Energizer Holdings, Inc. (ENR) Q4 2023 Earnings Call Transcript

Good morning. My name is Gary and I'll be your conference operator today. At this time, I'd like to welcome everyone to Energizer's Fourth Quarter 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. I'd now like to turn the conference over to Jon Poldan, Vice President, Treasurer and Investor Relations. You may now begin your conference.

Good morning, and welcome to Energizer's fourth quarter fiscal 2023 conference call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Executive Vice President and Chief Financial Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. In addition, a slide deck providing detailed financial results for the quarter is also posted on our website. During the call, we will make forward-looking statements about the company's future business and financial performance among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, which may cause actual results to differ materially from these statements. We do not undertake to update these forward-looking statements. Other factors that could cause actual results to differ materially from these statements are included in reports we file with the SEC. We also refer in our presentation to non-GAAP financial measures, a reconciliation of non-GAAP financial measures to comparable GAAP financial measures is shown in our press release issued earlier today, which is available on our website. Information concerning our categories and estimated market share discussed on this call relates to the categories where we compete and is based on Energizer's internal data, data from industry analysis and estimates, we believe to be reasonable. The battery category information includes both brick-and-mortar and e-commerce retail sales. Unless otherwise noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year relate to the same period in fiscal 2022. With that, I'd like to turn the call over to Mark.

Good morning, everyone and thank you for joining us on our yearend earnings call. As we close our fiscal 2023, let's start today by reviewing the priorities we established coming into the year: the restoration of gross margin, returning to healthy free cash flow generation, and paying down debt. Over the course of the year, we've made excellent progress across each one, including year-over-year improvement in gross margin of 170 basis points, free cash flow generation of $340 million, and debt paydown of $225 million. We also delivered adjusted earnings per share and adjusted EBITDA within our original guided ranges, despite the impacts of persistent inflation and macroeconomic pressures. I would like to thank our teams across the globe as these results are a reflection of their dedication, execution, and focus on fundamentals. As we look ahead, there are several areas influencing our plans for 2024. First, we have a macroeconomic backdrop where higher interest rates, resumption of student loans, and the end of emergency pandemic benefits are just a few of the areas that have taken a toll on consumer sentiment. That shift in consumer confidence has been exacerbated by persistent inflation, forcing consumers to shop more cautiously and to reallocate their household spending across discretionary and nondiscretionary products. In terms of the impact on our categories, let's start with batteries. It is important to look at the category over the long term to understand the impact that the pandemic and broader inflationary trends have had on value and volume. On a global basis, the battery category experienced a spike in volume growth during the pandemic as consumers spent more time at home and with their devices. As consumers returned more closely to their pre-pandemic routines, volume normalized from the peak levels experienced in 2020 and 2021. Additionally, inflation across the store and several price increases within the battery category contributed to the volume decline. As we have begun to lap these impacts, we have seen category volume growth resume in the U.S. in recent periods. The end result is a category which is 5% larger today than pre-pandemic, at roughly 20 billion cells versus 19 billion cells in 2019. Since 2015, global category volume has experienced compounded annual growth of approximately 1.5%. Over that same time period, U.S. category volume grew roughly at 1% annually. The strength and stability of the category stem from device ownership, which is a primary driver of consumption. The number of devices per U.S. household has increased by more than 5% since 2015. The incorporation of smartphones into our daily lives has enabled a world of connected devices, with over 50% of those requiring primary batteries, including connected home devices such as security cameras, doorbells, and smart tags, and health devices, including blood pressure monitors and pain relief devices. The future pipeline of devices is also strong, where we anticipate global consumer devices will continue to grow, many of those taking primary batteries, as they do today. Our long-term outlook for the category remains flat to low single-digit volume growth, supported by these healthy category fundamentals. Moving to auto care; the auto care category remains an attractive area for growth, supported by strong category dynamics. Miles driven exceed pre-pandemic levels, over 6% higher than 2019. The age and size of the car park are also increasing. The average age of vehicles in the U.S. has steadily increased and now exceeds 12 years, and the size of the fleet has grown by over three million vehicles in the last year. As vehicles continue to age and consumers feel the impact of economic pressures, more of them are stating that they are performing car care themselves versus do-it-for-me options. With that as the general landscape in our categories, here is how we are thinking about FY'24. The continuation of our strategic priorities underpins our plan. We will continue margin recovery, generate free cash flow, and pay down debt. Those objectives ensure we can invest in our business and achieve the financial algorithm, both of which drive significant value for our shareholders. Project momentum is a key driver. With $50 million realized in fiscal '23, we will add an incremental $80 million to $100 million of savings over the next two years, providing the flexibility to operate in this environment. We will look to accelerate investments throughout this downturn with a focus on innovation and brand building to drive consumer engagement and long-term consumer preference. In batteries, we will be disciplined in balancing our pricing and promotion strategies with the need to engage consumers, deliver top line, and take advantage of the improving volume trend. When balancing these factors, we focus primarily on driving overall health of the category and continuing to improve the earnings power of the business. In a healthy category with improving earnings, we will not prioritize share at the expense of those two objectives. In auto care, we are proud of the growth we have achieved. Top line is up over $90 million since 2020, representing a 6% compounded annual growth rate consistent with our low to mid-single-digit growth expectations over the long term. We have an exciting slate of innovations launching this year and will continue to invest behind new product development and launches.

Thanks, Mark. I will provide a more detailed summary of the quarter and full fiscal year before turning to our 2024 outlook. The fourth quarter was another solid performance by the organization in the culmination of a year in which pricing and savings from project momentum offset continued macro headwinds, and we delivered adjusted earnings per share and EBITDA within our original guided ranges. Reported revenue grew 2.6% with organic revenue up 2%. The organic growth was driven by 150 basis points of pricing across both the battery and auto segments. In addition to pricing, we generated roughly 100 basis points of volume due to earlier holiday shipments and batteries, partially offset by underperformance of non-track channels, as well as channel shifting, which favors value offerings, and lost battery distribution in a few international markets. Adjusted gross margin in the quarter increased 380 basis points to 40% due to pricing, the continued benefits of project momentum, and lower transportation costs. Adjusted SG&A as a percent of net sales was 14.2% versus 15.1% in the prior year. The current year decrease was primarily driven by project momentum savings. A&P as a percent of sales was 4.1%, up 60 basis points and consistent with our plans to focus A&P spending in our first and third quarters. We delivered adjusted EBITDA and adjusted earnings per share of $185.4 million and $1.20 per share. We also generated $78 million of free cash flow in the quarter and paid down $25 million of debt. As noted in our press release this morning, we recorded a one-time non-cash $50 million settlement charge during the quarter related to a partial buyout of U.S. pension liabilities. For the full year, organic revenues decreased 1% as the benefits of pricing actions were largely offset by lower volumes due to higher retail pricing and general economic conditions, in addition to volume declines related to the planned exit of lower margin business and lost battery distribution in international markets. Adjusted gross margin was up 170 basis points as pricing actions and savings from project momentum were partially offset by higher input costs. Adjusted EBITDA grew to $597.3 million, and earnings per share of $3.09 were driven by significant gross margin improvement and the benefits of project momentum. Looking forward to our coming fiscal year, we anticipate operating in an environment where input costs have stabilized but remain elevated, and consumers remain financially stretched and pricing and promotion in our categories will remain strategically important. As such, we expect organic revenues to be flat to down low single digits and at current rates for FX to be modestly negative. Input costs beginning to turn positive, a full year of freight rate savings, and continued momentum improvements more than offset the costs of targeted promotional activity, resulting in expected gross margin improvement of roughly 100 basis points, reaching 40% for the full year. We expect AMP and SG&A levels on the dollar basis to remain relatively consistent with fiscal year '23. Due to debt pay down and a largely fixed debt capital structure, we expect interest expense to be favorable by $8 million to $10 million for the full year. We also project a tax rate of 22% to 23% for the year. Primarily through gross margin improvement and continued leveraging of project momentum for savings, we expect to grow our earnings next year, resulting in an outlook for adjusted EBITDA in the range of $600 million to $620 million, and earnings per share in the range of $3.10 to $3.30. Project momentum is expected to benefit 2024 by $55 million to $65 million and has been included in the outlook ranges we provided today. Over the next two fiscal years, we expect project momentum to generate $80 million to $100 million in savings, with roughly 70% of those benefits impacting gross margin and the remainder recognized throughout the rest of the P&L. Due to continued investments in our underlying operations, project momentum, and our digital transformation, we are projecting capital expenditures for 2024 to be between $95 million and $105 million. We anticipate that continued strong cash flow aided by working capital management will allow us to cover capital expenditures and one-time momentum costs while still delivering free cash flow consistent with our goal of 10% to 12% of net sales, albeit at the lower end this year. I would like to provide additional context on the first quarter, given our expectations for a challenging start to the year. Despite continued category volume improvement, we expect impacts from the earlier holiday shipments, channel shifting which favors the value segment, and weaker performance in non-track channels to impact the first half of the year. As a result, we expect organic sales to be down 6% to 8% in the first quarter and improve as we move through the year. Gross margins should be roughly comparable to the prior year quarters, and due primarily to lower net sales, we expect to deliver adjusted EPS in the first quarter of $0.50 to $0.60 per share.

Thanks. Good morning. Mark, could you provide more insight into the status of the battery category, both in the U.S. and internationally? I understand that you think consumer demand is relatively stable after several years, but I’d like to know what the current promotional levels look like, especially in the U.S. and also internationally. Do we need to revert to 2019 promotional levels, or should we go even higher to boost demand further? Are you observing competitive promotional levels that differ from your expectations? Please share more about what actions or strategies the category might need to adopt to achieve annual volume growth in the zero to low single-digit range.

Sure, Bill. There's a lot to cover. Let me start by outlining how we structured our plans for 2024, and then John can provide additional details on our vision for the year. Our approach is based on maintaining the strategic priorities we established in 2023. We aim to improve our margins, which ties into your question about promotions, and we are targeting a 100 basis points improvement throughout fiscal 2024. Additionally, we want to generate free cash flow for the second consecutive year, in line with our historical performance, and we plan to reduce our debt to below five times by the end of fiscal 2024. Our strategic priorities align with these goals. Regarding consumers, they are certainly facing some pressure currently. There are mixed signals in the data, as consumers remain engaged in various categories, yet they are shifting their priorities, which leads to delayed purchases. This shift can result in trading down from premium products to value options or changing pack sizes, as well as brand-switching behavior. These changes stem from consumers' temporary priorities and needs in a challenging environment. However, our categories remain strong. Battery sales are normalizing after a surge during the pandemic, and we're also observing the effects of pricing and elasticity. We've seen volume stability over the last couple of quarters, which has created a positive trend. Auto care is similar, possibly a bit more discretionary than batteries. As we integrate our strategic priorities with stable category trends and cautious consumer behavior, it ultimately comes down to discipline in pricing and promotions. Promotions are essential for enhancing our gross margins. We will maintain a focus on pricing and promotions that resonate with consumers while safeguarding our long-term pricing strategies. John, would you like to share more about the specifics for 2024?

Yeah, maybe I'll just speak to some of our planning assumptions. I'll start with the full year and then move to Q1. For the top line, we expect flat to down low single digits for the full year. In battery, we've seen category volumes recover, and we project those to be relatively flat for the rest of the year. We're projecting auto volumes in the category to be modestly positive. Given that environment, we expect to reinvest some of our gross margin recovery into pricing and promotional activity, both online and in-store. We expect to start the year with some headwinds, as we saw some holiday volume shift into the fourth quarter last year, which we don't expect to comp again this year. Moving on to gross margin where we expect continued improvement of about 100 basis points for the full year. Project momentum remains a key source of efficiency for us, with improvements of around 100 to 140 basis points expected. Transportation rate savings will be beneficial as we will have a full year of those. Following two years of significant pricing, we expect some of that pricing and promotion to be invested back in, with about 100 to 150 basis points headwind expected. We've seen a lot of inflationary impacts on conversion costs, utilities, and wages, which should be another drag of about 50 basis points. We expect SG&A to be roughly flat due to project momentum offsetting some of the inflationary costs as well as digital transformation investments. A&P is expected to increase, probably more in the 5% range for the year. Interest, based on our debt paydown and being 90% fixed-rate debt, we expect to improve interest expense by $8 million to $10 million next year, and the tax rate is going to increase, running between 22% and 23%. In summary, we expect adjusted EBITDA to be in the range of $600 million to $620 million, and EPS between $3.10 and $3.30. For Q1, we expect to see top line dips of about 6% to 8% from the holiday shift and weaker performance in some non-track channels.

Threw a lot of ads to their bill. Any areas we didn't answer?

No, I think I've finished my model for the next year. Perfect. Just one quick follow up. You did allude to the weakness in the non-track channel. Is that tougher comps year-over-year or is there something else going on? Or is that just the way those retailers are kind of acting right now in terms of store traffic?

I think it's a general store traffic trend in non-track channels, depending upon the information that you may get. So that's DIY and online, and you're seeing growth. Thus, I would think about this way: traditional brick-and-mortar stores down a little bit on volume, while online is up. Non-track, including home centers, is down.

Great. Thanks. Good morning. I guess one question I have is this: you think about and talk about some of the trade down and the value-seeking behavior you're seeing from consumers. Now that you've got this broader portfolio than you did five years ago or so, how does that play in? What can you do with Rayovac? What can you do in terms of your merchandising sets? Is the situation fluid enough that you can leverage that broader portfolio a bit more to position yourself well for changing consumer behavior? That would be kind of number one. And then just number two is on pricing. Pricing is moving negative with volumes up in track channels and then it looked like the same dynamic in the slide. So just curious what you can tell us a little bit more, maybe on the promotional conversation, where we stand versus maybe 2019 in terms of normalized promotional levels and where you expect that to settle out? Thanks.

Thanks, Lauren. On the last point, I think on the promotional levels, we would not see a situation where we would exceed promotional levels from 2019. Regarding value brands, the short answer is yes. We have the full portfolio. We have several value brands that can fulfill a need, particularly during times consumers are experiencing now. It's a little easier to do that online because it's easier to cut in than it is in a brick-and-mortar environment, but we are leveraging this. We are having some encouraging discussions with retailers on that front. We'll continue to leverage that as long as the macro environment remains what it is today. Anything I missed on that one, Lauren?

No, I think that's great. And then can I just switch for a second to Auto, just thinking about long-term margin goals for that business, kind of maybe what you're willing to share on where gross margins in that business are now, kind of where you think you can go to?

I think on that one, Lauren, let me take a step back on what we've experienced the last couple of years as an organization. The first thing you dealt with was a pandemic that tested your ability to manage supply chain disruptions, which required sort of greater insights and proactive management of bottlenecks as well as greater resiliency. We not only made decisions to solve the issues of the day, but we invested to improve operational excellence on a go-forward basis and enhance visibility across our supply chain. There's been tremendous progress there. In auto care, we are making strides in the face of inflation and have launched project momentum to drive costs out of our supply chain. You've seen some stabilization on some inflation rates, and we've leaned into our pricing and revenue management teams. As we sit here today, our visibility across our network is dramatically better than it was pre-pandemic. Our fill rates are at or above targeted levels. Our margins are steadily improving. We've made significant progress in auto care, with an increase of nearly 500 basis points as showcased in the prepared remarks. Beyond financial results, our supply chain margin management has improved, positioning us better for the future. Regarding Auto Care, we've seen strong foundational macro trends driving volume demand in that category, and we're focused on margin levels, which we expect to continue improving this year. Our first target is to return to pre-pandemic margin levels, with plans for further improvements thereafter.

Thank you. Good morning, everyone. I hope you can give some more clarity or perspective on some of the international distribution losses you cited. Is that just a competitor getting hyper-promotional, or any perspective around that would be helpful? Then thinking about the first quarter, the holiday season is important for the battery business given device trends, etc. What are you baking in terms of your assumptions on how the holiday season progresses into your guidance? Thanks.

Regarding international distribution, our primary focus last year and this year is to restore margins, which means pushing pricing. In some international markets, our aggression on pricing caused some lost distribution. It wasn't overly promotional; it was a strict pricing discussion. Even with that, we still believe it's the right approach. We would do exactly what we did on pricing if we had to do it all over again as it allows us to restore margins, invest back in the business, and regain distribution through healthy category management. Regarding holiday performance, we are seeing great support from our retailers going into the holiday season, and I'm optimistic. That said, there's a noted caution from both us and the retailers as they want to see how consumption trends develop before making larger replenishment orders, particularly as we approach Christmas.

Yeah. Good morning, Mark, John. You mentioned that half of the 6% to 8% declining sales in the first quarter is actually attributed to the shift in the holiday sales, such as the pull forward. Is the other part more of a consumption impact? Can you bridge the other half if it's the loss of distribution you mentioned or really consumption at this moment that moved to your point in the non-track channels? Also, could you provide some insight on e-commerce tracking related to promotions at your key partners? Thank you.

From a digital standpoint and then John can discuss some sales differentials. As consumers shift online, there is a natural share shift from brick-and-mortar to online. We don't hold as high of a share online as we do in traditional stores, which contributes to the shifting dynamics. Currently, promotional levels are somewhat higher than last year but lower than what we experienced in 2019. I think you'll see promotional levels remain around those levels, and to earlier questions, I don't see any exceeding 2019. We need to ensure promotion right now bridges consumers to higher price points and keeps them engaged with our brand. John, can you break down some of that for us?

You're correct, Andrea. Half of the decline relates to that shift in holiday volume into the fourth quarter. The remainder of the difference relates mostly to consumption in non-track channels, which has seen decreases due to reduced foot traffic. We've also seen slight shifts towards channels favoring value offerings, which have impacted our share and resulted in trade-down.

So first, just for clarity, I think I heard that you expect an incremental $80 million to $100 million in project momentum savings. Is that correct?

Yes, over the next two years.

Okay, with the $50 million plus this year, what's driving the upside relative to your original goal? Out of that incremental $80 million to $100 million, how much is slated to come through in fiscal '24 vs. fiscal '25?

Fiscal '24 is $55 million to $65 million of the savings. The upside is driven by the decision to add a third year, which has allowed us to undertake operational network projects that were somewhat constrained under a two-year structure. This yielded greater savings. Additionally, we made organizational changes through our digital transformation, contributing to savings in SG&A. Overall, it's a three-year program expected to yield $130 million to $150 million in total savings.

Gotcha. In terms of the battery pricing front, one of the hallmarks of the battery category has been pretty consistent price increases over time. I understand why you're not seeing that this upcoming fiscal year with the consumer and retailer environment. However, can you discuss conceptually your expectations regarding pricing for the battery category moving beyond this year compared to the previous fiscal year?

'24 feels a bit like a reset year for a lot of categories in terms of returning to foundational elements of category management. It’s crucial to continue investing in brands and products. Batteries have not typically followed a year-over-year price increase model; increases usually come every couple of years. That should continue, but first, we need to normalize promotional activity and allow consumers to find the right price points. Investments in brands and innovations will drive future pricing discussions.

Thanks. I appreciate the context. I have two follow-up questions. Regarding the volume outlook, you mentioned holiday volume impacting the upcoming quarter. However, there's a bit of confusion. Could you clarify if we are comparing activity year-over-year, as I thought you were down 5% in December? What does that mean for the upcoming volume guidance? Also, what’s the split between your shipments and takeaways in the U.S. and internationally for batteries? Any insight into destocking in any particular regions or categories?

Let me clarify: Our holiday shipments for this year shifted into Q4 of '23, comprising about half of our headwinds as we enter Q1. On inventory at retail, we've sold in ahead of the holidays. For now, inventories appear consistent, but we need to monitor how sell-through goes over the next month. Most critically, consumer behavior shows a reduction in purchasing, with delays as they utilize existing household inventory. We see no headwinds from high consumer inventory levels at present, possibly a tailwind once the macro environment stabilizes.

Hi, good morning. Thank you. I have two follow-up questions. On category growth, when thinking about device growth over the upcoming years, would you anticipate growth in healthcare—such as blood pressure monitors and glucose monitors—or do you expect growth from elsewhere?

I would categorize home automation in line with healthcare automation, indicating that both will contribute substantially to device growth.

Great. And my second question relates to the online share. Is that specific to non-tracked home stores, or does it apply broadly across the domestic market?

It's a trend observed broadly across the online market.

Good morning. I have two. First, regarding the headwinds in the first quarter, you mentioned DIY and the timing shift. I didn’t hear if there were any distribution changes in shelf space allocation for the holiday period?

There are no significant changes. It's consistent year-over-year for what we're seeing in the U.S. That being said, in the international markets, we mentioned some distribution losses, which would impact holiday supply, but in the U.S., holiday sets remain largely consistent with the previous year.

Okay. And in terms of consumer consumption around private label, are there any noteworthy changes happening?

Globally, private label share overall is up about 0.7 points. In the U.S., it's higher, but isolated to specific retailers, particularly in the online space. In international markets overall, it's on the decline, particularly in Europe, while slightly increasing in APAC. Overall, it remains within the manageable historical range of category penetration we've seen.

Hey, good morning, guys. Thanks for taking the question. Following up on Andrea's inquiry, the top line is starting at minus 6% to 8% in Q1, and you’re expecting it to improve to flat to low singles for the year. What drives that improvement, and specifically, what volume improvement do you anticipate in the latter half of the year?

Our forecast considers half of the transition is moving from Q1 into Q4 for the holiday factor. We expect volume to remain relatively steady year-over-year for the rest of the year, plus healthy category dynamics and distribution should drive improvements as we transition into Q2 and Q3.

There’s alignment in volume outlook across both batteries and auto care. Expect slight growth in auto care, while batteries will likely lag behind. As we analyze our promotional strategy amidst this consumer landscape, we must ensure that we address temporary challenges without creating lasting changes. Thus, we continue to invest in our brands while providing value offerings. It’s crucial to maintain engagement along the premium segment, as healthy margins depend on it. We will balance our promotional strategies as this macro environment unfolds. Thanks, everyone, for joining the call and for your ongoing interest in Energizer. I hope everyone has a great rest of the day.

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