Energizer Holdings, Inc. (NYSE:ENR) Q4 2023 Earnings Call Transcript

Energizer Holdings, Inc. (NYSE:ENR) Q4 2023 Earnings Call Transcript November 14, 2023

Energizer Holdings, Inc. beats earnings expectations. Reported EPS is $1.2, expectations were $1.14.

Operator: Good morning. My name is Gary and I’ll be your conference operator today. At this time, I’d like to welcome everyone to Energizer’s Fourth Quarter Fiscal Year 2023 Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] As a reminder, this call is being recorded. I’d now like to turn the conference over to Jon Poldan, Vice President, Treasurer and Investor Relations. You may now begin your conference.

Jon Poldan: Good morning, and welcome to Energizer’s fourth 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. 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 financial 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 and thank you for joining us on our yearend earnings call. As we close our four fiscal 2023, let’s start today by reviewing the priorities we established coming into the year, restoration of gross margin, return to healthy free cash flow generation, and paying down debt. Over the course of the year, we’ve made excellent progress across each one, including year-over-year improvement in gross margin of 170 basis points, free cash flow generation of $340 million and debt paydown of $225 million. We also delivered adjusted earnings per share and adjusted EBITDA within our original guided ranges, despite the impacts of persistent inflation and macroeconomic pressures. I would like to thank our teams across the globe as these results are a reflection of their dedication, execution and focus on fundamentals.

As we look ahead, there are several areas which are influencing our plans for 2024. First, we have a macroeconomic backdrop where higher interest rates, resumption of student loans, and the end of emergency pandemic benefits are just a few of the areas, which have taken a toll on consumer sentiment. That shift in consumer confidence has been exacerbated by persistent inflation, forcing consumers to shop more cautiously and to reallocate their household spending across discretionary and nondiscretionary products. In terms of the impact on our categories, let’s start with batteries. It is important to look at the category over the long term to understand the impact that the pandemic and broader inflationary trends have had on value and volume.

On a global basis, the battery category experienced a spike in volume growth over the course of the pandemic as consumers spent more time at home and with their devices. As consumers returned more closely to their pre-pandemic routines, volume normalized from the peak levels experienced in 2020 and 2021. In addition, inflation across the store, as well as several price increases within the battery category, added to the volume decline. As we have begun to lap these impacts, we have seen category volume growth resume in the U.S. in recent periods. The end result is a category which is 5% larger today than pre-pandemic, at roughly 20 billion cells versus 19 billion cells in 2019. Since 2015, global category volume has experienced compounded annual growth of approximately 1.5%.

Over that same time period, U.S. category volume grew roughly at 1% annually. The strength and stability of the category stems from device ownership, which is a primary driver of consumption. The number of devices per U.S. household has increased by more than 5% since 2015. The incorporation of the smartphone into our daily lives has enabled a world of connected devices, with over 50% of those taking primary batteries, including connected home devices such as security cameras, doorbells, and smart tags, and health devices, including blood pressure monitors and pain relief devices. The future pipeline of devices is also strong, where we anticipate global consumer devices will continue to grow, with many of those taking primary batteries, as they do today.

Our long-term outlook for the category remains at flat to low single-digit volume growth, supported by these healthy category fundamentals. Moving to auto care; the auto care category remains an attractive area for growth, supported by strong category dynamics. Miles driven exceed pre-pandemic levels over 6% higher than 2019. The age and size of the car park is also increasing. The average age of vehicles in the U.S. has steadily increased and now exceeds 12 years, and the size of the fleet has grown by over three million vehicles over the last year. As vehicles continue to age and consumers feel the impact of economic pressures, more of them are stating that they are performing car care themselves versus do-it-for-me options. With that as the general landscape in our categories, here is how we are thinking about FY’24.

The continuation of our strategic priorities underpins our plan. Continue margin recovery, generate free cash flow, and pay down debt. Those objectives ensure we can invest in our business and achieve the financial algorithm, both of which drives significant value for our shareholders. Project momentum is a key driver. With $50 million realized in fiscal ’23, we will add an incremental $80 million to $100 million of savings over the next two years, which provides the flexibility to operate in this environment. We will look to accelerate investments throughout this downturn with a focus on innovation and brand building to drive consumer engagement and long-term consumer preference. In batteries, we will be disciplined in balancing our pricing and promotion strategies with the need to engage consumers, deliver top line, and take advantage of the improving volume trend.

When balancing these factors, we focus primarily on driving overall health of the category and continuing to improve the earnings power of the business. In a healthy category with improving earnings, we will not prioritize share at the expense of those two objectives. In auto care, we are proud of the growth we have achieved. Top line is up over $90 million since 2020. This represents a 6% compounded annual growth rate and is consistent with our low to mid-single digit growth expectations over the long term. As we look ahead, we have an exciting slate of innovation launching this year and will continue to invest behind new product development and launches. Fiscal ’23 was a pivotal year for auto care. We made tremendous progress restoring profitability, increasing operating margins by almost 500 basis points over last year, while maintaining stability in the top line.

This focus on pricing, innovation and cost control will generate further margin improvement over the course of fiscal 2024. Now let me turn the call over to John to provide additional details about our financial performance and fiscal 2024 guidance.

John Drabik: Thanks Mark. I will provide a more detailed summary of the quarter and full fiscal year before turning to our 2024 outlook. As a reminder, we have posted a slide deck highlighting our key financial metrics on our website. The fourth quarter was another solid performance by the organization in the culmination of a year in which pricing and savings from project momentum offset continued macro headwinds and we delivered adjusted earnings per share and EBITDA within our original guided ranges. Reported revenue grew 2.6% with organic revenue up 2%. The organic growth was driven by 150 basis points of pricing across both the battery and auto segments. In addition to pricing, we generated roughly 100 basis points of volume due to earlier holiday shipments and batteries, partially offset by underperformance of non-track channels, as well as channel shifting, which favors value offerings, and lost battery distribution in a few international markets.

Adjusted gross margin in the quarter increased 380 basis points to 40% due to pricing, the continued benefits of project momentum, and lower transportation costs. Adjusted SG&A as a percent of net sales was 14.2% versus 15.1% in the prior year. The current year decrease was primarily driven by project momentum savings. A&P as a percent of sales was 4.1% up 60 basis points and consistent with our plans to focus A&P spending in our first and third quarters. We delivered adjusted EBITDA and adjusted earnings per share of $185.4 million and $1.20 per share. We also generated $78 million of free cash flow in the quarter and paid down $25 million of debt. As noted in our press release this morning, we recorded a one-time non-cash $50 million settlement charge during the quarter related to a partial buyout of U.S. pension liabilities.

For the full year, organic revenues decreased 1% as the benefits of pricing actions were largely offset by lower volumes due to higher retail pricing and general economic conditions, in addition to volume declines related to the planned exit of lower margin business and lost battery distribution in international markets. Adjusted gross margin was up 170 basis points as pricing actions and savings from project momentum were partially offset by higher input costs. Adjusted EBITDA grew to $597.3 million and earnings per share of $3.09 were both driven by significant gross margin improvement and the benefits of project momentum. Looking forward to our coming fiscal year, we anticipate operating in an environment where input costs have stabilized but remain elevated, consumers remain financially stretched and pricing and promotion in our categories will remain strategically important.

As such, we expect organic revenues to be flat to down low single digits and at current rates for FX to be modestly negative. Input costs beginning to turn positive, a full year of freight rate savings, and continued momentum improvements more than offset the costs of targeted promotional activity, resulting in expected gross margin improvement of roughly 100 basis points, reaching 40% for the full year. We expect AMP and SG&A levels on the dollar basis to remain relatively consistent with fiscal year ’23. Due to debt pay down and a largely fixed debt capital structure, we expect interest expense to be favourable by $8 million to $10 million for the full year. We also project a tax rate of 22% to 23% for the year. Primarily through gross margin improvement and continued leveraging of project momentum for savings, we expect to grow our earnings next year, resulting in an outlook for adjusted EBITDA in the range of $600 million to $620 million, and earnings per share in the range of $3.10 to $3.30.

Project momentum is expected to benefit 2024 by $55 million to $65 million and has been included in the outlook ranges we provided today. Over the next two fiscal years, we expect project momentum to generate $80 million to $100 million in savings, with roughly 70% of those benefits impacting gross margin and the remainder recognized throughout the rest of the P&L. Due to continued investments in our underlying operations, project momentum, and our digital transformation, we are projecting capital expenditures for 2024 to be between $95 million and $105 million. We anticipate that continued strong cash flow aided by working capital management will allow us to cover capital expenditures and one-time momentum costs while still delivering free cash flow consistent with our goal of 10% to 12% of net sales, albeit at the lower end this year.

I would like to provide additional context on the first quarter, given our expectations for a challenging start to the year. Despite continued category volume improvement, we expect impacts from the earlier holiday shipments, channel shifting, which favors the value segment, and weaker performance in non-track channels to impact the first half of the year. As a result, we expect organic sales to be down 6% to 8% in the first quarter and improve as we move through the year. Gross margins should be roughly comparable to the prior year quarters, and due primarily to the lower net sales, we expect to deliver adjusted EPS in the first quarter of $0.50 to $0.60 per share. And finally, a few comments on our debt capital structure and capital allocation priorities.

Our debt is currently 91% fixed at an average interest rate of 4.8%, with no meaningful maturities until 2027. Looking ahead, debt pay down and deleveraging continues to be our primary capital allocation priority, and we expect to end 2024 below five times leverage. We believe that consistent free cash flow generation is one of the most important factors impacting our business today. Returning this cash to shareholders through our quarterly dividend and paying down debt provides Energizer shareholders with a compelling opportunity to benefit from consistent returns combined with capital appreciation potential. Now I would like to turn the call back over to Mark for closing remarks.

Mark LaVigne: When we began the year, we embarked on a multi-year transformation, which will streamline our operations, improve our financial performance, and ultimately shape the future of Energizer. We have made significant progress over the last 12 months, and in fiscal 2024, we’ll focus on the same strategic priorities, restoration of gross margin, top-tier free cash flow generation, and debt reduction, ultimately driving sustainable earnings growth and shareholder value over the long term. Now I’ll turn it back over to the operator to open up for questions.

See also 12 Biggest Leasing Companies in the World and Stocks That Will Double in 2023.

Q&A Session

Operator: [Operator instructions] Our first question today is from Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell: Thanks. Good morning. Mark, just to talk a little more color on kind of the state of the battery category, both U.S. and international, and I’m just trying to understand — I think I understand that you believe that kind of consumer demand is fairly stable after a few years, but I’m trying to understand where the promotional levels might be, both, especially in the U.S., but also international in terms of do we need to go back to 2019 levels, or do we need to go higher than 2019 levels to kind of spur demand even further? Are you seeing kind of competitive promotional levels that are different than what you were expecting? Just kind of talk more about the environment there of what you need to do or what the category needs to do to kind of get back to that zero to low single digit kind of annual volume growth.

Mark LaVigne: Sure, Bill. There’s a lot in there. Let me — I’ll kick it off kind of how we built ’24 from a framework perspective, and then John can maybe give you some details just on how we’re framing up the year. It really starts with how we approach the plan for the year, which is staying consistent to the strategic priorities we had in ’23. We want to continue to improve margin, which gets to a little bit of your promotion question, but we want to improve margin. Our outlook provides 100 basis points improvement over the course of fiscal ’24. We want to continue to generate free cash flow for the second year in a row, consistent with our historical levels, and we want to continue to pay down debt, and our plan is to be below five times at the end of fiscal ’24.

So from a strategic priorities standpoint, our outlook achieves all of those objectives, but then when you take a step back to your point and look at consumers generally and then our categories, so if you look at consumers generally, even beyond our categories, certainly they’re feeling pressure. There’s some mixed data points out there. I think it’s mixed because consumers are very engaged in categories, but they’re rotating around a lot of ever-shifting priorities for them, and that results in delayed purchasing. It can result in some trade-down, either in terms of from premium to value or even pack size, and then some brand-switching activities. All of that is based on temporary priorities and needs that consumers are experiencing in a relatively pressured environment for them, but then when you delve deeper into our categories, our categories are in solid shape.

Batteries have been on a process of coming down from normalized levels from the pandemic, the spike in demand we saw during the pandemic. We’re also seeing the impact of pricing and elasticity. We have achieved sort of volume stability over the last couple of quarters, which has been a nice plateau to see in the volume trend. Auto care, roughly the same, maybe a little bit more discretionary than batteries. So when you combine our strategic priorities that we want to achieve from our business with stable category trends and then a cautious consumer, it comes down to pricing and promotion, to your question and pricing and promotion discipline is critical to what we want to do. It was critical for us restoring gross margins. It will be critical for us to continue to preserve gross margins and then from a promotional side, I think the questions that we constantly push is we are promoting to bridge consumers to a higher price point and keeping them engaged with our brand.

We’re not promoting to prime them for sort of permanently lower prices and so we’re going to continue to lean in to the former, not the latter and that’s how we built the ’24 plan to make sure that we can continue to achieve the results that we that we laid out today. John, do you want to go through the details of ’24?

John Drabik: Yeah, maybe I’ll just come about some of our planning assumptions. I’ll start with the full year and then move to Q1, because I know that’s part of what we came out with this morning. So on the top line, flat to down, low single digits for the full year and as Mark just said, in battery, we’ve seen category volumes recover. We project those to be relatively flat for the rest of the year. We’re projecting auto volumes in the category to be modestly positive and in that environment, we expect to reinvest some of our gross margin recovery into pricing and promotional activity. That’s both online and in store and as we’ve mentioned, on top of that, we’ll start the year with some headwinds as we saw some holiday volume shift into the fourth quarter last year, which we don’t expect to comp again this year.

Kind of moving on to gross margin where we continue to see improvement, we’re expecting 100 basis points for the full year. Project momentum, a great source of efficiency for us. We expect that to continue generating improvement, something like 100 basis points to — 120 basis points to 140 basis points. We have seen raw material input costs kind of come back our direction. We see that being about an 80 basis point improvement next year. We continue to see transportation rate savings be beneficial. And we get a full year of those this year. So we should see another 70 basis points of improvement. After two years of significant pricing, we’re expecting some of that pricing and promotion to be invested back in and, we’re probably going to see about 100 basis point to 150 basis point headwind and then we’ve seen a lot of inflationary impacts on conversion costs, utilities and wages and that should be another 50 basis point drag.