Energizer Holdings, Inc. (ENR) Q4 2022 Earnings Report, Transcript and Summary

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. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference back over to Jackie Burwitz, Vice President 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 LaVigne, President and Chief Executive Officer; and John Drabik, 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 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 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 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.

Thank you, 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 million 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, an 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 million 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 2.5 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 products 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 initiative, 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 1 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%. Top line 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 nonworking 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 $0.82 per share, respectively, in spite of currency headwinds of $9.7 million or $0.11 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 onetime noncash $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 noncash accounting charge 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 $0.29 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 headwinds, resulting in a low single-digit decline. We expect gross margins to improve between 100 basis points 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 margin should start the year roughly in a 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 million 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 million 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 million 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 net working capital by $100 million, which will allow us to fund the projected onetime cash operating expenses related to the program of $40 million 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 at 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 paydown 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 Burwitz, our long-time 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 investments 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.

[Operator Instructions] Today's first question comes from Lauren Lieberman with Barclays.

First, Jackie, I'm jumping on the bandwagon. So congratulations and enjoy and also thank you for everything. Now on 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 1 and kind of cleanup question. And then the second thing was I wanted to talk a little -- 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 we -- 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?

Yes, the outlook that we gave is inclusive of currency impact. So that $585 million to $615 million for EBITDA and $3 to $3.30 million for EPS include all the currency impacts that we've talked about. 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%. In the third quarter, spiked a bit, fourth quarter came in at that 36%. We were actually in ranged with what we were expecting. But as much as we've built inventory, we've seen some movement. We've 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 will continue to impact us a little bit in the first quarter. And as you talk about, 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 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, you take longer to work through gross margin? So can you just maybe share a little bit about the volume outlook in particular relative to elasticity? And that's what I'm asking it in terms of the gross margin progression.

Yes. 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 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 -- elasticity held up nicely, but Mark can probably give us some more color there.

Yes, 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, 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. 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 demand 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 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 may evolve over the course of the year, just like they did last year.

Next question comes from Bill Chappell with Truist Securities.

And also, Jackie, congratulations, I can't believe we worked together for 20 years. A couple of things. I guess first on Project Momentum, given -- maybe the understanding of 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 are 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 efforts 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 out. 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 program is built around -- we have $30 million 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, 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, it's obviously look across the board at indirect spending, see if we can optimize the 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.

And then some kind of granular questions on looking at both fourth quarter and first quarter. Any impact from Hurricane Ian, was that in the fourth quarter? Or was that in the first quarter? Was there an incremental price increase in October? Or was that just -- 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?

Yes, 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 rightsized for everyone. We're comping elevated demand coming in the quarter. So we expect organic low single-digit top line. Gross margin year-over-year should be roughly flat. We are going to reinvest back into A&P. So as we talked about, it was a little bit light in the fourth quarter. We're pushing that into the holiday. So that should be up a bit. And then this is the quarter where the currency impact 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 million. And one other thing I wanted to call out, I don't think I was specific in the full year. Interest is a headwind of about $10 million to $15 million full year. In the quarter, it's probably $5 million or $6 million. And so 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 is equally beneficial position this year as we were last year for holiday. So we feel really good about where we're headed.

The next question comes from Andrea Teixeira with JPMorgan.

This is Shabana on for Andrea. You did mention that the batteries usage is about 15% higher and I think the categories are definitely larger than pre-pandemic. But I was wondering like since the 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, like 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?

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, 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 slightly elevated but in normal position 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. The consumers are obviously feeling pressured in the current environment. There has been a focus on essentials when they're really focused on grocery, utilities fuel. Unfortunately, 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-sized, it could be the frequency of the purchase. In terms of the fundamentals of all of our categories, particularly on batteries, the underlying fundamentals are very strong. Device ownership is up 6% still today versus pre-pandemic levels. 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 consumers continue to prioritize brands. Quality is really going to be the decision driver with long-lasting and a trusted brand, going to drive that decision. And you're seeing that play out in the scanner data with private label down 2 share points globally. In the U.S., it's down 3.2 share points and Energizer has gained 2.5 share points globally. So brands continue to matter. Demand is holding up well and you're not seeing a lot of trade down.

The next question comes from Robert Ottenstein with Evercore.

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 up 15% versus pre-pandemic, but you also talk about elevated. 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 impacts. 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 3% or just kind of rough order of magnitude?

Well, I mean, if you look at the latest 13 weeks, when you're looking at the battery category, you have -- in the category, you’ve value up slightly with volume down 12%. 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 value is carrying the day right now in the battery category. But you're going to see that volume 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 to add?

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.

Why don't I start and turn it over to John for a little more color. 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 every -- all the savings that we're talking about is sort of regardless of what happens in the inflationary environment. So it was -- 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 is 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 basis points to 150 basis points within that first year of the program.

I mean higher than pandemic mark?

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.

The next question comes from Kevin Grundy with Jefferies.

I apologize for the background noise. I'm traveling. And I also wanted to echo congratulations to Jackie as well. It's been a pleasure, well-deserved retirement. A couple of 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 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.

Yes. 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 a 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 noncash, but I'm just trying to -- number one, I can appreciate noncash. Number two, I can also appreciate how much variability in terminal value and your valuing assets. I'm just trying to marry that up with some of the transitory near-term cost pressures with Mark's comments about greater optimism on the battery category longer term. Can you help reconcile those a bit?

Yes. 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 -- impacted our cost of capital. So when we look at those models, it wasn't so much the cash flows that changed for the organic cash flow. It was really currency and cost of capital.

The next question comes from Hale Holden with Barclays.

I think from the gross margin comments for the first half of '23 that I heard that there was some manufacturing deleverage, as you work through your inventory backlog -- define that as what the headwind was?

Well, we didn't give the exact number. But I mean, what we're saying is that we'll 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 will improve a little bit. But most of that deleveraging of inventory that's really impacting our production volumes, that will 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?

Yes, gross margin or just generically, what headwinds you were looking at?

Okay. Maybe let me just walk you through -- thinking about this here. We expect organic top line growth, low single digits. That's obviously currency is going to drag that down to low single-digit decline. We anticipate the volumes will be modestly down due to the elasticity impact 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 I did want to call out the rates have risen very dramatically on interest, even though we're over 85% fixed. That is a $10 million to $15 million headwind year-over-year. The currency that I talked about, $90 million top line, $30 million roughly bottom line. That's $0.30 a share. So those are kind of the key items that we're looking at that are there are going to be headwinds going into '23.

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

I just have to 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. 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're seeing that net leverage end of fiscal year '23?

I just -- in general, paying down debt is our #1 priority. I think we have the opportunity to take out around 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.

The next question comes from Carla Casella with JPMorgan.

One clarification on margin. You called out this quarter recycling costs. I'm wondering if there's something -- was the first time I think I've heard you talk about that this thing going on in that market and if that’s -- how about your forecast?

Okay. Yes, there -- recycling is something that we've done in a number of markets consistently. There are some new programs. Yes. Australia was one of the larger one. 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 -- well, it will just be an ongoing cost of managing the business.

Okay. And then I might have missed it. Did you give the amount of pull forward holiday sales? You find some of the holiday sales were pulled into this quarter from next?

No, we didn't give 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 -- as we look fourth quarter, what I would point to is organic declines of low single digits is really what we're forecasting for this quarter.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mark LaVigne 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.