Energizer Holdings, Inc. (ENR) Q1 2022 Earnings Call Transcript

Good morning. My name is Anthony. I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's First Quarter Fiscal Year 2022 Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference call over to Jackie Burwitz, Vice President of Investor Relations. You may begin your conference.

Good morning, and welcome to Energizer's first quarter fiscal 2022 conference call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Chief Financial Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, 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. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC. We also refer, in our presentation, to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to categories where we compete and is based on Energizer's internal data, data from industry analyses, and estimates we believe to be reasonable. This quarter the battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year, and all comparisons to the prior year relate to the same period in fiscal 2021. 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 2022 results. In our first quarter, strong demand, expanded distribution, and execution in the holiday season led to a solid start to our fiscal year. While the operating environment remains challenging, our first quarter results are a testament to our team's preparation, resilience, and commitment. Before I go into detail on the quarter, there are three key points to take away from our call today. First, our team delivered in the critical holiday season, and our categories remain strong. Second, we continue to manage through a very challenging cost environment with increases in transportation, commodity, and labor costs as well as ongoing supply chain disruption. And third, as a result of our additional pricing actions and cost containment measures, we are reaffirming our outlook for net sales, adjusted earnings per share, and adjusted EBITDA for the full year. As we look specifically at the results for the quarter, we maintain strength in our top line, delivering revenue of $846 million. This was roughly flat to the prior year on an organic basis. Global price increases and expanded distribution in the battery business were offset by an expected decline in volumes as we comp elevated COVID demand from the prior year. Adjusted gross margin decreased 320 basis points, as increased input costs are partially offset by price increases, synergies, and the comping of prior year COVID costs. On a sequential basis, gross margin was roughly flat with the prior quarter, consistent with our view for the start of the year. With our solid top-line performance and lower interest expense, we partially offset the gross margin decline and delivered adjusted earnings per share of $1.03 in the quarter. Before John provides more details on the quarter, I want to provide some additional color on the performance of our categories, the rising cost environment, the resiliency of our supply chain, and other actions we have taken to operate with excellence in an uncertain environment. First, our categories remain healthy, with both Battery and Auto Care showing robust demand versus pre-pandemic levels. Specifically, the Battery category benefited from two drivers, an increase in devices owned per household and an increase in usage of those devices, resulting in higher battery replacement frequency. These trends have resulted in consumers using more batteries. On a two-year stack basis, the global battery category has grown by 9.7% in value and 7.8% in volume. As anticipated, we saw the category decline in the three months ending November 2021, which was down 3.5% in value and 8.4% in volume. As we look to the long-term, we anticipate category value to experience flat to low-single-digit growth off a higher base, as the category has increased in size due to consumer behavior during the pandemic. Our iconic brands outpaced the category resulting in a 1.2 share point gain versus last year, with expanded distribution in the U.S. being the key driver. As we turn to the Auto Care category, in the latest 13-week period, category value was up 9% versus a year ago and 20.6% on a two-year stack basis. As with batteries, growth is being driven by changing consumer behavior, including do-it-yourself habits established during the pandemic, such as higher levels of cleaning and renewed interest in car care as a hobby, a higher number of cars in the car park and an increase in the age of vehicles given the shortage of new vehicles, and a recovery in miles driven given the increase in personal travel by car. As we look ahead, we anticipate that Auto Care category value will grow at low-single-digit once it has cycled through the COVID-related demand. Energizer continues to be a leader in the Auto Care category through our strong portfolio of brands. Specifically in appearance, the largest sub-segment in which we compete, our Armor All brand outpaced the category in the U.S. due to distribution gains and the strength of our innovation. In addition, our international Auto Care growth plan has resulted in growth ahead of the category in key markets, including Australia, Germany, New Zealand, the U.K., and Mexico. While our categories are healthy, the macro environment in which we are operating remains difficult. This leads me to the next important topic: operating costs. Commodities, transportation, and labor costs continue to rise, resulting in increased cost pressures that are incremental to the outlook we provided in November. We have moved quickly to offset these pressures through additional pricing actions, cost reduction initiatives, and improved mix management. Pricing actions in both our segments were announced within the last couple of weeks and are incremental to the increases discussed in November. They will become effective late in the second quarter for North America and in the third quarter for the international market. We expect the cumulative effect of these actions to offset the inflationary cost pressures on a dollar basis. In addition to inflationary pressures, the global supply chain network remains stressed from pandemic-related disruptions, which includes port congestion and transportation delays, as well as availability challenges with respect to labor, sourced products, and raw materials. As a result of this dynamic, we took a proactive approach by investing in incremental inventory both in the prior year and in the current quarter. This decision paid dividends as we were positioned to meet our customers' and consumers' needs and delivered a successful first quarter. We expect to operate with elevated safety stock for the foreseeable future, but we monitor the supply network for signs of stability. As you can see, the business is operating on solid footing, and the underpinnings of our categories remain healthy and in a stronger position than before the pandemic. Even with the difficulties we experienced, we delivered strong results and are on track to deliver another successful year. Now let me turn the call over to John to provide additional details about our financial performance in the quarter.

Good morning, everyone. Before expanding on the financial highlights, I would like to point out that our segment reporting has changed from two geographical segments to two product line segments. Going forward, our two segments will be Battery and Lighting Products and Auto Care, more accurately reflecting how we manage the operations. Press release issued earlier today recast the prior year first quarter to align with this new segment reporting. Now turning to our results. Reported and organic revenues were both essentially flat. In Battery and Light, strong demand and solid execution resulted in a modest decline in organic sales, while Auto Care continued its strong performance with organic growth of 1.3%. Pricing actions globally delivered roughly 2% growth and additional distribution contributed another 1%. Offsetting these gains was a decrease in replenishment volumes driven by the timing of COVID-related demand in the prior year. As a reminder, we executed price increases in our Battery segment in the first quarter of this year, and we have taken pricing in Auto Care in both the second and third quarters prior. The impact of these pricing actions was reflected in our initial outlook for this year. As Mark mentioned, we experienced significant incremental cost pressures during the first quarter and moved quickly to implement additional pricing that will benefit the second half of fiscal 2022. Sequentially, adjusted gross margin was roughly flat versus the fourth quarter of fiscal 2020 as we expected. However, adjusted gross margin decreased 320 basis points to 37.5% versus the first quarter of 2021, as pricing, lower COVID-related costs, and synergies were offset by more than 700 basis points of margin erosion from inflationary cost pressures. This quarter also marks the conclusion of the integration of our Battery and Auto acquisition. The successful integration positions us well to focus on continuous improvement initiatives to offset inflationary pressures going forward. Advertising and Promotion (A&P) as a percent of sales was 6.1% versus 5.8% in the prior year as a result of planned increased spending. We remain committed to investing in our brands for the long-term health of our business. Excluding acquisition and integration costs, SG&A as a percentage of net sales was roughly flat at 13.2%, but declined $2 million in absolute terms as lower compensation expense was partially offset by increased travel and higher IT spending related to our digital transformation. Looking at segment profit, both Battery and Lights and Auto Care benefited from continued strong demand, pricing actions, and distribution. However, the inflationary input cost pressures more than offset the stronger-than-expected top-line performance. This impact flowed through to the bottom line for each business, resulting in a segment profit decline of $12 million for Battery and $18 million in Auto Care. Interest expense was $37 million or $10.3 million lower than the prior year, reflecting the benefits of significant refinancing activity in our debt capital structure over the past year. We expect a similar quarterly run rate for interest expense over the remainder of the year. I would also like to point out changes to our shares outstanding for the quarter and the remainder of the year. In the first quarter, we completed the accelerated share repurchase program that was announced last August. The total number of shares purchased under this program was nearly 2 million. Additionally, on January 18, our mandatory convertible preferred stock converted to approximately 4.7 million common shares. Absent any additional share repurchases, weighted average shares outstanding for the remainder of the year will be approximately 72 million. As we look at our outlook for 2022, we are facing a number of gross margin headwinds. We continue to experience significant cost pressures in transportation, driven primarily by the global backlog of ocean freight. In addition, labor availability is a major challenge across most U.S. sites, pressuring rates. Finally, many commodity markets remain at all-time highs, impacting our raw material costs. Through a combination of pricing actions, improved mix management, and cost reduction efforts, we expect to offset the absolute dollar amount for these rising costs. However, due to the lag in timing between the recognition of these higher costs and the successful rollout of our pricing actions and cost reduction efforts, we expect as much as 50 basis points of additional gross margin pressure to impact us for the full year 2022. This is incremental to the 150 basis points provided in our outlook in November. We expect to see the most significant impact to gross margin in our second fiscal quarter, as we will absorb the full effect of these costs without the offset from our incremental pricing. With the benefit of the actions we are taking now, we expect gross margin to recover in the back half of the year. Given the continued strength of demand in our categories and our efforts to offset the majority of these headwinds through pricing and cost reduction initiatives, we are maintaining our fiscal 2022 outlook for roughly flat net sales, adjusted earnings per share in the range of $3 to $3.30, and adjusted EBITDA of $560 million to $590 million. Now I would like to turn the call back to Mark for closing remarks.

Thanks, John. As I mentioned at the beginning of the call, our team delivered well in the critical holiday season, and our categories performed well globally. Like many companies, we're also continuing to face a rising cost environment and supply chain disruption. Given these conditions, we are taking aggressive action to offset the most recent cost escalations, including an additional recently announced pricing action in North America Battery and Auto Care. We remain confident in our outlook for the year, reflected in our reaffirmation of our guidance for net sales, adjusted earnings per share, and adjusted EBITDA. I am incredibly proud of our team for continuing to operate with excellence and delivering on our priorities and commitments. With that, I will open the call for questions.

At this time, we'll take Lauren Lieberman with Barclays. You may now go ahead.

Great, thanks. Good morning.

Good morning, Lauren.

Hi, Lauren.

Hey, so John, you gave us some great color already on gross margin, very clear on the pricing catching up with cost in dollar terms. But I was just curious a little bit more about how to think about progression of gross margin through the year because I would think there should also be some incremental price measures up in the second quarter by virtue of timing of some of the battery pricing really showing up on shelf that's already been making its way to the market. And then also knowing what you've offered on incremental costs. How front half-weighted that is, and when we think about recovery in the back half is it up just in the fourth quarter to be our benchmark for what level we're kind of able to be marching towards. Any further color would be great. Thanks.

Yes, Lauren, both John and I will address this. I'll start, and then John can provide more details about the pressures we expect to face this year. As you may remember, in November, we were already dealing with inflation and assumed that it would continue throughout fiscal '22. At that point, we had already undertaken several cost reduction initiatives and implemented pricing changes in the market. Since then, the inflationary situation has worsened. However, we took a more aggressive approach this time by implementing additional price increases in January in our U.S. battery sector, followed by more adjustments last week in our Auto Care division. We are also reevaluating international price increases, with some markets experiencing a second round of increases, while others will see larger first-round increases. Most of these price increases will take effect at the end of Q2. Therefore, as we move into Q3, we should start benefitting from these increases, but we’ll need to navigate some cost pressures we expect to encounter in Q2. John, could you provide some more details?

Yes, Lauren, let me break this down from the start because there were several factors coming into the year and we have faced a lot of incremental costs. In the last quarter, I mentioned that we anticipated 500 basis points of additional costs that would negatively affect our results. This is largely related to pricing and cost-saving measures that Mark discussed as we began the year. On a run rate basis, we expected these costs to be roughly offsetting, leading to an overall decline in gross margin by about 150 basis points for the year. The first quarter performed well and aligned with our expectations. However, as the quarter progressed, we faced significant additional inflation. For example, zinc prices have increased around 10% since November, and EMV has risen nearly 20%. Lithium has surged even more. In the Auto category, we've also seen substantial price increases for materials like silicone and R134A gas. When we factor in ongoing elevated transportation costs, we're projecting an additional 400 basis points of pressure for the full year. As Mark mentioned, the pricing adjustments we've recently announced should positively affect us in the latter half of the year, but we still anticipate about 400 basis points of incremental pressure throughout the year. Similar to the challenges we faced at the beginning of the year, we now expect an additional 50 basis points of headwinds on gross margin largely due to timing and the fact that we are passing through costs without raising rates. We believe that the pricing and cost measures we took this quarter will help us approach our original full-year gross margin expectations. While the first quarter was in line with what we anticipated, we expect a decline in the second quarter. However, with the new pricing strategies, we foresee improvements in the last half of the year.

Okay, great. Thanks. And then I had a more strategic question, because one of the things that was most interesting to me last quarter was the more detail you were beginning to share on some of the price pack realignment work that you've been putting in the market. So just any updates there on what you're seeing in terms of shelf sets, how much more widely that might be in place, if you've seen competition follow suit in any way to kind of on-shelf look and feel. That's really what I'm asking about. Thanks.

Lauren, we did execute the price increase that went into effect on October 1. We did take a more progressive nature with that price increase with larger pack sizes, executing higher percentage increases. For the purposes of the price increase that we executed in January, we did not double down on that strategy. It's not because we didn't believe it was a good one. It was because ease and simplicity of execution in this environment, because we were moving faster and frankly, because of the execution timeframe, we're striving for 60 days, simply going with a straight percentage increase made more sense to us at this time. We have seen the pricing realignment show up on shelf similar to what we did in our first round, and that's encouraging. It's certainly something we'll continue to look at in the future.

Great. Thanks so much.

Thanks, Lauren.

Our next question comes from Nik Modi with RBC Capital Markets. You may now go ahead.

Yes, thank you. Good morning, everyone. So, John, maybe you could just talk about the top line. I mean, obviously, very, very good results, but you're holding your guide for the full year. So just wanted to understand the puts and takes on that standpoint. And then just more broadly, if you could just share what you're seeing from a competitive standpoint in terms of pricing? Has everyone pretty much taken place in the category to the same grid?

I can address the second question, Nik. Regarding competitive activity, as we analyze the retail environment, we notice movement across all categories, with not only Energizer products but also competitive and private label products increasing in price due to the inflation we've discussed. As long as the price gaps remain consistent with historical levels, the only change will be higher pricing across the board. In terms of our financial outlook, we had a strong first quarter, but given the dynamic nature of the current environment, we felt it wasn't wise to alter our projections for the year. Instead, we will focus on implementing the price increases we've planned, enhancing our supply chain management, and working towards the goals we set in November. While we had a solid quarter and saw pricing begin to rise, we do expect some impact on volume and are also comparing against a strong first half of last year. As Mark mentioned, it’s early in the year, so we will maintain our current outlook.

Excellent. So, if I could just follow-up on a quick labor question. I mean, are you guys seeing things start to improve at all? I mean, is there any loosening of the market, any buffer in that?

I would say that tends to be very location-specific, in terms of labor availability and the rate that you have to pay, particularly for temp labor, which many of our facilities utilize. I would say there's been some mild improvement in certain areas, but it's not consistent enough yet to call it a trend.

Great. I will pass it on. Thanks. Thanks, everyone.

Our next question comes from Andrea Teixeira with JPMorgan. You may now go ahead.

Thank you. Good morning. My question is on the distribution side. And obviously, you had an impressive increase in distribution last year. I was wondering if you can comment on how you were positioning into the spring shelf resets and how you were seeing private label, part of the conversation during this earnings season by peers has been potentially the demarginalization of private label availability. Of course, you've been gaining a lot of share over the past few years. Just curious if you were seeing your retailers starting to bring that conversation just to barbell the pricing and the pricing actions if they can?

Andrea, I would say the discussions that we're having across both of our main categories are roughly consistent with what they've been in the past. I think private label has been a part of, for instance, the Battery category for a long time. We have seen private label price increases moving at roughly the same rate that we've seen branded products, but private label will always be part of the discussion from a distribution gain. We had a very healthy distribution gain year in '21, and that's going to continue to benefit us into '22. We expect distribution gains to positively impact offline, really into Q3 and as a result of some of the great work from the commercial team. But private label, if you look at globally as well as in the U.S has declined over the last reporting period. I do think as we get into uncertain economic environments in the future, that's certainly you can't tend to see some softening in trade down into private label. It's something we've experienced in the past, but it's obviously something we'll watch and make sure we manage appropriately.

And super helpful. And then on the pricing, just a clarification. You were saying the additional pricing would be mid-single, and is that an international that includes global or that's mostly U.S.?

That's a great question, Andrea. Let me see if I can just level set pricing and kind of where we are because there's so many different moving pieces that we've executed. Let me go back to fiscal '21. We took our first round of pricing in Auto Care, which was effective August 1. We took another round in refrigerants only that was effective December 1. If you recall last summer, we also announced our first round of Battery pricing in the U.S., which was effective October 1, and that was all executed in fiscal '21. As we got into November, and the inflationary pressures that both John and I have talked about, we recognized the need for additional pricing. We executed an additional round of battery pricing on January 15, with a 60-day effective date. We've also announced on February 1 additional Auto Care pricing with an effective date around April 1. So, there's multiple rounds of pricing. If you get into the international markets, it's very difficult to provide a quick summary of that, and it would take probably too much time. But what I would say is we're taking pricing across many, if not all of our international markets in some form or fashion. Some of them will experience higher one-time increases, others depending upon where they were in the price in pre-cycle will get a second round in the future. So, all in, what I would say is about 95% of the portfolio will experience price increases, some of them multiple times. And all the pricing should be in place and executed, or most of it should be executed by April 1.

That's very helpful. You are leading in pricing in many ways, and are you observing delays from your branded competitor?

Yes, I would say that's just not how we look at it. I would say we're taking pricing that we need for our business, and we're managing it appropriately and executing when we think it's justified, and how competition does that with respect to their business we will leave to them.

Okay, that's fair. Thank you so much. I will pass it on. Congrats again.

Thank you.

Our next question comes from Wendy Nicholson with Citi. You may now go ahead.

Hi. I wanted to focus more on the capital allocation side. I know you said that you're largely finished with the integration of the acquisition. So, does that sort of make you feel maybe more confident as you look ahead about looking for other acquisitions? I know M&A has kind of taken a backseat for a lot of companies during COVID. Does that become more of a priority for you? And now that you've exhausted the share repurchase program, what's the plan going forward? Do you expect to re-up that and open up a new one? Any color on that would be great.

I would say, Wendy, initially, our focus is on gross margin recovery. And I think that's the focus of the organization primarily. When it comes to capital allocation, what I would say is, M&A is of reduced interest at the moment just because of our leverage levels. And there is an enhanced interest on our part to delever a little bit before engaging in any meaningful M&A activity.

Yes. Maybe to add a little bit there. We've invested a fair amount of working capital, Wendy. So, we probably have to turn that we're financing right now on working capital. And I would say that as free cash flow normalizes, we would look to probably pay down some debt. And then to Mark's point, M&A would be after that.

Sure. Regarding the Auto side, can you share your insights on demand? Given the changes in people's commuting habits and car usage for vacations, what is your outlook for auto demand as we approach spring and summer? Specifically, how do you expect demand to differ this summer compared to last year, especially with more people likely traveling by car and plane? Any insights on sentiment related to the demand in the Auto Care sector would be appreciated. Thank you.

Wendy, the demand in the Auto Care segment is very strong. When you consider the key factors influencing this category, the growing size of the car park, the increasing age of vehicles due to challenges in buying new cars, and the rise in miles driven as people return to more regular travel patterns, all of these aspects are trending positively. This is evident in the substantial category growth we're seeing. On a two-year stacked basis in the Auto Care segment, it's up 20%. Our results reflect this as well. We expect Auto Care to grow by 2% this year, following a 16% growth last year. We're also experiencing excellent growth in our international Auto Care, gaining market share, especially in appearance products across many of our key international markets. From the perspective of overall consumer sentiment, consumers appear to be resilient, our brands are quite strong, and this is contributing to heightened interest in the category. I believe that during economic downturns, while some consumers might reduce their purchases, there’s a tendency for them to shift from buying services to doing things themselves, which provides us with a natural buffer as economic cycles fluctuate.

Got it. Fair enough. Thanks so much for the color.

Thanks, Wendy.

Thanks.

Our next question comes from Kevin Grundy with Jefferies. You may now go ahead.

Thank you, good morning, everyone. I have a couple of questions regarding the guidance, one focused on the near-term and the other on the long-term. Could you provide some insights into your key assumptions regarding input costs, especially for your larger exposures? Are you anticipating any moderation, or are you keeping the current spot rates unchanged? How much of your costs are hedged? As you noted, there has been a significant increase in some of your input costs, particularly lithium. Additionally, considering the expected 50 basis points extra pressure on gross margin and the timing mismatches, would you say your guidance is now lower than before? Are you leaning towards the lower end or the midpoint of your range? That would be helpful for everyone. Lastly, looking at the long-term ambition, I know you're focused on recovering gross margins. Based on your current estimates, what does the timeline look like to return to mid-20% EBITDA margins? Do you believe it's a three-year timeline or closer to five? I understand there is quite a bit of uncertainty, but there's a keen interest from Wall Street regarding the path back to normalized margins. Thank you for addressing these questions.

Thanks a lot in there, John. Why don’t you take the inflation question?

Yes, Kevin. To address a couple of points, regarding our modeling and outlook, we are monitoring the market and maintaining our current stance. We do not anticipate any improvement, nor are we projecting any decline. This approach is consistent with what we implemented last quarter as we move forward. In terms of cost management, we have fixed approximately 25% to 30% of our expenses for the rest of the year. However, I would note that negotiating longer-term agreements with many of our vendors has become more challenging in the current environment. We are making efforts to resolve these issues, but our ability to extend terms may not be as strong as in the past. As for the overall recovery, rather than provide specific timelines or milestones, which are hard to determine in the current environment, I can say that our price increases and production costs have put us in a challenging position regarding gross margins for the remainder of this fiscal year. It is crucial for us to continue implementing pricing strategies and engage in productivity programs that we have previously discussed. We have a continuous pipeline of initiatives and, given the circumstances, have assembled an integrated cross-functional team to drive gross margin improvement. This effort is part of our normal business operations and incorporates short, medium, and long-term initiatives. In the short term, we are focusing on mix management, pricing and revenue strategies, production costs, and SKU optimization opportunities. On the longer end, we are exploring network and automation opportunities, which will be closely tied to our digital transformation efforts aimed at enhancing data insight and availability. This will enable us to make better business decisions across all aspects. We will pursue these initiatives alongside our pricing strategies to restore gross margins and improve the overall margin structure of the business. However, I believe there are too many uncontrollable variables at present to accurately predict a specific timeframe for recovery.

Very good. Thank you, guys. Good luck.

Thanks, Kevin.

Our next question comes from Robert Ottenstein with Evercore ISI. You may now go ahead.

Great. Thank you very much. You talked about a fair amount of detail on the timing of some of the price increases. And I think we all understand it's a very fluid environment, early days on some of those increases. Just was wondering if you had started to see any kind of sense of consumer response, whether it is going from one channel to another or different pack sizes. And you also mentioned, I think in your opening statements that you were now discussing in terms of the markets, both brick and mortar and e-commerce. So perhaps you could give us an update on what your e-commerce business is looking like, the growth there, the percent of sales, and whether you're still category agnostic. Thank you.

I can answer the last question first, Robert. I think we are still channel agnostic as consumers migrate from brick and mortar to online. And I would say, I mean for your first part of the question was a good one and a general one around the state of the consumer and what's happening as some of these prices are increasing both on our products but also across the store. What we've seen is our brands have really been resilient and have been able to carry the additional pricing quite well. Consumers have been resilient with the price increases that we executed last year over the holiday season. We assumed historical elasticities would fold and they held up much better than we anticipated. And that's both due to the strength of the consumer but frankly, also the strength of our brands and the execution by our teams in the marketplace. As we've launched these additional price increases, we are assuming historical elasticities also will hold going forward. We did not assume that the elasticities that we saw in the holiday would continue. But I would say when you look at the underlying drivers of the category for both Auto Care and we talked a little bit about that with Wendy, but let's touch on Batteries. I mean, batteries are driven by devices, disasters, and demographics. They are really focused on devices. And from that perspective, and devices may be a bit of an antiquated word to use. I mean, what this is about for consumers right now is connected homes, connected health, connected work, all of these tools that they use to stay connected throughout all parts of their lives. Many of them take our batteries. And as a result, you're seeing a battery category that is healthier than it has been in years. You are certainly coming out of the other end of this pandemic in a healthier spot than you did going into it. You've seen devices in the home go up about 7.5% over the last two years. So, when you look at the Battery category and the Auto Care category, our consumers are healthy, our brands are strong, and the underlying drivers for category demand are better than it's been in several years. I think the underlying health of both of our businesses is tremendous. It's just simply a question right now executing pricing, managing cost reduction opportunities within your business, and driving gross margin improvement.

Great. And can you break out what percentage of your U.S. business is e-commerce?

We have not broken that out specifically, I will tell you. But if you look at the Battery category, across all of e-commerce, again, not just Amazon, you're looking at about 17% of the category that goes through online.

Great. Thank you very much.

Our next question comes from Bill Chappell with Truist Securities. You may now go ahead.

Thanks. Good morning.

Good morning, Bill.

Good morning, Bill.

Can you discuss the trends at Rayovac and how they impact elasticity and retailers' willingness to adopt more appealing price points? Additionally, do you have any insights on distribution gains that might help us understand the progress of that franchise?

That's been a tremendous addition to our portfolio, Bill. I think it's particularly as you head into environments like we're in right now. Having that strong value brand in the portfolio just adds a level of defense to your portfolio that we didn't have before in the U.S. Rayovac distribution in the U.S is a little bit limited in terms of one large mass customer and the main customers being home centers. But they are putting in place a very key role in their offering to their shoppers. I think our emphasis as a selling organization as a company is always going to be on the Energizer brand, but not to the detriment of Rayovac. We just want to make sure that we use Rayovac in the value offering space and where we can trade those consumers up to Energizer. But it will be a very important tool to us as we move forward. The distribution gains on that, should not I don't think I would expect seismic distribution shift from Rayovac standpoint. I think we're going to continue to use it as a tool that we have in the portfolio to fill a need with specific customers.

Thanks. I guess I'm trying to figure it out here what we've seen in other CPG over the past year is kind of a trade-up to more premium stuff away from value. And I guess it's too early for the consumers to trade back but I didn't know if you've seen that. It's tougher to track the DIY channel for us until it re-vaccines similar type growth that the Energizer brand is or if that started to turn or started getting worse or better anything that would tell.

As pricing in the market shifts rapidly, we're monitoring this situation closely. Over the past couple of years, we've observed that consumers have been moving towards more premium brands. However, with fluctuating price points, some retailers are experiencing shoppers who are more price sensitive. This has led to consumers sometimes opting for Rayovac and other value brands, but this shift is often temporary, and they tend to revert back to premium brands. We will keep a close eye on these trends as they affect our Energizer brand, while also creating potential opportunities for Rayovac in the future.

Got it. And one last follow-up. I made the comment that you feel like the Battery category is bigger post-pandemic, and you'll grow off of that new base. Can you just give us some examples of what that means? I mean, why people don't, as they go back to work and fully back to school and fully back to normal, don't use some of those battery power devices less and we see some contraction.

Well, I think what we've said is you've got to work through the elevated demand that you saw during the pandemic and get to that new baseline level. And what we talked about in November is Q1 and Q2 being the elevated comp, with Q3 and Q4 being the more normalized level of demand. I think that outlook provided that stair-step build into what we would do is more normalized usage patterns as people get back into whatever the routine they are going to have post-pandemic. But in the course of the pandemic, consumers bought more and more devices. I used the number earlier, but 7.5% more devices in the home in '21 than they were in '19. So, there's a larger installed base in homes in the U.S., and around the world. The inventory of batteries that consumers need is larger than it was pre-pandemic. So, I think the Battery category will continue to grow off that newly installed base. In terms of usage, that's really what's going to drive in terms of the growth rate. And I think we said in the past it is definitely a larger category, and it's going to grow in accordance with historical growth rates off that larger base. In terms of a higher growth rate, I think that's when we're going to have to watch consumer usage of those devices because if that starts to escalate, and I think that could move the growth rate of the Battery category.

Got it. Thanks so much for the color.

Thanks, Bill.

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

Thanks for joining our call today and the ongoing interest in Energizer. Hope everyone has a great day.

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