Energizer Holdings, Inc. Q2 FY2020 Earnings Call

Good morning. My name is Chad, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's second-quarter fiscal-year 2020 conference call. Please note, this event is being recorded. I would now like to turn the conference over to Jackie Burwitz, Vice President, Investor Relations. Please go ahead.

Good morning and thank you for joining us. During the call, we will discuss our results for the second quarter of fiscal-year 2020. This call will be available for replay via the Investor Relations section of our website, energizerholdings.com. Also available on our website is a slide presentation providing details about results for the quarter. On the call with me this morning are Alan Hoskins, Chief Executive Officer; Mark LaVigne, President and Chief Operating Officer; and Tim Gorman, Chief Financial Officer. During the call, we will make forward-looking statements about the Company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from our forward-looking statements. We do not undertake to update these forward-looking statements. Factors that could cause actual results to differ materially from these statements are included in today's presentation slide and in the reports we filed with the SEC. We also refer to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in the press release issued earlier today, which is available on our website. Information concerning our category and market share discussed on this call relates to markets where we compete and is based on Energizer's internal data, data from industry analysis, and estimates we believe to be reasonable. Unless otherwise stated, all comparisons are to the same period in the prior year. With that, I'd like to turn the call over to Alan.

Thanks, Jackie, and good morning, everyone. I want to start by first expressing our deepest sympathies for those affected by COVID-19. The global disruption and loss of life are truly devastating and unprecedented. And over 36 years with Energizer, I have seen this company face adversity time and again, but I have never seen our colleagues rally together as they have during this crisis. The work by our colleagues and business partners has been remarkable and driven by a shared passion, resiliency, and collaboration. We are exceptionally proud of this organization and everything it has really endured and accomplished. Early in the pandemic, we established two principles to guide our response: protect the health and well-being of our colleagues and preserve business continuity in order to ensure we could provide our customers and consumers with our products at a time when they need them most. The safety and health of our colleagues are Energizer's top priority. We reacted quickly to implement safety guidelines and health protocols across all Energizer locations in many instances ahead of government requirements. As with natural disasters, there was a surge in demand for batteries as governments around the world implemented shelter-in-place orders and our consumers prepared by stocking up on the critical products they needed. The ongoing demand is driven by increased consumption as consumers shelter in place and interact even more with their devices, which require the power our products provide. Even with the challenges presented by operating in this environment, all of our manufacturing facilities and distribution centers are operational, and we are consistently achieving overall fill rates of over 90%. This is critically important because demand for our batteries has remained elevated beyond the initial spike in mid-March, and we continue to support our Auto Care customers for the upcoming peak selling season. Our strong second-quarter results demonstrate how we continue to execute our strategies and operate with excellence to achieve strong organic sales growth of 2.7%, driven by our performance in batteries. The organic growth, ongoing cost controls, and synergy capture from our integration efforts helped drive adjusted EBITDA growth of 22% and adjusted earnings per share of $0.37 compared to $0.20 in the second quarter of last year. And while managing through the early days of the crisis, we also continued to make significant progress in our integration efforts, which benefited the quarter. Given the uncertainty in the operating environment today, we have taken prudent actions to strengthen our liquidity as a precautionary measure and currently have nearly $600 million of cash on hand globally and access to approximately $200 million of additional liquidity through our revolver. As of today, our business remains strong, and our strategic initiatives, including integration, are on track. These strategic plans are expected to help deliver EBITDA in excess of $700 million and adjusted free cash flow of above $400 million by the end of fiscal 2022, consistent with what we provided at Investor Day last November. We are confident in our ability to execute the strategies in place. However, the uncertainty around the length of the pandemic, the shape of the recovery, and its ultimate impact on the global economy are variables we cannot quantify with clarity at this time. But for the uncertainty related to COVID-19, we remain on track to achieve our EBITDA and cash flow goals. We have a strong global team responding to the crisis with an extraordinary level of dedication, creativity, and resiliency. We will continue to do what we always do in times of crisis: take care of each other and work with customers to ensure our products are available to consumers. I am more than confident in our organization's ability, and we are ready for the challenges that lie ahead. With that, I'd like to turn the call over to Mark.

Thank you, Alan, and good morning, everyone. As Alan described, the last few months have been unlike anything we have ever seen. Our colleagues around the world have worked exceptionally well to serve our customers and consumers with the same determination we have when natural disasters strike. Managing through this crisis has truly been a team effort. While we, like many other companies, face a steady stream of issues and potential disruptions, we have found ways to operate at an extremely high level during the crisis. The guiding principles Alan described, colleague health and business continuity, are uniting our organization to meet the challenges we face today and into the future. Early on, Energizer implemented health and safety protocols at our facilities, including temperature monitoring, enhanced cleaning and sanitation, social distancing, and the work-from-home policy for more than 40% of our colleagues. These actions have resulted in a healthy and productive organization. In response to the incredible consumer demand caused by the pandemic, Energizer's commercial teams did a remarkable job partnering with our customers to ensure they were adequately prepared for the increased demand for our products. In addition, our product supply team proactively increased manufacturing output as well as the sourcing of raw materials in order to successfully meet ongoing increased demand. Thus far, we have been able to resolve literally hundreds of challenges from a global supply standpoint, which have run the gamut from new government regulations, border closings, and temporary shutdowns to finding new and alternative supply partners in record time. The teams are undertaking all of this while maintaining high fill rates and delivering high-quality products. As a result of this tremendous effort, we are reinforcing the confidence that our customers have in us during times of crisis. Now let's turn to category performance, starting with batteries. For the 13-week period ending in February, which measures activity before COVID-19 impacted the U.S., battery category value grew 1.2% globally and 1.9% in the U.S. As we have progressed through March and April, there was a significant increase in demand in both measured and unmeasured channels. In the U.S., category value sales in measured channels grew 32% in the 4 weeks ending in March. More recently, category value trends remained elevated, up approximately 20%, through the first few weeks of April. During the 4-week period in March, Energizer's share in measured channels declined by 4.6 points. This stems from prior year resets at major U.S. retailers as well as the impact of consumer shopping in channels where we are underrepresented as they were making their initial stock-up purchases. As we mentioned in the previous earnings call, we expect these share trends to improve throughout the balance of the fiscal year as our distribution wins are executed. Prior to the pandemic, trends in U.S. e-commerce continued to show strength, with category value sales increasing over 16% in early 2020. More recently, we are seeing a significant shift to consumers shopping online, both pure-play and omnichannel. This trend has driven demand to two to three times the normal e-commerce battery category growth rate. On Amazon, Energizer's portfolio outpaced category growth, and we gained value share, enhancing our overall share leadership. Our leadership position in this area as well as our strong partnerships with other leading omnichannel retailers have served us well and will continue to be a strength in the future as more and more consumers shop online. While there have been shifts in where consumers purchase batteries, our analysis continues to show a stable commercial pricing environment in the U.S. with a reduction in promotional activity and an increase in average unit price. Demand trends indicate that consumers stocked up in the initial days of the pandemic, but our recent analysis of U.S. consumer behavior also shows they are using more batteries in their daily lives. As a result, we do not believe there will be a significant headwind in the remainder of the year, which has been further validated by the ongoing sales trends in April. Now going deeper into our battery performance. Last quarter, we announced significant distribution gains at several U.S. retailers, and these wins are now showing up on shelf. At several retailers, you can see we significantly improved the quantity and quality of space for our overall portfolio, including both Energizer and Rayovac. This quarter, we continued that momentum and have additional distribution gains in our international markets. As of this time, we do not believe the pandemic will impact our ability to execute the remaining resets and new distribution by the end of the fiscal year. Our strong organic net sales growth was driven by these distribution gains as well as some increased battery demand caused by the pandemic. While it is difficult to generalize because it impacted countries differently, we have seen a similar trend in both Americas and international segments. Modern markets have shown strong consumer demand, while developing markets have been more constrained by shelter orders. As a result, the increase in battery sales was also largely limited to markets like the U.S., U.K., and Australia. Consolidating those factors into our segments, in the Americas, we delivered strong growth in the U.S. and Canada, which was partially offset by declines in Latin America. This remained consistent throughout April. In our international segment, growth was driven by distribution gains as well as increased demand in modern markets, offset by softness in developing and distributor markets. Now turning to Auto Care. Prior to the onset of the pandemic, the Auto Care category was relatively stable in a seasonally low period with category sales down slightly in the 13-week period ending in February. Since the government restrictions were implemented in the U.S., the number of miles driven has decreased significantly. This is a key driver for Auto Care category demand. As a result, during the four-week period ending in March, we saw the category down nearly 15% in the U.S. Energizer's share in measured channels declined by 0.8 points in March, which reflects solid performance during a period of category disruption. In the quarter, our organic Auto Care net sales were down slightly as shelf resets and promotional activity were offset by the impact of COVID-19 beginning in mid-March. We are monitoring when markets and regions ease the various restrictions, which will have a direct impact on the U.S. peak selling season. We have a strong portfolio of branded do-it-yourself Auto Care products, which offer an attractive value proposition versus more expensive do-it-for-me options. We remain optimistic about our Auto Care business and its potential for future growth, both in the U.S. and internationally. As we have started to roll out each of those plans in international markets, we have already achieved several important distribution wins in Europe and Australia. Now let's turn to our integration efforts. The great work done by our colleagues to address the pandemic has not changed our focus or impacted our ability to achieve our long-term strategic objective. While we did make some minor timing adjustments to our integration schedules due to travel restrictions, which limited on-site activities, our efforts to integrate the acquired battery and Auto Care businesses are moving ahead. We realized synergies of $13 million in the quarter and still expect to deliver incremental synergies of $45 million to $50 million this year. Our remaining plans for our calendar year include the following initiatives in the U.S.: First, our optimization of footprint with centralized distribution for batteries and Auto Care; second, the consolidation of Auto Care production in Dayton, Ohio and specialty battery production in Portage, Wisconsin; and third, the migration of the acquired battery and Auto Care businesses onto Energizer's SAP platform. By the end of 2020, we still expect to be two-thirds of the way to realizing over $100 million in synergies. As we have mentioned previously, synergies in excess of $100 million will be reinvested to support our leading brands and accelerate the multiyear innovation portfolio in Auto Care. As you can see, Energizer is well positioned to manage through the uncertainties in the months ahead because of the incredibly strong response from our colleagues. We are doing exactly what we need to do to emerge from this crisis as an even stronger and more efficient company than we were before. Now I'll turn it over to Tim.

Thanks, Mark, and good morning, everyone. As Alan said earlier, our second-quarter results of adjusted earnings per share of $0.37 and adjusted EBITDA of $123 million reflect strong execution in the quarter and the benefit of higher-than-expected battery sales, driven by increased consumer demand due to COVID-19. While I will cover a few highlights in my prepared remarks, we have also posted more detailed slides on our website. Net sales in the quarter increased 5.5% to $587 million. This includes one month of incremental acquired Auto Care sales of $24 million, offset by $7.4 million of unfavorable foreign currency. On an organic basis, global net sales were up 2.7% driven primarily by distribution gains and higher battery replenishment sales in March due to COVID-19. These results were balanced in our geographic segments with Americas up 2.9% and international up 2.3%. We did see softness in our Auto Care business in the latter part of March. So far in the third quarter, we have continued to experience increased demand in batteries and softness in Auto Care. Gross margin rate in the second quarter increased 100 basis points to 41.6%. The increase was primarily driven by the synergies Mark talked about a moment ago and favorable raw material costs, partially offset by foreign currency headwinds as well as unfavorable product and channel mix and incremental operating costs related to COVID-19. While raw material prices have declined significantly, our requirements for 2020 were already 90% locked through forward contracts. However, we do expect lower commodity costs in the marketplace today to be a benefit in 2021. We always look to maximize the return on our A&P investment. As a result of COVID-19, we have shifted some of our in-store investments to later in the year, which has resulted in a decrease in investments for the second quarter. In addition, we have optimized our A&P spend to reflect the changing consumer dynamics, addressing both the shift to online shopping and increased media consumption across all mediums. Investing to build strong brands is one of our core strengths, and we will continue to do so going forward. The exit of several transition service agreements and certain mark-to-market adjustments on deferred compensation drove a decline in SG&A of $5 million to 18.4% of sales versus 20.2% in the prior year. We will maintain spending discipline as we manage the business during this crisis, and we expect to realize additional synergy savings in the second half of 2020. As we discussed on our previous earnings call, we utilized the proceeds from the sale of the Varta Consumer Battery business in January to pay down $346 million of term loan debt during the quarter. In addition, we have taken several steps since the end of the second quarter to improve our liquidity position as we move forward: First, we drew down $200 million on our revolver; second, subsequent to the second quarter, we completed a $250 million add-on offering of our 2026 senior notes with a yield of 5.94%. Finally, we secured an amendment on our credit agreement extending our leverage covenant of 6.25x net debt to EBITDA. This will ensure significant earnings cushion against our covenants through the end of fiscal 2021, at which time, the ratio will step down to 5.75x. These actions leave us in a significantly enhanced financial position today. As of May 1, we have almost $600 million of cash on hand with two-thirds held in the U.S., approximately $200 million of remaining capacity on our revolver and total debt of $3.5 billion with nearly 90% fixed. From a liquidity standpoint, we also benefit from minimal near-term debt maturities with approximately $45 million due during the remainder of 2020 and approximately $91 million in 2021. We remain committed to reducing debt once we have greater clarity on the potential impact from the pandemic. We expect the excess cash, which we obtain to improve our near-term liquidity position, would ultimately be used to pay down debt. We also expect our strong free cash flow to reduce debt over time by about half a turn per year in a normal operating environment. During the second quarter, prior to the onset of the pandemic, we repurchased 980,000 shares at a cost of $45 million. Capital expenditures through the first six months of our fiscal year were below expectations at $28 million, comprised mostly of integration-related activities. As we previously announced, we elected to withdraw our full-year outlook due to the uncertainties over the next several quarters caused by the pandemic and the associated global shutdowns that have taken place. We will press forward with what we can control in the remainder of the year by executing against the distribution gains we have achieved and our integration plans to realize synergies in the range of $45 million to $50 million, continuing to invest in A&P and innovation to ensure the long-term health of our brands and maintaining a strong balance sheet and liquidity position to manage through the uncertainty brought about by COVID-19. We will keep our colleagues safe and best position Energizer to adapt to what may come next. Now, I would like to turn the call back over to Alan for closing remarks.

Thanks, Tim. Energizer will take the necessary steps to keep our colleagues safe as they continue to support one another and do remarkable work to operate with excellence during this crisis. We remain focused on our customers, and we'll provide them with our products in the safest possible manner. While there will be challenges in the months ahead caused by COVID-19, we are not losing sight of our strategic objectives to become the leading global household products company in batteries, lights, and auto care and deliver significant shareholder value by achieving the long-term objectives we presented at our Investor Day in November. With that, I'd like to now turn it over to the operator, who will open up the line for questions.

Thank you. The first question will come from Wendy Nicholson with Citigroup. Please go ahead.

Hi. Good morning. I wanted to follow up for more details on the Auto Care business. Although I understand you have branded products across different price points, I'm curious about the health of that category in the coming months, especially as people are traveling less and staying home more. Could you share your expectations for that channel during the summer? Also, can you remind us about your distribution? I assume that products sold in big-box retailers might be performing better than those in specialty auto stores, which might still be closed in many areas. Could you speak more about the auto sector and your outlook for that business in the next quarter, please?

Certainly, Wendy. As we discussed on the call, the category remained roughly flat through the end of February, but it started to decline throughout March. The three months ending in March showed a decrease of about 5%. We noted that March alone saw a 15% decline in the U.S. This was largely due to widespread shelter-in-place orders that impacted our consumers in the auto care sector, primarily because the number of miles driven has significantly decreased. People aren't using their cars or driving as much as they used to. Thus, in the short term, this has led to a decline in demand in the category. However, as these orders are lifted across the country, I believe there are some macro factors that will benefit the category. I anticipate that people will start to go out more, which will naturally increase miles driven. Additionally, due to the macroeconomic situation, we might see an increase in the age of the car fleet, as people may be less inclined to purchase new vehicles. There is likely to be a growing focus on cleanliness that wasn't previously prioritized, and our Auto Care products will meet that demand. I also expect that people will avoid public transport, shared vehicles, or flying, leading to potential road trips instead of family flights. All these factors should help stimulate demand within the auto care market. The main concern could be the economic situation and its aftermath from the pandemic as we navigate through it. Regarding distribution, we are established in mass retail and auto retailers. Most auto retailers have remained open as essential businesses during this pandemic, but foot traffic has decreased since people aren't driving as much. Meanwhile, mass retail has seen increased traffic as consumers stock up on essential items.

Are you planning to change any of your investment spending plans to remind people about your brands, or given the still weak category growth, would you reduce spending? How are you approaching this to hopefully come out with a stronger market share than you had at the start?

No, that is certainly our intention. We are not going to pull back on planned investment levels. This is an opportunity. I think on the auto care space, this is largely a pause. I wouldn't call it, necessarily a systemic weakness; it's just a pause. We're going to continue to invest. We are looking at how we're investing, and this is both on batteries as well as on auto care, where some of the in-store promotions have been pushed off until later in the year. And that was largely just due to the ability to execute in-store was different during the pandemic than it would have been under normal circumstances. So we pushed those off. We've also looked at our digital spend as well as our media spend to understand how we should be engaging with consumers. Certainly, a lot of their habits have changed over the last couple of months, and we need to make sure that we're connecting with them. So we're constantly evolving that. We are not pulling back investment. We are not pulling back spending. We think this is an opportunity to remind everyone of the strength of our brands, both in batteries as well as in auto. And also in auto, you have to remind them of the value proposition of the product, which is instead of having your car washed and if you're at home, you can wash it at home yourself and save some money. And in terms of the A/C Pro product, when we were at Investor Day, we talked about that product being a value proposition for consumers. If your air conditioning is not working, use this product instead of taking it to a shop and paying more for that.

The next question comes from Dara Mohsenian with Morgan Stanley.

Hope you're all well. Two-part question on margins. First, you reiterated your synergy guidance for the acquired battery and Auto Care businesses. It didn't sound like operationally you had to slow much down on that front, given the COVID situation, but just wanted to double-check there. And can you discuss your level of visibility around realizing the synergies that you've outlined for this fiscal year? And then secondly, can you also give us an update on the commodity outlook with the recent spot declines we've seen, when might that flow through the P&L? Any sense of magnitude and how you sort of manage a potential windfall there on that side?

Yes. Dara, first on synergies and integration, as Mark indicated in his remarks, we remain on track with that. We've had some timing issues relative to travel restrictions, but we still are confident in our ability to deliver the $40 million to $45 million that we've laid out. And so that we're comfortable with. Things are progressing, particularly on the consolidation of distribution, that is on track as well as the integration to our SAP platform. So we're confident in doing that and moving forward through the end of this fiscal year and then into next. Relative to our expectations on commodities, we did experience favorability in the quarter. That was approximately a 110 basis point benefit in the quarter. And as I mentioned in my prepared remarks, we're essentially 90% locked for this year. So as we see the current spot prices, we expect that to be a benefit as we move into 2021. So we'll give further guidance on that when we give our outlook for 2021.

Our next question will be from Bill Chappell with SunTrust.

I hope you and your families are safe. First question, just kind of follow-up. Same kind of question as Dara's, but on currency. Can you kind of give a sense of where you stand? I know you're not giving full guidance, but just kind of what the headwind would be on top line for currency, kind of where we stand? And then just remind us where you are on hedges for this year, on how that affects the bottom line?

Yes. Bill, in terms of hedges, so we hedge against the four significant baskets of currencies, so British pound, the euro, Canadian dollar, and Aussie dollar. We hedge about 50% of that. Relative to FX, what we saw within the quarter, we called out the currency impact top line of roughly 140 basis points. We would expect, given where it's at right now, that you'd see a similar headwind as we move through the balance of the year.

Okay. This is a more challenging question, but is there a way to assess the overall impact of pantry loading? It seems that in the U.S., there was some pantry loading, as people are at home using toys and other products. However, it appears there was less opportunity for pantry loading in Europe and in certain markets with shutdowns. I wanted to understand if there's a way to differentiate between normal demand in this unusual environment and what was simply stockpiling.

I believe there is a distinction between modern markets and developing distributor markets. In modern markets, we've observed an increase in purchases, particularly in the U.S., where consumers stocked up during the early stages of the crisis. The U.S. consumer is more likely to do this due to past experiences with hurricanes and wildfires, and retailers are better equipped to meet this demand. Consequently, consumers purchased more batteries, often in larger packs. Our consumer research indicates that much of this behavior isn't solely pantry loading; rather, it's intuitive. People are spending more time at home, using their devices more, and everything in the household is being utilized more than before, including remote controls and toys. We don't believe there's a significant level of pantry loading happening right now. Looking at value sales growth through the end of April, we see it at 16.4%, which surpasses the 10% growth observed in the three months leading to March. This reflects consistent buying patterns as consumers utilize these batteries at home. As we move forward, there might be a slight pantry load effect, but we don't anticipate it will be substantial or a significant challenge for the rest of the year.

The next question will be from Faiza Alwy with Deutsche Bank.

So, first, I just wanted to ask if you could break down the Auto Care business between appearance, refrigerants, and chemicals. I think at Investor Day, you told us what the overall category was, but I don't think you've disclosed what your breakdown was. So I was wondering if we could get that.

I can break down some of the recent trends. Let me provide some insights on demand because what's most important to all of you is what future demand looks like in these subcategories. Currently, we've observed a few weeks of healthy growth in appearance chemicals. We've previously discussed the focus on cleanliness and hygiene, which is certainly affecting this area. Appearance has experienced nice growth rates recently, and we believe it will be the first subcategory to reflect this trend. Regarding refrigerants, as you know from last year, growth depends on the heat. In regions where we've experienced extreme heat, particularly on the West Coast in recent weeks, we've seen noticeable growth. However, for us to achieve the growth we anticipate, we need a normalized heat pattern as we progress through the summer. There’s still time for that to occur, and as you recall from last year, it came late in the season and impacted our results. As long as we see a more typical season, we believe refrigerants should show some growth year over year. For air fresheners, this is possibly the third category that will emerge from this trend. We are observing moderating trends; there was a decline in March and April, but we have started to see growth in the past weeks, reversing the previous decline. Performance chemicals represent the smallest segment of our business. This area will also be influenced by current gas prices, which are lower right now. Consequently, consumers are less inclined to invest in improving efficiency through fuel and oil additives as they did when prices per gallon were higher. In terms of our overall Energizer share in the Auto Care sector, it stands at approximately 15.5%. Our share may fluctuate due to the seasonal nature of the business; in appearance chemicals, we hold 29%; in air fresheners, 20%; in performance chemicals, 4%; and in refrigerants, about 53%.

Okay. That's very helpful. I also wanted to ask, broadly, where do you see the most uncertainty for the rest of this year? You've reiterated your synergies, and you seem to have a good understanding of battery demand. You're hedged on commodities, and the distribution you anticipated appears to be occurring. So where do you perceive the greatest uncertainty?

What we're focused on is controlling the aspects we can and continuing to execute. This includes the integration, distribution, and ongoing investment in advertising and promotions. We believe these elements are within our control and are confident in our overall strategic objectives for 2022. The uncertainty lies primarily in the broader economic context, including the duration and severity of the pandemic, the length of the shutdown, and the overall impact on the economy and consumers' willingness to spend on our products.

Okay. Thank you.

The next question comes from Olivia Tong with Bank of America. Please go ahead.

All right. Thanks. First on synergies. I just wanted to talk through that a little bit because I think it's fairly impressive that you could hold your synergy expectations, both for the year-end and for the long term. So can you talk through the plans a little bit? Because I would imagine that there are some incremental challenges in terms of implementing the initiatives, whether it's your own manufacturing plants and just getting in there and moving things around in your facility right now, and then also with respect to retail, just getting into the store to push through any shelf plans that you might have drawn up pre-COVID.

Olivia, I think it's a real credit for the teams what they've been able to accomplish during this time. And I think we make that statement in a fairly benign way, which is we're holding our synergies, but it's not without a lot of effort from the teams to be able to do that. With the integration, the items that we had to delay slightly were those that really required in-person meetings. And that's around some user acceptance training that you need to do to make sure that when you flip the systems on that they work and people know how to use them and they know how to problem solve and troubleshoot when things may not go quite as smoothly as you want them to. So we delayed those. We're consolidating distribution centers. All of our facilities on the DCs as well as the plants are operating. And then there's the added complexity around the battery side as we've seen significant increased demand. But thus far, we've been able to navigate it. I think it's a credit to the well thought out plans that we had, the teams that are executing them, and the willingness to delay things 30 or 45 days, which we've done in order to make sure we do have a smooth transition. It's something we constantly monitor on a weekly basis to make sure we don't need to modify any additional plans. Thus far, we're holding, and we are managing through it quite well, actually. And it's impressive to see the teams do it. But as to the future uncertainty, I think we'll continue to monitor it. And if we need to, we're going to adjust because we will sacrifice timing to ensure no disruption of our business.

Yes. I think, Olivia, the teams jumped on it right away as it became clear what was coming in front of us. And the amount of contingency planning that they've been doing is, to Mark's point, very impressive. And they've been just very flexible in terms of how we accomplish the integration planning. So they'll continue to adjust as things become clear as we move forward.

Great. That's helpful. And then just turning to batteries. As we sort of look to the future and just the pandemic and the increased usage from staying at home right now, we're obviously going through a pretty tough time in terms of recession. So as you talk to your retailers and as they restock, is it pretty much more or less the same conversation? Or is the way of that portfolio coming up more in discussions? And how are they thinking about restocking shelves as we go into a tougher time?

Olivia, I believe that was also part of your last question. The retail teams have been performing exceptionally well, and I should have mentioned them earlier. They have been actively accessing the stores and ensuring that we move products from the backrooms to the shelves. Consequently, we haven't experienced significant stock shortages across our retailers despite the strong consumer demand, which is another remarkable achievement for the team. Regarding batteries, in the short term, there has been an uptick in battery demand which is expected to continue through April. As long as people are at home and engaging with their devices, we anticipate a moderation but still expect elevated demand. In the medium term, this situation serves as a tailwind because even as restrictions ease, people may be more inclined to stay at home for some time. The longer-term economic impact you're referring to is something we are very mindful of, and we want to ensure we meet consumers where they are engaging with our category. We're better positioned now than during the last recession because we have two new value brands, Varta and Rayovac, to address those needs. The situation will vary from retailer to retailer regarding how much they want to highlight value brands in their offerings. We are ready to partner with them to capture the consumer demand specific to their retail environments. Additionally, we will continue to focus on our success and investment in e-commerce. During this pandemic, consumers across all categories have increasingly turned to online shopping. As you know, we made significant strides in this area several years ago on Amazon and are now expanding our omnichannel success in the U.S. and globally. This will remain a key area of focus moving forward.

From a global supply chain perspective, Olivia, our team has done an outstanding job overcoming various challenges in this essential category. All of our facilities are fully operational, and we have been shipping batteries with line item fill rates in the 90s.

The next question will come from Steve Strycula with UBS.

So, first question would be for Mark and wanted to just touch in. I don't mean to get overly prescriptive here, but I think it would be helpful since the Auto Care business is still a little bit newer to a lot of us. Were your comments, I think, to an earlier question on the call regarding April trends, were you saying that the Auto Care business has gotten directionally better from March? Or were you saying certain categories such as appearance were, in fact, actually up year-over-year? So just a quick clarification, just so we understand that a little bit better.

Thanks for the clarification, Steve. In February, the three-month data showed that it was roughly flat in value. However, for the three months ending in March, there was a decline of 4.8%. If we look specifically at March data alone, it showed a decrease of 15%, which we mentioned earlier. We don’t yet have syndicated data for April, but from our sales trends at key retailers during that month, we have observed two weeks of year-over-year sales growth at several of our retailers. This indicates some positive movement in the appearance category, influenced by the macro trends we’ve discussed. However, we have not seen similar impacts across our other three subcategories yet. Regarding refrigerants, there have been some localized increases in sales due to pockets of warmer weather across the country. Nonetheless, this growth has not been widespread enough to significantly affect the overall U.S. market.

Mark, considering the slower industry-wide demand for March and the first half of April, what is the current state of channel inventory in your end markets? Does this suggest that there may be temporary pauses on orders as you work to sell existing stock in the supply chain? Tim, investors have frequently asked about your decision to maintain the dividend despite your efforts to reduce debt. How did you approach scenario planning and stress testing for potential downturns to ensure that you could still support the dividend despite the ongoing uncertainties?

On the inventory was specific to auto? What I would say is that retailers have experienced some softness due to trends in March and early April, and we anticipate continued softness in replenishment for a while. Retailers are actively managing this situation, so they are not currently overstocked with inventory. As we approach the peak selling season, inventory levels were higher, but we are ensuring that we are in close communication with retailers to prevent any inventory issues.

Yes. And, Steve, relative to the dividend, as you point out, we did maintain the dividend in the quarter. As we move forward, we continue to discuss that with the board on a quarterly basis. And as we do our scenario planning, at this point, we're comfortable. We'll continue to review that as we move forward.

Thank you.

Our next question is from Kevin Grundy with Jefferies. Please go ahead.

Hey. Good morning, everyone. I hope that everyone is doing well. I wanted to drill down a little bit on the commentary with respect to distribution wins in the battery category, which I think was certainly part of the guidance coming into the year and understanding that you have kind of taken that off the table. But for Alan and Mark, maybe talk a little bit about the visibility on those distribution gains. I'm trying to reconcile that a bit. I think the prior comment, if I'm not mistaken, was we begin to see those in the March, April timeframe and understanding there's kind of a lot of noise in the scanner data at this point with pantry loading, but we haven't really seen the market share improve, at least in scan channels. So maybe just some comments around visibility and timing, and maybe that's been pushed back, any implications from the shelf space reset. And that if you could also kind of weave into that answer a little bit, we know what's happened to Target, which has been an Energizer stronghold. Any surprises there with the magnitude of the private label share gains, which have ticked up a little bit and how you're kind of thinking about that risk more broadly, whether this is a target or beyond another channel.

On the latter question, we'll start there and then we can revisit the distribution. Regarding private label, there was a large retailer that shifted its focus to private label products, not only in batteries but across various categories, which impacted the overall category. Typically, during a recession, there is a trend towards value brands and private label products. Although we expect this to normalize over time, we observed similar patterns during H1N1 and the Great Recession. Therefore, we anticipate a return to historical trends. Now, Mark, could you provide some insights on the distribution?

Distribution progress is advancing rapidly with the successes we've achieved since our last earnings call. We have already implemented several of these in stores. When we mentioned that you would start seeing results in March and April, those have continued to appear in stores. In one major retailer, a reset took place, benefiting our brands significantly, even during the pandemic. We managed to complete the majority of these resets, achieving completion in over 90% of the stores. As you go through March and April, you would have noticed these products in stores, though it may take some time for this to be reflected in market share numbers. There is considerable variability in the numbers during this period. We observed changes in consumer shopping patterns, with club stores initially attracting more customers, and they remain popular. Following that, mass and grocery stores experienced varying degrees of shifts as consumers leaned towards smaller stores to avoid large crowds. There's also been a notable shift to e-commerce, particularly with Amazon, which remains unmeasured. All distribution gains we've secured since our last call are still on track to be implemented by the end of the fiscal year. We believe you'll notice an improvement in market share as these implementations occur and products become available in stores. We expect to address areas where we are currently underrepresented, and as consumers continue to engage across different channels, our products will be available.

Mark, and just one point of clarification. Do you have a percentage even roughly in terms of what portion of distribution gains you have secured that was anticipated for the year? So is it 50%, is it 60% of what you hope to accomplish for the year?

In terms of what's in-store today versus what you're going to see going forward? Just what percentage of the distribution gains that were expected for the year have you already secured? You will still see some significant distribution hit the markets over the balance of the year.

The next question will come from Javier Escalante with Evercore ISI.

My question is about e-commerce. Could you discuss your performance in this area regarding brand? Also, can you provide some insights on how the Amazon private label business is developing? Specific numbers aren't necessary, but I'd like to understand if there is an advantage to having a brand on Amazon.

Javier, as you've observed across various categories, e-commerce growth has been notable. I'm particularly focusing on batteries, which have been a central topic in our e-commerce discussions previously. You may have noticed a shift in this channel as more people engaged with e-commerce, omnichannel shopping, and delivery services during this crisis. I want to mention that we are currently transitioning to a new data source, so some of the information provided may not be as clear as it was before; therefore, I would consider these growth figures to be more directional than precise. For the three months ending in January, the battery category experienced an approximate growth of 15% to 16% online. Moving forward, using January as a base for battery category growth, February saw a growth of 3% compared to January, while March and April experienced significant growth ranging from 70% to 75% over January. Notably, for the four weeks ending in mid-April, Energizer brands grew by 95% during that period, and Rayovac saw an 84% increase. This denotes substantial growth for both us and the category. Our estimate is that the private label offerings on Amazon grew by around 60% in that same four-week timeframe. This growth has fluctuated throughout the crisis, but this snapshot provides an indication of the directional growth numbers we’ve been seeing.

Mark, could you provide an update on how much of the battery category is currently online and what you believe Energizer's exposure to that online market is? That information would be very helpful.

We have not previously conducted business online, and I believe we will continue to avoid that. However, I can provide some insight regarding Amazon. Currently, Amazon accounts for approximately 8% to 11% of our business when considering measured channels, and this data extends through February. It's reasonable to assume that this percentage has increased as we've entered March and April, likely falling in the range of 15% to 18% of the total category. Previously, Amazon represented about 85% of overall online sales in the battery category. By applying this estimation, you can infer the omnichannel impact. Additionally, all our retail partners, with whom we collaborate on omnichannel strategies, are experiencing significant growth as well, although from a lower starting point.

The next question will come from Robert Ottenstein with Evercore.

Two questions. First, just a follow-up on Javier's question on e-commerce. Obviously, this is becoming a pretty material part of your business now. I know you're not giving out the exact percentage, but I think our numbers would suggest somewhere like 20% to 30% of your sales. How does that inform your overall retail strategy? And as you look going forward, your supply chain, your organization as a whole, and do you feel well set up for that? So that would be the first question. And then the second one, from an organizational perspective, these are absolutely unprecedented times. And you talked a little bit about it at the beginning, but maybe just give us a little bit more color in terms of how you're keeping organizational focus and execution through unprecedented challenges.

Let's begin with the second question. Since January and February, our global supply team has been actively managing potential disruptions from China. They have been working proactively on a daily basis to ensure continuity in our supply chain. As the pandemic spread globally, this team became more cross-functional and global, allowing us to stay ahead of the situation. In February, we decided to operate our plants at full capacity to prepare for any potential supply chain disruptions and to meet the increase in demand. This strategy has proven effective, as we have maintained fill rates above 90%, with only minor intermittent issues. Our key focus has been on keeping our colleagues healthy and ensuring the business continues to operate. During this time of uncertainty, we advised our team to disregard distractions that do not impact these priorities. This clear guidance has contributed to our high levels of execution, and I can confidently state that there has been no significant disruption, thanks to the hard work and problem-solving efforts of our organization.

Yes, Robert, Alan. A couple of builds on Mark's comments. He is spot on. My adds would be, we put a task force in place with high level of engagement from our senior management. That task force has really been focused on the risk mitigation plans in the event that they are needed, but really dovetailing those plans with just running the business every day. They've done a tremendous job. Communication to the organization has been key. So to your question on focus and the attention, which the team has done a terrific job, not only managing through the COVID, but also managing through running the day-to-day business as well as the integration. We've not had really any hiccups or events at this point that would concern the organization, but that is running exceptionally well for us right now.

In response to your first question about e-commerce, I wouldn't characterize this as a significant shift in our perspective on the business since we are already well-established in the digital economy with our battery business. We are certainly assessing opportunities in other categories and markets globally. E-commerce has been a priority for us, not just with online retailers like Amazon, but also by partnering with retailers who offer an omnichannel experience. We have made substantial progress in this area. At this stage, it's about continuing to adapt our approach based on recent trends. From a supply chain perspective, we have already accounted for these considerations in our planning. We must take a step back and evaluate our response to events like this. One topic we've discussed as a team is the increasing demand surge, whether it's related to crisis management during hurricanes in the U.S. or the ongoing pandemic. We need to carefully consider how we manage inventory and working capital moving forward to ensure we handle these challenges effectively.

Terrific. Thank you very much.

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

Thank you for fitting me in, and I hope everyone is well. Could you discuss the pricing of batteries? What was your price/mix component this quarter, and how should we view it moving forward? I understand that the mix may have shifted against you based on your comments about the large bag. I'm also interested in the promotional environment, as we've been hearing that the consumer packaged goods sector has seen a reduced promotional environment due to strong demand and less price sensitivity among consumers. As we hopefully move past COVID and consider the impact of a recession, are you aware of retailers potentially requesting price concessions or positioning Rayovac closer to private label brands? Is this something you don't anticipate in the near future? I'd also appreciate insights from prior recessions and what occurred then. I think you mentioned this earlier, but if you could elaborate, that would be great.

Yes. Andrea, generally on pricing, while the current crisis is really causing rapid and dramatic shifts in where consumers purchase batteries, our analysis really continues to show there was a stable commercial pricing environment, particularly in the U.S. As Mark alluded to in his prepared remarks, we are seeing a reduction in promotional activity and an increase in average unit price. The price increases have actually improved overall category value. This is something we're going to continue to monitor. And the addition of Rayovac to our portfolio, and I think this gets missed sometimes, is really going to give us an even greater ability to meet the needs of the cost-conscious consumer as this recession plays out. And then, Tim, maybe a little bit about the mix. And Mark, you can conclude.

Yes. So Andrea, we called out both the distribution and replenishment. And if you look at both channel and when we talk about channel, there, in particular, you're seeing a mix in the international markets. I think Mark alluded to modern trade versus traditional trade. And so for the quarter, that mix impact was roughly about 70 basis points in the quarter. So you are seeing some shifting taking place. But to Alan's point, the promotional environment remains stable, and AUPs are actually...

Next question will come from William Reuter with Bank of America.

I only had one, most of mine have been answered. But in terms of your channels that you sell your products across, both batteries as well as auto, it would seem like the large majority of these would be open. Is there any way you can quantify what percentage of the channels that you sell into may be closed due to regulatory restrictions?

It would be a small percentage of the retailers, I think that would be in the U.S., big-box specifically there. Most of the Mass and auto retailers have been open and able to operate. In international markets, that does depend on which market you're in; you do see home centers and some international markets have been closed. You have mom-and-pop stores in just developing markets that have been closed. But in the U.S., it would be a relatively high percentage of our main retailers that have been able to be open.

Yes. The majority of them have been deemed essential in those sections of the store where our products are sold. Battery, in particular, are open.

Okay. So it sounds like it's not meaningful?

No, it's not for the nonessential in the U.S. And Tim chime in, it's not a big number. We've not disclosed that publicly, but it's not a big number.

The next question is from Carla Casella with JPMorgan.

You asked earlier about retail inventory, specifically regarding autos. I'm curious about how battery inventory looks as we approach hurricane season. Given the forecasts for a potentially severe hurricane season, do retailers prepare for that? Have you noticed an uptick in orders ahead of the hurricane season?

That's something that we partner with our retailers on heading into hurricane season, so they have hurricane-ready inventory that they deploy when those hurricanes strike so that they can move it around to the given stores where the area is, the impacted area. Certainly, that's something that we have been talking about for the last month. We'll continue to talk to our retailers and make sure that we get them prepared as well. So that will play into our plans for, as we get into summer and as we watch inventory levels. But that's something we're proactively managing, and we'll make sure we're prepared and the retailers are prepared and that they can respond as they usually do when hurricanes strike.

Okay. I have a follow-up regarding the capital structure. You took steps to enhance liquidity. How do you view the duration of holding onto that excess liquidity compared to when you might focus on debt repayment or buybacks? Could we expect to see that this year, or are you planning to wait until you can annualize it?

We're going to hold on to the liquidity until we have clarity on how things are recovering in terms of markets opening up, customers returning to the marketplace and how we see in terms of customer activity as we move forward. So once that uncertainty is behind us, then we'll move forward with our normal debt paydown.

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

Thank you for joining us on our call today and for your interest in Energizer. This concludes the call.

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