Energizer Holdings, Inc. (ENR) Earnings Call Transcript & Summary

Good morning, everyone. I'm Nik Modi, RBC's HPC, beverage, packaged food and tobacco analyst, and I'm joined by Energizer's CEO, Alan Hoskins; President and COO, Mark LaVigne; and CFO, Tim Gorman. Alan Hoskins is an Energizer veteran, having been with the company since 1983. Mark has served as COO since 2015 and has played a critical role in the spin-off from Edgewell and executing the Auto Care acquisition. Tim Gorman has served a number of finance positions at Energizer before being promoted as CFO in 2017. And they have all been very busy of late, working to power all of our kids' gaming controllers and our TV remotes while we all Netflix and chill at home. So Alan, Mark, Tim, thank you again for taking the time and being part of the RBC Consumer Conference.

Thanks for having us, Nik. We appreciate it.

You bet. So let's get right into it. On batteries, I mean I have to say I was a bit shocked by how well the category has been trending, both the initial spike and the fact that sales have held up since. So I'm just curious what your data suggests is actually happening. And do you think prolonged fears of what's going on will actually continue to ramp category even further as we progress through the year? And why don't I kick that over to you, Alan, to start off with.

All right. Mark, maybe we can -- since it's business ops, why don't you go ahead and jump in and we can address the category question.

Yes. Thanks, Nik. That's a great question, it's obviously one we've been getting a lot of lately. I think, first and foremost, we've been able to operate at a very high level throughout this crisis, and it's a real credit to our teams who have been able to make sure that our products are available to consumers, and that's really been no small task. The reason that, that has been so critical is we did see a surge in demand for batteries, particularly in developed markets around the world, most notably in the U.S. There was some initial stock up that really started around the middle of March time frame. If you look at the standard data in the U.S. for the month of March, it was a plus 32%. But we've also continued to do some analysis on what consumer behavior has been like as we've gone through these shelter-in-place orders. And if you think about all those things around the house, and Nik, you mentioned them in your intro, I mean remote controls, gaming controllers, wireless keyboards, toys, everything around the house is getting used far more than it was previously. And so as a result, you've seen sustained trends. In the month of April, it was up 22%. So you've seen sustained increases over an extended period of time. We've also done consumer research over that time where we've reached out to consumers to validate that, and certainly, it's come back consistent with people are using devices more. They're buying batteries more for immediate need, not as much for stock up. Outside the U.S., particularly in developing markets, it's been a little bit of a different story where you've seen more negative trends. But net-net, it's been positive overall for Energizer because of the developing market tailwind that we've had outside the U.S., its markets like the U.K., Australia, Canada. So overall, there's been an increased demand. There's been some offset by some softness in developing markets. We don't think there's been a significant amount of pantry loading. We do think consumers are using the batteries they're buying. Going forward, there could be some modest pantry loading, but we don't think it's going to have a significant headwind for us in the balance of the year.

That's very helpful color. And just if I can talk about market share for a second. And you recently indicated that the March quarter market share declined by about 460 basis points, driven by the lapping of shelf space resets at a major U.S. retailer and from consumers initially stocking up in nontracked channels. Can you just share any updates that you might have, maybe how April, May have looked in that regard?

Sure. So you did see a continuation of trends that we talked about back in November at Investor Day where there was some loss of space related to the competitive launch. And you also saw one retailer where private label was introduced where that wasn't previously and that share came from Energizer space. In addition to those factors, the shopping patterns in the early days of the pandemic, it was more heavily weighted in channels where we're underrepresented. So that exacerbated the trend a little bit. The trend improved in April. We also were able to get some resets done in March. Even with the crisis unfolding, we were able to get that done. And throughout the balance of the fiscal year, we're going to continue to see distribution wins play out in the marketplace. We have not heard that those are going to be interrupted. Everything is on track. There may be some minor delays here and there, but overall, we remain on track. And so as a result, you'll see the share trends really turn around as we head towards the end of our fiscal year. There's also -- I mean tracked channels are only part of the story with the battery category. There's significant distribution in untracked channels, both in home center as well as online, and we continue our momentum in that regard as well.

Excellent. And then if we could just talk about strategy for a second. Can you provide a few examples of how having the Rayovac brand in your arsenal has helped the portfolio as a whole? Initially, there were some concerns that you might have unintentionally traded down consumers. So maybe just a thought on what's happened so far and the opportunity going forward?

Yes. I think the addition of the Rayovac and the VARTA brand in certain markets around the world really do enhance our overall portfolio, and it allows us to execute a strategy that we've been able to successfully execute with the Eveready brand, which is a multi-brand strategy and allows us to leverage VARTA, Rayovac or Eveready as a value brand in those markets which have the -- which has the best resonance with consumers. For example, Rayovac and Eveready are well-recognized value brands in the U.S. Eveready also plays a part in some of our Asian markets. And then you have VARTA and Rayovac in Latin American markets. In terms of the risk of trade down, we understand the category and how to orchestrate the appropriate strategy. We agree that you don't want to prompt trade down, but you do want to meet consumers where they're interested in shopping with one of our products. So over time, we believe that gives us the ability to trade them up in the category. Historically, Rayovac had a significant portion of their distribution in mass and DIY. And our initial focus was really to ensure that we were retaining that space and leveraging that space appropriately. We also believe there's opportunities in channels where we can provide a strong value proposition versus other private label or value brands. We've had some success to date expanding that. I would not expect from a value standpoint of large-scale distribution wins with our value brands, but incremental wins, which help fill out the category for our customers. And as a result, that's going to give us the ability to capture more of the overall category value.

And keep in mind, a lot of our confidence comes from the fact that we have significant experience in driving the trade-up strategy in different markets around the world, leveraging a multi-brand strategy and broad portfolio.

On Auto Care, have your long-term views of this business changed at all? Do you think a structural shift towards working remotely could move the dial at all as we look forward?

No. Our long-term view of the Auto Care category hasn't changed. I think certainly, you saw some disruption in the category, particularly in March. When the stay-at-home orders hit and the number of miles driven really dropped precipitously, you did see that impact the category. You saw March decline, 1-month decline of around 15%. But then if you take a step back. So I would say in the short term, the Auto Care category has been impacted by the stay-at-home orders. As those become loosened up over the coming months, we really think the macro factors shape up in the medium term to longer term nicely for the category. We think the number of cars on the road will continue to increase. The number of miles driven will come back, certainly off the depressed levels of where it is now. We think people will be less inclined to buy new cars in this economic environment. And then there's also kind of some new trends which have emerged out of this, which is people are most likely going to opt to drive instead of fly. They're not going to be as inclined for ride sharing or using mass transit. And so all of that causes consumers to engage and interact with their cars more. The economic impact is also you could see some people who were previously do-it-yourself -- or do-it-for-me trade into do-it-yourself. And as a result, we think the macro trends shape up nicely. Obviously, there's the unknown question of what's the economic backdrop look like over the next 3 to 6 months, and that will play a role in it as well. We also see the fact that brands account for roughly 90% of U.S. category sales, so healthy brands participation. And so we think there's a great opportunity just to leverage and participate in those macro trends, engage in innovation and brand building, like you know that we were -- we excel at and then execute in-store. And then we're also going to move ahead with growing this business internationally and make sure that we continue to drive a healthy and robust innovation pipeline. So all in, we're as excited if not more excited about that business than we even were back in November.

Yes. And just kind of going to your point, Mark, if you look at what's happened in China as they reopened, you've seen congestion -- traffic congestion rise significantly because people are going to work in cars instead of commuting via public transport. So that kind of speaks to potentially what could happen here in the U.S. in terms of people getting to the office.

That's right. I think we do see that continue to play out. And certainly, it could be a macro trend. We see how long that persists and how long it -- and the stickiness of that trend is one we're going to have to watch.

Absolutely. So moving on to e-commerce. Your share performance online has been very impressive, especially on Amazon. Given there's an incredible amount of trial for grocery delivery services or click and collect, there's bound to be a decrease in that impulse purchase occasion that's so important for the battery category. What more can you do to accelerate growth online? And especially, if you can address the impulse point, that would be really helpful.

Yes. Sure, Nik. I think the investments we've made in digital over the last couple of years has certainly paid off in the most recent couple of months. I mean it's a good time to be the #1 brand in e-commerce. And to your point, on an impulse purchase, I mean you're right. It is a prompted purchase in-store. It is an impulse purchase, but you can replicate that experience online as well. You can prompt purchases and interrupt the shopping experience through different tactical measures, and we've been able to successfully test and learn from that over the last couple of years. So it is something that we're adept at. And so I would say that what we're going to focus on is continue to focus on what it takes to win in e-commerce, whether that's with pure-play e-commerce retailers or obviously you've seen healthy growth in a lot of the omnichannel platforms as well. So it allows us to leverage our strong brick-and-mortar position, continue to build it out in the omnichannel offering as well. I think you're going to see the -- you've seen significant growth in that area over the last couple of months as more and more consumers have shopped online, and you've probably broken through a couple of thresholds. I think it's safe to say you're going to see that growth moderate a bit, but certainly, you're not going to see it revert back to where it was in January. I think some of that shopping habits is going to be more permanent, and we're going to make sure we invest and we're there to win.

Excellent. Tim, maybe a question for you on the balance sheet and just how you think about capital allocation, just a quick update on current leverage and leverage targets. And I would suspect that this is an environment that is ripe for potentially bolt-on M&A and more M&A. Can you just give us your thoughts on that?

Yes, Nik. I'll take the first part of that, and then I'll hand it over to Alan on M&A. So in April, we took a number of steps to improve liquidity. We drew down on our revolver. We issued some add-on, approximately $250 million in add-on bonds to our 2026 notes. So we have about $600 million in cash, about 2/3 of that is in the U.S. We've got about approximately $200 million remaining on our revolver in terms of additional capacity. So we've got total debt of about $3.5 billion, roughly 90% of that's fixed. Finally, we secured an amendment to our credit agreement, extending our leverage covenant of 6.25x to the end of fiscal 2021. So that ensures we've got significant earnings coming in against our covenants through the end of fiscal 2021, at which time the ratio will step down to 5.75x. So at the end of the second quarter, our credit-defined leverage was roughly 4.9x, and after the steps we took, it increased to approximately 5.2x. So looking forward, we remain committed to reducing debt once we have greater clarity on the impact from the pandemic. And any extra cash we have, which we've obtained to improve our near-term liquidity, we'll use that excess cash to pay down debt. We also expect our strong free cash flow will enable us to reduce debt over time at roughly 0.5 turn per year in a normal operating environment. And so I'll turn it over to Alan.

Yes. Thanks, Tim. So Nik, regarding M&A, as you know, we can't speculate on future M&A activity. We have continually taken a balanced approach to capital allocation, including M&A. Right now, I'd say we're viewing things through the lens of the current economic and market conditions caused by the pandemic. Our near-term focus is on really managing through the uncertainty that lies ahead by maintaining both sufficient liquidity and financial cushion. So in the meantime, we're really focused on executing our long-term strategic objectives. And as you know, we're holding to our outlook on the synergy capture that we identified on Investor Day. And we are on track with the integration activities, and we have reconfirmed the delivery of our $45 million to $50 million in synergies in fiscal year '20 and overall $100 million run rate savings by the end of 2021. And I think as Tim alluded to, as we continue to move forward, we remain committed to reducing debt. And then once we have a clear view of what's happening in the operating environment from the potential impact of the pandemic, we'll continue to provide updates.

Excellent. And I'm getting different answers from different companies in terms of marketing spend and kind of how to think about it as we move forward, just given some of the consumption behavior. So maybe you guys can just -- I mean I know you have a big thrust and focus to reinvest in the brand. So maybe you could just give us a big picture, philosophically, how you're thinking about marketing spend as we move throughout the year.

Nik, I think our focus hasn't changed in terms of the commitment to investment behind the brands. I mean we're going to continue to invest. We're going to continue to drive additional synergies so that we have the ability to take those excess synergies and drive them back into the business and push more innovation, more A&P investments to make sure that we build the brands to be even stronger coming out of this than they were coming in. And that's going to be true across all of our businesses. I mean innovation matters, brand-building activities matter. Now the way we're going to go about it has changed. I mean as we were heading into this crisis, we did have to take a step back. And obviously, we've emphasized some digital spend because of the shopping behavior online. We've had to take a look at how we were going to spend our A&P from a media standpoint because typically, you would see a lot of our ads on football and sports, and -- where we've had to reassess where we think the eyeballs are going to be. And you've seen us lean in a little bit more heavily on streaming and maybe some gaming platforms than maybe we otherwise would have. But we are committed to the spend, but we're going to continue to make sure that we analyze the best way to spend it so that we get the best return and that we're hitting consumers where they're participating today.

Excellent. And just moving towards competition, there obviously was some activity in the marketplace in terms of new product launches. So I was just hoping maybe you can provide a state of the union on where we are in terms of new product launches, kind of when you're going to be lapping some of that and how retailers are interacting and behaving with private label, especially when we are all kind of, I think, anticipating economic downturn, though no one really knows how long it's going to last. We know it's going to happen. So any thoughts around that would be helpful.

Yes. There's a lot in there. I mean so you did have a competitive launch. And as we've said all along, we like the fact that they were investing in innovation and that they were investing behind brand building. I mean they were investing with what we feel is the right way to invest dollars in the category. I'll let them speak about their launch and how they feel about its success and whether it met their internal metrics or not. What we can say is even with that launch, we still believe that we have the best-performing portfolio out there. We can take consumers all the way from a value brand in the premium with Energizer MAX and then use Ultimate Lithium at the high end of the category. And we have the best performing product in the market today with Ultimate Lithium. That combination of performance and brands is the most complete out there, and it allows us to go to consumers and really mix and match those value brands with premium brands with performance and really meet their needs depending upon the demographics and where their emphasis is going to be from a strategic point of view with their consumer. So it allows us to be an even better partner. In terms of private label, it's been a part of the category, will continue to be a part of the category. Heading into or in the middle of, currently, the economic situation we're in, certainly, we feel like we're better positioned today because we have Rayovac and VARTA in our portfolio and an ability to leverage that. So it makes us an even stronger participant if the economic backdrop does do what we expect it to do over the next couple of quarters. But then as things normalize, we continue to be there with the best premium branded product out there with Energizer MAX as well as Lithium.

Very helpful. And the last question, and you guys have been incredibly efficient, so thank you. I think we can all use a little bit of extra time between some meetings or fireside chats. Last question is really about leaning in. And you think about all the change that COVID has brought, at least in the near term, and some of that could be more long-lasting, like think about one-way aisles and the way the stores are configuring and how important merchandising is to a lot of your businesses, both on batteries and Auto Care. Or you think about the cost structure or the amount of trial you've gotten for your brands. I mean just talk a little bit about how you guys think about leaning in to this current environment to kind of come out of this stronger than you were prior? I don't know if Alan might want to kick it off?

My take on that...

Yes, or Mark...

Yes. I'll kick it off. Maybe Alan -- and then I'll give it to you. I mean I think our customer approach, it means we're going to work with them to maximize the category growth and profitability even throughout this crisis. Consumers and our customers clearly view batteries as critical, and obviously, in the current term, essential. And it's obviously been driving some pretty healthy POS trends. We're going to continue to have to adjust the shopping experience because of shopping habits, safety requirements, those all necessitate doing things differently than what we've done in the past. And if we're anything, we are an exceptional partner to our customers to make sure that we do it the right way, but in a way that also protects an important category not only to our customers but also to our consumers. And the same is going to be true for Auto Care as well. The macro trends provide a tailwind with consumers holding on to their cars longer and then potential migration from do-it-for-me to do-it-yourself. So net-net, we just got to continue to think category first and lean in with our retailers and make sure that as the shopping dynamics, the shopping habits and requirements are made that we're there to help capitalize on it.

Yes. Mark, and I think my build would be is we continue to -- I want to just reinforce, Nik, our confidence comes from the fact that our strategies remain on track as does integration. We're proven brand builders, category value creators. We've built a really strong multi-brand strategy. And we've got the leverage ability in both the global footprint and infrastructure to be able to utilize that to our advantage. So we feel we're well positioned to continue to achieve industry leadership in our respective categories. And as Mark alluded to in several of his answers, we're going to continue to support that with the right level of marketing spend. It was a great lesson for us coming out of the prior Great Recession to make sure that you continue to invest in your brands and your business, and we're going to continue to do that again through the lens of the pandemic. But we really appreciate your time this morning and allowing us to participate, and thank you and -- for all the listeners' time as well.

Excellent. Gentlemen, thank you so much, again, for being part of RBC Consumer Retail Conference. Enjoy the rest of the day, stay safe and healthy, and thanks, everyone, for dialing in. We'll talk to you on the next fireside chat. Thanks, everyone.

Thanks, Nik.

Thanks, Nik.

Thanks, Nik.

Yes, you bet.