is Rayvex seeing a similar type of growth that the Energizer brand is, or if that started to turn or started to get worse or better, anything that would tell us?

Yeah, I think as pricing is moving as dynamically as in the market, we do watch this very carefully. What you saw for the bulk of the last couple of years is consumers were trading up more premium brands. What you've started to see as price points are moving is there is some in certain retailers where the shoppers tend to be more price sensitive than others. You will see a trade down into Rayovac and other value brands. Sometimes, you know, that's a very temporary move for consumers, and then they will ultimately migrate back up to the premium end. It's something we're going to watch. We're going to watch both as it impacts our Energizer business, but it also opens the door for greater opportunities for Rayovac in the future as well.

Got it. And one last follow-up. You made the comment that you feel like the battery category is bigger post-pandemic and you'll grow off of that new base. Can you just give us some examples of what that means? I mean, why people don't, as they go back to work and fully back to school and fully back to normal, don't use some of those battery-powered devices less and we see some contractions?

Well, I think what we've said is you've got to work through the elevated demand that you saw during the pandemic and get to that new baseline level. And what we've talked about in November is Q1 and Q2 being the elevated comps, with Q3 and Q4 being the more normalized level of demand. I think that outlook provided that stair-step bill into what we would view as more normalized usage patterns as people get back into whatever the routine is that they're going to have post-pandemic. But in the course of the pandemic, consumers bought more and more devices. I used the number earlier, but 7.5% more devices in the home in 21 than there were in 19. So there's a larger installed base in homes in the U.S. and around the world. So the inventory of batteries that consumers need is larger than it was pre-pandemic. So I think the battery category will continue to grow off that newly installed base. In terms of usage, that's really what's going to drive in terms of the growth rate. And I think we've said in the past, it is definitely a larger category, and it's going to grow in accordance with historical growth rates off that larger base. In terms of a higher growth rate, I think that's when we're going to have to watch consumer usage of those devices, because if that starts to escalate, then I think that could move the growth rate of the battery category.

Got it. Thanks so much for the call. Thanks, Bill.

Our next question comes from Jason English with Goldman Sachs. You may now go ahead.

Hey, good morning, folks. Thanks for slotting me in. A couple of quick questions. So first, a lot of focus on your pathway to recovering gross margins to what you think it should be. What do you think it should be?

It should be higher than it is right now, Jason. I think what we're trying to do right now is... we are trying to offset the inflationary pressures on a dollar basis first. And let's get those price increases in the marketplace. Let's get them executed. Let's restore that element of stability in the P&L. From that point forward, we've got a number of internal initiatives, productivity initiatives to try and drive gross margin improvement. And then also, I would say the macro backdrop has to stabilize and start to reverse course in terms of some of this input cost inflation. And then I think as you get to the back half of this year, as John talked about in his prepared remarks, you're going to see gross margin improvement in the second half of 22. But I don't want to get too ahead of ourselves and start providing 23 color this far away from it.

Oh, for sure. I'm not trying to lock you down to that either. To help us understand the bridges, we're through the bulk of synergy related to the acquisitions, your prior acquisitions. John, what's the right level of productivity to think about as we contemplate these COGS bridges and gross margin bridges for the next few years?

Yeah, as Mark said, we've got a number of programs in place. I think we're going to look not only at pricing like we have. We're digging into the cost side of it. I mean, we want to go after, you know, realistically 1 to 200 basis points a year is what we probably need to go after. But as Mark said, it's a very volatile, fluid environment, so we're trying to figure out the best way to go after that. Sure.

One to 200 bits would be certainly better than what we're expecting. Last question. The cost pressures, and you highlighted the incremental cost just to get things across the pond here. I've got to believe that this is creating a substantial amount more stress and turbulence in a private label model. particularly given so many of the private label products sold in the U.S. in the battery category are brought from overseas. Why are we not seeing more price momentum building on private label? Do you think it's just a matter of time? What is your market intel telling you on that front?

We've started to see private label pricing move. I mean, because private label is going to be at the discretion, you know, as all pricing is with the retailers, I think it's up to them to set their pricing parameters accordingly. I would expect them, as you said, that they're experiencing the same inflationary pressures that we are, and as a result, I would expect that pricing to move in tandem with branded competition at some point over the next quarter or two.

Thanks a lot, guys. I'll pass it on.

Our next question comes from William Bruder with Bank of America. You may now go ahead.

Good morning. So with regard to the most recent price increases that you've pushed through in the battery category in the U.S., it sounds like from the fact that you expect that there's going to be some distribution gains this spring that there weren't many customers that pushed back and are either going to reduce allocation or reallocate any sort of their shelf space. Do you think that that's the case?

I don't want to front-run our discussions with customers at the moment. We're in the middle of executing these price increases, the latest round with both battery and auto care, and I'll let those conversations progress as they normally would. I think there is a recognition by our retail partners of the environment that we're operating in. I would say we know the different procedures that they all have in order to execute price increases. It's a fact-based discussion, and we're going to make sure we execute that and get that across the line. Retailers have different cadences in terms of their line reviews, and we'll go through those as appropriate and make sure that we update all of the outlook that we've provided, contemplate all of the distribution, puts and takes that we're aware of at the moment.

Got it. Yeah, I didn't mean to put words in your mouth there, but the helpful commentary, and then It sounds like from the tone of the comments you've made about M&A as well as debt reduction that the focus is shifting more towards debt reduction and getting leverage down. I don't think you guys have a firm or stated leverage target either long term or in the near term. Is that still the case or are you guys going to be implementing something like that?

Yeah, but we don't have a stated target. I mean, the one thing I'd say about leverage is, as I mentioned a little bit earlier, we're carrying about a half a turn incremental for the working capital investments that we've made. And what we're really focused on right now is making sure that we've got liquidity. So, you know, we've got very minimal near-term maturities. We've got our debt fixed up at below 4%. We did just increase the revolver and added $100 million. So we feel like liquidity is in really good shape, and we'll continue to manage that balance down as we go forward.

Makes sense. All right, I'll pass to others. Thank you.

Our next question comes from Mike Copla with JP Morgan. You may now go ahead.

Hey, good morning, and thanks for taking our question. Just one of the ones we wanted to ask about was the battery segment. You know, it was a little bit better than we'd expected. We were just kind of curious if you guys could talk about how much of that was driven by shelf space gains, or any other factors like seasonal promotions and restocking. Any call there would be much appreciated. Thank you.

Look, I would say as far as the quarter performing well, I think two things. Pricing did start to come in in the category, which was good. And then the other thing is we had anticipated very tough comps from 21. We had grown over 10% in the first quarter last year. And so I think as we came through and we took the pricing, we actually did outperform some of those expectations.

And the numbers that we talked through on the call from a category standpoint, you know, for the three-month ending November, you missed the December part of the selling season. But on a two-year basis, volume was up about 7.8%, and value in the category was up 9.7%. So the category over a two-year basis is really trending in a healthy direction.

Great. Thank you. That's all from me. Thanks.

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 joining our call today and the ongoing interest in Energizer. Hope everyone has a great day.

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