Q4 2020 Energizer Holdings Inc Earnings Call
Good morning, My name is Andrew and I will be your conference operator today.
At this time I would like to welcome everyone to energize <unk> fourth quarter fiscal year Twentytwenty Conference call. All participants will be in listen only mode should you need assistance. Please signal a comfort specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an.
Trinity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Jackie Burwitz, Vice President Investor Relations.
I'll begin your conference.
Good morning, and thank you for joining us during the call we will discuss our results for the fourth quarter and fiscal year 2020, as well as our outlook for fiscal 21.
This call will be available for replay via the Investor Relations section of our website Energizer holding back huh.
Available on our website and that's my friend.
In addition to providing details about results for the quarter.
On the call with me. This morning are Alan Hoskins, Chief Executive Officer, Mark Levine, President and Chief Operating Officer, Tim Gorman, Chief Financial Officer, and John Drew <unk> Senior VP corporate controller with respect to our use of forward looking statements risk factors and GAAP to non-GAAP reconciliation.
Commission, please refer to our press release and five concentration issued earlier today, which is available on our website and the risk factors. We have in reports we file with the SEC.
Information concerning our category and market share discussed on this call relates to markets, where we compete and is based on energizes internal data data from industry.
<unk> 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'll turn the call over to Alan.
Thanks, Jackie and good morning, everyone.
As I'm sure you saw our press release. This morning, we have many topics today.
On todays call.
Ill first address our performance in the quarter and the year at a high level before providing some color around my planned retirement and marks the point Vince as Energizer its next CEO.
At the onset of the pandemic, we committed to two principles, ensuring the well being of our colleagues.
And meeting the needs of our customers and consumers.
In a year filled with incredible challenges, we leaned on exceptional team to adapt in real time to ensure business continuity and reposition us for the future.
While we ensure that our brands and products were available to customers and consumers.
Where and when they needed.
It came at a higher cost than expected, which is reflected in our financial performance for the quarter and the year.
In particular, we have seen three factors impact our business since the beginning of the pandemic Inc.
Increased cobot costs based on our efforts to meet the elevated demand of our customers and consumers.
Mers chain.
Changing sales mix due to the pandemic, including markets channels and products and.
And higher interest expense as we defensively positioned our balance sheet.
The demand, particularly for batteries in the us and many developed markets internationally.
It was elevated and prolong since.
The middle of March.
Because of the duration of this outsized demand in the variability between markets, we fulfilled the demand spikes in the spring and summer while also undertaking additional actions to ensure we were prepared for the upcoming holiday season.
As a result.
The cost to serve the.
Increased demand has been higher than we expected.
However, since the start of the pandemic, we made the decision to meet the demand given our belief that our valuable relationships with our customers far outweighs the short term costs.
As Mark will describe in detail in a moment our performance is true.
Generally been a team effort and involved a multitude of actions, including a small acquisition improving operating efficiency in our supply chain plant reconfigurations and true partnerships with our suppliers.
Based on what we know today and our expectations for the future in terms of demand levels cost and product mix, we expect our.
First quarter Twentytwenty, one results will reflect the tail end of the incremental costs with minimal cost thereafter, even at the current level of demand persists.
However, we recognize that there remains a high level of uncertainty because of the pandemic and its impact on the retail landscape and our global business.
We also saw a shift in the mix of our business across markets channels and products driven in part by consumer behavior in response to the pandemic.
Ultimately this has had a net negative impact on our margins in the fourth quarter of 2020 and full year, particularly in the fourth quarter.
While we believe.
A portion of this shift is temporary as Tim will discuss we have accounted for the ships in the business mix that we believe will continue into the next year and our guidance for 2021, assuming no material disruption to our markets customers for operations.
And finally, our results for the year.
There were also impacted by interest expense as we defensively positioned our balance sheet to the uncertainty we saw earlier in the year.
In recent months Weve aggressively pursued opportunities to pay down debt and refinance our outstanding indebtedness at lower interest rates.
Even with the channel.
I will just brought on by the pandemic there were several notable accomplishments from the year that we believe demonstrate our organizations resilience.
And validate the confidence we have about this business moving forward.
All major initiatives related to the integration of our battery and Autocare acquisitions are either well underway or completely.
Fleet.
And Twentytwenty, we delivered $51 million in synergies and the outlook that Tim will cover for 2021 reflects the full year run rate of the benefits that we expect our shareholders will see from over $100 million and synergies.
We maintain the topline momentum in our business.
Business with organic net sales of 6.1% in the quarter and 2.5% for the year.
Over the latest three months, we have seen strong category growth and share gains across our battery and auto care businesses.
In particular, our Autocare business delivered extremely strong results.
For the quarter and full year behind strong operating fundamentals exciting innovation and favorable weather patterns.
While due in part to one time items.
Working capital management, and the timing of inventory movements, which will reverse as we rebuild our safety stock.
We significantly over delivered on.
On free cash flow, our number one priority achieving $405 million up $149 million versus the prior year.
This cash flow has enabled us to pay down over $100 million of debt to start 2021, and we remain in a strong position to continue to further reduce debt.
And pursue a balanced approach to capital allocation.
Finally, the global efforts of our colleagues have been remarkable and I have seen more dedication in the past year in the service of colleagues safety and business continuity than I ever could have imagined.
I truly appreciate the hard work that so many colleagues.
Put in as we continue to operate through the pandemic.
In summary, 2020 was a challenging year and we are looking ahead to 2021 and our plans to drive organic sales growth margin expansion as the year progresses synergy realization and EBITDA growth.
Before I turn the call over to Mark I'd like to take a moment to address the CEO succession plan, we announced this morning.
After nearly 40 years at energizing the past five years as CEO I announced that I have chosen to retire effective January onest Twentytwenty, one and Mark will become our new company CEO.
Mark's appointment is the culmination of rigorous succession planning with our board over the past two years and after thoughtful reflection I believe now is the right time to transition to the next generation of leadership.
We have nearly completed the integration of the spectrum businesses have taken action to address challenges from the pandemic and.
On track to substantially eliminate incremental costs, resulting from meeting elevated demand.
And the platform for the company's next phase of growth is well established.
There was no one more qualified than mark to oversee energizer. His next chapter.
He has been instrumental in defining and executing our.
Our strategic initiatives and has overseen our integrated operating model with a focus on growing our platform and market positions across categories.
I have great confidence that he will be an exceptional CEO for energizer.
To ensure a smooth transition I will continue to serve as a director and advisor to the company.
Till the end of September Twentytwenty one.
It has been an honor and privilege to have spent nearly a 40 year career as part of the Energizer family and a pleasure to have served as its chief Executive officer of the past five years.
We have taken bold steps to transform the company from a single category comp.
Revenue for one with a mission to achieve industry leadership as a diversified global household products company in batteries lights and auto care.
Couldn't be prouder of what this organization has accomplished and want to thank the energizer colleagues for their dedication commitment to excellence and their passion for winning.
With that I'll now turn it over to Mark for a detailed review of the business and actions we've taken to put us on a path to deliver meaningful growth and 2021 and beyond.
Thanks, Alan and good morning, everyone.
I'm truly honored and humbled to take on the role of CEO.
On behalf of energized.
Geysers colleagues around the world I want to thank Alan for his leadership and contributions to Energizer and.
And on a more personal note for the great working relationship we have had and will continue to have as we work closely over the coming months to ensure a seamless transition.
As we move forward our long term strategies remain intact, we have put in place.
Initiatives to address recent challenges and we are positioning the company to build upon our accomplishments strengthen our leadership across our core markets and create value for our shareholders.
Before jumping into the results I also want to thank our colleagues around the globe, who have continued to demonstrate resiliency on a daily basis.
It's in their tenacity and hard work are incredibly impressive, but more importantly, their commitment to keeping each other healthy and to meeting our customers needs is truly inspiring.
Let me briefly touch on the battery and auto care categories, and then turn to our performance.
Consumption in the battery category remains strong, particularly in North America.
Modern markets globally category value was up over 15% in the three months ending August showing some moderation versus the previous quarter.
While our value share was down slightly in improved sequentially in the latest three months due to new distribution, which set during the summer in the U.S.
If we look.
At the us for the four weeks ending October 18th the category grew over 7% and we gained slightly more than three share points.
The auto care category also continued to show very strong growth as it rebounded from the lockdown period in the spring.
This resulted in category value growth, 17% for the three months ended the dollars.
Yes, with the appearance sub segment growing more than 27%.
Our innovation in combination with our brand building expertise expanded distribution and continued strong operational performance created momentum for our brands, resulting in share growth in a category that is experiencing double digit growth rates.
Turning to our financial results topline momentum in our businesses continued to be very strong while we gained share in both batteries and auto care and delivered strong organic sales growth. We are not pleased that we were not able to translate this into earnings growth.
Our bottom line results reflect the impact we saw from changes in our sales mix.
As well as higher costs from our effort to meet increased demand, particularly in our battery business.
Let's walk through the impact of the sales mix changes.
As you May recall, we started our fiscal year was softer than expected performance in batteries following increased pricing taken in 2019 as well as some competitive activity.
Okay.
Then as the year unfolded the pandemic resulted in lockdowns across the world, which drove shifts in our business from higher margin markets, which in some cases had longer and more severe lockdowns two lower margin markets.
In addition, we also saw shopping behaviors change as consumers navigated the pandemic.
By migrating to different channels, and often bought larger packs to meet their increasing consumption.
Looking at the full year the combination of the lower volume of higher margin sales in the first quarter and then a migration to lower margin markets channels and products later in the year impacted our gross margin.
We believe that many of these.
The actors have already reversed or will reverse over 2021.
Our margin compression was also impacted by higher costs, particularly in the fourth quarter as we continued with our efforts to meet as much of the increased demand as we could.
As you know, we typically see low single digit growth in the battery category.
With short periods of heightened demand for holidays and disasters as a result of the pandemic, we experienced elevated and prolonged demand in certain geographies.
This was compounded as we were preparing for the upcoming holiday season.
At that point, we were faced with the decision to abandon customers in a moment of need or extending ourselves to deliver.
Spend a matter what.
To us the choice was painful but abundantly clear we took a series of temporary actions to ensure we can serve our customers ramping up our internal production aggressively sourcing raw materials and finished goods frequently at higher prices and in some cases and incurring tariffs and increasing airfreight.
Okay, and Copac and capacity.
Many of these actions are not part of our normal low cost operating model.
In addition, we purchased a new manufacturing facility, which we believe will help support us in meeting the demand in the first quarter of 21 and will also provide benefits well into the future.
The efforts resulted.
Additional costs for the fiscal year of $29 million.
Combined the shift in mix and the decision to meet the needs of our customers and consumers impacted our gross margin by 200 basis points during 2020.
Looking ahead current trends show consumers are beginning to return to pre pandemic shopping behaviors.
Five years and some of the mix shift is reverting to historical levels.
However, we are actively managing the business based on the belief that some portion of these mix shifts will continue in the short to medium term.
We are confident that our broad distribution positions us well to mitigate any lasting changes in the mix.
Profile.
With respect to the incremental costs, we've taken steps to substantially eliminate them by the end of the first quarter of fiscal 21, more specifically, we identified two areas of focus to enable us to meet the increased demand at a cost more in line with our historical model.
First we enhance.
Hands, our manufacturing network to meet near near term needs and support long term plan and second we reorganized our global product supply teams.
In batteries, we increased capacity in the us by adding lines in both our fenimore in asheboro facilities.
In our international network, we completed a modernization project at our.
Singapore plant in June that provided additional capacity.
Then in October we acquired announcement facility in Indonesia.
We expect these actions will significantly increase our cost competitive capacity and will enable us to reduce the amount of product that is sourced from third parties. Since we are leveraging our existing facilities we.
We believe there will be minimal incremental fixed costs added to our network, which creates flexibility for variations in demand without stranding unnecessary costs.
We are already seeing the benefits in the three month period from July through September approximately 10% of the batteries packed in the North American market were transported using airfreight.
While in October that number was down to 6% in.
In November that number is trending at 3% and by December.
Our plans call for our use of airfreight to return to pre pandemic levels.
In auto care, while our business performed extremely well during the past year, we still see opportunities for this business.
In particular, we have added shifts and are running our Dayton facility at much higher utilization rates in the coming months, we once we expect to install additional lines and our production facilities to manufacture our wipes products.
These lines will initially help support the extreme demand, we're seeing for that product.
As demand.
A man normalizes, we expect to be in a position to bring certain outsource products in house as well as support our international auto care growth plans.
We're also streamlining and improving how our global product supply teams operate.
In particular, we are investing in our demand and supply organizations, including with enhanced technology.
To enable them to predict and manage through much greater volatility than we have historically seen in.
In addition, we are streamlining our end to end supply chain model with single point of accountability by category, which spans from manufacturing to customer delivery.
We expect the actions I just outlined we will remove.
Actually all of the incremental costs by the end of the first quarter of fiscal 21, and we anticipate being able to achieve further cost reductions overtime.
We believe that the end result will be a more diversified resilient and agile end to end supply chain that operates with a lower cost structure than before the pandemic.
We are also accelerating our investment in enterprise analytics to drive better and more timely decision making.
With the majority of the integration efforts behind US we are turning to the next phase of our system and process improvements.
Which is intended to deliver significantly improved visibility and insight into our business results.
It's similar.
Similar to supply chain, we expect that the end result of this project will enhance our ability to analyze and model our business and ultimately have greater predictability on cost to serve and emerging consumer patterns.
Overall, we will continue to focus on what we have done repeatedly in recent years.
Finding areas, where we can drive costs out of our business and improved margins as we progress through the integration of our recent acquisitions, we identified additional opportunities to streamline and simplify our organization.
We believe these efforts will allow us to improve our overall margins, while still providing the flexibility to invest in growth.
Which emerge in our categories.
Before I turn the call over to Tim I also want to comment on our outlook, including providing an update on the long term targets for fiscal 2022.
With our fiscal 2020 results and the expectations for 2021 that were included in our earnings release, we earned.
We're now projecting growth of a lower than previously expected base as a result, as a result, we no longer anticipate meeting our pre pandemic targets of $700 million in EBITDA and $400 million in free cash flow in 2022.
With that said, we expect to deliver growth beyond 2021 based.
Financial algorithm that underpinned the long term targets, we had previously provided which Tim will detail shortly.
As we look ahead, we remain committed to our strategic priorities, which were key to delivering five consecutive years of organic growth.
It is clear that going forward, we need to not only maintain our topline.
On the momentum, but also aggressively drive productivity to remove the temporary incremental costs and.
And return us to our historical low cost operating model.
During times like these that is good to return to basic foundational execution and focus on what matters to drive long term value for shareholders to building blocks to delivering this value store.
Starts with the flawless execution of our fiscal 2021 plan and that is exactly what we are committed to do with that let me now turn it over to Tim.
Thanks, Mark and good morning, everyone.
In addition to the earnings release, we provided this morning. The slide deck is also available on our website highlighting sunit.
Additional key financial metrics.
First I would like to look at our three main earning metrics for the quarter earnings per share EBITDA and free cash flow.
Sales mix shifts across our markets channels and products as well as increased cost related to co. It negatively impacted our fourth quarter performance.
Performance, resulting in adjusted earnings per share of 59 cents and adjusted EBITDA of $140 million.
Earnings per share was also negatively impacted by an increase in attach rate.
Adjusted EBITDA and earnings per share were both below our previously provided outlook.
Adjusted free cash flow of $161 million.
On the other hand came in well above expectations. This was primarily due to significant working capital benefits caused by the spikes in demand that Alan and Mark described earlier.
Now a bit more on the drivers of these results.
First organic revenue increased 6.1% due to positive results across all our cash.
Degrees, driven by distribution gains and strong punishment because of increased demand, particularly in North America.
These items were partially offset by the year over year decline in measured storm related sales and increased cost to serve due to continued elevated demand in batteries.
Based on the elevated demand and bad.
Batteries, and resulting pressure on fill rates, we incurred increased cost to serve which we anticipate will impact the first quarter of 2021.
But expect these costs to be reduced in subsequent quarters based on the actions Mark described earlier.
While we have also talked a lot about increase battery demand I.
I would also like.
Went out that following Lockdowns in March and April our Autocare business also experienced elevated demand as consumers became focused more on the cleanliness of their cars and shifted to do it yourself.
We grew faster than the category as consumers turn to our brands and innovation as a result organic sales in our Autocare business.
Grew 18.6% in the quarter.
Total company gross margin decreased 370 basis points to 38.4% driven by incremental coded cost of $19 million unfavorable sales mix and currency impacts, partially offset by expected synergies of $9.4 million.
SMP increased $12.8 million to 5.3% of sales as we continue to invest in our brands and innovation.
As DNA, excluding acquisition and integration costs declined approximately $4 million to 15.6% of net sales down 150 basis points due to synergies and travel restrict.
Frictions.
While we achieved strong topline growth we did not achieve the outlook. We provided in September for EBITDA and EPS due to three factors.
First increased cobi cost of $6 million caused by elevated demand, primarily customer fines and penalties, which negatively impacted sales and gross margin.
Second increased costs associated with source product from third parties of $4 million, including terrorists and finally SGN eight did not decline as much as we anticipated due in part to $6 million of factoring cost legal fees and compensation expenses.
The increased factoring contributed in part to our free cash flow.
Formats for the year.
These factors combined account for a decline of $60 million in EBITDA and coupled with an increase in our tax rate about 20 cents in earnings per share.
During the quarter, we took advantage of favorable debt markets and refinanced our 2025 and 2026 senior notes.
Totaling $1.35 billion in principle.
The refinancing transactions, where net present value positive.
Lowered our annual interest rates, resulting in approximately $17.5 million in annual savings and extended the duration of these borrowings by roughly three years. These.
These actions resulted in a loss from the.
Pringles shipment of debt of $90.7 million or one dollar and one cents per share.
Now turning to our outlook for 2021.
As we continue to navigate through the impacts of the pandemic, we've made certain assumptions for purposes of our operating and financial planning projections, including the duration severity.
Pretty and global macroeconomic impacts of the pandemic.
Specifically, our assumptions for fiscal 2021, do not anticipate any significant disruption to our global manufacturing plants distribution centers or customers, we assume the retail environment will remain competitive and the commodity costs will be.
Be benign should.
Should any of the assumptions we have made change our expected results may be significantly impacted.
Looking specifically at our key metrics we.
We expect net sales growth in the range of 2% to 4% with expected growth in batteries at the low end of the range and auto care at the high end of the range.
Gross margin to be essentially flat with approximately $15 million of cobot costs included in the first quarter and minimal coded cost in subsequent quarters adjust.
Adjusted earnings per share in the range of $2.95 to $3.25.
Adjusted EBITDA in the range of $600 million to $630 million.
Colors, and adjusted free cash flow in the range of $325 million to $350 million as working capital returns to more normalized levels.
The main drivers of improvement our expectations for continued topline growth.
The expected reduction of covert driven cost.
Incremental center.
Value realization and lower interest expense as a result of lower average debt and refinancing actions that were taken during 2020.
We expect foreign currency to be a slight tailwind in 2021, and the impact of commodities to be flat to slightly positive.
Partially offsetting these benefits we expect.
Correct a portion of the margin compression we experienced in 2020 will continue into 2021 as some of the shifts in markets channels and products will persist.
We also wanted to provide a quick reminder, about the quarterly cadence of sales we saw in 2020.
In the first quarter last year.
We saw reduced sales levels, particularly in battery and as a result of the continued elevated demand in many markets much of the net sales growth for 2021 is expected to take place this quarter.
The spike in demand and battery and auto care due to cobot related Lockdowns took place late in the second quarter.
And with sustained through the fourth quarter.
We expect to continue to see net sales growth until we lap those spikes and battery at which point, we anticipate we will start to see slight year over year declines in net sales as we approach a more normalized level of demand, particularly in North America.
We.
Specked to continue to incur incremental coated cost in the first quarter with a favorable lap in similar covered cost in the third and fourth quarter of 2021 based upon our current assumptions, we would expect to see a gradual improvement in gross margin rates as we progress through 2021.
Turning to capital allocation.
Over the long term, we remain committed to a balanced approach to capital allocation.
In the near term our focus will continue to be on paying down debt.
Driven by our strong free cash flows in the fourth quarter, we have already paid off $100 million in debt during October.
We ended 2020 with net debt to credit defined.
EBITDA below five times and expect to continue to generate strong cash flow, which can be used to reduce leverage by up to half a turn per year.
We also plan to continue to invest in our businesses to achieve our sixth consecutive year of organic sales growth complete bolt on acquisitions and battery and auto.
Care, while also returning cash to our shareholders through our dividend and opportunistic share repurchases.
Today, we announced our board declared our quarterly dividend and approved a new share repurchase authorization of 7.5 million shares.
The outlook for 2021 includes the benefits of the full run rate.
And more than $100 million in synergies, we expect to achieve.
As we look beyond fiscal 2021, we plan to return to guidance based on the financial algorithm that underpin our long term targets prior to the pandemic in particular.
Grow topline ahead of our categories, which in a normalized environment.
And that would mean flat to low single digit growth.
Improved gross margins and SGN, a leading to consistent low to mid single digit growth in EBITDA and EPS.
After normalizing, we would expect free cash flow to return to the historical range of 11% to 13% of net sales and finally, we continue to expect to supplement.
Rader holder returns with a dividend.
Now I would like to turn the call back over to Allen for closing remarks.
Thanks, Tim as I stated earlier, the pandemic created many challenges during the fiscal year. However.
However, we believe the plans we have laid out today will put us back on the path of delivering meaningful growth in fiscal.
So 2021.
Our focus over the course of the fiscal year will be on driving topline growth through innovation.
Testing in strengthening our brands for the long term and driving productivity to simplify and standardize our business and reduce costs.
With that I'd like to now turn it over to the operator, who will.
Open the line for your questions.
We will now begin the question and answer session.
Ask the question in the press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys if at any time your question is.
Has been addressed and you would like to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
First question comes from Bill Shope.
People have proved securities. Please go ahead.
Thanks, Good morning.
I want to congratulate wanted so.
Enjoyed working with you Mark congrats.
Congratulations to you as we continue this journey [laughter]. Thanks, so much.
Yeah, I guess before looking at me.
Well down but the biggest driver of why you don't think you're going to get to that 700 million.
Unit 2022, EBITDA just trying to understand.
It seems like a lot of these changes over the past two quarters have been transitory and and as we move towards 2022 things should normalize hopefully so just kind of help me. If there was one major driver what why we can't get there.
Sure Bill I can walk you through.
Through some of the the rationale where we had a lot of long discussions about this and really took a step back and we're in the middle of enormous disruption in the marketplace right now planning for 21 was a bit of a challenge, but we felt like we had enough of a handle on the building blocks to be able to provide the outlook that we did today, but then when you take a step back.
Think about the macro backdrop with the pandemic, both its duration and severity and the impact on markets around the world, how a vaccine might impact the trajectory of any of those items. I think then you look at the economic impact from a fallout standpoint, any government stimulus that may or may not be introduced whether in the us around that.
Macworld and then the resulting impact that you would see those have on or categories.
All of those items have significant uncertainty in the further out you go it's tougher to call, but what the impact would be and what the shape of our business would look like at that time.
So.
All in iOS and then second we have tremendous growth in topline are.
The winds are.
Being sought out by consumers all over the world, we realize the synergies.
But then we also have to recognize we incurred significant transitory costs, which need to be addressed in our business. Those costs are unacceptable and we need to take steps and have taken steps to actively get those out and so from that point forward.
If you look at reestablishing growth off a lower base than than what we were initially projecting.
There is a smaller impacts I would say that's involved here, which is the international auto care growth plan, it's still going it's still going to grow and grow at a healthy rate, but it is been slowed a little bit because of some of the disruption around the panda.
Demick, we took all those factors in and we just felt that it was prudent to focus on executing 21, we want to go back to basics, we want to make sure we deliver exactly what we just said around 21.
And then continue to move forward with the financial algorithm that we introduced a couple of years ago.
Okay. So it's not.
Not necessarily.
Impossible is just there's no point in setting a huge base, but its only two years out.
There you go.
Got it then second just trying to understand the commentary on kind of the mix shift.
Quarter on the batteries going to more multi vaccine I understand that but I guess I'm trying to understand.
Why that.
Thats new versus gravy since we started in March or how it was incrementally impactful in that maybe you could was that more on the rayovac side. It was more on the energizer side or is it kind of across the board.
I would say most of the impacts that we've described are across the category and what I would say is that the mix shift from our vet business has.
We have been impacted by market mix shift, which is when some of the higher margin markets were shut down you saw demand the less than we expected some of that demand.
Migrated to higher or lower margin markets that had less impactful shutdowns, we think thats the factor that the earliest to reverse as some of the mark.
These risks.
Open back up and even some of the shutdowns that have occurred.
In Europe recently have been less restrictive than they were initially and then you have the channel and pack size dynamic, which is consumers migrating to different channels to shop, and then also buying larger pack sizes, because they are using more batteries thats something that we do thing.
I think it has already started to revert back in terms of channel shifting back as well as a little bit of pack size.
Reversion and so as a result, we we think about half of that is going to persist into fiscal 21 in terms of the channel and pack size.
And then we will continue to work to make sure that the margin impact as.
That enter into 22 is his lessons, but we have built in about a 50 basis point headwind because of some of those shifts things in 21.
Got it thanks, so much.
Thank you Bill.
The next question comes from Jason English of Goldman Sachs. Please go ahead.
Okay.
Yes, good morning folks. Thank you for sliding in and let me Echo the congratulations to both you, especially you Alan you've had a long and illustrious career and energizer and congratulations for that comp base to two questions one super simple one.
Free cash flow outlook for next year, I don't really understand what adjusted free cash flow is.
Could you just give me what your expectations are in terms of real cash flow free cash flow for 21.
While operating cash flow.
Going to come down when we talk about adjusted free cash flow.
We're taking out the acquisition integration cash flow number so we expect that to be about $20 million of noncash items.
Can there and overall, it's about 60 total so when we say 325 to 350, what that really is reflecting as a return to normalization of our working capital.
So 325 to 350 overall working capital returning to normal and then in this year, we had a onetime recovery of about $30 million early in the year that.
And we're not going to see repeat.
So so take 20 million off off that to get to like reels, Benji spendable free cash flow.
Deployable free cash flows is that good I hear that right.
Okay got it up and I know Mark I know it's early.
And you're just assuming the news.
Leadership role.
I'll have some preliminary thoughts on what you think you may look to do different in terms of strategic direction for this business.
Because I'm sure you've got some ideas Youve, obviously had a position of heavy influence so I can't imagine its going to be a massive shift.
But I'm sure you're going to look to find ways to put your own your own.
Mark on the business will give us some your preliminary thoughts on that.
Sure Jason I think it's a little early to sort of put a put a fine point on any sort of different direction. We may want to take I mean, obviously, we are going to continue with the three strategic priorities, we've had a leading with innovation operating with excellence and drive productivity.
That won't change.
I'd say our focus for 21 is fairly simple it is to continue with the topline momentum that we've seen to continue to invest in our brands continue to drive innovation in our categories because consumers are responding to that the focus on the organization needs to be two folds, we need to get the cost that we incur.
Incurred 20 out of the system and improve the margin profile that eroded over the course of 20, and we need to increase our visibility from a financial perspective to be able to.
Improve the visibility and our analytics to be able to do to drive better decision, making and then frankly, just some better communication externally to be.
Able to provide better visibility to where we think the shape of the PML is going I think if we accomplish those items I think thats a thats a successful 21.
And I think we continue the momentum that Alan started with the company right. After separation and we look to continue to drive that forward certainly some things would be different in the future, but I'm not ready to put.
Fine point on those until I have a little more time in the seat and can have more discussions about it.
The next question comes from Lauren Lieberman of Barclays. Please go ahead.
Great. Thanks, good morning, everyone.
Just curious I know, it's not so much fun to be backward looking but I think in this incentive.
Probably appropriate to do so and.
Just curious kind of looking back at the way the Youre global supply chain is set up the capacity trigger the on hand again, all all pre pandemic.
What were kind of the alternatives right I mean, it's a pandemic and this surge in demand was that was it for obvious.
It's not in your business plan, nor should it have been so if you sort of look backwards now and say are there just things that.
Operationally should have been set up differently to begin with were you.
You know not yet adjusting to the idea that battery demand had kind of.
Hit.
It hit a trough in was it was starting to improve in a structural way, but I just want to kind of if we almost could take the covance surge out.
Did this environment reveal you know sort of cracks in the prior set up the prior plan and I'd be curious to learn about that.
It's a great question, we're I don't.
Don't believe.
Yes.
Obviously in hindsight, knowing what we all know about the pandemic, we all would have planned differently heading into it but I I believe our supply chain, even with that operated extremely well during this pandemic.
I think what it did and we had long challenged the organization to increase our flexibility and.
Chile and that is something we've been pushing for years and as we got into the pandemic.
Recall that our demand curve for batteries is fairly stable in fairly steady with increases around holiday and then burst capacity around disasters, that's something that we've long planned for and long been able to handle.
What you saw in the pandemic was that it was it was prolonged and elevated for an extended period of time.
Well since we run our very efficient from a capacity standpoint during the year.
Obviously, the longer that that demand stayed elevated the more problematic that was going to become within our currency.
The strength.
We saw that coming and as a result.
I am actually really impressed with what the organization has been able to achieve because we've essentially asked the organization to manage through the pandemic continue to execute the integration and in the middle of it reshaped your supply chain and they were able to do all three we added lines and sentiment.
The more we added lines in Ashburn, we added a much more.
More efficient lines in Singapore, and we bought a new facility in Indonesia, what that does is it reshaped our ability to be more flexible and agile and does it in a way that doesn't increase our cost structure in the system. So I think all in the transitory costs that we incurred over the last.
Last six or seven months are unacceptable.
We took that head on we fixed it and they're not going to continue once we get through Q1 and to be able to do that in six or seven months in the middle of the pandemic is an impressive accomplishment of the organization. So I think the supply chain was operating well, it's going to operate even better in the future.
Thanks, so much.
Okay.
The next question comes from Kevin Grundy of Jefferies. Please go ahead.
Great. Thanks, Good morning, everyone and Oh, we want to extend my congratulations to both of you as well.
Two questions from me Mark Mark the first one just building on some of the topics.
There have been addressed on the call specifically enterprise systems and how this pertains to your outlook now seat you touched on this and I think the commentary was you know with new systems in place. It will it will give you better ability to model the business. So.
The natural concern and disappointments I'm sure from your end as well is just with the model.
Laughs.
In the quarter.
Earnings outlook would you Williams delivery Phil fell short. So the question is where are you seeing there.
Process now.
Again, appreciating the volatility in the environment with respect to your systems and enterprise analytics. When you get process is going to be completed and then what the natural follow up would be.
Given what you currently have in place how would you characterize your visibility on the current outlook for fiscal 2000 launch investors be concerned on the ability to deliver on it and then I have a follow up thanks.
The all fair questions and pushes Kevin I think as we think about where we are on the enterprise analytics our business as we got through the in our business as we go through the underground.
Commissions became more complex you had more markets of scaling significance around the world you had a more diverse product portfolio as well as brands to track and monitor the first priority was to migrate all of those integrate acquisitions onto the same platform and get everyone within in the same environment, which we were able to do over the core.
Our gross or 20 now it's the next next natural step to start making adjustments to those systems to make sure that it kicks out data faster and more in a more reliable way I would the process is really well underway for that we've done a lot of deep dives over the last six months into into those systems and how we can change it and what alterations we need to make we're certainly not.
All the way to bright and it'll be an ongoing process as we work our way through 21, but in terms of visibility and processes and systems. We've already seen improvements we're going to continue to see improvements every quarter throughout 21, I would say that the migration to to the end state will be at the end of 21, but certainly.
Steady improvement throughout.
We recognize the.
The Miss is that we've had in the past and we take those very seriously. They are frustrating to us as a result, you can rest assured we took a lot of diligence in what we just provided today and made sure that we felt very comfortable.
With with the numbers, we put out today.
Recognizing that we've had a spotty track record in the past and the only way to change that is just to continue to hit the numbers, we say and show you that things are going to improve.
Got it thanks for that Mark, but two quick follow up quickly on I guess on the guidance since the rules of the good drivers as we look at the EBITDA.
Going from from fiscal 20 to 21.
And Mark touched on specifically really trying to drive to get some of these some of these costs out of the system, but I guess it doesn't seem like there's a big expectation of that happening.
I guess, where I'm coming from with that could you just sort of tumble through the numbers and you put sort of a reason.
Incremental margins on what you expect to do from a topline perspective synergies again will be material. This year. So far so good on your ability to deliver FX and commodities not a big factor and then as you sort of baking the cobot costs that you called out.
In the first quarter, but it doesn't that kind of gets you there that.
Kind of math trying to get you to what you expect to do for the year, which then begs. The question why are more the cobot cost coming out of the of the TNL in the balance of the year. So maybe you can just sort of comment on that or maybe clarify what how I may not be thinking correctly about how you guys see the next 12 months. So thanks for all that no profit, yes, yes, so Kevin we called out for this.
Last year roughly $29 million.
Constant and what Weve baked into next year, which is all in the first quarter is.
15 million, so year over year about a 14 million decline in.
Those costs.
And so we do have those costs coming out.
And the trends as we indicated the trends, we're seeing are favorable and knows and that by the end of the first quarter.
It will be essentially eliminated is our current expectation. So that is that is embedded within the EBITDA outlook that we provided.
You know the big the big driver of not seeing more is just that.
Our expectation is for gross margins to be flat year over year inclusive of the $50 million of coal cost in Q1.
The next question comes from Andrew to share of JP Morgan. Please go ahead.
Yes, Thank you and congrats both from Alan and Mark. So my question is is again just.
On the margin side.
And building on what you just said.
As we went back to the to the guide you for Cove, It right and you just suggested.
Put it out there was also like the synergies right that we had in.
And in the auto business. So I wanted to just bridge what is the new implied.
Kind of all things equal kind of more normalized phase of profitability is that something that it sounds as if a lot.
Has to do with the it at the price back or more competitive pricing or channels. So I was just thinking of like how we should be thinking.
Longer term take the 2021 I just the for Cove, It and then take that for the loan.
And then and perhaps some of that discourages it will be.
What you could extract were all embedded in your 2021.
Yes, so Andrew in terms of.
21, you know.
The cobot impact is about 50 basis points so you're.
Sure you're roughly at 41, one X coded and so the.
The remainder of the erosion that we saw in in.
In 20 inclusive of the covered cost currency was a headwind.
The last component that we talked about on.
On.
This call was was the mix impacts it. So we are expecting those mix impact to continue into ended 21, which is why you're not seeing a higher gross margin rate 2021, but as we move forward.
We expect that things will normalize.
The rate will improve as we go forward.
I don't know if there's anything else you cover Cynthia.
Yeah, I, just struggle with because you're going to be anniversarying that mix shift right unless you're saying, it's going to exacerbate to fiscal 2021, obviously you still have the first quarter today.
Its a fluid it right the first and most likely the first half of the fiscal but then you're going to anniversary. So unless you were saying like people are going to continue to pile up even more with via the channels or you're just seeing people trade down even within your mix within the brands.
Yeah.
I think the reason or no.
No I think the way we're thinking about gross margin for 21 anyway, I don't we don't want to back into providing 22 guys.
Gross margin, but as you think about gross margin from the guide we provided at the beginning it 20 until the actual is it 20, we had $29 million of.
Direct cobi costs.
15 of that is going to continue into 21.
On the mix shift we said half of that we think is going to continue into 21, you're going to have both market customer channels. Some combination revert back beyond 21, we're going to we're going to assess that as we work through 21, but we already see from a direct costs and indirect.
Mix.
Half of that of each coming back.
Into 21, and so as we get through 21, we're going to get a better handle on any long term changes, but as of now we don't expect any and theirs and there's a lot of actions, we're taking to ensure that we have improving gross margins beyond 21.
The next question.
Then comes from Rob Ottenstein of Evercore. Please go ahead.
Great. Thank you very much.
Couple of things first can you tell us where you are on the service levels.
With the retailers that cause the fines and do you expect that to roll over.
Hi, al into calendar 2021.
We are in I would say we are in a much better shape from a from a fill rate standpoint than the period that resulted in the fines that we talked about today, we entered into a bit of a pinch point I would say in around mid September to mid October.
From a.
From a service level standpoint, but I, but I would say, where we sit here today as we head into the holiday season and service levels are very strong.
Great and second can you talk a little bit about.
The channel mix shift that you're seeing is this is this a shift to.
E Commerce and.
Maybe maybe you can kind of give us a sense of what the channel mix shift was last year. What it was this year. So you just get a little bit better clarity on the moving pieces there.
Hey, Robert I would I would say is if you use 19 as a baseline the shifting that occurred in 20 was.
Obviously strong ecommerce across both pure play digital as well as omnichannel offerings from retailers that saw a significant increase.
At one point during the during the year there was.
Around 21% or north of 21% of the battery category went through digital that is.
Subsequently come down to 16, and then down to 13, depending upon which retailers are in and out of that number but that gives you directionally kind of where the shifting was and where its migrating to.
I would say the easiest way to describe it is consumers were really.
Trying to make fewer trips and.
And then there were bigger they were bigger trips to retailers. So you. What you saw is some smaller retailers.
Suffering and then larger retailers benefiting so it was really consumer saying I don't want to have to go to the store at all I'm going to go through a digital platform or when I go I am going to stock up and I'm going to go to a big store that has more off.
Offerings you.
You are seeing some of that revert I mean as you went through the pandemic you did see more.
More specialized retailers benefit, particularly in the auto channel where that foot traffic in the auto channel benefited because it was a small shopping experience consumers knew they could get in and get out more quickly.
It really has been a dynamic where.
Consumers have shifted around in terms of what stores Theyre shopping in and as a result, we see some of that continuing into 21, particularly as the pandemic has we're experiencing a bit of resurgence, but expect that to normalize our basis is Q3 Q4, as we sort of work our way through the year.
Okay and then just finally, how are you thinking about the trade off between pricing and market share you're getting good market share.
On the brands are strong the consumer demand is strong in general.
How are you thinking about hey, maybe maybe raise prices to offset some of the the higher costs.
Hello.
Go ahead Alan.
Yes, I was going to say you know.
Rubber we look at that on a regular basis and we look at any number of factors to assess whether pricing is warranted in the market at this stage. We don't feel it is although we will continue to monitor that.
From an overall pricing.
Standpoint, we're actually seeing globally that the current pricing environment remains stable.
At retail and from a cost to retailers at this point, we feel that we're in a pretty good place, where we're going to take a first pass as would be expected by our retail partners to eliminate any efficiencies and costs in our own business, which is more.
Mark laid out earlier in the prepared remarks.
The next question comes from buys are only of Deutsche Bank. Please go ahead.
Yes, hi, good morning.
Yeah.
I don't know if I missed this but can you give us.
Breakdown.
How batteries.
Elsewhere in international markets versus in the U.S.
And I would like to know how you're thinking about that in 2021, I know you've talked about a 2%.
Sales growth number for batteries, how should we think about that us versus international.
On the international.
So what we saw is obviously some pretty steep declines as we worked our way through the pandemic and some of the shutdown measures were more extreme and others in recent months when those restrictions have lapsed we've seen a rebound.
They are not all the way back to where they were in the aggregate, but certainly.
Our much improved from what I would say would be the May June July timeframe, yes.
Size as you know as we said.
Some of the markets were severely impacted.
During during the pandemic and if you look at Q4.
International was was just slightly positive.
Compared to strong growth in the Americas, driven by North America.
You look at the full year some of that similar trend.
For the full year so.
In Q.
Q Q3, as we reported international was actually down compared to.
Mary.
We must be being up nearly 9% and so it did have an impact on on international.
As Mark indicated as we move through 21, we would expect that to normalize back to historical trends for international.
The next question comes from Olivia Tong of.
Eric of America. Please go ahead.
Great. Thanks first congrats on your retirement and congrats Mark and best of luck in this new role.
Yes.
Hi, My question I wanted to get back.
And I guess at this isn't a normal backdrop in that original experts and that your regional expectations. When you kept the 700 million target than anticipated.
Ben.
But it also means I assume increased demand shelf space gains and I would assume that.
Thats somewhat measured macro backdrop so.
It looks like based on your new growth targets and it will take until 2024 to reach that original target.
But your your fiscal 21 EBITDA chart.
It's only 10 million off of your pre pandemic target. So I guess, what's what's changed that drives an additional year to lay off of that.
600 to 630 target if you think you're getting back to normal levels of air Freighting in the next few months and mixing batteries going to return to normal seems like you said a couple times that you think most of these things by chicken.
21 are back to a more normalized level so.
So if you could.
Great. Thank you Olivia I think the main.
Rationale behind the decision is just the uncertainty in the macro backdrop on what is going to be the after effects of the of the pandemic and with the further out you go it obviously it become.
Comes harder to predict what those are and because of the cost. We've incurred 20, we do on our focus to be make those transitory get them out, but then recognize we're also growing off a lower base. So in order to get to the same levels. As we were to get to 22 the growth rates would have to increase fairly dramatically. Obviously, we will work hard to make that.
And to make that the case, but we didnt want to put out numbers, where theres really a fair amount of uncertainty behind them and certainly as it goes beyond 2022, we felt it was prudent to just get back to the financial algorithm. It served us well from from separation forward execute 21 like you said that if we can execute 21 and achieve what we set out.
We are back on track and then let's provide 22 guidance when we get to the end of 21.
Got it thanks.
The next question comes from Carla Casella of JP Morgan. Please go ahead.
Hi, My question is on.
Fix that you talked about can you just talk about which were the biggest.
Drivers of driving down the margin on the mix shift side.
And also I'm, sorry, if via in that you're including the customer penalties when you're talking about the mix shift as well or if those are separate items.
I think on until as we think about gross margin lets isolate it as direct cobi costs of $29 million and that includes the fines and penalties when and when you're talking about mix shift, which is roughly another 100 basis point decline in gross margin, we have allocated that the shift between markets channels.
And pack sizes.
But I would say if you were to work your way through it I mean.
Roughly assign a third a third a third to each of those and you'd be in the probably in the neighborhood of the impact.
This concludes our question and answer session I would like to turn the conference back.
To Alan Hoskins for any closing remarks.
Thank you for joining us on our call today and again your continued 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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