Energizer Holdings, Inc. (NYSE:ENR) Q1 2024 Earnings Call Transcript
Energizer Holdings, Inc. (NYSE:ENR) Q1 2024 Earnings Call Transcript February 6, 2024
Energizer Holdings, Inc. misses on earnings expectations. Reported EPS is $0.02617 EPS, expectations were $0.57. ENR isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Jon Poldan: Good morning, and Welcome to Energizer's First 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 would like to turn the call over to Mark.
Mark LaVigne: 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 FY '23, 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 over 21% of net sales and paid down $78 million in debt, solidifying our path to achieve below 5 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 in 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 digit. 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 brands while preserving our pricing and expanding gross margin in the quarter. As we look ahead, we will be disciplined in our pricing and promotion strategies 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 margin. 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 million 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.
John Drabik: 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 mix 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. A&P 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 peso 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 $0.59. 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 onetime 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 net sales to be down between 2% and 3% as we cycle through softness in 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 to 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 U.S. We also expect a 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 million to $65 million. We also expect to pay down $150 million to $200 million of debt for the year, and to end fiscal '24 below 5 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 in the range of $600 million 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.
Mark LaVigne: 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 condition, 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.
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