Energizer Holdings, Inc.

Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's first quarter fiscal year 2023 conference call. All participants will be in 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 your touchtone phone. 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 over to John Polden, Vice President, Treasurer, and Investor Relations. You may begin your conference.

Good morning, and welcome to Energizer's first quarter fiscal 2023 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, and John Drabek, 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 risks and uncertainties, 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 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 estimated market share discussed in 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 2022. With that, I would like to turn the call over to Mark.

Good morning, everyone. Before we talk about the results of the quarter, I want to introduce John Poldan, who has been with the organization for 13 years. He is Energizer's Vice President and Treasurer, and he will lead our investor relations efforts going forward. Now on to the results. Our fiscal year is off to a strong start. During our call last November, we highlighted how the restoration of margins, free cash flow generation, and debt reduction were key focus areas as we commenced the new fiscal year. Our first quarter results demonstrate significant progress across all of these areas. Let me walk through how we've been able to get off to this great start. It all starts with our categories. In batteries, the category remains resilient despite the economic environment, as it is an essential category for consumers. On a three-year stack, U.S. category value is up over 20% in the 13 weeks ended November, with volume up over 4% during the same period. In the quarter, global category value was up almost 6%, with volumes down roughly 3%. And consumers prefer our brand, with Energizer outpacing the category. Our value share was up 1.2 points globally versus prior year, behind a strong performance in the U.S. Now turning to auto care. Category-leading indicators remain strong. and each of our four subcategories has experienced double-digit value growth since pre-pandemic levels. Year over year, the category value grew over 3%, with the benefit of pricing more than offsetting volume impact. While this is the smallest quarter of the year for auto care, both Armorall and STP grew share, including in the important appearance subcategory, which represents nearly half of our total auto care portfolio. As John will explain in a moment, our first quarter sales did not track with syndicated data across our categories. We mentioned last quarter that retailers entered the quarter with slightly elevated inventory levels, particularly in batteries, which partially contributed to that disconnect. As the quarter progressed, retailers also began to more aggressively manage inventory levels despite the strong consumer demand. After a strong holiday season, many of our customers were either below or at the low end of their historical inventory levels. While this impacted our net sales in the quarter, the strength of our categories, our performance at shelf, and lower retail inventory gives us the confidence in delivering our full year outlook. Against the backdrop of those strong category fundamentals, our focus on restoring gross margins has begun to pay dividends. First, let's cover pricing. As we discussed in previous quarters, we have taken multiple rounds of broad-based pricing across both battery and auto care to offset the inflationary headwinds we were experiencing. And we expect to continue to benefit from favorable cons in the first two quarters of the fiscal year. Looking ahead, any additional pricing actions are expected to be more targeted in nature. In addition to pricing, savings from the initiatives under Project Momentum have driven gross margin improvement year over year as benefits from reengineering our products, consolidating suppliers, and improving labor efficiency are beginning to flow through. The auto care business has been a point of emphasis as gross margins were impacted significantly by inflation and is one where we are already making great progress. Our considered efforts around pricing, combined with the benefits of Project Momentum, contributed to a significant improvement in segment profit in the quarter. Project Momentum is not just improving gross margins, It is also driving much improved working capital deficiency, which John will provide more detail on later in the call. The combination of our expanded margins and leaner balance sheet helped to generate over $150 million of free cash flow in the quarter, which we used to pay down over $100 million of debt in the first four months of the year. As we look ahead, debt paydown continues to be our primary capital allocation priority. Now let me turn the call over to John to provide additional details about our financial performance.

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter, an update on project momentum, and some additional color on our outlook for the remainder of the year. For the quarter, reported net sales were down 9.6%, with organic revenue down 5.4%. Our initial outlook for the quarter was for low single-digit organic declines. due to lower current year volumes in response to pricing actions over the last year, the exit of lower margin battery business, and slightly elevated retail inventory levels entering the quarter. While our categories performed in line, or better than our original expectations, retailer inventory management across both battery and auto care businesses at the end of the quarter created additional headwinds of 300 to 400 basis points. The volume declines in the quarter were partially offset by roughly 950 basis points of pricing. Adjusted gross margin increased 150 basis points to 39%, driven by pricing actions, savings generated from project momentum, and the benefit of vexing that lower margin battery business in the quarter. While the cost environment has stabilized, we continue to see elevated operating costs, including material and ocean freight costs, and unfavorable currency impacts versus the prior year quarter. Adjusted SG&A increased $2.5 million, primarily driven by higher stock compensation amortization, factoring fees tied to rising interest rates, and depreciation expense related to our digital transformation initiatives. The increases were partially offset by project momentum savings and favorable currency impacts. A&P as a percent of sales was 7%, up from 6.1% in the prior year. The increase was driven by planned brand support and shifting spend from Q4 of the prior year to Q1 of this year to better align with the holiday season. Interest expense increased $5.9 million year-over-year due mainly to rising interest rates, partially offset by lower average debt outstanding. We delivered adjusted EBITDA and adjusted earnings per share of $145.6 million and 72 cents per share, respectively. On a currency neutral basis, adjusted EBITDA and adjusted earnings per share were $155.6 million and 83 cents per share, respectively. We also generated over $152 million of free cash flow in the quarter, nearly double our long-term algorithm of 10% to 12% of net sales. We achieved these excellent results by combining strong operating earnings with a nearly 250 basis point improvement in working capital as a percent of net sales since the start of the year. In the quarter, we paid down over $50 million of debt through a combination of term loan retirement and open market bond repurchases. Our strong cash flows also enabled us to pay down another $53 million of the term loan in January. Including this payment, we have paid down over $100 million of debt in the first four months of the fiscal year and over $170 million in the previous five months. Our debt capital structure remains in great shape. with a weighted average cost of debt of around four and three quarters and 87% fixed, with no meaningful maturities until 2027. Project Momentum is also off to a solid start in the quarter with savings of $7.3 million. Our plans are focused on generating savings through network optimization, strategic sourcing efforts, and SG&A savings enabled by our digital transformation. And as previously mentioned, we expect the benefits of these efforts to impact each of our segments, The program is on track to deliver $80 to $100 million in run rate savings, with roughly 80% of those benefits impacting gross margin, and the remainder recognized throughout the rest of the P&L. We anticipate $30 to $40 million of those savings will benefit our results in fiscal 2023. Working capital improvements are also off to a fast start, with project momentum generating over $20 million of improvement this quarter. bolstering our efforts across inventory, payables, and receivables management. We continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program, further supporting our free cash flow efforts. And finally, I would like to provide additional color on our outlook for our second quarter and the remainder of the year. We expect our top line in the second quarter to continue benefiting from pricing actions, partially offset by lower volumes, with organic growth in the low to mid single digits. On a reported basis, we expect reported revenue of flat to low single digits. While our cost of goods will continue to reflect the negative impact of inventory previously built at higher total costs, our gross margin should benefit from both pricing actions and project momentum savings, with gross margins expected to improve by 150 to 200 basis points from the prior year quarter. We expect A&P as a percent of sales to be consistent with investment levels in the prior year quarter and SG&A roughly flat on a dollar basis. Interest expenses expected to be up $4 to $5 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt in the quarter. And finally, at current rates, we forecast currency headwinds to impact the quarter's pre-tax earnings by approximately $8 to $10 million. We remain on track to deliver the full year as guided in November. Despite top-line softness in Q1, we still expect low single-digit organic next sales growth led by pricing and recovering category volumes as we progress throughout the year. Pricing, mix management, and project momentum savings are expected to result in improved gross margins of 100 to 150 basis points year over year. We've also seen a weakening of the U.S. dollar relative to a number of our currency exposures and now expect full-year negative impacts of $50 million on the top-line and $20 million on pre-tax earnings. Combined with continued cost management down the rest of the P&L, we are reaffirming our outlook for adjusted EBITDA in the range of $585 million to $615 million, and adjusted earnings per share of $3 to $3.30, both of which represent in excess of 9% growth at the midpoint on a currency-neutral basis. Now, I'd like to turn the call back over to Mark for closing remarks.

Thanks, John. We delivered a strong first quarter. Project Momentum is already delivering savings, and we remain confident the program will achieve $80 to $100 million in run rate savings and over $100 million in working capital improvement. Our ability to execute projects like Momentum and our digital transformation position Energizer to deliver for our customers and consumers while also delivering our financial algorithm and driving long-term shareholder value. 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 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. We ask that you please limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will be from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. Good morning. Good morning. Just first off, I mean, something I've gotten a few times from people already this morning was just the question on FX being less of a headwind to the full year but holding the year. And I have more interesting follow-ups. But I'm just curious if you could comment on that decision and, you know, why – there wouldn't have been an improvement to the range given FX is less of a headwind.

Sure. Let me talk just specifically, Lauren, to the FX treatment. So the currencies that moved the most for us were euro and pound. Those are also our largest hedge positions. So coming into the year, we had a pretty significant offset. When those turned over in the last couple of months, the benefits that you're seeing on the top line aren't going to flow through to the bottom line as much because the hedge actually reverses. So, you know, we average into these positions, so it's going to take a little while for some of those benefits to come through. And as we talked about, we're only getting, you know, $5 to $7 million of benefit on the bottom line, incremental to, let me say, versus the downside that we expected originally. So we're picking up only $5 to $7. So not a significant change overall to our outlook for the year.

Okay. All right, great. And then another question I've gotten is just the gross margin during the call, just the gross margin commentary. For 2Q, it's almost like half the expansion maybe of what at least I have in my model for second quarter. So just everything timing-related that's worth talking about on gross margin build. I know this quarter was well ahead of expectations, but just wanted to know if you could comment on the 2Q outlook too.

Yeah, well, 2Q, I mean, partially you get mixed impact, so it's going to be more auto than battery. It's also one of our smaller quarters. We expect to be 150 to 200 basis points better than last year. So I think a lot of the improvement that we've been seeing will continue to flow into the second quarter. And then as we go throughout the year, we're still expecting 100 to 150 basis points of total improvement. So we expect, you know, pretty good improvement in Q2 and then full year improvement to be in a pretty good place.

Okay, great. And then just any commentary on volume versus price. I know there was the inventory destocking and the exits, which you specified as well. But just read on kind of, I guess, elasticity that you would effectively be seeing in market, how that's shaping up versus what you might have expected. I know market share performance is good, but how would you discuss elasticity? Thanks.

Yeah, Lauren, on that one, I think we're off to a really solid start for the year. and largely in line with our expectations. I would say the one unanticipated development that we dealt with is how tightly retailers managed inventory as we worked our way through the holiday season. But to your point on elasticity, the categories performed really well with batteries up almost 6% and auto care up 3%. And that was ahead of our expectations. And obviously, in batteries, we were able to gain shares. So we're outperforming the category. So I would say from elasticity standpoint, both are probably better than our historical analysis would have indicated. We feel like we're in a really strong position. And then, as John mentioned, we're trending ahead on margin with healthy free cash flow, and we're able to pay down debt. So off to a good start. We're one quarter in and recognize we haven't made the year yet, but certainly good enough for us to be able to reaffirm outlook and get off to the good start that we needed to. Okay.

All right. Thanks so much. I'll pass it on.

The next question will be from Bill Chappell with Truist Securities.

Please go ahead. Bill, your line is open. Perhaps you're muted on your end. Please proceed. Can you hear me? There we go. Hey, Bill.

Thanks. Good morning. Hey, just trying to understand the inventory reductions at retail during the quarter, I guess, is the plan that for the rest, I mean, did you expect that when you were giving guidance in November? And so this is all kind of in line with expectations. Was that a surprise by how deep they went? And you're just, it's taking out some of the cushion that you had baked into the year, or do you expect to kind of make up with battery sales kind of in the off seasons?

Bill, I think there's a couple different things in your question, and maybe John and I will tag team them separately. I think the first part of your question, we expected low single-digit decline coming into the quarter. We ended up in mid-single-digit decline. That is entirely related to a change in the way retailers dealt with inventory in October, November, December, most prominently in December as we got towards the end of the holiday season. Really, you know, the low single-digit decline, the mid-single-digit decline is entirely explained by the way retailers dealt with inventory. I would say we are starting to see that revert. I think, you know, the way we set it in the call was there are some retailers that are well below historical averages. And so for those retailers that were on the more extreme side of that, as soon as we got into January, we started to see that reverse and start to get back to not yet to but closer to normalized levels. In terms of the retailers that really just trended down to the low end of the historical range, you know, it wasn't as an abrupt change, but we expect that over the course of the year for them to work back to where they've been on a more normalized basis. So we are assuming that. We're already seeing it in some cases, but we certainly did see a different change. We saw a change, particularly as we got into December. I also think as part of your question, there's a difference between what's in scanner data versus in our results, and I think John can decompose that and walk you through the different pieces of that because that's related but a little bit different.

Right. Yeah, obviously a lot of the changes are what were in our outlook, but there was a little bit of incremental. So what was in our outlook and what was the difference between the scanner that we saw in the quarter and our actual reported results, lower current year volumes, universal pricing actions, that was in our outlook. The shift in holiday orders, that definitely had an impact. And then we had talked about exiting some of this low margin battery business, part of our margin management group. And I think it was the right move to make. It was definitely accretive to our margins, but that did have an impact on the top line. And then I think a little bit more of what we also saw, you saw track channels perform very strong. Non-track channels were actually lower than that. So that was a drag as well on our top line.

Got it. And then just to follow up on auto care, just kind of your expectations for the upcoming season. I mean, with the understanding of in the four or five years you've owned this business, it never seems to have been a normal year. Either we've had weather or we've had COVID or we've had weather and COVID. And so just, you know, what is a normal, I mean, are you, do we expect a normal year? Do we expect easy comps? How are you looking at it this year?

Well, from the overall year, we expect organic growth. And we're expecting organic growth in both auto care and batteries, which is built into the outlook that we provided. You're right. Every year plays out a little bit differently than the previous year and certainly than as expected. But when we go into the year, you know, you've followed us long enough to remember when, you know, We model what we would consider to be sort of normalized demand, and so it's not an extreme heat. It's not extreme cold. So we moderate in terms of what the expectations are in that organic growth call. We do expect volumes to be down, but that's consistent with batteries. As you work our way through the fiscal year, pricing is really going to carry the day from an organic growth standpoint. Volume's going to pick up as you progress through, and by the time you get to sort of Q4, you're going to be at flat volumes, and then you're going to move forward on kind of a normalized category basis from that point forward.

Got it. Thanks so much.

Thanks, Bill. Thanks, Bill.

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

Hey, good morning, folks. Good morning, Jason. A couple quick questions. First, I don't understand the timing on holiday orders. Can you provide a little more detail on that?

If you recall, Jason, in Q4 we talked about we were going into the holiday season, slightly elevated inventory levels. There was a pull forward of some orders into Q4 from Q1. We noted that on the previous call. That was at least part, and that was a known item as we provided outlook, as we provided outlook for the low single-digit decline in Q1. The incremental piece to that as it related to retailers was the inventory destocking that went on as we got into December. They were separate in terms of what caused the impact on our P&L.

Yeah, yeah, I got that. Okay, and then looking at your gross margin bridge, this is a lot of volume decline, yet you're not calling it out as a drag on gross margin. Why are you not seeing more substantial deleverage there?

You know, look, I think we're attacking costs across the board.

So you've seen, you know, project momentum is really going after a lot of that. We have seen some impact, but we've, you know, we had that also last year. So it's flowed through into this year, and I think we're in a pretty good spot overall.

Okay. And, Jens, it sounds like you're looking for your categories to firm volumetrically as the year progresses. You came in highlighting now consumption level from both the value and volume perspective are still above pre-COVID levels. Why wouldn't we expect a continued reset lower? In other words, why shouldn't we expect volumes to remain a headwind for much longer than your guidance suggests?

Well, I think we're seeing the categories perform in a really healthy way, Jason. I think as We've had negative volume trends as we did in this quarter, but we just expect them to moderate as we get through the quarters. I mean, one, you're going to see pricing settle into the market. Last year was a very active year from a pricing standpoint. That obviously has an impact on consumer behavior. You have the general macro trends that's impacting consumer behavior. But really, I think at the end of the day, batteries in particular are an essential category to consumers. They continue to shop the category. And, you know, it showed those healthy trends as we got through holiday and we expect, you know, and also as you get through the year, Jason, you're going to have, you know, mitigating impacts of the COVID comps as you work your way through this fiscal year. Because at this time last year, we were still having a little bit of elevated demand from COVID, not to mention, you know, some of the overall category dynamics.

Okay.

Okay.

Thank you.

Thank you. The next question will be from Nick Modi with RBC Capital Markets. Please go ahead.

Yeah, thank you. Good morning, everyone. I was hoping you can comment on inventories, but not necessarily battery inventories. I'm more worried about end market demand and inventory levels, you know, for what batteries go into. So I'm just curious on kind of how you guys think about that. Have you kind of thought about that in terms of the guide? And, you know, would that present any potential risk down the road?

Are you talking in terms of the consumer inventory levels, Nick?

Yeah, I'm talking, I'm talking more about, you know, end market demand for controllers and, you know, TV remotes and things like that. Cause you know, the retailers are obviously skinning down on inventories across the board, but I feel like there's still a lot more that they might hold back on as it relates to some of those more discretionary items. So that's kind of where the question is coming from. So it's not pantry inventory, it's more retailer inventories of things that batteries go into.

Understood. Well, I do think, Nick, in terms of as you worked your way through the pandemic, you saw a great deal of pull forward of consumers purchasing devices as they were stuck at home during the pandemic. And gaming controllers are certainly one of them. You know, when consumers buy devices, the great thing is that just expands the installed base that they have in their home. And 60% of the devices that consumers have in their homes take primary batteries. Those devices are still there. What's really going to drive our consumption is going to be the usage of those devices. There is an ample installed base of devices already existing within consumer homes to more than drive our categories. What we want to make sure is, you know, one, as, you know, devices consistently, they'll roll off in terms of usage or, you know, some devices convert into battery on board. But you see new devices come online. And I would say that, you know, what we're seeing in new devices is roughly the same percentage of those devices take primary batteries. So there's a constant replenishment. in consumers' homes for batteries. And then as they engage with those devices, as they utilize them more, then the change-out frequency increases and they consume more batteries. The consumption of batteries for a household is still up. We would expect that to continue. We just would expect the growth to moderate. I think we've said a number of times the category is larger. Coming out of the pandemic, from a growth rate standpoint, it will revert back to where it was pre-pandemic, but off of a larger base. So I would say From a device universe standpoint, from an install-based standpoint, categories is healthy. It's been in a long time.

Very helpful. Thank you. I'll pass it on.

Thank you. The next question will be from Andrea Tixera with J.P. Morgan. Please go ahead.

Thank you. Good morning, everyone. I have a clarification question on the inventory following up on the non-track channels on the performance that you called out. Was it mostly on the sell-out basis or an inventory drawdown at your largest e-commerce partner? And if that's so, is that a normalized, mostly normalized at this point? And another question on distribution, you gained a lot of share during COVID, and do you see any potential changes to that in your overlapping understanding of you're probably lapping a lot of that this year. So I wonder if what's happening there from a distribution standpoint. Thank you.

Andrea, on the first point, it was mostly sellout, but probably both impacted the performance there.

And on the distribution side, you're right. I mean, we did gain a lot of distribution during the pandemic. We've had a very long run of share gains, particularly in the U.S., Any distribution gains or losses is built into the outlook we provided. You know, I think we've mentioned a number of times, share is not the ultimate objective for us. I think if, you know, from a share standpoint, if we were to have share moderate or if we were even to lose a little bit of share, but we were able to improve the financials of our business, that's an okay tradeoff for us. So it is not something that we're focused on in terms of preserving it. We're more focused on improving the financials and driving gross margin improvements. But, you know, thus far we've been able to hold share while doing that at the same time, which is a great place to be in.

No, that's fair. And then the other fine point on just on a clarification on a commentary of getting out of one of the, I believe, contracts, is that something that we, if you can kind of parse out that or bridge that change in the quarter, if I understood it correctly, and then what's the impact for the next few quarters?

Well, it was OEM business, so very low or no margin on the battery side. So you really won't, you know, it won't be very visible to you other than in our financials.

Right, and not on the top line.

It'll continue through sort of at that pace.

Okay. All right. Thank you.

The next question will be from Kevin Grundy from Jefferies. Please go ahead.

Hey, good morning, everyone. Question on the guidance, and I'm just trying to sort of reconcile a bit the tone on the call versus the way the market is digesting your quarter today. It sounds like, from your perspective, this is currency is a little bit better, but, you know, you're still within the range. Are you toward the midpoint of the range? Are you toward the high point of the range? Is it currency got a little bit better, but the first quarter may be a little bit worse, so it kind of gets you squarely back to the midpoint? of the range. I'm just trying to sort of understand, based on what you know and understanding the volatility of the environment, how are you guys just kind of digesting the quarter relative to the full-year guidance? And then I have a follow-up on the Nielsen data.

Yeah, Kevin, I'll probably risk repeating something I've said earlier, but I'll kind of kick it off and then John can maybe get into specifics as we walk through the outlook. But Certainly, the tone from our perspective is intended to be that we're off to a great start. I mean, categories are performing better than we anticipated through Q1. We did have the inventory issue with retailers that we're working our way through, and we're already starting to see that reverse as we get into Q2. Margins trended ahead of our plans with great work on pricing, but also the project momentum, which is off to a fast start. We've been able to really, you know, advance that program and have great line of sight to $80 to $100 million of savings. Working capitals, you know, off to a great start with $21 million when we were going to have $100 million of improvement over the course of the program. You know, all of that, I think, gives us great confidence as we head into the rest of this year. But then it also lays the foundation for a great 24 as well. So I think we feel great about the start to the year. Certainly a lot of work to do. You know, the only unanticipated development, like I said, was in the retail inventory space. But, you know, we're working our way through that, you know, this quarter. John, anything specific on the outlook?

The only thing I'd add, Mark. So, Kevin, you hit on the FX. It's a slight benefit from what we originally had in our outlook. I'd also say if you look at the way we're calling gross margin for the full year, there's a little bit of headwinds going into the back half. And what we're seeing is some of our raw material costs are a little bit higher this as well as some of the energy surcharges that we're seeing. So, you know, we're still calling for 100 to 150 basis points up, but probably not as much push here as we had, you know, if it was just the FX, and that's not a little bit ahead of when.

Okay, that's helpful. One follow-up, and I would also agree with Lauren's point earlier. I think some of it around transactional FX, I think, is probably driving some of the disappointment. But setting that aside, just tying together some of the commentary around the Nielsen data and then the retailer commentary and destocking. Should we expect now, given your commentary, that you feel comfortable, it was sort of a seasonal sort of dynamic, that your U.S. business should start tracking much more closely to what we see in the Nielsen? Because obviously the gap was very, very wide. I'm just trying to connect your commentary with you seem reasonably comfortable with where they are now. So is that to say that investors should be relying much more closely, again, on sort of what we see in terms of retail takeaway in the Nielsen going forward? And I'll pass it on. Thank you.

Yeah, Kevin, that's a great question. I mean, I think certainly as inventory levels would recover, you would expect, you know, Nielsen as well as our financial results to track more closely together. But I caution a little bit because there are other things which impact our business, both positively and negatively at times. And one is the untracked channels that we've mentioned. And the other piece is the international part of our business, which is frequently not captured in that scanner data. So I would say yes, as inventory levels sort of recover, there will become closer alignment. How closely remains to be seen. both given, you know, sort of the ordering patterns of the quarters, but then also the other untracked pieces of our business, which impact the overall financials. Understood. Thanks for your time. Good luck.

Thank you.

And the next question is from Rob Ottenstein with Evercore. Please go ahead.

Great. Thank you very much. A couple of follow-ups from the opening commentary. Can you give us maybe a little bit more color on the planned savings, what particular operations, functions are involved, and maybe most importantly, are those savings going to fall to the bottom line? Are they net of reinvestment in some of the systems improvements you're talking about? So that's the first question. And then possibly related to that, I was just wondering if you could give us more information detail more specific detail on the working capital programs uh in in other debt pay down programs and you know given everybody's desire right to manage working capital uh what gives you the confidence that you're able to execute on them thank you there's a lot in there robert let me let me start to chip away at it and we can kind of direct us in places uh that maybe we didn't cover let me

I'll just sort of remind you and others on the call about the overall details of the program, $80 and $100 million by the end of 2024. Cost to implement the program is roughly 50% of savings. We achieved $7 million of savings already in Q1, $21 million working capital benefits already in Q1. We expect $30 to $40 million of savings in fiscal 23 from the program. It's going to be split roughly 80% gross margin, 20% SG&A. And then the balance would be achieved into 24. And the intention is certainly for that to drop to the bottom line. I want to be careful in saying that, though, because I don't want to get ahead of ourselves and provide 24 guidance prematurely. But that's certainly the intention of the program is to claw back margins, improve earnings of the enterprise as we go through this program, and to be able to drive incremental earnings power as we get into 24 and 25. And John, maybe in the working capital, kind of the details of that.

Yeah, the only thing I'd add to that, Mark, is on the 30 to 40 million that's going to drop. And that really is very much in gross margin that's helping us drive those gross margin numbers this year and offsetting some of those, you know, inefficiencies that might come as some of those volumes came down to an earlier question. On the working capital, Robert, you know, we've, you know, really prioritized inventory and continue to do that even outside this program. Just over the last quarter, you know, we've taken out close to $100 million of our working capital. We were able to go after inventory, AR, and AP. It'll continue to be a high focus. I think you'll see some normalization as we go throughout this year. This was a very good quarter for us and obviously close to 20%. Free cash flows are presented at sales as, you know, we're calling for more like 10% to 12%. for the full year, and I think that'll give us the opportunity to really fund the momentum project in the back half of the year. So pre-cash flow is really a positive number for us this quarter, and we expect it to be really strong throughout the rest of the year. As far as debt paydown, still number one priority for us for capital allocation. As we talked about in the prepared remarks, we've paid off almost $170 million over the last five months, so something we'll continue to focus on as we go throughout the year.

Have you kind of disclosed and had approved your working capital objectives with your supply chain? Because there's two sides to every kind of transaction.

Understood, Robert. I mean, there's certainly a counterparty in some of these changes we're trying to drive through, but we have confidence in our ability. I mean, some of the things that are internal working capital management, which are sort of unilateral things, actions we can take and have taken to implement, but then it's also working with your counterparties to improve your working capital, and we certainly have confidence in our ability to do that.

Terrific. Thank you very much.

Thanks, Robert. Thanks, Robert.

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

Hi, this is Mary Ann for Bill. Thanks for taking our questions. So first, I know you touched on some of the value share increases in the quarter, but are you seeing any signs of trade down the private label?

We are not. Private label, particularly in the battery category, is basically flat. You're seeing some increases in international markets, but as of now, private label is just staying consistently flat in the reporting periods we've seen thus far.

Got it. And I know debt reduction is your primary focus, but is there any potential for M&A? And if you could share your expectation for debt reduction for the year, if you have one.

I think with our stated priority of debt pay down, I mean, M&A would be on the sideline. I mean, I think it's very difficult to speak in absolutes with something like M&A, but with our stated priorities and, you know, our point of emphasis of paying down debt, M&A would certainly be a secondary consideration right now for the business.

And we're looking to pay down around a half a turn from the beginning of the year, and that's both through debt pay down and earnings growth.

Great. Thank you very much. Thanks.

The next question is from Carla Casella from JP Morgan. Please go ahead.

Hi. Thank you. Did you say which of the, how much of the debt pay down was bonds versus term loan, and in each of the quarters, did you do some buybacks?

Yeah, in the first quarter, it was about half and half bonds versus term loan. And then when we paid down, it was all term loan to start the second quarter.

Okay, great. And then you mentioned about this quarter, there were some timing differences in the brand support. And I'm wondering, as you go into spring, summer, and next holiday, if we should think of any – is there any change in your cadence of brand support or – And is that dictated by kind of what's going on with the retailer, or is that something you can set months in advance, meaning was it a surprise change?

No, it wasn't a surprise. Last quarter we had talked about shifting some of this into the holiday season. That's why you saw it higher. I think in general, you know, our biggest quarters are going to be first quarter and third quarter because you've got the holiday for battery and then you've got the – the summer for the auto care. So, you know, I would expect, you know, as we talked about, 5% to 6% for the full year. But you're going to spike in the first and the third quarter. You'll be the lowest in the second, and you'll be also lower in the fourth.

Okay, great. And then can you give a little more clarity? You mentioned about some costs. You made some comments on the costs, and you called a material ocean freight. Can you just talk about any more color you can give there? And is it still inflationary and when we should see the costs come down and how much of that is because what you've locked in versus just where the markets are?

Well, so we're about 75% locked for the year in our total cost positions and that's inventory on hand and what we've already experienced. So we're in pretty good shape for knowing what's coming down at us for the rest of the year. What we are seeing is a little bit of headwinds in some of these metals really on the battery side. So zinc, lithium. We're also seeing energy, which energy impacts our own plants as well as some of the conversion costs for those metals. So all of that's a bit of a headwind for us as we're building this next round of inventory for the back half. But we've seen ocean freight moderate. Now, we had kind of anticipated some of that in our outlook, so it's not a big upside to what we were originally calling, but it's still positive. And then I did call some outperformance in the first quarter of warehousing and distribution, which was mostly in North America. And that also was a little bit lower than we had anticipated. So a positive there.

Okay. That's great. Thanks.

And again, if you have a question, please press star then one. The next question is from Hal Holden from Barclays. Please go ahead.

Good morning. I just had two quick ones. You called out in the script negative headwinds from higher factoring rates, and I was wondering if you could sort of give us a sense of what that looked like and if it changes your view on whether factoring is an attractive source of cash.

Yeah, that's a good question. We called it out because that factoring goes through SG&A, and it is kind of variable rate. So we are looking at whether we can optimize that, and I think there's To the extent that we use it, it might be less. We'll also look to use – we have multiple programs. We'll try to find the ones that are the best for us, but it is something that we're evaluating.

Great. The second question was, I was wondering if you could tell us which bonds you bought back in the fourth quarter. I can wait for the queue if you need me to.

Let me follow up with you on that one. I can get you the details.

Great. Thank you very much.

Thanks, Al.

The next question is from Brian McNamara from Canaccord Genuity. Please go ahead.

Hey, good morning guys. Thanks for taking the question. I hate to, uh, you know, beat a dead horse on the, uh, the inventory levels. You guys mentioned the stocking at retailers. I'm curious which business are channel inventories in better shape at the moment, auto care batteries. And then secondly, um, I'd be curious your opinion of consumer inventories in terms of pantry loading or lack thereof in both businesses. Thank you.

No, we're happy to revisit this. Obviously, it's an important point. I think from a consumer standpoint, we continue to see consumers buying for immediate needs. So, we do not anticipate nor are we seeing that pantries are loaded from a consumer standpoint. You know, they are migrating either to larger pack sizes or smaller pack sizes depending upon the individual consumer. means something different to most consumers, but in the overall research that we're seeing, we are seeing that a very high percentage of consumers are buying for immediate need. Retailer standpoint, when you go through October, November, December, it's a critical quarter for batteries. You tend to see inventory levels shift quite a bit during that time period. We are now entering peak season for auto care, so it'll be inventory built as we work our way into the spring season. which, you know, Q2 and Q3 tend to be the big quarters for that business. So I would say we're seeing a recovery on the battery side, which was the main impact that you saw in Q1. But in auto care, we're also going to see a recovery. But that's also just going to be because you're heading into peak season.

Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mark Levine for any closing remarks.

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

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