Energizer - Q3 2023

Transcript

Operator (participant)

Good morning. My name is Nick, and I'll be your conference operator today. This time, I'd like to welcome everyone to Energizer's Q3 fiscal year 2023 conference call. After the speaker's remarks, there'll be a question and answer session. As a reminder, this call is being recorded. I'd like to turn the conference over to John Poldan, Vice President, Treasurer, and Investor Relations. We now begin your conference.

Jon Poldan (VP, Treasurer and Investor Relations)

Good morning, welcome to Energizer's Q3 fiscal 2023 conference call. Joining me today are Mark LaVigne, President and Chief Executive Officer, and John Drabik, Executive Vice President and Chief Financial Officer. A replay of this call will be available on the investor relations section of our website, energizerholdings.com. 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, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC.

We also refer in our presentation to non-GAAP financial measures. A reconciliation of non-GAAP financial measures to comparable GAAP financial measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis, and estimates we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year, and all comparisons to prior year relate to the same period in fiscal 2022. With that, I would like to turn the call over to Mark.

Mark LaVigne (CEO)

Thank you, John. Good morning, everyone, and welcome to our Q3earnings call. There are three key messages I would like to reinforce in my remarks today. First, when we laid out our priorities for fiscal 2023, we highlighted three strategic areas of focus: restoration of gross margin, the return to healthy free cash flow generation, and reduction of debt. Q3 into the year, we have solidly delivered against all three. Second, the demand environment has not progressed as we expected, and while we are tempering our top-line outlook for the year, we are reaffirming our original ranges for both EPS and EBITDA, albeit at the lower end, which has been made possible by the terrific work from the organization to sustain the earnings power of our business.

Third, we are making tremendous progress under Project Momentum, with the savings and cash flow generated in the first Q3 exceeding our expectations. We have also identified a substantial pipeline of incremental initiatives, which will be executed over the next two years. As a result, we are increasing our savings expectation by $50 million, for a total program savings of $130 million-$150 million by the end of fiscal 2025. Let's dig into the progress we have made. Gross margin recovery has outpaced our expectations through the first Q3 of the year, and we are on track to achieve a gross margin of approximately 40% in the Q4, which would represent a full year improvement of nearly 200 basis points.

The over-delivery in gross margin is primarily driven by Project Momentum, which we expect to deliver between $45 million-$50 million in savings, an increase versus our previous forecast of $30 million-$40 million. We are not yet back to pre-pandemic levels, but we have come a long way this year and set ourselves up for further progress in 2024. We have also generated free cash flow of over $260 million year to date while absorbing the cash outlays required by Project Momentum. Finally, we have paid down $200 million of debt in the first Q3 and are on track to reduce leverage by over 0.5 turn from our peak in fiscal 2022.

While we have made significant progress against many of our key objectives, this year has also presented us with challenges as consumers manage through the effects of high inflation, rising interest rates, and economic uncertainty. Specifically in batteries, consumers continue to prioritize the category, but after those critical needs, such as food, fuel, and shelter. While volumes continued to improve in the quarter, they did not recover as quickly as anticipated. Value growth, which was largely driven by pricing, has slowed as we lap those price increases. Some of the factors which have influenced the volumetric trends we have been seeing are as follows: First, a slowdown in the U.S. housing market, driving lower foot traffic at retailers who benefit from home sales, which is a key channel for batteries.

Second, a shift in consumers' engagement with devices from both buying new and using existing devices, to spending more time and dollars on experiences like travel. Third, consumers across all income groups, changing their behavior to offset their reduced purchasing power, including reducing their household inventory, which is contributing to a 1% reduction in purchase frequency. Our` brands, however, have outperformed the category, marked by continued global share growth in the latest three months. Looking ahead, we expect category volumes to continue to improve, with value more closely tracking volume as price increases are lapped. In the most recent reporting cycle, category volumes improved to low single-digit growth in the US. Now turning to the auto category. Our appearance, air freshener, and performance chemicals businesses all performed in line with expectations.

Refrigerants, however, were impacted by mild weather during the quarter across much of the United States, which created revenue headwinds. We have seen positive sales trends in July, however, as the extreme heat across the country has stimulated consumer demand. While weather has been a challenge to top line growth, we have made significant progress improving the profitability of our auto portfolio. In the quarter, we improved segment profits by 270 basis points. Year-to-date, we have grown segment profit by 55%. This exceptional progress reflects a combination of focused cost measures, sourcing events, and input cost favorability. We also continue to execute against our international growth plans, where we drove organic top line growth of more than 10% in the quarter.

Moving on to Project Momentum, where we have accelerated many of our plans and enacted new initiatives to counter the impact of the challenging demand environment. To date, Project Momentum has delivered $32 million in savings. The addition of a third year, as well as the inclusion of more initiatives into the program, will increase our savings range by $50 million to $130 million-$150 million by the end of fiscal 2025. These savings are independent of inflationary impacts. The incremental savings reflect opportunities uncovered by the team since the inception of the program and reflect additional benefits from further optimizing our batteries network, including executing longer lead time initiatives that weren't possible in the two-year program, and ultimately create a network that will enable us to even more efficiently and effectively serve our customers and consumers.

The incremental opportunities also involve changes to our operating model to drive a step change in our cost structure, all of which is enabled by digital transformation through the implementation of global standard processes and tools that allow us to streamline the organization, reduce spans and layers to create a flatter, more agile organization. Overall, roughly 60% of the program's savings will be generated from operational and distribution network efficiencies, 20% from procurement savings, and 20% from SG&A improvements. Consistent with our previous guidance, we expect 80% of the program's savings will be delivered through gross margin, with the balance to SG&A. We are proud of the progress we have made on our strategic priorities to date, encouraged by recent demand trends, and very pleased with the early success of Project Momentum.

This program should deliver significant savings over the next 2 years, which will help fuel our investments in sustainable growth and deliver long-term shareholder value. Now, let me turn the call over to John to provide additional details about our Q3 performance and balance of the year guidance.

John Drabik (EVP and CFO)

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter and some additional color on the evolution of our outlook for the year. For the quarter, reported net sales were down 3.9%, with organic revenue down 2.7%. Lower volumes in batteries contributed about 600 basis points of the decline due to delayed volume recovery as macroeconomic headwinds and price increases negatively impact the category, weaker performance during the quarter in non-track channels, as well as lower sales to device manufacturers as they delayed some new product launches in the quarter. Auto volumes were down roughly 300 basis points, almost entirely due to lower refrigerant sales, owing to cooler weather in the first two months of the quarter.

The negative volume impacts in both businesses were partially offset by 650 basis points of pricing in the quarter. Adjusted gross margin was 38.8% for the quarter, representing a sequential 90 basis point improvement over our Q2 performance. As you will recall, last year's Q3 input costs were favorably impacted by the building of excess inventories in a rising cost environment, all of which substantially reversed in the subsequent quarter. This year reflects a more normalized inventory level, resulting in more consistent gross margin performance and 160 basis point decline in the Q3 versus the prior year. As I'll note in a few minutes, we expect our margins to continue to sequentially improve with a meaningful increase in the Q4 relative to the same period last year.

Adjusted SG&A decreased $5.6 million, primarily driven by Project Momentum savings, favorable currency, and comping an elevated environmental charge in the prior year, partially offset by higher compensation expense and factoring fees tied to rising interest rates. A&P, as a percent of sales, was 5.4%, consistent with our investment levels in the prior year. Interest expense increased $1.1 million year-over-year due to an increase in interest rates, partially offset by lower average debt outstanding. We delivered adjusted EBITDA and adjusted earnings per share of $126.8 million and $0.54 per share. On a currency-neutral basis, adjusted EBITDA and adjusted earnings per share were $132.0 million and $0.58 per share, respectively.

Through the first nine months of the year, we have generated $261 million of free cash flow, or over 12% 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. We have also paid down $200 million of debt year to date and over $260 million over the last Q4. Our debt capital structure remains in great shape, with a weighted average cost of debt of around 4.75% and over 90% fixed, with no meaningful maturities until 2027. Turning to our outlook. As we entered the Q3, we anticipated top line organic growth of 3%-5% for the remainder of the year.

Actual performance in the quarter was below that level, primarily due to a slower than planned recovery in volumes in the battery category, weaker refrigerant sales due to cooler weather in April and May, and much lower sales in non-track channels during the quarter. As we start the Q4, we have seen an acceleration in battery category performance and warmer weather in June and July, and now expect organic revenue in the to partially recover to roughly flat year-over-year. All in, we are now calling for full year organic revenue to be down low single digits. We also expect gross margins in the Q4 to be up 350-400 basis points, as they meaningfully benefit from input cost tailwinds, specifically freight and incremental Project Momentum savings, driving significant gross margin expansion year-over-year.

We expect A&P spending in the Q4 to be slightly above prior year levels, with a full year forecast of just below 5% of net sales. We expect that SG&A in the Q4 will improve by roughly 100 basis points relative to the prior year, due to continuing Project Momentum savings. Q4 interest expense is expected to be relatively flat to the prior year, with higher interest rates being offset by lower average outstanding debt in the year. Finally, at current rates, we expect the currency impact on earnings to be slightly positive in the quarter. 2023 has presented many challenges, which our team has been able to meet throughout the year.

Recognizing we are still operating in a fluid environment, especially as it relates to the consumer, we now expect to deliver adjusted EPS for the Q4 between $1.10 and $1.20 per share, and adjusted EBITDA of $173 million and $183 million. Based on our outlook for the Q4, we expect to deliver full year earnings at the low end of our previously communicated ranges. We also remain on track to generate free cash flow at the high end of our long-term target of 10%-12% of net sales. Now I would like to turn the call back over to Mark for closing remarks.

Mark LaVigne (CEO)

Thanks, John. Though the year has not progressed as expected, the impressive work from the organization gives us confidence to deliver adjusted earnings per share and adjusted EBITDA at the low end of our original guidance. I am proud of the progress we continue to make across our strategic priorities and remain confident that we are executing the right strategies to navigate the environment and deliver our long-term objectives.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. As a reminder, please limit yourself to 1 question and 1 follow-up. This time, we'll pause momentarily to assemble the roster. First question will be from Bill Chappell, Truist Securities. Please go ahead.

Bill Chappell (Managing Director)

Thanks. Thanks. Good morning.

Mark LaVigne (CEO)

Morning, Bill.

John Drabik (EVP and CFO)

Morning, Bill.

Bill Chappell (Managing Director)

As we talk about this journey, I wanted to understand the battery volumes. Like, why they took a dip this quarter, even just sequentially? I think you're kind of alluding to there was some elasticity, but I just didn't really understand why that was more so now than the prior couple quarters. What gives you confidence that you said it's kind of stabilized, what's... You know, that continues, as just because we lap the price increases taken a year ago?

Mark LaVigne (CEO)

Yeah, good question, Bill. I'll get started, then I'll turn it over to John, who can give a little bit of a year-over-year bridge. You know, the Q3 definitely did not transpire as we expected. You know, there was also significant positives to the quarter. Let me address your question first on top line. The volume trends are progressing from a trajectory standpoint as we expected, although it's at a slower pace, which was the reason, you know, for the call down on the top line. In track channels, volume trends remain negative longer than we expected, although we've seen this turn positive. That's a point, you know, for why we feel confident that we've turned the corner on that.

If you look at the latest four-week data that ended July twenty-third, it was up volume 4.2%. In untracked channels, you know, which is home center and hardware, those have trailed track channels. You know, that was also a drag on volume. OEM customers that we have contracts with for new device launches have paused or delayed some of their launches, which had an impact on volume. The final piece is refrigerants, which with the weather in May and June, was a volume drag on our business, but we've seen it pick back up in July as some of the record heat has hit across the US.

You know, as we take a step back, I think with all those factors, there's also a lot to be happy about with this quarter, and we don't want the, you know, the top line to overshadow it. I mean, one, gross margin recovery is ahead of schedule. Free cash flow is at the high end of the range. We're on track to reduce leverage by a 0.5 turn ahead of schedule, and we've been able to find $50 million of additional savings and added that to Project Momentum. Certainly a challenging quarter from a top line perspective. You know, we also feel like it validates a lot of what, you know, the work the teams are doing to make sure that we put the business back in the shape to compete long term and deliver value. John, you wanna talk Q3?

John Drabik (EVP and CFO)

Yeah, maybe just to put some numbers behind what you just said, Mark. The category volume's, you know, improving, but still negative. That was a 270 basis point decline year-over-year. The non-tracked channels issue, which, you know, home, hardware, and certain club stores, that was about 280 basis point drag. You know, the device manufacturers delaying or reducing orders in the quarter, that hit us for about 150 basis points. The cooler weather in April and May impacting refrigerant sales, that was a 220 basis point decline. Those were partially all offset by still 650 basis points of pricing.

Maybe just to give a little bit of color, what we're thinking for the Q4, you know, we, we originally thought mid-single digit growth. We're now calling for flat top line in the Q4. We're seeing that slower category recovery. It's probably a 100 basis point drag from where we thought. The non-measured performance issues in the US, that's probably a 200 basis point drag. The device manufacturers OEM sales is probably another 100 basis points. That will shift our full year view to kind of from that up low single digits to down low single digits for the full year.

Mark LaVigne (CEO)

Bill, on the volume trends, we did post a slide today, which at least provides an illustration of the track channels, which you can reference, which shows some of the progress that we're referencing as well.

Bill Chappell (Managing Director)

Got it. Just, I mean, just as a follow-up, and, and I think on batteries, in particular, the Street worries that, that we go back to the, the post pre-pandemic trends of kind of flat to no volume growth category. Obviously, these past few years have been throwing everything for a loop, and, and it's tough to forecast, but just trying to see, does anything you see make you, make you change your kind of longer-term outlook for, for battery volume growth?

Mark LaVigne (CEO)

Nothing has changed our long-term view, Bill. I would say, as we look at the battery category today, it is still larger than it was pre-pandemic. I mean, we have some data that shows it's about 1 billion cells larger globally than it was pre-pandemic. In the US, it continues to be larger. What we've said in the past is you, we're in the process of establishing that new base, which will be larger than pre-pandemic, and then you'll grow off of that new base at the same level that what we call, which is sort of flat to low single-digit growth going forward.

I do think, you know, we have worked our way through some, some choppy waters as it relates to macro pressures, you know, cautious consumers, as well as all the pricing that both, you know, Energizer, as well as all CPG companies have, have taken over the last 12-18 months. We're working through that cycle and think we're about through it.

Bill Chappell (Managing Director)

Okay, great. Thank you.

Mark LaVigne (CEO)

Thanks, Bill.

John Drabik (EVP and CFO)

Thanks, Bill.

Operator (participant)

Thank you. Our next question will be from Lauren Lieberman, Barclays. Please go ahead.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Great. Thanks. Good morning. First thing, Sorry, I wanted to clarify, you've given so much great detail, but on the non-tracked channel shortfall, was that destocking at these retailers in particular? Was there shelf space changes? I was just curious, a little bit more detail on the non-tracked piece.

Mark LaVigne (CEO)

It is not reduced, distribution. It is simply, you know, sort of foot traffic and POS. It's just lower sales in non-tracked channels.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Okay. The overall channel and not necessarily an inventory dynamic at those retailers?

Mark LaVigne (CEO)

Correct.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Okay. Okay. Just following on that point, do you have a sense of inventory levels with those retailers such that there is, is or isn't risk of, you know, further headwinds in Q4 or even into Q1, if inventory levels are, you know, in excess of what foot traffic would demand?

Mark LaVigne (CEO)

We've taken a look at inventory levels across both autos and batteries as we head into Q4, and on balance, they're in a relatively normal position. There's some retailers that are a little light and some that are a little heavy, but specifically in non-tracked channels, we don't have inventory concerns related to those.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Okay. Okay, great. Then just, as we look forward, and as you said, the, the gross margin recovery is kind of coming through ahead of, of plan. I just wanted to maybe step, step back and think about kind of structural gross margin and profitability for the business because of, you know, Project Momentum and so on, and the cost savings that you are in the midst of. Do you have any thoughts on kind of longer-term gross margin or even just overall margin profile for the business?

Mark LaVigne (CEO)

John, why don't you talk through sort of the Q4 gross margin improvement and what's driving that, and then we can talk longer term.

John Drabik (EVP and CFO)

Yeah. Well, let me, let me talk a little bit about the Q3, where we, kind of what we delivered, and then I think we can talk about where we, we think that's going even a little bit further out. You know, when we're looking at the upcoming Q4, you know, last year, we built, you know, excess inventory in a rising cost environment. I talked about that a couple of minutes ago. That really resulted in Q3 margin last year, above 40%, you know, as we had some temporary benefit to the P&L, as a lot of those costs got moved into inventory, they came back in the Q4. That's gonna give us a pretty easy comp going into this Q4.

I would say broadly, when you start to look at our raw material input costs, we've seen decent, you know, favorability across most of the input complex. So, you know, spot prices, as I look at the, at the list of the key ones that come for us, mostly favorable, over the last couple of months, and we'll start to see that come through our P&L really in the Q4. I think it'll be the first time in a while that we've seen raw material input costs turn favorable overall.

... We, we still are seeing some headwinds from, you know, higher labor and energy costs, but I think that we're, you know, getting into a pretty good spot here. You know, I think third, as you talked about, we've got momentum savings that we expect to, to contribute about 125 basis points this year. All of those together, you know, we think that the Q4, we're gonna be up 350-400 basis points. That's gonna put us up for the year, 150-200 basis points, which is ahead of where we originally thought we'd be.

As we look at the Q4 going into 2024, all of the key indicators would say that we've got good, you know, positive momentum going into next year to see continued improvement in that gross margin line.

Mark LaVigne (CEO)

Then, Lauren Lieberman, I think, you know, long term, the number that we, we talk about and have it circled is when we bought these businesses, the consolidated gross margin was 41.5%. That's certainly the first milestone we wanna make sure that we get back to longer term. John Drabik and I both have aspirations beyond that, but I've, you know, we don't wanna get too far ahead of ourselves, and, and let's achieve that gross margin on a consolidated basis that was existed at the acquisition first, and then go from there.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Okay, thanks. I really appreciate the detail.

Mark LaVigne (CEO)

Thanks, Lauren.

Lauren Lieberman (Managing Director and Senior Research Analyst)

Yeah, thank you.

Operator (participant)

Thank you. Our next question will be from Jason English, Goldman Sachs. Please go ahead.

Jason English (Managing Director, Equity Research)

Hey. Good morning, folks. Thanks for taking this.

Mark LaVigne (CEO)

Good morning, Jason.

Jason English (Managing Director, Equity Research)

1 real quick tactical question. Lauren asked about inventory situation. Sounds like you feel it's clean, including on refrigerants, which is, which is encouraging, given the seasonality there. Is the same true with OEM manufacturers? Are there any inventory, inventory issues to be concerned with there?

Mark LaVigne (CEO)

No.

Jason English (Managing Director, Equity Research)

Okay. Then if I'm looking at your battery sales, and it looks like we're down now versus pre-COVID levels, which is volumetrically, which is, which is kinda shocking, given what you've discussed many times, of incremental devices in these homes, not to mention the Internet of Things, which you characterized as a bit of a secular trend for battery demand growth. Those are clearly should have been tailwinds that created more demand for batteries, yet battery volume is down. What's the offset? Like, has there been a reacceleration of the secular demand destruction within batteries? If so, where, where are you seeing that weakness?

Mark LaVigne (CEO)

Jason, we may be looking at different data. It may be worth a longer conversation to understand what data sets we're both using. I'm looking at data here just in North America that shows that volumetrically, the battery category is up versus pre-pandemic levels. Our data includes both the measured universe in the US as well as Amazon, which is where, as you've seen, growth in that channel as well. It does not include Home Center, it does include Measured plus Amazon. If yours does not include Amazon, you're missing a big piece of the component of growth that existed during that period of time. If you have Amazon in your numbers, maybe it's worth a longer conversation to understand where the disconnects may be. We are showing volumes both in the US and globally, higher than pre-pandemic levels.

Jason English (Managing Director, Equity Research)

I'm just looking at your reported sales. Your battery sales are up 14.5% versus 2019, same quarter. You've taken more than 14.5% pricing. You're telling me you grew share. Your global battery volume is down versus 2Q 2019, I believe, assuming you've taken more than 14.5% pricing, and you've said you've grown share, implicitly, the category is down even more than that.

Mark LaVigne (CEO)

Well, if you're speaking specifically on quarter-over-quarter sales over a multi-year period, I'd wanna make sure we went back and understood from a detailed level what was in and out of those quarters from a timing perspective. Let's make sure we follow up on that, because, you know, at a broad level, you know, the volume trends have held up nicely in the battery category. In terms of the timing and sequence and cadence of our sales in a quarter over a four-year period, I think we'd need to dig into that further, make sure we were comparing apples to apples.

Jason English (Managing Director, Equity Research)

Yeah, that's fair. That's fair. There can definitely be timing, issues quarter - quarter. All right, well, let's dig in afterwards. Thank you. I appreciate it. I'll pass it on.

Mark LaVigne (CEO)

Yep. Thanks, Jason.

Jason English (Managing Director, Equity Research)

Thanks, Jason.

Operator (participant)

Thank you. Next question will be from Andrea Teixeira of JPMorgan. Please go ahead.

Andrea Teixeira (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning. Thank you for the bridge. That's super helpful in terms of the revenue for track and on track, but also the volume side. I was wondering, as we, we all ask about top line, how, how you're seeing in terms of what the consumer is doing at this point? It doesn't look like it's, it's, it's necessarily less to see, but it seems that the consumer is taking inventory out of the pantry. I was wondering if you can comment on that, and how do you see that inventory shift?

If you're seeing consumers more sensitive to your point in your prepared remarks that, you know, their basic needs, and then comes batteries, if you're seeing them making tough choices as it, as it relates to their own, you know, choices there, on the shelf, like perhaps, you know, private label picking up. We don't see the Amazon private label that much, so it's, it's, it's, it's, it's challenging for us on the south side to see what's the dynamic there. If you can comment on, on first, the consumer behavior, and then second, on from your, your customers?

Mark LaVigne (CEO)

Sure, Andrea. A lot of, a lot of topics within that question. Let me make sure I let me give a shot at covering all of them. First, from a consumer standpoint, as we highlighted last quarter, consumers began to shop cautiously, and we started to see their behavior shift. Certainly, their needs based, you know, food, fuel, shelter, are gonna come first in terms of the priority stack. Batteries is an essential product, but it's beneath those areas. We did start to see consumers react to higher inflation, macroeconomic uncertainty. We did see a particular blip in sort of the April-May timeframe as well. You know, and what we're seeing from a what consumers are doing differently, they are using their devices less, and then they're also leveraging their household inventory to buy batteries more judiciously.

They may be skipping a cycle, they may be, you know, just, you know, engaging in other activities, and they may be, borrowing, you know, batteries from one device to another in order to delay battery purchases. We have seen that turn around a little bit, and we have seen trends improve. As we mentioned, in track channels in particular, we're starting to see volume growth, so consumers are working their way through that. It, it's, it's tough to blame it on elasticity. I would say our elasticity models have roughly held. I would say the recovery is, is taking a little bit longer than we anticipated.

I'm not sure I would attribute that to our, you know, elasticity or pricing, as much as just the general environment that consumers are shopping in, as well as their, the need to absorb price increases, which have occurred across the store. You know, so I would say we have, you know, we are very confident heading into Q4 in terms of, of the recovery is underway, admittedly, at a slower pace than we expected, which is, why we called down the top line that we did. As it flows through the PNL, we continue to make progress in all the areas that we can control, which is why we were able to hold the earnings ranges.

Speaker 11

Okay, thank you.

Mark LaVigne (CEO)

Thanks, Andrea.

Operator (participant)

Thank you. Next question will be from William Reuter, Bank of America. Please go ahead.

William Reuter (Managing Director and Research Analyst)

Good morning. I just have two. The first is, you had alluded to the fact that we could see some tailwinds from lower input costs in 2024. I know it's early, and you're probably not gonna wanna say a lot, but is there anything you can expand on that in terms of which, input costs, costs specifically, and will these be offset by other areas of inflation?

Mark LaVigne (CEO)

Bill, there's, there's puts and takes, but we have seen a number of inputs on both the battery and the auto side come down. Zinc has, has come down pretty significantly over the last couple of months, which we'll start to see flow through our, you know, our COGS in the Q4 and Q1 next year. Lithium has abated a little bit, although that one moves around a lot. We're still seeing the, the gas that we use in the refrigerant at a pretty elevated level, but it's kind of stabilized. We've seen some of the other, like silicone has come back for us on the auto side. Jet fuel has come back for us.

Those are, are coming, you know, not, not all the way down to where they were pre-pandemic, but have come off their highs a bit over the last couple of months. Those are, should be benefits to us.

William Reuter (Managing Director and Research Analyst)

Okay. Given a little bit slower velocity at retail, are you expecting any changes in your promotional activity, either surrounding the holiday period this year? Have you heard anything from your retail customers in terms of would the, you know, their expectations or hopes around how maybe that promotional strategy will change?

Mark LaVigne (CEO)

I wouldn't expect a material change in our promotional strategy. I mean, if you look at the latest 52-week data, you're at roughly pre-pandemic levels. If you look at the 13-week data, you're actually below pre-pandemic levels. We're gonna do some shifting between A&P and trade spend, in order to have some of that spend be closer to the consumer. You know, we're not interested in, in share promotion. You know, I think, you know, what we're focused on is keeping the consumer engaged in the category, maintaining the premium end of the category, make smart investments in, in any promotion that we do engage in, while continuing to improve gross margin overall.

William Reuter (Managing Director and Research Analyst)

Great. That's all for me. Thank you.

Mark LaVigne (CEO)

Thanks, Bill.

Operator (participant)

Thank you. Next question will be from Hale Holden, Barclays. Please go ahead.

Hale Holden (Managing Director, Head of US High Yield Research)

Good morning. I had two questions. You know, in Mark's discussion on two of the three issues that kind of drove the volume weakness was Home Depot or home centers and pantry destocking. In the recovery that you're seeing in the current quarter or the current fiscal Q4, is that sort of the blip that you think is ending and folks are back into a normalized demand state?

Mark LaVigne (CEO)

What we're seeing, the recovery that we're seeing is in track plus Amazon. It's an amalgamation of those two channels. In terms of home center and hardware, we would expect that recovery to lag, just based on what we're seeing from a home sales standpoint.

Speaker 11

Yeah, Hal, we, we specifically said that was probably a 200 basis point drag in the Q4 in the non-track channels.

Hale Holden (Managing Director, Head of US High Yield Research)

Got it. The last one is, you know, off the sort of the long-term guidance, no change in the expectation of your ability to sort of delever by about half a turn a year going forward?

Mark LaVigne (CEO)

No, that's still our expectations. We've made really good progress this year. We saw a little bit of a, a blip as the earnings dropped in this quarter versus last year's Q3, but with the recovery in the Q4 and continued debt paydown, you know, we would expect to end this year at, you know, 5.5 or below.

Hale Holden (Managing Director, Head of US High Yield Research)

Great. Thank you very much.

Mark LaVigne (CEO)

Thanks.

Operator (participant)

Thank you. Again, if you have a question, please press star then one. Next question will be from Carla Casella, JP Morgan. Please go ahead.

Carla Casella (Managing Director, Credit Research)

Hi, most of my questions have been answered, but just one clarification. You talked a bit about inventory at retail on the battery side. Did you give a sense for our inventory at retail, how comfortable you are with it on the auto side? Yeah, and if you can give us some detail by channel, type of channel?

Mark LaVigne (CEO)

Well, I mean, It's mass and auto channels is really where you'll, you'll speak to in terms of inventory, and I believe our answer was meant to be sort of a consolidated inventory answer, but certainly it applies to auto care. We've, you know, we have slightly elevated or slightly lower inventory levels, depending upon an individual retailer and an individual subcategory, but on balance, there are not inventory concerns that we have in that business.

Carla Casella (Managing Director, Credit Research)

Okay, great. The rest of my questions have been answered. Thanks.

Mark LaVigne (CEO)

Thanks, Carla.

Operator (participant)

Thank you. This concludes our question and answer session. Let me turn the conference back over to Mr. Mark LaVigne for closing remarks. Please go ahead.

Mark LaVigne (CEO)

Thanks for your time today, and hope everyone has a great rest of the day.

Operator (participant)

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.