Energizer Holdings, Inc.

Good morning. My name is MJ and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's fourth quarter and fiscal year 2022 conference call. After the speaker's remarks, there will be a question and answer session. To ask a question, please 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 back over to Jackie Berwitz, Vice President, Investor Relations. You may begin your conference.

Good morning, and welcome to Energizer's fourth quarter and 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. In addition, a slide deck providing a 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 uncertainty, 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 the categories where we compete and is based on Energizer's internal data. data from industry analysis, and estimates we believe to be reasonable. The battery category information includes both brick and mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year, and all comparisons to prior year relate to the same period in fiscal 2021. With that, I'd like to turn the call over to Mark.

Thanks, Jackie, and good morning, everyone. We finished the year strong and delivered our outlook, despite an incredibly challenging environment. I want to thank the Energizer team for their commitment to excellence and their continued dedication to serving our consumers and customers across the globe. Before turning it over to John for a more detailed discussion, let me start with a few headlines. First, we delivered a solid fiscal 2022, but more importantly, laid the foundation for significant value creation in 2023 and beyond. Second, we have launched a series of internal initiatives under a program called Project Momentum. which is expected to generate $80 to $100 million in savings over the next two years. And third, the vast majority of our portfolio has proven to be resilient, and that strength, when combined with the benefits of project momentum, is expected to drive double-digit constant currency EPS and EBITDA growth while generating 10% to 12% free cash flow for the full fiscal year. A few more details on each of these. Despite significant headwinds from persistent inflation on our input costs and appreciating U.S. dollar and our exit from the Russian market, we delivered on the outlook we provided last November. Just as important, we returned to generating strong free cash flow with $95 million in the fourth quarter, and we deployed a significant portion of this cash to begin paying down debt. In addition to returning to our historical free cash flow generation, Another focus for the organization has been to restore the earnings power of our businesses. As you may recall, early in fiscal 2022, we implemented a series of initiatives designed to offset the inflationary headwinds we were experiencing. As part of that undertaking, we identified a substantial pipeline of incremental initiatives that are expected to further rebuild gross margins, improve working capital efficiency, and support long-term growth. Based on the scope, timing, and investment level, we consolidated these initiatives into a standalone program, Project Momentum. Project Momentum is designed to improve margins across each of our businesses and is expected to ultimately generate incremental savings of $80 to $100 million over the next two fiscal years. These savings are independent of any changes to the inflationary environment and are coming from a broad range of projects. including operational and distribution network efficiencies, procurement savings, and SG&A reduction. We have learned a great deal over the past two and a half years, and those lessons have helped us identify more effective and efficient ways to operate our businesses. We're confident these efforts will not only help restore our margins over the long term, but also provide us the flexibility to navigate a dynamic environment with excellence. Beyond the improvement in our earnings, Project Momentum will help optimize our balance sheet to drive more than $100 million in working capital improvement. A more efficient balance sheet combined with expanded operating margins will reestablish Energizer as a leading cash flow generator. The success we have had in 2022 and the benefits of Project Momentum make us very confident heading into 2023. Our categories are meaningfully larger than pre-pandemic levels. Batteries are considered essential product to consumers and we continue our work to serve our consumers when and where they need us. Consumers are using 15% more batteries than they were pre-pandemic. We expect this demand to be resilient even as economic conditions impact consumers. Against this backdrop, we expect to drive low single digit organic top line growth across both of our businesses in fiscal 23. This growth combined with sequentially improving gross margins from targeted pricing and cost savings initiatives, is expected to deliver double-digit, currency-neutral growth in both EBITDA and EPS. Furthermore, we expect to generate 10% to 12% free cash flow for the fiscal year, allowing ongoing debt reduction and deleveraging, driving an important part of the equity return story for our shareholders. Fiscal 22 was a solid year and one that we are proud of. As we look ahead, the environment in which we are operating remains challenging. By enhancing our long-term algorithm with projects like Momentum, we have positioned ourselves for success not only this year, but future years as well. Now let me turn the call over to John to provide additional details about our financial performance, Project Momentum, and our 2023 outlook.

Good morning, everyone. I will provide a more detailed summary of the quarter and full fiscal year before turning to our 2023 outlook and a brief financial overview of project momentum. For the quarter, reported revenue grew 3.2%, with organic revenue up 7.4%. Topline benefited from pricing, partially offset by lower volumes due to broader inflationary pressures, and the lapping of elevated volumes in the prior year. Adjusted gross margin decreased 150 basis points to 36.2%, due to higher operating costs, including transportation, material and labor costs, as well as unfavorable currency impacts. The positive impact of price increases in both battery and auto care partially offset the negative impact to margins. Adjusted SG&A as a percent of net sales was 15.1% versus 14.3% in the prior year. The absolute dollar increase of $9.8 million was primarily driven by increased recycling fees, IT spending related to our investment in digital transformation, and compensation expenses. A&P as a percent of sales was 3.5%, down 190 basis points. The decrease in the current year is the result of a reduction in non-working spending as well as a lighter investment in the fourth quarter as we were past the peak auto season and transitioning into the holiday season for batteries. We elected to move more of our spending for batteries into the coming first quarter, closer to the holiday season. Interest expense increased $5.2 million due to a combination of higher average debt and rising rates. We delivered adjusted EBITDA and adjusted earnings per share of $146 million and 82 cents per share, respectively, in spite of currency headwinds of $9.7 million, or 11 cents per share. We also generated $95 million of free cash flow in the quarter, returning to the top end of our long-term algorithm of 10% to 12% of net sales. We paid down $60 million of debt and retired another $25 million subsequent to the end of the quarter. As noted in our press release this morning, we recorded a one-time, non-cash $542 million impairment charge on certain intangible assets, including trademarks and goodwill associated with the acquisition of Spectrum's battery and auto care businesses. This accounting charge reflects the negative impact on the cash flows associated with these assets, which, as we have previously noted, have been adversely affected by rapidly increasing input costs. and more recently, currency headwinds and interest rate increases. We continue to view these assets as vital components of our portfolio, and this non-cash accounting chart does not have an impact on our outlook for these businesses. As Mark mentioned, we delivered our full year 2022 outlook for revenue, adjusted EBITDA, and adjusted EPS. Organic revenues increased 3.1%, marking our seventh consecutive year of organic growth. as pricing actions and new distribution across both our segments were partially offset by volume declines. Adjusted gross margin was down 230 basis points, as higher input costs were partially offset by pricing actions, synergies, and the reduction of COVID-related costs incurred in 2021. Adjusted EBITDA of $568 million and earnings per share of $3.08 were within our original outlook provided at the beginning of the year. despite currency headwinds of $26 million, or 29 cents per share, respectively. For our fiscal 2023, we expect organic revenues to increase low single digits, as the benefits of carryover pricing and additional targeted pricing are partially offset by category volume declines across both the battery and auto care segments. Reported revenues are expected to be negatively impacted by approximately $90 million of currency headwind, resulting in a low single-digit decline. We expect gross margins to improve between 100 and 150 basis points year over year. Carryover pricing, new pricing in the year, and improvement in freight costs are net positives, while input costs and currency continue to be headwinds. In addition, project momentum is expected to generate approximately 100 basis points of margin recovery. We are actively managing costs in the remainder of our P&L, keeping most flat with the prior year. However, we do plan to increase investments in A&P back to the 5% to 6% range in the coming year. All of these factors result in an outlook for adjusted EBITDA in the range of $585 million to $615 million and earnings per share in the range of $3 to $3.30. These results reflect negative currency headwinds on earnings of approximately $27 million or $0.30 per share. On a currency neutral basis, adjusted EBITDA is expected to grow 10% and earnings per share is expected to grow 12% versus prior year, both at the midpoint of our outlook. I would like to also give additional color on the first quarter and rest of year trends. First, we are still comping elevated volumes in the prior year and expect organic sales to be down low single digits in the first quarter and then improve as we move through the year. Our cost of goods in the first two quarters will also reflect the impact of production at peak inflationary costs, and to a lesser extent, the cost of operational inefficiencies as we produce lower volumes while actively managing down inventories at the end of last year. Gross margins should start the year roughly in the range of 37% to 38% and improve each quarter thereafter. Also, based on current rates, year-over-year currency impacts are expected to be most pronounced during the first half of the year. with the first quarter seeing currency headwinds of roughly $40 million on sales and $10 million on operating earnings. Finally, rising interest rates are expected to add $10 to $15 million to full-year interest expense, again weighted towards the first half of the year. Project Momentum is expected to benefit 2023 by $30 to $40 million, more weighted to the back half, and has been included in the outlook ranges we provided today. Over the next two fiscal years, we expect project momentum to generate $80 to $100 million in total savings, with roughly 80% of those benefits impacting gross margin, and the remainder recognized throughout the rest of the P&L. We also expect to improve networking capital by $100 million, which will allow us to fund the projected one-time cash operating expenses related to the program of $40 to $50 million, and generate free cash flow in line with our long-term algorithm of 10 to 12% of net sales. We are planning for capital related to the program to be largely incorporated in our annual budget expectations of 2% of net sales. And finally, a few comments on our debt capital structure and capital allocation priorities. Our debt is currently 86% fixed and an average interest rate of 4.6%, with no meaningful maturities until 2027. We paid down $85 million of debt in September and October, making good progress towards our deleveraging plans. Looking ahead, debt pay down and deleveraging is our primary capital allocation priority. We will also continue to invest in our business and brands for the long term, while returning cash to shareholders through our quarterly dividend. Before I turn the call over to Mark for closing remarks, I wanted to announce that Jackie Berwitz, our longtime VP of IR, is going to retire at the end of this year. That means this will be Jackie's final earnings call. Jackie, thank you for your dedicated service to Energizer. We appreciate everything you have done and wish you well. Now I will turn the call back over to Mark.

Thanks, John. Our investment and the team's work and dedication are evident in our fiscal year results. Looking ahead, we are well positioned to drive growth in the years ahead. I want to echo John's congratulations to Jackie on a tremendous career with Energizer. Thank you for everything, Jackie. We wish you the best. With that, I will open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning. First, Jackie, I'm jumping on the bandwagon. So congratulations and enjoy and also thank you for everything. Now to my question. So first, I just wanted to clarify. I think there's been some confusion this morning just around the guidance. And so I just wanted to be clear that the ranges in the release are, in fact, inclusive of the currency headwind. So that's just sort of part one and kind of clean up question. And then the second thing was, I want to talk a little bit about gross margins this quarter. I think we're a little bit below expectations. I know the total P&L came in in line, but kind of what was the negative surprise on gross margins? And just as you gave us some guidance as to how to think about the slope of recovery into 23. But I was curious kind of what's kind of pulled it down a bit as the starting point is a little bit different than we'd expected. Thanks.

Thanks, Lauren. Yes, the outlook that we gave is inclusive of currency impact. So that 585 to 615 for EBITDA and 3 to 330 for EPS include all the currency impacts that we've talked about. You know, in the quarter, we came in at about 36.2% adjusted. And as we talked about going into the back half of the year, we were looking at about 37% to 38%. And the third quarter spiked a bit. Fourth quarter came in at that 36%. We were actually in range with what we were expecting. But as much as we had built inventory, we'd seen some movement. We'd also seen as we kind of finished out the quarter, we had been actively working down those inventory levels. So you're seeing that production volumes were a bit lower. That's impacting the fourth quarter. It'll continue to impact us a little bit in the first quarter. And as you talk about, you know, we're looking at a 37% to 38% starting point in the first quarter and then growing sequentially as we go through the year.

Okay. And then I guess the follow-up question to that would be, and we've seen this from some other companies that are coming into the the new year with elevated inventory and high-cost inventory at that. So I guess how sensitive is the outlook and how much wiggle room is there? Should volumes be lower than what you'd have expected? If the rate of volume decline is greater, it would take more time to work through that inventory and then therefore take longer to work through gross margins. So Can you maybe share a little bit about the volume outlook in particular relative to elasticity? That's what I'm asking in terms of the gross margin progression.

Yeah, I mean, I think specifically to working through inventory, we did a really good job this last quarter. Inventory is down over $100 million. We've seen that continue to work through. We do expect it to take us about, you know, first and second quarter to get through the inventory levels. That's our outlook right now. No change to that. I think I would turn it over to Mark a little bit to talk about how we see, you know, ELF cities have held up nicely, but Mark can probably give us some more color there.

Yeah, Lauren, I think when you think through, we took multiple price increases in both battery and auto in 22. Really pleased with how demand held up, you know, particularly when you consider a lot of the macro factors. We have additional sort of carryover pricing that's built into the 23 outlook. We do anticipate taking some targeted pricing in 23 as well, not broad portfolio pricing, but I would just call them more micro-targeted pricing. You know, elasticities have really held in there for us. They're at or better than what we expected. In recent periods, you've seen them worsen a little bit as macro factors compounded some of the price increases with general inflation. You're also looking from a volume standpoint, still working through some of the elevated COVID demands. in batteries and auto, so that's going to be a little bit of a drag on volumes. We factored all of that into the outlook as well as, you know, from an impact on gross margin as well. So I think we feel really confident in the outlook we're providing today and do have some flexibility as things, you know, may evolve over the course of the year just like they did last year.

Okay, great. Thanks so much.

The next question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good morning. Morning, Bill. Morning, Bill. And also, Jackie, congratulations. I can't believe we've worked together for 20 years. Thanks, Bill. A couple things. I guess first, on Project Momentum, give me the understanding, the genesis behind this. I mean, obviously, you've had a good year. A lot of the issues that have plagued margins, per se, have been macro that affected other companies. So, Just trying to understand what was the genesis of doing this now and where you think margins – where the biggest buckets of kind of margin improvement can come from.

Sure, Bill. I think the name for the project was chosen really with a purpose. And when you think through the effort that the organization undertook in 22 – the organization really did a fantastic job getting us back on our front foot in terms of how we were able to manage the business and manage a lot of, to your point, a lot of these macro factors that were coming at us. So it was absolutely an inflection point. We were able to deliver on the outlook that we provided last November, despite a lot of twists and turns that I don't think anyone anticipated going into the year. And that's a testament to that effort. But as we took a step back and we're thinking about 23, we really wanted to accelerate on that progress. And this This program is built around, we have $30 to $40 million of savings built into 23 already, with the balance being recognized in 24. A number of major buckets of work. We've taken all the lessons that we've learned over the last couple of years and looked at operational distribution network changes that we could make, product sourcing, footprint optimization, some automation, value engineering. On procurement, obviously, we're going to run sourcing events. We're going to look at additional partners. We're going to look at both the location. We're going to look at the location in terms of where we source product. And then in SG&A, just obviously look across the board at indirect spending, see if we can optimize model and sort of where work takes place and how we can improve the way we work together. I think this program has everything you like to see. It's going to benefit the P&L. It's going to improve the balance sheet with working capital efficiency. It's going to be able to drive improved debt reduction. And then equally importantly, it's going to drive and change the way we operate, which is going to benefit the organization in the long run. So we're really excited about what this program is going to bring to the financials, but also in terms of how we operate the business going forward.

Got it. Thanks. And then Some kind of granular questions on looking at both fourth quarter and first quarter. Any impact from Hurricane Ian? Was that in fourth quarter? Was that in first quarter? Was there an incremental price increase in October? Or is this carryover pricing? And then also kind of holiday sets. Are you in a better space spot for holidays 2022 than you were in 2021 or about the same or worse? Thanks.

Yeah, hey, Bill, let me take you through the first quarter a little bit. So the hurricane did occur in the fourth quarter. We probably saw about $3 million of incremental sales. Looking at the total first quarter, we do want to kind of get this right size for everyone. You know, we're copying elevated demand coming in the quarter, so we expect organic, low single-digit top lines. Gross margin year over year should be roughly flat. We are going to reinvest back into AMP. So as we talked about, it was a little bit light in the fourth quarter. We're pushing that into the holidays, so that should be up a bit. And then this is the quarter where the currency impacts will be most severe. So on a year-over-year basis, top line is going to be impacted by about $40 million, and OP is going to be impacted by about 10. And one other thing I wanted to call out, I don't think I was as specific in the full year. Interest is a headwind of about $10 to $15 million full year. In the quarter, it's probably $5 or $6 million. And so, you know, all in, there are a fair amount of headwinds going into the quarter. We expect all of those to improve, though, as we kind of go sequentially throughout the year.

And Bill, on your last question about holiday sets, I would say we're in as equally a beneficial position this year as we were last year for holidays. So we feel really good about where we're headed.

That's great. Thanks for the color. Thanks, Bill.

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

Hi, good morning. This is Shabana on for Andrea. You did mention that the batteries usage is about 15% higher and the categories are definitely larger than pre-pandemic. But I was wondering, since Q4 ended in the last, let's say, five, six weeks since then, can you please comment on the current consumer trends you're seeing as it relates to, let's say, either trading down or private label? And also, are you also seeing any retailer inventory management and If so, how long do you expect it to be a headwind? Thanks.

A lot of questions in there. Let me see if I can tackle all of them, but let me know. Sorry about that. That's okay, but just let me know if I missed any. I mean, first, the last question first on inventory. You know, I would say we're seeing slightly elevated inventories right now, but that's not unusual with where we are in the holiday season. A lot of that's driven by holiday shipments. Retailers wanted to get an early start on holiday, because I think by all accounts, we're going to look at an elongated holiday buying season. So that is not something that we're worried about. I would say inventory levels are in, you know, slightly elevated but in normal positions heading into holiday. Not a big concern for us. Now let me walk back to, I think, some of the macro questions in terms of the consumer. You know, the consumers are obviously feeling pressured in the current environment. There has been a focus on essentials, you know, when they're really focused on grocery, utilities, fuel. Fortunately, the bulk of our portfolio falls within the essentials bucket, particularly when you're talking about our largest category in batteries. That is an essential product, and consumers are focused on value. And value is going to depend on the individual consumer preference. That could be pack size. It could be the frequency of the purchase. In terms of, you know, the fundamentals of all of our categories, you know, particularly on batteries, the underlying fundamentals are very strong. You know, device ownership is up 6% still today versus pre-pandemic levels. You know, the number of batteries that a household uses on a year-over-year basis is up 15% when you compare it to pre-pandemic levels. And then let me transition into sort of private label part of your question, which is, you know, consumers continue to prioritize brands. You know, quality is really going to be the decision driver with, you know, long-lasting products. and a trusted brand going to drive that decision. And you're seeing that play out in the scanner data with private label down two share points globally. In the U.S., it's down 3.2 share points, and Energizer's gained 2.5 share points globally. So brands continue to matter. Demand's holding up well, and you're not seeing a lot of trade down.

That's very helpful. Thank you. And I'll pass it on. The next question comes from Robert Ottenstein with Evercore. Please go ahead.

Great. Thank you. A few connected questions. Can you just give us your best sense now on what normalized battery demand looks like? On one hand, you talk about 6% more devices, batteries of 15% versus pre-pandemic, but you also talk about elevated devices. So just as kind of the initial question, are we 5% over normalized, do you think? Or where would you assess that?

Well, what I would say is as you look at the outlook we provided for 23, we are calling for organic growth in batteries. And that is driven primarily by pricing. You are going to see some volume declines in the first part of the year as you work your way through the year. So I would say from a volumetric standpoint, You still have to work through the elasticity impact, I would say the COVID impact, as well as just the general inflation impact. But we are showing organic growth in both batteries and auto care. So from a value standpoint, I would say you're at the new base in terms of the business. I think volume has a little bit of work to come back to as we get through 23. But I would say you're establishing that new base now, both when you compare it to a value and volume basis.

And on the volume side, maybe 5% or... three or just kind of rough order magnitude?

Well, I mean, if you look at the latest 13 weeks, when you're looking at the battery category, you have, you know, in the category, you have value up slightly with volume down 12%. You know, pricing during that time period was up 20% or more across the board in the battery category. So I think what you're seeing is, you know, values is carrying the day right now in the battery category, but you're going to see that volumes work its way up as you get through the quarter. So I would say you're on a category basis down 12, but that's going to improve as you work your way through the year. John, anything else?

No, I think full year, it's a high single-digit decline. So to Mark's point, it improves as we go throughout the year.

Okay. And then just in terms of the productivity program and the rationale for that, Is that designed to restore margin or gross profit dollars? And I guess the question is, is given that the category is stronger, if it was just dollars, why wouldn't pricing alone, given the health of the category, offset it? Or do you need it because of what's happened with currency? Just trying to understand the structural drivers here?

Well, I started that turn over to John for a little more. I mean, I would say we're attacking the margin recovery from all angles, inclusive of pricing. We leaned in heavily on pricing, as you know, during fiscal 22. I think what we're leaning into as we head into a tougher economic environment is we're keeping things within sort of the four corners. We are going to make sure that we attack costs that have crept into the system over the last couple of years and make sure we get rid of those. And all the savings that we're talking about is sort of regardless of what happens in the inflationary environment. So take things into your own hands and continue to improve the profitability based on what you can control. But certainly pricing and trade investment will continue to be a focus to make sure that where we do invest those dollars, we get the highest return.

No, no, and that's all great. So could we expect perhaps that as we come out of this, you'll have higher margins than in the past? Is that something that you can aspire to?

I think when you look at our gross margin improvement, we're expecting to improve gross margin over the course of fiscal 23 from 100 to 150 basis points.

And that's the first year of the program. I mean, higher than... you know, pandemic.

Robert, what I'd say is this is a recovery program. We're trying to get back to where we were. So I don't, I wouldn't project higher because we can't see that far. But I do think that this will give us the best chance to continue to improve those margins as we go forward.

Got it. Thank you very much. Thanks, Robert.

The next question comes from Kevin Grundy with Jeffries. Please go ahead.

Great morning, everyone. I apologize for the background noise. I'm traveling, and I also wanted to echo my congratulations to Jackie as well. It's been a pleasure. Well-deserved retirement. A couple cleanups for me, probably with John. Just first to follow up, I guess, on Lauren's line of questioning around FX. I think the market was probably a bit surprised by the impact on profit, which, you know, relative to the top line, not quite as dire as it's been historically for Energizer's business. And then relatedly, John, I guess I think folks are probably also a little bit surprised that the top line impact was not more dire, given what the dollar has done relative to sort of your preliminary guidance with fiscal 3Q. Can you help on those two fronts? And then I have a follow-up.

Yeah. So if you look at the impact that we have to profitability next year, that's inclusive of hedges. And so it matters how fast this rolls in and rolls out. So the hedges are offsetting some of that impact. So we're saying $30 million roughly versus the $90 million top line. And that's not outside our normal band. I think we also, we saw significant impact, like you said, last quarter coming into the fourth quarter. So that's already baked in, and then you've got the year-over-year change. So you are seeing into next year, it's been a pretty significant headwind for us in total.

Okay, got it. I can follow up a little bit more offline with that. And then the other question, just on the impairment charge, I can appreciate it's non-cash, but I'm just trying to marry, number one, I can appreciate it's non-cash. Number two, I can also appreciate how much variability is in terminal value when you're valuing assets. I'm just trying to marry that up with some of the transitory near-term cost pressures with, you know, Mark's comments about greater optimism on the battery category longer term. Can you help reconcile those a bit?

Yep. So the majority of the write-offs were in the auto care side. And I think the two things that occurred as we kind of finished out the quarter, the currency that we just talked about had a significant impact on all of our international earnings relative to these models, as well as the rapidly rising interest rates. And that really changed, you know, impacted our cost of capital. So when we look at those models, it wasn't so much the cash flows that changed or the organic cash flows. It was really currency and cost of capital.

Got it. I'll pass it on. Thanks, guys. Good luck.

Thanks, Kevin.

The next question comes from Hale Holden with Barclays. Please go ahead.

Good morning. I think from the gross margin comments for the first half of 23 that I heard that there was some manufacturing deleverage as you worked through your inventory backlog. I don't know if you could define that as what the head one was.

Well, we didn't give the exact number. But, I mean, what we're saying is it will start out the first quarter sort of at 37, 38, which is flat year over year. And it's a bit of a sequential improvement from the fourth quarter. And then as you go through, it'll improve a little bit. But most of that deleveraging of inventory that's really impacting our production volumes, that'll be absorbed in the first quarter.

Great. And then for 23, I was wondering if you could walk through what your inflation expectations were.

On which part? Are you talking about gross margin?

Yeah, gross margin or just generically what headwinds you were looking at.

Okay. Maybe let me just walk you through thinking about this. There, you know, we expect, you know, organic top line growth, low single digits. That's obviously, you know, currency is going to drag that down to low single digit decline. You know, we anticipate the volumes will be modestly down due to the elasticity impacts that Mark talked about. Gross margins will be up, and that's really, we expect to have continued elevated material costs and the currency headwinds that we've talked about. We are seeing some benefit in freight, which will really kind of roll through as all of the improvements will kind of in the back half of the year. We're going to continue to invest in A&P, so that's going to go up on a year-over-year basis. I did mention and did want to call out, you know, the rates have risen pretty dramatically on interest, even though we're, you know, over 85% fixed. That is a $10 to $15 million headwind year over year. The currency that I talked about, $90 million top line, $30 million roughly bottom line, you know, that's $0.30 a share. So those are kind of the key items that we're looking at that are going to be headwinds going into 23.

Great. Very much appreciate it. Thanks, Al.

The next question comes from William Reuter with Bank of America. Please go ahead.

Hi. I just have two. So the first is it seems like you paid down your ABL balance during the fourth quarter. You repaid another $25 million of debt in the first quarter. Was that the term loan that you repaid or was that bonds?

It was a term loan.

Okay. Okay. And then the second question, in terms of where you see your leverage ending the year based upon expectations for how much inventory you take out of the system, do you have a sense for where you see net leverage at the end of fiscal year 23?

You know, I just, in general, paying down debts are number one priority. I think we have the opportunity to take out around a half a turn. And that's going to be plus or minus, but that's where we're going to push over the year.

Great. So half a turn, not of working capital reduction, but of net leverage reduction, correct?

Net leverage reduction, yes.

Perfect. Okay. I'll pass to others. Thank you. Thanks.

The next question comes from Carla Casella with J.P. Morgan. Please go ahead. Hi.

One clarification on margin. You called out this quarter recycling costs. I'm wondering if there's something – It's the first time I think I've heard you talk about that. I'm just going to see if there's something going on in that market and how that's built into your forecast.

Okay.

Yeah, recycling is something that we've done in a number of markets consistently. There are some new programs.

Yeah, Australia was one of the larger ones, so that was a bit of an increase for us in the year.

And going forward, that will continue to be a

That should be in our base.

We'll continue to run the – well, it'll just be an ongoing cost of managing the business.

Okay. And then I might have missed it. Do you give the amount of pull-forward holiday sales? You said some of the holiday sales are pulled into this quarter from next?

No, we didn't give, you know, an amount. It always kind of goes on either side of the line, so it varies from year to year. But I don't think – you know, as we look fourth quarter, what I would point to is You know, organic declines of low single digits is really what we're forecasting for this quarter.

Okay, great. Thank you.

This concludes our question and answer session. I would now like to turn the conference back over to Mark Levine for any closing remarks.

Thanks, everyone, for joining the call and your ongoing interest in Energizer. I hope everyone has a great day.

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