Energizer Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Energizer Holdings Inc. fourth quarter and FY 2024 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, November 19, 2024. I would now like to turn the conference over to John Polden, Vice President, Treasurer, and Investor Allegiance, you may begin.

Good morning, and welcome to Energizer's fourth quarter and fiscal 2024 conference call. Joining me today are Mark Levine, President and Chief Executive Officer, and John Dravik, Executive Vice President and Chief Financial Officer. A replay of this call will be available in 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 it's 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 thanks for joining us today.

The hard work and dedication of the Energizer teams paid off as we achieved a great deal in 2024. Specifically, we delivered organic net sales within our originally guided range, bolstered by second half top line momentum. We improved adjusted gross margins by 190 basis points. We delivered free cash flow of nearly $340 million, and we paid down $200 million of debt, reducing leverage to below five times. Let me expand on each of these. First, advancement of our strategic top line growth initiatives coupled with steadily improving category trends came through in our back half results. As we enter the new fiscal year, we are well positioned to drive both top and bottom line growth. Second, gross margins and earnings continue to improve. We achieved adjusted gross margins of 42.2% in the fourth quarter and nearly 41% for the full fiscal year. We also generated adjusted earnings per share of $3.32, exceeding the top end of our original outlook, Third, cash flow remains healthy. Fiscal 2024 was another very good year with free cash flow of nearly 12% of net sales, enabling another $50 million of debt reduction in the quarter and a total of $200 million in the fiscal year. With the progress we have made over the past two years, we are carrying a lot of momentum into the year ahead. For fiscal 2025, we expect to deliver 1% to 2% organic sales growth across both batteries and auto care, adjusted EBITDA in the range of $625 to $645 million, and adjusted earnings in the range of $3.45 to $3.65 per share. John will provide a bit more context on the outlook, but first I wanted to touch on those areas where we expect to drive consistent top-line growth. First, distribution. We are expanding our footprint with retailers where we do not currently have distribution, and we are also expanding the space we have with existing customers. This is a strength of our organization, and based on the recent customer decisions, we expect to expand distribution in both batteries and auto care in 2025. Second, we are accelerating our growth in e-commerce, both in the U.S. and in key international markets. During fiscal 2024, we grew e-commerce by roughly 15%, and our goal for fiscal 2025 is even more ambitious. To drive this outsized growth, we have expanded our internal capabilities, enhanced external partnerships, and invested in the right product assortment across our categories. Third, we are expanding our presence in developing markets. As we look to 2025, we are investing for growth in markets where population and GDP growth are healthy, where we believe that we can become the market leader. We expect developing markets to continue to drive outsized growth in the years ahead. In addition to expanding our footprint, we are also investing with our customers to drive velocity of our products while remaining committed to ongoing margin improvement. We have expanded the capabilities of our pricing and revenue management teams to maximize the effectiveness of our trade spend and to optimize our pricing. This group leverages data-driven insights to highlight and emphasize those promotions that are most meaningful to consumers and that will maximize category value for our customers. Finally, we are very excited about the role innovation will play in our growth. In batteries, we have recently talked about the introduction of the world's first three-in-one coin lithium child shield, which is in the market today and designed with secure packaging, bitter taste to deter ingestion, and a new color alert technology, which is activated when it comes into contact with saliva. The consumer reaction to this innovation has been very positive and demonstrates our leadership in this fast-growing segment of the category. We have invested further in batteries in the form of plastic-free packaging. We have transitioned our European markets, and over the next few years, nearly 90% of our products sold in the North American market will be converted to plastic-free packaging. In AutoCare, on our last earnings call, we mentioned exciting innovation. Today, I am very pleased to introduce our newest and most innovative product line, the ArmorAll Podium Series, developed in partnership with Oracle Red Bull Racing. Armor All became the official auto cleaning and care partner of the team in 2021. Since then, Oracle Red Bull Racing and Formula One have seen tremendous success with a global TV audience in excess of 1 billion race fans. Oracle Red Bull Racing's unparalleled performance on track and global brand recognition, combined with the legacy and expertise of Armor All, makes this an ideal evolution of the partnership. Podium Series will include a full portfolio of automotive appearance and air freshener products at the premium end of the category. We believe the new product line positions us well to capitalize on this fast-growing segment of the market. This type of innovation, combined with our leading brands and global platform, will enable us to continue scaling this business into a meaningful growth engine for Energizer. In summary, we are proud of our performance in 2024, a year in which we executed our plan, achieved significant milestones, and delivered on our financial expectations as we closed out the year. As we move into 2025, we are squarely focused on driving growth while growing earnings and generating stable, class-leading free cash flow. Let me now turn the call over to John to provide additional details about our financial performance and fiscal 2025 guidance. Thanks, Mark, and good morning, everyone. I will provide an update on the fourth quarter and full year results before turning to our expectations for our 2025 performance. We delivered a strong end to the year. Organic net sales were up slightly in the quarter. Combined with strong gross margins, we delivered adjusted earnings and free cash flow in excess of our outlook for the quarter. Fourth quarter organic revenue was positively impacted by improved category trends and new distribution globally. partially offset by planned pricing and promotional investments. Adjusted gross margin increased 220 basis points to 42.2%, driven by $18 million of savings from project momentum and favorable commodity input costs. These benefits were partially offset by planned pricing and promotional investments. Adjusted SG&A as a percent of sales was 15.3%, or an increase of $7.5 million mainly driven by an increase in digital transformation depreciation, higher travel expense, and an increase in wages and benefits. This was partially offset by project momentum savings. A&P as a percent of sales was 4.6%, up 50 basis points, and consistent with the increased investment in our long-term growth initiatives. Interest expense decreased $3.8 million due to lower average debt outstanding and lower interest rates. Project Momentum delivered almost $25 million of total savings in the quarter. These savings, combined with strong operational performance, resulted in adjusted EBITDA of $187.3 million and adjusted earnings per share of $1.22. We also generated $143.9 million in free cash flow or 17.9% of sales in the quarter and paid down $50 million of debt. For the full year, Organic net sales declined 2.2%, in line with our original guide. Battery and lights organic sales declined 3.4%, mainly driven by the timing of holiday orders, which benefited the fourth quarter of 2023, and planned pricing and promotional spend. These headwinds were partially offset by distribution gains and improved category trends. In auto care, organic sales increased 2.3%, driven by distribution gains. partially offset by planned promotional spend. Adjusted gross margin was up 190 basis points to 40.9%, as savings from project momentum and lower commodity costs more than offset planned pricing and promotional spending. Adjusted EBITDA grew 2.5% to $612.4 million, and adjusted earnings per share grew 7.4% to $3.32. Free cash flow for the year was $339 million, or 11.7% of net sales. We deployed this cash flow to pay down $200 million of debt and ended fiscal 2024 with a net leverage ratio of 4.9 times. And for the year, project momentum generated almost $90 million of savings. Looking forward to fiscal 2025, as Mark stated, we expect to generate organic top line growth in the range of 1 to 2%, driven by new and expanded distribution as well as product launches across both our battery and auto care businesses. We expect gross margin expansion of roughly 50 basis points, which will put us above 41% for the full year. We expect SG&A on a dollar basis to be up between $15 and $20 million year over year. Through our top line growth initiatives, gross margin improvement, and project momentum savings, we expect solid growth in our earnings again next year, resulting in an outlook for adjusted EBITDA in the range of $625 million and $645 million, and adjusted earnings per share in the range of $3.45 to $3.65. Project momentum savings of between $40 million to $60 million are included in our outlook. We intend for 2025 to be the final year of project momentum, and we project total savings of the program to be between $180 million and $200 million. This program has been tremendously successful for the company, and these results are a testament to the organization's ability to drive productivity, allowing us to invest for growth in the years ahead. We expect to pay down between $150 and $200 million of debt in 2025, resulting in reduced interest expense of roughly $8 to $10 million. We project capital expenditures to be in the range of $80 to $90 million, driven by investments across operations, digital enablement, and plastic-free packaging, as well as one-time momentum costs. Due to some of these incremental investments, we expect to generate free cash flow between 8% and 10% of sales. I would also like to provide additional color on our expectations for the first quarter. We expect organic nut sales to be up between 2% and 3%. In addition to continued solid category growth, The beginning of the quarter benefited from the demand related to two named hurricanes, which drove approximately $10 million of incremental sales, providing a strong start to our year. Slightly offsetting these organic tailwinds is a sharp appreciation of the U.S. dollar, which has been rallying versus a basket of our largest foreign currency exposures to start the year. Net, we anticipate reported revenue to be up 1% to 2% for the quarter. Adjusted gross margins are expected to be up between 50 and 100 basis points. We expect adjusted earnings per share in the range of $0.60 and $0.65, up mid-single digits versus the prior year first quarter at the midpoint. And lastly, I would like to provide some color on our capital structure and capital allocation priorities. Over the last two years, our organization has been heavily focused on the recovery of gross margins and a return to consistent free cash flow generation. We are ending fiscal 2024 with gross margins roughly in line with pre-pandemic performance and have been able to utilize strong free cash flows to pay down almost $500 million of debt, reducing our total outstanding debt by roughly 13%. Looking ahead, we will continue to focus on debt pay down as our number one priority for capital allocation. We believe this continued transition of value from debt to equity holders, combined with our projected earnings growth and meaningful dividends, offers a compelling return proposition for our shareholders.

I would now like to turn the call back over to Mark for closing remarks. Thanks, John.

Our results in 2024 are further proof that our strategies are working. We have meaningfully strengthened our operating foundation and financial position, enabling continued investment in our long-term growth objectives. We entered 2025 in a position of strength, and I am confident in our ability to deliver our financial algorithm, anchored by consistent growth and class-leading free cash flow.

Now let's open the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press the star followed by the number two. We ask that you please limit yourself to one question and one follow-up. One moment, please, for your first question. And your first question comes from the line of Lauren Lieberman with Barclays. Please go ahead. Great. Thanks. Good morning.

I was curious if we could talk a little bit about gross margin trajectory long term, because you called out the accomplishment of getting back to pre-pandemic levels. We've made a lot of structural and underlying changes to business, all the work with momentum. So Maybe as we look out over the next, like, three to five years, let's call it, how should we think about gross margin trajectory and kind of, you know, if we're talking about a new benchmark level? Thanks.

Sure. So if we've gotten back to where we started at the pandemic, we've done a lot of work to get there. We're calling for about 50 basis points next year in 2025. And then I think we'll go back to more algorithmic growth, which is probably more of that $25 know plus basis points every year we've got a number of programs teed up beyond momentum that we'll continue to lean into so i think we've got a good pipeline to continue to drive that year after year but i think we'll get back to that more algorithmic growth level okay great and if i can squeeze in another um i was just curious if you could talk a little bit about tariff impacts you know steel cans where do you produce product that's sold in the us just a little bit about the um

of the global supply chain as we think about potential tariff risks broadly. Thanks.

Sure. You know, that's one good thing about Project Momentum as well, with that we've really leaned into in market for market production, which has, you know, helped minimize some of that exposure to tariffs. So, you know, we're starting to look at that. We'll continue to evaluate as things progress over the next couple of months. But as we stand today, less than 5% of our global cost of goods sold dollars the China sourcing. So we think that we've really minimized that exposure pretty well and feel pretty good going into next year.

Okay, great. I'll pass it on and get back in the queue. Thank you.

Thanks, Lauren.

And your next question comes from the line of Bill Chappell with TruViz Securities. Please go ahead.

Thanks. Good morning.

Hello.

Just a little bit more talk on, I guess, the battery category and why you think we're in a better place going forward and maybe the level of pricing you're seeing over the next year from both you and the whole category.

Well, I think the battery category has proven to be a very resilient category. It's certainly a need-based product for consumers. We went through a lot of peaks and valleys over the last three to four years with surges in demand. And then you had a COVID recovery in pricing. And we're really achieving, you know, a stability within the volume elements of the category. So as you look at the category, we're expecting kind of that, you know, 1% growth trajectory in 25. And we would expect that to be the new baseline. You are seeing in the U.S. and globally very healthy volume trends. You're seeing kind of mid-single-digit volume in the 4% to 5% from a volume standpoint. So the slightly elevated promotion that you're seeing both in the U.S. and certain international markets is driving demand in the category that you would expect. I think over time, you'll see volume and value trend more in line with one another. But I think with the pricing that was taken, then the slightly increased promotional, we've continue to invest to keep consumers engaged in the category and continue to drive demand. It's working, and we're expecting growth in 25. Got it.

And just to follow up on your comment on distribution gains, I think that meant you were talking about North America, and maybe you could help us understand where that is. Is that holiday sets for the upcoming quarter, or is this kind of more spring reset shelf space gains?

It's global. So we do have distribution gains around the world. We do have distribution gains in the U.S. You are going to see some expanded space in certain retailers. You are going to see us pop up in new retailers in the sort of second half of the year. So it's going to be sprinkled in throughout the fiscal year, but it will be a net positive for us throughout 25, both in the U.S. and in international markets.

So it's not holiday-weighted. It's full year.

It is full distribution-weighted.

Gotcha. Thanks so much.

Your next question comes from the line of Rob Ottenstein with Evercore. Please go ahead.

Great. Thank you very much. I think I heard you said that you grew e-commerce 15% in 2024, and you expected to do more than that in 2025. Was that the right number?

That is correct.

Great. So can you give us a sense of how large e-commerce is as a channel for you? and then given your success there, how that may or may not change your overall retail channel strategy, and does it give you more leverage with some of the brick-and-mortar retailers? Thank you.

Let me dig into that, Robert, and then we can see if it's answering your questions. I think what I would say is if you look at the size of e-commerce within the battery category in the U.S., you're probably in that north of 20% range. I think it's maybe it can peak mid-20s, maybe not that high. So that's roughly, I think, the size. And that includes both Amazon as well as a lot of other online sites that are omni-channel sites from retailers. It has been an area that we've been investing in for a number of years. We put people resources behind it, financial resources behind it. We're a gate. We have the right partnerships externally. We're making sure we have the right product strategy for online. So it's becoming a center of excellence for us. We did grow 15% in 24. We do expect to grow meaningfully more than that in 25. So it's going to provide a nice tailwind from a growth rate standpoint for us. What that does, Robert, it makes us just a better partner for all of our retailers. I mean, certainly this is an area of emphasis for brick-and-mortar retailers. It's an area of emphasis for pure play online retailers. And the better we can be at navigating that channel, the better partner we'll be all around.

And what you say you're going to grow meaningfully greater than that – Can you give us some thoughts on what underscores that confidence?

I would be disappointed if we didn't double that growth rate next year.

And that's because you're going to be spending more investment on online promotions or just trying to get a sense of why it should accelerate?