Energizer Holdings, Inc.

Good morning. My name is Mark, and I will be your conference operator today. At this time, I would like to welcome everyone to Energizer's first quarter fiscal year 2024 conference call. After the speaker's remarks, there will be a question and answer session. To do so, you will dial star 1 to join the Q&A queue, and if you wish to cancel, you can dial star 2. As a reminder, this call is being recorded. I would now like to turn the conference call over to John Polden, Vice President, Treasurer, and Investor Relations. You may begin your conference.

Good morning, and welcome to Energizer's first quarter fiscal 2024 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, and John Drabek, 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 in 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 2023. With that, I would like to turn the call over to Mark.

Good morning, everyone, and thank you for joining us on our fiscal 2024 first quarter earnings call. We started the fiscal year with the same priorities as we had in FY23, improving margins, generating free cash flow, and paying down debt. In our first quarter, we delivered on our outlook and made great progress in each of these areas. Gross margin improved. to 39.5% for the quarter as a result of the benefits from Project Momentum. We generated free cash flow of over 21% of net sales and paid down $78 million in debt, solidifying our path to achieve below five times debt to EBITDA by the end of the fiscal year. In addition to the strong execution against our main priorities, we are seeing healthy indicators across our business. including an excellent response to our investments to drive improved consumer engagement without impeding margin improvement, steadily improving category trends, share gains and batteries across key customers and markets around the world, and improving consumer sentiment. When you combine the momentum of our strategic priorities with these trends, we are positioned to deliver both top and bottom line growth over the balance of the year.

Turning to a review of the first quarter. Globally, battery category volume and value performed as expected, with both down low single digits.

This was largely driven by ongoing elasticity impacts from international price increases, which occurred later than in the U.S., as well as comping the energy crisis in Europe last fall, which caused a surge in category demand in our first quarter of 2023. When you narrow the view to the U.S., category volumes increased roughly 6% in the quarter. We expect international category trends to follow roughly the same recovery pattern as the U.S. as they cycle through the impact of price increases, with positive global volume trends in the back half of the year. We are achieving these results while maintaining a prudent approach to pricing and promotion. These strategically important investments have been designed to engage and bridge consumers to higher price points after multiple rounds of pricing in the category. On a year-over-year basis, the percent sold on promotion for the category was up in the quarter, but the depth of that promotion was meaningfully less than the prior year. Importantly, the investments are having the intended impact without sacrificing gross margin. We drove volume in the category and for our brand while preserving our pricing and expanding gross margin in the quarter. As we look ahead, we will be disciplined in our pricing and promotion strategy with a focus on driving the overall health of the category and our brand.

Moving to auto care.

While the December quarter is the smallest in terms of sales for our auto business, we are entering the critical peak season with a fast start, growing organic sales by nearly 5% versus the prior year. We saw growth across three of our four subcategories, appearance, refrigerants, and fragrance, and delivered double-digit growth internationally. Importantly, we are set up well to deliver low single-digit organic growth for the full year in auto care while also expanding margins. And finally, Project Momentum is delivering. The program generated over $20 million in savings in the quarter, taking total program savings to over $75 million to date. As we announced today, we continued to find areas of opportunity, and we increased the total program savings target by $30 million, taking our savings range to $160 to $180 million. Our strong free cash flow has also been a bright spot. The combination of margin improvement and continued progress on working capital management helped to generate free cash flow of over 21% of net sales, up nearly 150 basis points from the prior year. As John will expand on in a moment, our free cash flows have allowed us to make significant progress towards reducing debt and strengthening our balance sheet. Let's turn it over to John for more details on the quarter and the full year outlook.

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 for our expectations for the rest of fiscal 24. For the quarter, reported net sales were down 6.3%, with organic revenue down 7.4%. The results for the quarter were within our initial outlook for organic sales to decline between 6% and 8%. As we called out in our last call, the largest driver of the decline was earlier holiday shipments, which benefited our fourth quarter in fiscal 2023. Our sales were further impacted this quarter by continued weaker performance in non-track channels. Adjusted gross margin increased 50 basis points to 39.5%. mainly driven by project momentum. Pricing was relatively flat on a year-over-year basis, but mixed impacts and modestly increased product costs were slight headwinds in the quarter. Adjusted SG&A increased $3.7 million, primarily related to labor and benefit costs, as well as factoring fees in a rising rate environment, partially offset by project momentum savings. AMP as a percentage of sales was 6.6%. consistent with our efforts to focus investments during the critical holiday season. Interest expense decreased $2.2 million due to lower average debt outstanding, as we have continued to prioritize debt paydown. As noted in our press release issued earlier this morning, we also recorded a non-cash exchange loss of $21 million in the quarter, recognizing the devaluation of the Argentine peso in December. The devaluation was a result of broad economic reforms introduced by the newly elected administration, in which the PESA was devalued by 50% in the month. Given the extraordinary nature of the devaluation, the impact was excluded from our adjusted earnings per share. We delivered adjusted EBITDA and adjusted earnings per share of $132.9 million and 59 cents. We also generated $153 million of free cash flow in the quarter, through a combination of margin improvement and continued progress on working capital management. We directed these strong cash flows to pay down $78 million of debt during the first quarter, and we've continued this progress by paying off an additional $58 million subsequent to quarter end, for a total of $136 million in the first four months of the fiscal year. Since the fourth quarter of fiscal 22, we have paid off over $400 million of debt to date, or almost 12% of our total outstanding debt. As rates stay higher for longer, our debt capital structure remains a valuable asset as we have a weighted average cost of debt of around 4.7%, which is 94% fixed and no meaningful maturities until 2027. As Mark noted earlier, project momentum continues to be an important focus for us and contributed approximately $22 million of savings in the quarter. As we look forward, we've identified additional opportunities to drive savings, including by leveraging production assets we were able to opportunistically acquire last quarter in Belgium. Based on our latest estimates, we are calling up our full program outlook by $30 million for total program savings of $160 million to $180 million. We also expect one-time cash costs for the program to run at roughly 80% to 90% of the projected savings. And finally, I would like to provide some additional color on our outlook for the remainder of the year. For the second quarter, we expect organic nut sales to be down between 2% and 3%, as we cycle through softness and non-track channels. We also anticipate gross margin in the quarter to improve by 150 basis points year over year, and for adjusted EPS to be in the range of $0.65 to $0.70, up mid-single digits at the midpoint versus the same quarter in the prior year. Over the back half of the year, we expect a return to top-line growth driven by a few key factors. First, we expect volumes to continue to improve in the category as consumers adjust to the pricing taken over the previous two years, especially in international markets where pricing actions occurred later than in the US. We also expect recovery in some of the non-track channels, which should begin to comp large declines that began last spring. And finally, we expect distribution wins across both battery and auto to help drive back half sales. For the full fiscal year, We continue to expect project momentum savings of $55 to $65 million. We also expect to pay down $150 to $200 million of debt for the year and to end fiscal 24 below five times leverage. We are reaffirming our outlook for organic net sales to be flat to down 2%. Adjusted gross margin improvement of 100 basis points with improvement across both battery and auto care. Adjusted EBITDA on the range of $600 to $620 million and adjusted earnings per share of $3.10 to $3.30.

With that, I'll turn it back over to Mark for closing remarks.

In summary, our first quarter performance sets us up well for the remainder of the year. We have the flexibility and discipline to navigate the market conditions, particularly in light of the strong momentum across our cost savings and cash generation initiatives. We will remain laser focused on delivering growth, advancing our strategic priorities, and delivering shareholder value. Now let's open the call for questions.

Thank you. If you wish to ask a question, please dial star 1 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial star 2 to cancel. Please be advised we request that you ask only one question followed by one follow-up just in the interest of time. And our first question comes from the line of Lauren Lieberman at Barclays. Please go ahead. Your line is open.

Great. Thanks so much. First thing I was hoping is if you could just tell us a little bit more about the Belgium facility you acquired and kind of, you know, anything you can offer on that and how much of that was really what was driving the uptick in momentum savings or is that something that still may be, you know, maybe more to be evaluated as we move forward?

Laura, we continue to evaluate project momentum. And as you've seen, as we've gotten further in the program, we've been able to take the ranges up to 160 to 180 is our current call based on everything we know today, including the acquisition of the Belgian facility. And that was an opportunistic opportunity that came across late last year. It allows us to pivot and do in-region, four-region manufacturing. It's driving great working capital improvements, cost savings improvements. And it was a relatively low-level investment. The purchase price for the assets was roughly 3.5 million euros.

Okay, great. That's fantastic. Thank you. And then just on auto care, constructive commentary on top line, but margins did take a step back this quarter. So just kind of curious about anything that was discreet to the quarter and how we should be thinking about kind of gross margin opportunity for the full year.

Yeah, I would say, Lauren, the first quarter was – not reflective of what we expect for the full year. We're still anticipating gross margin improvement as we go throughout the year, pretty significant. And that should help us deliver, you know, bottom line performance on a segment profit perspective as well.

Okay. And is there anything within there that, you know, you just – I guess I'm sure it's still partially project amended, but like operational – changes that are being made in auto versus, you know, raw max and pricing kind of stuff. I'm curious about what sort of the in your control versus the macro, if you will.

No, no, it's obviously the smallest quarter by far. So when you kind of come into the year and look at re-rolling standards, you got some indirect costs that you allocate to the business. It's really not reflective of the full year run rate.

And Lauren, just to build on that, I think from a gross margin standpoint in auto care, we're expecting improvement this year. And then I think one of the questions that's out there is when will we get that business back to where we were when we acquired it, and our anticipation is we continue gross margin improvement, including a lot of the plans we have under project momentum as we'll achieve that level in 25. Okay, great.

All right, thanks. I'll pass it on and come back on.

Thanks, Lauren. Thank you. Our next question comes from the line of Bill Chappell at Tourist Securities. Please go ahead. Your line is open.

Thanks. Good morning. Talk a little bit more about your kind of commentary or maybe your visibility into battery volumes picking up. And I'm just trying to understand kind of the elasticity commentary in terms of the business has always been kind of impulse slash commodity in terms of you endure seller line priced. You haven't seen Rayovac really pick up and share, even though it's a lower priced product or private label. So try and understand, you know, how consumers adjust if they haven't already and volumes start to pick back up or if there's something else I'm missing.

No, Bill, let me start. So I would say from an overall standpoint on the category, let me, you know, we really like where we are from category trends. I think we're positioned very well to deliver the year. Let me start by kind of breaking it down in the component parts of the overall category. And this is, you know, so in the U.S., when you talk tract channels, volume is consistently improving. You saw us go from kind of down high single digits down, you know, percent and a half year over year. And then the latest numbers have been down 0.5 in volume. And even the numbers that came out this morning were positive. So you are seeing that inflection point in tract channels to positive volume growth. That's a great sign in terms of working through the elasticity impacts, working through the, you know, the pandemic surge in demand and all of the factors that have gone into that. Then you break it down into sort of the online channel, both pure play as well as Omni. That's been a consistent source of growth over the last couple of quarters and would continue, would expect that to continue. Then when you get into non-track channels with home center and OEM, we expect those trends to stabilize. If you recall, it was kind of last April, May, when we saw some of the declines that we saw in home center, we expect to work our way through those. And so those trends should stabilize international. You know, you have elasticity impacts from pricing, which occurred later in the U.S. We expect to work through those. We're already seeing signs that you are, you know, Latin America, Asia Pacific in particular. In Europe, you had a bit of an anomaly with the energy crisis there last year. So all in all, those trends are positive just from a category standpoint. And then specific to our business, on top of just basic execution, we are seeing some distribution wins in both batteries as well as in auto. which we expect to take hold in the back half of the year. So all of those factors, both from a category as well as our business specifically, give us great confidence in the back half of the year returning to growth.

OK. So just to follow up, I mean, is your thought that it's greater on the normalization post-COVID, or is it elasticity? It seems like it's more of the former, whereas pricing, I guess, Adjusting to pricing is more of a relative type thing. It seems like you're more comfortable that we're getting back to a normal consumer behavior.

I think we are getting back to a more normal consumer behavior. It's very difficult to parse those out. I wouldn't want to blame, you know, some of the current trends on COVID related. I mean, you did have a long cycle of working through that, and then you had the pricing impacts. from two fairly significant price increases over the last couple of years. So there was a lot there for consumers to work through, plus just the overall backdrop impact as well. So I would say you are back to, you know, more normal category patterns, you know, as we work our way through into Q3 is when you're really going to see that inflection point from a volume standpoint in the U.S. Consumers are reacting accordingly. Your question on Rayovac, I mean, we are seeing interest in Rayovac, you know, sort of a increased interest in Rayovac. As we've talked to retailers, you have seen some share gains in Rayovac as some of the more value-oriented offerings and retailers are leaning in with consumers. So there is an opportunity there, and we've been able to capture some of that. Obviously, we want the bulk of our business to stay at the premium end with Energizer, and that's where it continues to be.

Great. Thanks for the call.

Thanks, Bill.

Thank you. Our next question comes from the line of Nick Modi at RBC Capital Markets. Please go ahead. Your line is open.

Thank you. Good morning, everyone. So just a couple questions. Just wanted to clarify that the non-track weakness, that was solely the home centers like it was last quarter, right? Is there anything else? It's the majority of it. Okay. And then I guess following up on Lauren's question, just from Project Momentum, obviously you're getting some benefits out of this plan, but what else is driving the upside in the program? If you could just provide some context on that, and I have just one follow-up.

Sure, Nick. I mean, look, Project Momentum has been an incredibly successful program for us. We launched it, and since then the organization has really dug in and been able to just drive savings throughout the organization. Right now, if you take the 160 to 180, as the savings range. It breaks down to 55% roughly in sort of network distribution footprint, 15% procurement, and then 30% SG&A. Those ranges have moved around a little bit as we've continued to uncover them. SG&A, we found additional opportunities as we've worked through the program, but the same has been true with the network design with the inclusion of the new facility in Belgium. So I would say it's a very broad base in terms of where the additional savings are coming from. And it's just been tremendous work by the organization to be able to hit 160 to 180 million savings over a three-year period.

Helpful color, Mark. And then just on the consumer, last quarter you had much more cautionary commentary, and I'm sensing a little bit more optimism now. Am I reading that correctly? Have you seen things really improve? Are you feeling better about where the consumer is?

I think we are. I think you are seeing improving consumer sentiment. I think you're seeing the volume trends in our categories, both from an auto and batteries, exceed our expectations and continue to have the right trajectory. I think it's dangerous in this environment to go too all in and sort of one direction. So I would say improving consumer sentiment. Still some caution out there, and you still need to be very choiceful in terms of how you engage and how you invest. to make sure that the consumers continue to stay engaged with your categories and your products. We're doing that. We're doing it successfully. But it is an improving backdrop compared to what we expected back in November.

Excellent. Thanks so much, Mark.

Thank you. And our next question comes from the line of Rob Openstein of Evercall. Please go ahead. Your line is open.

Great. Thank you very much. I just wanted to follow up. a little bit in terms of your confidence in the second half of the year. And I think, you know, you mentioned one of the key drivers of that is the increased distribution for both auto and batteries. Can you give us a sense of how much of the improvement is from the increased distribution and then more details on that increased distribution in terms of channel, products, any particular color around that?

um would be helpful thank you well let me get started robert i think on the on the sort of confidence it really breaks down into how i laid it out before which is improving trends across the category in tract you have nice growth potential online you have a stabilization and non-track so that that's kind of the foundation and then on top of that we have been able to gain incremental distribution in you know, in auto care with some of our key retailers, with some partnerships that we're driving that you're going to hear more about as the year progresses. And then in batteries, you know, we continue to push for additional distribution across our footprint, both existing retailers as well as some new retailers. That's true in both the U.S. and international. We called out international distribution on the last call. I would say that Deems have aggressively moved to, you know, claw back some of those distribution losses. And so as you look to the balance of the back half of the year, we expect distribution win to be a tailwind and not a headwind as we get into Q3 and Q4. So a lot of hard work in the distribution. I don't want to get into specific customers and certain products, but you'll see them hit shelves here in Q3 and Q4.

Terrific. Thank you very much.

Thanks, Robert.

Thank you. Our next question comes from the line of Andrea Tuxera of J.P. Morgan. Please go ahead. Your line is open.

Thank you. Good morning, everyone. So can you comment on your online channel, Performance for Batteries? You mentioned just recently that you saw an opportunity online, but that, by the same token, is also the most fragmented channel. And I remember in the past few quarters, it was one of the areas where you had the most deceleration, or in a way, some sort of increased obviously squeeze competition against private labels. So if you can comment on how your share stands right now and how you're thinking in your model. Thank you.

Good morning, Andrea. I think the best way to describe it, and a lot of this is limited the information that we receive from an online standpoint. But what we're seeing is we're continuing to see healthy volume growth in online. You're continuing to see healthy value growth online. In the past quarter, in the October, November, December quarter, we were able to match online growth both in terms of volume and value. So our share from our estimates is probably flat. We're not losing share. We're not gaining share at this moment. But I think a really solid quarter for us in the online channel in holiday, which was, as you know, a very critical quarter for us.

And if I can, that's encouraging. And then if I can, just like go back to the project momentum as you raised the $30 million. And I believe in August you had included 2025 into the program. So where, number one, where did the 30 million come from, the additional? And when should we, I think you didn't change the amount that is going to be in 2024. But I was wondering if you can mention where it came from and where we should be thinking of the extra 30 million lending. I'm assuming that's 25.

So the extra is certainly in 25. We did keep 24 between 55 and 65 million of savings. The balance of the program to hit in 25. As I mentioned on one of the previous questions, it's really broad based across the program. It's 70-30 split, you know, gross margin SG&A. That's a little different than when the program started, which was 80-20. We did add a third year as we continue to find additional opportunities throughout the program, but really excited about the benefit it's going to provide for us and our ability to sort of deliver ongoing earnings momentum in the business. And so tremendous work. It's broad-based. The teams continue to work hard and execute against the program. I would say 70% in gross margin, 30% in SG&A. And, you know, with the $55 million and $65 million and $24 million with the balance next year.

That's great. And then if I can just squeeze a bit of the rail vac kind of repositioning, and as you gain more shelf space in BRICS, do you see the need for kind of pushing? Because obviously when you're growing and the market was immunizing, Do you see the need of positioning Rayovac as like an entry level for you, which has always been, but just to see if you're looking at this additional shelf space to be positioning and to protect the entry level battery market or not?

Well, Andrea, I think we're perfectly positioned in the battery category to really lean in with retailers and solve any of the sort of strategies or issues that they're trying to connect with consumers on. And I would say our full portfolio, the fact that we go from value offerings all the way up to super premium with lithium is a unique advantage that we bring. You know, I would say the goal is to source Rayovac volume from private label and to make sure that we continue to keep consumers in the branded side of that business. That's an important element that Rayovac plays. Obviously, you know, our flagship Energizer brand will continue to be our emphasis and continue to be the bulk of the distribution that we see. But it plays an important role. I don't think it will take outsize, you know, have an outsize impact on our overall share or our financials. But it is a key asset that we have that we leverage very, you know, tactically as we work with retailers to solve any sort of issues that they're looking to solve.

Thank you, President.

Thank you. And our next question comes from the line of Hale Holden at Barclays. Please go ahead. Your line is open.

All right. Good morning. Could you give us any change or update to what you're seeing on input prices and the overall inflationary market or environment or deflationary environment, however it may fall out for the rest of the year?

Yeah. Yeah. For the rest of the year, specifically to materials, you know, It was slightly negative in this quarter, but we're looking for, you know, pretty consistent improvement going forward. We're calling for about 80 basis points of gross margin full year improvement. And the biggest benefit's really coming from lithium, zinc, steel, and R134A. So we do have some tailwinds coming in from direct input costs.

Thank you very much.

Thank you. And our next question comes from the line of Carla Casella at JP Morgan. Please go ahead. Your line is open.

Hi. I'd like to focus on the debt pay down. And I'm just wondering, was the debt that you paid down in the quarter and after all term loan, and is that what you expect to target going forward? Or would you look at that bond as well, given that they're trading at discounts?

Yeah, it was all term loan so far this year. I mean, we'll continue to evaluate what's the best option for us to pay down going forward. But, you know, we'll continue, I think, to go after that term loan as much as we can over the next couple of years.

Okay, great. Thanks.

Thanks. Thank you. And we currently have one further question. So just as a reminder, if you do wish to ask any further questions, please dial star 1 now. And that next question is from Lauren Lieberman at Barclays. Please go ahead. Your line is open.

Hey, I'm sorry. I'm actually all set because I was going to ask about the incremental distribution and the outlook in the back half, but you ended up answering it. So I am all set. Thank you.

Great. Thanks, Lauren.

No problem. And we've had one further question come through, and that's Brian McNamara at Canaccord Genuity. Please go ahead. Your line is open.

Hey guys, thanks for taking the question. I believe that you expected flat year-over-year volume pretty much throughout the year with Q4 earnings back in November, excluding the impact of the earlier holiday shipments in Q1. Is that still the case broadly for the year?

Yeah, we're still looking for the full year to be roughly flat from a volume perspective. I think if you look at it, obviously it was down about 700 basis points in the first quarter. we expect it to be kind of flattish in Q2 and then see, you know, turnaround in the back half of the year to get us back to flat.

Great. And then secondly, on debt pay down, you guys have paid down a good amount of debt over the last several quarters. It's kind of the sticking point with, you know, any investors kind of we speak to to kind of, you know, get involved in the name that aren't already. I'm just curious, is there anything you guys can do to kind of hasten that process, whether it be divestitures of maybe smaller brands, things like that, that you're considering and that's on the table?

No, I think we'll continue to focus on the operational performance. So back at the end of 22, we started to talk about momentum. We really went after working capital as part of that. We've been able to generate significant cash flow over the last six quarters through operations. I think we'll focus there and then we'll continue to look to pay down debt going forward as our primary capital allocation.

Thank you. Best of luck. Thank you.

Thank you. And currently there are no further questions in the queue at this time, so I'll hand the floor back to Mark for the closing comments.

Thanks, everyone, for joining us this morning. Hope everyone has a great rest of the day, and thanks for your interest in Energizer.

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.