Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Energizer Holdings (ENR -0.40%)
Q2 2022 Earnings Call
May 09, 2022, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

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 second quarter fiscal year 2022 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.

Jackie Burwitz -- Vice President, Investor Relations

Good morning, and welcome to Energizer's second quarter fiscal 2022 conference call. Joining me today are Mark LaVigne, president and chief executive officer; and John Drabik, chief financial officer. A replay of this call will be available on the investor relations section of our website, energizerholdings.com. During this call, we will make forward-looking statements about the company's future business and financial performance, among other matters.

These statements are based on management's current expectations and are subject to risks and uncertainties, including those resulting from the ongoing conflict between Russia and Ukraine as well as the COVID-19 pandemic, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in the reports we file with the SEC. We also refer in our presentation to non-GAAP financial measures.

10 stocks we like better than Energizer Holdings
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now... and Energizer Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of April 7, 2022

A reconciliation of non-GAAP financial measures to GAAP 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 categories and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2021.

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

Mark LaVigne -- President and Chief Executive Officer

Thanks, Jackie, and good morning, everyone. As you saw in our release posted earlier today, we delivered a strong second quarter, which is a testament to our team's dedication and resilience. Due to the hard work of our colleagues around the world, we are very well positioned and excited about the prospects for our business. Let me start by highlighting some key themes and headlines to take away from today's call.

First, we successfully executed pricing actions and growth plans, which generated healthy organic top-line growth. As a result of our performance in the first half of the year and the benefits of pricing, we are increasing our top-line guidance to low single-digit growth for the full year. Second, while we remain focused on preserving gross profit dollars, the combination of our pricing efforts and internal cost savings initiatives should begin to drive gross margin expansion in the back half of the year. From a category standpoint, we operate in categories that are meaningfully larger than pre-pandemic levels with both volume and value up considerably on a two-year stack.

And finally, the investments we are making in our global supply chain are paying off. Fill rates are steadily improving, and we have enhanced visibility and connectivity from our digital transformation. These improvements are designed to drive efficiencies to reduce working capital, allowing us to return to normalized free cash flow generation in the back half of the year. Let me take each of these in turn.

First, we delivered organic growth of 1.3%, driven by a combination of global price increases and strong growth in auto care. This is over and above the almost 13% organic growth we saw in the prior-year quarter. In the battery segment, we experienced normalization in net sales as volumes declined as compared to the elevated prior-year period. This volume decline was partially offset by pricing as well as distribution growth in key markets.

Our auto care business delivered organic sales growth of nearly 20% in the quarter, with double-digit growth across both North America and International, more than offsetting the organic decline in battery. This growth was driven by a combination of pricing, timing of refrigerant shipments and expanded distribution, particularly internationally, as we continue to execute our international growth plans behind armor all and our portfolio of iconic auto care brands. Turning to margins. The macro environment, in which we are operating, remains volatile.

We recognize the need to generate improved insights early in the pandemic, and our investments in data and analytics have enabled steadily improving fill rates. That improved connectivity is now allowing us to see the inflationary impacts earlier and take quick action on pricing to ensure we are offsetting the dollar cost of these headwinds. Those insights are also highlighting areas where we can be even more efficient, which will drive margin expansion over the balance of the year. Our latest round of broad-based pricing actions took effect in each of our categories toward the end of the quarter.

We also announced another round of targeted pricing in areas that continue to experience cost inflation. In general, these pricing actions have lagged the impact of the cost increases we have seen. And as they take full effect, we anticipate meaningful margin improvement in the second half of the fiscal year. Third, our categories continue to perform well and remain larger than pre-pandemic levels.

In the battery category, both volume and value remain up double digits on a two-year stack basis. While we saw declines in the latest three-month data, we expect price increases executed across the category will drive an increase in value over the balance of the year. Our iconic brands outpaced the category, resulting in a 2.8% share point gain versus last year, with growth across each region in total batteries. In particular, we experienced growth in the U.S., driven by expanded distribution as well as strong performance internationally, including share gains in 17 of our top 20 markets.

Turning now to auto care, where the fundamentals of the category remain healthy. The net cars in the car park, the average age of vehicles and the number of miles driven are all growing compared to pre-pandemic levels. As we look ahead, we are excited about the growth engine we are creating in auto. Our business continues to grow rapidly and the platform is designed to support our future growth aspirations while also improving margins.

The growth will come from a robust innovation pipeline, which is full of products containing new exciting technology, designed to deliver the performance, value and convenience expected by our consumers. We are also connecting with consumers through marketing communication and efforts to drive engagement with our brands. A great example of how all of this comes together is our armor all partnerships with the Formula One champion, Red Bull racing team and Formula One racing legend Jensen Button. Formula One is truly a global sport and resonates in every market and our sponsorship has led to millions of impressions through everything from new in-store displays to presence in social media in markets around the world.

We have the right combination of product innovation, marketing efforts and operational excellence to continue to grow this business in the years ahead. And finally, we are starting to see some early dividends from our investments in digital transformation. I talked earlier about the benefits of greater visibility and faster insights on our margins. We also expect these investments to enable us to maintain acceptable fill rates while prudently reducing our inventory levels as we continue to see stability in the global supply chain.

While our heightened inventory levels remain important to serving our customers and consumers, we build this combination of a stabilizing global supply chain and better data and analytics will enable us to decrease inventory toward the end of the fiscal year, unlocking free cash flow to continue to invest in our business and reduce debt. As you can see from our results, our business is strong and our strategy is paying off. We have overcome significant and the investments we have made position us well for the future and will allow us to emerge stronger than before the pandemic. I am incredibly proud of our colleagues around the world and the results we delivered this quarter, which are a testament to our team's commitment to success.

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

John Drabik -- Chief Financial Officer

Good morning, everyone. I'll start this morning with some highlights on progress we are making in a few focus areas, followed by an overview of our financial performance this quarter and our outlook for the remainder of the year. We like many others have experienced significant cost pressures as inflation has proven to be more permanent and pervasive than many anticipated. As such, we are redoubling our efforts to address the drivers of gross margin across our businesses and regions.

We have historically employed dedicated teams focused on pricing and revenue management as well as ongoing efforts to optimize costs in our supply chain. Given the fast-paced environment which we have been operating, we consolidated those efforts to prioritize the preservation and expansion of gross margin. By bringing those teams together at the beginning of the year, we were able to execute incremental pricing and focused cost savings projects that we expect to help deliver the outlook we initially provided in November despite continued inflationary pressures. By further coordinating these efforts and expanding or involvement, we were able to deploy resources toward our highest ROI opportunities.

We have already identified a substantial pipeline that we can undertake over the balance of this fiscal year and future years to enhance our portfolios, improve pricing and reduce costs. This program is designed to ensure we maintain the healthy growth in both batteries and auto care, while accelerating margin improvement. Based on the work we have done to date, we already expect incremental gross margin improvement in the back half of the year and remain on track to deliver the full year gross margin rate as guided in our first quarter earnings. Our working capital has been elevated throughout the course of the pandemic.

The increase is primarily due to incremental investments in inventory attributable to inflation, the impact of a more elongated supply chain, increased safety stock and more recently, prebuild for the auto care season. These investments were critical to ensure customer service in the volatile environment of the last two years. However, improved visibility from our digital investments as well as improved stability in the global supply chain, should allow us to reduce the heightened levels of inventory and lower our working capital needs. As a result, we expect to return to more normalized free cash flow generation in the second half of the year, and we'll prioritize debt reduction as our cash flows recover.

Finally, over the last two years, we have made significant strides in our digital transformation, which has elevated the quality of our data, the visibility we have over multiple aspects of our business and our analytic capabilities. As you have already heard, these tools are yielding substantial benefits. And as we seek to implement new tools and capabilities, we will remain focused on areas with the highest return potential. For instance, we have been able to greatly improve the quality of the analytics on our ocean freight spend and have find areas to reduce transportation costs and optimize container utilization, which can lead to cost reductions as well as more efficient inventory management.

We have stayed disciplined and focused on short and long-term priorities while managing through the crisis. Our digital transformation is starting to pay dividends by focusing our efforts on high priority areas like gross margin and working capital management. And by continuing to develop our digital capabilities, we are confident that we will continue to generate improvement alts in the quarters and years to come. Now, turning to our financial results.

Reported sales of $685.4 million were essentially flat, while organic revenues were up 1.3%. Pricing actions globally delivered roughly 5% to organic growth and additional distribution contributed another 1%. While volumes were better than expected during the quarter, they declined roughly four and a half percent as we lapped elevated COVID-related demand in the prior year. Looking at our two segments, battery and lights organic revenue was down hree and a half percent and primarily due to elevated comps with the prior-year quarter as last year grew roughly 15%, driven by that elevated COVID-related demand.

We were able to partially offset these volume declines with our first round of pricing actions and distribution gains. As a reminder, our first round of pricing went into effect in the December quarter, and we have executed additional pricing that went into effect mid-March. Auto care continued its strong performance with organic sales up 19.4%, primarily due to pricing actions, a shift in timing of AC Pro shipments from the third to second quarter and distribution gains in both the U.S. and international markets.

We've implemented numerous price increases across our portfolio with the most recent round going into effect in early April. As expected, adjusted gross margin decreased 560 basis points to 34.9% as increased input costs, including material, transportation and labor were partially offset by the impact of our pricing actions. A&P as a percent of net sales was 2.9% for the quarter and 4.7% for the first six months. While the second quarter is typically our lowest quarter for A&P spend due to the seasonality of both of our businesses, this year, we made a conscious decision to shift more of our auto care investment in the third and fourth quarters as both periods created higher ROI for our investments last year.

As a result, we anticipate A&P spending for the full year to trend more toward our historical norm as we continue to prioritize investment in our brands. Excluding costs associated with acquisition and integration and exiting the Russian market, SG&A as a percent of net sales was 17.2%, up from 16.7% in the prior year. On an absolute dollar basis, SG&A increased $3.5 million due primarily to higher IT spend related to our digital transformation. Similar to the first quarter, segment profit for both battery and lights and auto care benefited from continued strong demand, pricing actions and distribution gains.

However, inflationary input cost pressures more than offset the stronger-than-expected top-line performance, resulting in segment profit declines of $30.1 million for battery and $4.6 million in auto care. Interest expense declined roughly $800,000 as the benefit of our refinancings over the last year more than offset an increase in debt, which was used to finance investments in incremental inventory. In March, we took the opportunity to term out our revolver and completed a $300 million bond offering at six and a half percent. As a result, we expect slightly higher interest expense in the remainder of the year.

Our debt capital structure is now 86% fixed at a blended average interest rate of 4.2% with minimal maturities prior to 2027, which positions us well in the current rising interest rate environment. As we mentioned on our last call, our mandatory convertible preferred stock converted to approximately 4.7 million common shares on January 18. Weighted average shares outstanding were 71.6 million for the quarter. And for fiscal '22, we are anticipating weighted average shares outstanding to be approximately $72 million.

Based on our outperformance on the top line in the first half of the year and the success of our pricing actions across the globe, we are increasing our outlook for net sales to low single digits. While the operating environment remains volatile, the pricing actions we have taken, along with cost management efforts are expected to offset inflationary pressures. As a result, we are reaffirming our outlook for adjusted earnings per share of $3 to $3.30 and adjusted EBITDA of $560 million to $590 million. I do want to note that these results exclude any onetime charges related to the exit of our Russian operations during the second quarter.

Now, I'd like to turn the call back to Mark for closing remarks.

Mark LaVigne -- President and Chief Executive Officer

Thanks, John. Through the first half of the year, our team's execution has been exceptional, our categories continue to perform well globally, and our pricing initiatives have delivered as expected. We have laid the groundwork over the last several quarters to restore the profitability and cash flow generation this business is capable of, and we are optimistic about the days ahead. We remain well positioned in the marketplace and have complete confidence in our team's ability to win the day by staying focused on the consumer, delivering for our customers and doing so despite any challenges which may come our way.

With that, I will open the call for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question is from Wendy Nicholson with Citi. Please go ahead.

Wendy Nicholson -- Citi -- Analyst

Hi. Good morning. I had two questions, if that's OK. First, on the battery business, sounds like your market shares are strong there, which is awesome.

I'm curious if you see any sort of, even just recently, any tick up in private label shares just given the economic situation and maybe increasing price sensitivity on the card of consumer. So anything that you're seeing there would be helpful. And then on the auto business, again, demand I know you said it was really strong, but I'm wondering if you anticipate in the summer months when seasonally a bigger business. Again, just with the higher gas prices, are you hearing from the trade any comments that they expect fewer people to be on the road, fewer people driving portion, anything like that, just given where gas prices are? Thank you so much.

Mark LaVigne -- President and Chief Executive Officer

Good morning, Wendy. I'll start and then I'll turn it over to John to maybe talk about the growth expectations we had in the past. On your first question as it relates to trade down, we really haven't seen it yet. We maybe have seen a slight trade down in terms of pack sizes, but the consumers are really sticking with premium brands.

In fact, private label and batteries were down in the U.S., about 2.5 share points and globally, just over two share points. That's obviously something we're not going to take for granted. We're going to watch it carefully. To the extent it happens, any trade down were to happen, we have value brands in our portfolio and can leverage those as we forward.

On auto care, the underlying fundamentals of the category are really healthy. Number of miles driven exceeds pre-pandemic levels the size of the car park, also going up as well as the age of the fleet now exceeds 12 years old. All of those factors are healthy drivers for category growth. And as a result, we expect great things for this business over the balance of the fiscal year.

And John, do you want to talk about sort of growth in Q3, Q4?

John Drabik -- Chief Financial Officer

I think we called up organic growth for the rest of the year, Wendy, and that is driven in large part by what Mark had talked about. So I think we're pretty optimistic about the pricing that we've taken and the continued performance. So we're expecting that growth to happen in the back half.

Wendy Nicholson -- Citi -- Analyst

Terrific. That's very helpful. Thank you so much.

Mark LaVigne -- President and Chief Executive Officer

Thanks, Wendy.

Operator

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

Bill Chappell -- Truist Securities -- Analyst

Thanks. Good morning. 

Mark LaVigne -- President and Chief Executive Officer

Good morning, Bill.

John Drabik -- Chief Financial Officer

Hey, Bill.

Bill Chappell -- Truist Securities -- Analyst

On the auto care, certainly, good start. Can you maybe just quantify the pull forward? Maybe I missed that. And also, has there been any negative impact from just weather we've seen from the garden companies, even some of the pet companies that it's been a late start to the spring season, colder, wetter than expected kind of in the southern half of the country. And so could the numbers have even been better?

John Drabik -- Chief Financial Officer

Well, I think maybe let's break down. So the growth on that 20%, it's about -- it's a little more than half was pricing. A little bit less than half was that pull forward of the AC Pro, and that's a shift from the prior year where I think we're having trouble getting our hands on some of that. So we shipped earlier this year than we did last year.

So I think it was a good quarter. I don't know if there were things left on the table, and I haven't heard that we've really been impacted by weather to this point, although it has been colder.

Mark LaVigne -- President and Chief Executive Officer

Q2, Q3 build always tends to be a bit of an inflection point in terms of shipments for us, and they tend to shift back and forth year to year. It has been a little bit from a weather standpoint, a later start to the season, but it's really starting to pick up. You're seeing the weather turn. And as long as, if you recall, a couple of years ago, we had an unusually long and cold spring.

And as a result, sales suffered. We're not seeing that same dynamic play out. Retailers to the point of John, on pull forward have continued to invest in inventory to be ready for when the season starts. So Q3 is really when it gets going, and if the weather cooperates, we should be fine.

Bill Chappell -- Truist Securities -- Analyst

Got it. And then on the distribution gains, I think you alluded, it's primarily international. Are you seeing distribution gains in battery and then maybe kind of any thoughts on how Rayovac's doing in terms of that trade down?

Mark LaVigne -- President and Chief Executive Officer

Rayovac has been holding steady. As we mentioned, we haven't seen trade down yet in the category. To the extent that we've taken pricing and the pricing continues to go into effect, typically, you may see some trade down. We're prepared for that with both Rayovac and Eveready value brands in our portfolio.

Distribution gains in batteries fairly broad-based. You're seeing it in just in every international trade group. You're seeing share gains across both modern developing and distributor markets. You're also seeing share gains in the U.S.

Our distribution gains in the U.S. should start to cycle off late Q3. And as a result, we should plateau, we wouldn't expect it to go down and will be in line with the category.

Bill Chappell -- Truist Securities -- Analyst

Great. Thank you.

Mark LaVigne -- President and Chief Executive Officer

Thanks, Bill.

Operator

The next question is from Andrea Teixeira with J.P. Morgan. Please go ahead.

Andrea Teixeira -- J.P. Morgan -- Analyst

Thank you. I was just trying to break down the pricing that, obviously, you gave us a good bridge for the pricing of the quarter, but I'm hoping to get a little bit of color into the second half. What are you embedding pricing? How much of that is already in the trade or coming up? And then on that also, part of it, like you were some -- you got some distribution gains. I was hoping to see if you believe things will flip, right, from the battery side coming into positive.

And then if we should expect. It doesn't look like you're sounding that auto care will continue, but you have a tough comp. So I was just trying to -- it's a second part question on the auto care and going back to Bill's question, and you mentioned that you see pro shipments from last year. How we should be thinking on auto care, the puts and takes? And how to think about the auto care numbers into the third quarter?

Mark LaVigne -- President and Chief Executive Officer

I'll start there, Andrea. I think in terms of pricing, all pricing that we have initiated with retailers is built into the outlook. We've also built in the historical elasticities associated with price increases into that outlook. In terms of auto care, we are, as you mentioned, we do have tough comps in large part because of the pricing actions we've taken on batteries and auto care, we do expect organic growth for both of those businesses going forward.

John, any other color?

John Drabik -- Chief Financial Officer

Maybe just a little more color on the back half. I mean, Andrea, we were roughly flat through the first six months, we've called up our top line. I would -- we're looking at organic growth in the back half of probably mid to high single digits. So it does grow substantially with that pricing.

Andrea Teixeira -- J.P. Morgan -- Analyst

No, that's great and best of luck. Thank you, both.

Mark LaVigne -- President and Chief Executive Officer

Thanks, Andrea.

John Drabik -- Chief Financial Officer

Thank you.

Operator

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

Lauren Lieberman -- Barclays -- Analyst

Great. Thanks. Good morning. Two questions for me also.

First was just curious if you could articulate the degree to which your inflation forecast have changed. So knowing you've held the expectation for bottom line, but just as we think through those building blocks, how much more the sort of grow level inflation is impacting the business versus how much you're hedged and they're not experiencing that inflation? So that was one. And then the second was, as you've talked about starting to work through some of the inventory that you've been holding, how we should be thinking about operating leverage as you start down that path. So it's end of the year that starts to happen not to look forward into '23, but should we be thinking about there being some drag on margins from working to that inventory? Thanks.

John Drabik -- Chief Financial Officer

Yeah, Lauren. Maybe I'll start with the first one real quick on what we've seen. So last quarter, we had kind of called full year '22, almost $250 million of inflationary cost pressures. As of today and kind of as we finish up the quarter, we still think we're roughly in line with that.

Now there's been puts and takes and so some items have gone up more. But we've seen some pullback in others. So all in, I think we've plateaued a bit over the last quarter from an inflationary standpoint. And so I think we feel like we're in a pretty decent place there.

As you think about operating levels as we go forward, there will be some actions that we'll take to work down inventory. And we've taken that into account as we look at '22, I'm not going to give '23 guidance, but we're mindful of the impacts of slowing things down in order to get through that. So we'll give a better outlook as we get to the end of the year, but it is something that we're working on.

Lauren Lieberman -- Barclays -- Analyst

Helpful. Great. All right. Cool.

Thank you.

Mark LaVigne -- President and Chief Executive Officer

Thanks, Lauren.

Operator

The next question is from Javier Escalante with Evercore ISI. Please go ahead.

Javier Escalante -- Evercore ISI -- Analyst

Hi. Good morning, everyone. My question is to see whether you can give us a breakdown or a bridge of gross margin change in the second quarter versus a year ago, the impact of commodities, logistics, and the benefit of pricing and how does it look into the second half, where margins is going to span? Secondly, and related to that is the run rate of pricing. So it's 5% in Q2, what was the exit rate? What is the level that you are aiming at with the third round? And whether that round is enough to get you back to gross margin recovery? Thank you.

Mark LaVigne -- President and Chief Executive Officer

On that last point, Javier, I'll cover that really quickly, and then I'll turn it over to John for sort of talk through the bridges in the quarters. But on the third round of pricing that we mentioned, it's a targeted price increase in a subset of our categories and we'll continue to monitor those. But I would say on -- in terms of all of our price increases, the original expectation as we go into it is to preserve gross margin dollars. And then over time, we'll be able to work on gross margin rate going forward.

But John, on the breakdown?

John Drabik -- Chief Financial Officer

Yeah, Javier. So we had gross about 920 basis points of cost increases. That was really transportation of about 470, raw materials of 340 and labor of 110. We were able to offset about 60 basis points with productivity improvements.

And then we took pricing of a little under 300 basis points that came through. And as Mark talked about earlier, that's rolling in over time. So we'll look for that to continue to improve as the year goes on. I think what we're expecting, if you look at our first half gross margin rate, we think that the back half will be up about 200 basis points and roughly in line with where we had said we'd be kind of at the end of the first quarter.

So we're still calling for that mid 37, 37 and a half percent range.

Javier Escalante -- Evercore ISI -- Analyst

And a follow-up on the inflationary situation when you talk about the plateau. You are referring more about the logistics side, with the freight and the elongated supply chain or you're talking more about spot prices for raw materials? Thank you.

John Drabik -- Chief Financial Officer

Yeah. Well, I would say it's both. So we have seen some plateauing and some opportunities on ocean freight. And as I think we mentioned in the prepared remarks, there's a lot of work we're doing on freight and other areas where we've seen dramatic increases over the last year to try to drive those down as much as we can.

So I think both macro and our own actions, we see some opportunity there. So I think we're in pretty good shape.

Mark LaVigne -- President and Chief Executive Officer

And Javier, I think on the ocean freight rates, for instance, as well as the North America freight rates, you're starting to see premiums come down. You're starting to see a reduction in the accessorial fees that you'll incur as a result of that. So while the rate, the base rates may be plateauing staying the same. You are seeing some favorability in terms of the premiums you're having to pay in order to move goods.

Javier Escalante -- Evercore ISI -- Analyst

Thank you very much.

Operator

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

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good mornign. Last quarter, you had mentioned that you had about 30% of your costs fixed for the remainder of the year. At this point, based upon what either contracted inputs or hedges you have in place, where are you guys in terms of how much exposure is left on those items.

John Drabik -- Chief Financial Officer

That's right, Bill. For fiscal '22, we should be mostly fixed. We've got pretty good visibility to our cost structure for the rest of the year. And that's a combination of inventory on hand and a little bit of hedging that we've got in place.

Bill Chappell -- Truist Securities -- Analyst

OK, and then secondarily for me. You've had some increased shelf space. I guess, are you -- is there an expectation that you think that you have an opportunity, given the strong velocity of units that you've had that you may be gaining additional space? Do you have any ongoing RFP processes? Any thoughts there?

Mark LaVigne -- President and Chief Executive Officer

Well, I would say that's an ongoing effort of our commercial teams across the world. We're continuing to look for improved visibility as well as expanded distribution and partner with retailers to make sure that we can bring that to life. All distribution gains or shifts have been built into the outlook that we provided. We do expect -- we've had very healthy share gains over the last 12 months.

You're going to start to see some of that expanded distribution start to plateau in Q3 -- toward the end of Q3. And as a result, we would expect our share gains to level off, but we wouldn't necessarily expect them to decline either because we continue to have healthy distribution and we'll continue to fight for more.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Got it. Helpful commentary. Thank you.

Mark LaVigne -- President and Chief Executive Officer

Thank you. 

John Drabik -- Chief Financial Officer

Thanks, Bill.

Operator

[Operator instructions] The next question is from Carla Casella with J.P. Morgan. Please go ahead.

Carla Casella -- J.P. Morgan -- Analyst

Hi. On the inventory front, could you give us a sense for how much of the increase is units versus costs? And if we should expect that to be up through the remainder of the year to similar degree?

John Drabik -- Chief Financial Officer

So as we break it down, a fair amount of the increase this year is cost, a lot of those cost increases came through in the fall. And so the next turn of inventory obviously went up. So the other part would be more days driven, and that's the elongation of the supply chain, that's safety stock that we've built. So I think a lot of that's going to hang around for the good portion of the year, although we're looking to address that as much as we can.

Obviously, in the macro environment, that will be tough but we're continuing to push there.

Carla Casella -- J.P. Morgan -- Analyst

OK. Great. And then revolver borrowings. And are you expecting -- are we -- should we be past the peak after at this point?

John Drabik -- Chief Financial Officer

Yes. So revolver borrowings, I think, as of today are zero, and I mentioned, we termed out most of that short-term debt during the quarter. I think what we're expecting is to return to free cash flow generation in the back half, and we're going to prioritize debt pay down as that starts to happen.

Carla Casella -- J.P. Morgan -- Analyst

OK. Great. And then just last one. Did you give your comments on -- any comments on the zinc, I may have missed it, the trends and sequential trends in zinc?

John Drabik -- Chief Financial Officer

Yes. Zinc is one of those commodities. It's been pretty volatile. It's gone up a lot over the last year, continued to go throughout the quarter.

We've seen it come back a little bit, but it has been one that has gone up.

Carla Casella -- J.P. Morgan -- Analyst

OK. Great. But is raw materials still around 40% of COGS or has that picked up just given all the raw material inflation?

John Drabik -- Chief Financial Officer

I think, it's roughly 40%. That's right.

Carla Casella -- J.P. Morgan -- Analyst

OK, great. Thanks.

John Drabik -- Chief Financial Officer

Thank you.

Operator

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

Mark LaVigne -- President and Chief Executive Officer

Thanks, everyone for joining, and have a good rest of the day.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Jackie Burwitz -- Vice President, Investor Relations

Mark LaVigne -- President and Chief Executive Officer

John Drabik -- Chief Financial Officer

Wendy Nicholson -- Citi -- Analyst

Bill Chappell -- Truist Securities -- Analyst

Andrea Teixeira -- J.P. Morgan -- Analyst

Lauren Lieberman -- Barclays -- Analyst

Javier Escalante -- Evercore ISI -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Carla Casella -- J.P. Morgan -- Analyst

More ENR analysis

All earnings call transcripts