Q2 2023 Energizer Holdings Inc Earnings Call
An estimated market share discussed on this call relates to the categories, where we compete and is based on Energizer is 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 pertained to energize this fiscal year and all comparisons to prior year relates to the same period in fiscal 2022.
With that I would like to turn the call over to Mark.
Thank you John .
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 risk.
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.
While also delivering organic topline growth of two 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 was up two 7% and volume is down five 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.
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 and both volume and value driven by increased device ownership usage and pricing.
For example in the U S 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 remained strong as consumers are selecting our brands as we gained seven share points globally behind robust performance in leading markets such as the U S, Germany and Canada.
And our auto care business we.
We have started the peak season with solid results.
The drivers of category demand.
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.
Being nearly 25% larger than pre pandemic levels.
During the quarter the category grew four 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 <unk>.
New products launched this year include a ceramic 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 and 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 influenced the choices, they make including where they shop the brands they choose and the pack sizes that meet their needs.
Finally as.
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 is 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.
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 cost, 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 in 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.
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 and as we look ahead, we are confident in our ability to navigate and admittedly uncertain macro environment that confidence stems from the actions we have taken in the past couple of years and our digital transformation to improve both visibility across the enterprise and to leverage data and analytics to capture opportunities.
<unk> and mitigate risks.
These transformational efforts combined with operational savings from momentum our positioning energizer as a much more agile and responsive organization in a dynamic environment now.
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 two 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 two 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 <unk> 64 per share.
On a currency neutral basis, adjusted EBITDA and adjusted earnings per share were $149 $9 million and 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 five six times, a reduction of half a turn year over year.
Our debt capital structure remains in great shape with a weighted average cost of debt of around four and three quarters percent 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.
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 build to support network changes.
We continue to expect our initiatives to deliver over $100 million and 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.
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 tailwind, 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 our 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 in the year.
And finally at current rates, we expect the currency impacts on earnings to be neutral over the remainder of the year relative to fiscal 2022 with.
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 mixed 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 $650 million and adjusted earnings per share of $3 to $3 30.
Now I would 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 to ask a question you May Press Star then one on.
John .
To withdraw your question you May Press Star then two.
Also please limit yourself to one question and one follow up at this time, we will pause momentarily to assemble our roster.
Our first question comes from Kevin Grundy with Jefferies. Please go ahead.
Great. Thank you both.
Hey, everyone. Good.
Good morning, Kevin wanted Kevin.
First question just on the <unk>.
<unk> organic sales growth in the back half of the year it sounds like Youre expecting 3% to 5% just maybe a little bit more color on the breakdown of pricing and volume and then how you expect that to sort of phases to the P&L also related to Mark you made a comment on some distribution gains in North American International maybe just a little bit on.
Quickly where those are coming from.
And also whether that was contemplated in your initial guidance or whether thats sort of a potential upside and maybe youre seeing a little bit better about where you are in the range relative to when you initially provided in a a follow up on gross margin.
Sure Kevin I'll start with the second one and I'll turn it over to Jeff for some of the phasing one I mean in terms of the distribution that was in auto care reference and it was a little bit of expanded distribution in the U S 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.
The original outlook that we provided in November and John do you want to yes, Kevin.
Kevin for our P&L for the back half of the year projection in batteries assumes we still see negative volumes in Q3 and flat to slightly positive positive in Q4, we're going to combine that with.
The continued benefits of pricing to get that 3% to 5% topline 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 are up 225 basis points.
Now so maybe just.
When you kind of pull all the pieces together between pricing 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 if I heard it correctly I thought the commentary was <unk> <unk> gross margin was to be flat sequentially or close to flat sequentially with the second quarter and if thats. The case that would imply sort of a.
Stepped down quite a step down I guess year over year, maybe just some cleanup there on the gross margin then I'll pass it on thank you Glen.
Glad you called it out Kevin we did want to talk about that a little bit. So when we look at the I'll just start with gross margin in general top priority for us and we've really made tremendous progress there. So.
300 basis points. This quarter was a really good accomplishment as you saw it was really driven by pricing and momentum.
We were offsetting the input costs that we're still up a headwind in the quarter in batteries, we saw that headwind really driven by some of the input costs lithium <unk> zinc and steel and auto care. It was still our 134, eight which is at refrigerant product in silicone.
And then both businesses <unk> seen impacted by increased energy and labor costs, which really impacting conversion cost for us.
What we've seen is those input costs have stabilized.
I would say that at market, we've had some positive some negative but really flat we're expecting the third quarter margins as you mentioned to be roughly consistent with the just completed second quarter, but we've also seen a lot of improvement in ocean freight and that has happened over the first half of the year, that's flowing through inventory right now and we expect to really see material improvement in the fourth quarter so different than last.
Year, where we saw a big bounce up in the third quarter and then a drop off in the fourth we're expecting pretty consistent this year, so you're going to see third similar to second quarter, and then you're going to see fourth quarter really end up in a nice spot as we finish out the year.
Got it okay very good I'll hop back into queue. Thank you guys. Good luck.
Kevin.
Our next question comes from Bill Chapell with <unk> Securities. Please go ahead.
Thanks, Good morning good.
Morning, Bill can you just kind.
I had a question on on Pos on battery volumes trying to understand kind of how elasticity works and how it should work through the remainder of this year because I would think on one hand you have.
If there's sticker shock.
Our people are trying to save money to go more towards value packs and multi packs that drive actual volumes up but at the same point I don't know if youre seeing just.
And exacerbated.
Volume drop right. After the holidays as people are pantry de loading before they buy a new battery, so and how that would work through the remainder of the year, so any kind of color around that.
The consumer takeaway trends youre seeing would be great.
Well I'll start and then maybe if I don't touch on something of interest. We can you can ask a follow up on it I think as you look at battery category globally and a lot of this will be driven at the market level, depending upon when pricing and different dynamics that may exist in that market, but if we look at it from a macro perspective the pricing.
Really started to flow into the category because of all the inflation that the manufacturers were experiencing last March April timeframe is when pricing started to move up again in the category you started to see the elasticity impact hit at that time, and so globally. We just started it kind of low double digits from a volume standpoint.
And then you work your way back.
Roughly to where we are now which is in that mid single digit range. We expect that trajectory to continue in the latest four week data in the US For example is that volumes down just over 3% I think it's three 3% in the latest four week data and so youre seeing that trajectory flow in a manner, which is consistent with what we would expect.
Higher price increases now as you can appreciate this is a different environment than what prior price increases have been executed under insight do you think there is a portion of that elasticity impact that has been exacerbated by the macro environment from consumers, particularly once we work our way through holidays. So in in calendar Q1.
One you started to see.
Tumors reacting more cautiously within the battery category itself, they're continuing to value sort of the premium performance brands and Thats continuing to carry the day, we are continuing to gain share with our Energizer brand, which is great that as we've taken pricing in the category, we have been able to keep the.
The brand preference that existed prior to the price increases so I would say all on track from an elasticity standpoint.
A little bit of a pressure from the consumer.
As we deal with the macro environment, but we are on track to achieve kind of the elasticity metric that we put in place when we are analyzing pricing last spring.
Got it and I guess I will just follow up on that on the volume.
Would you also consider this quarter to be kind of the last.
Tough comp with with with Covid because this time last year, there were still a fair amount of consumers at home with Omicron and it was kind of a changing environment.
It seemed to have opened up as we got to the summer and so I would think that that has some some impact on the year over year comparisons as well, but I could be wrong, but I think thats a great point I think anytime youre looking at a comp period over the last three years youre dealing with a multi variable situations. So you had increased COVID-19 demand that drove.
<unk> <unk>.
Difficult comp periods as well as growth in certain time periods, you had inflation and increased pricing not just within our category had it across the store you have a tougher macro backdrop right now.
So I think anytime youre comparing period over period, you have to take into account likely more than one variable to your point with there is some carryover that existed in the prior year period in Q3 likely a little bit but its been diminishing as we've worked our way through it. So there may be a little bit, but I think most of the impact will become from.
As we work our way through pricing.
Great. Thanks, so much.
Thanks, Bill Thanks Bill.
Our next question comes from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you everyone and thank.
Thank you operator, and Michael Mooney.
Just coming back to Bill's question I think you quoted also.
It has happened with the carrier overall globally.
Particularly in batteries I think is that in the prepared remarks to 0.7% up.
<unk> volume.
Now I believe five 5%.
So like.
Just thinking of the puts and takes between pricing and mix.
And also the comparison of volumes.
Does the comparison I believe the comparison for volumes and going to the third quarter gets easier for batteries.
And it gets tougher for out of cash. So you can kind of like talk to us on that on a sequential basis.
And then related to that the price mix.
And how you are seeing I believe we heard from pretty much.
Everyone that reported so far that we are seeing consumers going to more value in terms of sciences, a fax and somewhere in the middle and we've done obviously, you've done a great job.
Kind of sweetening, the mixing that way in premium <unk> and <unk> can you talk to that as we go through the end of the year on why do you expecting where youre seeing and just on your commentary regarding consumer spending to become a little bit more price conscious. Thank you Andrew.
Andre 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 tax as you are seeing some shifting that's occurring depending upon which retailer which channel.
You are 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.
Increased pack size purchase in order to get a better perceived value, but again still continuing to stay with premium brands. So we to your point, we have continue to premium is the.
Category and trade people up in Energizer continued with our share growth.
But that really gets down to an individual consumer level of how to achieve the value that they're seeking.
Great News is we have a broad portfolio of brands, but also pack sizes to meet them wherever they want wherever they want to go within the category.
John on volume of value Andrea.
We still expect to see volumes improving throughout the back half of the year in battery 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 topline growth, 3% to 5% and then on the auto.
So we're still expecting to see low to mid single digit volume declines all the way through the end of fiscal 'twenty. Three and then also we will 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 on the price mix.
Price mix getting the mix getting even better and then the pricing rolling over like in terms of the timing of pricing Thats something that obviously is happening do you have any one you signing Tony.
Big price increases.
So how should we cannot take credit of course, they've done tremendously well from from a margin standpoint, and I. Appreciate all the breaches and puts and takes with 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 modified function.
The easy comparison.
Andre I think.
Embedded in your question is what we expect to happen as we anniversary the price increases is that youre going to start to see volume and value conversion value of volume come back.
In Q4 as John mentioned.
Ultimately work the way back to flat and then work off a new base from there that is historically consistent consistent with our historical elasticity patterns that we've 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 youll start to see volume work its way back to it to a new baseline.
Q4, yes, Andrew the only thing I'd add to that is the price mix portion of it we do expect to see declining impact obviously, we had 13% tailwind this quarter, it's not going to be that high it'll still be positive in the third quarter and then 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 all.
Our next question comes from Robert Austin style 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.
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 ladder 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 as Ryan back, helping you there as well thank you.
I think the short answer to your questions. Robert is yes. It is helping us a great deal I think the we're extremely happy with the acquisition of the Rayovac brand, it's given us the ability to be even a better supplier to our retailers. It gives us another brand in our portfolio to meet their needs It gave us.
Extra manufacturing capacity in order to be able to address, particularly the surge demand which occurred during the pandemic.
And it allows us to be a better supplier a more efficient supplier and continue.
To drive value for the retailers, depending upon what their needs may be as you've seen from an overall share perspective, it's certainly Madison.
Healthier business from a share perspective, because we've continued to gain share consistently over the last couple of years, we've been able to consistently trade up into the Energizer brand, which is which is a great trade up.
<unk>.
From our perspective and as a result, I think it's been a hugely successful acquisition for US, particularly online now what we've been able to do as we as you know we had.
A fairly mature e-commerce effort against our Energizer brand when we acquired.
The business, we've been able to fold that in and we've been able to continue to use our platform to drive rayovac sales online you've seen some shifting going around within Amazon in terms of value and premium brands, but we've continued to emphasize the energizer brand online as well, but rayovac certainly plays a role and as consumers migrate.
The more value end of the equation, we're going to be there and have great offerings for them at that level as well.
Yes.
Yes.
Thank you very much.
Thanks Robert.
Next question comes from Hale Holden with Barclays. Please go ahead.
Hi, Good morning, I just had one question the $100 million in debt that you guys pay down in the quarter or was that kind of a term loan or apply tomorrow.
It was all term loan hail.
Great. Thank you so much thanks.
Our next question comes from Carla Casella with Jpmorgan. Please go ahead.
Hi. This is I think you partly answered this but just to clarify.
Given the weather in March was there how much of your sales would you say might be pull forward.
Just given timing of kind of storms and the weather season this year versus last.
Yeah 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 SaaS <unk> and retailers over Q2.
Certainly warmer weather earlier hotter weather and 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.
The weather continues obviously that will only help help that business going forward.
And batteries or about March there was a lot of unseasonable storms or was there any pull forward or do you think in the battery business.
Well I mean, what you had seen 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 impressed over some path.
Potential litigation suits and I'm. Just curious are you indemnified for anything that happened before year 2019 acquisition of the batteries are an indemnification agreement with spectrum.
Okay.
I want to make sure.
I want to make sure I'm answering the question.
In terms of what Youre asking are you referring to the recent litigation that was filed.
Yes, I think I saw the recent litigation about the <unk>.
Complaint about that versus the Sherman and the California Cartwright Act about price fixing.
And I mentioned 2018 and.
Alright.
False soon.
No I think because thats active 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.
They're okay.
For a period that you didn't own the batteries I'm assuming UBS. Please go ahead.
When you bought it if there was an agreement and that agreement with them I'm, sorry up provision in the agreement with spectrum.
Yes, I don't want to get into the specifics of the litigation I think to the extent that we had we have any recourse under any agreement with spectrum.
Deal with them separately within the spectrum acquisition, but for now I think we ought to.
Respond within 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 from me.
Probably for Mark just on advertising.
Marketing levels. How are you currently thinking the environment has clearly.
Gotten much better from a cost perspective from an FX perspective, due to the extent that you're able to succeed on the gross margin outlook.
Whats your bias towards reinvestment I know you are trying to accelerate the topline appropriately trying to restore gross margin, but also concurrently trying to raise advertising and marketing levels and I just wanted to trying to get your sense of where you are now to the extent the company does exceed on gross margin gross profit how youre thinking about potential.
For reinvestment and I have a quick follow up on promotions. Thanks.
Sure Kevin I think we always look to stay within that 5% to 6% range.
If I take a step back.
We're really pleased with the first half of the year, we came into the year with really three key priority is gross margin improvement free cash flow generation paying down debt. We've made phenomenal progress against all of those looking ahead project momentum is accelerating we are going to continue to achieve savings there.
And the two year program and a high degree of confidence in $80 million to $100 million. As we are if we're able to accelerate things and we do see opportunities to reinvest.
I think thats always something we will look at doing in order to continue to drive top line growth I think right now obviously, we're controlling what we can within the P&L.
And the caution is around the consumer and to the extent that we can invest.
And have the flexibility to invest to reach those consumers to be able to drive.
Consistent topline growth, we will absolutely look at that.
Got it and then a quick follow up Mark you just don't promotion levels as I look across as I look at the Nielsen data.
Batteries is actually one of the heavily promoted at least in terms of the degree of the increase year over year.
And you guys seem to be leading that relative to your key competitor and even ahead of private label and I just wanted to kind of get your sense of the use of promotion as a tool to sort of drive demand.
We are relative to pre pandemic levels, and how you're sort of thinking about that because the gross margin improvements it looks quite good. Despite the fact that the promotion is seemingly ramped here in the U S. So just some thoughts there.
And then.
Thank you very much.
Sure Kevin on that one I would say, we try to look at the promotional cycles and longer terms, a 52 week cycles.
And the most recent time periods, you've seen an uptick year over year relative to price promotion and this is always going to be a category, where there is 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, which you've seen in the most recent time period is that from a category standpoint, it's around 11, 5% energizer, 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 is promotional activity would be connected to distribution gains that we made over that time period. So there hasnt been a shift in our philosophy.
You're about promotion, we still continue to think it is a lever that we have we need to pull in order to stay connected with consumers, but it is not one that we need to.
To pull because battery category as you know is relatively inelastic and theres no need to overly promote in the category.
Okay very good I appreciate you taking the follow up guys. Good luck.
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 is for.
For batteries and that category is very weak I was wondering if <unk> had initial discussions with your retail partners about how they may be planning their holiday sets and whether that could have any impact on your fourth quarter revenues or first quarter of next year.
Or anything in terms of what we're aware of for the balance of this fiscal year. It's been built into the outlook that we provided today and as we get into sort of Q1.
Next year, we'll provide an update of that in November I would say the benefit for us in the battery category. This is David.
Very fragmented device universe, which use our batteries certainly if there's negative trends.
One subcategory of those devices frequently there is an increase in other devices that will offset those so we have a fragmented enough base that there is not.
Really concern.
Overall amount of concern in any one area, but I would say we can weather.
We can weather the economic.
Conditions that we're experiencing now because the category is a need based product and it's relatively in elastic.
Okay, and then secondarily from C. When you laid out your financial priorities for the year and 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 wherewith leverage needs 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 a half a 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 that leverage level to something like four below.
Again, thats 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.
Down that is our primary objective M&A is not something that we're looking at is 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 material M&A target.
Great. That's all very helpful. Thank you.
Our next question comes from Brian .
Emera with Canaccord Genuity. Please go ahead.
Hey, good morning, Congrats on the strong results and thank you for taking the questions.
So in Q1, <unk> and several CPG companies called out Destocking at retailers with this quarter, we really havent heard that as much are we through the destocking in euro opinion, 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.
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 there.
Inventory levels at home have decreased as they buy less frequently than <unk> seen them.
Many of the shop more cautiously as inflation is that's 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 in our outlook contemplates kind of status quo with where we are now and not coming all the way back for the balance of the year.
Yes, I would just to 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 more type 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.
Our next question comes from Andrea Thanks, Kara with Jpmorgan. Please go ahead.
Thank you for taking my follow up so the one.
On this prior question also on the volume.
The sell out and sell in so you should take all channels globally I think the comparison you gave was.
Five 5% volume decline in the category.
Then you called out today with prepared remarks, and then if I'm doing my math right here and you just gave 50 to 100 basis points for the full year.
So if you and it's a big number one are you tracking volume share as well and it's not.
I think the math would imply that you had about 300 to 400 basis points declining in from Destocking. So in other words, the war about 8% to 9% on a actually a 9% 10% decline in volume across all across both categories.
And any batteries you had the category down as long as by $5. Five so is that right that in this quarter, probably you had.
Number one volume share decline accelerating and if not why and it's just like the destocking being stronger now in this quarter than it was.
Just trying to make on Si and then part of the question just on the on the pricing of private label I understand that some private label manufacturers have a pass through.
Then may be coming up in the next two quarters given that commodities are rolling over so when do you anniversary that some.
They have to actually reduce prices are you seeing that happening.
Anything of that sorry, thank you.
So Andrew on the first point when I was talking about the volume impact that occurred in the first quarter. So I wasn't.
Saw some bounce back in the second quarter, but really attribute the midst of the first quarter. So that's not a <unk>.
Go forward, our second quarter statement on the volume differential if I'm catching your question right.
I'll turn it over to Mark on the private label question.
On private label Andre globally, it's flat.
A small increase in the U S, 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 Levine for any closing remarks.
Thank you for your interest in Energizer and for joining the call today hope everyone has a great rest of the day.
Conference has now concluded. Thank you for attending today's presentation you may now.