Energizer Q3 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 11 speakers on the call.

Operator

Good morning. My name is Nick, and I will be your conference operator today. At this time, I'd like to welcome everyone to Energizer's Q3 Fiscal Year 2023 Conference Call. After the speakers' remarks, there will be a question and answer session. As a reminder, this call is being recorded.

Operator

I'd now like to turn the conference over to John Bolton, Vice President, Treasurer and Investor Relations. You may now begin your conference.

Speaker 1

Good morning, and welcome to Energizer's Q3 fiscal 2023 conference call. Joining me today are Mark Levine, President and Chief Executive Officer and John Drabic, 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. Call.

Speaker 1

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.

Speaker 1

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 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.

Speaker 2

Thank you, John. Good morning, everyone, and welcome to our Q3 earnings call. There are 3 key messages I would like to reinforce in my remarks today. First, when we laid out our priorities for fiscal 2023, We highlighted 3 strategic areas of focus: restoration of gross margin, the return to healthy free cash flow generation and reduction of debt. 3 quarters into the year, we have solidly delivered against all 3.

Speaker 2

2nd, 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. And third, we are making tremendous progress on our project momentum with the savings and cash flow generated in the 1st 3 quarters exceeding our expectations. We have also identified a substantial pipeline of incremental initiatives, which will be executed over the next 2 years. As a result, we are increasing our savings expectation by $50,000,000 for a total program savings of $130,000,000 to $150,000,000 by the end of fiscal 2025.

Speaker 2

Let's dig into the progress we have made. Gross margin recovery has outpaced our expectations through the first 3 quarters of the year and we are on track to achieve a gross margin of approximately 40% in the 4th quarter, 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 $45,000,000 to $50,000,000 in savings, an increase versus our previous forecast of $30,000,000 to $40,000,000 We are not yet back to pre pandemic levels, 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 2 $1,000,000 year to date, while absorbing the cash outlays required by Project Momentum. And finally, we have paid down $200,000,000 of debt in the first three quarters and are on track to reduce leverage by over half a turn from our peak in fiscal 2022.

Speaker 2

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 Traits 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. Driving lower foot traffic at retailers who benefit from home sales, which is a key channel for batteries. 2nd, 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.

Speaker 2

And 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 3 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 U. S.

Speaker 2

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.

Speaker 2

In the quarter, we improved segment profit by 2 70 basis points and 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 $32,000,000 in savings.

Speaker 2

The addition of a 3rd year as well as the inclusion of more initiatives into the program will increase our savings range by $50,000,000 to $130,000,000 to $150,000,000 by the end of fiscal 2025. Earnings release. 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 2 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, reduced spans and layers to create a flatter, more agile organization.

Speaker 2

Overall, roughly 60% of the program savings will be generated from operational and distribution network efficiencies, 20 from procurement savings and 20% from SG and A improvements. Consistent with our previous guidance, we expect 80% of the program savings will be delivered through gross margin with the balance to SG and 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 Q3 performance and balance of the year guidance.

Speaker 3

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

Speaker 2

in the quarter.

Speaker 3

Auto volumes were down roughly 300 basis points almost entirely due to lower refrigerant sales owing to cooler weather in the 1st 2 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 2nd quarter 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.

Speaker 3

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 and A decreased $5,600,000 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 and P as a percent of sales was 5.4% consistent with our investment levels in the prior year. Interest expense increased $1,100,000 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 $126,800,000 $0.54 per share.

Speaker 3

On a currency neutral basis, adjusted EBITDA and adjusted earnings per share were $132,800,000 $0.58 per share respectively. Through the 1st 9 months of the year, we have generated $261,000,000 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 $200,000,000 of debt year to date and over $260,000,000 over the last four quarters. 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.

Speaker 3

Now turning to our outlook. As we entered the Q3, we anticipated top line organic growth of 3% to 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 May and much lower sales in non tracked channels during the quarter. As we start the Q4, we have seen an acceleration in battery category performance and warmer weather in June July and now expect organic revenue in the Q4 to partially recover to roughly flat year over year. Call in, we are now calling for full year organic revenue to be down low single digits.

Speaker 3

We also expect gross margins in the 4th quarter to be up 3 400 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 and 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 and A in the 4th quarter will improve by roughly 100 basis points relative to the prior year due to continuing project momentum savings. 4th quarter 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. And finally, at current rates, we expect the currency impact on earnings to be slightly positive in the quarter.

Speaker 3

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 $1.20 per share and adjusted EBITDA of $173,000,000 $183,000,000 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% to 12% of net sales.

Speaker 2

Now I'd like to turn the call back over

Speaker 3

to Mark for closing remarks.

Speaker 2

Thanks, John. Though the year has not progressed as expected, 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'm 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

First question will be from Bill Chappell, Chappell Securities. Please go ahead.

Speaker 4

Thanks. Good morning.

Speaker 2

Good Morning, Bill. Morning,

Speaker 4

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

Speaker 2

Yes, good question, Bill. I'll get started and then I'll Turn it over to John, who can give a little bit of a year over year bridge. The Q3 definitely did not transpire as we expected. There was also significant positives for the quarter, but 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 for the call down on the top line.

Speaker 2

In tracked channels, volume trends remain negative longer than we expected, although we've seen this turn positive. So that's a point for why we feel confident that we've turned the corner on that. If you look at the latest 4 week data that ended July 23, it was up volume 4.2%. In untracked channels, which home center and hardware, those have trailed track channels, and 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.

Speaker 2

And then the final piece is refrigerants, which with the weather in May 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 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 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 half a turn ahead of schedule and we've been able to find 50,000,000 dollars of additional savings and added that to momentum. So certainly a challenging quarter from a top line perspective, but We also feel like it validates a lot of what the work the teams are doing to make sure that we put the business back into shape to compete long term and deliver value. John, you want to talk Q3?

Speaker 3

Yes. Maybe just to put some numbers behind what you just said, Mark. The category volumes improving, but still negative. That was a 270 basis point decline year over year. The non tracked channels issue was home hardware and certain club stores.

Speaker 3

That was about 280 basis point drag. The device manufacturers delaying or reducing orders in the quarter, that hit us for about 150 basis points. And then the cooler weather in April May impacting refrigerant sales, that was a 2 20 basis point decline. Those were partially all offset by still 6 50 basis points of pricing. And then maybe just to give a little bit of color what we're thinking for the Q4.

Speaker 3

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 U.

Speaker 3

S, that's probably a 200 basis point drag and then the device manufacturers OEM sales is probably another 100 basis points. And 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.

Speaker 2

And 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.

Speaker 4

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

Speaker 2

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 1,000,000,000 cells larger globally than it was pre pandemic in the U. S. It continues to be larger.

Speaker 2

So what we've said in the past is you and 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 we have worked our way through some choppy waters as it relates to macro pressures, cautious consumers as well as all the pricing that both Energizer as well as all CPG companies have taken over the last 12 to 18 months. We're working through that cycle and think we're about through it.

Speaker 4

Okay, great. Thank you.

Speaker 2

Thanks, Bill. Thanks, Bill.

Operator

Thank you. Our next question will be from Laura Lee Barmint of Barclays. Please go ahead.

Speaker 5

Great. Thanks. Good morning. So first thing, I just sorry, I wanted to clarify, you've given so much great detail, but on the non track channel shortfall, Was that destocking at these retailers in particular? Was there shelf space changes?

Speaker 5

I was just curious a little bit more detail on the non tracked piece.

Speaker 2

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

Speaker 5

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

Operator

Correct.

Speaker 5

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

Speaker 2

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 are 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.

Speaker 5

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

Speaker 2

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.

Speaker 3

Yes. Well, let me talk a little bit about the Q3 That's what we delivered and then I think we can talk about where we think that's going even a little bit further out. So when we're looking at The upcoming Q4, last year, we built excess inventory in a rising cost environment. I talked about that a couple of minutes ago. And that really resulted in Q3 margin last year above 40% as we had some temporary benefit to the P and L as a lot of those costs got moved into inventory.

Speaker 3

They came back in the Q4. That's going to give us a pretty easy comp going into this Q4. I would say broadly, when you start to look at our raw material We've seen decent favorability across most of the input complex. And so spot prices, as I look 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 and L really in the Q4. I think it will be the time in a while that we've seen raw material input costs turn favorable overall.

Speaker 3

We still are seeing some headwinds from higher labor and energy costs, but I think that we're getting into a pretty good spot here. And then I think third, as you talked about, we've got momentum savings that we expect to contribute about 125 basis points this year. So all of those together, we think that the Q4 we're going to be up 3 50 to 400 basis points. That's going to put us up for the year 150 basis points to 200 basis points, which is ahead of where we originally thought we'd be. And as we look at the Q4 going into 2024, All of the key indicators would say that we've got good positive momentum going into next year to see continued improvement in that gross margin line.

Speaker 2

And then Lauren, I think long term, the number that 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 want to make sure that we get back to longer term. John and I both have aspirations beyond that, but we don't want to get too far ahead of ourselves and let's achieve that gross margin on a consolidated basis that was existed at the acquisition first and then go from there.

Speaker 5

Okay. Thanks. I really appreciate the detail.

Speaker 2

Thanks, Lauren. Yes. Thank you.

Operator

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

Speaker 2

Hey, good morning folks. Good morning, Jason.

Speaker 6

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

Speaker 6

No. Okay. And then if I'm looking at your battery sales and it looks like we're down now versus pre COVID levels, which is unvolmetrically, which is kind of shocking given what you've discussed many times, 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. So what's the Are there has there been a reacceleration of the secular demand destruction within batteries?

Speaker 6

And if so, where are you seeing that weakness?

Speaker 2

Jason, we may be looking at different data and 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. Now our data includes both the measured universe in the U. S. As well as Amazon, which is where as you've seen growth in that channel as well.

Speaker 2

It does not include home center, but it does include Measured Plus Amazon. If yours does not include Amazon, you're missing a big piece of the component growth that existed during that period of time. If you have Amazon in your numbers, then maybe it's worth a longer conversation to understand where the disconnects may be. But we are showing volumes both in the U. S.

Speaker 2

And globally higher than pre pandemic levels.

Speaker 6

I'm just looking at your reported sales. Your battery sales were up 14.5% This 2019 same quarter, you've taken more than 14.5% pricing. Your and you're telling me you grew share. So your global battery volume is down versus 2Q 2019, I believe, assuming you've taken more than 40.5% pricing And you've said you've grown share implicitly the category is not even folded that.

Speaker 2

Well, if you're speaking specifically on quarter over quarter sales over a multi year period. I want to make sure we went back and understood from a detailed level what was in and out of those quarters from a timing perspective. So let's make sure we follow-up on that because at a broad level, 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 4 year period. I think we'd need to dig into that further, make sure we were comparing apples to apples.

Speaker 6

Yes, that's fair. That's fair. There can definitely be timing issues quarter over quarter. All right. Well, let's dig in afterwards.

Speaker 6

Thank you. I appreciate it.

Speaker 2

I'll pass it on. Yes. Thanks, Jason. Thanks, Jason.

Operator

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

Speaker 7

Thank you. Good morning. So thank you for the bridge. It's super helpful in terms of the revenue per Protracted and on tracked, but also the volume side. So I was wondering, as we all ask about top line, How you're seeing in terms of the what the consumer is doing at this point?

Speaker 7

It doesn't look like It's necessarily a necessity, but it seems that the consumer is taking inventory out of the pantry. So I was wondering if you can comment on that and how do you see that inventory shift or if you're seeing Consumer is more sensitive to your point in your prepared remarks that their basic needs and then comes batteries. If you're seeing them making tough choices as it relates to their own choices there on the shelf, like perhaps private label picking up. We don't See the Amazon private label that much. So it's challenging for us on the sell side to see, what's the dynamic there, but if you can comment on, 1st, the customer behavior and then second, the

Operator

customer hearing from your customers.

Speaker 2

Sure, Andre. A lot of topics within that question. Let me make sure I Let me give a shot at covering all of it. 1st 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 food, fuel, shelter are going to come first in terms of the priority stack.

Speaker 2

Batteries is an essential product, but it's beneath those areas. And 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. But and what we're seeing from 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. So they may be skipping a cycle.

Speaker 2

They may be just engaging in other activities and they may be borrowing 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's tough blame it on elasticity, I would say our elasticity models have roughly held. I would say the recovery has taking a little bit longer than we anticipated.

Speaker 2

I'm not sure I would attribute that to our elasticity or pricing as much as just the general environment that consumers are shopping in as well as the need to absorb price increases which have occurred across the store. So I would say we have We are very confident heading into Q4 in terms 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, but as it flows through the P and L, we continue to make progress in all the areas that we can control, which is why we're able to hold the earnings ranges.

Speaker 7

Okay. Thank you.

Speaker 2

Thanks, Andrea.

Operator

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

Speaker 8

Good morning. I just have 2. The first is you had alluded to the fact that we could see some tailwinds from lower input costs in 20 24. I know it's early and you're probably not going to want to say a lot, but is there anything you can expand on that in terms of which input costs specifically and will these be offset by Other areas of inflation?

Speaker 3

Bill, there's puts and takes, but we have seen a number of Inputs on both the battery and the auto side come down. So zinc has come down pretty significantly over the last couple of Which we'll start to see flow through our COGS in the 4th Q1 next year. Lithium has abated a little bit, although that one moves around a lot. We're still seeing 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.

Speaker 3

So those are coming not all the way down to where they were pre pandemic, but have come off their highs a Over the last couple of months, so those are should be benefits to us.

Speaker 8

Okay. And then 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 With their expectations or hopes around how maybe that promotional strategy will change?

Speaker 2

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 going to do some shifting between A and P and trade spend in order to have some of that spend be closer to the consumer. We're not interested in share promotion.

Speaker 2

I think what we're focused on is keeping the consumer engaged in the category, maintaining the premium end of the category, make smart investments in any promotion that we do engage in while continuing to improve gross margin overall.

Speaker 8

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

Speaker 2

Thanks, Bill.

Operator

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

Speaker 9

Hi, good morning. I had two questions. In Mark's discussion on 2 of the 3 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?

Speaker 2

What we're seeing the recovery that we're seeing is in track plus Amazon. So it's an amalgamation of those 2 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 3

Yes, Hal. We specifically said that was probably a 200 basis point drag in the Q4 in the non track channels.

Speaker 9

Got it. And the last one is, 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?

Speaker 3

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

Speaker 9

Great. Thank you very much.

Speaker 2

Thanks. Thank you.

Operator

Next question will be from Carlin Casella, JPMorgan. Please go ahead.

Speaker 10

Hi. Most of my questions Just one clarification, you talked a bit about inventory at retail on the battery side. Did you Give us a sense for inventory at retail, how comfortable you are with it on the auto side. Yes. And if you can give us some detail by channel type of channel?

Speaker 2

Well, I mean, it's mass and auto channels is really where 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 have slightly elevated or slightly lower inventory levels depending upon tool retailer and an individual subcategory, but on balance, there are not inventory concerns that we have in that business.

Speaker 10

Okay, great.

Speaker 5

The rest

Speaker 10

of my questions have been answered. Thanks.

Speaker 2

Thanks, Taylor.

Operator

Thank you. This concludes our question and answer session. I'd now like to turn the conference back over to Mr. Mark Levine for closing remarks. Please go ahead.

Speaker 2

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

Operator

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

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