Energizer Holdings, Inc. (NYSE:ENR) Q2 2024 Earnings Call Transcript

Energizer Holdings, Inc. (NYSE:ENR) Q2 2024 Earnings Call Transcript May 7, 2024

Energizer Holdings, Inc. misses on earnings expectations. Reported EPS is $0.4463 EPS, expectations were $0.67. Energizer Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Ludy, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer’s Second Quarter Fiscal Year 2024 Conference Call. [Operator Instructions] 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.

Jonathan Poldan: Good morning, and welcome to Energizer’s second 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 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 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 relate to the same period in fiscal 2023. With that, I’d like to turn the call over to Mark.

Mark LaVigne: Good morning, and welcome to our second quarter earnings call. While we are pleased to report on a solid second quarter, we are even more excited to discuss what’s ahead. More on that in a moment as we will start with Q2. We once again made great progress on our priorities for the year, margin improvement, free cash flow generation and debt pay down. Our top line benefited from our continued recovery in the battery category and another strong performance in auto, which along with significant improvement in gross margin drove 13% adjusted earnings growth in the quarter. Strong free cash flow generation year-to-date has enabled us to pay down over $60 million of debt in the quarter. Our success against these priorities has reduced our leverage, which we expect to be below 5x by year-end and fueled our growth initiatives which will help deliver top line growth in the back half of the year.

Let’s review the current state of the businesses starting with batteries. Battery organic net sales were down roughly 4% in the quarter. The decline was consistent with our expectations with improving trends from the prior quarter, primarily driven by improving category dynamics and distribution gains. Looking at the category, global battery volume and value both showed growth in the latest 3 months data. Importantly, global battery volume grew nearly 3.5% during that period. This represents a significant improvement from the prior year where volume was down 5.5% in the comparable period. U.S category volume increased 2.8% in the latest 13 weeks, in addition to the healthy trends we are seeing in measured channels and online, we’ve also seen improving trends in non-track channels as we lapped softness which began in the spring of last year.

Our performance within the category remains strong. Consumers are selecting our brands, driving a value share gain in the U.S. in the quarter. Private label value and volume share declined globally in the quarter. And while private label is growing across many consumer categories in the U.S., we have seen battery private label value share declines in each of the last three quarters. Within our battery business, we have maintained a prudent approach to pricing and promotion, ensuring that we engage with consumers and drive demand while improving overall gross margins. That discipline will continue as we leverage the strength we have reestablished in our P&L to drive future growth with ongoing margin improvement. As we look ahead, our improved margins, the inflection and category volume, the strength of our brands and a stable pricing environment reinforce our confidence in returning to growth in the back half of the year.

Turning to Auto Care, which is another bright spot in the quarter. Organic net sales increased over 2% following a 5% organic increase in the prior year quarter. Our appearance business had a particularly strong quarter increasing nearly 9% organically year-over-year. The investments we are making are working. Exciting innovation and increased investment to connect with consumers are driving much improved business performance. In the second quarter, segment profit expanded by nearly 600 basis points. We have returned the Auto Care business back to pre-pandemic profitability and expect further improvement going forward. The day-to-day execution by the teams has been outstanding, particularly when you take into account the progress also being made on Project Momentum.

The program generated $20 million in savings in the quarter, taking total program savings nearly $100 million to date, serving as a key factor in margin expansion and earnings growth in the quarter. We launched Project Momentum over 18 months ago to restore the health of our P&L, and thus far it has exceeded the ambitious goals we set at the time. Even more encouraging, we have uncovered opportunities for additional savings. We now have both of our categories returning to pre-pandemic levels of profitability with line of sight for ongoing improvement this year and next, providing us the flexibility to invest for future growth. The organization has worked tirelessly to reach this inflection point, and we have the business poised for growth, all while remaining focus on continued margin improvement, free cash flow generation and debt reduction.

Beginning next quarter, we expect to see the combined benefits of top line growth and further margin expansion with Q3 adjusted earnings expected to increase 20% year-over-year at the midpoint of our range. While the work around Project Momentum has been at the forefront of much of our presentations in the past, we’ve been working to reenergize what we do best, invest in innovation, build our brands and drive distribution gains across our categories around the world. Over the balance of the fiscal year, you will start to see the results of that effort. And as we approach FY ’25, it should become even more additive. To provide some context around this confidence, let me break down the areas of focus. First, we’ve discussed our investments in e-commerce capabilities many times in the past.

And after assessing the current landscape and opportunities, we have made additional significant financial and organizational investments to ensure we capture the growth available to us in each of our categories, not only in the U.S., but in many other markets around the world. Second, the investments we have made in our digital transformation provide much improved data and analytics to our pricing and revenue management teams, which allow them to read and react in a more dynamic way to capture opportunities and mitigate risks, index management and strategic pricing. Third, improved visibility and distribution of our brands across major markets will drive top line growth in the back half of this year and beyond. Fourth, we believe that we’ve strategic market expansion opportunities in attractive international markets.

By leveraging our distributor market group, we gather insights into markets which may initially be too subscale to warrant significant investment. Ultimately, we’re able to identify certain markets, which we [technical difficulty] and allow us to accelerate growth further and faster. And fifth and finally, we’ve been investing our innovation pipeline and partnership opportunities to deliver exciting new products which meet consumer and customer needs better than anyone else. The innovation pipeline in both batteries and Auto Care is the strongest we have had in many years, and we are excited to introduce many new and improved products to consumers over the next several years. These growth opportunities have been made possible by the tremendous work in restoring the margins in our business and now allow us to invest in a cycle of growth going forward.

Having set the stage for what’s ahead, let’s take a step back and turn it over to John to talk about the progress made in the second quarter and provide some details around the balance of the year outlook.

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 for our expectations for Q3 and the rest of fiscal ’24. For the quarter, net sales were down 3% with organic revenue down 2.7%. Volume improvement and distribution gains contributed to organic growth of .6%, offset by planned strategic pricing and promotional investments of 3.3%. The results were in line with the outlook provided on our first quarter call of an organic decline of between 2% and 3%. Adjusted gross margin increased 260 basis points to 40.5%, driven by Project Momentum savings of approximately $11 million as well as lower input costs, including improved commodities pricing and lower ocean freight.

These benefits were partially offset by the plan strategic pricing and promotional investments. Adjusted SG&A decreased $2.6 million primarily driven by Project Momentum Savings. A&P as a percentage of sales was 3.2%, up from 2.7% in the prior year period, and consistent with our focus on increasing investment behind our brands. Interest expense decreased $3.3 million as we continue to focus on reducing our average debt outstanding year-over-year, offset by higher average interest rates. Our strong operational performances in both Battery and Auto Care along with significant margin recovery over the last year resulted in adjusted EBITDA and adjusted earnings per share of $142.5 million and $0.72, representing a 13% increase in adjusted earnings year-over-year.

Throughout the first 6 months of fiscal ’24, we have generated $163 million of free cash flow, or 11.8% of net sales. This is within our long-term algorithm of between 10% and 12%. Our strong free cash flow generation has allowed us to pay down $141 million of debt during the first two quarters. We’ve also paid off $425 million of debt in the previous seven quarters and reduced our leverage by nearly a turn during that time. Our debt capital structure remains in great shape, with a weighted average cost of debt of around 4.6%, which is 96% fixed and with no meaningful maturities until 2027. As Mark noted in his comments, Project Momentum continues to be a driver of significant efficiencies and benefits for our organization. As we announced last quarter, we expect the 3-year program to drive savings of between $160 million and $180 million.

This quarter, we saw savings of approximately $20 million, taking total savings generated since the start of the program to $96 million. Lastly, I would like to provide some additional color for Q3 and the rest of the year. For Q3, we expect to return to growth on the top line with organic net sales up approximately 1%. We anticipate gross margin in the quarter to improve by roughly 150 basis points year-over-year, and adjusted earnings per share to be in the range of $0.62 to $0.68, up 20% at the midpoint. For the full fiscal year, we continue to expect Project Momentum Savings of $55 million to $65 million. We expect to pay down between $150 million and $200 million of debt, and to end fiscal ’24 below 5x net leverage. We are reaffirming our outlook for organic net sales to be flat to download single digits.

Adjusted gross margin improvement of over 100 basis points, 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 will turn it over to Mark for closing remarks.

Mark LaVigne: Thank you, John. To summarize, this organization deserves a lot of credit for delivering a long-term plan which started with an incredible effort to restore margins and enable us to invest for growth. Having reached that point, we very much look forward to delivering the return on those investments in the quarters ahead. With that, let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Robert Ottenstein from Evercore. Your line is open.

Robert Ottenstein: Great. Thank you very much, and congratulations on the progress. Certainly hearing a lot of optimism on the Q3 and the second half of the year. I was wondering if you could just give us a little bit more details on your visibility into the third quarter, what’s driving your confidence in terms of returning to growth. And maybe kind of put into perspective the role of promos both in this quarter, and how that impacts the second half. Thanks.

Mark LaVigne: Good morning, Robert. I’ll kick this off, and then John can provide some color as well. We’re really positive and optimistic about where we are 1IN the year. We’ve — over the last couple of years, we’ve really attack the issues the right way with a long-term view in mind. We started with restoring stability in the supply chain, we then moved to restore margins and working capital discipline and free cash flow generation. We’ve done that with the assistance of Project Momentum which has been very successful for the organization and now it allows us to invest for growth. Having that flexibility, it allows us to deal with the external environment. I mean, the external environment sort of — is what is it — what it is, and we’re well-positioned to manage our way through it.

So it feels great for us and the organization to be turning the page to growth going forward. And we highlighted some of those areas in the prepared remarks in terms of areas that we would look to, but that visibility is really designed to reinforce the confidence, provide some visibility to you all for that low single-digit algorithmic growth, which we expect going forward. The underlying category trends are healthy. We’re seeing stability and improving trends in home center and non-track channels. The areas of growth that we highlighted in the prepared remarks are on distribution. We’re expecting distribution gains in the back half of the year in international as well as pretty broad based distribution gains in the U.S. eCommerce continues to be a source of growth going forward.

Pricing and mix management is an increasingly sophisticated discipline we have in the organization allowing us to drive growth. You also have market expansion opportunities, and we’re really excited by some of the innovation that we’re bringing to market both this year and next. Having multiple levers to pull, really allows us to drive growth in the right way. It allows us to be choice full about where we’re going to drive that growth, because then it will allow us to continue to expand margins along the way. So I think we’re really well positioned in terms of going forward. And we’re confident in the back half of the year as well as heading into ’25. Anything I missed there, Robert?

Robert Ottenstein: No, that’s great. I was just wondering if you could talk just a little bit about your thoughts around promos both in the quarter and how that may play out in the second half of the year?

Mark LaVigne: You are seeing a slightly elevated promotional environment. It was one that we expected, given the macro environment that we’re in given the pricing that’s occurred over the last couple of years. I wouldn’t say it’s anything problematic. You’re seeing a stable pricing environment, a healthy promotional environment, it’s driving real volume growth in the category both internationally as well as in the U.S. The depth of the promotion is up a little bit, the frequency is up slightly, but overall and on balance its consistent with what you would have seen pre-pandemic 4 years ago. So nothing overly troubling from an unhealthy promotional environment.

John Drabik: Yes, for the back half of the year, I think we’re looking at kind of pricing and promotional levels consistent with what we saw on the second quarter. So kind of offsetting some of the volume that we’re seeing, but still ending up with about a 1% top line organic growth rate back half.

Robert Ottenstein: Terrific. Thank you very much.

Mark LaVigne: Thanks, Robert.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Lauren Lieberman from Barclays. Your line is open.

Lauren Lieberman: Great, thanks. Good morning, guys.

Mark LaVigne: Good morning, Lauren.

Lauren Lieberman: Wanting to talk — hey, something a little bit Auto Care. I think it’s the lunch you guys posted in New York, you talked about the division getting back to pre-COVID margins in fiscal ’25 and now you’re there. So just kind of curious, I guess just in the short-term sequentially, is this a high watermark we can maintain and build from here? Is there anything just sort of timing wise to be aware of? And then also, I’ll preempt my follow-up and just ask also about auto distribution gains. I’d love to hear a little bit more color on that elements of the growth strategy that you guys have had, but we’re sort of stymied by the macro and the environment. Just what you can tell it’s kind of about the specifics on some of the distribution wins, it’d be great to get more color. Thanks.

John Drabik: Yes, Lauren, we’ve done a really nice job recovering margins in that business. I know we said we were working to get there by ’25, and this quarter was a testament to the hard work a lot of people have done. So we were able to get segment profit up 600 basis points in the quarter, that really wasn’t timing. It’s input cost taken, costs out of the system, it’s continuing to hold the pricing. So I would say that that has gotten us to a good run rate. We expect to continue that as we go forward throughout the rest of this year and into next.

Mark LaVigne: And, Lauren, on the distribution gains as you know, when we bought that business, it was a fairly mature distribution set at the time, but we’ve been able to provide incremental distribution opportunities, expanding some of the distribution, or innovations being well received. Some of our partnerships are being well received. It’s not necessarily unique to this year, but in years past, we’ve had wins in home center as well as club which those continue. On the international side, we continue to expand that business, and year-to-date, we’re up 4.2% in that international business. So a lot of great things happening in Auto Care on the top line as well as with the margins.

Lauren Lieberman: Okay, great. Thank you so much.

Mark LaVigne: Thanks, Lauren.

Operator: And your next question comes from the line of Bill Chappell from Truist Securities. Your line is open.

Bill Chappell: Thanks. Good morning.

Mark LaVigne: Good morning, Bill.

Bill Chappell: Just first on batteries, maybe a little more detail of what you’re seeing. It seems like the category is normalizing post COVID, and just trying to understand that you talked about private label was starting to recede. But what are you seeing on like the premium on the lithium side? What are you seeing in terms of Rayovac? Is that gaining, holding, losing share just kind of more color on the consumer, as they’re looking at the category today.

Mark LaVigne: Bill, on the battery category globally, we’re seeing volume and value growth globally. You’re seeing volume growth in the U.S as well, [indiscernible] an important data point. You are seeing a little bit of value declines in the U.S., so that’s related to the pricing and the promotion that John talked about in terms of our Q2 and Q3 results that we expect. All in all, seeing the positive volume growth is a great sign both globally in the U.S private label share. You’re seeing volume and value declines globally. So stable — shares are stable overall. Our shares are roughly consistent with where they’ve been. So not a lot of disruption among trade down within Rayovac, you are seeing share gains in the U.S. It was up .3 value points in the latest reporting period. So that brand is playing its role within our portfolio and catching some of that demand as consumers may be looking for lower price points.

Bill Chappell: Got it. And then on the lithium side, I’m sorry.

Mark LaVigne: And lithium, you’re seeing some positive trends on lithium as consumers are settling into higher price points. I think with that one, you’re continuing to see maybe a bifurcation from consumers where sort of higher income consumers are continuing to spend more freely than middle to lower income consumers are. And I think as the macro environment cooperates and some of the pricing settles in, we continue to be optimistic in the role that lithium is going to play in our category.

Bill Chappell: Got it. And then just one follow-up on Auto Care. What is kind of the March quarter tell us? I mean, you said appearances were up strong, but I thought appearance kind of segment was more of a midsummer type category. So — and I assume that means if it was up 9% and the overall business was up 2%, that’s something else lagged. So how does the setup look for the category as we are going into the key summer months?

Mark LaVigne: I would say, Bill, we’re off to a good start. And I wouldn’t take too much of a read in what happens in March in terms of April, May and June. We’re off to a good start. We’ve had good early shipments, appearances off to a strong start. Some of the innovation that we’ve launched this is off to a good start. Refrigerants tends to be a little uneven in terms of its demand, just because of the weather dynamics that it plays. Performance chemicals is flat, fragrance was down a little bit.

John Drabik: Yes. And just to tidy up a little bit on the third quarter, I think we — some of the volume that we planned in auto we now expect to see hitting the fourth quarter, and that is a little bit of an impact to our third quarter called top line consolidated.

Bill Chappell: Got it. Thanks so much.

Mark LaVigne: Thanks, Bill.

Operator: Your next question comes from the line of Andrea Teixeira from JPMorgan. Your line is open.