Energizer Holdings, Inc. Q1 FY2026 Earnings Call

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Energizer's First Fiscal Year 2026 Conference Call. As a reminder, this call is being recorded. I would now like to turn the conference over to John Poldan, Vice President, Treasurer and Investor Relations. Please go ahead.

Good morning, and welcome to Energizer's First Quarter Fiscal 2026 Conference Call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Executive Vice President and Chief Financial Officer. In just a moment, Mark will share a few opening comments, and then we'll take your questions. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. In addition, please note that our earnings release, prepared remarks, and the slide deck are 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 to a presentation of 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. And as always noted, all comments regarding the quarter and year pertain to Energizer's fiscal year and all comparisons to prior year related to the same period in fiscal 2025. With that, I would like to turn the call over to Mark.

Good morning, and thanks for joining us today. As we've done in prior quarters, we posted prepared remarks on our website, which provides a comprehensive overview of our achievements this quarter and our forward outlook. But I first wanted to open the call with just a few comments before we head into Q&A. As we closed our first quarter of 2026, our agenda is unchanged and firmly aligned with long-term value creation for store growth, rebuilding margins that were pressured by tariffs, and returning the business to our historical cash flow profile. In the first quarter, we made meaningful progress on all fronts. Our performance exceeded expectations, and we've established a clear foundation for sequential gross margin expansion and a return to meaningful earnings growth in the back half of the year. The quarter demonstrated that our strategy is working. We secured final customer decisions on the APS to Energizer brand transition, which is expected to contribute over $30 million of organic growth in the year, most of it landing in the third and fourth quarters. We strengthened distribution across our value and premium brands with key U.S. retailers, advanced innovation across both Batteries and Lights and Auto Care, and substantially completed the supply chain realignment that is central to restoring margin. These actions position us to deliver over 300 basis points of gross margin expansion from Q1 to Q2, with another 300 to 400 basis points anticipated by year-end. We also delivered robust cash generation that allowed us to pay down over $100 million of debt while returning nearly $28 million in capital to shareholders through dividends and share repurchases, reinforcing the durability of our cash flow model. And finally, I wanted to spend a brief moment on our capital allocation strategy, which remains a cornerstone of long-term value creation. We will continue to prioritize reducing debt, which directly shifts value to equity holders while strengthening our balance sheet. In addition to reducing leverage, our free cash flow supports a balanced shareholder-first capital allocation strategy. We intend to return capital through an attractive dividend, which reflects our confidence in ongoing cash generation, and through share repurchases when market conditions create attractive entry points. This disciplined deployment of cash, paying down debt, maintaining an attractive dividend, and buying back shares reinforces our commitment to maximizing long-term shareholder value. Thank you for your continued confidence in Energizer. And with that, let's open the call for questions.

Your first question comes from Lauren Lieberman from Barclays.

Great. So one quarter into the year, I wanted to just get a sense for how you're thinking about things broadly versus what you might have said 3 months ago. So thinking about the consumer backdrop, maybe what you're seeing in terms of category trends, any kind of uptick from private label. We know the continued pressure on the lower-end consumer has been a dynamic. And it just feels like there's a lot of moving parts and now a very back half weighted year. So just kind of degree of confidence in hitting that ramp in the second half.

Let me start high level. So when we were building our plan for '26, we knew it was going to be a transitional start to the year. We saw softening consumer trends in October and November. We were lapping last year's hurricane-driven demand. And we had some orders which were planned for the first quarter, which benefited the fourth quarter of fiscal '25. On the cost side, we were managing through elevated tariff pressures, which were the result of tariffs levied at higher than the current rates. And in light of that, we were reshaping our network, which also created some short-term operational inefficiencies, including some absorption. These affected the results at the end of last year and we expected them to continue into the first half of '26. These were understood going in and were fully embedded in our plan, and the year has thus far unfolded largely as we expected. Looking ahead, we're encouraged by the trends we're seeing in the business. Consumer demand has stabilized. We saw a strong rebound in December volumes in the U.S., which remains our largest market. We also strengthened our in-store presence with broader and higher-quality distribution across major retailers, which you'll see over the back half of the year. At the same time, we've done additional work to reposition our cost structure, and that's starting to take hold. We are starting to cycle through inventory, which were impacted by those higher rates and our mitigation efforts are starting to come to fruition. That includes relocating production capacity in the U.S., diversifying sourcing, and investing in efficiencies to make the network more efficient. We've taken targeted steps to increase production, to increase the tax credits which we expect to earn this year, which should drive a benefit of roughly 50% above last year. These dynamics are all coming together and setting us up for a strong acceleration of net sales and earnings in the back half. So while the first half reflects the short-term factors, the underlying trajectory is improving. This year is really about restoring growth, restoring margins, and restoring free cash flow. And thus far, we're off to a great start. Specific, Lauren, to your question on battery consumption trends, we saw meaningful improvement in the quarter, as I just mentioned. December inflected the volume growth. You see in the standard trends, the 13-week volume was slightly negative. But then when you see the December data in the 4 weeks, that was where volume inflected positively. Obviously, January is going to have a very positive volume growth with winter storms in the U.S. For the balance of the year, we expect the category to be stable and the trajectory of the category is essentially what we assumed going into the year. Anything I missed?

No, I think that was perfect.

Your next question comes from Peter Grom from UBS.

I guess I wanted to follow up on that last point, right, just on the January trends and kind of the impact of weather. And so I ask this in the context of you mentioned in the release that your outlook does not contemplate any impact from the recent winter storm activity. So just whether it's based on what you've seen thus far, maybe what you've seen over time, can you maybe just help us understand what this could do to your guidance as it relates to either the second quarter or for the full year outlook?

Sure. Peter, why don't I start with the storm impact and then maybe John can bridge a little bit of kind of the front half, back half dynamic that we're seeing. I mean the storm volume in the U.S., clearly, there's a benefit to POS. I mean the 1 week numbers were significant category value north of 50%. It's really too early to quantify the impact that this will have on our business as we'll need to work through replenishment orders. We need to manage through any shipments which may have been disruptive because of the weather as well as work through resulting inventory levels at retailer inventory levels. It will certainly be a benefit for our business, but it's just too early to tell how much. I would say there's just more to come on that in connection with the Q2 earnings call. John, do you want to walk through kind of the bridge as we think through the balance of the year?

Yes, I can provide some insights into the second half of the year. We believe that the category will remain relatively stable, as we've observed in December and January. We're starting with a solid foundation. A significant factor contributing to our growth is the transition of APS customers to our branded product, Energizer, which we anticipate will add around $30 million or approximately 200 basis points to our organic growth. Additionally, we plan to enhance distribution in the latter part of the year by capitalizing on our innovation and utilizing our full range of products, both in physical stores and rapidly expanding e-commerce channels. Given our current planogram adjustments and anticipated e-commerce growth, we project a growth of 400 to 500 basis points for the second half. We're also expecting between 50 to 100 basis points of benefit from some pricing strategies as we move forward. On the gross margin front, the first quarter faced substantial challenges due to various factors, many of which won't persist. For instance, tariffs accounted for almost a 300 basis point impact in the first quarter, but we expect improvements as we proceed through the year. Additionally, we sold about $65 million of Panasonic branded products in Q1 related to the APS transition, which significantly affected our gross margin by around 200 basis points. This situation won't continue moving forward. Transitional product cost impacts have also been substantial, reaching nearly 100 basis points. We've undertaken significant efforts to revamp our global supply chain, and we should see the benefits of those improvements throughout Q2 and beyond. In Q2, we expect to see a 300 basis point sequential improvement in gross margins, with continued growth anticipated in Q3 and Q4. Our goal is to return to the low 40s range, similar to where we were prior to the tariff impacts. We believe that by overcoming these one-time transitional costs and leveraging targeted pricing strategies, we will optimize our production credits in the second half of the year. Overall, we're observing positive trends in our efforts.

We brought your question a little bit. We thought it was important to sort of highlight that front half, back half.

No, that is helpful. I mean, I guess one follow-up to that. I mean, in the building blocks are really helpful, but it remains a pretty volatile uncertain environment. So how would you characterize or how do you think about layering in flexibility or cushion as you think about the guidance from here?

Yes, Peter, we always try to build in enough flexibility in the plan to be able to deal with uncertainty. I mean, what you just described has been a constant over the last 5 or 6 years. So every year evolves differently than you expect going in. I think if one thing this organization has developed over that time period, it's the muscle memory to be able to read and react to the situation and adjust our plans accordingly. And that's a daily occurrence around here. So I think we've got the right plans in place. We're confident in the outlook that we provided. It may not play out exactly as we forecast sitting here today. But ultimately, we feel like we can deliver the financials we've laid out.

Your next question comes from Rob Otenstein from Evercore.

I think you may have just answered my question, but I want to clarify. The batteries are much stronger than we anticipated, and there has been less increase in gross profit than expected. Have you explained what happened regarding Panasonic and the tariffs, or are there other factors involved? Or am I misunderstanding that?

No, that's correct, Robert. There are three factors. The higher tariffs significantly impacted APS, which was a 200 basis point drag on its own during the quarter. Additionally, the transitional nature of some product cost changes is something we are currently addressing, and we expect these to improve moving forward.

Great. And then can you talk about the strength in December? Was that the category? Or was it more you? And does that tell us anything about potential market share gains in '26, and maybe you could touch on what you see in calendar '26 in terms of shelf space, point of distribution, those sorts of drivers?

Sure, Robert. The category saw improvement in December, and we've also increased our market share in the latest reporting periods. This trend of category improvement and our performance slightly ahead of it is continuing. Looking ahead to calendar '26, we anticipate an expansion in our distribution footprint, which includes not only a broader reach but also higher quality distribution. We're utilizing our entire portfolio, from value to premium products, to ensure we cater to consumers effectively. Additionally, we've introduced some exciting innovations in Batteries and Auto Care that will launch in Q2 and Q3. We are enthusiastic about our plans with retailers as we move through the rest of the year.

Your next question comes from Andrea Teixeira from JPMorgan.

I would like to focus a bit more on the top line. You've mentioned stable categories and selective pricing. I'm interested in understanding the dynamics within private label, especially regarding your largest e-commerce partner. How are you approaching pricing in relation to volume in that context? Additionally, what are your expectations regarding shelf resets? You mentioned there would be some additional shelf space, so I’m curious about that. We haven't yet covered the auto sector, so any insights you could provide on that would be appreciated.

Sure, Andrea, let me start with Auto. I mean, it's the smallest quarter we have in Auto in Q1. There was a slight impact from weather as well as some timing as well within the auto business. We're heading into peak season. We're really excited about your terpodium series. We have additional innovation that we're launching across the portfolio. We always are excited about the prospects of international growth as well as growth in e-commerce. You are seeing a little bit more of a bifurcated consumer in the auto category where higher-end parts of the category are showing growth. We're in the middle to the lower end of the category. You're having some consumers that are delaying purchases or opting out altogether. I think that makes the terpodium series launch all the more timely for us, which we're participating now in growth at the high end. So as we head into Auto Care for the balance of the year, still expecting growth, but you are seeing a little bit more of a pronounced bifurcated consumer in that part than maybe what you're seeing in batteries. Now, if I want to switch over to batteries, I mean let's just talk consumers generally. I mean consumers are continuing to search for value. You are seeing consumers stressed about finances. In light of those dynamics, they're comfortable switching channels, retailers, brands, pack sizes. So they're willing to rotate their purchases to meet their needs. It's critical that we meet them where they are, and this is where Energizer is uniquely positioned with our portfolio. Private label plays a role in the category. Certainly, some retailers are looking to connect with consumers in light of those trends. In the first quarter, we did see an increase in private label at certain retailers as well as some aggressive pricing. This results in volume growth for those retailers but actually erodes category value at the same time. Our view is this is all about balance, and we've already seen some retailers recalibrate their approach and bring more balance to both private label value and premium equation. Even with those dynamics, we gained share over the holiday period, and we're excited about some of the plans that we're leveraging in order to be able to compete with private label but also leverage our value brands and our premium brands to connect with consumers.

Your next question comes from Carla Casella from JPMorgan.

I'm wondering if you have a leverage target you would like to reach by the end of this year.

Yes. I think by the end of this year, we're expecting to achieve a leverage ratio of around 5% or slightly below. We will continue to focus on paying down debt, having already reduced it by over $100 million in the first quarter. Our target remains between $150 million and $200 million, which we believe will help us manage leverage levels for the remainder of the year.

Okay. Great. And should we assume that M&A is back burner until you delever? Or are you looking at M&A opportunities?

We will always look at M&A opportunities. I think any deals that we would look at would be leverage neutral and not impact our debt paydown trajectory that we're looking to achieve. So that would be on the smaller side.

Okay. Great. And then I know in the past, you've often talked about storms affecting, the hurricanes, winter storms. Are there distinct differences between winter storms and summer storms? Do you prefer one or the other? Just curious.

Well, I mean, hurricanes tend to be a little more isolated in terms of impact whereas this winter storm that we saw over the last couple of weeks really covered a broad section of the country, which is a little different. So the response is going to be different and the impact on our business will be different. But I wouldn't say we prefer either, but we make sure that we can deliver products where consumers need them. And obviously, this is something that the organization excels at.

Great. Yes, I can figure how to word that. But you got my point.

Don't worry. We struggle with that, too.

Your next question comes from William Reuter from Bank of America.

The first, you mentioned that there were impacts of products that were produced during periods when tariffs were elevated, which have since normalized to the current levels. Can you talk about what the amount of impact that we should kind of normalize this quarter's EBITDA based upon the elevated tariff rates?

I believe we are estimating tariffs to be in the range of $60 million to $70 million, with around $60 million being the last figure we had. This should remain relatively stable going forward. We experienced a larger impact in the first quarter, but that should represent our ongoing rate.

Okay. So I guess I thought you guys had highlighted that the elevated tariff rates possibly on some products impacted you. Did I misunderstand that?

Yes. It will go down a bit as you go through the year. I don't have the exact tariff hit in the first quarter. We'll come back to you on the exact number. But it does get a little bit better. Plus remember, we've got pricing and credits. And the credits, the tax credits that we've got will continue to grow as we go throughout the year. So the total impact that we're calling for tariffs will improve as we go throughout.

Got it. And then on the gross margins, you were explicit that the second quarter will improve 300 basis points. And then you said an additional $300 million to $400 million by the end of the year. So does that mean you will see a sequential improvement from the second to the third and fourth quarters of 300 to 400 basis points in each of...

That's correct, Bill. It will be sequential. Our first quarter tariff impact was about 300 basis points, and that will definitely improve on a margin rate as we move forward.

And Bill, just to clarify, just to make sure you're not walking away with a different model. So it's 300 basis points from Q1 to Q2 and then 300 to 400 million between Q3 and Q4, not in each of Q3 and Q4.

That's right.

Okay. I might send you an email just to make sure I understand that correctly. Lastly, for your input costs, certainly, there's some inflation in some of those metals. Can you talk about what you're seeing now? How much you have locked in? And then what that might mean for necessary price increases next year for products which you haven't hedged if these elevated input costs remain?

Yes, we experienced a slight setback in the first quarter, around 80 basis points. We had some counteracting momentum, but input costs were mainly responsible, particularly due to freight and certain production inefficiencies. Currently, raw materials are about stable, although spot prices for zinc have increased. We’ve also observed declines in lithium, silver, and R134a, which is a gas used in many of our refrigerant products. For zinc, we are more than 90% secured for 2026. With the combination of contracts and inventory, we are in a reasonable position with many of these materials. However, I expect to see continued pressure as we progress into 2027. We have implemented some targeted price increases, particularly in the automotive sector, to address these cost impacts, which should be reflected in the second and third quarters, as mentioned earlier. Overall, the trends are slightly negative. While I do not anticipate a significant impact for 2026, it is a situation we need to manage continuously.

Bill, one follow-up question on margin. We have a slide within the earnings deck that provides a little bit more color on the margin progression over the balance of the year, which I think you may find helpful, but I'm happy to connect after the call as well.

And there are no further questions at this time. I will turn the call back over to Mark LaVigne for closing remarks.

Thanks for joining us today. I hope everyone has a great rest of the day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.