Energizer Holdings, Inc. (ENR) Q1 2021 Earnings Call Transcript

Good day and welcome to the Energizer Holdings, Inc. First Quarter Fiscal Year 2021 Results Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. 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 welcome to Energizer’s first quarter fiscal 2021 conference call. Joining me today are Mark LaVigne, Chief Executive Officer; Tim Gorman, Chief Financial Officer; and John Drabik, Controller and Chief Accounting Officer. A replay of this call will be available on the Investor Relations section of our website energizerholdings.com. In addition, a slide deck providing detailed financial results for the quarter is also posted on our website. During the call we will make forward-looking statements about the company’s future business and financial performance among other matters. These statements are based on management’s current expectations and are subject to risk and uncertainties including those resulting from the ongoing COVID-19 pandemic which may cause actual results to differ materially from these 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 slides and in the reports we filed with the SEC. We also refer to our presentation to non-GAAP financial measures, a reconciliation of non-GAAP financial measures to comparable GAAP measures as shown in our press release issued earlier today which is available on our website. Information concerning our categories 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. This quarter e-commerce data is not included in our category overview due to a restatement of the external database. 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 2020. With that, I would like to turn the call over to Mark.

Thanks Jackie and good morning everyone. I am pleased to be here this morning to share our first quarter results, which reflect strong performance as elevated demand, expanded distribution, and improved execution led to earnings growth. Our team has moved with speed to address the ongoing challenges of operating in this environment, while continuing to focus on keeping each other healthy and safe. As I will talk about in a moment, while the pandemic-driven demand is the main story, we remain focused on our business strategies to ensure that we are well-positioned as the pandemic subsides. Leading with innovation, operating with excellence, and driving productivity are the keys to our success both now and into the future. Looking at the results for the quarter, we maintained our top-line momentum with strong sales across categories and markets around the world, resulting in organic sales growth of 12.7%, with battery up 11% and auto care up 27% globally. We delivered adjusted gross margin of 40.7% as we were able to meet the demand while incurring lower incremental costs than we did last quarter. This combination of strong top-line growth and improving margins resulted in adjusted earnings per share growth of 38% and adjusted EBITDA growth of 17%. We were also able to take advantage of low interest rates to refinance a portion of our debt, which will result in significantly reduced interest expense going forward. We are off to a solid start for the fiscal year. With lower interest expenses due to the refinancing, we are increasing our outlook for the full year adjusted earnings per share to a new range of $3.10 to $3.40. In a few minutes, Tim will provide more detail on the results for the quarter, as well as our view for the full year. Let me start with category trends where we continue to see strong consumer demand. As Jackie mentioned earlier, our category data this quarter does not include e-commerce due to an external database restatement. Globally, battery category value was up 6.9%, and we continue to see consumers purchasing batteries for immediate use. Consumers have increased the number of devices they own as well as their usage of those devices. With a gain of 2.5 share points, Energizer is growing faster than the category driven by distribution gains in the U.S. and in international markets, including Canada, France, Korea, and the UK. With auto care, the U.S. category grew more than 10% as a result of changes in consumer behavior, including an increased focus on cleaning and disinfecting as well as an increase in do-it-yourself activities. During the quarter, Energizer’s auto care share was flat. Of note during the quarter, we did see strong growth in non-measured channels, including e-commerce, home center, and international markets. In auto care, we are meeting the needs of consumers by rolling out innovation and strengthening our product pipeline. We recently launched an Armor All Disinfectant as consumers are more focused than ever on keeping their cars clean and disinfected. We also acquired a small formulations business, which to date has primarily commercialized household disinfectants. The robust portfolio of innovative cleaning, disinfecting, and odor-eliminating formulations we've acquired is an extremely attractive addition to our R&D pipeline and is expected to enhance our leadership in auto care. In looking at e-commerce, while we don't have consumption data this quarter, based on our sales we continue to see solid e-commerce performance versus prior periods. Our investments and ongoing focus are paying off and positioning us to lead well into the future. If we take a step back, the pandemic-driven demand in our categories has been and for the foreseeable future will continue to be the main story. And while our priority will be to successfully navigate a very complicated operating environment in order to meet this elevated demand efficiently, we are also undertaking initiatives to emerge from this period poised for growth in the future. As we are nearing completion of our integration efforts, including the recent bolt-on acquisitions, we are also undertaking several initiatives to modernize our core operational capabilities. Let me take a moment to provide an update on these initiatives. Despite the challenges of this past year, our integration activities for the battery and auto care acquisitions have continued and are scheduled for completion by the end of 2021. In the first quarter, we realized $20 million in synergies and we remain on track to achieve $40 million to $45 million in 2021 and to deliver more than $100 million in total synergies. We also closed on the acquisition of an Indonesian battery plant, which contributed significantly to our ability to meet the strong demand during the quarter and will enable further efficiencies in the future. In addition to the integration activities, we have launched several significant projects to modernize our core as the pandemic-related shifts have shown very clearly, we must become a more digitally advanced organization in order to ensure we can meet the demands of the consumer in a rapidly-changing operating environment. We are transforming our global product supply organization by moving to an end-to-end category structure, which will create greater agility within each category and closer connections to customers and consumers. We are also investing in our business planning tools and supply planning analytics to provide more predictive insight which are needed for today's environment. The end result will be a product supply organization that is better equipped to capitalize on opportunities while also enhancing our ability to navigate disruption. These efforts are already paying off as we were able to meet the continued elevated demand, especially in batteries with lower-than-expected COVID-related costs. This project will continue to be important in the near term to meet demand and in the medium-term to take better advantage of opportunities across our business. We are also investing in more advanced data and analytics capabilities, which will enable us to better detect and understand in near real-time impacts to the business from shifting consumer behavior and macroeconomic events such as mix shifts in markets or products. Armed with the most recent data and insights, our commercial and marketing teams can respond and more effectively connect with consumers and drive growth in our business. These projects, as well as other smaller ones, will enhance our ability to operate more effectively and will also drive our costs down. We are committed to the efficient low-cost operating model you have seen from us in the past while being equally committed to ensuring we have the flexibility to invest in opportunities to drive future growth. We believe these initiatives will allow us to do both. Before I turn it over to Tim, I also wanted to provide some perspective on how we are thinking about the future. Our strategic priorities of leading with innovation, operating with excellence, and driving productivity has served us well as we navigated the pandemic and they will remain critical going forward. However, 2020 also provided significant insight that will enable Energizer to emerge as a stronger, more resilient, and dynamic company. The pandemic reminded us that consumers are at the heart of what we do. Fundamentally, it was consumer behavior that drove disruptions. As their habits and routines changed, they gravitated to trusted brands and engaged with our categories in new and different ways. They accelerated the changes in how they consume information and ultimately how they shop. Our consumer insights, combined with our powerhouse brands enable us to create value for our retail partners by ensuring we are there to meet consumers where they are going. Remaining consumer-focused, investing in our brands, and ensuring we can adapt at the speed of the marketplace are the keys to our success in the future. We will leverage the best attributes of a large-scale organization with the mentality of a startup where small teams are unleashed to focus on critical initiatives. With that, I will now turn things over to Tim, who will provide more details about our financial performance for the quarter, including our refinancing efforts, capital allocation, and our outlook for the fiscal year.

Thanks, Mark and good morning, everyone. In addition to the earnings release we provided this morning, as Jackie mentioned, a slide deck is also available on our website highlighting some additional key financial metrics. As Mark indicated, our organic revenue growth of 12.7%, coupled with cost controls and favorable currency tailwinds, resulted in strong adjusted earnings per share of $1.17, adjusted EBITDA of $192 million, and adjusted free cash flow of $90 million. Taking a deeper look at the topline, both our Americas and international segments grew organically more than 12% with batteries up 11% and auto care up more than 27%. As Mark mentioned, the categories in which we compete continue to experience elevated demand. In addition, our organic sales growth also benefited from distribution gains that began last summer, as well as some shifting of shipments between quarters. Finally, the growth we are seeing this year is off the prior year, first quarter organic sales decline of 3.4%. Adjusted gross margin decreased 110 basis points versus the prior year to 40.7%, although this represented a sequential improvement versus the last quarter. Gross margin was impacted primarily by incremental COVID costs of approximately $12 million, largely related to air freight, fines and penalties, and personal protection equipment necessary to meet the sustained elevated demand. End channel customer and product mix, as well as increased operating costs, resulted from increased tariffs associated with higher volumes, commodity costs, and transportation costs consistent with inflationary trends in the global market. Partially offsetting these impacts to gross margin, the first quarter benefited from synergies of $13 million and favorable currency exchange rates. As we exit the first quarter, we believe the incremental COVID costs from air freight and fines and penalties over the remainder of the year will significantly diminish. However, like many other companies, we anticipate additional cost pressures from increased tariffs, commodities, and transportation to impact us over the remainder of the year, and we have included these items in our outlook. A&P as a percent of net sales was 5.8% versus 6.4% in the prior year, due primarily to the strong top line growth experienced in the current quarter. Consistent with our priorities, we continue to invest on an absolute dollar basis in A&P to support our brands with total A&P up $3 million or 6%. Excluding acquisition and integration cost, SG&A as a percent of net sales was 13.4% versus 15.1% in the prior year. This was primarily due to the elevated sales experienced in the current quarter. On an absolute dollar basis, adjusted SG&A increased $2.7 million, driven in part by higher overheads associated with the top line sales growth and the timing of costs, partially offset by synergies of $7 million and lower travel expense due to COVID. As Mark mentioned, we realized $20 million of synergies in the quarter with $13 million in cost of goods sold and $7 million in SG&A. For the full year, we continue to expect to realize $40 million to $45 million of incremental synergies. In total, we have recognized nearly $90 million since we completed the battery and auto care acquisitions and remain on track to realize in excess of $100 million by the end of fiscal 2021. We also took advantage of accommodating debt markets to refinance our existing short-term secured debt and our 2027 unsecured bonds with a new $1.2 billion term loan. Based on the new all-in interest rates, we anticipate annualized interest savings of roughly $25 million, with about $90 million to be realized over the remainder of fiscal 2021. We also amended certain covenants in our credit agreement, which will create additional capacity and flexibility in our debt capital structure. Our net debt to credit to find EBITDA at the end of the quarter was 4.6 times, reflecting improved EBITDA performance and debt pay down during the quarter of $80 million, excluding refinancing activities. At the end of the quarter, our total debt was approximately $3.4 billion, with nearly 85% now at fixed rates and an all-in cost of debt of approximately 4.3%. And finally, we continue to drive shareholder returns through our balanced approach to capital allocation by investing in our business through innovation, brand-building activities, and the projects we mentioned earlier to modernize our core and drive costs out of the business, delivering a quarterly cash dividend of $27 million, repurchasing 500,000 shares for $21 million, representing an average price of 42.61, paying down $80 million of debt excluding the refinancing activity, and finally planning two bolt-on acquisitions. As a result of our strong organic growth in the first quarter and the interest expense savings from the refinancing we undertook in December, we are updating our full year fiscal 2021 outlook for the following key metrics; net sales growth is expected to be at the upper end of the range of 2% to 4%, driven in large part by continued elevated battery demand in North America and favorable currency impacts. Adjusted gross margin rate is expected to be essentially flat on a year-over-year basis in line with our previously provided outlook. Adjusted EBITDA is expected to be at the upper end of our previously provided range of $600 million to $630 million, and free cash flow of $325 million to $350 million remains unchanged due to working capital requirements, in particular inventory as we look to rebuild safety stock. Adjusted earnings per share is now expected to be in the range of $3.10 to $3.40. I would also like to provide a reminder regarding the quarterly phasing for the remainder of 2021. Beginning late in our second quarter of 2020 and through today, we have seen elevated demand for both battery and auto care products due to the impacts of COVID. In 2021, we expect to continue to see net sales growth until you lap those elevated demands, at which point we will likely start to see year-over-year declines in net sales as we approach a more normalized level of demand. We expect this will begin to occur towards the end of the second quarter in battery and late in the third quarter in auto care. With respect to gross margin rates, we expect them to remain consistent throughout the year. The gross margin rate in this quarter was better than our expectations due to lower-than-expected COVID costs, the timing of the realization of synergies, and the impact of favorable foreign currencies. While we are increasing components of our outlook for the full year, there remains a great deal of uncertainty over the balance of the fiscal year with respect to the pandemic and related macro factors and impacts, including currencies, commodities, and transportation costs. We have addressed the items that are within our control and continue to improve our execution, actions that we have taken include continuing to drive increased distribution with strong organic growth across all categories and geographies, improving supply chain surety with expanded capacity, and significantly reducing incremental COVID costs by the end of the first quarter, and finally refinancing more than half of our debt portfolio over the past seven months due to the accommodative debt markets. We remain confident that continued focus on our strategic priorities and our balanced approach to capital allocation will allow us to deliver long-term shareholder value. Now, I would like to turn it back over to Mark for some closing remarks.

Thanks, Tim. In the midst of a very uncertain operating environment, we will focus on meeting the demands of today while building the capabilities we will need to succeed in the post-pandemic period. Our operating performance in the first quarter is a testament to the efforts of our colleagues around the world to make, shift, and deliver the products that our consumers need during this time. With that, I will open the call for questions.

The first question comes from Nik Modi with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. The question is about the top line and the balance between volume and price/mix. We've noticed a general reset of promotions over the last eight or nine months, and I'm curious about how you're seeing the category evolve, particularly since batteries have traditionally been highly promoted. I would like to get some context on that. Additionally, I have a broader question regarding distribution gains, which have been crucial to the story. With e-commerce driving significant incremental consumption and the impulsive nature of your category, could you provide an update on how you plan to drive sales in this current environment if it remains unchanged? Thank you.

Hey Nik, there are a lot of questions in your comment. I'll begin with our top line growth. We started Q1 with the goal to execute our plans, and we were successful in capturing the increased demand we saw during the quarter while keeping incremental costs low and improving our gross margins. Our focus was to return to our foundational execution, and we achieved that. We anticipated a strong Q1, although it was a softer comparison to last year. We expected organic growth in Q1 and Q2, but as we move into the latter part of March and particularly into Q3 and Q4, we will be comparing against higher comps from last year's pandemic impact. This aligns with the projections we discussed in November. There remains some uncertainty for the latter half of the year that we will continue to assess to ensure we are prepared. Factors such as new virus waves, the vaccine rollout, economic influences, and weather impacts on the auto sector will be closely monitored. Overall, we expect the year to unfold in line with the phasing I described. We remain focused on executing our plans as laid out in November, and we adjusted our outlook to reflect the strong start to the year. You noted our distribution gains, which are vital to our strategy. We are seeing increased demand from the pandemic as well as from our distribution gains that began in the spring of last year and will continue through the remainder of fiscal 2020. We anticipate more distribution gains throughout 2021. We feel confident about our positioning in planograms with our major retailers and are looking forward to new distribution opportunities coming later in the year, including in e-commerce. We are emphasizing online sales not just in batteries, but also in auto care and lighting, and we are having significant success in these areas. As mentioned in the prepared remarks, we had a database restatement, so we are currently withholding our category competitive information until we thoroughly review that data before sharing it externally. However, our internal e-commerce results remain strong, consistent with previous quarters, and we are experiencing a lot of momentum as more consumers shift to online shopping.

Helpful, thanks Mark.

The next question comes from Wendy Nicholson with Citi. Please go ahead.

Hi, good morning. Just really as a follow up to that, first thing is just sort of what are you anticipating or even maybe beginning to see from a competitive perspective. I mean, your distribution gains have been huge, but I would wonder if at some point Duracell starts to kick back and gets more aggressive, either from a promotional perspective or a negotiation with retailers, are you starting to see any of that, is there any point at which you say, wow, you've got big contracts coming up for renewal that you might not be able to whatever renew and keep intact?

Well, I would say Duracell has always been a strong competitor. We have been able to gain significant distribution over the last couple of years, and that's just by focusing on fundamentals with innovation and investing behind brands. We're not seeing it play out in the promotional environment and this is probably one question I left out of my answer for Nik as well is the promotional environment for the latest 13 weeks has been flat. So, we are seeing a stable, benign promotional environment. And what you've seen with our largest competitor is they've emphasized innovation and investing in their brands. We've done the same, and we've had success with distribution as well. And so, I would expect that to continue to be a healthy competitive environment for us and our biggest competitor, both in the U.S. as well as around the world. So, nothing, no change and nothing unusual that we're seeing.

Fair enough, and then if I can, just a follow-up, actually for Tim on the balance sheet. That's awesome on the debt refinancing, that's huge in terms of the savings. But does that impact at all your thought process, does it give you more flexibility in terms of buying back stock or raising your dividend even further, just how does it impact on sort of capital allocation thought thinking? Thanks.

Wendy, really no change in our thought process around capital allocation. So, we'll continue to maintain a balanced approach as we move forward.

Perfect. Thanks so much.

Thanks Wendy.

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

Thanks. Good morning.

Good morning Bill.

I guess first question, just discussing the cadence of the rest of the year and the comparisons, I mean, I certainly understand how the initial stock up is a tough comp. But as you look past that, I mean, what you've said is people have been consuming their batteries as fast as they've been buying. There hasn't been a major pantry loading, at least for the past 10 months. So why would unless you expect everybody to kind of head back and stop using their devices, why do you expect year-over-year declines or meaningful year-over-year declines, if at all, once we get past the initial kind of pantry load of March, early April?

I think it's just the uncertainty built into that the back half of the year, Bill. I think it was an initial surge in the March-April timeframe and then you did sort of settle into elevated demand. I think it's going to be demand that may be relatively lower than what you saw throughout Q3 and Q4 than what we would expect. But it may be still higher than what our base growth rates were before the pandemic. So I think that's the big question that we hear from folks is what do we expect the end-state demand to look like in our categories. And I think what you're seeing in batteries is that, a lot of the habits and routines that consumers have adopted over the pandemic like work from home, which many of us are doing but in the future, they may not be doing that as much as they are today. So there may be some reversion back from a demand standpoint on the battery side, but it's likely somewhere in between where we were pre-pandemic and where we are today. It's just a question of where it settles in. And I think that's the unknown with all of the uncertainty built into it. I think that's the end state. But then there's also the transition to the end state. And I think one of the things we have to cycle through in Q3 and Q4 is that transition of how do you get to where we are today to that end state where there may be some elevated demand beyond what we saw pre-pandemic. And that's what we're preparing for. We are analyzing multiple scenarios. We're ready for just about any different scenario that comes our way. But in terms of changing our outlook in Q3 and Q4, we just don't have enough data points to do that with the certainty that we think we need. That's why as a result, we just called it to the high end of the range of 2% to 4%.

Got it. To follow up on auto care, I was a bit surprised that your market share remained flat. I know there have been many efforts aimed at increasing share in the second and third years of ownership. While it's currently the off-season, can you share your thoughts on whether you expect your market share to start increasing alongside the category as we approach summer?

We would expect that. We have some really exciting innovation that's coming to market. I mean, we've mentioned disinfectants as one piece of that, but there are going to be additional pieces of innovation which are going to be set in February, March timeframe as those spring resets are established. It also has a little bit to do with the seasonality of the business. As you get into this part of the year, obviously refrigerants don't play as big of a part in the overall category as much as it does for us in the summer season. So some of that as you get caught up in the seasonality of the share. Most importantly, the biggest sub-segment for us is appearance. And yes, we would expect that share growth to happen in the spring season.

Great, thanks so much.

Thanks Bill.

The next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey, guys. So first, just a detailed question. If you look at the increase in your earnings guidance, it's actually less than what will be implied by the raise in EBITDA guidance on top of the lower interest expense guidance. So I just want to understand what was the offset to those positive items, I assume it's a tax rate, but any clarity would be helpful? And then the real question is, as we look at sort of commodity costs here, can you talk about what you're expecting in the balance of the fiscal year, particularly towards the end of the year, how ahead you are at this point, and if there could be some further risk there and just any thoughts on taking potential pricing at some point to offset some of the potential commodity pressure as we look out here over the next few quarters?

Go ahead Tim.

Yes, so on commodities Dara, we're roughly about 80% hedged for the balance of the year. On the first question, the outlook that we provided does reflect the benefit on the interest that we called out. And so that's roughly $90 million or about $0.20. We do have some embedded within our outlook that does reflect the cost pressures that exist and some additional investment in A&P that we have in the balance of the year given the strong start we have the opportunity to invest back in the business. So we provide the outlook that we have for the year and the components all hold together.

We will always keep an eye on opportunities to adjust pricing. We consider factors such as commodities, currency, the competitive landscape, and our innovation pipeline, which we've discussed previously. We will evaluate these aspects, and there may be chances for adjustment in the future. However, as we've mentioned, the current pandemic situation makes it challenging to implement price increases. If opportunities arise during the remainder of this fiscal year, we will certainly pursue them.

Okay, great, that's helpful. And any thoughts on sort of the basic commodity inflation as you move through the fiscal year or where this fiscal year ends up versus a typical year just in terms of the commodity pressure? Thanks.

You know, I think like other companies, everyone is seeing some pressure as demand opens up globally. So, where we're seeing most of the pressure is on zinc and steel. And so that's factored into the outlook that we provided.

Great, thanks.

The next question comes from Kevin Grundy with Jefferies. Please go ahead.

Great, thanks. Good morning, everyone. Congratulations on the quarter. Mark, you addressed the organization's priorities and potential investments in enhanced analytics and systems. How should investors perceive these investments? Will this involve reallocating existing spending from operating expenses? Additionally, how should we consider this spending in relation to advertising and marketing? Could you elaborate on the level of investment, whether it’s currently reflected in the profitability and loss statement, or if it will be an incremental addition? Thank you.

Kevin, everything that we're going to undertake in 2021 is built into the outlook that we provided and there are projects that are already underway. We've scoped them. They're in process. This is just about modernizing our systems and the tools we have to give the organization to be able to operate better and more effectively. Excuse me, on the digital front it's a lot more than just having an effective digital commerce team, which we certainly do and we have invested behind for many years. But it's making sure that the balance of the organization also has access to real-time data in a much more meaningful way than they have in the past. And that's a supply chain where we create a seamless connection across the end-to-end supply chain to make sure that we eliminate handoffs and communication, and it just flows seamlessly through the system so that procurement understands in real-time with operations and doing it in Feb by the demand team. All of that we just want to make sure we take advantage of the technology that's out there. It allows us to make better business decisions faster. And similarly with our forecasting and working capital management, it just allows us to take steps out of the process, create less labor-intensive insights, and allows us to just run the business. So it's really making sure that digital really took hold as a front facing with digital commerce. But there's a whole host of things you can do behind it which are really going to modernize your organization. You asked a question about digital advertising, every year we spend a little bit more than we did the previous year on digital advertising. We still continue to spend in traditional mediums as well. But, connecting with the consumer digitally as you would expect is becoming more and more important. You need to personalize those messages more and more and target your consumers more and more. And that's what we're investing in to make sure that we can do it. And really what that does is create a sustainable foundation to be able to drive future growth well into the future.

Got it, that makes sense. Quick follow-up, Mark, if I can squeeze in another one. I know this is a difficult question to answer, but long-term demand for batteries. So post spin, the outlook was and it's closing around six years ago, hard to believe, but it was down low single about three years ago. The company cited stable and improving trends and optimism about growth potential. So it moved to flat to up modestly. As we sit here today and I know you guys have just been through a period of trying to keep up with demand and all the costs and the supply chain related to that. But, as we kind of consider a post-vaccine world across categories, I wanted to get your updated thoughts on how you see global category demand, both with respect to the U.S. and then potentially any regional differences and I'll pass it on? Thank you.

That’s a great question. We think about it a lot and have our long-term outlook, which we updated a couple of November's ago to be flat to slightly positive. During the pandemic, we've experienced unprecedented demand for batteries, lasting for an extended period. Consumers have changed their daily behaviors; they are spending more time at home, purchasing more devices, and using those devices more, leading to increased battery replacements and higher buying rates. All of this positively influences the battery category. However, it would not be wise to project a long-term trajectory based solely on current experiences. We need to observe what happens in a post-vaccine world and how consumer habits settle. We believe many of the habits developed during the pandemic will persist, positively impacting global consumer demand for batteries. Yet, there will be a transition period, and we need to ensure our assumptions are valid. Internally, we are prepared for various outcomes, but I believe the pandemic will ultimately have a positive long-term effect on the battery category. The question is about the magnitude of that impact, and once we have clarity, we can revise our long-term outlook for the category.

Yep, fair enough. Thanks guys. Good luck.

The next question comes from Andrea Teixeira with J.P. Morgan. Please go ahead. Andrea, are you muted? I believe she's muted or we've lost Andrea’s connection. We can move to the next one, we'll circle back to Andrea if she logs back in. Okay. The next question comes from Faiza Alwy with Deutsche Bank. Please go ahead.

Yes, hi. Good morning. So, first I just wanted to clarify the outlook for net sales, which I think you're saying higher end of 2% to 4%. Is that organic or does that include acquisitions and FX? And if it does include acquisitions, could you just help us sort of frame out how big the acquisition impact might be? I am sorry if I missed those in your very detailed press release.

Thanks Faiza. It is inclusive of acquisitions and the currency tailwinds. So if you look at both of those, relative to acquisitions, it was about 130 basis points in Q1. You can use that as a proxy for the balance of the year, and then likewise we do expect currencies to be a tailwind over the balance of the year.

Okay, great. I wanted to discuss your outlook for the international business. In batteries, the emerging markets have lagged all year but saw a significant increase this quarter. Were you noticing considerable replenishment from retailers? How do you perceive the underlying demand trends, and what are your expectations for growth in that business for the remainder of the year, particularly regarding batteries and auto care?

For the international business, we witnessed the advantages of markets reopening in a significant manner. There was strong growth across all segments internationally, including developed, developing, and distributor markets. We expect this growth to persist. However, some disruptions occurred in January and February due to stricter lockdowns, but we don't anticipate these will affect our business as they did last year. There may have been some pull forward into December due to BREXIT and the lockdowns. We expect trends in Q2 and Q3 to be consistent. Regarding Q1 growth, Q3 will present differentiated comparisons between international and our Americas segment. I expect the battery business to be less negatively affected in Q3 and Q4 compared to the Americas from a comparative perspective. In auto care, which has a smaller base, we are seeing healthy growth rates. As we have mentioned before, the growth in international auto care presents an exciting opportunity, and it is off to a strong start. We anticipate continued nice growth in 2021 for the international auto care business.

Okay, great. And then just another clarification on the sales outlook. I think previously you had talked about batteries being at the low end of the 2 to 4 and auto care being at the high end. Is there and how should we think about that, given that now you're at the high end, is the upside coming from batteries effectively?

That's right. It's really being driven by the strong demand in batteries. So where we are headed at the low end of the range it's now moving towards the high end of the range.

Got it. Thank you so much.

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

Thank you. My question is on gross margin, and if you could talk a little bit more about the cadence for the year because clearly some of the COVID-related costs should happen, synergies are also helping, but we've obviously seen commodities logistics costs go up for everyone. It sounds like visibility on pricing is a bit challenging right now. So, certainly sounds like you're hinting that the gross margin should be worse than the prior expectation for flat for fiscal 2021, so I just wanted to see if you can give a little bit more color there? Thank you.

So Olivia, we didn't change the outlook for the balance of the year. When we gave our outlook in November, we indicated that gross margin would be flat versus a year ago. We're holding to that same outlook for the full year. You're right, we do have the benefits of lapping the COVID costs that occurred in Q3 and Q4, as well as synergies. Offsetting that are the cost pressures that we talked about relative to tariffs and commodities and transportation costs. I think you're seeing that across a number of companies. And then we also have the mix impact that we called out in November as well. And so those two factors are offsetting the benefits of lapping the COVID costs and the synergy benefits that we expect over the balance of the year.

Got it. And then can you talk a little bit about the household disinfectant acquisition that you mentioned in your prepared remarks, how you plan on leveraging it, and are you considering expansion outside of auto-related channels as well or is this specific to auto care? Thank you.

Thanks Olivia. We're really excited about that acquisition. I mean, it was a formulations company, which really provides a great addition to the auto care innovation pipeline. That was the primary focus as some of the technology and formulation expertise that they have on disinfectant, but also odor elimination, cleaners, degreasers, there's a nice portfolio that they have. They had an existing business, which is expected to generate roughly in the 4 million to 6 million range in EBITDA and that was where they commercialized their disinfectant technology through a licensing arrangement with major retailers and other household CPG companies. And so we expect that part of that business to continue and we will help them drive that further licensing to additional counterparties to drive that business. Our interest is really taking their technology, infusing it in our auto care portfolio, and helping us lead and shape that into the future. But a lot of exciting opportunities there. Our focus right now is helping them on their core business, which is that licensing arrangement with retailers. But then also making sure we lean in and invest in our portfolio in auto care.

Got it. Thank you.

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

Thank you and apologies for the earlier issues. I hope you can hear me now. I would like some clarification on the outlook for auto care and a follow-up on the synergies. I appreciate the insights regarding the potential negative shift in batteries, but with all the innovation in auto care, could you explain how you'll manage the changes we've made? It seems that the recent gains have largely come from batteries, so I would like to understand the situation in auto care. Additionally, regarding the cost of goods sold bridge, I’m more focused on the synergy aspect. You’ve had a solid performance with synergies; how should we consider the margin components in light of your outlook moving forward? Thank you.

I can cover the first one and turn it over to Tim for the second part of that, Andrea. I think the battery and auto care phasing from a top-line perspective looks similar. I mean, it's just different orders of magnitude given the percentages in our business. But Q3 and Q4 have tough comps. I would say auto care has an easier comp at the very beginning of that March-April time period. But then as they get further into the summer, you had really favorable weather last year, but you also had elevated demand from the pandemic as well with an increase of cleaning also, more do-it-yourself activities. So we would expect a tough time for both auto care and batteries in the Q3-Q4 time period, which is why we've provided the phasing guidance that we did on the top line.

Yeah, and on synergies in Q1 we realized $20 million, $13 million of that was in COGS and $7 million was in SG&A. Over the balance of the year the remaining $20 million to $25 million will be roughly that same composition. So roughly two-thirds in COGS and the balance in SG&A.

That’s helpful, thank you.

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

Hey guys, good morning. I have a couple of quick housekeeping questions. First, regarding working capital, you mentioned that you have higher interest expenses but are keeping pre-cash steady. I believe you referenced working capital in the press release; can you explain what's going on there?

Yeah, Jason this is with the elevated demand that we've had. We are expecting to make an investment in inventory to get our safety stock levels back to kind of normal levels. And so that's what we have anticipated in the balance of the year and that's why we're holding the free cash flow range where it was in November.

Okay. Okay. And then SG&A, I think you referenced $7 million of synergies this quarter, and then you also have $2.2 million in COVID-related cost relief in SG&A. That implies that your SG&A on an underlying basis is up 13% year-on-year, excluding those benefits. What's causing SG&A to inflate so much?

There are several factors contributing to this. First, top line growth is leading to increased selling, general, and administrative expenses. Additionally, we are facing typical inflationary pressures. Year-over-year, there are some timing differences in when costs are incurred, especially when comparing quarters. Overall, the SG&A expenses align with the full year outlook we provided in November, which is consistent with what we shared in October.

Okay. Thanks a lot and I will pass it on.

The next question comes from Rob Ottenstein with Evercore. Please go ahead.

Great, thank you very much. First question, can you please give us a little bit more detail on the distribution gains, I think sort of mid last year you entered Sam's Club for batteries, obviously very prominent and important retailer. Can you talk maybe a little bit about the magnitude or the size of the distribution gains in terms of who you're entering, both in auto and in batteries in the U.S. and internationally?

Well, I can provide this sort of some directional in terms of retailer distribution, because it comes from a couple of different places. Obviously we were able to enter club last year but also as you saw play out over the balance of 2020, we were able to expand distribution and get more favorable distribution in a number of retailers that are out there. We don't like to speak to specific customer distribution wins or losses or developments, but broadly speaking, we were able to expand distribution and improve our space in a number of major retailers in both measured and unmeasured channels. And that's true, both in batteries as well as auto care. In auto care we were able to jump into the home center. We were able to get expanded distribution there. And then in unmeasured universe it's also online. And our digital commerce team has been able to make great headway in growing our auto care business online and we would expect that to continue. Same is true in international markets as well. You just don't have the distribution gains of the size and scale that you do in the U.S., but very similar in markets like the UK, we were able to get better distribution, expanded distribution in many major retailers in that market.

And Rob, the combined between battery and auto care we've called out that distribution is driving about 5.5% of the organic growth that we had this quarter.

Terrific. And then a second, last quarter I think you mentioned that you thought that channel mix and package mix would be about a 50 basis point headwind to margins. Is that still your current read of things and is there anything that you can do with revenue management or any other tools to try to mitigate that? Thank you.

Rob, with the elevated demand continuing we are seeing a little bit more pressure from a mix standpoint in terms of where consumers are shopping. You're spot on. I mean, the things that we're going to be looking at are managing that mix from both a package standpoint as well as a revenue standpoint. So teams are first and foremost was working on surety of supply and we're moving to look longer term for other mitigation tactics that we can employ.

Terrific. Thank you very much.

Thank you.

The next question comes from William Raddell with Bank of America. Please go ahead.

Good morning. I have two quick questions. First, toy sales have been very strong. I think that's an important category for you. Do you have an estimate of how much of the sales growth is attributed to that category specifically?

It's hard to decompose it at that level. I mean, what we can see in the device universe that consumers have in their home, if they continue to buy more devices, a lot of it's related to home office trends, home health trends, home hygiene trends. You're seeing devices increase in the home related to those items. Certainly, toys, gaming controllers obviously plays a role in it as well. But we haven't provided sort of our internal device surveys and how those are broken down. There is a page in the Investor Day deck from two Novembers ago where we provided that and we can send that to you if it's helpful.

Okay, I can search for that. The other one is, you're still going to continue to be integrating the auto care acquisition through this year. Are you at the point where now you're evaluating additional M&A opportunities given that leverage still is above five times or will you wait to get through the integration this year before looking for additional opportunities?

I think we are always looking at opportunities. I think we are mindful of leverage levels when we're doing that. We're also mindful of what the organization has on its plate and whether they can handle an acquisition. I mean, the two bolt-on acquisitions that we were able to do last quarter were manageable from a debt standpoint, they were manageable from an organizational standpoint, and any future deals we would put the same lens on to make sure that it was strategically important. It was manageable within debt levels and manageable from an organizational standpoint. Those are all always lenses we make sure we take these opportunities through.

Great, helpful commentary. That's all from me. Thank you.

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

Hi, could you clarify your thoughts on working capital for the year? You've mentioned the upcoming inventory rebuild, but have you also adjusted your payable terms at all? Do you expect those to return to more normal days as the year progresses?

We haven't changed our terms and so teams continue to manage all components of working capital, including accounts receivable and accounts payable, but we haven't seen any noticeable changes on payment cycles.

Okay, great. And then also on cash flow, your CAPEX this quarter was running a little bit below the rate that you're guiding to for the year. Can you give us a sense for timing and any special projects that would come in one quarter versus another?

No significant changes in terms of cadence for the remainder of the year; we consider that the full year amount, and Q1 results were consistent with our expectations.

Okay, and I had one business question on the auto care side, given the recent increase in gas prices with some of the state restrictions, do you see much impact on sell-through when we see those kinds of stresses?

You can. I mean, I think the key driver for that is going to be number of miles driven. And to the extent that increased prices are going to keep people from driving as many miles that you can see an impact. But right now there's a lot of counterbalances to that, including, just travel in general in terms of preferred method of travel. And right now you are seeing more and more people driving as opposed to flying. So the miles driven is increasing, but elevated gas prices can have an impact if it ultimately takes people off the road.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Mark LaVigne for any closing remarks.

Thanks for joining us today and your interest in Energizer.

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