Q4 2021 Energizer Holdings Inc Earnings Call

November 10, 2021

Good morning. My name is Betsy and I will be your conference operator today. At this time I would like to welcome everyone to Energizer's fourth quarter and fiscal year 2021 conference call.

At this time I would like to welcome everyone to energize this fourth quarter and fiscal year 2021 conference call.

Should you need assistance, please signal a conference specialist by pressing star key followed by zero.

After today's presentation there'll be an opportunity to ask questions. To ask a question you may press star then one on your touchtone phone. To withdraw your question. Please press star then two.

As a reminder, this call is being recorded. I would now like to turn the conference call over to Jacky Burwitz, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. During the call we will discuss our results for the fourth quarter and fiscal 2021 as well as our outlook for fiscal 2022. Joining me today on the call are Mark LaVigne, President and Chief Executive Officer, and John Drabik, Chief Financial Officer.

Joining me today on the call are Mark Levine, President and Chief Executive Officer, and John <unk>, Chief Financial Officer.

A replay of this call will be available on the Investor Relations section of our website Energizer Holdings Dot 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 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 today's presentation slides and in reports we filed with the SEC. We also refer in our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website.

Other factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in reports we filed with the SEC. We also refer in our presentation to non-GAAP financial measures a reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available.

On our website.

Information concerning our categories and market shares discussed on this call relates to markets where we compete and is based on Energizer's internal data data from industry analysis and estimates we believe to be reasonable.

Unless otherwise noted, all comments regarding the quarter and year pertained 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. Despite operating in what remains an incredibly volatile environment. We delivered on our previously provided 2021 outlook for net sales, synergies, adjusted earnings per share and adjusted EBITDA. 2021 was our sixth consecutive year of organic revenue growth behind elevated demand and distribution gains.

Site operating in what remains an incredibly volatile environment. We delivered on our previously provided 2021 outlook for net sales synergies adjusted earnings per share and adjusted EBITDA.

2021 was our sixth consecutive year of organic revenue growth behind elevated demand and distribution gains.

This topline growth combined with synergies we achieved from the spectrum acquisition and interest expense savings, translate into strong adjusted EPS and EBITDA growth.

<unk> into strong adjusted EPS and EBITDA growth.

In a few moments John will provide details on the fourth quarter and full year. However, before he does some key headlines from our fiscal 2021 performance.

For the first time, our company exceeded $3 billion in net sales. We also maintain top line momentum with organic sales growth of 7.3%, including growth of nearly 17% in our auto care business.

We also maintain top line momentum with organic sales growth of seven 3%, including growth of nearly 17% and our auto care business.

Our battery and Auto Care businesses benefited from elevated demand and distribution gains in North America. Auto Care further benefited from the expansion in our international markets, reaching $100 million in sales in those markets for the full year.

<unk> further benefited from the expansion in our international markets, reaching $100 million in sales in those markets for the full year.

We also delivered synergies of $62 million for the year, resulting in total synergies from the spectrum acquisition in excess of $130 million, 30% higher than our initial estimate.

30% higher than our initial estimate.

And we continue to invest in our brands, resulting in strong brand, resulting in strong brand preference globally. With more consumers selecting our battery brands, we gained 2.2 share points in the last 12 months.

With more consumers selecting our battery brands, we gained two two share points in the last 12 months.

This performance is attributed to our team and their resiliency. Since the beginning of the pandemic, we have consistently adapting in real-time to ensure business continuity and repositioned to energizer for the future.

Since the beginning of the pandemic, we have consistently adapting in real time to ensure business continuity and repositioned to energizer for the future.

The hard work of our global colleagues to produce and deliver products to our customers and consumers in a time of heightened demand and significant disruption has been impressive to witness on a daily basis.

In a moment I will provide headlines for our 2022 outlook. However, before I do, I want to provide an update on a few key topics that will set the stage for the future.

First, our categories remain healthy and are showing solid growth when compared to pre-pandemic levels. And we expect the consumer behaviors supporting that demand will continue for the foreseeable future. Specifically in batteries there are two drivers. Devices owned per household are up mid single digits in the US.

Specifically in batteries there are two drivers.

<unk> owned per household are up mid single digits in the U S.

And an increase in the amount of time those devices are being used. Consequently, consumers are using more batteries, which has resulted in new buying patterns versus a year ago, including increased purchase frequency and spending per trip.

Consequently, consumers are using more batteries, which has resulted in new buying patterns versus a year ago, including increased purchase frequency and spending per trip.

As a result on a two year stacked basis without e-commerce the global battery category has grown by 2.9% in value and 3.7% in volume.

In the near term, we will see the category decline as it did in the three months ending August 2021, where it was down 6.9% in value and 5.3% in volume due to comping elevated demand from a year ago.

However, as we look to the long term, we anticipate the category two experienced flat to low single digit growth, albeit on a higher base as the category has increased in size due to consumers' behavior during the pandemic.

Within the category, our iconic brands remain well positioned. Our brands outpaced the category, resulting in a 2.2 share point gain versus last year, as we increased distribution in the US and internationally with share gains in those markets, representing 70% of our total battery revenues.

Our brands outpaced the category, resulting in a $2 two share point gain versus last year as we increased distribution in the U S and internationally with share gains in those markets, representing 70% of our total battery revenues.

Turning to the Auto Care category. Over the last five years, the Auto Care category has shown consistent growth. A trend that continued in the latest 13 weeks with category value up 3.5% versus year ago, and 16.3% versus 2019.

Over the last five years, the auto care category has shown consistent growth.

That continued in the latest 13 weeks with category value up three 5% versus year ago, and 16, 3% versus 2019.

The growth is being driven by consumers continuing the do it yourself behaviors established during the pandemic. Including higher levels of cleaning and renewed interest in car care as a hobby.

Including 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.

And a recovery in miles driven given the increase in personal travel.

All of this increased US household penetration to nearly 75% with a resulting buy rate that is up 20% as consumers are buying the category more frequently and spending more per trip.

As we look ahead, we anticipate the Auto Care category will settle in at low single digit growth. Once it has cycled through the COVID-19 related demand.

In the US we continue to be the market leader in this large and growing category driven by our armor all brand, which continues to have positive momentum due to the strength of our innovation and brand building activities.

As I mentioned earlier, our efforts to leverage our geographic footprint and expand our Auto Care brands internationally are proving successful.

While the categories are showing resilience, the macro environment in which we are operating is volatile, which leads me to the next important topic around operating costs. Costs related to commodities transportation and labor continue to rise.

Costs related to commodities transportation and labor continue to rise.

We saw a significant escalation in these costs during the fourth quarter and we expect these headwinds to continue throughout 2022, resulting in over $140 million of increased input costs versus 2021. In order to mitigate the impact of these costs, we have executed our planned pricing against roughly 85% of our business.

In order to mitigate the impact of these costs, we have executed our planned pricing against roughly 85% of our business.

In addition to raising prices to cover input cost inflation, we are also strategically redefined our battery pricing architecture to re-establish relative value across pack sizes, resulting in a progressive rate increase on larger pack sizes.

Currently, we are exploring the opportunity for additional pricing opportunities across our business. We expect these pricing actions improved mix management and cost reduction initiatives to partially offset the impact on our gross margin rate.

As you all know, in addition to the challenges companies are experiencing related to increased costs, the global supply chain network is under pressure from increased demand and pandemic related disruption.

Earlier this year, we made the decision to proactively build inventory to ensure we have product for the peak batteries selling season and upcoming Auto Care resets.

The change is in response to both the potential for supply disruption we have seen in recent quarters and the higher level of in transit inventory versus historical levels due to shipping delays and port congestion. As such, our inventory at the end of fiscal '21 was up 42% versus the prior year.

As such our inventory at the end of fiscal 'twenty, one was up 42% versus the prior year.

This action has given us flexibility to avoid disruption and ensure we service our customers as reliably as possible in this environment. With that backdrop, I'll turn to a high level overview of our 2022 outlook. The two headwinds I mentioned earlier the decline in demand to more normalized levels and inflationary cost trends have impacted our outlook.

With that backdrop, I'll turn to a high level overview of our 2022 outlook. The two headwinds I mentioned earlier the decline in demand to more normalized levels and inflationary cost trends have impacted our outlook in.

In fiscal 2022 organic sales will be roughly flat with Auto Care growth and pricing actions across our businesses offset by volume declines and battery as we comp prior year elevated demand in the first half of the year.

Despite our cost reduction initiatives and pricing actions, we expect to see gross margin rate of road given the escalating costs, resulting in year over year declines in EBITDA and EPS.

Given the macro environment, we are proactively exploring additional options to reduce our costs, enhance our mix as well as evaluate additional pricing to further offset these cost headwinds. Now, let me turn the call over to John to provide additional details about our financial performance and outlook.

Now, let me turn the call over to John to provide additional details about our financial performance and outlook.

Good morning, everyone. I will provide a more detailed summary of the quarterly financial results and then the highlights for fiscal 2021 before turning to our 2022 outlook.

As a reminder, we have posted a slide deck, highlighting our key financial metrics on our website. For the quarter, reported revenue grew 40 basis points with organic revenue down less than 1% versus the 6% organic growth in the prior year quarter.

For the quarter reported revenue grew 40 basis points with organic revenue down less than 1% versus the 6% organic growth in the prior year quarter.

Robust demand and distribution gains in Auto Care delivered 11.5% growth in the quarter, which offset the expected decline in battery. We expect these difficult comparisons and batteries to continue for the first half of 2022.

We expect these difficult comparisons and batteries to continue for the first half of 2022.

Adjusted gross margin decreased 70 basis points to 37.7%. The combination of $9 million in synergy benefits and the elimination of $19 million of COVID-related costs from the prior year did not fully offset inflationary cost pressures related to commodities transportation and labor.

The combination of $9 million and synergy benefits and the elimination of $19 million of Covid related costs from the prior year did not fully offset inflationary cost pressures related to commodities transportation and labor.

In addition, category mix impacted our gross margin as our lower margin auto care business achieved significant growth relative to battery in the quarter. Excluding acquisition and integration costs, SG&A as a percent of net sales was 14.3% versus 15.6% in the prior year.

Excluding acquisition and integration costs SG&A as a percent of net sales was 14, 3% versus 15, 6% in the prior year.

The absolute dollar decrease of $9.4 million was driven primarily by a reduction in compensation costs. In the quarter, we realized $9 million in synergies, bringing the total for 2021 to $62 million.

In the quarter, we realized $9 million in synergies, bringing the total for 2000 $21 million to $62 million.

We have delivered over $130 million of synergies related to our battery and Auto Care acquisitions, well exceeding our initial targets. Interest expense was $13.4 million, lower than the prior year quarter, as we are benefiting from significant refinancing activity over the past 18 months.

Well exceeding our initial targets.

Interest expense was $13 4 million lower than the prior year quarter as we are benefiting from significant refinancing activity over the past 18 months.

During the fourth quarter, we entered into a $75 million accelerated share repurchase program. Approximately 1.5 million shares were delivered in fiscal 2021, and we expect another 400000 shares to be delivered in the first quarter of fiscal '22. Bringing the total number of shares repurchased under the ASR program to approximately $1.9 million. Now turning to the highlights for fiscal 2021.

Ultimately one 5 million shares were delivered in fiscal 2021, and we expect another 400000 shares to be delivered in the first quarter of fiscal 'twenty two.

Bringing the total number of shares repurchased under the ASR program to approximately $1.9 million. Now turning to the highlights for fiscal 2021.

Now turning to the highlights for fiscal 2021.

As Mark mentioned, we delivered our full year 2021 outlook for revenue adjusted EBITDA and adjusted EPS. Net sales grew 10.1%, including organic sales up 7.3% as we experienced robust growth in both the Americas and international and across all three product categories, batteries, auto care and lighting products.

Net sales grew 10, 1%, including organic sales up seven 3% as we experienced robust growth in both the Americas and international and across all three product categories batteries auto care and lighting products.

Adjusted gross margin was down 100 basis points as higher input costs were partially offset by synergies and the reduction of COVID-19 related costs incurred in 2020.

Interest expense benefiting from significant refinancing activity decreased $33 million. Adjusted earnings per share increased 51% to $3.48. As higher sales, synergies and lower interest expense more than offset the higher input costs and adjusted EBITDA increased 10%.

Adjusted earnings per share increased 51% to $3 48.

As higher sales synergies and lower interest expense more than offset the higher input costs and adjusted EBITDA increased 10%.

At the end of 2021, our net debt was approximately $3.2 billion. Or 5.1 times net debt to credit defined EBITDA with nearly 85% at fixed interest rates, no near term maturities and an all in cost of debt below 4%. Our adjusted free cash flow for 2021 was $203.5 million.

Or five one times net debt to credit defined EBITDA with nearly 85% at fixed interest rates no near term maturities and an all in cost of debt below 4%.

Our adjusted free cash flow for 2021 was $203 $5 million.

The decline versus the prior year, primarily reflects working capital investments as we proactively invested in incremental inventory given the continued volatility in the global supply network and uncertainty around product sourcing transportation and labor availability.

Now turning to our fiscal 2022 outlook. As Mark discussed, our categories remain healthy and are showing solid growth when compared to pre-pandemic levels. As we enter fiscal 2022, we are benefiting from significant pricing actions, however input costs continue to rise.

As Mark discussed our categories remain healthy and are showing solid growth when compared to pre pandemic levels.

As we enter fiscal 2022, we are benefiting from significant pricing actions, however input costs continue to rise.

The outlook we are providing for next year reflects pricing actions that we have executed our plan as well as the assumption that our input costs remain at current levels for the full year.

Organic revenue is expected to be roughly flat with auto care growth and pricing actions across 85% of our businesses offset by declines in battery as we comp prior year elevated demand in the first two fiscal quarters.

We also expect reported revenue will be negatively impacted by foreign currency headwinds of $20 to $25 million at current rates. As we've talked about for the last couple of quarters, input cost, including raw materials, labor and transportation costs are rising rapidly and supply chain networks continue to be stressed.

As we've talked about for the last couple of quarters input cost, including raw materials labor and transportation costs are rising rapidly and supply chain networks continue to be stressed.

Last quarter I highlighted the potential for an additional 100 basis points of gross margin headwinds in 2022, if input costs did not improve. And as of today the trends have worsened.

And as of today the trends have worsened.

While we expect the absolute dollar amount of these rising costs to be offset by the pricing actions and cost reduction efforts that our team has undertaken, we now project gross margin headwinds of approximately 150 basis points based on current rates and assumptions.

These inflationary cost pressures combined with the anticipated volume declines in battery in the first half of the year are expected to result in adjusted earnings per share in the range of $3 to $3.30. And adjusted EBITDA in the range of $560 million to $590 million.

And adjusted EBITDA in the range of $560 million to $590 million.

As we look at our capital allocation priorities during this volatile macro environment, we will continue to invest in our businesses and brands for the long term, while returning cash to shareholders and paying down debt. Now I would like to turn the call back over to Mark for closing remarks.

Now I would like to turn the call back over to Mark for closing remarks.

Thanks, John. While 2021 was a solid year for Energizer and one that we are proud of, our focus today is on moving forward and working to further mitigate the cost headwinds we are facing, while ensuring our products are available to consumers around the world. With that, I will open the call for questions.

Thank you, we will now begin the question and answer session. To ask a question you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

We are using a speakerphone please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, we ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Kevin Grundy with Jefferies. Please go ahead.

In the interest of time, we ask that you. Please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

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

Yes.

Great. Thanks, good morning, everyone. Hey, Kevin. Hey, I just wanted to start on gross margin and just how you're currently thinking about the opportunity to take additional pricing. Mark, I think the decision was made I know you guys gave a lot of thought to wait until you got through the holiday period to implement some of the pricing increases that you intend to put into place on the look back was there any thinking perhaps you should move more quickly and to a greater degree to offset some of this? Maybe just comment as well on what you expect the competitive response to be from Duracell. And then, John, maybe just comment on what is embedded in your in your commodity cost outlook, then I have a quick follow up. Thanks for that.

Hey, Kevin.

Hey, I just wanted to start on gross margin and.

Just how you're currently thinking about the opportunity to take additional pricing Mark I think the decision was made I know you guys gave a lot of thought to wait until you got through the holiday period.

To implement some of the pricing increases that.

you intend to put into place on the look back was there any thinking perhaps you should move more quickly and to a greater degree to offset some of this? Maybe just comment as well on what you expect the competitive response to be from Duracell. And then, John, maybe just comment on what is embedded in your in your commodity cost outlook, then I have a quick follow up.

Thanks for that.

Sure, Kevin. I'll get started with that one I think as we've talked about before we were proactive in taking pricing last year. I would say the comment we made in the prepared remarks was around 85% of our business has pricing actions that we've already been working on against it. I would say 65% of those have been fully executed and a representative in the marketplace. The other 20% are further along and we will be rolling out as we get through '22. That 85% is included in the outlook that we provided today. To your point, Kevin we're continuing to look at the remaining 15% of their pricing opportunities there. Is there the need to go back on the on the 85% for additional rounds of pricing. That's something that we continue to look at on an ongoing basis. You are seeing in terms of battery pricing you are seeing shelf price go up.

Has pricing actions that we've already.

That we've already been working on against it I would say 65% of those have been fully executed and a representative in the marketplace.

20% are further along and we will be rolling out as we get through 'twenty two that 85% is.

included in the outlook that we provided today. To your point, Kevin we're continuing to look at the remaining 15% of their pricing opportunities there. Is there the need to go back on the on the 85% for additional rounds of pricing. That's something that we continue to look at on an ongoing basis. You are seeing

in terms of battery pricing you are seeing shelf price go up.

You're seeing it across the category not just with Energizer, but you're seeing with competitors in private label as well. Leave any pricing outside of Energizer's pricing to be spoken to by competitors and retailers, but that's what we're seeing in the marketplace. So that's an encouraging sign that you're seeing. The categories overall increase and then, John, maybe in terms of the gross margin and commodity input. Kevin, maybe I'll start a little bit September was a really volatile month as we were finishing up the year. So we saw an acceleration of some of these negative trends.

Leave any pricing outside of Energizer is pricing to be spoken to by competitors and retailers, but that's what we're seeing in the marketplace. So that's an encouraging sign that youre seeing on.

The categories overall increase and then John maybe in terms of the gross margin and commodity input Kevin maybe I'll start a little bit September was a really volatile month as we were finishing up the year. So we saw an acceleration of some of these negative trends.

Out of that going into '22 we expect compared to where we were originally, we expect commodities to be about 100 basis points worse than we were seeing back when we gave our outlook in August. And then freight also has gotten about 100 basis points worse relative to our P&L. So we're going to offset that absolute dollar impact with pricing and cost save initiatives, but we're expecting now about 150 basis points total margin erosion compared to the 100 that I saw. As we look at the full sort of impact the '22, saw a couple of points I would say, we are projecting cross pressures going into '22 about little over 300 basis points of material and manufacturing inflation, about 150 basis points of transportation of impact and then 40 basis points of labor.

50 basis points total margin erosion compared to the 100 that I saw and as we look at the full sort of impact of <unk> 22, a couple of points I would say, we are projecting cross pressures going into 'twenty, two about little over 300 basis points of material and manufacturing inflation about 150 basis points of transportation.

Of impact and then 40 basis points of labor.

I think I said 300, a little over 300 material in inflation costs. Got it. Thank you. That's close to 500 basis points in total. Okay.

Got it. Thank you that's close to a 500 500 basis points in total.

Okay.

Thank you both for that, just a quick follow up the EBITDA margin guidance implies about 19%. It seems like the gross margin commentary you guys had provided then the cost pressure there, the erosion in gross margin basically sort of flows through with little offset from SG&A and marketing spend.

Please just confirm if that's correct, number one. Number two, just how you're thinking about those areas of efficiency within SG&A and current marketing spend levels and then I'll pass it on. Thank you both.

Yes, in general Kevin it is going to flow down through the P&L I mean, we still expect on marketing spend to come in between that 5% to 6% probably at the low end of that amount. And in SG&A, we expect to be up a little bit as we head into '22 and that's really we had a number of cost savings initiatives that we've that we've put in place are offsetting inflationary pressures, but we've done a fair amount of integration and technology investments over the last couple of years, you're starting to see some of that depreciation come back into the SG&A line.

Marketing spend to come in between that 5% to 6% probably at the low end of that amount and in SG&A, we expect to be up a little bit as we head into 'twenty, two and Thats really we had a number of cost savings initiatives that we've that we've put in place are offsetting inflationary pressures, but we've done a fair amount of integration and.

technology investments over the last couple of years, you're starting to see some of that depreciation come back into the SG&A line.

The next question comes from Lauren Lieberman with Barclays. Please go ahead.

Great. Thanks. I was curious taking a longer-term view, I know, Mark, one of the things you've talked about is that the objective to rebuild gross margins. So if we look beyond '22.

I was curious taking a longer term view I know mark one of the things you've talked about is that the objective to rebuild gross margins. So if we look beyond 'twenty two.

How do you think about kind of the structural profitability of the business? I'm not asking you to project what happens with some of these material cost and so on. But if you think about building blocks or ability to rebuild margins. What are the key building blocks to be able to get there?

Im not asking you to project what happens with some of these material cost and so on but if you think about building blocks or ability to rebuild margins.

What are the key building blocks to be able to get there?

Key building blocks to be able to get there.

Yeah, Lauren, I think in the near term when we've seen the inflationary environment that we've seen initially our focus on making sure that we're dollar hole and then over time where there's rate erosion, we consider that to be a medium long term effort to continue to improve margin rate overall.

Theres rate erosion, we consider that to be a medium long term effort to continue to improve margin rate overall.

<unk>.

As the teams are digging into it, there's going to be opportunities as we get into a more normal operating environment to continue to drive efficiencies and cost savings. So I would say we've accomplished what we needed to for purposes of fiscal '22 by making sure that we [inaudible] dollars as it related to inflation. But longer term, there's additional opportunities for us to continue to drive efficiency that we're going to go after as soon as the operating environment permits it.

<unk> dollars as it related to inflation, but longer term, there's additional opportunities for us to continue to drive efficiency that we're going to go after as soon as the operating environment permits it.

Okay, that's great. And then just thinking about the intentional inventory build ahead of fourth quarter. I was curious as you look through '22 just your thoughts on inventory in 2022, will you want to continue carrying kind of a higher level of inventory than is normal? Or do you think this kind of work down in the logistics side of things gets a bit more predictable as you move to next year?

And then.

Just thinking about the.

Intentional inventory build ahead of fourth quarter I was curious as you look through 'twenty two.

Thoughts on inventory in 2000, <unk>, where you want to continue carrying kind of a higher level of inventory than is normal or do you think.

This kind of work down in the logistics side of things gets a bit more predictable as you move to your next year.

Yeah, Lauren, we're definitely being cautious as we go into '22 so we have built that inventory. I think as I break it down there's probably three things driving the balance right now it's just overall cost is higher so that's the cost of what we're carrying is higher. There's more product on the water and imports just because of supply chain issues. So that is something that we're dealing with. And then we've rebuilt that safety stock and with that so I would kind of look at those three buckets as kind of a third a third a third of the $200 million that we built up. Our expectations going into '22 is that we would like to pull back on that but obviously that's in the environment we're operating in so we're going to be thoughtful. about it but we do have plans to bring that back down.

I think as I break it down there's probably three things driving the balance right now it's just overall cost is higher so thats.

The cost of what we're carrying as higher there's more product.

on the water and imports just because of supply chain issues. So that is something that we're dealing with. And then we've rebuilt that safety stock and with that so I would kind of look at those three buckets as kind of a third a third a third of the $200 million that we built up. Our expectations going into '22 is that we would like to pull back on that but obviously that's in the environment we're operating in so we're going to be thoughtful.

about it but we do have plans to bring that back down.

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

Thanks. Good morning. Good morning Bill. Just maybe I'm over simplifying the cost pressures, but is it fair to say you paced. You have probably 85% of your portfolio, but the cost of kind of crept up further over the past two or three months and while you're going to pass on additional prices. The peak season for batteries is in the next next few months and so you won't in this fiscal year be able to fully capture it. Is that the best way to look at it? Over the long run we look at this longer than just quarter to quarter, but that's fair, I think costs have crept up more than they were at the time we announced our battery price increase back in the summer.

Good morning Bill.

Just.

Maybe im over simplifying the cost pressures, but is it fair to say.

Placed.

Price, 85% of your portfolio, but the cost of kind of crept up.

Further over the past two or three months and while youre going to pass on additional prices. The peak season for batteries as the next next few months and so you won't in this fiscal year be able to fully capture it is that the best way to look at it.

Over the long run we look at this longer than just quarter to quarter, but thats fair I think costs have crept up.

More than they were at the time, we announced our battery price increase back in the summer.

And that will go back into the equation that we look at in terms of is there a rationale to take additional pricing in any parts of our portfolio, but your point is right, which is we're in the midst of the peak season for batteries and so any pricing that we've taken will have to be sufficient for now.

We'll have to be sufficient for now.

Okay, and then on the the supply chain issues. I guess when you're talking about freight in courts, are we primarily talking about auto care because the majority of your of your batteries at least in the US are made in the US. So just trying to understand. If that's the issue or if there are some other issues that might be missing.

When you're talking about freight in courts are we primarily talking about auto care because the.

Majority of your of your batteries at least in the U S are made in the U S.

Trying to understand.

If that's the issue or if there are some other issues that might be missing.

I would say it affects the supply chain congestion effects both of our businesses, we do import products for our battery business in addition to auto care. So container rates availability of ocean freight cost of ocean freight all play into account in both businesses. And then over the road transportation rail transportation, packaging capacity availability of certain raw materials all of that plays into account.

<unk> packaging capacity availability of certain raw materials all of that plays into account.

And I would say impacts batteries as much as it has auto care. I think our teams have done a phenomenal job getting us in a much better position this year than we were going into peak season for battery last year. And so we feel really good about where we are. Obviously to John's point, our inventory levels are higher than we would like them to be, but I think that was a prudent step earlier in the year that we took in as we go into next year we'll work those down over time, but do so cautiously.

getting us in a much better position this year than we were going into peak season for battery last year. And so we feel really good about where we are. Obviously to John's point, our inventory levels are higher than we would like them to be, but I think that was a prudent step earlier in the year that we took in as we go into next year we'll work those down over time, but do so cautiously.

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

Yes. Good morning, everyone. So I was hoping you did announce the 85% and I appreciate Mark that obviously, you can't take pricing in the peak season, but just curious the other 15%.

The peak season, but just curious the other 15%.

What are you embedding into the fiscal '22? Is that a function of price letters that you believe are appropriate? Or those are the items that are not being pressure as much as before? And just also a follow up on a clarification of your guidance. The 150 basis points implied gross margin reduction for fiscal '22, is that including spot prices in some assumptions. So can you clarify if that's mostly spot prices are you also assuming some decline in the backend of the fiscal? Thank you.

Price letters that you believe are appropriate.

Or those are the items that are not being pressure as much as before? And just

also a follow up on a clarification of your guidance.

The 150 basis points implied gross margin reduction for fiscal 'twenty, two is that including.

Yes.

spot prices in some assumptions. So can you clarify if that's

mostly spot prices are you also assuming some decline in the backend of the fiscal? Thank you.

Some decline in the backend of the fiscal thank you.

Andrea. I'll get started and then I'll kick it over to John for kind of the assumptions built into the cost pressures Your question on pricing, the pricing on the 85% of the portfolio that is either been executed or as an advanced planning or execution is embedded in the guidance that we provided. Pricing on the remaining 15% as well as pricing additional pricing on the 85% has not been included. I would say we went after the largest margin pools in the largest geographies first. We also went after the areas that we are getting impacted the most in our pricing approach.

It started and then I'll kick it over to John for kind of the assumptions built into the cost pressures Youre question on pricing the pricing on the 85% of the portfolio that is either been executed or as an advanced planning or execution.

is embedded in the guidance that we provided. Pricing on the remaining 15% as well as pricing additional pricing on the 85% has not been included. I would say we went after the largest margin pools in the largest geographies first. We also went after the areas that we are getting impacted the most in our pricing approach.

But we will continue to mine the rest of the portfolio and the 15% and then double back on the remaining portion to see if there is any additional pricing we can take. In the event that we do take pricing on on that part of the portfolio. It would be in addition to what's provided in the outlook and John on the gross margin. Yes, and Andre on the gross margin.

We updated our plans to the current spot rates and then we assume that those stay consistent through the entirety of 'twenty two so theres no improvement or worsening anticipated in our plan for the for the year.

The next question comes from Nik Modi with RBC capital markets. Please go ahead.

Thank you good morning, everyone.

Just follow up on that last question and I'll ask my other question, but just when you think about your cost basket and think about some of the kind of geopolitical macro dynamics that are at play.

Where would your bias in terms of where it can be coffee been ahead as we move forward because obviously using spot is fine because it's hard to forecast. These things I just wanted to get a sense on the underlying drivers of some of these cost increases and if you think that some of those.

Issues will subside as we get deeper into the year and then the broader question is just online while market. If you can provide any context on kind of how the business is doing online.

Consumers are very sticky in this category right now are generally across all CPG just wanted to get an understanding of how much visibility you have and changing a business here.

Yes.

And I'll have John layer in any additional color on this one I think in terms of.

The way, we approached our assumptions going into the year from a geopolitical just macro environment. As we just decided we were going to assume that the current environment persists through 'twenty two to John's point, no improvement no worsening and felt like trying to get overly predictive on either one of those was going to be counted.

Productive given the frequency and the speed with which things change on E. Commerce, we continue to see consumers migrate to ecommerce no surprise, there coming out of the pandemic it is sticky.

Consumers are going back there frequently for purchases.

Robust growth rates on the battery side, we continue to be the branded share leader we've mentioned previously.

We no longer providing overall category information, but we're confident we're the branded share leader in that space and auto care, we're making great inroads with our auto care portfolio a lot of emphasis for us on appearance, where we're showing healthy growth rates and continuing to drive that business, which is embedded in the overall growth rates with auto care, which was up seven.

17% for the year, so that we couldnt be happier with the way of the auto care business is performing.

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

Hi, and that was actually a perfect lead in to my question, which was just on the auto care business.

On the 17% growth obviously, we've heard a lot about how people didn't go on normal vacations. This year, they drove places et cetera et cetera.

So there's been a spike in sort of everything auto related but your business has been especially strong I guess as you look into next summer, which I know is a lifetime away, but can you talk about.

Number one, kind of any plans you have to sustain that growth. Do you think there's incremental distribution opportunity? Is there particular innovation that's coming out? Just because that's going to obviously be a tougher comp as you look into I guess the back half of your fiscal year.

That's going to obviously be a tougher comp as you look into I guess the back half of your fiscal year.

Sure, Wendy. That business is doing very well for us I mean, if you look at the aggregation of the four categories that we participate in. It was up 3.5%.

Our that business is doing very well for us I mean, if you look at the aggregation of the.

The four categories that we participate in.

It was up three 5%.

For the three months ending in October so that shows the strength that's continuing within those four sub categories over the two year period, it's up 16%. So really strong growth. We're going to continue to do what we've done thus far which is invest in innovation, invest in brand building activities. In the US as we've talked about before.

It was a fairly mature business in terms of distribution, but we've still been able to get incremental distribution in club and home center, which is driving some of the nice growth you've seen in our business I would say as we get into as we've gotten into this year and next year Youre going to see a lot of growth coming out of the international auto care growth plan, which is off to a great start.

And so we expect auto care growth year over year in our 'twenty two outlook and so we're going to continue with the momentum that we have I would say structurally youre seeing consumers Youre seeing household penetration go up youre seeing consumers continue to engage in do it yourself activities, we're going to watch those consumer habits to see how many.

Are those truly are sticky and how many of them may revert back to the way they were pre pandemic, but we feel very bullish about that business right now, particularly when you layer on the ability for us to accelerate growth through our international platform.

That sounds great.

And then I actually had a follow up and I might have totally misheard. It. So I apologize if that's the case, but I think when you were talking about pricing you talked about doing something different with either your large packs. All of this is on the battery side.

Did I hear something different because I'm just curious if there is maybe more price pack architecture thinking creeping into the battery category and just kind of what youre seeing competitively if youre doing anything maybe different than any other branded guys.

You did not hear that wrong in fact, as we were going into pricing with the battery business back in the summer we decided to take a look at some of the.

Price pack disparity and attempted to address that through a progressive price increase so as pack sizes got larger we took a larger price increase to help reset some of the disparity that was existing within our business and the category and so you are seeing right now pricing on shelf and I'll just speak in general terms.

And the 410 packs up roughly 7% on shelf pricing.

Pack sizes around the 16, 20, 24, it's roughly between between 10 and 12% to what we're trying to do is address that value equation. And if you recall early on in the pandemic. We were seeing some gross margin erosion from pack size trade up and we're just trying to address that through our pricing actions as well as encouraging retailers who ultimately set shelf price to follow suit. In terms of what competition will do, I'll defer to them in terms of how they want to approach it but that's the way we are approaching the category.

our pricing actions as well as encouraging retailers who ultimately set shelf price.

Encouraging retailers, who ultimately set shelf price.

to follow suit. In terms of what competition will do, I'll defer to them in terms of how they want to approach it but that's the way we are approaching the category.

The next question comes from Rob Ottenstein with Evercore.

Great. Thank you very much. Wondering for starters, if you can remind us on the battery side, about roughly how much or what percentage of your volume is sold on promotion.

Wondering for starters, if you can remind us on the battery side.

Roughly how much or what percentage of your volume is sold on promotion.

And to what degree over the next 12 months the promotional calendar is locked in and is there any kind of flexibility that you can build into the promotional calendar given the margin pressures.

I'll ask or answer that question generally I would say what we are doing there is full.

Full price displays and then theres pricing promotion and obviously in today's demand environment, we're going to take a hard look at pricing promotion and make sure that.

We can pull back wherever.

We're able to I think youre going to continue to see as mine that the trade investment spending along those lines to make sure that we can achieve any optimization. We can in some of the data that you get full price displays get picked up as promotional items and they're not there's not a price reduction involved in that.

Okay.

And can you give us a rough sense of what percentage of.

Volume is sold on promo.

Okay.

But let's let's follow up with you on that one.

Okay.

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

Hi, I just have one.

Given the volatility in the market.

Would you continue to pursue M&A. The last couple of times. This question and ask you guys have said you would still be active but given the situation, which is so dynamic I was wondering if that's changed your thought process there. Thanks.

I would say we have an emphasis right now I think we're recognizing with premium in terms of our overall leverage levels that there is a premium on paying down debt. We will still leave all of the levers from a capital allocation standpoint open.

Dividend buying back shares and paying down debt with an emphasis on paying down debt to try to bring our leverage levels down.

We will continue to investigate M&A, but I think the filter for us executing M&A in terms of the size would have to be fairly strict.

So I would I would emphasize debt pay down for us for the foreseeable future, but still kicking around M&A as it becomes available.

Perfect. Thank you.

Yes.

As a reminder, if you have a question. Please press star one to be joined to the queue.

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

Hi, I know you said a couple of questions in terms of just the auto care and promotion, but if.

If we look back at last year, it was pretty choppy in the first half I'm wondering if there any major changes in the seasonality or timing for this year.

We're back to more of a 2019 cadence there last year, a good cadence to look at.

Okay.

I think from an overall cadence perspective, I wouldn't think there's not any material deviations from last year.

Okay. So no like shipments moving from <unk> into <unk> or vice versa. Okay. Thank as what happened last year or something I think I think we saw AC kind of move around in the second and third quarter last year, it should be a pretty normal pattern.

Okay. Great. Thank you you asked my questions have been answered.

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

Thank you all once again for joining our call today and your ongoing interest in Energizer I hope everyone has a great day.

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

Q4 2021 Energizer Holdings Inc Earnings Call

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