Energizer Holdings, Inc.

Good morning. My name is Dave and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's second quarter fiscal year 2023 conference call. After the speaker's remarks, there will be a question and answer session. 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 to begin your conference.

Good morning, and welcome to Energizer's second quarter fiscal 2023 conference call.

Joining me today are Mark Levine, President and Chief Executive Officer, and John Drabik, Executive Vice President and Chief Financial Officer. The play 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. 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. but conciliation 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, estimates we believe to be reasonable. Battery category information includes both brick and mortar and e-commerce retail sales. As 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.

Thank you, John.

Good morning, everyone, and welcome to our second quarter earnings call. Our second quarter results demonstrate another terrific performance by our team. We delivered organic sales growth across both battery and auto care while improving operating margins. as we remain laser focused on generating growth while maintaining our focus on gross margin. We entered fiscal 2023 with a few key priorities. Restore gross margins across our portfolio, reestablish healthy free cash flow generation, and pay down debt. We have made significant progress against each of these areas this quarter, while also delivering organic top line growth of 2.6%. Categories are resilient. even in a difficult environment. Our iconic brands and broad portfolio of products allow us to meet consumers where they are. In batteries, global category value is up 2.7% and volume is down 5.5% on a year-over-year basis. When considering the comparison against last year, keep in mind that the category is cycling through price increases which occurred last March. In addition to expected elasticity impacts from pricing, consumers are also shopping cautiously and prioritizing critical categories, such as food, fuel, and utilities. Batteries are an essential product for consumers, and as a result, demand for our products has been resilient, and we expect volume trends to improve in the back half of the year. From a long-term perspective, the category remains meaningfully larger than prior to the pandemic in both volume and value, driven by increased device ownership, usage, and pricing. For example, in the U.S., category value is up over 28% in the 13 weeks ending March, with volumes up almost 9% as compared to pre-pandemic levels. Our performance within the category remains strong as consumers are selecting our brands, as we gain 0.7 share points globally behind robust performance in leading markets such as the U.S., Germany, and Canada. Our auto care business, we have started the peak season with solid results. The drivers of category demand, size and age of the car park, along with miles driven, all have positive trends. The underlying factors, combined with pricing, have resulted in category value nearly 25% larger than pre-pandemic levels. During the quarter, the category grew 4.7% as price increases more than offset volume declines. Expect continued value growth for the remainder of the year led by pricing offset by volume climbs. We performed well in the quarter and delivered auto care organic growth of 6%, on top of nearly 20% growth in the year-ago quarter. Our growth was driven by a combination of pricing and expanded distribution across both North America and international. Teams have done a terrific job in improving the margins in our auto care business. while also bringing category-leading innovation to market. New products launched this year include a ceramics line within our appearance portfolio and an expanded line of refrigerant products. As we look ahead, we will stay close to consumers and how the current environment is impacting their overall shopping behaviors in both of our categories. Our broad portfolio, expansive distribution, and best-in-class shopper-based solutions we are positioned to connect with consumers and influence the choices they make, including where they shop, the brands they choose, and the pack sizes that meet their needs. Finally, as you can see from our results today, we have made significant progress restoring the profitability of our business. Driven by the benefits of last year's broad-based pricing, this year's targeted pricing, and project momentum, Adjusted gross margins expanded 300 basis points versus the prior year. While we are encouraged with this progress, there is more work to do as our margin profile remains below historical levels. With the impact of both project momentum and our approach to pricing and revenue management, we are confident in our ability to close that gap. When we kicked off project momentum, we highlighted the redesign of our operational network. These actions will optimize our route to market and create manufacturing and packaging centers of excellence that are designed to improve the resiliency of our business, all while driving significant savings across our product portfolio. Additional areas of value creation include a focus on value engineering to reduce costs while maintaining or improving product efficacy. as well as the efforts of our procurement team to leverage new approaches to reduce our costs, including securing sources of supply in closer proximity to our plants. We're also driving savings from the investments we are making in our digital transformation, including improved data and analytics, which enable activities such as predictive modeling to optimize our ocean shipment costs. To date, behind these efforts, the program has generated $20 million in savings and contributed to a meaningful reduction in working capital as a percentage of sales. The program is off to a great start, and the teams are executing with excellence. The combination of organic sales growth, gross margin improvement, and working capital reductions enabled us to significantly improve free cash flow relative to the prior year. The first two quarters, we have generated free cash flow of almost $200 million in excess of 13% in net sales. to pay down over $150 million of debt during the first half of the year, including over $100 million in the second quarter. We delivered a solid first half of the year, and as we look ahead, we are confident in our ability to navigate an admittedly uncertain macro environment. That confidence stems from the actions we have taken in the past couple of years in our digital transformation to improve both visibility across the enterprise and to leverage data and analytics to capture opportunities and mitigate risks. transformational efforts combined with operational savings from Momentum are positioning Energizer as a much more agile and responsive organization in a dynamic environment. 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 flat, with organic revenue up 2.6%. Adjusted gross margin increased 300 basis points to 37.9%, driven by pricing actions, savings generated from project momentum, and the benefit of exiting lower margin battery business, partially offset by increased input costs. Adjusted SG&A decreased $1.1 million, primarily driven by project momentum savings and favorable currency, partially offset by higher stock compensation amortization and factoring fees tied to rising interest rates. MP as a percent of sales was 2.7%, reflecting the seasonality of our business and roughly in line with the prior year. Interest expense increased $3.7 million year over year, due mainly to rising interest rates, partially offset by lower average debt outstanding. Delivered adjusted EBITDA and adjusted earnings per share of $139.5 million and 64 cents per share. Currency neutral basis, adjusted EBITDA, and adjusted earnings per share were $149.9 million, and 75 cents per share, representing currency neutral adjusted EBITDA growth of 31%, and earnings per share growth of 60%. The first six months of the year, we have generated approximately $192 million of free cash flow, or over 13% of net sales. We achieved these excellent results by combining strong operating earnings with a nearly 200 basis point improvement in working capital since the start of the year. In the quarter, we also paid down over $100 million of debt. Ended the quarter with net debt to adjusted EBITDA of 5.6 times, a reduction of half of a turn year over year. Our debt capital structure remains in great shape, with a weighted average cost of debt of around 4.75% and 90% fixed, with no meaningful maturities until 2027. continue to show solid progress with project momentum as we generated savings of $12.9 million in the quarter. We are focused on continued improvements through network optimization, strategic sourcing efforts, value-added value engineering, and SG&A savings enabled by our digital transformation. The program remains 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. anticipate an additional $10 to $20 million of savings to benefit the remainder of fiscal 2023. Working capital improvement is another critical aspect of our effort to improve free cash flow. Project Momentum initiatives have bolstered our efforts across inventory, payables, and receivables management, resulting in a working capital reduction of roughly $40 million in the first half of the year. This is inclusive of incremental inventory built to support network changes. Continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program. Finally, I would like to provide additional color on our outlook for our third quarter and the remainder of the year. Expect organic revenue growth in the back half of the year of 3% to 5%, driven by the continued benefits of pricing and a moderation of volume declines. Reported revenues are projected to be 2% to 4% over the same period. Expect gross margins in the third quarter to be roughly flat to our recently completed second quarter, as input costs have stabilized and product mix will be relatively consistent quarter over quarter. Also expect fourth quarter gross margins to meaningfully benefit from both input cost tailwinds, specifically freight, and incremental project momentum savings, driving significant gross margin expansion year over year. We will continue to invest in support of our brands and expect A&P spending for the remainder of the year to be slightly above prior year levels with a full year expectation of roughly 5% of net sales. We expect that SG&A will be roughly flat on a dollar basis relative to the prior year. Interest expense over the remainder of the year is expected to be up about $2 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt in the year. Finally, at current rates, we expect the currency impacts on earnings to be neutral over the remainder of the year relative to fiscal 2022, with modest headwinds in the third quarter, offset by a pickup in the fourth quarter. We remain on track to deliver the full year as guided in November. We continue to expect low single-digit organic net sales growth for the full year. Mixing, mixed management, and project momentum savings are still expected to result in improved gross margins of 100 to 150 basis points year over year. 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. Now, I would like to turn the call back over to Mark for closing remarks.

Thanks, John. We delivered a strong first half of the year. We generated organic growth in a dynamic environment and improved both profitability and cashflow. I am proud of our team's execution and look forward to our exceptional brand continuing to generate long-term shareholder value.

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 touch-tone phone. To withdraw your question, you may press star, then two. Also, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our rosters. First question comes from Kevin Gundy with Jefferies. Please go ahead. Great. Thanks. Good morning, everyone.

Good morning, Kevin. Good morning, Kevin.

question just on the phasing of organic sales growth in the back half of the year. It sounds like you're expecting 3% to 5%, just maybe a little bit more color on the breakdown of pricing and volume and how you expect that to sort of phase into the P&L. Also, related to Mark, you made a comment on some distribution gains in North America and international, maybe just a little bit on specifically where those are coming from. and also whether that was contemplating your initial guidance or whether that's sort of a potential upside or maybe you're feeling a little bit better about where you are in the range relative to when you initially provided. I have a follow-up on gross margin. Thanks.

Okay. And I'll start with the second one. I'll turn it over to John for some of the phasing one. I mean, in terms of the distribution, That was an auto care reference, and it was a little bit of expanded distribution in the U.S. and some of our existing retailers as well as continued expansion in international markets as we continue to roll that out with the international growth plan. Those were contemplated in the original outlook that we provided in November. And, John, do you want to?

Kevin, for our P&L for the back half of the year, you know, projection in batteries, you know, it seems we still see negative volumes in Q3 and flat to slightly positive in Q4. We're going to combine that with, you know, the continued benefits of pricing to get that 3% to 5% top-line organic growth in the back half. In auto care, you know, we anticipate low to mid-single-digit volume declines in both quarters, but really that pricing will continue to carry to, you know, slightly positive organic growth.

Got it. Thank you, guys. And then just a very quick follow-up. On the gross margin outlook, and I apologize if I missed this, I think the prior outlook was up 100 to 150 basis points for the year. So you're up 225 basis points. Now, so maybe just when you kind of pull all the pieces together between pricing, commodities, productivity, et cetera, where are you now in terms of overall gross margin? And then just a little bit on the phasing. If I heard it correctly, I thought that the commentary was 3Q gross margin was to be flat sequentially or close to flat sequentially with the second quarter. If that's the case, that would imply sort of a step down, quite a step down, I guess, year over year. Maybe just some cleanup there on the gross margin. Then I'll pass it on. Thank you.

Yeah, glad you called it out, Kevin. We did want to talk about that a little bit. So, you know, when we look at the, you know, I'll just start with gross margin in general, top priority for us. And, you know, we've really made tremendous progress there. So, you know, up 300 basis points this quarter was a really good accomplishment. As you saw, you know, it was really driven by pricing and momentum. We were offsetting, you know, the input costs that were still up, you know, a headwind in the quarter. Batteries, we saw that headwind really driven by some of the input costs, lithium, EMD, zinc, and steel. In auto care, it was still R134A, which is that refrigerant product and silicone. And in both businesses, you've seen impacted by increased energy and labor costs, which are really impacting conversion costs for us. What we've seen is those input costs have stabilized. What I'd say that, you know, at market, we've had some positive, some negative, but really flat. We're expecting the third quarter margins, as you mentioned, to be roughly consistent with the just completed second quarter. But we've also seen a lot of improvement in ocean freight, and that's happened over the first half of the year. That's flowing through inventory right now, and we expect to really see material improvement in the fourth quarter. So different than last year where we saw a big bounce up in the third quarter and then a drop off in the fourth. We're expecting pretty consistent this year. So you're going to see third similar to second quarter, and then you're going to see fourth quarter really end up in a nice spot as we finish out the year.

Okay. Very good.

I'll hop back into the queue. Thank you, guys. Good luck. Thanks, Kevin.

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

Good morning. Morning, Bill. This is a kind of question on POS, on battery volumes, trying to understand kind of how elasticity works and how it should work through the remainder of this year. Because I would think on one hand you have If there's, you know, sticker shock or people are trying to save money, they go more towards value packs and multi-packs that drive actual volumes up. But at the same point, I don't know if you're seeing just an exacerbated volume drop right after the holidays as people are pantry deloading before they buy new batteries and how that would work through the remainder of the year. So any kind of color around the consumer takeaway trends you're seeing would be great.

Well, I'll start, and then maybe if I don't touch on something of interest, you can ask a follow-up on it. I think as you look at every category globally, and a lot of this will be driven at the market level, depending upon when pricing and different dynamics that may exist in that market. But if we look at it from a macro perspective, the pricing really started to blow into the category because of all the inflation that the manufacturers were experiencing last March, April timeframe is when pricing started to move up. again, in the category, you started to see the elasticity impact hit at that time. And so, globally, you just started at kind of low double digits from a volume standpoint, and then you've worked your way back, you know, roughly to where we are now, which is in that mid-single-digit range. We expect that trajectory to continue in the latest four-week data in the U.S., for example. It volumes down just over 3%. I think it's 3.3% in the latest four-week data. And so, you're seeing that trajectory flow in a manner which is consistent with what we would expect from prior price increases. Now, as you can appreciate, this is a different environment than what prior price increases have been executed under. And so I do think there's a portion of that elasticity impact that has been exacerbated by the macro environment from consumers, particularly once we work our way through holidays. So in calendar Q1, you started to see the consumers reacting more cautiously. Within the battery category itself, they're continuing to value sort of the premium performance brands, and that's continuing to carry the day. We're continuing to gain share with our Energizer brand, which is great that as we've taken pricing in the category, we've been able to keep the brand preference that existed prior to the price increases. So I would say all on track. from an elasticity standpoint, you know, a little bit of a pressure from the consumer as we deal with the macro environment. But we're on track to achieve kind of the elasticity metric that we put in place when we were analyzing pricing last spring.

And I guess I will just follow up on that on the volume. Would you also consider this quarter to be kind of the last tough comp with COVID? Because this time last year, there were still a fair amount of consumers at home with Omicron, and it was kind of changing environment where it seemed to have opened up as we got to the summer. And so I would think that that has some impact on the year-over-year comparisons as well, but I could be wrong.

No, Bill, I think that's a great point. I think anytime you're looking at a COP period over the last three years, you're dealing with a multivariable situation. So you had Increased COVID demand that drove difficult comp periods, as well as growth in certain time periods. You had inflation and increased pricing, not just within our category. You had it across the store. You have a tougher macro backdrop right now. So, I think any time you're comparing period over period, you have to take into account likely more than one variable. To your point, was there some carryover that existed in the prior year period in Q3? likely a little bit, but it's been diminishing as we've worked our way through it. So there may be a little bit, but I think most of the impact will become from as we work our way through pricing.

Thanks so much.

Thanks, Bill. Thanks, Bill.

Next question comes from Andrea Texera with JP Morgan. Please go ahead.

Thank you, everyone. And thank you, operator and Michael Money. So I was just coming back to Bill's question. I think you quoted Also, what has happened with the carrier overall globally, and in particular in batteries, I think you said in the preparatory match, 2.7% up, and volume still down, I believe, 5.5%. So just thinking of the put and takes between pricing and mix, and also the comparison of volumes, I believe the comparison for volumes as you go into the third quarter gets easier for batteries and gets tougher for auto care. So if you can kind of like talk to us on that on a sequential basis. And then related to that, the price mix and how you're seeing, I believe we heard from pretty much everyone that reported so far that we are seeing consumers going to more value in terms of sizes of packs and somewhere in the middle. And we've done, obviously, we've done a great job kind of sweetening the mix in that way and premiumizing the packs and RGM. Can you talk to that as we go through the end of the year? What are you expecting? What are you seeing? And just on your commentary regarding consumers starting to become a little bit more price conscious. Thank you.

Andre, I'll cover maybe the last part of your question first and then turn it over to John for some of the volume value breakdown. But what I would say is there haven't been drastic movements in pack sizes. You are seeing some shifting that's occurring depending upon which retailer, which channel you're analyzing. I would say some consumers tend to trade down to achieve a lower price point in terms of pack size, but they stay at premium brands. And then other consumers will increase the pack size purchase in order to get a better perceived value. But again, still continuing to stay with premium brands. So to your point, we have continued to premiumize the category and trade people up and Energizer continued with our share growth. But that really gets down to an individual consumer level of how to achieve the value that they're seeking. The great news is we have a broad portfolio of brands, but also pack sizes to meet them wherever they want to go within the category. John, on volume and value.

Yeah, Andrea. You know, we look like to see volumes improving throughout the back half of the year, in batteries specifically, although we are calling for negative volumes in Q3 and then slightly positive in Q4. And then, as I mentioned, we're going to combine that with just carryover benefits of pricing. So we're expecting to see some top-line growth, you know, 3% to 5%. And then on the auto care side, we're still expecting to see low to mid-single-digit volume declines all the way through the end of fiscal 23. And then also we'll have a fair amount of pricing that will give us, you know, kind of flat to slightly positive growth in that category.

All right. That is super helpful. Just as a follow-up on the price mix, isn't the price mix getting, the mix getting even better and then the pricing rolling over? Like in terms of the timing of pricing, that's something that obviously is happening to everyone. You're starting to anniversary pretty big price increases. So how should we, and not to take credit, of course, you've done it tremendously well from a margin standpoint and I appreciate all the bridges and , but how we should be thinking of as you roll over the pricing, you can kind of have that, you know, volume back. And what gives you confidence that the fourth quarter volume will pick up? Is that more of a function of the easy comparison?

Andre, I think embedded in your question is what we expect to happen as the anniversary of the price increases. is that you're going to start to see volume and value converge and volume come back in Q4, as John mentioned, ultimately work your way back to flat and then work off the new base from there. That is historically consistent with our historical elasticity patterns that we've seen in the past. It's what's been playing out since last March. when we initiated the price increases. And so you'll start to see volume work its way back to its new baseline in Q4.

Yeah, and Andre, the only thing I'd add to that is that the price mix portion of it, we do expect to see, you know, declining effect. Obviously, with 13% tailwind this quarter, it's not going to be that high. It'll still be positive in the third quarter, and it'll continue to come down in the fourth quarter. So to Mark's point, we expect to see a flip between volume and pricing as we finish out the year.

Okay. Thank you so much. I'll pass it on.

Next question comes from Robert Autenstein with Evercore.

Please go ahead.

Hey, thank you very much. Two questions, please, possibly related. I was wondering if you could kind of, you know, stand back and review the RIOVAC acquisition, you know, how that has played out, you know, given, you know, your original thesis and How retailers have responded, you know, is it giving you more flexibility versus private label, you know, as the consumer gets squeezed and as you've got to deal with, you know, pricing increases or cost increases and you've got a wider, I guess, ladder, you know, pricing ladder to work with. So just trying to, you know, kind of understand how that has played out. And then, you know, possibly related, if you could give us an update in terms of e-commerce, what the competitive dynamics there look like, and is Rayovac helping you there as well? Thank you.

I think the short answer to your question, Robert, is yes. It's helping us a great deal. I think we're extremely happy with the acquisition of the Rayovac brand. It's given us the ability to be even a better supplier to our retailers. It gives us another brand in our portfolio to meet their needs. It gave us extra manufacturing capacity in order to be able to address particularly the surge demand which occurred during the pandemic. And it allows us to be a better supplier, a more efficient supplier, and continue to drive value for the retailers depending upon what their needs may be. As you've seen from an overall share perspective, it's certainly made us a a healthier business from a share perspective because we've continued to gain share consistently over the last couple of years. We've been able to consistently trade up into the Energizer brand, which is a great trade-up from our perspective. And as a result, I think it's been a hugely successful acquisition for us, particularly online. Now, what we've been able to do is, as you know, we had a fairly mature e-commerce effort against our Energizer brand when we acquired the business. We've been able to fold that in, and we've been able to continue to use our platform to drive Rayovac sales online. You've seen some shifting going around within Amazon in terms of value and premium brands, but we've continued to emphasize the Energizer brand online as well. But Rayovac certainly plays a role, and if consumers migrate to the more value end of the equation, we're going to be there and have great offerings for them at that level as well.

Thank you very much. Thanks, Robert. Next question comes from Hale Holden with Barclays.

Please go ahead.

Good morning. I just had one question. The $100 million in debt that you guys paid down in the quarter, was that against the term loan or applied somewhere else?

It was all term loan, Hale.

Thank you so much. Yeah, thanks. The next question comes from Carla Casella with J.P.

Morgan. Please go ahead.

Hi. I think you partly answered this, but just to clarify, given the weather in March, how much of your sales would you say might be pulled forward just given timing of kind of storms in the weather season this year versus last?

You know, like I would say Q2 is really the beginning of the peak season for auto care, and I'm assuming you're referencing specifically auto care. you saw all of the new sets going in retailers over Q2. Certainly warmer weather, earlier, hotter weather in the season helps drive early momentum in the season, but it really needs to continue through Q3. But I would say we're off to a very solid start in auto care. If the weather continues, obviously that will only help that business going forward.

And batteries, what about, I mean, I just felt like in March there was a lot of unceasable storms. Is there any pull forward you think in the battery business?

Well, I mean, what you would see from storms in terms of power outages, you will see some surge demand. A lot of that will get to sort of inventory levels at retail. We have not seen a tremendous amount of pull forward. We've seen inventory levels You know, it was a big point of emphasis coming out of holiday. We've seen some mild improvement. I would say we have not gone back to historical levels in inventory yet. So, we have not seen a bunch of pull forward from Q3 into Q2 because of storms.

Okay, great. And then, there was just some press over some past, some potential litigation suits. And I'm just curious, are you indemnified for anything that happened before your 2019 acquisition? Is there an indemnification agreement with Spectrum?

I want to make sure I'm answering the question, you know, in terms of what you're asking. Are you referring to the recent litigation that was filed?

I think I saw the recent litigation about the complaints about the Sherman and the California Cartwright Act about price fixing. And they mentioned 2018 and the I've not gone through the full suit.

Understood. No, I think because that's accurate litigation, obviously we can't comment on it. I mean, our view of those pieces of litigation is that they don't have any merit, and as a result, we're just going to respond within the confines of the legal process, and we'll leave our comment.

Okay. But I know if it's for a period that you didn't own the batteries, I'm assuming you'd be undignified. I just wasn't sure when you bought it if there was an agreement in the – agreement with that. I'm sorry, a provision in the agreement with Spectrum.

I don't want to get into the specifics of the litigation. I think to the extent that, you know, we have any recourse under any agreement with Spectrum, you know, we'll deal with that separately within the Spectrum acquisition. But for now, I think we ought to just respond within the legal process.

Okay. Okay, great. Thank you.

Next question comes from Kevin Grundy with Jefferies. Please go ahead.

Hey, great, guys. I appreciate you taking the follow-up. Two from me. Probably from Mark. Just on advertising and marketing levels, how are you currently thinking? The environment has clearly gotten much better from a cost perspective, from an FX perspective, to the extent that you're able to proceed on the gross margin outlook. Mark, what's your bias towards reinvestment? I know you're trying to accelerate the top line, appropriately trying to restore gross margin, but also concurrently trying to raise advertising and marketing levels. And I just wanted to kind of get your sense of where you are now, to the extent the company does exceed on gross margin, gross profit, how you're thinking about potential for reinvestment. Then I have a quick follow-up on promotion. Thanks.

Sure, Kevin. I think we always look to stay within that 5% to 6% range. If I take a step back, Really pleased with the first half of the year. We came into the year with really three key priorities. Gross margin improvement, free cash flow generation, paying down debt. We've made phenomenal progress against all of those. Looking ahead, project momentum is accelerating. We're going to continue to achieve savings there in the two-year program and a high degree of confidence in $80 to $100 million. If we're able to accelerate things and we do see opportunities to reinvest, I think that's always something we will look at doing in order to continue to drive top-line growth. I think, you know, right now, obviously, we're controlling what we can within the P&L, and, you know, the caution is around the consumer. To the extent that we can invest and have the flexibility to invest to reach those consumers and be able to drive consistent top-line growth, we'll absolutely look at that.

Got it. And then the quick follow-up, Mark, is just on promotion levels. You know, as I look across, as I look at the Nielsen data, batteries is actually one of the heavily promoted, at least in terms of the degree of the increase year over year. And you guys seem to be leading that relative to your key competitor and even ahead of private label. And I just wanted to kind of get your sense of the use of promotion as a tool to sort of drive demand, where we are relative to pre-pandemic levels and how you're sort of thinking about that. Because the growth margin improvement still looks quite good. despite the fact that the promotion is seemingly ramped here in the U.S. So just some thoughts there, and then I can pass it off. Thank you very much.

Sure, Kevin. On that one, I would say we try to look at the promotion cycles in longer terms of 52-week cycles. In the most recent time periods, you know, you've seen an uptick year over year relative to price promotion. And this is always going to be a category where there's some degree of promotion, and I think The important thing to dissect is full price displays versus the percentage of sales that are off with a price reduction. What you've seen in the most recent time period is from a category standpoint, it's around 11.5%. Energizer is a little bit below that. Our competition is a little bit above that. When you look at it over a longer-term horizon pre-pandemic, that's actually lower than historical levels. If you look at it again three years ago, any increase that you've seen in energy Energizer's promotional activity would be connected to distribution gains that we made over that time period. So, there hasn't been a shift in our philosophy about promotion. We still continue to think it is a lever that we need to pull in order to stay connected with consumers, but it's not one that we need to pull because, you know, battery category, as you know, is relatively inelastic, and there's no need to overly promote the category.

Okay. Very good. I appreciate you taking the follow-up. Good luck.

Next question comes from William Reuter with Bank of America. Please go ahead. Good morning. I know that toys is one of the categories of devices that is for batteries, and that category is very weak. I was wondering if you've had initial discussions with your retail partners about how they may be planning their holiday sets, whether that could have any impact on your fourth quarter revenues or first quarter of next year.

Well, anything in terms of what we're aware of for the balance of this fiscal year has been built into the outlook that we provided today. And as we get into sort of Q1 of next year, we'll provide an update of that in November. I would say the benefit for us in the battery category is a very fragmented device universe which use our batteries. Certainly, if there's negative trends in one subcategory of those devices, frequently there's an increase in other devices. that will offset those. So, we have a fragmented enough base that there's not overly concern, an overall amount of concern in any one area. But I would say we can weather the economic, you know, conditions that we're experiencing now because the category is a need-based product and it's relatively inelastic.

Okay. And secondarily, for me, when you laid out your financial priorities for the year, they were all around deleveraging and free cash flow. Historically, the company has not had a formal leverage target. I guess, does that remain to be the case? And in light of that, where would leverage need to be down to where you would consider either M&A or shareholder returns, other things that are not focused on reducing leverage?

So, Bill, I'll start with the first part. You know, we still don't have a formal target, but we are working to de-lever, you know, as our primary objective. So we think we can take leverage down around a half a turn a year. We've already done that, you know, over the last nine months. We're making really good progress. I think we'll continue to focus on de-leveraging as we go forward. I think we would all feel much more comfortable if we can get that leverage level to something like four below. You know, again, that's not a specific target, but I think that will be a better place for us to operate in the long run. As far as M&A, you know, I think that is, you know, if paying down debt is our primary objective, M&A is not something that we're looking at as a, you know, material investment at this point. So we need to make a lot of progress on the debt pay down before we consider anything that would be, you know, a material M&A target.

Great. That's all very helpful. Thank you. Next question comes from Brian with CanCord Genuity. Please go ahead.

Good morning. Congrats on the strong results, and thank you for taking the questions. So in Q1, you and several CPG companies called out destocking at retailers, but this quarter really haven't heard that as much. Are we through destocking, in your opinion? And if not, how did that contribute to volume declines in the quarter? And then secondly, I'd be curious to hear your opinion on consumer inventory levels in general in terms of pantry loading or lack thereof. Thank you.

Sir, I'll start with the last part. I think from a consumer standpoint, you are seeing a more cautious consumer. I think as a result, it's safe to say that their inventory levels at home have decreased as they buy less frequently, and you've seen them continue to shop more cautiously as inflation has really hit across the store. From a retailer standpoint, we have seen mild improvement in the inventory levels at retail, but we have not seen it snap back to, you know, historical levels just yet. our outlook contemplates a kind of status quo of where we are now and not coming all the way back for the balance of the year.

Yeah, I would just add a little bit of color to that last comment. So we do expect retailers for the rest of the year to kind of manage on a more tight basis. So we're viewing that as probably a 50 to 100 basis point headwind for our full year outlook.

So it didn't come all the way back, and we expect that to come off the top of it. Thank you, guys. Thank you.

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

Thank you for taking my follow-up. So the one just on this prior question also on the volume and the sell-out and sell-in. So if you take all channels globally, I think the comparison you gave was the 5.5% volume decline in the category. that you called out in the prepared remarks. And then if I'm doing my math right here and you just gave 50 to 100 basis points for the full year. So if you, and it's a big if, number one, are you tracking volume share as well? And if not, I think the math would imply that you had about 300 to 400 business points declining from the stocking. So, in other words, you were about 8% to 9% – actually, 9% to 10% decline in volume across both categories. And in batteries, you had the category down in volumes by 5.5%. Is that right that in this quarter probably you had, number one, volume share decline accelerating? And if not, why? And it's just like the stocking being stronger now in this quarter than it was? I'm just trying to reconcile. And then part of the question just on the pricing of private label, I understand that some private label manufacturers have a pass-through price. that may be coming up in the next few quarters, given that commodities are rolling over. So, when the anniversary, there's some, they have to actually reduce prices. Are you seeing that happening or heard of anything of that sort? Thank you.

So, Andrea, on the first point where I was talking about the volume impact, that occurred in the first quarter. So, I wasn't, we saw some bounce back in the second quarter, but really attribute the midst of the first quarter. So, that's not a go-forward or a second-quarter statement on the volume differential, if I'm catching your question right. I'll turn it over to Mark on the private label question.

On private label, Andrea, globally it's flat. You're seeing a small increase in the U.S., but not above sort of historical levels of what we've seen previously. As we've mentioned, we continue to see consumers migrate to the premium end of the category.

Okay, perfect. Thank you.

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

Thank you for your interest in Energizer and for joining the call today. I hope everyone has a great rest of the day. The conference is now concluded. Thank you for attending today's presentation.