Energizer Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 6, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to Energizer's Q1 fiscal 2024 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. During the call, we will make forward looking statements about the company's future business and financial performance, among other matters.

Operator

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

Speaker 1

with the SEC. We also refer

Operator

in our presentation to non GAAP financial measures. A reconciliation of non GAAP financial measures comparable GAAP measures, as shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick and mortar and e commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2023.

Operator

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

Speaker 2

Good morning, everyone, and thank you for joining us on our fiscal 2024 Q1 earnings call. We started the fiscal year with the same priorities as we had in FY2023, improving margins, generating free cash flow and paying down debt. In our Q1, we delivered on our outlook and made great progress in each of these areas. Gross margin improved to 39.5% for the quarter as a result of the benefits from Project Momentum. We generated free cash flow over 21% of net sales and paid down $78,000,000 in debt solidifying our path to achieve below 5 times debt to EBITDA by the end of the fiscal year.

Speaker 2

In addition to the strong execution against our main priorities, we are seeing healthy indicators across our business, including an excellent response to our investments to drive improved consumer engagement without impeding margin improvement, steadily improving category trends, share gains in batteries across key customers and markets around the world and improving consumer sentiment. When you combine the momentum of our strategic priorities with these trends, We are positioned to deliver both top and bottom line growth over the balance of the year. Turning to a review of the Q1. Globally, battery category volume and value performed as expected, with both down low single digit. This was largely driven by ongoing elasticity impacts from international price increases which occurred later than in the U.

Speaker 2

S. As well as comping the energy crisis in Europe last fall, which caused a surge in category demand in our Q1 of 2023. When you narrow the view to the U. S, category volumes increased roughly 6% in the quarter. We expect international category trends follow roughly the same recovery pattern as the U.

Speaker 2

S. As they cycle through the impact of price increases with positive global volume trends in the back half of the year. We are achieving these results while maintaining a prudent approach to pricing and promotion. These strategically important have been designed to engage and bridge consumers to higher price points after multiple rounds of pricing in the category. On a year over year basis, the percent sold on promotion for the category was up in the quarter, but the depth of that promotion was meaningfully less in the prior year.

Speaker 2

Importantly, the investments are having the intended impact without sacrificing gross margin. We drove volume in the category and for our brands, while preserving our pricing and expanding gross margin in the quarter. As we look ahead, we will be disciplined in our pricing and promotion strategy with a focus on driving the overall health of the category and our brand. Moving to Auto Care. While the December quarter is the smallest in terms of sales for our auto business, We are entering the critical peak season with a fast start, growing organic sales by nearly 5% versus the prior year.

Speaker 2

We saw growth across 3 of our 4 subcategories appearance, refrigerants and fragrance and delivered double digit growth internationally. Importantly, we are set up well to deliver low single digit organic growth for the full year in Auto Care, while also expanding margins. And finally, project momentum is delivering. The program generated over $20,000,000 in savings in the quarter, taking total program savings to over $75,000,000 to date. As we announced today, we continue to find areas of opportunity And we increased the total program savings target by $30,000,000 taking our savings range to $160,000,000 to $180,000,000 Our strong free cash flow has also been a bright spot.

Speaker 2

The combination of margin improvement and continued progress on working capital management helped to free cash flow of over 21% of net sales, up nearly 150 basis points from the prior year. As John will expand on in a moment, our free cash flows have allowed us to make significant progress towards reducing debt and strengthening our balance sheet. Let's turn it over to John for more details on the quarter and the full year outlook.

Speaker 1

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter and update on project momentum and some additional color for our expectations for the rest of fiscal 2024. For the quarter, reported net sales were down 6.3% with organic revenue down 7.4%. The results for the quarter were within our initial outlook for organic sales to decline between 6% 8%. As we called out in our last call, The largest driver of the decline was earlier holiday shipments which benefited our Q4 and fiscal 2023.

Speaker 1

Our sales were further impacted this quarter by continued weaker performance in non track channels. Adjusted gross margin increased 50 basis points to 39.5 mainly driven by project momentum. Pricing was relatively flat on a year over year basis, but mix impacts and modestly increased product costs were slight headwinds in the quarter. Adjusted

Speaker 3

SG and

Speaker 1

A increased $3,700,000 primarily related to labor and benefit costs as well as factoring fees in a rising rate environment, partially offset by project momentum savings. A and P as a percentage of sales was 6.6%, consistent with our efforts to focus investments during the critical holiday season. Interest expense decreased $2,200,000 due to lower average debt outstanding as we have continued to prioritize debt pay down. As noted in our press release issued earlier this morning, We also recorded a non cash exchange loss of $21,000,000 in the quarter, recognizing the devaluation of the Argentine peso in December. The devaluation was a result of broad economic reforms introduced by the newly elected administration, in which the peso was devalued by 50% in the month.

Speaker 1

Given the extraordinary nature of the devaluation, the impact was excluded from our adjusted earnings per share. We delivered adjusted EBITDA and adjusted earnings per share of $132,900,000 $0.59 We also generated $153,000,000 of free cash in the quarter through a combination of margin improvement and continued progress on working capital management. We directed these strong cash flows to pay down $78,000,000 of debt during the Q1 and we've continued this progress by paying off an additional $58,000,000 subsequent to quarter for a total of $136,000,000 in the 1st 4 months of the fiscal year. Since the Q4 of 22, we have paid off over $400,000,000 of debt to date or almost 12% of our total outstanding debt. As rates stay higher for longer, our debt capital structure remains a valuable asset as we have a weighted average cost of debt of around 4.7%, which is 94% fixed and no meaningful maturities until 2027.

Speaker 1

As Mark noted earlier, Project momentum continues to be an important focus for us and contributed approximately $22,000,000 of savings in the quarter. As we look forward, we've identified additional opportunities to drive savings, including by leveraging production assets we were able to opportunistically acquire last quarter in Belgium. Based on our latest estimates, we are calling up our full program outlook by $30,000,000 for total program savings of 160,000,000 $180,000,000 We also expect one time cash costs for the program to run at roughly 80% to 90% of the projected savings. And finally, I would like to provide some additional color on our outlook for the remainder of the year. For the Q2, we expect organic net sales to be down between 2% 3% as we cycle through softness in non tracked channels.

Speaker 1

We also anticipate gross margin in the quarter to improve by 150 basis points year over year and for adjusted EPS to be in the range of $0.65 to 0 point 7 0 dollars up mid single digits at the midpoint versus the same quarter in the prior year. Over the back half of the year, we expect to return to top line growth driven by a few key factors. First, we expect volumes to continue to improve in the category as consumers adjust to the pricing taken over the previous 2 years, especially in international markets where pricing actions occurred later than in the U. S. We also expect recovery in some of the non track channels which should begin to comp large declines that began last spring.

Speaker 1

And finally, we expect distribution wins across both battery and auto to help drive back half sales. For the full fiscal year, we continue to expect project momentum savings of $55,000,000 to $65,000,000 We also expect to pay down $150,000,000 to $200,000,000 of debt for the year and to end fiscal 'twenty four below 5 times leverage. We are reaffirming our outlook for organic net sales to be flat to down 2%. Adjusted gross margin improvement of 100 basis points with improvement across both battery and auto care, adjusted EBITDA in the range of $600,000,000 to $620,000,000 and adjusted earnings per share of $3.10 to $3.30 With that, I'll turn it back over to Mark for closing remarks.

Speaker 2

In summary, our Q1 performance sets us up well for the remainder of the year. We have the flexibility and discipline to navigate the market conditions, particularly in light of the strong momentum across our cost savings and cash generation initiatives. We will remain laser focused on delivering growth, advancing our strategic priorities and delivering shareholder value. Now let's open the call for questions.

Speaker 1

Thank

Speaker 4

And our first question comes from the line of Lauren Lieberman at Barclays. Please go ahead. Your line is open.

Speaker 5

Great. Thanks so much. First thing I was hoping is if you could just tell us a little bit more about the Belgium facility you acquired and kind of just anything you can offer on that and how much of that was really what was driving the uptick in momentum savings? Or is that something that So maybe more to be evaluated as we move forward?

Speaker 2

Laura, we continue to evaluate project momentum. And as you've seen, as we've gotten further in the program, we've been able to range is up, yes, 160 to 180 is our current call based on everything we know today, including the acquisition of the Belgium facility. And that was an opportunistic opportunity that came across late last year. It allows us to pivot and do in region, for region manufacturing. It's driving great working capital improvements, cost savings improvements And it was a relatively low level investment.

Speaker 2

The purchase price for the assets was roughly €3,500,000

Speaker 5

Great. That's fantastic. Thank you. And then just on Auto Care, constructive commentary on top line, but margins did take a step back this quarter. So just kind of curious about anything that was discrete to the quarter, and how we should be thinking about kind of gross margin opportunity for the full year?

Speaker 6

Yes. I would say, Lauren, the Q1 was not reflective of what we expect for the full year. We're still anticipating gross margin improvement as we go throughout the year, pretty significant. And that should help us deliver bottom line performance on a segment profit perspective as well.

Speaker 5

Okay. And is there anything within there that you just I guess I'm sure Still partially project amended, but like operational changes that are being made in auto versus raw max and pricing kind of stuff. I'm curious about what sort of In your control versus the macro, if you will.

Speaker 2

No, no. It's obviously

Speaker 6

the smallest quarter by far. So when you kind of come into the year and look at every rolling standards, you got some indirect costs that you allocate to the business. It's really not reflective of the full year run rate.

Speaker 2

And Lauren just to build on that, I think from a gross margin standpoint in auto care, we're expecting improvement this year. And then I think one of the questions that's out there is when will we get that business back to where we were when we acquired it. And our anticipation is with continued gross margin improvement, including a lot of as we have under project momentum is we'll achieve that level in 2025.

Speaker 1

All right.

Speaker 5

Thanks. I'll pass it on and come back on.

Speaker 2

Thanks, Lauren.

Speaker 4

Thank you. Our next question comes from the line of Bill Chappell at Truist Securities. Please go ahead. Your line is open.

Speaker 7

Thanks. Good morning.

Speaker 2

Good morning, Bill. Hey, Bill. I want

Speaker 7

to talk a little bit more about your kind of commentary or And maybe your visibility into battery volumes picking up. And I'm just trying to understand kind of elasticity Commentary in terms of the businesses has always been kind of impulse slash Commodity in terms of you and Duracell are line priced. You haven't seen Rayovac really pick up in share even though it's a lower priced product or private label. So try and understand how consumers adjust if they haven't already and volume start to pick back up or is it more Or if there's something else I'm missing?

Speaker 2

No, Bill, let me start. So I would say from an overall standpoint On the category, let me we really like where we are from a category trends. I think we're positioned very well to deliver the year. Let me start by kind of breaking it down in the component parts of the overall category. And this is so in the U.

Speaker 2

S. When you talk tracked channels, volume is consistently improving. You saw us go from kind of down high single digits, down percent and a half year over year and then the latest numbers have been down 0.5 in volume and even the numbers that came out this morning were positive. So you are seeing That inflection point in tracked channels to positive volume growth, that's a great sign in terms of working through the elasticity impacts, working through the pandemic surge in demand all of the factors that have gone into that. Then you break it down into sort of the online channel, both pure play as well as omni.

Speaker 2

That's been a consistent source of growth over the last couple of quarters and would continue would expect that to continue. Then when you get into non track channels with home center and OEM, We expect those trends to stabilize. If you recall, it was kind of last April, May when we saw some of the declines that we saw in home center. We expect to work our way through those. And so those trends should stabilize.

Speaker 2

International, you have elasticity impacts from pricing, which occurred later in the U. S. We expect work through those. We're already seeing signs that you are, Latin America, Asia Pacific in particular. In Europe, you had a bit of an anomaly with the energy crisis there last year.

Speaker 2

So all in all, those trends are positive just from a category standpoint. And then specific to our business, on top of just basic execution, we are seeing some distribution wins in both batteries well as in auto, which we expect to take hold in the back half of the year. So all of those factors, both from a category as well as our business specifically, give us great confidence in the back half of the year returning to growth.

Speaker 7

Okay. So just to follow-up, I mean, Yes. Is your thought that it's greater on a normalization post COVID or is it elasticity? It seems like it's more of the former, whereas pricing, I guess, adjusting to pricing is more of a relative type thing, it seems like you're more comfortable that we're getting back to a normal consumer behavior.

Speaker 2

I think we are getting back to a more consumer behavior. It's very difficult I wouldn't want to blame some of the current trends on COVID related. I mean, you did have a long cycle of working through that. And then you had the pricing impacts from 2 fairly significant price increases over the last couple of years. So there was a lot there for consumers to work through plus just the overall backdrop impact as well.

Speaker 2

So I would say you are back to more normal category patterns as we work our way through into Q3 is when you're really going see that inflection point from a volume standpoint in the U. S. Consumers are reacting accordingly. Your question on Rayovac, I mean, we are seeing interest In Rayovac, sort of increased interest in Rayovac as we've talked to retailers, you have seen some share gains in Rayovac as Some of the more value oriented offerings and retailers are leaning in with consumers. So there is an opportunity there and we've been able to capture some of that.

Speaker 2

Obviously, we want the bulk of our business to stay at the premium end with Energizer and that's where it continues to be.

Speaker 7

Great. Thanks for the color. Thanks, Bill.

Speaker 4

Thank you. Our next question comes from the line of Nik Modi at RBC Capital Markets. Please go ahead. Your line is open.

Speaker 8

Thank you. Good morning, everyone. So just a couple of questions. Just wanted to clarify the non tracked weakness that was fully the home centers like it was last quarter, right? Was there anything else?

Speaker 1

It's the majority of it.

Speaker 8

Okay. And then I guess following up on Lauren's question just on Project Momentum, obviously you're getting some benefits out of this plant, But what else is driving the upside in the program, if you could just provide some context on that? And I have just one follow-up.

Speaker 2

Sure, Nick. I mean, look, Project Momentum has been an incredibly successful program for us. We launched it and Since then the organization has really dug in and been able to just drive savings throughout the organization. Right now, if you take the 160 to 180 as the savings range. It breaks down to 55% roughly in sort of network distribution footprint, 15% procurement and then 30% SG and A.

Speaker 2

Those ranges have moved around a little bit as we've continued to uncover them. SG and A, we found additional opportunities as work through the program, but same has been true with the network design with the inclusion of the new facility in Belgium. So I would say it's very broad based in terms of where the additional savings are coming from. And it's just been tremendous work by the organization to be able to hit $160,000,000 to $180,000,000 in savings over a 3 year period.

Speaker 8

Helpful color, Mark. And then just on the consumer, last quarter, you had much more cautionary commentary and I'm Sensing a little bit more optimism now is, am I reading that correctly? Have you seen things really improve? Are you feeling better about where the consumer is?

Speaker 2

I think we are. I think you are seeing improving consumer sentiment. I think you're seeing the volume trends in our categories both from an auto and batteries exceed our expectations and We continue to have the right trajectory. I think it's dangerous in this environment to go to all in and sort of one direction. I would say improving consumer sentiment, still some caution out there and you still need to be very choiceful in terms of how you engage and how you invest to make sure that the consumers continue to stay engaged with your categories and your products.

Speaker 2

We're doing that. We're doing it successfully. But it is and improving backdrop compared to what we expected back in November.

Speaker 8

Excellent. Thanks so much, Mark.

Speaker 4

Thank you. And our next question comes from the line of Rob Okenstein of Evercore. Please go ahead. Your line is open.

Speaker 3

Great. Thank you very much. I just wanted to follow-up a little bit in terms of your confidence in the second half of the year. And I think you mentioned one of the key drivers of that is the increased distribution for both auto and batteries. Can you give us a sense of how much of the improvement is from the increased distribution and then more details on that increased distribution in terms of channel products, any particular color around that would be helpful?

Speaker 3

Thank you.

Speaker 2

Well, let me get started, Robert. I think on the sort of the confidence, it really breaks down into how I laid it out before, which is improving trends across the category in tracked. You have nice growth potential online. You have a stabilization and not track. So that's kind of the foundation.

Speaker 2

And then on top of that, we have been able to gain incremental distribution In auto care with some of our key retailers, with some partnerships that we're driving that you're going to hear more about as the year progresses. And then in batteries, we continue to push for additional distribution across our footprint, both existing retailers as well as some new retailers. That's True in both the U. S. And international.

Speaker 2

We called out international distribution on the last call. I would say that themes have aggressively move to claw back some of those distribution losses. And so as you look to the balance of the back half of the year, we expect distribution wins to be a tailwind and not a headwind as we get into Q3 and Q4. So a lot of hard work in the distribution. I don't want to get into specific customers and certain products, But you'll see them head shelves here in Q3 and Q4.

Speaker 3

Terrific. Thank you very much.

Speaker 2

Thanks, Robert.

Speaker 4

Thank you. Our next question comes from the line of Andrea Teixeira of JPMorgan. Please go ahead. Your line is open.

Speaker 9

Thank you. Good morning, everyone. So can you comment on your online channel performance for batteries? You mentioned just recently that You saw an opportunity online and but that by the same token is also the most fragmented channel. And I remember in the Past few quarters, it was one of the areas where you had the most deceleration or In a way, some sort of like, increased obviously, increased competition against private label.

Speaker 9

So if you can comment on how your share stands right now and how you're thinking in your model? Thank you.

Speaker 2

Good morning, Andrea. I think the best way to describe it and a lot of this limited the information that we receive from an online standpoint. But what we're seeing is we're continuing to see healthy volume growth in online. You're Continuing to see healthy value growth online. In the past quarter, in the October, November, December quarter, we were able to match online growth both in terms of volume and So our share from our estimates is probably flat.

Speaker 2

We're not losing share. We're not gaining share at this moment. But I think a really solid quarter for us in the online channel in holiday, which was as you know a very critical quarter for us.

Speaker 9

And if I can that's encouraging. And then if I Ken, just like go back to the project momentum as you raised the $30,000,000 And I believe in August, you had included 2025 into the program. So where number 1, where did the 30,000,000 come from the additional? And when should we I think you didn't change the amount that is going to be in 2024, but I was wondering if you can mention where it came from and where we should be thinking of the Extra $30,000,000 lending. I'm assuming that's $25,000,000

Speaker 2

So the extra is certainly in $25,000,000 We did keep $24,000,000 between $55,000,000 and $65,000,000 of savings. The balance of the program to hit in 2025. As I mentioned on one of the previous questions, it's really broad based across the program. It's seventythirty split gross margin SG and A. That's a little different than when the program started, which was eightytwenty.

Speaker 2

We did add a 3rd year as we continue to find additional opportunities throughout the program, but really excited about the benefit it's going to provide for us and our ability to sort of deliver ongoing earnings momentum in the business. And so tremendous work, it's broad based, the teams continue to work hard and execute against the program. I would say 70% gross margin, 30% in SG and A, and with the $55,000,000 $65,000,000 $24,000,000 with the balance next year.

Speaker 9

That's great. And then if I can just squeeze a bit of the And as you gain more shelf space in bricks, do you see the need for kind of pushing because Obviously, when you're growing and the market was premiumizing, do you see the need of positioning Rayovac as like an entry level for you, which has always been, but just to see if you're looking at this additional shelf space to be positioning and to protect the entry level battery market or not?

Speaker 2

Well, Andre, I think we're perfectly positioned in the battery category to really lean in with retailers and solve any of the sort of strategies or issues that they're trying to connect with consumers on. And I would say our full portfolio, The fact that we go from value offerings all the way up to super premium with lithium is a unique advantage that we bring. I would say the goal is to source Rayovac volume from private label and to make sure that we continue to keep consumers in the branded side of that business. That's an important element that Rayovac plays. Obviously, our flagship Energizer brand will continue to be our emphasis and continue to be the bulk of the distribution that we see.

Speaker 2

But it plays an important role. I don't think it will take outsized have an outsized impact on our overall share or our financials, but it is a key asset that we have that we leverage very tactically as we work with retailers to solve any sort of the issues that they're looking to solve.

Speaker 9

Thank you.

Speaker 4

Comes from the line of Hale Holden at Barclays. Please go ahead. Your line is open.

Speaker 10

Hi, good morning. Could you give us any change or update to what you're seeing on input prices and the overall inflationary market or environment or deflationary environment, however it may Fall out for the year?

Speaker 6

Yes. For the rest of the year, specifically to materials, it was slightly negative in this quarter, but we're looking for consistent improvement going forward. We're calling for about 80 basis points of gross margin full year improvement. And the biggest benefit is really coming from lithium, zinc, steel and R134A. So we do have some tailwinds coming in from direct input costs.

Speaker 10

Thank you very much.

Speaker 4

Thank you. And our next question comes from the line of Carla Casella at JPMorgan. Please go ahead. Your line is open.

Speaker 11

Hi. I'd like to focus on the debt pay down. And I'm just wondering, was the debt that you paid down in the quarter and after all term loan? And is that what

Speaker 9

you expect to going forward or would you

Speaker 8

like to buyback bonds as

Speaker 9

well given that they're trading at discount?

Speaker 6

Yes. It was all term loan So far this year, I mean, we'll continue to evaluate what's the best option for us to pay down going forward. But we'll continue, I think, to go after term loan as much as we can over the next couple of years.

Speaker 11

Okay, great. Thanks.

Speaker 1

Thanks.

Speaker 4

Thank you. And we currently have one further question in this queue. So just a reminder, if you do wish to ask any further questions, please dial star 1 now. And that next question is from Lauren Lieberman at Barclays. Please go ahead.

Speaker 4

Your line is open.

Speaker 5

Hey, I'm sorry. I'm actually all set because I was to ask about the incremental distribution and the outlook in the back half, but you ended up answering it. So I am all set. Thank you.

Speaker 2

Great. Thanks, Lauren.

Speaker 4

No problem. And we've had one further question come through, and that's Brian McNamara at Canaccord Genuity. Please go ahead. Your line is open.

Speaker 12

Hey guys, thanks for taking the question. I believe that you expected flat year over year volume pretty much throughout the year when With Q4 earnings back in November, excluding the impact of the earlier holiday shipments in Q1, is that still the case broadly for the year?

Speaker 6

Yes, we're still looking for the full year to be roughly flat from a volume perspective. I think if you look at it, obviously, it was down about 700 basis points in the Q1. We expect it to be kind of flattish in Q2 and then see turnaround in the back half of the year to get us back to flat.

Speaker 2

Great.

Speaker 12

And then secondly on debt pay down, you guys have paid down a good amount of debt over the last several quarters. It's kind of the sticking point with any investors kind of we speak to kind of get involved in the name that aren't already. I'm just curious, is there anything you guys can do to kind of hasten that process, whether it be Divestitures of maybe smaller brands, things like that that you're considering that's on the table?

Speaker 6

No, I think we'll continue to focus on the operational performance. So back at the end of 2022, we started to talk about momentum. We really went after working capital as part of that. We've been able to generate Significant cash flow over this last 6 quarters through operations. I think we'll focus there and then we'll continue to look to pay down debt going forward as our primary capital allocation.

Speaker 12

Thank you. Best of luck.

Speaker 1

Thank you. Thank

Speaker 4

you. And currently there are no further questions in the queue at this time. So I'll hand the floor back to Mark for the closing comments.

Speaker 2

Thanks everyone for joining us this morning. Hope everyone has a great rest of the day and thanks for your interest in Energizer.

Speaker 4

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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Energizer Q1 2024
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