Q3 2020 Energizer Holdings Inc Earnings Call
[music].
Good morning, My name is Gary and I will be your conference operator today.
At this time I would like to welcome everyone to energize, there's third quarter fiscal year 2020 conference call.
After the speaker's remarks, there will be a question and answer session.
To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
As a reminder, this call is being recorded.
I would now like to turn the conference over to Jackie Burwitz, Vice President Investor Relations you May begin your conference.
Good morning, and thanks for joining.
During the call we look at their though for the third quarter fiscal year 21. It call. It will be available for replay via the Investor Relations section or what to think anything there will be.
Also available on our website in my presentation, writing details about result for the quarter.
On the call with me this morning, our Allen Chief Executive Officer, Mark Libby, President and Chief operating Officer, and Timberman, Chief Financial Officer.
During the call we will make forward looking statement about the company eat your business and financial performance either based on management's current expectation and are subject to risk and uncertainty, which may cause actual results could differ materially from appointed agent.
We do not undertake the update forward looking statement.
Factors that could cause actual results could differ materially from these statements are included in todays presentation slide and in the reports we file with the LP.
We also refer to non-GAAP financial measure a reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in the press release issued earlier today, which is available on our website.
Information concerning our category and markets here discussed on this call relates to the market, where we compete and is based on energizes internal data data from industry analysis and estimates we believe to be reasonable.
Unless otherwise stated all comparisons are to the same period in the prior year with that I'd like to turn the call over to Alan.
Thanks, Jackie and good morning, everyone. Let me begin by thanking our colleagues around the world who demonstrated unwavering commitment I.
I made the most current circumstances 10 year bond Super Foods.
All the pandemic remains a global threats the team's focus and agility contributed to the health and safety of our colleagues.
And drove Energizer strong performance in the core.
We continue to operate in an uncertain environment limited clarity on the length of depends I like it severity and its economic impact.
However to date, our team has acted with urgency and purpose to put us in the best possible position based on what we do know.
And looking ahead, our long term strategies remain intact and continued to drive strong top and bottom line performance.
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During the quarter organic net sales grew 3.4%, reflecting strong battery performance and organic growth and auto care.
Our strong battery performance was primarily due to the distribution gains in North America pricing actions and elevated demand for batteries and the U.S. caused by cold in 19.
The growth in auto care reflected improved trends during the quarter as consumers increased vehicle usage and we benefited from favorable weather conditions.
Throughout the quarter colleagues in our manufacturing facilities and distribution centers did a terrific job responding to the increased demand by delivering overall consistently high stories.
As did our retail operations colleagues, who executed our plans in store with excellence.
Despite headwinds from both currency and incremental cobot 19 related costs adjusted earnings per share increased 35% to 50 cents led by the benefits of organic sales growth and continued synergy capture.
In addition, we generated strong adjusted free cash flow further demonstrating the stability of our business.
During the quarter, we continued to make progress on our long term abductors, including executing our integration plans to deliver over $100 million and synergies by the end of calendar year Twentytwenty one.
Leveraging the strength of our broad portfolio to gain new and expanded distribution in the U.S. and several international markets.
Investing in our auto care business to build a robust pipeline of innovation complemented by a new impactful created that strengthens our brands and resonates with consumers.
Implementing our plan to expand the auto care business in international markets.
We expect fiscal 2020 to be our fifth consecutive year of organic growth as a result to lead distribution higher demand for batteries in the U.S. because of cold 19 and improved pricing.
Net sales growth should be in the range of 9% to 10%, including organic growth of one to one in the 5%.
In addition, we expect adjusted earnings per share $2.45 to $2.55 and adjusted free cash flow in excess of $300 million.
As we look to the future. We believe the long term strategies, we shared with you at Investor Day has served us well to the pandemic and we'll continue to do so in the new normal that follows.
Operating categories, which are resilient in challenging times and have opportunities for road given changing consumer needs.
And we are confident our colleagues will create advantages out a bit burst study, which will allow energizer to emerge from the pandemic even stronger.
With that I'll turn it over them off.
Thank you Alan and good morning, everyone.
We could not be prouder of how our colleagues have managed through the first phase of the pandemic.
It has truly been a collective team effort where colleagues around the world responded with urgency focus and agility.
And operated with excellent through the worst crisis. This team has ever experienced.
We have been tested in every way possible and managed to deliver a strong financial performance.
While more importantly, managing to keep each other safe.
Today, our manufacturing facilities are safer.
Our global supply chain more resilient.
And our systems and processes more robust.
As a result, we're serving our customers at high level. Despite the challenges from the pandemic.
We entered the fourth quarter with clear insight into consumer behavior in this new environment as economies have begun to reopen and our categories have withstood the pressures of the past six months.
We are monitoring the recent spike in covert 19 cases, especially in the U.S.
And just as we did in the early stages of the pandemic, we will adapt our operations as needed to ensure we continued to deliver for our customers and consumers.
Before I dive into the battery category I want to share how we're going to look at our categories going forward.
We're all aware that the retail landscape has been evolving for some time.
The pandemic is accelerating changes in both consumers buying behavior as well as retailers response.
The rapid growth of E commerce, click and collect and home delivery are all driving to a true omni channel retail environment.
Based on this going forward, we will be communicating a holistic approach to measured category performance as we believe it provides a more accurate picture.
Therefore, our category comments today and going forward will combine brick and mortar U.S. omnichannel performance from several large retailers and pure play ecommerce in the U.S.
Now, let's review the battery category.
For the 13 week period, ending in May which includes the height of the shelter in place orders.
Battery category value grew 28.4% globally and 37% in the U.S.
The sharp spike in demand at the beginning of the pandemic was significant in the U.S.
Well these trends have moderated since the end of may they remain well above historical levels.
Our ongoing analysis of consumer behavior in the U.S. shows elevated usage of batteries as consumers continue to spend more time at home.
Outside of the U.S. It was a starkly different story.
Generally shelter in place orders in many international markets, where more restrictive.
And as a result had a negative impact on the category, especially in a measured channels and markets.
Let me provide a little more context.
In developed markets outside of the U.S. the supermarket channel, which is measured grew rapidly as it was one of the few channels deans essential well and measured channels like home center and mom and pop stores were closed.
In developing markets, such as the Philippines, Malaysia, the shelter in place orders came swiftly.
With little warning and essentially shut down in the country.
In these markets the category experienced significant decline as a result of government actions to address covert 19.
In terms of the overall pricing environment average unit prices increase and promotions declined in the quarter as the focus of retailers was rightly on keeping their stores operational their shelf stock and the shopper safe.
Turning to our performance during the quarter, our share position globally, while down 2.8 points.
Continued to improve sequentially.
We expect this trend to accelerate in the fourth quarter as we realize the benefit of the reset executed at several U.S. customers.
This includes expanding the availability of our brands in the club channel, where we had been underrepresented as well as enhancing visibility with preferred positioning in other channels.
In addition, our share performance will soon reflect the lapping of prior year resets at major U.S. retailers.
We also anticipate that some of the channel shifting which occurred in the early days of the pandemic.
We'll revert to more normalized patterns.
Overall, we generated strong organic growth because of the distribution gains and the increased demand for our products in the U.S. as a result of covert 19.
Which was partially offset by the contrast and conditions in our international markets.
As we look to the remainder of the calendar year, we're well positioned given the distribution gains in the U.S. and preparations are underway for the upcoming holiday season.
This includes adjustments to our a NP investments to account for the changing buying behaviors of consumers, including increased spend on digital.
And even though our outlook does not include the impact of Hurricanes, we are well positioned to support our customers as storms arise.
Turning now to auto care.
Category trends in the U.S. are up significantly compared to last quarter for the 13 week period ending in May the category value grew 4.3%.
Improving trends in the category were driven by.
Consumers hitting the road versus flying during the summer vacation season, as the U.S. economy reopened.
A focus on do it yourself activities in light of the closure or reduced services from car care businesses, which were deemed non essential.
And overall focus on cleaning and disinfecting cars as a result for the pandemic.
And the return of warm weather, which enables consumers to attend to the maintenance in cleaning of their vehicles, and which drove improved demand for refrigerants.
During the quarter, our share declined 1.2 points as segments like waxes polishes in vehicle wash drove the growth and our areas where energizer under indexes.
In the quarter, we saw strong demand for our appearance products, especially armor all wipes.
Our innovation is working as well as we have five of the top 10, new items, including several new armor all products with armor, all extreme protectant armor, all snowfall and wash and armor, all wheel and tire tire cleaner.
Additionally, we executed new distribution in the U.S., Europe, and Australia, expanding into new channels and customers.
We are cautiously optimistic about the final months of the summer selling season as these favorable trends have continued thus far in our fourth quarter.
However, the increase in cases in the U.S. could dampen the growth if more restrictive shelter in place orders are reinstated.
Longer term, we remain optimistic about the category fundamentals as consumer shift to do it yourself from do it for me.
Keep their vehicles longer and increased miles driven.
There was also a potential benefit from consumers focusing more on cleaning their cars.
We are investing heavily in our brands with new creative and innovation in a focused effort to reshape the pipeline and reinvigorate the brands.
We have begun to execute our international expansion plans, which will generate nice growth over the next several years.
The combination of investment in brands products and geographic expansion is the right strategy to sustainably grow the auto care business over the long term.
Now turning to our integration efforts.
Despite the pandemic our colleagues continue to do a remarkable job executing our integration plans with minimal customer disruption.
By creative by creatively leveraging technology and by being laser focused on the task at hand.
Several initiatives have recently been completed while others are underway, including.
The consolidation of our auto manufacturing into the Dayton, Ohio facility and shipment of all auto care products from a new distribution center.
The opening of a new battery and lights distribution facility and the continued migration of the acquired battery and auto care businesses onto Energizer is essay platform, which will be completed by the end of the calendar year.
We delivered $15 million, a synergy savings in the quarter and we remain on track to achieve the previously disclosed incremental synergies a $45 million to $50 million this year.
We are excited about our progress and anticipate that by the end of the calendar year, our integration initiatives will be substantially complete and keep us on track to deliver more than $100 million of synergies by the end of 2021.
We expect to reinvest synergies above this amount to support our leading brands and to accelerate the multiyear innovation portfolio and auto care.
In summary, our focus and agility over the last seven months got us to where we are today and will carry us forward.
We moved quickly to adapt to an evolving operating environment by ensuring our and P. investments mirror changing consumer behavior. So we meet consumers, where they are and to be the brands. They seek see in select regardless of the channel.
Increasing the resiliency of our global product supply chain to limit disruptions and maintaining best in class service to our customers.
We are well positioned to continue operating with excellence by meeting the needs of our customers and consumers while also advancing our long term strategies.
We have withstood the early days of the pandemic and we're committed to emerging from this crisis, even stronger than when it began.
Let me now turn it over to Tim to review the quarter.
Thanks, Mark and good morning, everyone.
We reported a strong third quarter performance with adjusted earnings per share of 50 cents up 35%.
And adjusted EBITDA of $135 million up 6%.
These results reflect an exceptional execution quarter as well as a benefit of higher than expected battery demand due to covert 19.
Improving trends in auto care sales.
And the delivery of plan synergy savings.
These results were tempered by incremental costs related to covert 19, and the unfavorable impact of currencies, which combined were approximately 19 cents per share.
Ill cover a few highlights on the quarter and our outlook.
We have also posted more detailed slides on our website.
Net sales in the quarter increased 1.7% to $658 million.
Organic net sales were up 3.4%.
Driven by distribution gains strong demand for batteries and auto care in the us and pricing.
Which was offset by softness in international markets due to the pandemic.
Organic net sales in the Americas grew 7%, while the international segment declined 6%.
The international decline reflects the impact of the lockdowns on measured channels, including developing the distributor markets and DIY and water markets.
As those markets and channels began to reopen later in the quarter, we did see a quick recovery in sales.
Adjusted gross margin rate in the third quarter increased 80 basis points to 40.8%.
The increase was primarily driven by synergies.
Favorable raw material costs and pricing.
These benefits were partially offset by foreign currency headwinds and incremental operating costs related to cover 19, which when combined negatively impacted gross margins by $18 million or 210 basis points.
The incremental covert costs were primarily comprised of airfreight.
Personal protection equipment and unfavorable absorption.
SGN eight excluding acquisition and integration costs client approximately $6 million, 16.2% of net sales down a 120 basis points.
With synergies being the main driver as we exit a majority of the transition service agreements with spectrum in a herd lower community due to travel restrictions.
Turning to adjusted free cash flow.
We generated $136 million in the quarter and approximately $244 million year to date.
The free cash flow generated this quarter was up $100 million versus same quarter last year.
As we mentioned on the second quarter call. We took several steps in April to improve our liquidity position due to the uncertainty in in the early stages of the pandemic.
Due to the strength of our business performance, we have been fortunate to minimize the use of our increase liquidity, thus far and ended the quarter with about $600 million and cash on hand.
About 60% of the cash was held in the U.S.
We also took advantage of low interest rate environment and issued $600 million of senior notes at 4.75%.
Due in 2028.
The proceeds were used to tender and redeem the $600 million and 5.5% senior notes due in 2025, reducing annual cash interest by approximately $4.5 million and extending the maturity by three years.
At the end of the calendar year, we will reevaluate whether to use the excess cash on hand in the us to accelerate the paydown of debt based on our view at the pandemic.
At this point in the fiscal year, we have more clarity over the near term and as Alan mentioned, we are providing a full year 2020 outlook.
We expect net sales growth of 9% to 10%, including organic growth of 1% to 1.5%.
Adjusted earnings per share in the range of $2.45 to $2.55.
Adjusted EBITDA between $575 million to $585 million.
And finally, we expect our adjusted free cash flow to exceed $300 million.
This is below the outlook provided in February primarily due to four factors incremental costs, a product sold due to cope with 19 of about $15 million to $18 million.
Reduced SDMA, reflecting decreased TD due to travel restrictions of $7 million to $8 million.
Increased interest expense related to incremental liquidity of approximately $9 million to $10 million.
And a larger impact from an unfavorable currencies of about $14 million.
The net combined impact of these factors caused about a 35 to 40 cents per share decrease which is included in our current outlook.
This represents our current view of the full year with three quarters of the year now complete and insights into the start of the fourth quarter.
However, there remains a high level of uncertainty because of the pandemic and its impact on the retail landscape and our global business.
Over the long term, we remain committed to a balanced approach to capital allocation.
Including an emphasis on paying down debt.
We will continue to execute against the things that are within our control, including the integration and optimization of the acquired businesses.
Our team has demonstrated the ability to operate with excellence during these challenging times created by the pandemic.
We remain on track to achieve long term financial objectives, we laid out at our Investor day, which includes more than $700 million of EBITDA and $400 million of free cash flow.
Now I would like to turn call back over to Alan for closing remarks.
Thanks, Tim while the features on certain dynamics, we are confident in our team's ability and agility.
To navigate successfully into the future.
Sean will help them safety of all colleagues in meeting the needs of all customers and Cmos remains on top priority.
As we entered the fourth quarter, where we have line of sight to finishing the year level strong load and holding liquidity to wellbeing uncertainties that may lie ahead.
The long term fundamentals of our categories remain strong we are confident in the actions. We are taking to achieve all stated long term objectives and deliver significant value for all stakeholders.
With that I'd like now total global could be outdoor pool from along two questions.
We will now begin the question and answer session.
To ask a question. He May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then too.
Please limit your questions to one with a single follow up at this time, we will pause momentarily to assemble our roster.
Our first question is from Wendy Nicholson with Citi. Please go ahead.
Hi, good morning.
Good morning.
Hi, Thanks, I'm struggling a little bit too on getting my arms around and I'm kind of working through the numbers here on sort of the guidance for.
The fourth quarter, you know obviously coming in below what folks are expecting and I guess I understand you know the incremental cost for pp any but they just strike me as big numbers on and so I guess first of all on the foreign exchange headwind.
Are you planning on taking any pricing to offset that headwind that just a hit to the CNL that we have to deal with a number two on any incremental interest expense.
For the incremental liquidity, that's a big numbers on do you think you need all that liquidity does it make sense taken on all that data or with your cash flow do you intend to pay that down and then I guess last question. It's just again with regard to the guidance.
You talked about how there is incremental demand.
For the products now, but at the same time your organic sales growth guidance is still the same as it was on you know at the beginning of the fiscal year. So I guess the question is do you think theres excess inventory sitting in people pantries or why isn't that incremental demand leading to a bump up if you will annual organic sales growth target.
I know that's a lot. So so anything you can give me on those couple of points would be great.
Yes, the Wendy I think maybe starting at the top line and then working working our way down.
Yes as market indicated we continued to see.
Good demand in the start of the fourth quarter.
With respect to that demand.
That is driving some incremental costs so.
A big component of the incremental cobot costs are airfreight, so were airframe product.
Because of the.
Accelerated demand that we're seeing particularly in batteries in the us.
Getting the product of where we needed we don't see that as a permanent cost but temporarily in the pandemic, we're doing what we need to do to maintain business continuity.
FX.
In terms of taking pricing you tend to do that where you have a more dramatic impact of of currencies.
More recently, we have seen a change in the currency trajectory.
With the dollar weakening so there may be some potential upside as we go through Q4.
We have made in and is reflected in our Q4.
I didn't see increased investment in a pea that we've talked about.
And then we are seeing the benefits of reduced travel on SGN, a and that likewise as reflected on the in the guidance with respect to the interest we made a call.
To increase our liquidity as we entered into the pandemic.
Theres still remains some uncertainty so as I as I indicated in prepared remarks, we're going to evaluate that at the end of the calendar year I view that as a cost too.
Have have that liquidity until we're certain that we don't need it. So thus far in the third quarter, we were able to maintain the level of cash that we had.
During the quarter, So we were roughly.
600 million when we increase liquidity would maintain that through the end of the quarter. That's the judgment call that we've made and.
I understand.
As we manage through the pandemic there are a lot of moving parts and so.
That's what's reflected in the guidance we provided.
Fair enough and that cost the incremental I mean, I assume as things get back to normal from a supply chain perspective, you won't have the air freight costs, but you know as we look out your fiscal 21, I also feel that savings in T. and he is going to come back people are going to probably start traveling again give a sense just as we look out to 20.
One on what sort of the permanent step up in coping related costs I assume you know higher end is gonna be where that's for some time to calm give a sense for kind of what we should think about for the model for 21 Bank.
Yes, when do you with respect to 21, you know, we're evaluating that right now I I.
It would make a call in terms of what component of that is permanent I would expect a significant majority of it is not going to be permanent.
You're right.
The increase in airfreight should diminish.
You know the PPD will there'll be a component of that.
That likely will continue beyond.
And with respect to the interest.
When we make the call at the end of the calendar quarter, if we do pay down debt that'll.
That will go away beginning in the second quarter. So you know with respect to the koby costs, we had a smaller number in Q2, we called out roughly a million this quarter and I'm talking about.
That's embedded within Cogs, it's roughly 9 million.
In the third quarter, we called out roughly five 8 million in Q4.
And then interest cost roughly 4.5 million a quarter for as long as we keep that increase liquidity.
Fair enough. Thank you very much for all that yes.
The next question is from Bill Chappelle would truly securities. Please go ahead.
Thanks, Good morning.
Good morning Bill.
I guess.
One kind of follow up to two Wendy's question can you kind of thought process on what 20.
What the FX headwind would be for 21 at current rates.
Yes, Bill and I'm I'm at this point on without having a holistic 21 outlook on I'm, just kind of kind of stay away from questions on 21 other than I can call out commodities were fully lock for this year were approximately 60% locked on commodities for next year.
Got it.
And then switching to kind of that your commentary about market share and in some of the recent gains.
Have you seen I think we're about to lap the target switch from ever ready to private label, which was about a year ago didn't know if you've seen.
Any other moves there or actually maybe some some.
Chris interest on the Rayovac brand as we are continuing a recession over the next few months just kind of thought process from the your your your customers in terms of what they're looking for or if you haven't seen any trade down at all if it really kind of focus more on the higher end brands.
Bill I think in terms of the lapping of some of the the shares the share losses that weve referenced in the script.
Between the competitive launch as well as the private label launch that you mentioned, we're roughly right around this time. So if we're anniversarying that basically now and then we obviously have all of the new distribution. So from a share standpoint, I think you're certainly going to see that accelerate as we get through Q4 and certainly into Q1 so that.
We will be a tailwind for us that I know people have been.
Looking for for quite a while we do continue to leverage rayovac again, good heading into this economic uncertainty.
It is a a weapon that we have that we didn't have before in terms of our discussions with customers and so we're able to leverage that where there is an interest on making sure that if they're shoppers are interested in more value brands that were there as well that can be either in lieu of private label or in addition to private label on it really depends.
On a retailers preference on how they want to go about orchestrating battery category, but it obviously puts us in a great position to really serve whatever needs that they may have in times like these you really do see consumers migrate the brands that they trust and trust trusted brands is something you'll hear from a lot of CPG companies. These days and Fortunately we have.
You know a whole host of them with Energizer eveready.
And rayovac that allow us to to meet a lot of different needs for different retailers. So we are seeing interest.
But obviously energizer continues to be are flat flagship and we'll continue to be so in future.
And I guess with that most of the share gains you're talking about a club elsewhere for core energizer not necessarily rayovac that's correct.
Okay, great. Thank you.
Thanks, Phil Thanks, Phil.
The next question is from Dara Mohsenian with Morgan Stanley.
Please go ahead.
Hey, good morning, guys.
Morning, Jeff.
So can you discuss the impact at the EBITDA that shortfall this year versus your original guidance has on your longer term targets for EBITDA on an excess of 700 million in fiscal <unk>.
22, obviously, we discussed at some of the pressures clearly more temporary with with Coca cost at some of it appears to be more ongoing. So just wanted to understand the impact on your longer term targets.
Yes, Tim I'll, let me take a longer term and then maybe you can chime in a little on the EBITDA, So Don or we remain on track to achieve the long term financial objectives that we laid out in Investor day, I think the way to think about it is near term, we're just continuing to execute against the things that are in our control.
So think about that is integration in the optimization of the acquired businesses and the continued focus on our three core strategies and intimidate any other commentary on the EBITDA.
Yeah, Doug I think relative to some of the big factors in terms of synergies that remains on track.
We're exceeding expectations and investing back into the business.
You know some of its some of the temporary impacts like.
The incremental covert costs.
The those will eventually go away and you know the other demand dynamic that we've seen is in terms of some of the channel and market dynamics relative to the current period. So we would expect as we exit this things would begin to normalize at 21, and so challenge pointed out we remain on track.
Back at this point in terms of long term, it's Chuck is played out.
Okay. That's helpful and then it'd be perspective, obviously, there's been a demand pickup in the category in the U.S. for battery category.
Do you think that is mostly crater actual usage of batteries has there been some pantry loading just any perspective in terms of if there may be a consumer pantry FIFO going forward here.
Thanks is there I don't think were overly concerned about a pantry load at this point this because of the persistence we've seen with the demand for batteries over this pandemic and we continue to do consumer research and the feedback we get is very convincing that consumers are in fact, using a lot more batteries than they used to it there still.
Okay and.
And that we certainly see have seen that play out in the Pos trends as we talked about globally. It was up roughly 28% and then in the U.S. and 37%. It is starting to moderate as the shelter in place orders are are being lifted and people are getting out of their houses more but even if you just look at the.
Look at the one month date of June it was roughly up 23% in the U.S. now that is being offset internationally by the impact of of the shutdown orders is very different until you are seeing that offset as you look at our consolidated results, but net net if if you were to tell us that we were going to make our way through the pandemic and grow.
Organically from a battery standpoint of 5.3%.
Those are really strong results, obviously within the U.S. The results were stronger and those were offset by some of the negative trends in international but.
We feel it was really strong quarter for batteries, we do see the trends continuing they will moderate as you get through the pandemic and people will resume more normalized activities, but for now battery business is strong and consumers are using a lot of batteries.
Great. Thanks.
The next question is from Kevin Grundy with Jefferies. Please go ahead.
Hey, good morning, everyone I.
I want to come back to the to the guidance if I could and specifically in look into the bridge from where you guys were in February in terms, how you saw the world in how you see it now.
So the time deep young students use to 40 probably to 55.
Excuse me 10 is equal to 55. It was three to 320 at the times, we down 60 cents at the midpoint and then round numbers Colby costs around 20 cents more dire FX routine. So that's still leaves the 25 cents, yeah and I appreciate the color in terms of trying to quantify kobin, but I just want to make sure im understanding the big change.
This year could top line, maybe not coming in as you thought.
The graphically or even from a category perspective, but in total.
Relatively healthy so help me bridge that gap, if you could the 25 cents a more dire weather mix supply chain costs other areas of investment outside.
A little bit and for dire FX.
Yes, so do so you know Kevin those roughly in line.
Kind of break it down to the 25 cents.
We we made a conscious decision to increase our NPL investments. So that's that's roughly six cents of the of the 25 cents with a heavy focus on investment in digital.
Given the shifting dynamics that are occurring.
There is another another six cents that is tied into.
Taxes and the mix the mix of earnings that we have with to the shifts that are taking place the balances an impact on on margin and again, we are seeing the dynamics of channel and market shifts that are occurring during.
During covert.
That are having a negative impact as well as some of the cost associated with.
Wow Wow.
Category trends are strong market called out 5.3%.
Battery in the quarter and 2.4% in Autocare again for auto care in international there was a there wasn't impact of co bid on the expectation is that we had that we set back in fact, the February particularly with Autocare again, we're lapping a soft.
Performance last year, and while 2.4% growth is is good in the quarter.
We had expectations for higher so.
That's that's the balance that makes up the differential with 25 cents is roughly 12 cents and margin.
Cobot impact on it on topline in margin and then some of it.
Cobot impact on channel and market dynamics.
Okay. Thanks. Thanks, that's all on a question for Alan Mark just on auto care, you had been targeting earlier in the year three to five person and then the pandemic kits Where's that target now I understand you're seeing some sequential improvement I think.
Mark you talked about how you're hopeful you're in terms of picking up some shelf space here with the some of the resets how where do you expect to finish now relative to the three to five and it doesn't sound like your longer term view with respect to the business has been didn't come up but made comments sort of.
Longer term.
For the business and I'll pass it on thanks.
Thanks, Kevin I do that you were breaking up a little bit, but I think I caught most of it in terms of just auto care growth and how it how does it look obviously.
With the international.
Business being what has been and having the struggles.
To operate through the crisis for us to be able to have organic growth of 2.4% despite that.
It's really encouraging from an auto care we are seeing.
Real strength in the U.S. in the auto care category and as you looked at that category as we work through the last quarter.
In March you had an aggregated for the sub categories. We operate in it was down roughly 4.7% in April was down 1.7 present and then in May He was up 18% and you've really seen those trends continue as we've worked our way through the summer so very encouraging signs in fact, when you look at the appearance sub segment, 50% of the appearance.
Buyers in this past quarter were new to the categories. So a lot of.
New consumers coming into the category. Obviously, our goal is to can continue to drive growth ahead of the category. We have work to do on that business just to continue to do.
Rejuvenate the innovation pipeline as well continue to spend money behind new creative and more NP, but but all in all im very pleased with the trends. We're seeing we do expect them to continue in the U.S. weather plays a big part and given the refrigerant business as well and so as the weather plays out over.
August and September time period that will impact results.
But again I don't want to get into 21 guidance for that business, but when I look at category trends I look at our innovation pipeline. Our line reviews that will be set next year, which will drive next year's organic growth.
Have been favorable and people are really pleased with the way, we're bringing innovation and being a category leader like we have been in batteries and the international growth plan continues to go on.
As well as the integration so I would say more to come in November when we talk about the growth in auto care, but that's still really pleased with this quarter's performance in terms of everything we've had to overcome and really look to accelerate that as we get into into 21.
I think you've covered at Walmart.
Thank you guys appreciate the color good luck.
The next question is from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, Good morning, and so it's I was actually planning and asking about others. Just this is Kevin that but I think one follow up I could throw in would just be anything you're doing to adjust your marketing plans in the channel going digital advertising on the messaging on things like that given changes in can.
Her behavior, which aim to your point should should benefit the auto category, but anything more specifically on ways that you can kind of target and actually drive greater usage and adoption.
Trigger and you take our purchasing behaviors to question in my comment that hi. Thanks.
Yeah, well into two things in that I mean, one we are looking at consumer survey consumer behaviors and how they're changing as a result of this pandemic and making sure we're using that consumer insights to drive our innovation pipeline as well and then to your point in terms of the how consumers are shopping the category. We are shifting our spend both from an antique Sam.
But it will also trade investment standpoint.
You are seeing us do a lot more digital conversion tactics and with search and Instacart since then.
From a media.
For lack of old media, new media kind of shifting between TV and you're getting more into streaming.
Video and gaming and social media.
From a trade investment standpoint, there were some limitations on on the type of promotional activities, we within certain retailers, we would redeploy those dollars from in their in store activities to an omnichannel investments to make sure. We were investing those dollars there to help grow that.
I would say just rough order of magnitude from.
Digital versus traditional we were maybe at a 60 40 split now we're probably leaning more towards the 50 50 split so we continue to shift more and more towards digital as this.
Crisis has evolved and that's something that we were already well on our way of doing as we entered into that and I would say the only thing we really does accelerate that a little bit more as result of what we're saying.
Okay, Great and then just one follow up on the call the costs and I apologize if I if I missed that but you mentioned airfreight you know not Jack.
Sure that pp type expenses so.
I guess the air freight piece, how long should that go on for I would think that as demand kind of stabilize it can work that you know manageable line rate that trying to get the posing cochon, even if you're not prepared to pay that's the case in the next three month, but beyond that.
You should start to either so anything you could offer can break down didn't make sense, though is.
Colgate cost just feel like we choose kit. However, we choose to model what happens it kills it going forward.
Yeah.
Yes, and and again, we call out.
Really three categories. So total that was in Cogs is roughly 9 million.
About five or that was airfreight so that was.
With that.
With the impacts the cobot had globally plus you know extremely high demand on batteries that was really driving to get them.
To get the batteries here in the U.S. and to your point I would not expect that to be a continuing.
A continuing issue we've included.
Cost in the in the Q4 outlook and then when we get to 21, we'll we'll assess what our expectations are pp was roughly.
Million dollars and then the remainder we called out was absorption we had some facilities that were shut down.
Temporarily and you know forced in terms of labor size, so that that impacted the absorption levels that we had for.
For the batteries, we were selling.
So again I would not expect in a normal environment that those will continue and learn I think on the air freight piece a couple of things to keep in mind. I mean, one is just the after effects of the disruption you've seen globally from an end to end supply chain standpoint, you do see some of our suppliers being disrupted. So you have to play catch up at a different points along the way and then also the.
Composition of the demand is different than what we expected. So it's in different parts of the world and as a result, we've had this shift.
Some of our inventories from from different places than we had planned on them being as we got into the year. So multifaceted and then as we exited the crisis a lot of those things will normalize as our suppliers can have more normalized operations and also as the demand smoothes out the more traditional demand model than what we've had and so its rich.
Only two fold in terms of what's driving it but to Tim's point, certainly wouldn't expect that to become the norm and we really called attitude to two priorities. We had as we were navigating through the pandemic was one health and safety of colleagues that was first and foremost, but the second one was business continuity and the cost of ensuring business continuity.
It was two in Q incur the airfreight because without it there wouldn't Venezuela. So you know we understand it so it's a higher cost, but it's it's what we needed to do to maintain those high service levels.
Yes, and then on the more constructive side of things I mean, you mentioned the lower team the expenses, which is obviously everyone is seeing Mike I mean, what are you finding there that you think might be sustainable like different ways is working though I think you can do more things remotely and peloton. So if were thinking about air freight in some of these costs mitigating potentially in 21.
Line.
Can we think about some of the good stuff sticking.
Yes, and I think I think that Oh go ahead.
Hi, Tim I was going I think we're evaluating.
With the task force all we've done under co bid that are part of continuous improvement that we'll be able to bake into the way we operate going forward quantifying those is still in process will continue to look at those but I think you're asking a fair question. While there were things like here that we undertook to ensure continuity and fill rates.
With our customers there are positives that are coming out of this as well that will continue to deploy and we'll have more on that is as we.
He'll provide guidance for 21 Tim.
Yeah, I would just to add to what Alan said I think we like many companies are evaluating the ways of working post post pandemic and.
You know certainly the face to face commercial travel is a necessity, but I think on the remaining.
Is there a better way to effect.
Activities that you need to do without actually having to physically be there and I think.
Our colleagues like many companies are finding that you know we're able to operate remotely in a highly effective manner and I would expect.
There will be a return to normal but they're also did evaluation of do you need to do every bit of travel that you were doing before.
Your next question is from Pfizer I'll leave with Deutsche Bank. Please go ahead, Jeff Hi, good morning.
So.
Great. Thank you had mentioned that you've done you've been doing some consumer research or on battery usage. So I was hoping you could elaborate a little bit on what you're seeing with respect to consumer research and what's driving the elevated usage of batteries, particularly in the U.S. and why it.
Higher in the U.S. choices and Ken.
By the it's consistent with what we've talked about on the last call I mean, let's talk to US first you have a lot more consumers are at home a lot more they're engaging with their devices more whether its gaming controllers home electronic equipment to be functional from an office standpoint, there's just a lot more usage of.
Those devices are getting used more and as a result, the demand in the U.S. has seen its a little bit different in international markets. I mean, it's different market to market I mean, some of it is the level of shutdown. That's been required. It's the number of devices per household that you'll see in some of those international market. It's also consumer shopping behaviors or do they buy.
And larger quantities in the U.S. like they do in some of the international markets.
But it really if you look at developed international market. The trends are similar to what you'd see in the U.S., they're just not as elevated as you would see in developed being and then sort of our distributor markets subset.
It's really thats, where in the script, we said it was a starkly different story and that's really the best way to describe it you just the shutdowns were more severe.
The retail shops were not open as nearly as Pervasively and businesses were deemed much more essential in a tighter way than they were in the U.S. So the availability of product just isn't there as well and and as a result consumers just shut down a lot more than they did and the disposable income and many of those markets is not what they are develop.
Markets as well.
Okay, and then just a follow up on auto care I think you had mentioned that there was some relative to your prior guidance on auto care. There is a bit of a shortfall and it seems to be primarily in international markets. So I just want to.
If you could just expand on what's driving that again is it is it is just the retailer environment that you just talked about and I Wonder if you think you had.
Sales and refrigerants just given.
The seasonality in that.
So on the international markets I think you've captured I mean, that's really where the shortfall has occurred when we were talking back in January February about 3.5%.
That was.
Based on a normalized international selling season, and certainly that was disrupted many of the retailers that we carry these products in international markets, where shutdown and so as a result that was just those were just lost sales and and so there was a disrupt disruption on the international certainly the U.S. has seen some strong trend March was tough and then it really does start.
Pick up from there and those have offset some of the international sales from refrigerants, we don't get that specific in terms in the numbers, but it's been a strong season for refrigerant, particularly when you factor in that I got off to a rough start both with the number of miles driven and people were just not in their cars nearly as much in March and April whether didnt qualify.
Great.
In the March April timeframe, but really between May and June certainly with some of the heat that you saw in the U.S. you saw pretty dramatic refrigerant trend. It's I would say from a refrigerant standpoint that business hung in there quite nicely and rebounded a little bit from what you saw last year.
And I think with respect to you know what Mark was talking about with the international markets. The one positive as we got towards the end of quarter as things did open back up you did see a recovery in the sales so.
That's a positive signs we took out of the out of the quarter.
Great. Thank you so much.
The next question is from Rob Ottenstein with Evercore ISI. Please go head grade <unk>. Thank you very much I'm I'm, a little bit confused or on the on the guidance when I stand back and listen to what you're saying I'm hearing very strong momentum in auto.
You just mentioned the international and the battery side is improving.
In the U.S. battery you get you're getting pricing demand is up and you believe that sticky you're going to get further distribution gains a your am P is going up soon.
Presumably that's gonna help.
You're not worried about pantry loading so I'm just a little bit confused why the the guidance in terms of organic top line growth seems some muted.
Well, rather if we if we look at where we're at.
Year to date organic growth is up 1% I would recall last year in the fourth quarter, we had a 9% organic growth rate and if you take the wonder 1.5%.
For the full year, that's slightly north of 2% organic growth in the in the fourth quarter. So.
Strong performance.
Year over year in the fourth quarter.
I think holding through the pandemic too.
Achieved the 1% to 1.5% organic.
Growth in the in the.
Full year is a strong performance.
The one thing we don't have and we're lapping hurricane volume from last year as well.
We don't have in the current outlook.
Obviously, there's been a recent storm that has has moved up the east coast, but that storm has been fairly.
Minimal in terms of volume associated with it because of how quickly that storm moved up there our power outages now so we will continue to monitor that.
We don't have hurricane activity in there so that may be kind of offsetting.
When you do the quarter over quarter calm and I think part part of it is the level.
Certainly, we're just dealing with from a from a macro picture I mean, we're seeing.
Obviously increase in in cases in the U.S., you're seeing international markets some of them doing well some of them not doing as well.
It's really just the uncertainty of what it's going to look like you have government stimulus that may or may not be in play.
You had they economic effects that consumers are feeling I I would say we want to be.
Prudently cautious about that but the guidance that we put out there for the fiscal year. Given we just don't have the operating environment changes so dramatically and if you look at March and April for example, we certainly are bullish on what we're seeing on the auto care category right now, but if we have to go into a severe locked down we've seen what that can do to the category trends.
As result of that so I would say, it's with all the factors that we're aware of we think it's the right call to make certainly if the trends that we're talking about continue.
Then that does we maybe able to exceed those numbers, but we certainly.
Want to be cautious about how much we're trying to predict the future an increasingly uncertain environment.
Okay. That's that's very helpful and appreciated can you I think you mentioned a little bit about what happened globally in terms of market share for batteries can you drill down on the U.S. and maybe perhaps separate between online and offline in terms of market share.
As we talked about in the in the prepared remarks, we do want to continue to look at this holistically.
Within the category you are going to see positive trends in our share continue over the next several reporting periods been just because of some of the distribution gains which are now visible in store I would say there are still distribution gains to be had over the balance of the year.
Those are in process as well as many of those are in on measure.
And that's a little bit in measured but from a measured standpoint, you're going to continue to see that.
You know consistently and I'm going to speak in more general terms from an online offline. We continue to be the branded share leader online you are seeing many retailers emphasize their omni channel offerings in their platforms and we're leaning in with them as well if you looked at that sort of digital space broadly within batteries your.
In that 20% to 25% range of what went through digital I would say Amazon's in the neighborhood of 15% of that.
And that 15% of that 15%.
With that the total omnichannel being.
20% to 25%, we're not as strong from a share position.
Online as we are offline, but obviously, we redouble our efforts to make sure that we continue to make sure that those share positions mirror, each other but but even within a given retailer. If you go retailer to retail our share positions are different retail to retailer, but rest assured we're pushing to maximize our our share in the right way.
Both online and offline retailer by retailer.
Great. Thank you very much.
The next question is from Olivia Tong with Bank of America. Please go ahead.
Good morning. Thank you. Good morning, just a couple of follow up questions there.
First in terms of the distribution distribution wins, you know are coming can you talk about how much of a share gain you think that that should begin to and then just in terms of.
Hey, I'm ecommerce efforts since you're making you talk a lot about digital marketing marketing. So can you talk a little bit about what's your specifically doing in E commerce.
To continue to drive your presentation and drive your share a little bit further up closer to your brick and mortar share. Thank you.
Olivia I think one thing I want to make sure. We emphasize is I, it's always dangerous to have an over emphasis on share just because I think that can drive bad behavior as you're trying to run your business. So we don't go after things for share sake, we we make sure we drive good permanent profitable distribution, which is what.
We've done over the balance over this fiscal year you are seeing.
A lot of resets going in and measured retailers right now that have been completed and as a result, you will see share trends I'm not going to predict what the share will be in the future I think thats is going to play itself out in the numbers and and also as channel shifting either moderator accelerates depending upon what's going on in the pandemic, so that it's a bit of.
Shifting landscape, but I feel comfortable in saying that the share numbers are going to continue to be positive as you get through this fiscal and calendar year and will likely accelerate as units through it all.
Our efforts on E commerce or no different than what we've been doing it's a focus on content. It's a focus on search it's making sure we're connecting with consumers digitally it's making sure that were.
Executing those conversion activities to make sure that we're driving purchase.
As as consumers are searching for batteries online lot of tactical stuff, but it's also continuing to invest in the brands continuing to invest in the products.
Not in different than what we've done it's probably just more of it and it's obviously workforce in the past its working for us on auto care as well, where you are seeing our growth rate, particularly on the appearance of category.
Our really almost triple of what you would see the growth rates for the category and so we're making sure that are our digital team is emphasizing not just batteries, but also autocare and lights as well and we're seeing tremendous growth numbers across all three businesses online.
Hi, Thanks.
Your next question is from Andrea Teixeira with JP Morgan. Please go ahead.
Hi, Good morning. So my question I am team, yes. So if you can double click on the six cents higher than previous guidance. So you called out digital but how much is just say you need to catch up on Pall Mall, you discussed earlier in particular against an uncle, Sam comforting to close call last year and.
Do you expect it some families Askmen E mail back to better position it against private label to help the consumer during the recession going be Canada's DLP.
As a follow up also on the exit rate you talked on the growth in June being the low the personal machine me could you speak so how trends have continued to progress. Thanks Joan.
And then just sue just anything to point out interest in markets, where do we open he has gone the other day action. So did you see similar uptick team concept systems consumption sorry pardon.
Or is more normalized behavior in your deal.
I think the way to think.
Theres lot of questions in there under I think MP span, we've we've consistently said between five and 6% it's consistent with the way we're guiding for this fiscal year and we'll land within that we obviously have to adjust.
As we go through the year on how we allocate those funds and invest them and make sure that the appropriate return is there, but we have seen an opportunity to invest behind autocare, particularly when you're seeing some of those category trend I don't want to talk about.
Future promotional activities on any of our brand, but I think from again, a NP five and 6% grab execute part of our cat of arc.
Of the category is of our portfolio, we're going to make sure. We invest you do tend to see that to be a little more tactical.
Investment as opposed to sort of campaign investment on AMC.
In terms of the trends that we've seen in the battery category. They continued to be strong I mean again in these are going to be U.S. numbers as much as we've cautioned people that theres different dynamics in international It was up 37%. We said in his prepared remarks, if you look at the one month in June it was 23% so still strong growth.
Moderating from where it was international markets really depends on the market. Your end you are seeing bounce back rather quickly as consumers get out and in the stores.
But you also are seeing some resurgence in some of the sheltering place orders I mean, just yesterday.
Manila put out a fairly restrictive shelter in place order, we have cities like Melbourne in Australia that are that are putting out some shelter in place orders. So it just changes rather rapidly we have leaders around the globe, who are responding to that and making sure but no certainly as consumers internationally.
Our able to get out into stores, we would expect to see normalized demand levels. I think the question in each market will be when that will be and then how long how long will that last and but I think we feel very confident in our international plan.
We just need to restrictions to allow people to get out and shop.
Thank you. Thank you.
The next question is from William Reuter with Bank of America. Please go ahead.
Good morning.
Good morning, So if we if we think about the de leveraging path where were you guys are on a little bit behind where I think we thought we'd be a couple of years ago.
Not that anyone can plan for cold it but leverage does remain a little bit elevated are you at the point, where you would consider M&A opportunities given the strong free cash flow the business or do we want to reduce leverage from here before you really think about taking on such opportunities.
So I feel.
Good yeah, sorry, if I was going to say just two real quick answers and then have Tim build on it so.
The short answer is obviously longer term, we remain committed to a balanced approach and capital allocation of we're going to continue to primarily focus on paying down debt in terms of M&A. The short answer would be we will continue to look at opportunities, but there will be bolt ons in battery or auto and then too many bill Jeff.
No that.
Yeah.
Perfect very helpful. I'll pass others. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Alan Hoskins for any closing remarks.
I just wanted to say thank you for joining us on the call today and we appreciate your interest in Energizer.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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