Energizer Holdings, Inc. (ENR) Q1 2024 Earnings Call Transcript

Good morning, and welcome to Energizer's First Quarter Fiscal 2024 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 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 relate to the same period in fiscal 2023. With that, I would like to turn the call over to Mark.

Good morning, everyone, and thank you for joining us on our fiscal 2024 first quarter earnings call. We started the fiscal year with the same priorities as we had in FY '23: improving margins, generating free cash flow, and paying down debt. In our first quarter, 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 million in debt, solidifying our path to achieve below 5 times debt to EBITDA by the end of the fiscal year. 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 first quarter. Globally, battery category volume and value performed as expected with both down low single digits. This was largely driven by ongoing elasticity impacts from international price increases, which occurred later than in the U.S., as well as comping the energy crisis in Europe last fall, which caused a surge in category demand in our first quarter of 2023. When you narrow the view to the U.S., category volumes increased roughly 6% in the quarter. We expect international category trends to follow roughly the same recovery pattern as the U.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 investments 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 than the prior year. 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 strategies 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. We saw growth across three of our four 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 margin. And finally, Project Momentum is delivering. The program generated over $20 million in savings in the quarter, taking total program savings to over $75 million to date. As we announced today, we continued to find areas of opportunity, and we increased the total program savings target by $30 million, taking our savings range to $160 million to $180 million. Our strong free cash flow has also been a bright spot. The combination of margin improvement and continued progress on working capital management helped to generate 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.

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter, an update on Project Momentum, and some additional color for our expectations for the rest of fiscal '24. 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% and 8%. As we called out in our last call, the largest driver of the decline was earlier holiday shipments which benefited our fourth quarter in fiscal 2023. 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 SG&A increased $3.7 million, primarily related to labor and benefit costs, as well as factoring fees in a rising rate environment, partially offset by Project Momentum savings. A&P as a percentage of sales was 6.6%, consistent with our efforts to focus investments during the critical holiday season. Interest expense decreased $2.2 million due to lower average debt outstanding as we have continued to prioritize debt paydown. As noted in our press release issued earlier this morning, we also recorded a non-cash exchange loss of $21 million 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. 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 $132.9 million and $0.59. We also generated $153 million of free cash flow 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 million of debt during the first quarter, and we've continued this progress by paying off an additional $58 million subsequent to quarter end for a total of $136 million in the first four months of the fiscal year. Since the fourth quarter of fiscal '22, we have paid off over $400 million 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. As Mark noted earlier, Project Momentum continues to be an important focus for us and contributed approximately $22 million 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 million for total program savings of $160 million to $180 million. 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 second quarter, we expect organic net sales to be down between 2% and 3% as we cycle through softness in non-track channels. 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 $0.70, 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 two years, especially in international markets where pricing actions occurred later than in the U.S. We also expect a recovery in some of the non-track channels, which should begin to comp large declines that began last spring. 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 million to $65 million. We also expect to pay down $150 million to $200 million of debt for the year, and to end fiscal '24 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 million to $620 million, and adjusted earnings per share of $3.10 to $3.30. With that, I'll turn it back over to Mark for closing remarks.

In summary, our first quarter performance sets us up well for the remainder of the year. We have the flexibility and discipline to navigate the market condition, 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.

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

Great. Thanks so much. And the 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 still maybe more to be evaluated as we move forward?

Lauren, we continue to evaluate Project Momentum, and as you've seen, as we've gotten further in the program, we've been able to take the ranges up 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 manufacturing. It's driving great working capital improvements, cost savings improvements, and it was a relatively low-level investment. The purchase price for the assets was roughly €3.5 million.

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

Yes. I would say, Lauren, the first quarter 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.

Okay. And is there anything within there that I guess, I'm sure it's still partially Project Momentum, but like operational changes that are being made in Auto versus raw materials and pricing kind of stuff? I'm curious about what's sort of in your control versus the macro, if you will.

Yes. No. It's obviously the smallest quarter by far. So when you kind of come into the year and look at re-rolling standards, you got some indirect costs that you allocate to the business. It's really not reflective of the full-year run rate.

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 the plans we have under Project Momentum, is we'll achieve that level in '25.

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

Thanks. Good morning.

Good Morning, Bill.

Good Morning, Bill.

Could you elaborate on your insights or visibility regarding the increase in battery volumes? I'm trying to grasp the elasticity aspect, considering the business has typically had an impulse or commodity nature, with you and Duracell maintaining similar pricing. Rayovac hasn't significantly gained market share, even though it's a lower-priced alternative or private label. How do you believe consumers are adjusting, if they are at all, as volumes begin to rise again? Is there something additional that I'm not taking into account?

No Bill. Let me start. From an overall perspective on the category, we're pleased with the current trends. I believe we are well positioned to achieve our goals for the year. To break it down by the components of the category, in the U.S. track channels, we are seeing consistent improvement in volume. We’ve moved from a decline of about high single digits, down 1.5% year-over-year, to a decrease of only 0.5% in volume recently, and this morning’s figures were positive. This indicates a turning point towards positive volume growth in track channels. That’s a promising sign regarding our ability to manage the impacts of elasticity and the pandemic surge in demand. When we look at the online channel, which includes both pure play and omni, this has been a steady source of growth over the past few quarters and we anticipate that will continue. In the non-track channels like home centers and OEM, we expect trends to stabilize after the declines we experienced last April-May. We plan to work through those challenges. Internationally, we are dealing with pricing elasticity effects that surfaced later in the U.S., but we expect to navigate those as well. We're already observing positive signs, particularly in Latin America and Asia Pacific. Europe experienced some unique challenges due to the energy crisis last year. Overall, these trends are encouraging from a category viewpoint. Specifically for our business, in addition to our regular execution, we are achieving distribution wins in both batteries and auto, which we believe will take effect in the latter half of the year. All these factors, both for the category and our business, give us strong confidence in returning to growth in the second half of the year.

Okay. To clarify, do you believe that the situation is improving more due to a return to pre-COVID norms, or is it a matter of pricing elasticity? It seems like you lean towards the former, while pricing adjustments appear to be more relative. You seem confident that we are moving back to typical consumer behavior.

I believe we are returning to more typical consumer behavior. It's challenging to separate the various influences at play, and I wouldn't attribute the current trends solely to COVID. There's been a long process of adjustment, compounded by two significant price increases over the past few years that consumers have had to navigate. In addition to that, there are broader factors to consider. Therefore, I can say that we are returning to more normal category patterns. As we move into the third quarter, you'll likely notice a significant change in volume in the U.S., as consumers are responding accordingly. Regarding Rayovac, we are observing growing interest in the brand. Conversations with retailers indicate that we've gained some market share with Rayovac, particularly as retailers focus on value-oriented products for consumers. This presents an opportunity for us, and we have managed to tap into some of that. Ultimately, we prefer to keep most of our business at the premium segment with Energizer, where we remain strong.

Great. Thanks for the color.

Thanks, Bill.

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

It's the majority of it.

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 then I have just one follow-up.

Sure, Nik. 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 million to $180 million as the savings range, it breaks down to 55% roughly in sort of network distribution footprint, 15% procurement, and then 30% SG&A. Those ranges have moved around a little bit. As we've continued to uncover SG&A, we found additional opportunities as we've worked through the program, but the 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 million to $180 million in savings over the three year period.

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. Am I reading that correctly? Have you seen things really improve? Are you feeling better about where the consumer is?

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 Auto and Batteries exceed our expectations and continue to have the right trajectory. I think it's dangerous in this environment to go too all-in in sort of one direction so 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. We're doing that. We're doing it successfully, but it is an improving backdrop compared to what we expected back in November.

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. Thank you.

Well, let me get started, Robert. I think on the sort of confidence, it really breaks down into how I laid it out before, which is improving trends across the category in track. You have nice growth potential online. You have a stabilization in non-track. So that's kind of the foundation. 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. We called out international distribution on the last call. I would say that teams have aggressively moved 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 hit shelves here in Q3 and Q4.

Terrific. Thank you very much.

Thanks, Robert.

Thank you. Good morning, everyone. Can you provide insights on the performance of your online channel for Batteries? You recently highlighted opportunities online, but it's also the most fragmented channel. In previous quarters, this was an area where you experienced significant slowdowns, partly due to increased competition from private labels. Can you discuss your current market share and your strategy moving forward? Thank you.

Good morning, Andrea. The best way to describe the situation is that we're somewhat limited by the online information we receive. However, we are experiencing healthy growth in both volume and value online. In the October to December quarter, we managed to achieve growth online in terms of both volume and value. Our market share appears to be flat; we are neither losing nor gaining share at this time. Overall, we had a strong quarter in the online channel during the holiday season, which is critical for us.

That's encouraging. Referring back to Project Momentum and the $30 million, I understand you included 2025 in the program in August. Can you clarify where the additional $30 million originated? Also, I believe the amount for 2024 remains unchanged. Could you explain the source of this funding and where we should expect to see the extra $30 million, likely in 2025?

So the extra is certainly in '25. We did keep '24 between $55 million and $65 million in savings. The balance of the program to hit in '25. As I mentioned on one of the previous questions, it's really broad-based across the program. It's a 70/30 split gross margin SG&A. That's a little different than when the program started, which was 80/20. We did add a third year as we continued to find additional opportunities throughout the program, but really excited about the benefit it's going to provide for us and our ability to 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% in gross margin, 30% in SG&A, and with the $55 million and $65 million in '24 with the balance next year.

That's great. And then if I can just squeeze a bit of the Rayovac kind of repositioning. And as you gain more shelf space in bricks, do you see the need for pushing because obviously when you're growing and the market was premiumizing, do you see the need for 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?

I believe we are well-positioned in the battery category to effectively engage with retailers and address their strategies or challenges in connecting with consumers. Our extensive portfolio, which spans from value offerings to super-premium lithium products, gives us a distinct advantage. Our aim is to increase Rayovac volume through private label while ensuring that consumers remain engaged with the branded side of the business, which is crucial for Rayovac. Our flagship Energizer brand will continue to be our focus and will account for most of our distribution. While Rayovac will not have a significant impact on our overall market share or financial performance, it is an essential asset that we strategically utilize when collaborating with retailers to address their concerns.

Thank you. I pass it on.

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, and how it may fall out for the rest of the year?

Sure. Yes. Yes. For the rest of the year, and specifically to materials, it was slightly negative in this quarter, but we're looking for pretty consistent improvement going forward. We're calling for about 80 basis points of gross margin full-year improvement, and the biggest benefits really coming from lithium, zinc, steel and R-134a. So we do have some tailwinds coming in from direct input cost.

Thank you very much.

Hi. I'd like to focus on the debt paydown. And just wondering what's the debt that you paid down in the quarter and after all term loan? And is that what you expect to target going forward? Or would you look at back bonds as well given that they're trading at a discount?

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 that term loan as much as we can over the next couple of years.

Okay, great. Thanks.

Thanks.

Thank you. We have one more question in the queue. The next question is from Lauren Lieberman at Barclays. Please go ahead; your line is open.

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

Great. Thanks, Lauren.

Hi, thanks for taking the question. I believe you anticipated flat year-over-year volume for most of the year, given the Q4 earnings discussion last November, and excluding the effect of earlier holiday shipments in Q1. Is that still the general expectation for the year?

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 first quarter. We expect it to be kind of flattish in Q2 and then see a turnaround in the back half of the year to get us back to flat.

Great. And then secondly, on debt paydown. 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 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?

No. I think we'll continue to focus on the operational performance. So back at the end of '22, 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 the last six 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.

Thank you. Best of luck.

Thank you.

Thank 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.

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

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