Energizer Holdings, Inc. (NYSE:ENR) Q2 2023 Earnings Call Transcript May 8, 2023

Energizer Holdings, Inc. beats earnings expectations. Reported EPS is $0.64, expectations were $0.52.

Operator: Good morning. My name is Dave, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer’s Second Quarter Fiscal Year 2023 Conference Call. After the speaker’s 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 Second Quarter Fiscal 2023 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. 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 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 would like to turn the call over to Mark.

Mark LaVigne: Thank you, Jon. Good morning, everyone, and welcome to our second quarter earnings call. Our second quarter results demonstrate another terrific performance by our team. We delivered organic sales growth across both Battery and Auto Care, while improving operating margins, as we remain laser-focused on generating growth, while maintaining our focus on gross margin. We entered fiscal 2023 with a few key priorities: restore gross margins across our portfolio; reestablish healthy free cash flow generation and pay down debt. We have made significant progress against each of these areas this quarter, while also delivering organic top line growth of 2.6%. Our categories are resilient even in a difficult environment. Our iconic brands and broad portfolio of products allow us to meet consumers where they are.

In batteries, global category value is up 2.7% and volume is down 5.5% on a year-over-year basis. When considering the comparison against last year, keep in mind that the category is cycling through price increases, which occurred last March. In addition to expected elasticity impacts from pricing, consumers are also shopping cautiously and prioritizing critical categories, such as food, fuel and utilities. Batteries are an essential product for consumers, and as a result, demand for our products has been resilient, and we expect volume trends to improve in the back half of the year. From a long-term perspective, the category remains meaningfully larger than prior to the pandemic in both volume and value, driven by increased device ownership, usage and pricing.

For example, in the US, category value is up over 28% in the 13 weeks ending March, with volumes up almost 9% as compared to pre-pandemic levels. Our performance within the category remains strong, as consumers are selecting our brands, as we gained 0.7 share points globally behind robust performance in leading markets, such as the US, Germany and Canada. In our Auto Care business, we have started the peak season with solid results. The drivers of category demand, size and age of the car park, along with miles driven, all have positive trends. These underlying factors, combined with pricing have resulted in category value in nearly 25% larger than pre-pandemic levels. During the quarter, the category grew 4.7%, as price increases more than offset volume declines.

We expect continued value growth for the remainder of the year, led by pricing, offset by volume declines. We performed well in the quarter and delivered Auto Care organic growth of 6%, on top of nearly 20% growth in the year ago quarter. Our growth was driven by a combination of pricing and expanded distribution across both North America and International. Our teams have done a terrific job in improving the margins in our Auto Care business, while also bringing category-leading innovation to market. New products launched this year include a ceramics line within our appearance portfolio and an expanded line of refrigerant products. As we look ahead, we will stay close to consumers and how the current environment is impacting their overall shopping behaviors in both of our categories.

With our broad portfolio, expansive distribution and best-in-class shopper-based solutions, we are positioned to connect with consumers and influence the choices they make, including where they shop, the brands they choose and the pack sizes that meet their needs. Finally, as you can see from our results today, we have made significant progress restoring the profitability of our business. Driven by the benefits of last year’s broad-based pricing, this year’s targeted pricing and project momentum, adjusted gross margins expanded 300 basis points versus the prior year. While we are encouraged with this progress, there is more work to do as our margin profile remains below historical levels, with the impact of both project momentum and our approach to pricing and revenue management, we are confident in our ability to close that gap.

When we kicked off project momentum, we highlighted the redesign of our operational network. These actions will optimize our route to market and create manufacturing and packaging centers of excellence that are designed to improve the resiliency of our business, all while driving significant savings across our product portfolio. Additional areas of value creation include a focus on value engineering to reduce costs while maintaining or improving product efficacy, as well as the efforts of our procurement team to leverage new approaches to reduce our costs, including securing sources of supply and closer proximity to our plant. We are also driving savings from the investments we are making in our digital transformation, including improved data and analytics, which enable activities, such as predictive modeling to optimize our ocean shipment costs.

Year-to-date, behind these efforts, the program has generated $20 million in savings and contributed to a meaningful reduction in working capital as a percentage of sales. The program is off to a great start and the teams are executing with excellence. The combination of organic sales growth, gross margin improvement and working capital reductions enabled us to significantly improve free cash flow relative to the prior year. Through the first two quarters, we have generated free cash flow of almost $200 million in excess of 13% of net sales. We have paid down over $150 million of debt during the first half of the year, including over $100 million in the second quarter. We delivered a solid first half of the year. And as we look ahead, we are confident in our ability to navigate an admittedly uncertain macro environment.

That confidence stems from the actions we have taken in the past couple of years, in our digital transformation to improve both, visibility across the enterprise and to leverage data and analytics to capture opportunities and mitigate risks. These transformational efforts, combined with operational savings from momentum are positioning Energizer as a much more agile and responsible organization in a dynamic environment. 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, an update on Project Momentum and some additional color on our outlook for the remainder of the year. For the quarter, reported net sales were flat with organic revenue up 2.6%. Adjusted gross margin increased 300 basis points to 37.9%, driven by pricing actions, savings generated from Project Momentum and the benefit of exiting lower-margin battery business, partially offset by increased input costs. Adjusted SG&A decreased $1.1 million, primarily driven by Project Momentum savings and favorable currency, partially offset by higher stock compensation amortization and factoring fees tied to rising interest rates. A&P as a percent of sales was 2.7%, reflecting the seasonality of our business and roughly in line with the prior year.

Interest expense increased $3.7 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 $139.5 million and $0.64 per share. On a currency-neutral basis, adjusted EBITDA and adjusted earnings per share were $149.9 million and $0.75 per share, representing currency-neutral adjusted EBITDA growth of 31% and earnings per share growth of 60%. Through the first six months of the year, we have generated approximately $192 million of free cash flow or over 13% of net sales. We achieved these excellent results by combining strong, operating earnings with a nearly 200 basis point improvement in working capital since the start of the year.

In the quarter, we also paid down over $100 million of debt. We ended the quarter with net debt to adjusted EBITDA of 5.6 times, a reduction of 0.5 a turn year-over-year. Our debt capital structure remains in great shape, with a weighted average cost of debt of around 4.75% and 90% fixed, with no meaningful maturities until 2027. We continue to show solid progress with Project Momentum as we generated savings of $12.9 million in the quarter. And we are focused on continued improvements through network optimization, strategic sourcing efforts, value-added value engineering and SG&A savings enabled by our digital transformation. The program remains 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 an additional $10 million to $20 million of savings to benefit the remainder of fiscal 2023. Working capital improvement is another critical aspect of our effort to improve free cash flow. Project Momentum initiatives have bolstered our efforts across inventory payables and receivables management, resulting in a working capital reduction of roughly $40 million in the first half of the year. This is inclusive of incremental inventory built to support network changes. We continue to expect our initiatives to deliver over $100 million in working capital improvements over the life of the program. And finally, I would like to provide additional color on our outlook for our third quarter and the remainder of the year. We expect organic revenue growth in the back half of the year of 3% to 5%, driven by the continued benefits of pricing, and a moderation of volume declines.

Reported revenues are projected to be 2% to 4% over the same period. We expect gross margins in the third quarter to be roughly flat to our recently completed second quarter as input costs have stabilized and product mix will be relatively consistent quarter-over-quarter. We also expect fourth quarter gross margins to meaningfully benefit from both input cost tailwinds, specifically freight, and incremental Project Momentum savings driving significant gross margin expansion year-over-year. We will continue to invest in support of our brands and expect A&P spending for the remainder of the year to be slightly above prior year levels with a full year expectation of roughly 5% of net sales. We expect that SG&A will be roughly flat on a dollar basis relative to the prior year.

Interest expense over the remainder of the year is expected to be up about $2 million from the prior year, driven by higher interest rates and partially offset by lower average outstanding debt in the year. And finally, at current rates, we expect the currency impact on earnings to be neutral over the remainder of the year relative to fiscal 2022, with modest headwinds in the third quarter, offset by a pickup in the fourth quarter. We remain on track to deliver the full year as guided in November. We continue to expect low single-digit organic net sales growth for the full year. Pricing, mix management and Project Momentum savings are still expected to result in improved gross margins of 100 to 150 basis points year-over-year. 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.

Now, I’d like to turn the call back over to Mark for closing remarks.

Mark LaVigne: Thanks, John. We delivered a strong first half of the year. We generated organic growth in a dynamic environment and improved both profitability and cash flow. I am proud of our team’s execution and look forward to our exceptional brands continuing to generate long-term shareholder value. With that, I will open the call for questions.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Kevin Grundy with Jefferies. Please go ahead.

Operator: Our next question comes from Bill Chappell with Truist Securities. Please go ahead.

Operator: Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Operator: Our next question comes from Robert Ottenstein with Evercore. Please go ahead.

Operator: Next question comes from Hale Holden with Barclays. Please go ahead.

Operator: Our next question comes from Carla Casella with JPMorgan. Please go ahead.

Operator: The next question comes from Kevin Grundy with Jefferies. Please go ahead.

Operator: Our next question comes from William Reuter with Bank of America. Please go ahead.

Operator: Our next question comes from Brian McNamara with Canaccord Genuity. Please go ahead.

Operator: Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mark LaVigne for any closing remarks.

Mark LaVigne: Thank you for your interest in Energizer for joining the call today. I hope everyone has a great rest of the day.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.