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

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 in 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 year relate to the same period in fiscal 2023. With that, I would like to turn the call 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 of over 21% of net sales and paid down $78 million in debt solidifying our path to achieve below 5x 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, 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 both top and bottom line growth over the balance of the year. Turning to our 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 curve last fall, which was 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 strategy with a focus on driving the overall health of the category and our brands. 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 3 of our 4 subcategories: appearance, refrigerants and fragrance and delivered double-digit growth internationally. Importantly, we are set up well to deliver low single-digit organic growth for the full year in auto care, while also expanding margins. And finally, Project Momentum is delivering. The program generated over $20 million in savings in the quarter, taking total program savings to over $75 million to date. As we announced today, we continue 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 detail on the quarter and the full year outlook.

Thanks, Mark, and good morning, everyone. I will provide a more detailed summary of the quarter and update on Project Momentum and some additional color for our expectations for the rest of fiscal '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 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-tracked 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 noncash 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 4 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 onetime 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-tracked 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 and $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 adjusted the pricing taking over the previous 2 years, especially in international markets where pricing actions occurred later than in the U.S. We also expect recovery in some of the non-tracked 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 5x 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 conditions particularly in light of the strong momentum across our cost savings and cash generation initiatives. We will remain laser-focused on delivering growth, advancing our strategic priorities and delivering shareholder value. Now let's open the call for questions.

[Operator Instructions]. And our first question comes from the line of Lauren Lieberman at Barclays.

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 any detail on 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?

Laura, we continue to evaluate Project Momentum. And as you've seen, as we've gotten further in the program, we've been able to take the ranges up to $160 million to $180 million is our current call based on everything we know today, including the acquisition of the Belgium facility. And that was an opportunistic opportunity that came across late last year, it allows us to pivot and do in region for region manufacturing. It's driving great working capital improvements, cost savings improvements and it was a relatively low level of investment. The purchase price for the assets was roughly EUR 3.5 million.

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

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 you just -- I guess, I'm sure still partially Project Momentum, but like operational changes that are being made in Auto versus raw mat and pricing kind of stuff. I'm curious about what's sort of in your control versus the macro, if you will.

No, 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've got some indirect cost 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 we 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. I'll pass it on and come back on.

And our next question comes from the line of Bill Chappell of Truist Securities.

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

No, Bill, let me start. So I would say from an overall standpoint on the category. Let me -- we really like where we are from a category trends. I think we're positioned very well to deliver the year. Let me start by kind of breaking it down into the component parts of the overall category. And this is -- so in the U.S., when you talk track channels, volume is consistently improving. You saw us go from kind of down high single digits, down 1.5% year-over-year and then the latest numbers have been down 0.5% in volume and even the numbers that came out this morning were positive. So you are seeing that inflection point in track channels to positive volume growth. That's a great sign in terms of working through the elasticity impacts working through the pandemic surge in demand and all of the factors that have gone into that. Then you break it down into sort of the online channel, both pure play as well as omni. That's been a consistent source of growth over the last couple of quarters, and we continue to -- we expect that to continue. Then when you get into non-tracked channels with home center and OEM, we expect those trends to stabilize. If you recall it was kind of last April, May, when we saw some of the declines that we saw in home center. We expect to work our way through those. And so those trends should stabilize. International, you have elasticity impacts from pricing, which occurred later in the U.S. We expect to work through those. We're already seeing signs that you are. Latin America, Asia Pacific, in particular. In Europe, you had a bit of an anomaly with the energy crisis there last year. So all in all, those trends are positive just from a category standpoint. And then specific to our business on top of just basic execution, we are seeing some distribution wins in both Batteries as well as in Auto, which we expect to take hold in the back half of the year. So all of those factors, both from a category as well as our business specifically, give us great confidence in the back half of the year returning to growth.

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

I think we are getting back to a more consumer behavior. It's very difficult to parse that. I wouldn't want to blame some of the current trends on COVID related. I mean you did have a long cycle of working through that and then you had the pricing impacts from 2 fairly significant price increases over the last couple of years. So there was a lot there for consumers to work through, plus just the overall backdrop impact as well. So I would say you are back to more normal category patterns as we work our way through into Q3 is when you're really going to see that inflection point from a volume standpoint in the U.S. consumers are reacting accordingly. Your question on Rayovac, I mean we are seeing interest in Rayovac -- sort of an increased interest in Rayovac as we've talked to retailers, you have seen some share gains in Rayovac as some of the more value-oriented offerings and retailers are leaning in with consumers, so there is an opportunity there and we've been able to capture some of that, obviously we want the bulk of our business to stay at the premium end with Energizer, and that's where it continues to be.

Our next question comes from the line of Nik Modi at RBC Capital Markets.

So just a couple of questions. Just wanted to clarify the non-track 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 I have just 1 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 that we -- as we work 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 savings over a 3-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 an 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 successfully. But it is an improving backdrop compared to what we expected back in November.

And our next question comes from the line of Rob Ottenstein of Evercore.

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.

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 tracked. You have nice growth potential online. You have a stabilization in non-tracked. 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 themes have aggressively move to claw back some of those distribution losses. And so as you look to the balance of the back half of the year, we expect distribution wins to be a tailwind and not a headwind as we get into Q3 and Q4. So a lot of hard work in the distribution. I don't want to get into specific customers and certain products, but you'll see them hit shelves here in Q3 and Q4.

Our next question comes from the line of Andrea Teixeira of JPMorgan.

So can you comment on your online channel performance for Batteries. You mentioned just recently that you saw an opportunity online and -- but that by the same token is also the most fragmented channel. And I remember in the past few quarters, it was one of the areas where you had the most deceleration or in a way, some sort of like increase, obviously increased competition against private labels. So if you can comment on how your share stands right now and how you're thinking in your model.

I think the best way to describe it, and a lot of this is limited to the information that we received from an online standpoint. But what we're seeing is we're continuing to see healthy volume growth in online. You're continuing to see healthy value growth online. In the past quarter, in the October, November, December quarter, we were able to match online growth, both in terms of volume and value. So our share from our estimates is probably flat. We're not losing share. We're not gaining share at this moment. But I think a really solid quarter for us in the online channel in holiday, which was, as you know, a very critical quarter for us.

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

So the extra certainly in '25, we did keep '24 between $55 million and $65 million of savings. The balance of the program to hit end of '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 continue to find additional opportunities throughout the program, but really excited about the benefit it's going to provide for us and our ability to sort of deliver ongoing earnings momentum in the business. And so tremendous work. It's broad-based. The teams continue to work hard and execute against the program. I would say 70% 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 -- do you see the need for kind of pushing because, obviously, when you're growing and the market was premiumizing. Do you see the need of positioning Rayovac as like an entry level for you, which has always been, but just to see if you're looking at this additional shelf space to be positioning to protect the entry-level battery market or not?

Well, Andrea, I think we're perfectly positioned in the battery category to really lean in with retailers and solve any of the sort of strategies or issues that they're trying to connect with consumers on. And I would say our full portfolio, the fact that we go from value offerings all the way up to super premium with lithium is a unique advantage that we bring. I would say the goal is to source Rayovac volume from private label and to make sure that we continue to keep consumers in the branded side of that business. That's an important element that Rayovac plays. Obviously, our flagship Energizer brand will continue to be our emphasis and continue to be the bulk of the distribution that we see, but it plays an important role. I don't think it will take outsize -- have an outsized impact on our overall share or our financials, but it is a key asset that we have that we leverage very tactically as we work with retailers to solve any of the issues that they're looking to solve.

And our next question comes from the line of Hale Holden at Barclays.

Could you give us any change or update to what you're seeing on input prices on the overall inflationary market or environment or deflationary environment and however it may fall out for the rest of the year?

Sure. Yes. Yes. For the rest of the year, specifically to materials, it was slightly negative in this quarter, but we're looking for a pretty consistent improvement going forward. We're calling for about 80 basis points of gross margin, full year improvement. And the biggest benefit is really coming from lithium, zinc, steel and R134a. So we do have some tailwinds coming in from direct input costs.

And our next question comes from the line of Carla Casella at JPMorgan.

I'd like to focus on the debt paydown. And I'm 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 for bond as well, given that they're [giving you 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.

[Operator Instructions]. And the next question is from Lauren Lieberman at Barclays.

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 ended up answering it. So I am all set.

No problem. And we've had one further question come through, and that's Brian McNamara at Canaccord Genuity.

I believe that you expected flat year-over-year volume pretty much throughout the year when -- with Q4 earnings back in November, excluding the impact of the earlier holiday shipments in Q1. Is that still the case broadly for the year?

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, to kind of get involved in the name that aren't already. I'm just curious, is there anything you, guys, can do to kind of hasten that process, whether it be divestitures or maybe smaller brands, things like that, that you're considering and 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 6 quarters through operations. I think we'll focus there. And then we'll continue to look to pay down debt going forward as our primary capital allocation.

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. I 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.