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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.

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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.

A technician inspecting a newly manufactured electric component in a modern lab.
A technician inspecting a newly manufactured electric component in a modern lab.

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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