Energizer Holdings, Inc. (ENR) Q1 2023 Earnings Report, Transcript and Summary

Good morning. My name is Chad and I will be your conference operator today. And 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. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Jon Poldan, 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 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. 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 2022. With that, I'd like to turn the call over to Mark.

Good morning, everyone. Before we talk about the results of the quarter, I want to introduce Jon 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 commence 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 brands 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 remained 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 Armor All 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 comps 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 has 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 margin, it is also driving much improved working capital efficiency, 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 use to pay down over $100 million of debt in the first four months of the year. As we look ahead, debt pay down 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 and 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 basis points to 400 basis points. The volume declines in the quarter were partially offset by roughly 950 basis points of pricing. Adjusted gross margin increased to 150 basis points to 39%, driven by pricing actions, savings generated from project momentum and the benefit of exiting 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 $0.72 per share respectively. On a currency neutral basis adjusted EBITDA and adjusted earnings per share were 155.6 million and $0.83 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 4.75 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 million 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 million 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 benefitting 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 basis points to 200 basis points from the prior year quarter. We expect A&P as a percent of sales to begin consistent with investment levels in the prior year quarter and SG&A roughly flat on a dollar basis. Interest expense is expected to be up $4 million 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 pretax earnings by approximately $8 million 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 net sales growth led by pricing and recovering and 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 basis points 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 pretax 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 million 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. [Operator Instructions] And 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 -- good morning. So, 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. So just -- and I have more interesting follow-ups, right? Just curious if you could comment on that decision and why there wouldn't have been an improvement to the range given FX is less a bad one?

Sure. Let me talk just specifically Lauren to the FX treatment. So the currencies that move the most for us were euro and pound. Those are also our largest hedge position, 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 the bottom line as much, because the hedge actually reverses. So and as 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 $5 million 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 million to $7 million, 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 is a bit almost like let's call it half the expansion maybe if what at least I have in my model for second quarter. So just if anything timing related that we are 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?

Yes. Well, 2Q, I mean, partially you get mix impact, so it's going to be more Auto than Battery. It's also one of our smaller quarters, we expect to be 150 basis points 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 basis points to 150 basis points of total improvement. So we expect 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 the [Technical Difficulty] there were the inventory destocking and the exits, which you specified as well. But just reads 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.

Yes, 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 of -- in the categories performed really well with Batteries up almost 6% and Auto Care up 3% and that was ahead of our expectations. And obviously, our Batteries were able to gain share, 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 our 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 given 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 makeup with Battery sales in the off season?

So I think there's a couple of different things in your question and maybe John and I will tag team on 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 have dealt with inventory in October, November, December most prominently in December as we got towards the end of the holiday season. Really, 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 the way we said 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 their historical range, 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 -- 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. Yes, 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, in our actual reported results, lower current year volumes, unit response to 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 and 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 performed very strong. Non-track channels were actually lower than that. So that was a drag as well on our top line.

Got it. Yes, and then just a follow-up on Auto Care. Just kind of your expectations for the upcoming season, I mean, with the understanding of in the four, 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 in COVID? And so just 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 then we're going to expecting organic growth in both auto care and batteries, in 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 that as expected. But when we go into the year, you followed us long enough to remember when there's been a particularly bad weather year for A/C Pro. We modeled 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 is 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.

Good morning.

A couple of quick questions. First, I don't understand this timing on holiday orders. Can you provide a little more detail on that?

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 declines in Q1. The incremental piece to that is 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.

Yes, yes. 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?

Look, I think we're attacking costs across the board. So you see project momentum is really going after a lot of that. We have seen some impact, but we've -- 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 gents, it sounds like you're looking for your categories to firm biometrically as the year progresses. Yet 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 suggest?

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 this general macro trend 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 it showed those healthy trends as we got through holiday and we expect. And also as you get through the year, Jason, you're going to have mitigating impacts of the COVID comps as you work your way through this fiscal year, because at this this time last year, we were still having a little bit of elevated demand from COVID, not to mention some of the overall category dynamics.

Okay, okay. Thank you.

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

Yes, 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 for the batteries go into. So I'm just curious kind of how you guys think about that? Have you kind of thought about that in terms of the guide and would that present any potential risk down the road?

Are you talking in terms of the consumer inventory levels Nik?

Yes, I'm talking -- no I’m talking more about end market demand for controllers and TV remotes and things like that, because 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 painter inventory, it's more retailer inventories of things that batteries go into.

Understood. Well, I do think Nik 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. 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 one, as devices consistently, they'll roll off in terms of usage or some devices convert into battery onboard, but you see new devices come online. And I would say that 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 per household is still up. We would expect that to continue. We just would expect the growth to moderate. I think we 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 also is a larger base. So I would say from a device universe standpoint, from an installed base standpoint, categories as healthy as 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 Teixeira with JPMorgan. Please go ahead.

Thank you. Good morning, everyone. I have a clarification question on the inventory following up on the non-tracked channels on the performance that you called out. Was it mostly on the sellout basis? Or any 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 and you are lapping or understanding, 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 been 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, I think we've mentioned a number of times share is not the ultimate objective for us, I think if from a share standpoint of if we were to have share moderate, 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 trade-off 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 improvement. But 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 -- it won't be very visible to you other than in our financials.

Right, you are not on the compliance?

It will continue through sort of at that pace.

Okay. Alright, thank you.

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

Hey, good morning, everyone. The 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 is currency is a little bit better, but 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 maybe 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 Nielsen data.

Yes, 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've walked 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 advance that program and have great line of sight to $80 million to $100 million of savings. Working capital is off to a great start with $21 million and we're going to have $100 million of improvement over the course of the program. All of that, I think, gives us great confidence as we head into the rest of 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. The only unanticipated development like I said was in the retail inventory space, but we're working our way through that this quarter. John, anything and certain specifics in the outlook?

The only thing I would add, Mark, so Kevin, you hit on the FX and so 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, as well as some of the energy surcharges that we're seeing. So we're still calling for 100 basis points to 150 basis points up, but probably not as much push here as we had, if it was just the FX and that's not a little bit headwind.

Okay. That's helpful. One follow-up, and I would also agree with Lauren's point earlier, I think some of that around transactional FX, I think is probably driving some of the disappointment. But sitting on the side, just tying together some of the commentary around the Nielsen data and then the retailer commentary in 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. So I'm just trying to connect your commentary with you seeing 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 and the Nielsen going forward, then I'll pass it on. Thank you.

Yes, Kevin, it's a great question. I mean, I think certainly as inventory levels would recover, you would expect 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 times and one is the on-track 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 that there will become closer alignment, how closely is remains to be seen both given, sort of, the ordering patterns of the quarters, but then also the other untracked pieces of our business, which impact the overall financials.

Okay. Understood. Thanks for the time and good luck.

Thanks, Kevin.

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 plan 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 detail, more specific detail on the working capital programs and other debt pay down programs and given everybody's desire right, to manage working capital. What gives you the confidence that you're able to execute on them? Thank you.

There's a lot in there, Rob. Let me start to chip away at it and we can kind of direct us in places 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 million to $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 million 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 call 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.

Yes. The only thing I’d add to that Mark is on the $30 million 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 inefficiencies in my comments, some of those volumes came down to an earlier question. On the working capital, Robert, we've really prioritized inventory and continue to do that even outside this program. Just over the last quarter, we've taken out close to $100 million of our working capital, we were able to go after inventory AR and AP, it will 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 flow as a percentage of net sales is we're calling from 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 free 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 pay down, still number one priority for us for capital allocation. As we talk about in the prepared remarks, we paid 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? Alright, because there's two sides to every kind of transaction?

Understood, Rob. 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 are just better internal working capital management, which are sort of unilateral 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] (ph) on for Bill. Thanks for taking our questions. So first, I know you touched on some of the value share increase is in the quarter, but are you seeing any signs of trade down to 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 that 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 side line. I mean, I think, it's very difficult to speak in absolutes with something like M&A, but with our stated priorities and 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 JPMorgan. Please go ahead.

Hi, thank you. Did you say which of the -- how much of the debt paydown was bonds versus term loan? And in each of the quarters that you just bought buybacks?

Yes. 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 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 is -- and is that dictated by kind of what's going on with the retailer? Is that something you can set month 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, 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 summer for the auto care. So I would expect as we talked about 5% to 6% for the full-year, but you're going to spike in the first and third quarter, you'll be the lowest in the second and you'll be also lower in the fourth.

Okay, great. And then could you give a little more clarity, you mentioned about some cost, you made some comments on the cost 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 cost 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 a 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 free 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, 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.

[Operator Instructions] The next question is from Hale 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?

Yes, 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 pro. 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 get you the details.

Great. Thank you very much.

Thanks, Hale.

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

Hey, good morning, guys. Thanks for taking the question.

Good morning.

I hate you beat a dead horse on 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 or batteries? And then secondly, I'd be curious your opinion of consumer inventory 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. They are migrating either to larger pack sizes or smaller pack sizes depending upon the individual consumer and value 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 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 will be inventory builds as we work our way into the spring season, which 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 LaVigne 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.