Energizer Holdings, Inc. (ENR) Q2 2023 Earnings Call Transcript

Good morning. My name is Dave, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's Second Quarter Fiscal Year 2023 Conference Call. After the speaker's remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the conference over to Jon Poldan, Vice President, Treasurer, and Investor Relations. You may begin your conference.

Good morning, and welcome to Energizer's Second Quarter Fiscal 2023 Conference Call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Executive Vice President and Chief Financial Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. During the call, we will make forward-looking statements about the company's future business and financial performance, among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC. We also refer our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2022. With that, I would like to turn the call over to Mark.

Thank you, Jon. Good morning, everyone, and welcome to our second quarter earnings call. Our second quarter results demonstrate another terrific performance by our team. We delivered organic sales growth across both Battery and Auto Care, while improving operating margins, as we remain laser-focused on generating growth while maintaining our focus on gross margin. We entered fiscal 2023 with a few key priorities: restore gross margins across our portfolio; reestablish healthy free cash flow generation and pay down debt. We have made significant progress against each of these areas this quarter, while also delivering organic top line growth of 2.6%. Our categories are resilient even in a difficult environment. Our iconic brands and broad portfolio of products allow us to meet consumers where they are. In batteries, global category value is up 2.7% and volume is down 5.5% on a year-over-year basis. When considering the comparison against last year, keep in mind that the category is cycling through price increases, which occurred last March. In addition to expected elasticity impacts from pricing, consumers are also shopping cautiously and prioritizing critical categories, such as food, fuel, and utilities. Batteries are an essential product for consumers, and as a result, demand for our products has been resilient, and we expect volume trends to improve in the back half of the year. From a long-term perspective, the category remains meaningfully larger than prior to the pandemic in both volume and value, driven by increased device ownership, usage, and pricing. For example, in the US, category value is up over 28% in the 13 weeks ending March, with volumes up almost 9% as compared to pre-pandemic levels. Our performance within the category remains strong, as consumers are selecting our brands, as we gained 0.7 share points globally behind robust performance in leading markets such as the US, Germany, and Canada. In our Auto Care business, we have started the peak season with solid results. The drivers of category demand, size, and age of the car park, along with miles driven, all have positive trends. These underlying factors, combined with pricing have resulted in category value nearly 25% larger than pre-pandemic levels. During the quarter, the category grew 4.7%, as price increases more than offset volume declines. We expect continued value growth for the remainder of the year, led by pricing, offset by volume declines. We performed well in the quarter and delivered Auto Care organic growth of 6%, on top of nearly 20% growth in the year-ago quarter. Our growth was driven by a combination of pricing and expanded distribution across both North America and International. Our teams have done a terrific job in improving the margins in our Auto Care business, while also bringing category-leading innovation to market. New products launched this year include a ceramics line within our appearance portfolio and an expanded line of refrigerant products. As we look ahead, we will stay close to consumers and how the current environment is impacting their overall shopping behaviors in both of our categories. With our broad portfolio, expansive distribution, and best-in-class shopper-based solutions, we are positioned to connect with consumers and influence the choices they make, including where they shop, the brands they choose, and the pack sizes that meet their needs. Finally, as you can see from our results today, we have made significant progress restoring the profitability of our business. Driven by the benefits of last year's broad-based pricing, this year's targeted pricing, and project momentum, adjusted gross margins expanded 300 basis points versus the prior year. While we are encouraged with this progress, there is more work to do as our margin profile remains below historical levels. With the impact of both project momentum and our approach to pricing and revenue management, we are confident in our ability to close that gap. When we kicked off project momentum, we highlighted the redesign of our operational network. These actions will optimize our route to market and create manufacturing and packaging centers of excellence that are designed to improve the resiliency of our business, all while driving significant savings across our product portfolio. Additional areas of value creation include a focus on value engineering to reduce costs while maintaining or improving product efficacy, as well as the efforts of our procurement team to leverage new approaches to reduce our costs, including securing sources of supply and closer proximity to our plant. We are also driving savings from the investments we are making in our digital transformation, including improved data and analytics, which enable activities such as predictive modeling to optimize our ocean shipment costs. Year-to-date, behind these efforts, the program has generated $20 million in savings and contributed to a meaningful reduction in working capital as a percentage of sales. The program is off to a great start and the teams are executing with excellence. The combination of organic sales growth, gross margin improvement, and working capital reductions enabled us to significantly improve free cash flow relative to the prior year. Through the first two quarters, we have generated free cash flow of almost $200 million, which is in excess of 13% of net sales. We have paid down over $150 million of debt during the first half of the year, including over $100 million in the second quarter. We delivered a solid first half of the year. As we look ahead, we are confident in our ability to navigate an admittedly uncertain macro environment. That confidence stems from the actions we have taken in the past couple of years, in our digital transformation to improve both visibility across the enterprise and to leverage data and analytics to capture opportunities and mitigate risks. These transformational efforts, combined with operational savings from momentum are positioning Energizer as a much more agile and responsible organization in a dynamic environment. Now, let me turn the call over to John to provide additional details about our financial performance.

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter, an update on Project Momentum and some additional color on our outlook for the remainder of the year. For the quarter, reported net sales were flat with organic revenue up 2.6%. Adjusted gross margin increased 300 basis points to 37.9%, driven by pricing actions, savings generated from Project Momentum, and the benefit of exiting lower-margin battery business, partially offset by increased input costs. Adjusted SG&A decreased $1.1 million, primarily driven by Project Momentum savings and favorable currency, partially offset by higher stock compensation amortization and factoring fees tied to rising interest rates. A&P as a percent of sales was 2.7%, reflecting the seasonality of our business and roughly in line with the prior year. Interest expense increased $3.7 million year-over-year, due mainly to rising interest rates, partially offset by lower average debt outstanding. We delivered adjusted EBITDA and adjusted earnings per share of $139.5 million and $0.64 per share. On a currency-neutral basis, adjusted EBITDA and adjusted earnings per share were $149.9 million and $0.75 per share, representing currency-neutral adjusted EBITDA growth of 31% and earnings per share growth of 60%. Through the first six months of the year, we have generated approximately $192 million of free cash flow or over 13% of net sales. We achieved these excellent results by combining strong operating earnings with a nearly 200 basis point improvement in working capital since the start of the year. In the quarter, we also paid down over $100 million of debt. We ended the quarter with net debt to adjusted EBITDA of 5.6 times, a reduction of 0.5 a turn year-over-year. Our debt capital structure remains in great shape, with a weighted average cost of debt of around 4.75% and 90% fixed, with no meaningful maturities until 2027. We continue to show solid progress with Project Momentum as we generated savings of $12.9 million in the quarter. And we are focused on continued improvements through network optimization, strategic sourcing efforts, value-added value engineering and SG&A savings enabled by our digital transformation. The program remains on track to deliver $80 million to $100 million in run rate savings, with roughly 80% of those benefits impacting gross margin and the remainder recognized throughout the rest of the P&L. We anticipate an additional $10 million to $20 million of savings to benefit the remainder of fiscal 2023. Working capital improvement is another critical aspect of our effort to improve free cash flow. Project Momentum initiatives have bolstered our efforts across inventory, payables, and receivables management, resulting in a working capital reduction of roughly $40 million in the first half of the year. This is inclusive of incremental inventory built to support network changes. We continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program. And finally, I would like to provide additional color on our outlook for our third quarter and the remainder of the year. We expect organic revenue growth in the back half of the year of 3% to 5%, driven by the continued benefits of pricing, and a moderation of volume declines. Reported revenues are projected to be 2% to 4% over the same period. We expect gross margins in the third quarter to be roughly flat to our recently completed second quarter as input costs have stabilized and product mix will be relatively consistent quarter-over-quarter. We also expect fourth quarter gross margins to meaningfully benefit from both input cost tailwinds, specifically freight, and incremental Project Momentum savings driving significant gross margin expansion year-over-year. We will continue to invest in support of our brands and expect A&P spending for the remainder of the year to be slightly above prior year levels with a full year expectation of roughly 5% of net sales. We expect that SG&A will be roughly flat on a dollar basis relative to the prior year. Interest expense over the remainder of the year is expected to be up about $2 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt. And finally, at current rates, we expect the currency impact on earnings to be neutral over the remainder of the year relative to fiscal 2022, with modest headwinds in the third quarter, offset by a pickup in the fourth quarter. We remain on track to deliver the full year as guided in November. We continue to expect low single-digit organic net sales growth for the full year. Pricing, mix management, and Project Momentum savings are still expected to result in improved gross margins of 100 to 150 basis points year-over-year. Combined with continued cost management down the rest of the P&L, we are reaffirming our outlook for adjusted EBITDA in the range of $585 million to $615 million and adjusted earnings per share of $3 to $3.30. Now, I'd like to turn the call back over to Mark for closing remarks.

Thanks, John. We delivered a strong first half of the year. We generated organic growth in a dynamic environment and improved both profitability and cash flow. I am proud of our team's execution and look forward to our exceptional brands continuing to generate long-term shareholder value. With that, I will open the call for questions.

We will now begin the question-and-answer session. The first question comes from Kevin Grundy with Jefferies. Please go ahead.

Great. Thanks. Good morning, everyone.

Good morning, Kevin.

Good morning, Kevin.

First question, just on the phasing of organic sales growth in the back half of the year. It sounds like you're expecting 3% to 5%. Just maybe a little bit more color the breakdown of pricing and volume and how you expect that to sort of phase into the P&L. Also related, Mark, you made a comment on some distribution gains in North America and international. Maybe just a little bit on specifically where those are coming from? And also whether that was contemplated in your initial guidance or whether that's sort of a potential upside or maybe you're feeling a little bit better about where you are in the range, relative to when you initially provided and I have a follow-up on gross margin. Thanks.

Hey, Kevin, I'll start with the second one, and I'll turn it over to John for some of the phasing one. I mean in terms of the distribution, that was an Auto Care reference, and it was a little bit of expanded distribution in the US and some of our existing retailers as well as continued expansion in international markets as we continue to roll that out with the international growth plan, those were contemplated in the original outlook that we provided in November. And John, do you want to

Yes, Kevin, for our P&L for the back half of the year, projection in batteries seems we still see negative volumes in Q3 and flat to slightly positive in Q4. We're going to combine that with the continued benefits of pricing to get that 3% to 5% top line organic growth in the back half. In Auto Care, we anticipate low to mid-single-digit volume declines in both quarters. But really, that pricing will continue to carry to slightly positive organic growth.

Got it. Thank you, guys. And then just a very quick follow-up. On the gross margin outlook, and I apologize if I missed this. I think the prior outlook was up 100 to 150 basis points for the year, so you're up 225 basis points. Now so maybe just when you kind of pull all the pieces together between pricing and commodities, productivity, et cetera, where are you now in terms of overall gross margin? And then just a little bit on the phasing. If I heard it correctly, I thought that the commentary was 3Q gross margin was to be flat sequentially or close to flat sequentially with the second quarter, if that's the case, that would imply sort of a step down, quite a step down, I guess, year-over-year. Maybe just some cleanup there on the gross margin, and then I'll pass it on. Thank you.

Yes, we wanted to address that point. Let's start with gross margin, which is a top priority for us, and we've made significant progress in that area. This quarter, we achieved a 300 basis point increase, which is a great accomplishment. This improvement was mainly driven by pricing and momentum, allowing us to offset the input costs that were still a challenge during the quarter. In the battery segment, we faced increased input costs related to lithium, EMD, zinc, and steel. In Auto Care, the pressures came from R-134a refrigerant and silicone, and both businesses have been affected by rising energy and labor costs that impacted our conversion costs. We’ve noticed that these input costs have stabilized, showing a mix of positives and negatives but essentially remaining flat. We anticipate that the margins in the third quarter will be similar to those in the recently completed second quarter. Moreover, we have observed significant improvements in ocean freight throughout the first half of the year, which is currently flowing through our inventory, and we expect to see substantial enhancement in the fourth quarter. Unlike last year, where we experienced a notable increase in the third quarter followed by a decline in the fourth quarter, we expect consistency this year. Therefore, the third quarter should resemble the second quarter, and we anticipate the fourth quarter will finish strongly as we conclude the year.

Got it. Okay. Very good. I'll hop back in the queue. Thank you, guys. Good luck.

Thanks, Kevin.

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

Thanks. Good morning.

Good morning, Bill.

Hi, Bill.

I have a question about battery volumes in the point of sale. I'm trying to understand how elasticity functions and how it is expected to evolve for the rest of the year. On one hand, if there is a price shock or people are looking to save money, they might gravitate towards value packs and multi-packs, which could actually increase volumes. However, I’m unsure if you're experiencing a significant volume drop immediately after the holidays, as consumers might be clearing out their supplies before purchasing new batteries. I would appreciate any insights on the consumer trends you are observing.

Bill, I'll begin, and if I miss any points of interest, please feel free to ask a follow-up. Looking at the global battery category, much will depend on market-level factors such as pricing and dynamics. From a macro view, pricing began to rise in this category due to inflation manufacturers faced around March and April last year. This is when we first observed the effects of price elasticity. Initially, we started with low double-digit volume growth, which has now adjusted to the mid-single-digit range. We anticipate this trend will continue; for instance, in the last four weeks in the US, volume decreased by approximately 3.3%. This decline aligns with our expectations based on past price increases. It's important to note that the current environment is different from those previous instances. We see that consumer behavior has shifted, especially as we transition past the holiday season. In the first quarter of the calendar year, consumers have become more cautious. Within the battery category, there's still a preference for premium performance brands, which is beneficial as we continue to grow our market share with the Energizer brand. Despite raising prices, we've managed to retain brand preference. Overall, we're on track with the elasticity metrics we established when we analyzed pricing last spring, although there is some pressure from consumer caution due to the broader economic climate.

Got it. I will just follow up on the volumes. Would you consider this quarter to be the last tough comparison with COVID? Last year at this time, many consumers were still at home due to Omicron, and the environment was changing as it began to open up in the summer. I think that may affect the year-over-year comparisons, but I could be wrong.

No, Bill, I think that's a great point. Anytime you're looking at a comparison period over the last three years, you're dealing with a situation that has multiple variables. There was increased COVID demand that created challenging comparison periods, along with growth at certain times. We also experienced inflation and increased pricing, not only in our category but across the store, and the macro environment is tougher right now. Therefore, when comparing periods, you need to consider more than one variable. Regarding your point about some carryover from the prior year's Q3, there was likely a little, but it has been reducing as we've progressed. So while there might be some carryover, I believe the majority of the impact will come from how we navigate pricing going forward.

Great. Thanks so much.

Thanks, Bill.

Thanks, Bill.

Thank you, everyone, and good morning. Regarding Bill's question about the global carrier situation, you mentioned that batteries are up 2.7% while volumes are down 5.5%. Considering the various factors impacting pricing and product mix, it seems that the comparison for battery volumes will improve as we enter the third quarter, whereas it will become more challenging for Auto Care. Could you elaborate on this sequentially? Additionally, about the pricing mix, it appears that many companies reporting have noticed consumers opting for more value in terms of pack sizes. We have also made significant progress in enhancing the product mix and premiumizing our packs and revenue growth management. What are your expectations as we approach the end of the year? What trends are you observing, especially with consumers becoming more price-sensitive? Thank you.

Andrea, I'll cover maybe the last part of your question first and then turn it over to John for some of the volume value breakdown. But what I would say is there haven't been drastic movements in pack sizes. You are seeing some shifting that's occurring depending upon which retailer, which channel you're analyzing. I would say some consumers tend to trade down to achieve a lower price point in terms of pack size, but they stay at premium brands. And then other consumers will increase the pack size purchase in order to get a better perceived value, but again, still continuing to stay with premium brands. So to your point, we have continued to premiumize the category and trade people up into Energizer, continuing with our share growth. But that really gets down to an individual consumer level of how to achieve the value that they're seeking. The great news is we have a broad portfolio of brands, but also pack sizes to meet them wherever they want to go within the category. John, on volume and value?

Yeah, Andrea. We used to expect to see volumes improving throughout the back half of the year in batteries specifically, although, we are calling for negative volumes in Q3 and then slightly positive in Q4. And then as I mentioned, we're going to combine that with just carryover benefits of pricing. So we're expecting to see some top line growth 3% to 5%. And then on the Auto Care side, we're still expecting to see low to mid-single digit volume declines all the way through the end of fiscal 23. And then also, we'll have a fair amount of pricing that will give us, kind of flat to slightly positive growth in that category.

That is super helpful. Just as a follow-up on the price mix, isn't the price mix getting – the mix getting even better? And then the pricing rolling over like in terms of the timing of pricing that's something that obviously is happening to everyone, you're starting to anniversary pretty big price increases. So how should we, and not to take credit, of course, you've done it tremendously well from a margin standpoint, and I appreciate all the bridges and puts and takes, but how we should be thinking of as you roll over the pricing, you can kind of have that volume back. And what gives you confidence that the fourth quarter volume will pick up? Is that more of a function of the easy comparison?

Andrea, I think embedded in your question is what we expect to happen as we anniversary the price increases is that you're going to start to see volume and value converge, volume and value come back to in Q4 as John mentioned, ultimately work their way back to flat and then work off the new base from there. That is historically consistent with our historical elasticity patterns that we've seen in the past. It's what's been playing out since last March when we initiated the price increases. And so you'll start to see volume work its way back to its new baseline in Q4.

Yeah. And Andrea, the only thing I'd add to that is that the price mix portion of it, we do expect to see declining impact. Obviously, with 13% tailwind this quarter. It's not going to be that high. It will still be positive in the third quarter, and it will continue to come down in the fourth quarter. So to Mark's point, we expect to see a flip between volume and pricing as we finish out the year.

Okay. Thank you so much. I'll pass it on.

Our next question comes from Robert Ottenstein with Evercore. Please go ahead.

Great. Thank you very much. Two questions, please, possibly related. I was wondering if you could kind of stand back and review the Rayovac acquisition, how that has played out given your original thesis, how retailers have responded? Is it giving you more flexibility versus private label as the consumer gets squeezed? And as you've got to deal with pricing increases or cost increases and you've got a wider, I guess, latter pricing ladder to work with. So just trying to kind of understand how that has played out. And then possibly related, if you could give us an update in terms of e-commerce, what the competitive dynamics there look like? And is Rayovac helping you there as well? Thank you.

The short answer to your question, Robert, is yes, it's helping us a great deal. We're extremely happy with the acquisition of the Rayovac brand. It has allowed us to be a better supplier to our retailers, adding another brand to our portfolio to meet their needs. It also provided us with additional manufacturing capacity to address the surge in demand during the pandemic. This positions us to be a more efficient supplier and continue to add value for our retailers based on their needs. From a market share perspective, the acquisition has made us a healthier business as we've consistently gained share over the last couple of years. Additionally, we've been able to trade up into the Energizer brand, which is a significant improvement for us. Overall, this acquisition has been hugely successful, especially in the online space. We had a mature e-commerce approach for our Energizer brand when we acquired the business, and we've integrated that to drive Rayovac sales online. Despite some shifts within Amazon regarding value and premium brands, we've maintained our focus on promoting the Energizer brand online, with Rayovac also playing an important role. If consumers lean towards the more value-oriented options, we are prepared with strong offerings at that level as well.

Thank you very much.

Next question comes from Hale Holden with Barclays. Please go ahead.

Good morning. I just had one question. The $100 million in debt that you guys paid down in the quarter was that against the term loan or applied somewhere else?

It was all term loan Hale.

Great. Thank you so much.

Yes, thanks.

Our next question comes from Carla Casella with JPMorgan. Please go ahead.

Hi. I think you partly answered this, but just to clarify, given the weather in March, how much of your sales do you think might have been pulled forward due to the timing of storms this year compared to last year?

Look, I would say, Q2 is really the beginning of the peak season for Auto Care, and I'm assuming you're referencing specifically, Auto Care. And you saw all of the new sets go in retailers over Q2. Certainly, warmer weather, earlier, hotter weather in the season helps drive early momentum in the season but it really needs to continue through Q3. But I would say we're off to a very solid start in Auto Care. If the weather continues, obviously, that will only build that business going forward.

In batteries, I was wondering if the unusual storms in March have impacted the battery business in terms of early demand.

Well, I mean, what you would see from storms in terms of power outages, you will see some surge demand. A lot of that will get to sort of inventory levels at retail. We have not seen a tremendous amount of pull forward. We've seen inventory levels. It was a big point of emphasis coming out of holiday. We've seen some mild improvement. I would say we have not gone back to historical levels of inventory yet. So we have not seen a bunch of pull forward from Q3 into Q2 because of storms.

Okay. Great. And then there was just some press over some past – there was some potential litigation suits. And I'm just curious, are you indemnified that for anything that happened before your 2019 acquisition of the batteries? Is there an indemnification agreement with Spectrum?

I want to make sure I'm answering the question in terms of what you're asking. Are you referring to the recent litigation that was filed?

Yes. I think I saw the recent litigation about the complaints about the Sherman and the California Cartwright Act of price fixing. And they mentioned 2018 in the article. I've not gone through the full suite.

Understood. No, I think because the factors of litigation, obviously, we can't comment on it. I mean our view of those pieces of litigation is that they don't have any merit. And as a result, we're just going to respond within the confines of the legal process, and we'll leave our comments there.

I understand, but if this is for a period when you didn't own the batteries, I assume you would be indemnified. I was just unclear about whether there was an agreement regarding the purchasing details with Spectrum when you acquired them.

Yes. I don't want to get into the specifics of the litigation. I think to the extent that we have any recourse under any agreement with Spectrum. We'll deal with them separately within the Spectrum acquisition. But for now, I think we ought to just respond within the legal process.

Okay. Okay, great. Thank you.

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

Hey, great, guys. I appreciate you taking the follow-up. Two for me, probably for Mark, just on advertising and marketing levels, how are you currently thinking – the environment has clearly gotten much better from a cost perspective, from an FX perspective. So to the extent that you're able to proceed on the gross margin outlook, Mark, what's your bias towards reinvestment? I know you're trying to accelerate the top line, appropriately trying to restore gross margin, but also concurrently trying to raise advertising and marketing levels. And I just wanted to try to get your sense of where you are now to the extent the company does exceed on gross margin, gross profit. How you're thinking about potential for reinvestment? And then I have a quick follow-up on promotion. Thanks.

Certainly, Kevin. We aim to maintain a range of 5% to 6%. Looking at the first half of the year, we are very pleased. Our focus has been on three main priorities: improving gross margins, generating free cash flow, and reducing debt. We've made significant strides in all of these areas. As we look forward, we are seeing an increase in project momentum. We expect to achieve savings in our two-year program, with a strong confidence in reaching between $80 million and $100 million. If we can speed things up and identify opportunities for reinvestment, we will consider those options to support continued top line growth. At this moment, we are managing what we can within the profit and loss statement, while maintaining caution regarding the consumer market. We will definitely explore investing to connect with consumers and ensure steady top line growth whenever possible.

Got it. And then a quick follow-up, Mark, is just on promotion levels. As I review the Nielsen data, batteries are actually one of the most heavily promoted categories, especially regarding the year-over-year increase. You seem to be leading that compared to your key competitor and even ahead of private labels. I wanted to get your thoughts on using promotion as a tool to drive demand, where we stand relative to pre-pandemic levels, and your overall perspective on that. The gross margin improvement looks quite good, despite the apparent increase in promotions here in the US. So just some thoughts on that, and then I can pass it on. Thank you very much.

Sure, Kevin. On that one, I would say, we try to look at the promotion cycles in longer-term, so 52-week cycles. In the most recent time period, you've seen an uptick year-over-year relative to price promotion. And this is always going to be a category where there's some degree of promotion. I think the important thing to dissect is full price displays versus the percentage of sales that are out with a price reduction. What you've seen in the most recent time period is from a category standpoint, it's around 11.5%. Energizer is a little bit below that. Our competition is a little bit above that. When you look at it over a longer-term horizon pre-pandemic, that's actually lower than historical levels. If you look at it against three years ago, any increase that you've seen in Energizer's promotional activity would be connected to distribution gains that we made over that time period. So there hasn't been a shift in our philosophy about promotion. We still continue to think, it is a lever that we need to pull in order to stay connected with consumers, but it's not one that we need to pull because the battery category, as you know, is relatively inelastic and there's no need to overly promote in the category.

Okay. Very good. I appreciate you taking the follow-up guys. Good luck.

Thanks, Kevin.

Our next question comes from William Reuter with Bank of America. Please go ahead.

Good morning. I know that toys is one of the categories of devices that use batteries and that category is very weak. I was wondering, if you've had initial discussions with your retail partners about how they may be planning their holiday sets, whether that could have any impact on your fourth quarter revenues or first quarter of next?

Well, everything we are aware of for the remainder of this fiscal year has been incorporated into the outlook we shared today. When we reach the first quarter of next year, we will provide an update in November. The advantage for us in the battery category is the diverse range of devices that utilize our batteries. Although there may be negative trends in one subcategory, there are often increases in other devices that can compensate for that. This diversity means we are not overly concerned about any single area. Additionally, we feel confident in managing the current economic conditions because our category consists of essential products that are relatively inelastic.

Okay. And then secondarily for me when you laid out your kind of financial priorities for the year, they were all around deleveraging and free cash flow. Historically, the company has not had a formal leverage target. I guess, does that remain to be the case? And in light of that, where would leverage need to be down to where you would consider either M&A or shareholder returns, other things that are not focused on reducing leverage?

So Bill, I'll start with the first part. We still don't have a formal target, but we are working to delever as our primary objective. So we think we can take leverage down around 0.5 turn a year. We've already done that over the last nine months, we're making really good progress. I think we'll continue to focus on deleveraging as we go forward. I think we would all feel much more comfortable if we can get that leverage level to something like 4% or below. Again, that's not a specific target, but I think that will be a better place for us to operate in the long run. As far as M&A, I think that is paying down debt is our primary objective. M&A is not something that we're looking at as a material investment at this point. So we need to make a lot of progress on the debt pay down before we consider anything that would be a material M&A target.

Great. That's all very helpful. Thank you.

Our next question comes from Brian McNamara with Canaccord Genuity. Please go ahead.

Hey, good morning. Congrats on the strong results, and thank you for taking the question. So in Q1, you and several CPG companies called out destocking at retailers, but this quarter really haven't heard that as much. Are we through the destocking in your opinion? And if not, how does that contribute to volume declines in the quarter? And then secondly, I'd be curious to hear your opinion on consumer inventory levels in general in terms of pantry loading or lack thereof? Thank you.

Sure. I'll start with the last part. I think from a consumer standpoint, you are seeing a more cautious consumer. I think as a result, it's safe to say that they're inventory levels at home have decreased as they buy less frequently. And you've seen them continue to shop more cautiously as inflation has really hit across the store. From a retailer standpoint, we have seen mild improvement in the inventory levels at retail, but we have not seen it snap back to historical levels just yet. Our outlook contemplates kind of status quo of where we are now and not coming all the way back for the balance of the year.

Yeah. I would just add a little bit of color to that last comment. So we do expect retailers for the rest of the year to kind of manage on a more tight basis. So we're viewing that as probably a 50 to 100 basis point headwind for our full year outlook. So it didn't come all the way back, and we expect that to come off the top of it.

Great. Thank you, guys.

Thank you.

Thank you for your follow-up. Regarding the previous question about volume and sell-out and sell-in, if we consider our channels globally, the comparison you mentioned indicates a 5.5% volume decline in the category noted in your earlier remarks. Based on your estimate of a 50 to 100 basis point adjustment for the full year, if my calculations are correct, and this is a significant if, are you also monitoring volume share? If not, the math suggests a decline of approximately 300 to 400 basis points due to destocking. This implies an overall volume decline of about 9% to 10% across both categories, with the category you mentioned down 5.5%. Is it correct to say that there was an acceleration in volume share decline this quarter? If that's not the case, can you explain? I'm trying to understand if destocking has become more pronounced this quarter compared to previous ones. Additionally, I'm curious about private label pricing; I've heard that some manufacturers may be facing price reductions in the coming quarters as commodity prices stabilize. Are you observing this trend or heard anything similar? Thank you.

So Andrea, regarding the volume impact in the first quarter, we saw some recovery in the second quarter, but I primarily attribute the changes to the first quarter. This does not indicate a trend for the second quarter in terms of volume differences, if I understood your question correctly. Now, I'll pass it over to Mark to address the private label question.

On private label, Andre, globally, it's flat. You're seeing a small increase in the US, but not above sort of historical levels of what we've seen previously. As we've mentioned, we continue to see consumers migrate to the premium end of the category.

Okay. Perfect. Thank you.

Thank you.

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

Thank you for your interest in Energizer for joining the call today. I hope everyone has a great rest of the day.

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