Energizer Holdings, Inc. (NYSE:ENR) Q1 2023 Earnings Call Transcript

Energizer Holdings, Inc. (NYSE:ENR) Q1 2023 Earnings Call Transcript February 6, 2023

Operator: Good morning. My name is Chad and I will be your conference operator today. And at this time, I would like to welcome everyone to Energizer’s First Quarter Fiscal Year 2023 Conference Call. All participants will be in listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I would now like to turn the conference over to Jon Poldan, Vice President, Treasurer and Investor Relations. You may begin your conference.

Jon Poldan: Good morning, and welcome to Energizer’s first quarter fiscal 2023 conference call. Joining me today are Mark LaVigne, President and Chief Executive Officer; and John Drabik, Chief Financial Officer. A replay of this call will be available on the Investor Relations section of our website, energizerholdings.com. 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 filed 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 2022. With that, I’d like to turn the call over to Mark.

Mark LaVigne: Good morning, everyone. Before we talk about the results of the quarter, I want to introduce Jon Poldan, who has been with the organization for 13-years. He is Energizer’s Vice President and Treasurer and he will lead our Investor Relations efforts going forward. Now on to the results. Our fiscal year is off to a strong start. During our call last November, we highlighted how the restoration of margins, free cash flow generation, and debt reduction were key focus areas as we commence the new fiscal year. Our first quarter results demonstrate significant progress across all of these areas. Let me walk through how we’ve been able to get off to this great start. It all starts with our categories. In batteries, the category remains resilient despite the economic environment as it is an essential category for consumers.

On a three-year stack, U.S. category value is up over 20% in the 13-weeks ended November with volume up over 4% during the same period. In the quarter, global category value was up almost 6% with volumes down roughly 3% and consumers prefer our brands with Energizer outpacing the category. Our value share was up 1.2 points globally versus prior year behind a strong performance in the U.S. Now turning to Auto Care. Category leading indicators remained strong and each of our four subcategories has experienced double-digit value growth since pre-pandemic levels. Year-over-year, the category value grew over 3% with the benefit of pricing more than offsetting volume impact. While this is the smallest quarter of the year for Auto Care, both Armor All and STP grew share, including in the important appearance subcategory, which represents nearly half of our total Auto Care portfolio.

As John will explain in a moment, our first quarter sales did not track with syndicated data across our categories. We mentioned last quarter that retailers entered the quarter with slightly elevated inventory levels. Particularly in batteries, which partially contributed to that disconnect. As the quarter progressed, retailers also began to more aggressively manage inventory levels, despite the strong consumer demand. After a strong holiday season, many of our customers were either below or at the low end of their historical inventory levels. While this impacted our net sales in the quarter, the strength of our categories, our performance at shelf and lower retail inventory gives us the confidence in delivering our full-year outlook. Against the backdrop of those strong category fundamentals, our focus on restoring gross margins has begun to pay dividends.

First, let’s cover pricing. As we discussed in previous quarters, we have taken multiple rounds of broad-based pricing across both Battery and Auto Care to offset the inflationary headwinds we were experiencing. And we expect to continue to benefit from favorable comps in the first two quarters of the fiscal year. Looking ahead, any additional pricing actions are expected to be more targeted in nature. In addition to pricing, savings from the initiatives under project momentum has driven gross margin improvement year-over-year as benefits from reengineering our products, consolidating suppliers and improving labor efficiency are beginning to flow through. The Auto Care business has been a point of emphasis as gross margins were impacted significantly by inflation and is one where we are already making great progress.

Our considered efforts around pricing, combined with the benefits of project momentum contributed to a significant improvement in segment profit in the quarter. Project momentum is not just improving gross margin, it is also driving much improved working capital efficiency, which John will provide more detail on later in the call. The combination of our expanded margins and leaner balance sheet helped to generate over $150 million of free cash flow in the quarter, which we use to pay down over $100 million of debt in the first four months of the year. As we look ahead, debt pay down continues to be our primary capital allocation priority. Now let me turn the call over to John to provide additional details about our financial performance.

John Drabik: 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 on our outlook for the remainder of the year. For the quarter, reported net sales were down 9.6% with organic revenue down 5.4%. Our initial outlook for the quarter was for low-single-digit organic declines, due to lower current year volumes in response to pricing actions over the last year. The exit of lower margin battery business and slightly elevated retail inventory levels entering the quarter. While our categories performed in line or better than our original expectations, retailer inventory management across both Battery and Auto Care businesses at the end of the quarter created additional headwinds of 300 basis points to 400 basis points.

The volume declines in the quarter were partially offset by roughly 950 basis points of pricing. Adjusted gross margin increased to 150 basis points to 39%, driven by pricing actions, savings generated from project momentum and the benefit of exiting that lower margin battery business in the quarter. While the cost environment has stabilized, we continue to see elevated operating costs, including material and ocean freight costs and unfavorable currency impacts versus the prior year quarter. Adjusted SG&A increased $2.5 million, primarily driven by higher stock compensation amortization, factoring fees tied to rising interest rates, and depreciation expense related to our digital transformation initiatives. The increases were partially offset by project momentum savings and favorable currency impacts.

A&P as a percent of sales was 7%, up from 6.1% in the prior year. The increase was driven by planned brand support and shifting spend from Q4 of the prior year to Q1 of this year to better align with the holiday season. Interest expense increased $5.9 million year-over-year, due mainly to rising interest rates, partially offset by lower average debt outstanding. We delivered adjusted EBITDA and adjusted earnings per share of $145.6 million and $0.72 per share respectively. On a currency neutral basis adjusted EBITDA and adjusted earnings per share were 155.6 million and $0.83 per share respectively. We also generated over $152 million of free cash flow in the quarter, nearly double our long-term algorithm of 10% to 12% of net sales. We achieved these excellent results by combining strong operating earnings with a nearly 250 basis point improvement in working capital as a percent of net sales since the start of the year.

In the quarter, we paid down over $50 million of debt through a combination of term loan retirement and open market bond repurchases. Our strong cash flows also enabled us to pay down another $53 million of the term loan in January. Including this payment, we have paid down over $100 million of debt in the first four months of the fiscal year and over $170 million in the previous five months. Our debt capital structure remains in great shape. With a weighted average cost of debt of around 4.75 and 87% fixed with no meaningful maturities until 2027. Project momentum is also off to a solid start in the quarter with savings of $7.3 million. Our plans are focused on generating savings through network optimization, strategic sourcing efforts and SG&A savings enabled by our digital transformation.

And as previously mentioned, we expect the benefits of these efforts to impact each of our segments. The program is on track to deliver $80 million to $100 million in run rate savings with roughly 80% of those benefits impacting gross margin and the remainder recognized throughout the rest of the P&L. We anticipate $30 million to $40 million of those savings will benefit our results in fiscal 2023. Working capital improvements are also off to a fast start with project momentum generating over $20 million of improvement this quarter. Bolstering our efforts across inventory, payables and receivables management. We continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program, further supporting our free cash flow efforts.

And finally, I would like to provide additional color on our outlook for our second quarter and the remainder of the year. We expect our top line in the second quarter to continue benefitting from pricing actions, partially offset by lower volumes with organic growth in the low to mid-single-digits. On a reported basis, we expect reported revenue of flat to low-single-digits. While our cost of goods will continue to reflect the negative impact of inventory previously built at higher total costs, our gross margin should benefit from both pricing actions and project momentum savings with gross margins expected to improve by 150 basis points to 200 basis points from the prior year quarter. We expect A&P as a percent of sales to begin consistent with investment levels in the prior year quarter and SG&A roughly flat on a dollar basis.

Interest expense is expected to be up $4 million to $5 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt in the quarter. And finally, at current rates, we forecast currency headwinds to impact the quarter’s pretax earnings by approximately $8 million to $10 million. We remain on track to deliver the full-year as guided in November. Despite top line softness in Q1, we still expect low-single-digit organic net sales growth led by pricing and recovering and category volumes as we progress throughout the year. Pricing, mix management and project momentum savings are expected to result in improved gross margins of 100 basis points to 150 basis points year-over-year. We’ve also seen a weakening of the U.S. dollar relative to a number of our currency exposures and now expect full-year negative impacts of $50 million on the top line and $20 million on pretax earnings.

Combined with continued cost management down the rest of the P&L, we are reaffirming our outlook for adjusted EBITDA in the range of $585 million to $615 million and adjusted earnings per share of $3 to $3.30, both of which represent in excess of 9% growth at the midpoint on a currency neutral basis. Now, I’d like to turn the call back over to Mark for closing remarks.

Mark LaVigne: Thanks, John. We delivered a strong first quarter. Project momentum is already delivering savings and we remain confident the program will achieve $80 million to $100 million in run rate savings, and over $100 million in working capital improvement. Our ability to execute projects like momentum and our digital transformation position Energizer to deliver for our customers and consumers, while also delivering our financial algorithm and driving long-term shareholder value. With that, I will open the call for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. And first question will be from Lauren Lieberman with Barclays. Please go ahead.

Lauren Lieberman: Great. Thanks. Good morning.

Mark LaVigne: Good morning.

Lauren Lieberman: Just first off, I mean, something I’ve — good morning. So, I’ve gotten a few times from people already this morning was just the question on FX being less of a headwind to the full-year, but holding the year. So just — and I have more interesting follow-ups, right? Just curious if you could comment on that decision and why there wouldn’t have been an improvement to the range given FX is less a bad one?

John Drabik: Sure. Let me talk just specifically Lauren to the FX treatment. So the currencies that move the most for us were euro and pound. Those are also our largest hedge position, so coming into the year, we had a pretty significant offset when those turned over in the last couple of months, the benefits that you’re seeing on the top line aren’t going to flow through the bottom line as much, because the hedge actually reverses. So and as you know, we average into these positions, so it’s going to take a little while for some of those benefits to come through. And as we talked about, we’re only getting $5 million to $7 million of benefit on the bottom line incremental to, let me say, versus the downside that we expected originally. So we’re picking up only $5 million to $7 million, so not a significant change overall to our outlook for the year.

Lauren Lieberman: Okay. All right, great. And then another question I’ve gotten is just the gross margin — during the call, just the gross margin commentary. For 2Q is a bit almost like let’s call it half the expansion maybe if what at least I have in my model for second quarter. So just if anything timing related that we are talking about on gross margin build? I know this quarter was well ahead of expectations, but just wanted to know if you could comment on the 2Q outlook too?

John Drabik: Yes. Well, 2Q, I mean, partially you get mix impact, so it’s going to be more Auto than Battery. It’s also one of our smaller quarters, we expect to be 150 basis points to 200 basis points better than last year. So I think a lot of the improvement that we’ve been seeing will continue to flow into the second quarter. And then as we go throughout the year, we’re still expecting 100 basis points to 150 basis points of total improvement. So we expect pretty good improvement in Q2 and then full-year improvement to be in a pretty good place.

Lauren Lieberman: Okay, great. And then just any commentary on volume versus the there were the inventory destocking and the exits, which you specified as well. But just reads on kind of I guess elasticity that you would effectively be seeing in market? How that’s shaping up versus what you might have expected? I know market share performance is good, but how would you discuss elasticity? Thanks.

Mark LaVigne: Yes, Lauren, on that one, I think we’re off to a really solid start for the year. And largely in line with our expectations. I would say the one unanticipated development that we dealt with is how tightly retailers managed inventory as we worked our way through the holiday season. But to your point on elasticity of — in the categories performed really well with Batteries up almost 6% and Auto Care up 3% and that was ahead of our expectations. And obviously, our Batteries were able to gain share, so we’re outperforming the category. So I would say from elasticity standpoint both are probably better than our historical analysis would have indicated. We feel like we’re in a really strong position, and then as John mentioned, we’re trending ahead on margin with healthy free cash flow and we’re able to pay down debt.