Energizer Holdings Inc (ENR) 2020 Q3 法說會逐字稿

Good morning. My name is Gary, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's Third Quarter Fiscal Year 2020 Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Jackie Burwitz, Vice President, Investor Relations. You may begin your conference.

Good morning and thank you for joining us. During the call, we will discuss our results for the third quarter of fiscal year 2020. This call will be available for replay via the Investor Relations section of our website, energizerholdings.com.

Also available on our website is a slide presentation providing details about results for the quarter.

On the call with me this morning are Alan Hoskins, Chief Executive Officer; Mark LaVigne, President and Chief Operating Officer; and Tim Gorman, Chief Financial Officer.

During the call, we will make forward-looking statements about the company's future business and financial performance. These are based on management's current expectations, and are subject to risks and uncertainties, which may cause actual results to differ materially from our forward-looking statements. We do not undertake to update these forward-looking statements.

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

Information concerning our category and market share discussed on this call relates to the 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 stated, all comparisons are to the same period in the prior year.

With that, I'd like to turn the call over to Alan.

Thanks, Jackie, and good morning, everyone. Let me begin by thanking our colleagues around the world who have demonstrated unwavering commitment amid the most trying circumstances any of us have ever faced.

While the pandemic remains a global threat, the team's focus and agility contributed to the health and safety of our colleagues and drove Energizer's strong performance in the third quarter. We continue to operate in an uncertain environment with limited clarity on the length of the pandemic, its severity and its economic impact. However, to date, our team has acted with urgency and purpose, put us in the best possible position based on what we do know. And looking ahead, our long-term strategies remain intact and continue to drive strong top and bottom line performance.

During the quarter, organic net sales grew 3.4%, reflecting strong battery performance and organic growth in Auto Care. Our strong battery performance was primarily due to distribution gains in North America, pricing actions and elevated demand for batteries in the U.S. caused by COVID-19. The growth in Auto Care reflected an improved trends during the quarter as consumers increased vehicle usage, and we benefited from favorable weather conditions.

Throughout the quarter, colleagues in our manufacturing facilities and distribution centers did a terrific job responding to the increased demand by delivering overall consistently high fill rates, as did our retail operations colleagues who executed our plans in-store with excellence.

Despite headwinds from both currency and incremental COVID-19 related costs, adjusted earnings per share increased 35% to $0.50, led by the benefits of organic sales growth and continued synergy capture.

In addition, we generated strong adjusted free cash flow, further demonstrating the stability of our business.

During the quarter, we continue to make progress on our long-term objectives, including executing our integration plans to deliver over $100 million in synergies by the end of calendar year 2021. Leveraging the strength of our broad portfolio to gain new and expanded distribution in the U.S. and several international markets, investing in our Auto Care business to build a robust pipeline of innovation, complemented by new, impactful creative that strengthens our brands and resonates with consumers and implementing our plan to expand the Auto Care business in international markets.

We expect fiscal 2020 to be our fifth consecutive year of organic growth as a result of new distribution, higher demand for batteries in the U.S. because of COVID-19 and improved pricing. Net sales growth should be in the range of 9% to 10%, including organic growth of 1% to 1.5%.

In addition, we expect adjusted earnings per share of $2.45 to $2.55 and adjusted free cash flow in excess of $300 million.

As we look to the future, we believe the long-term strategies we shared with you at Investor Day have served us well through the pandemic and will continue to do so in the new normal that follows. We operate in categories which are resilient in challenging times and have opportunities for growth, given changing consumer needs. And we are confident, our colleagues will create advantages out of adversity, which will allow Energizer to emerge from the pandemic even stronger.

And with that, I'll turn it over to Mark.

Thank you, Alan, and good morning, everyone. We could not be prouder of how our colleagues have managed through the first phase of the pandemic. It has truly been a collective team effort where colleagues around the world responded with urgency, focus and agility and operated with excellence through the worst crisis this team has ever experienced.

We have been tested in every way possible and managed to deliver a strong financial performance, while, more importantly, managing to keep each other safe. Today, our manufacturing facilities are safer, our global supply chain more resilient and our systems and processes is more robust. As a result, we are serving our customers at high level, despite the challenges from the pandemic.

We entered the fourth quarter with clear insights into consumer behavior in this new environment as economies have begun to reopen, and our categories have withstood the pressures of the past 6 months. We are monitoring the recent spike in COVID-19 cases, especially in the U.S. And just as we did in the early stages of the pandemic, we will adapt our operations as needed, to ensure we continue to deliver for our customers and consumers.

Before I dive into the battery category, I want to share how we are going to look at our categories going forward. We are all aware that the retail landscape has been evolving for some time. The pandemic is accelerating changes in both consumers' buying behavior as well as retailers' response. The rapid growth of e-commerce, Click and Collect and Home Delivery are all driving to a true omnichannel retail environment. Based on this, going forward, we will be communicating a holistic approach to measured category performance, as we believe it provides a more accurate picture. Therefore, our category comments today and going forward will combine brick-and-mortar, U.S. omnichannel performance from several large retailers and pure play e-commerce in the U.S.

Now let's review the battery category. For the 13-week period ending in May, which includes the height of the shelter-in-place orders, battery category value grew 28.4% globally and 37% in the U.S. The sharp spike in demand at the beginning of the pandemic was significant in the U.S. While these trends have moderated since the end of May, they remain well above historical levels.

Our ongoing analysis of consumer behavior in the U.S. shows elevated usage of batteries as consumers continue to spend more time at home.

Outside of the U.S., it was historically different story. Generally, shelter-in-place orders in many international markets were more restrictive, and as a result, had a negative impact on the category, especially, in unmeasured channels and markets.

Let me provide a little more context. In developed markets outside of the U.S., the supermarket channel, which is measured, grew rapidly as it was one of the few channels deemed essential, while unmeasured channels like Home Center and mom-and-pop stores were closed.

In developing markets such as the Philippines and Malaysia, the shelter-in-place orders came swiftly, with little warning and essentially, shut down the country. In these markets, the category experienced significant declines as a result of government actions to address COVID-19.

In terms of the overall pricing environment, average unit prices increased and promotions declined in the quarter as the focus of retailers was rightly on keeping their stores operational, their shelves stocked and the shoppers safe.

Turning to our performance during the quarter. Our share position globally, while down 2.8 points, continued to improve sequentially. We expect this trend to accelerate in the fourth quarter as we realize the benefit of the resets executed at several U.S. customers. This includes expanding the availability of our brands in the club channel, where we had been underrepresented as well as enhancing visibility with preferred positioning in other channels.

In addition, our share performance will soon reflect the lapping of prior year resets at major U.S. retailers. We also anticipate that some of the channel shifting, which occurred in the early days of the pandemic will revert to more normalized patterns.

Overall, we generated strong organic growth because of the distribution gains and the increased demand for our products in the U.S. as a result of COVID-19, which was partially offset by the contrasting conditions in our international markets.

As we look to the remainder of the calendar year, we are well positioned, given the distribution gains in the U.S. and preparations are underway for the upcoming holiday season. This includes adjustments to our A&P investments to account for the changing buying behaviors of consumers, including increased spend on digital. And even though our outlook does not include the impact of hurricanes, we are well positioned to support our customers as storms arise.

Turning now to Auto Care. Category trends in the U.S. are up significantly compared to last quarter. For the 13-week period ending in May, the category value grew 4.3%. The improving trends in the category were driven by consumers hitting the roads versus flying during the summer vacation season as the U.S. economy reopened, a focus on do-it-yourself activities in light of the closure or reduced services from car care businesses, which were deemed nonessential; an overall focus on cleaning and disinfecting cars as a result of the pandemic and the return of warm weather, which enabled consumers to attend to the maintenance and cleaning of their vehicles and which drove improved demand for refrigerants.

During the quarter, our share declined 1.2 points as segments like waxes, polishes and vehicle wash drove the growth and our areas where Energizer under indexes. In the quarter, we saw strong demand for our appearance products, especially Armor All wipes. Our innovation is working as well, as we have 5 of the top 10 new items, including several new Armor All products, with Armor All Extreme Protectant, Armor All Snow Foam Wash and Armor All Wheel and Tire Cleaner.

Additionally, we executed new distribution in the U.S., Europe and Australia, expanding into new channels and customers. We are cautiously optimistic about the final months of the summer selling season as these favorable trends have continued thus far in our fourth quarter. However, the increase in cases in the U.S. could dampen the growth, if more restrictive shelter-in-place orders are reinstated.

Longer term, we remain optimistic about the category fundamentals as consumers shift to do-it-yourself from do-it-for-me, keep their vehicles longer and increase miles driven. There is also a potential benefit from consumers focusing more on cleaning their cars. We are investing heavily in our brands with new creative and innovation and a focused effort to reshape the pipeline and reinvigorate the brands. We have begun to execute our international expansion plans, which will generate nice growth over the next several years.

The combination of investment in brands, products and geographic expansion is the right strategy to sustainably grow the Auto Care business over the long term.

Now turning to our integration efforts. Despite the pandemic, our colleagues continue to do a remarkable job executing our integration plans with minimal customer disruption by creatively leveraging technology and by being laser-focused on the task at hand. Several initiatives have recently been completed, while others are underway, including the consolidation of our auto manufacturing into the Dayton, Ohio facility and shipment of all Auto Care products from a new distribution center, the opening of a new battery and lights distribution facility and the continued migration of the acquired battery and Auto Care businesses on to Energizer's SAP platform, which will be completed by the end of the calendar year.

We delivered $15 million of synergy savings in the quarter, and we remain on track to achieve the previously disclosed incremental synergies of $45 million to $50 million this year. We are excited about our progress and anticipate that by the end of the calendar year, our integration initiatives will be substantially complete and keep us on track to deliver more than $100 million of synergies by the end of 2021. We expect to reinvest synergies above this amount to support our leading brand and to accelerate the multiyear innovation portfolio in Auto Care.

In summary, our focus and agility over the last 7 months got us to where we are today and will carry us forward. We move quickly to adapt to an evolving operating environment by ensuring our A&P investments mirror changing consumer behavior. So we meet consumers where they are and to be the brands they seek, see and select, regardless of the channel. Increasing the resiliency of our global product supply chain to limit disruptions and maintaining best-in-class service to our customers. We are well positioned to continue operating with excellence by meeting the needs of our customers and consumers, while also advancing our long-term strategies.

We have withstood the early days of the pandemic, and we are committed to emerging from this crisis even stronger than when it began.

Let me now turn it over to Tim to review the quarter.

Thanks, Mark, and good morning, everyone. We reported a strong third quarter performance with adjusted earnings per share of $0.50, up 35% and adjusted EBITDA of $135 million, up 6%. These results reflect exceptional execution in the quarter as well as the benefit of higher-than-expected battery demand due to COVID-19, improving trends in Auto Care sales and the delivery of planned synergy savings. These results were tempered by incremental costs related to COVID-19 and the unfavorable impact of currencies, which combined were approximately $0.19 per share.

While I cover a few highlights on the quarter and our outlook, we have also posted more detailed slides our website. Net sales in the quarter increased 1.7% to $658 million. Organic net sales were up 3.4%, driven by distribution gains, strong demand for batteries and Auto Care in the U.S. and pricing, which was offset by softness in international markets due to the pandemic.

Organic net sales in the Americas grew 7%, while the International segment declined 6%. The International decline reflects the impact of the lockdowns on unmeasured channels, including developing in distributor markets and DIY in modern markets. As those markets and channels began to reopen later in the quarter, we did see a quick recovery in sales.

Adjusted gross margin rate in the third quarter increased 80 basis points to 40.8%. The increase was primarily driven by synergies, favorable raw material costs and pricing. These benefits were partially offset by foreign currency headwinds and incremental operating costs related to COVID-19, which when combined, negatively impacted gross margins by $18 million or 210 basis points. The incremental COVID cost were primarily comprised of airfreight, personal protection equipment and unfavorable absorption.

SG&A, excluding acquisition and integration costs, declined approximately $6 million to 16.2% of net sales, down 120 basis points, with synergies being the main driver as we exited majority of the Transition Service Agreements with Spectrum and incurred lower T&E due to travel restrictions.

Turning to adjusted free cash flow. We generated $136 million in the quarter and approximately $244 million year-to-date. The free cash flow generated this quarter was up $100 million versus the same quarter last year.

As we mentioned on the second quarter call, we took several steps in April to improve our liquidity position due to the uncertainty in the early stages of the pandemic. Due to the strength of our business performance, we have been fortunate to minimize the use of our increased liquidity thus far and ended the quarter with about $600 million in cash on hand. About 60% of the cash was held in the U.S.

We also took advantage of the low interest rate environment and issued $600 million of senior notes at 4.75% due in 2028. The proceeds were used to tender and redeem the $600 million and 5.5% senior notes due in 2025, reducing annual cash interest by approximately $4.5 million and extending the maturity by 3 years.

At the end of the calendar year, we will reevaluate whether to use the excess cash in hand in the U.S., to accelerate the pay down of debt based on our view of the pandemic.

At this point in the fiscal year, we have more clarity over the near term. And as Alan mentioned, we are providing a full year 2020 outlook. We expect net sales growth of 9% to 10%, including organic growth of 1% to 1.5%. Adjusted earnings per share in the range of $2.45 to $2.55. Adjusted EBITDA between $575 million to $585 million. And finally, we expect our adjusted free cash flow to exceed $300 million.

This is below the outlook provided in February, primarily due to 4 factors: incremental cost of products sold due to COVID-19 of about $15 million to $18 million; reduced SG&A, reflecting decreased T&E due to travel restrictions of $7 million to $8 million; increased interest expense related to incremental liquidity of approximately $9 million to $10 million; and a larger impact from unfavorable currencies of about $14 million.

The net combined impact of these factors caused about a $0.35 to $0.40 per share decrease, which is included in our current outlook. This represents our current view of the full year with 3 quarters of the year now complete and insights into the start of the fourth quarter. However, there remains a high level of uncertainty because of the pandemic and its impact on the retail landscape and our global business.

Over the long term, we remain committed to a balanced approach to capital allocation, including an emphasis on paying down debt. We will continue to execute against the things that are within our control, including the integration and optimization of the acquired businesses. Our team has demonstrated the ability to operate with excellence during these challenging times created by the pandemic. We remain on track to achieve long-term financial objectives we laid out at our Investor Day, which includes more than $700 million of EBITDA and $400 million of free cash flow.

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

Thanks, Tim. While the future is uncertain dynamic, we are confident in our team's ability and agility to navigate successfully into the future, ensuring the health and safety of our colleagues and meeting the needs of our customers and consumers remains our top priority.

As we enter the fourth quarter, we have line of sight to finishing the year on a strong note, and holding liquidity to weather uncertainties that may lie ahead. The long-term fundamentals of our categories remain strong, and we are confident in the actions we are taking to achieve our stated long-term objectives and deliver significant value for all stakeholders.

With that, I'd like to now turn it over to the operator, who will open the line for questions.

(Operator Instructions). Our first question is from Wendy Nicholson with Citi.

I'm still struggling a little bit to get my arms around and I'm kind of working through the numbers here sort of the guidance for the fourth quarter, obviously, coming in below what folks are expecting. And, I guess, I understand the incremental costs for PP&E, but they just strike me as big numbers. And so I guess, first of all, on the foreign exchange headwind, are you planning on taking any pricing to offset that headwind? Or is that just hit to the P&L that we have to deal with?

Number two, the incremental interest expense for the incremental liquidity, that's a big number. Do you think you need all that liquidity? Does it make sense to take it on all that debt? Or with your cash flow, do you intend to pay that down?

And then, I guess, last question is just again with regard to the guidance. You talked about how there's incremental demand for products now. But at the same time, your organic sales guidance is still the same as it was at the beginning of the fiscal year. So I guess the question is, do you think there is excess inventory sitting in people's pantries? Or why isn't that incremental demand leading to a bump up, if you will, in your organic sales growth target?

I know that's a lot. So anything you can give me on those couple of points would be great.

Yes. So Wendy, I think maybe starting at the top line and then working our way down. Yes. As Mark had indicated, we continue to see good demand in the start of the fourth quarter. With respect to that demand, that is driving some incremental costs. So a big component of the incremental COVID costs are airfreight. So we're airfreighting product because of the accelerated demand that we're seeing, particularly in batteries in the U.S. getting the product to where we need it. We don't see that as a permanent cost, but temporarily, in the pandemic, we're doing what we need to do to maintain business continuity.

FX, in terms of taking pricing, you tend to do that where you have a more dramatic impact of currencies. More recently, we have seen a change in the currency trajectory with the dollar weakening. So there may be some potential upside as we go through Q4. We have made and is reflected in Q4, our guidance the increased investment in A&P that we've talked about. And then we are seeing the benefits of reduced travel on SG&A. And that, likewise, is reflected on the -- in the guidance.

With respect to the interest, we made a call to increase our liquidity as we entered into the pandemic. There still remains some uncertainty. So as I indicated in prepared remarks, we're going to evaluate that at the end of the calendar year. I view that as a cost to have that liquidity until we're certain that we don't need it. So thus far, in the third quarter, we were able to maintain the level of cash that we had during the quarter. So we were roughly $600 million when we increased liquidity, we've maintained that through the end of the quarter. That's a judgment call that we've made. And understand as we manage through the pandemic, there are a lot of moving parts. And so that's what's reflected in the guidance that we've provided.

Fair enough. And that caused the incremental -- I mean, I assume as things get back to normal from a supply chain perspective, you won't have the airfreight costs. But as we look out to Fiscal '21, I also assume that savings in T&E is going to come back, people are going to probably start traveling again. But do you have a sense, just as we look out to '21, what sort of the permanent step-up in COVID-related costs? I assume higher PP&E is going to be with us for some time to come. Do you have a sense for kind of what we should think about for the model for '21?

Yes. Wendy, with respect to '21, we're evaluating that right now. I would make a call in terms of what component of that is permanent. I would expect a significant majority of it is not going to be permanent. You're right, the increase in airfreight should diminish. The PP&E will -- there'll be a component of that likely will continue beyond. And with respect to the interest, when we make the call at the end of the calendar quarter, if we do pay down debt, that will go away beginning in the second quarter. So with respect to the COVID cost, we had a smaller number in Q2. We called out roughly $1 million this quarter, and I'm talking about that's embedded within COGS, it's roughly $9 million in the third quarter. And we called out roughly $5 million to $8 million in Q4. And then interest cost, roughly $4.5 million a quarter for as long as we keep that increased liquidity.

The next question is from Bill Chappell with Truist Securities.

I guess, one, kind of follow-up to Wendy's questions. Any kind of thought process on what the FX headwind would be for '21 at current rates?

Bill, I'm -- at this point, without having the holistic '21 outlook, I'm just kind of stay away from questions on '21 other than -- I can call out commodities. We're fully locked for this year. We're approximately 60% locked on commodities for next year.

Got it. And then just switching to kind of your commentary about market share and some of the recent gains. Have you seen -- I think we're about to lap the target switch from Eveready to private label, which was about a year ago. Didn't know if you've seen any other moves there? Or actually maybe some increased interest on the Rayovac brand as we are continuing the recession over the next few months, just kind of thought process from your customers in terms of what they're looking for? Or if you haven't seen any trade down at all, if they really kind of focus more on the higher end brands?

Bill, I think in terms of the lapping of some of the shares, the share losses that we've referenced in the script, between the competitive launch as well as the private label launch that you mentioned, we're roughly right around this time. So we're anniversarying that basically now. And then we obviously have all of the new distribution. So from a share standpoint, I think you are certainly going to see that accelerate as we get through Q4 and certainly into Q1. So that will be a tailwind for us that I know people have been looking for quite a while.

We do continue to leverage Rayovac, again, heading into this economic uncertainty. It is a weapon that we have, that we didn't have before in terms of our discussions with customers. And so we are able to leverage that where there is an interest on making sure that if the shoppers are interested in more value brands that were there as well. That can be either in lieu of private label or in addition to private label and it really depends on a retailer's preference on how they want to go about orchestrating the battery category. But it obviously puts us in a great position to really serve whatever needs that they may have.

In times like these, you really do see consumer migrate to brands that they trust and trusted brands is something you'll hear from a lot of CPG companies these days. And fortunately, we have a whole host of them with Energizer, Eveready and Rayovac that allow us to meet a lot of different needs for different retailers. So we are seeing interest but obviously, Energizer continues to be our flagship and will continue to be so in the future.

And I guess with that, most of the share gains you're talking about it get club elsewhere for core Energizer, not necessarily Rayovac?

That's correct.

The next question is from Dara Mohsenian with Morgan Stanley.

So can you discuss the impact of the EBITDA shortfall this year versus your original guidance has on your longer-term target for EBITDA in excess of $700 million in fiscal '22? Obviously, we discussed that some of the pressures is clearly more temporary with COVID cost, but some of it appears to be more ongoing. So just wanted to understand the impact on your longer-term targets.

Yes. Tim, let me take the longer-term and then maybe you can chime in a little on the EBITDA. So Dara, we remain on track to achieve the long-term financial objectives that we laid out at Investor Day. I think the way to think about it is near term, we're just continuing to execute against the things that are in our control. So think about that as integration and the optimization of the acquired businesses and the continued focus on our 3 core strategies. And then Tim, any other commentary on the EBITDA?

Yes. Dara, I think relative to some of the big factors in terms of synergies that remains on track. We're exceeding the expectations and investing back into the business. Some of the temporary impacts like the incremental COVID cost, those will eventually go away. And the other dynamic that we've seen is, in terms of some of the channel and market dynamics relative to the current period. So we would expect as we exit this, things would begin to normalize in '21. And so to Alan's point, we remain on track at this point in terms of the long-term objectives that we laid out.

Okay. That's helpful. And then any perspective, obviously, there's been a demand pickup in the category in the U.S., the battery category. Do you think that is mostly greater actual usage of batteries? Has there been some pantry loading? Just any perspective in terms of, if there may be a consumer pantry deload going forward here?

Dara, I don't think we're overly concerned about a pantry load at this point just because of the persistence we've seen with the demand for batteries over this pandemic, and we continue to do consumer research. And the feedback we get is very convincing that consumers are, in fact, using a lot more batteries than they used to as they're staying home more. And that, we certainly -- have seen that play out in the POS trends. As we talked about globally, it was up roughly 28% and then in the U.S. 37%. It is starting to moderate as the shelter-in-place orders are being lifted and people are getting out of their houses more. But even if you just look at the 1-month data of June, it was roughly up 23% in the U.S. now that is being offset internationally by the impact of the shutdown orders is very different. And so you are seeing that offset as you look at our consolidated results. But net-net, if you were to tell us that we were going to make our way through the pandemic and grow organically from a battery standpoint of 5.3%, those are really strong results. Obviously, within the U.S., the results were stronger and those were offset by some of the negative trends in international. But we feel it was a really strong quarter for batteries. We do see the trends continuing. They will moderate as you get through the pandemic and people resume more normalized activities. But for now, battery business is strong and consumers are using a lot of batteries.

The next question is from Kevin Grundy with Jefferies.

Tim, I wanted to come back to the guidance, if I could. And specifically, I'm looking to bridge from where you guys were in February in terms of how you saw the world and how you see it now. So at the time the EPS is $2.45 to $2.55 -- excuse me, [$2.45 to $2.55] it was $3 to $3.20 that time, so down $0.60 at the midpoint. And then round numbers, COVID costs are $0.20 more by our [FX 15], so that still leaves like $0.25 and I appreciate the color in terms of trying to quantify COVID. But I just want to make sure I'm understanding the big changes here because the top line, they maybe not coming in as you saw like, at least geographically or even from a category perspective, but in total, relatively healthy. So help me bridge that gap, if you could, the $0.25 more dire, whether mix supply chain costs, other areas of investments outside of COVID and by our FX?

Yes. So Kevin, roughly in line, kind of breaking down the $0.25. We made a conscious decision to increase our A&P investments. So that's roughly $0.06 of the $0.25 with a heavy focus on investment in digital, giving the shifting dynamics that are occurring. There's another $0.06 that is tied into taxes and the mix of earnings that we have with the shifts that are taking place. The balance is an impact on margin. And again, we are seeing the dynamics of channel and market shifts that are occurring during COVID that are having a negative impact as well as some of the costs associated with. While category trends are strong, Mark had called out 5.3% in battery in the quarter and 2.4% in Auto Care. Again, for Auto Care and International, there was an impact of COVID on the expectations that we had, that we set back in past February, particularly with Auto Care. Again, we were lapping a soft performance last year. And while 2.4% growth is good in the quarter, we had expectations for hire. So that's the balance that makes up the differential to the $0.25 is roughly $0.12 in margin. COVID impact on top line and margin and then some of the COVID impact on channel and market dynamics.

Okay. That's helpful. Then a question for Alan or Mark, just on Auto Care. You had been targeting earlier in the year, 3% to 5% and then the pandemic hit. Where is that target now? I understand you're seeing some sequential improvement. I think, Mark, you talked about you're hopeful here in terms of picking up some shelf space here with some of the resets. How -- where do you expect to finish now relative to the 3% to 5%? And it [doesn't] sound like your long-term view with respect to the business has been [down] but maybe your comments on sort of the longer-term for the business, and I'll pass it on.

Thanks, Kevin. I see that you're breaking up a little bit, but I think I caught most of it in terms of just Auto Care growth and how does it look? Obviously, with the international business being what it's been and having the struggles to operate through the crisis for us to be able to have organic growth of 2.4% despite that is really encouraging from an Auto Care. We are seeing real strength in the U.S. in the Auto Care category. And as you looked at that category as we work through the last quarter, in March, you had an aggregated for the subcategories we operate in, it was down roughly 4.7%. In April, it was down 1.7%. And then in May, it was up 18%. And you've really seen those trends continue as we've worked our way through the summer. So very encouraging signs. In fact, when you look at the appearance sub segment, 50% of the appearance buyers in this past quarter were new to the category. So a lot of new consumers coming into the category, obviously, our goal is to continue to drive growth ahead of the category. We have work to do on that business just to continue to rejuvenate the innovation pipeline as well as continue to spend money behind new creative and more A&P. But all in all, I'm very pleased with the trends we're seeing. We do expect them to continue in the U.S., weather plays a big part in the refrigerant business as well. And so as the weather plays out over August and September time period, that will impact results. But again, I don't want to get into '21 guidance for that business. But when I look at category trends, I look at our innovation pipeline, our line reviews that will be set next year, which will drive next year's organic growth have been favorable and people are really pleased with the way we're bringing innovation and being a category leader like we have been in battery. And the international growth plan continues to go on as well as the integration. So I would say more to come in November when we talk about the growth in Auto Care, but still really pleased with this quarter's performance in terms of everything we've had to overcome and really look to accelerate that as we get into '21.

I think you've covered it well, Mark.

The next question is from Lauren Lieberman with Barclays.

So I was actually planning on asking about Auto, just as Kevin did. But I think one follow-up I could throw in, would just be, anything you're doing to adjust your marketing plans in the channels in which you'll advertise the kind of messaging things like that, given changes in consumer behavior, which, to your point, should benefit the Auto category. But anything more specifically on ways that you can kind of target and actually drive greater usage and adoption to trigger purchasing behaviors to proportionally more time in their card?

Yes. Lauren, so we've 2 things in that. I mean, one, we are looking at consumer behaviors and how they're changing as a result of this pandemic and making sure we're using that consumer insight to drive our innovation pipeline as well. And then to your point, in terms of how consumers are shopping the category, we are shifting our spend, both from an A&P standpoint, but also trade investment standpoint. You're seeing us do a lot more digital conversion tactics with search and instacarts and then from a media, for lack of old media, new media kind of shifting between TV and you're getting more into streaming, video and gaming and social media. From a trade investment standpoint, there were some limitations on the type of promotional activities. Within certain retailers, we would redeploy those dollars from in -- their in-store activities to an omnichannel investments to make sure we were investing those dollars there to help grow that. I would say, just rough order of magnitude from digital versus traditional, we were maybe at a 60-40 split. And now we're probably leaning more towards a 50-50 split. So we continue to shift more and more towards digital as this crisis has evolved, and that's something that we were already well on our way of doing as we entered into that. And I would say the only thing we really did is accelerate that a little bit more as a result of what we were seeing.

Okay. Great. And then just one follow-up on the COVID cost, and I apologize if I missed this. But you mentioned airfreight, not just sort of the PPE type expenses. So I guess the airfreight piece, how long should that go on for? I would think that as demand kind of stabilizes to more of a manageable run rate that a chunk of these COVID costs and even if you're not prepared to say that's the case in the next 3 months. But beyond that, should start to ease. So anything you could offer to break down the mix of those COVID costs just so as we choose to -- however we choose to model what happens with COVID going forward, you can do in that form...

Yes. And again, Lauren, we called out really 3 categories. So total that was in COGS is roughly $9 million, about $5 million of that was airfreight. So that was -- with the impacts that COVID had globally, plus extremely high demand on battery, that was really driving to get the batteries here in the U.S. And to your point, I would not expect that to be a continuing issue. We've included cost in the Q4 outlook. And then when we get to '21, we'll assess what our expectations are. PPE was roughly $1 million and then the remainder, we called out was absorption. We had some facilities that were shut down temporarily and forced in terms of labor size, so that impacted the absorption levels that we had for the batteries we were selling. So again, I would not expect in a normal environment that those would continue.

And Lauren, I think on the airfreight piece, a couple of things to keep in mind. I mean, one is just the after effects the disruption you've seen globally, from an end-to-end supply chain standpoint, you do see some of our suppliers being disrupted. So you have to play catch-up at a different points along the way. And then also the composition of the demand is different than what we expected. So it's in different parts of the world. And as a result, we've had to shift some of our inventories from different places than we had planned on them being as we got into the year. So it's multifaceted. And then as we exit the crisis, a lot of those things will normalize as our suppliers can have more normalized operations and also as the demand smooths out to more traditional demand models than what we've had. And so it's really twofold in terms of what's driving it. But to Tim's point, certainly wouldn't expect that to be become the norm.

Yes. And we really called out the 2 priorities we had as we were navigating through the pandemic was: one, health and safety of colleagues, that was first and foremost. But the second one was business continuity. And the cost of ensuring business continuity was to incur the airfreight because without it, there wouldn't have been a sale. So we understand it's a higher cost, but it's what we needed to do to maintain those high service levels.

Yes. And then on the more constructive side of things, I mean, you mentioned the lower T&E expenses, which obviously everyone is seeing. But I mean, what are you finding there that you think might be sustainable, like, different ways of working, realizing, you can do more things remotely and so on. So if we're thinking about airfreight and some of these costs mitigating potentially in '21, can we think about some of the good stuff sticking?

Yes, Lauren, I think that -- go ahead, Alan.

Tim, I was going to -- I think, we're evaluating with the task force all that we've done under COVID that are part of continuous improvement that we'll be able to bake into the way we operate going forward, quantifying those is still in process. We'll continue to look at those. But I think you're asking a fair question. While there were things like that [airfreight] that we undertook to ensure continuity and fill rates with our customers, there are positives that are coming out of this as well that we'll continue to deploy. And we'll have more on that as we provide guidance for '21. Tim?

Yes. I would just add to what Alan said, I think we like many companies are evaluating the ways of working post pandemic. And certainly the face-to-face, commercial travel is a necessity. But I think on the remaining, is there a better way to affect the activities that you need to do without actually having to physically be there. And I think our colleagues, like many companies, are finding that we're able to operate remotely in a highly effective manner. And I would expect there will be a return to normal, but there also be an evaluation of -- do you need to do every bit of travel that you were doing before.

The next question is from Faiza Alwy with Deutsche Bank.

So Mark, I think you had mentioned that you've done -- you've been doing some consumer research around battery usage. So I was hoping you could elaborate a little bit on what you're seeing with respect to consumer research? And what's driving the elevated sort of usage of batteries, particularly in the U.S.? And why it's higher in the U.S. versus in other markets?

Faiza, it's consistent with what we talked about on the last call. I mean, let's talk to U.S. first. You have a lot more -- consumers are at home a lot more. They're engaging with their devices more whether it's gaming controllers, home electronic equipment to be functional from an office standpoint. There's just a lot more usage of those devices. They're getting used more. And as a result, the demand in the U.S. is seen. It's a little bit different in international markets. I mean, and it's different market to market. I mean some of it is the level of shutdown that's been required. It's the number of devices per household that you'll see in some of those international markets. It's also consumer shopping behaviors. So do they buy in larger quantities in the U.S. like they do in some of the international markets? But really, if you look at developed international markets, the trends are similar to what you'd see in the U.S. They're just not as elevated as you would see and develop being and then sort of our distributor market subset, it's really -- that's where -- in the script, we said it was a starkly different story. And that's really the best way to describe it. You just -- the shutdowns were more severe. The retail shops were not open as nearly as pervasively and businesses were deemed much more essential in a tighter way than they were in the U.S. So the availability of product just isn't there as well. And as a result, consumers just shut down a lot more than they did. And the disposable income in many of those markets is not what they are in developed markets as well.

Okay. And then just a follow-up on Auto Care. I think you had mentioned that there was some -- relative to your prior guidance on Auto Care, there is a bit of a shortfall. And it seems to be primarily an international market. So I just want to -- if you could just expand on what's driving that? Again, is it just the retailer environment that you just talked about? And I wonder if you think you've had lost sales in refrigerants, just given the seasonality in that business?

So in the international markets, I think, you've, captured. I mean that's really where the shortfall has occurred. When we were talking back in January, February, about 3.5% that was based on a normalized international selling season. And certainly, that was disrupted many of the retailers that would carry these products in international markets were shut down. And so as a result, that was -- those were just lost sales. And so there was a disruption on the international. Certainly, the U.S. has seen some strong trends. March was tough, and then it really did start to pick up from there and those have offset some of the international sales. For refrigerants, we don't get that specific in terms of the numbers, but it's been a stronger season for refrigerants, particularly when you factor in, then it got off to a rough start, both with the number of miles driven and people were just not in their cars nearly as much in March and April, weather didn't cooperate in the March, April time frame, but really between May and June, certainly, with some of the heat that you saw in the U.S., you saw pretty dramatic refrigerant trends. And so I would say from a refrigerant standpoint, that business hung in there quite nicely and rebounded a little bit from what you saw last year.

And I think with respect to what Mark was talking about with the international markets, the one positive as we got towards the end of the quarter, as things did open back up, you did see a recovery in the sales. So that's a positive sign that we took out of the quarter.

The next question is from Rob Ottenstein with Evercore ISI.

I'm a little bit confused on the guidance. When I stand back and listen to what you're saying, I'm hearing very strong momentum in Auto. You just mentioned that international on the battery side is improving, in the U.S. battery you're getting pricing, demand is up. And you believe that's sticky. You're going to get further distribution gains. Your A&P is going up. So presumably, that's going to help. You're not worried about pantry deloading. So I'm just a little bit confused why the guidance in terms of organic top line growth seems so muted?

Well, Rob, if we look at where we're at, year-to-date, organic growth was up 1%. I would recall, last year, in the fourth quarter, we had a 9% organic growth rate. And if you take the 1% to 1.5% for the full year, that's slightly north of 2% organic growth in the fourth quarter. So a strong performance year-over-year in the fourth quarter, I think, holding through the pandemic to achieve the 1% to 1.5% organic growth in the full year is a strong performance.

The one thing we don't have, and we're lapping hurricane volume from last year as well that we don't have in the current outlook, obviously, there's been a recent storm that has moved up the East Coast, but that storm has been fairly minimal in terms of volume associated with it because of how quickly that storm moved up. There are power outages now. So we will continue to monitor that, but we don't have hurricane activity in there. So that may be kind of offsetting when you do the quarter-over-quarter comp.

And I think part of it is the level of uncertainty we're just dealing with from a macro picture, I mean, we're seeing, obviously, increase in cases in the U.S., you're seeing international markets, some of them doing well, some of them not doing as well. It's really just the uncertainty of what it's going to look like. You have government stimulus that may or may not be in play. You've had the economic effects that consumers are feeling. So I would say we want to be prudently cautious about the guidance that we put out there for the fiscal year, given we just don't have the operating environment changes so dramatically. And if you look at March and April, for example, we certainly are bullish on what we're seeing on the Auto Care category right now. But if we have to go into a severe lockdown, we've seen what that can do to the category trends as a result of that. So I would say -- it's with all the factors that we're aware of, we think it's the right call to make. Certainly, if the trends that we're talking about continue, then that does -- we may be able to exceed those numbers, but we certainly want to be cautious about how much we're trying to predict the future in an increasingly uncertain environment.

Okay. That's very helpful and appreciate it. Can you -- I think you mentioned a little bit about what happened globally in terms of market share for batteries. Can you drill down on the U.S. and maybe perhaps, separate between online and offline in terms of market share?

As we talked about in the prepared remarks, we do want to continue to look at this holistically within the category. You are going to see positive trends in our share continue over the next several reporting periods just because of some of the distribution gains, which are now visible in store. I would say, there are still distribution gains to be had over the balance of the year, those are in process as well. Many of those are in unmeasured and a little bit in measured. But from a measured standpoint, you're going to continue to see that consistently, and I'm going to speak in more general terms from an online, offline. We continue to be the branded share leader online. You are seeing many retailers emphasize their omnichannel offerings and their platforms, and we're leaning in with them as well. If you look at the sort of digital space broadly within batteries, you're in the 20% to 25% range of what went through digital. I would say, Amazon is in the neighborhood of 15% of that -- and that 15% of that, 15% with the total omnichannel being 20% to 25%. We're not as strong from a share position online as we are offline, but obviously, we've redoubled our efforts to make sure that we continue to make sure that those share positions mirror each other. But even within a given retailer -- if you go retailer to retailer, our share positions are different, retailer to retailer. But rest assured, we're pushing to maximize our share in the right way, both online and offline retailer by retailer.

The next question is from Olivia Tong with Bank of America.

Just a couple of follow-up questions there. First, in terms of the distribution wins you know are coming. Can you talk about how much of a share gain do you think that, that should bring to? And then just in terms of some of the e-commerce efforts that you're making, you talked a lot about digital marketing. So can you talk a little bit about what you're specifically doing in e-commerce to continue to drive your presence and drive your share a little bit further up closer to your brick-and-mortar share?

Olivia, I think one thing I want to make sure we emphasize is I've -- it's always dangerous to have an overemphasis on share just because I think that can drive bad behavior as you're trying to run your business. So we don't go after things for share's sake. we make sure we drive good permanent profitable distribution, which is what we've done over the balance, over this fiscal year. You are seeing a lot of resets going in, in measured retailers right now that have been completed. And as a result, you will see share trends. I'm not going to predict what the share will be in the future. I think that's just going to play itself out in the numbers and also as channel shifting either moderates or accelerates, depending upon what's going on in the pandemic. So that's -- it's a bit of a shifting landscape, but I feel comfortable in saying that the share numbers are going to continue to be positive as you get through this fiscal and calendar year and will likely accelerate as you move through it.

Our efforts on e-commerce are no different than what we've been doing. It's a focus on content. It's a focus on search. It's making sure we're connecting with consumers digitally. It's making sure that we're executing those conversion activities to make sure that we're driving purchase as consumers are searching for batteries online. A lot of tactical stuff, but it's also continuing to invest in the brands, continuing to invest in the products. It's not indifferent than what we've done. It's probably just more of it and it's obviously worked for us in the past. It's working for us on Auto Care as well, where you're seeing our growth rates, particularly in the appearance subcategory, are really almost triple of what you would see the growth rates for the category. And so we're making sure that our digital team is emphasizing not just batteries but also Auto Care and lights as well, and we're seeing tremendous growth numbers across all 3 businesses online.

Next question is from Andrea Teixeira with JPMorgan.

So my question is on A&P. Yes. So if you can double-click on the $0.06 higher than previous guidance. So you called out digital, but how much would you say you need to catch up on promo you discussed earlier, in particular, against the 9% comp in the fourth quarter of last year?

And do you expect some promo investment in Rayovac to better position it against private label to help the consumer doing the recession, that will be careless (inaudible). As a follow-up also on the exit rates, you talked on the growth in June being below the performance in May. Could you speak to how trends have continued to progress since June? And then just to -- just anything to point out in certain markets whether reopening has gone the other direction? So did you see similar uptick in consumption, sorry, pardon? Or is more normalized behavior in your view?

I think the way to think -- there's a lot of questions in there, Andrea. I think A&P spend, we've consistently said between 5% and 6%. It's consistent with the way we're guiding for this fiscal year, and we'll land within that. We obviously have to adjust as we go through the year on how we allocate those funds and invest them and make sure that the appropriate return is there. But we have seen an opportunity to invest behind Auto Care, particularly when you're seeing some of those category trends. I don't want to talk about future promotional activities on any of our brands. But I think from, again, A&P, 5% and 6%, Rayovac is a key part of our -- of the category of our portfolio. We're going to make sure we invest. You do tend to see that to be a little more tactical investment as opposed to sort of campaign investment on A&P. In terms of the trends that we've seen in the battery category, they continue to be strong. I mean, again, these are going to be U.S. numbers as much as we've cautioned people that there's different dynamics in the international. It was up 37%. We said in the prepared remarks. If you look at the one month in June, it was 23%. So still strong growth, moderating from where it was.

International markets, it really depends on the market you're in. You are seeing bounce back rather quickly as consumers get out and in the stores. But you also are seeing some resurgence in some of the shelter-in-place orders. I mean, just yesterday, Manila put out a fairly restrictive shelter-in-place order. We have cities like Melbourne in Australia that are putting out some shelter-in-place orders. So it just changes rather rapidly. We have leaders around the globe who are responding to that and making sure. But no, certainly, as consumers internationally are able to get out into stores, we would expect to see normalized demand levels. I think the question in each market will be when that will be and then how long will that last? And -- but I think we feel very confident in our international plans. We just need the restrictions to allow people to get out and shop.

The next question is from William Reuter with Bank of America.

So if we think about the deleveraging path where you guys are on, we're a little bit behind where I think we thought we'd be a couple of years ago. Not that anyone can plan for COVID, but leverage does remain a little bit elevated. Are you at the point where you would consider M&A opportunities, given the strong free cash flow of the business? Or do we want to reduce leverage from here before you'd really think about taking on such opportunities?

So I think -- go ahead, Alan.

Sorry. I was going to say, just 2 real quick answers and then have Tim build on it. So the short answer is, obviously, longer term, we remain committed to a balanced approach in capital allocation. And we're going to continue to primarily focus on paying down debt. In terms of M&A, the short answer would be, we will continue to look at opportunities, but there'll be bolt-ons in battery or Auto. And then Tim, any builds you to have?

No. That - spot on.

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

I just want to say thank you for joining us on the call today, and we appreciate your interest in Energizer. Thank you.

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