Q1 2021 Energizer Holdings Inc Earnings Call
Good day and welcome to the Energizer Holdings, Inc. First quarter fiscal year 'twenty 'twenty. One results conference call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by Seattle.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on attached on fun.
Try a question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Jackie Burbidge, Vice President Investor Relations. Please go ahead.
Good morning, and welcome to Energizer first quarter fiscal 'twenty 'twenty One conference call. Joining me today are Mark Levine, Chief Executive Officer, Tim Gorman, Chief Financial Officer, and John <unk> Controller, and Chief Accounting Officer.
A replay of this call will be available on the Investor Relations section of our website Energizer Holdings dotcom.
In addition, a slide deck, providing detailed financial results for the quarter is also posted on our website.
During the call we will make forward looking statements about the company's future business and financial performance. Among other matters. These statements are based on management's current expectations and are subject to risks and uncertainties, including those resulting from the ongoing COVID-19, pandemic, which may cause actual results to differ materially from these statements we do not undertake.
To update these forward looking statements factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in the reports we filed with the SEC.
We also refer in our presentation to non-GAAP financial measures a reconciliation of non-GAAP financial measures to comparable GAAP measures is shown in our press release issued earlier today, which is available on our website.
Information concerning our category and market share discussed on this call relates to markets, where we compete and it's based on Energizer is internal data data from industry analysis and estimates we believe to be reasonable.
This quarter E. Commerce data is not included in our category overview future restatement of the external badly.
Unless otherwise noted all comments regarding the quarter and year pertained to Energizer is physical year and all comparisons to prior year relate to the same period in fiscal 2020 with that I'd like to turn the call over to Mark.
Thanks, Jackie and good morning, everyone.
I am pleased to be here. This morning to share our first quarter results, which reflect strong performance as elevated demand expanded distribution and improved execution led to earnings growth.
Our team has moved with speed to address the ongoing challenges of operating in this environment, while continuing to focus on keeping each other healthy and safe.
As I will talk about in a moment, while the pandemic driven demand at the main story, we remain focused on our business strategies to ensure that we're well positioned.
Pandemic subsides, leading with innovation operating with excellence and driving productivity are the keys to our success, both now and into the future.
Looking at the results for the quarter.
We maintained our top line momentum with strong sales across categories and markets around the world, resulting in organic sales growth of 12, 7% with battery up 11% and auto care up 27 per cent globally.
We delivered adjusted gross margin of 47 per cent as we were able to meet the demands while incurring lower incremental cost than we did last quarter.
This combination of strong topline growth and improving margins resulted in adjusted earnings per share growth of 38 per cent and adjusted EBITDA growth of 17%.
We were also able to take advantage of low interest rates to refinance a portion of our debt, which will result in significantly reduced interest expense going forward.
We are off to a solid start for the fiscal year.
With lower interest expenses due to the refinancing we are increasing our outlook for the full year adjusted earnings per share to a new range of 310 to $3 40.
In a few minutes, Tim will provide more detail on the results for the quarter as well as our view for the full year.
Let me start with category trends, where we continue to see strong consumer demand as Jackie mentioned earlier, our category data. This quarter does not include ecommerce due to an external database restatement.
Globally battery category value was up six 9% and we continue to see consumers purchasing batteries for immediate use.
<unk> increased the number of device to stay on as well as their usage of those devices.
With a gain of 2.5 share points Energizer is growing faster than the category driven by distribution gains in the U S and in international markets, including Canada, France, Korea, and the U K.
With auto care U S category grew more than 10% as a result changes in consumer behavior, including an increased focus on cleaning and disinfecting as well as an increase in do it yourself activities.
During the quarter Energizer is auto care share was flat.
Of note during the quarter, we did see strong growth in non measured channels, including E Commerce home Center and international markets.
In auto care, we are meeting the needs of consumers by rolling out innovation and strengthening our product pipeline.
We recently launched an armor all disinfectant as consumers are more focused than ever on keeping their cars clean and disinfect it.
We also acquired a small formulations business, which to date has primarily commercialized household disinfectants.
Robust portfolio of innovative cleaning disinfecting and odor eliminating formulations. We've acquired is an extremely attractive addition to our R&D pipeline and is expected to enhance our leadership in auto care.
And looking at ecommerce, while we don't have consumption data this quarter based on our sales we continue to see solid E commerce performance versus prior periods.
Our investments and ongoing focus are paying off and positioning us to lead well into the future.
If we take a step back the pandemic driven demand in our categories has been and for the foreseeable future will continue to be the main story.
And while our priority will be to successfully navigate a very complicated operating environment in order to meet this elevated demand efficiently. We are also undertaking initiatives to emerge from this period poised for growth in the future.
As we are nearing completion of our integration efforts, including the recent bolt on acquisitions. We are also undertaking several initiatives to modernize our core operational capabilities.
Let me take a moment to provide an update on these initiatives.
Despite the challenges of this past year, our integration activities for the battery and auto care acquisition have continued and are scheduled for completion by the end of 'twenty 'twenty one.
In the first quarter, we realized $20 million on synergies and we remain on track to achieve $40 million to $45 million in 2021.
And to deliver more than $100 million in total synergies.
We also closed on the acquisition of an Indonesian battery plant, which contributed significantly to our ability to meet the strong demand during the quarter and will enable further efficiencies in the future.
In addition to the integration activities, we have launched several significant projects to modernize our core.
As the pandemic related shifts have shown very clearly we must become a more digitally advanced organization in order to ensure we can meet the demands of the consumer in a rapidly changing operating environment.
We are transforming our global product supply organization by moving to an end to end category structure, which will create greater agility within each category and closer connections to customers and consumers.
We are also investing in our business planning tools and supply planning analytics to provide more predictive insights which are needed for today's environment.
The end result will be a product supply organization that is better equipped to capitalize on opportunities while also enhancing our ability to navigate disruption.
These efforts are already paying off as we were able to meet the continued elevated demand, especially in batteries with lower than expected COVID-19 related costs.
This project will continue to be important in the near term to meet demand and in the medium term to take better advantage of opportunities across our business.
We are also investing in more advanced data and analytics capabilities, which will enable us to better detect and understand in near real time impacts to the business from shifting consumer behavior and macroeconomic events, such as mix shifts in markets or products.
Armed with the most recent data and insights our commercial and marketing teams can respond more effectively connect with consumers and drive growth in our business.
These projects as well as other smaller ones will enhance our ability to operate more effectively and will also drive out cost from the business.
We are committed to the efficient low cost operating model you've seen from us in the past while being equally committed to ensuring we have the flexibility to invest in opportunities to drive future growth.
We believe these initiatives will allow us to do both.
Before I turn it over to Tim I also wanted to provide some perspective on how we were thinking about the future are.
Our strategic priorities of leading with innovation operating with excellence and driving productivity.
As well as we navigated the pandemics and they will remain critical going forward.
However, 2020 also provided significant insight that will enable energizer to emerge as a stronger more resilient and dynamic company.
The pandemic reminded us that consumers are at the heart of what we do fundamentally it was consumer behavior that drove disruption as their habits and routines changed they gravitated to trusted brands and engaged with our categories in new and different ways. They accelerated the changes in how they consume information and ultimately how they shop.
Our consumer insights combined with our powerhouse brands enable us to create value for our retail partners by ensuring we are there to meet consumers where they are going.
Remaining consumer focused investing in our brands and ensuring we can adapt the speed in the marketplace are the keys to our success in the future we will leverage the best attributes of a large scale the organization with the mentality of the startup where small teams are on leash to focus on critical initiatives.
With that I will now turn things over to Jim who will provide more details about our financial performance for the quarter, including our refinancing efforts capital allocation and our outlook for the fiscal year Tim.
Thanks, Mark and good morning, everyone. In addition to the earnings release, we provided this morning.
You mentioned a slide deck is also available on our website highlighting some additional key financial metrics.
As Mark indicated our organic revenue growth of 12, 7%, coupled with cost controls and favorable currency tailwind resulted in strong adjusted earnings per share of $1 17.
<unk> EBITDA of $192 million and adjusted free cash flow of $90 million.
Taking a deeper look at the top line, both our Americas and international segments.
Grew organically more than 12% with batteries up 11% and auto care up more than 27%.
As Mark mentioned the categories in which we compete continued to experience elevated demand in.
In addition, our organic sales growth also benefited from distribution gains that began last summer as well as some shifting of shipments between quarters.
Finally, the growth we are seeing this year is off of prior year first quarter organic sales decline of three 4%.
Adjusted gross margin decreased 110 basis points versus the prior year to 47%.
Although this represented a sequential improvement versus the last quarter.
<unk> margin was impacted primarily by incremental COVID-19 costs of approximately $12 million largely related to airfreight fines and penalties and personal protection equipment necessary to meet the sustained elevated demand.
And channel customer and product mix as well as increased operating costs resulted from increased tariffs associated with higher volumes commodity costs and transportation costs consistent with inflationary trends in the global market.
Partially offsetting these impacts to gross margin the first quarter benefited from synergies of $13 million.
And favorable currency exchange rates.
As we exit the first quarter, we believe the incremental COVID-19 costs from airfreight and fines and penalties over the remainder of the year will significantly diminish.
However, like many other companies, we anticipate additional cost pressures from increased tariffs commodities and transportation to impact us over the remainder of the year and we have included these items on our outlook.
A&P as a percentage of net sales was five 8% per.
It's a six 4% in the prior year due primarily to the strong top line growth experienced in the current quarter.
Consistent with our priorities, we continue to invest on an absolute dollar basis and A&P to support our brands with total A&P up $3 million or 6%.
Excluding acquisition and integration costs SG&A as a percentage of net sales was 13 four.
4% versus 15, 1% in the prior year.
This was primarily due to the elevated sales experience in the current quarter.
On an absolute dollar basis.
Adjusted SG&A increased $2 $7 million driven in part by higher overheads associated with the topline sales growth and the timing of costs, partially offset by synergies of $7 million and lower travel expense due to COVID-19.
As Mark mentioned, we realized $20 million of synergies in the quarter with $13 million on cost of goods sold and $7 million on SG&A.
For the full year, we continue to expect to realize 40% to $45 million on incremental synergies in.
In total we have recognized nearly $90 million since we completed the battery and auto care acquisitions and remain on track to realize in excess of $100 million by the end of fiscal 2021.
We also took advantage of accommodating debt markets to refinance our existing short term secured debt and our 2027 unsecured bonds with a new $1 $2 billion term loan.
Based on the new all in interest rates, we anticipate annualized interest savings of roughly $25 million with about $19 million.
To be realized over the remainder of fiscal 2021.
We also amended certain covenants in our credit agreement, which will create additional capacity and flexibility in our debt capital structure, our net debt to credit defined EBITDA at the end of the quarter was four six times, reflecting improved EBITDA performance and debt paydown during the quarter of $80 million.
Loading refinancing activities.
At the end of the quarter, our total debt was approximately $3 4 billion.
With nearly 85% now at fixed rates and an all in cost of debt of approximately four 3%.
And finally, we continue to drive shareholder returns through our balanced approach to capital allocation by investing on our business through innovation brand building activities and the projects, we mentioned earlier to modernize our core and drive cost out of the business.
Delivering net quarterly cash dividend of <unk> $27 million.
Repurchasing 500000 shares.
$21 million, representing an average price of $42 61.
Paying down $80 million of debt, excluding the refinancing activity.
And finally, completing two bolt on acquisitions.
As a result of our strong organic growth in the first quarter and the interest expense savings from the refinancing we undertook in December.
We're updating our full year fiscal 2021, the outlook for the following key metrics.
Net sales growth is expected to be at the upper end of the range of 2% to 4% driven in large part by continued elevated battery demand in North America and favorable currency impacts.
Adjusted gross margin rate is expected to be essentially flat on a year over year basis in line with our previously provided outlook.
Adjusted EBITDA is expected to be at the upper end of our previously provided range of $600 million to $630 million and free cash flow of 300.
25 million to $350 million remains unchanged due to working capital requirements in particular inventory as we look to rebuild safety stock.
Adjusted earnings per share is now expected to be in the range of $3 10.
To $3 40.
I would also like to provide a reminder, regarding the quarterly phasing for the remainder of 2021.
Beginning late in our second quarter of 2020 and through today, we've seen elevated demand for both battery and auto care products due to the impacts of Covid.
In 2021, we expect to continue to see net sales growth.
Till you lap those elevated demand at which point, we will likely start to see year over year declines in net sales as we approach a more normalized level of demand.
We expect this will begin to occur towards the end of the second quarter and battery and late in the third quarter in auto care.
With respect to gross margin rates, we expect them to remain consistent throughout the year. The gross margin rate in this quarter was better than our expectations due to lower than expected COVID-19 costs.
<unk> of the realization of synergies and the impact of favorable foreign currencies.
We are increasing components of our outlook for the full year. There remains a great deal of uncertainty over the balance of the fiscal year with respect to the pandemic and related macro factor impacts, including currencies commodities and transportation costs.
We have addressed the items that are within our control and continue to improve our execution.
Actions. We have taken include continuing to drive increased distribution with strong organic growth across all categories and geographies.
Proving supply change surety with expanded capacity and significantly reducing incremental COVID-19 costs by the end of the first quarter and finally refinancing more than half of our debt portfolio over the past seven months due to the accommodating debt markets.
We remain confident that continued focus on our strategic priorities and our balanced approach to capital allocation will allow us to deliver long term shareholder value.
Now I would like to turn it back over to Mark for some closing remarks.
Thanks, Tim.
In the midst of a very uncertain operating environment, we will focus on meeting the demands of today, while building the capabilities, we will need to succeed in the post pandemic period, our operating performance in the first quarter is a testament to the efforts of our colleagues around the world to make ship and deliver the products that our consumers need during this time with that I will.
On the call for questions.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on you touched on phones, if you're using a speakerphone. Please pick up your handset before pressing the keys.
Draw. Your question. Please press Star then two please.
Please limit yourself to one question and one follow up.
Have further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Nik Modi with RBC capital markets. Please go ahead.
Thank you good morning, everyone.
The question is hey, how are you doing the question is really thinking about the top line and what the balance will look like between volume and price mix one of the things we've seen generally is kind.
Kind of a general resetting.
Promotions, given what's been going on in the last eight or nine months and so I'm just curious how you're seeing the CAGR you Bob given batteries has historically been a very highly promoted category. So I just wanted to get some context from there and then just kind of a.
Bigger picture question on distribution gains and such an important part of the story and given how much E. Commerce has really been driving a lot of incremental consumption and the impulse nature of your categories. I guess I was hoping you could give us an update on how youre thinking about.
Driving scale within this kind of new environment, if things stay the way they are.
And then there's a lot of questions in there.
Start with the top line growth I mean, we started Q1 and we really just we wanted to execute.
And do what we said we were going to do and we were successful on that that we were able to capture the upside demand that we saw in the quarter with lower incremental costs with improving gross margin. So we wanted to get back to just execution on foundation and we were able to do that we were expecting a strong Q1, I mean again it was a soft comp from a year.
A year ago, but we were expecting.
Organic growth from Q1 Q2.
And then as you get into the back half of March and really into Q3, and Q4 is when we're going to be up against the elevated comps from when the pandemic hit last year. So this is consistent with the phasing that we have expected with the outlook. We provided in November a lot of uncertainty in the back half that we're going to still continue to analyze and make sure we're ready for.
Sure.
I mean, theres new waves of the virus, there's backing of the vaccine rollout economic impact the weather impact on auto we're going to continue to monitor those we still expect the year to play out roughly in line with with the phasing that debt I just described but ultimately we're focused on executing what we did.
What we said we were going to do in November we updated it to the high end of the range because of the strong start to the year. As you mentioned distribution gains that continues to be a key part of the story I mean, we are experiencing both elevated demand from the pandemic, but also higher demand from our distribution gains but started to rollout in the spring of last year really continued through the balance of <unk>.
Fiscal 'twenty.
We have additional distribution gains, which will continue to play out over the balance of 'twenty. One we feel great about where we're going to be positioned from a plan on ground standpoint.
And most of our major retailers and excited about some of the new distribution, that's going to be coming on later in the year that includes ecommerce we continue to emphasize digital commerce not only on batteries.
But also in auto care and lights as well having great success.
The board on that as you heard in the prepared remarks, there was a database restatements, so withholdings sort of on category competitive information just because we wanted to make sure that.
We take a hard look at that before communicating that externally, but our internal results on E. Commerce are really strong they continue to be as strong as they have been in previous quarters and so there are a lot of momentum as you would expect in this new environment as more and more consumers are shopping online.
Super helpful. Thanks, a lot.
Thanks, Nick.
The next question comes from Wendy Nicholson with Citi. Please go ahead.
Hi, good morning.
It really is a follow up to that.
First thing is just sort of what what are you anticipating or even maybe beginning to see from a competitive perspective, I mean, your distribution gains have been huge but I would wonder if you know.
At some point to ourselves starts to kick back in and gets more aggressive either from a promotional perspective are in negotiation with retailers, where you're starting to see any of that is there any point at which you say wow, you've got big contracts coming up for renewal that you might not be able to.
Whatever renew and keeping intact.
Well I would say <unk> always been a strong competitor, we have been able to gain significant distribution over the last couple of years and that's just by focusing on fundamentals with innovation and investing behind brands.
Not seeing it play out in the promotional environment and this is probably one question I left out of my answer for Nick as well as the promotional environment for the latest 13 weeks. It has been flat. So we are seeing.
Our stable benign promotional environment.
If you have seen with our.
Our largest competitor is <unk>.
Emphasized innovation and investing in their brands we've done the same.
And we've had success with distribution as well and so I would expect it to continue to be a competitive.
Healthy competitive environment for us and our biggest competitor both in the U S as well as around the world. So nothing no change and nothing unusual that we're seeing.
Fair enough and then if I can just a follow up actually on for Tim on the balance sheet.
That's awesome on the debt refinancing that was huge in terms of the savings but does that.
Impact at all your thought process on does it give you more flexibility in terms of buying back stock or or raising your dividend. Even further just how does it how does it impact on cash.
Capital allocation thought thanks.
Really no change in our thought process around capital allocation. So we will continue to maintain a balance approach as we move forward.
Perfect. Thanks, so much.
Thanks Wendy.
The next question comes from Bill Chappell with <unk> Securities. Please go ahead.
Thanks, Good morning.
Good morning Bill.
Hey, I guess first question just discussing the cadence the rest of the year and the comparisons I mean, I certainly understand.
How the initial stock up you know its a tough comp, but but as you look past that I mean, what you've said is people have been consuming their batteries as fast as they've been buying there hasn't been major pantry loading at least for the past 10 months, So why would anyone.
Unless you expect everybody to kind of head back and stop using their devices.
Why why do you expect year over year declines or meaningful year over year declines if at all once we get past the initial pantry load of March early April.
I think it's just the uncertainty built into the back half of the year. So I think it was an initial surge in the March April time period, and then you did sort of settle into elevated demand I think it's going to be demand that may be relatively lower than what you saw throughout Q3 and Q4.
More than what we would expect but it may be still higher than what our base growth rates were before the pandemic. So I think that's the big question that we hear from from folks is what do we expect the end state demand will look like in our categories.
What youre seeing in batteries is that a lot of the habits and routines that consumers have adopted over the pandemic like work from home, which many of us are doing.
But in the future they may not be doing that as much as they are today. So there may be some reversion back from a demand standpoint.
On the battery side, but at some likely somewhere in between where we were pre ban demick and where we are today. It's just a question of where it settles in and I think thats the unknown with all the uncertainty built into it I think thats. The end state, but then there's also the transition to the end state and I think one of the things we have to cycle through in Q3, and Q4 is that transition.
<unk> of how do you get to where we are today to that end state where there may be some elevated demand beyond what we saw pre pandemic and that's what we're preparing for we are analyzing multiple scenarios. We're ready for just about any different scenario that comes our way, but in terms of changing our outlook in Q3 and Q4, we just don't have enough data points to.
Do that with the certainty that we think we need that's why as a result, we just called it to the high end of the range of 2% to 4%.
Got it and then just to follow up on on auto care.
I guess, a little surprised that your market share was flat just because I know there had been a lot of efforts to gain some share in the second and third year of ownership of the whole business I know its the off season, but can you maybe tell us what you see as we are.
Don't know if the retailers do similar spring resets in front of the season, but I mean would you expect your share to start to tick up.
In addition to the category ticking up as we move to the summer.
We would expect that we have some really exciting innovation thats coming to market I mean, we've mentioned disinfectants as one piece of that but there are going to be additional pieces of innovation, which youre going to set in.
February March timeframe is as those spring resets are established it's also has a little bit to do with the seasonality of the business as you get into this part of the year, obviously refrigerants doesn't play as big of a part in the overall category as much as it does for us in the summer season. So some of that as you get caught up on the seasonality of the share most.
<unk> won the biggest sub segment for US is appearance and yes, we would expect that share growth to happen in the spring season.
Great. Thanks, so much.
Thanks Bill.
The next question comes from Dara <unk> with Morgan Stanley. Please go ahead.
Hey, guys.
Yes.
Just a detailed question if you look at the increase in your earnings guidance, it's actually less than would be implied by the raise in EBITDA guidance on top of the lower interest expense guidance. So just wanted to understand what was the offset to those positive items I assume its a tax rate, but any clarity would be helpful.
And then.
The real question is as we look at sort of commodity costs here can you talk about what youre expecting in the balance of the fiscal year, particularly towards the end of the year.
How hedged you are at this point and if there could be some further risk there.
Just any thoughts on taking potential pricing.
At some point to offset some of the potential commodity pressure as we look out here over the next few quarters.
Okay.
Go ahead, Tim yes, so.
On commodities Dara were roughly.
About 80% hedged.
For the balance of the year.
On the first question.
The outlook that we provided does not reflect the benefit on on the interest that we called out and so that's roughly $19 million or about 20.
We do have some.
Embedded within our outlook does reflect the cost pressures that exist.
Some additional investment in A&P that we have in the balance of the year given given the strong start we had the opportunity to invest back in the business. So.
We've provided the outlook that we have for the year and the components.
Altogether and on.
The pricing question Dara.
Always continue to monitor opportunities to take pricing.
We factor in commodities currency, the competitive environment, our innovation pipeline all of the things you've heard us talk about in the past and we'll analyze that there may be opportunities for that in the future also as you've also heard us say in the backdrop of with the backdrop of the pandemic. It is a tough environment to try and drive pricing through.
If there is an opportunity over the balance of this fiscal year, we will certainly look to do that.
Okay, Great that's helpful and any thoughts on sort of the pace of commodity inflation as you move through the fiscal year or where this fiscal year ends up versus a typical year just in terms of the commodity pressure.
Yes.
Yeah.
I think like other companies everyone has seen some pressure as it is.
Opens up globally, so where we're seeing.
Most of the pressure is on zinc and steel and so that's factored into the outlook that we provided.
Yeah.
Great. Thanks.
The next question comes from Kevin Grundy with Jefferies. Please go ahead.
Great. Thanks, Good morning, guys congrats on the quarter.
Marc you spent some time on the organization's priorities and where you may be leaning in investing behind.
Greater analytics analytic capabilities systems et cetera, how should investors think about those sorts of investments is this going to be a reallocation of where some of this spend is already flowing through opex. How should we think about the spend relative to advertising and marketing maybe just spend a moment on where we're.
How we should think about the the level of investment as it currently in the P&L, which is going to be something incremental and then I have a follow up thanks.
Kevin I think everything that we're going to undertake.
'twenty one is built into the outlook that we've provided and there are projects that are already underway, we've scoped on there.
Our in process. This is this is just about modernizing our systems and the tools, we have to get the organization to be able to operate better and more effectively.
Excuse me on that.
On the digital front. It is a lot more than just having an effective digital commerce team, which we certainly do and have invested behind for many years.
But it's making sure that the balance of the organization also has access to real time data in a much more meaningful way than they have in the past in that supply chain, where we create a seamless connection across.
And on supply chain to make sure that we eliminate handoffs and communication and it just flow seamlessly through through the system, so that procurement understands.
In real time on operations and doing and fed by the demand team all of that we just want to make sure. We take advantage of the technology. That's out there it allows us to make better business decisions faster.
And similarly, with our forecasting and working capital management. It just allows us to take steps out of the process create less labor intensive.
Insights and allows us to run the business. So it's really making sure that digital really took.
Took hold as a front facing with digital commerce, but theres a whole host of things you can do behind it which are really going to modernize your organization you asked a question about digital advertising.
Every year, we spend a little bit more than we did the previous year on digital advertising, we still continue to spend on traditional mediums as well, but connecting with the consumer digitally as you would expect is becoming more and more important you.
You need to personalize those messages more and more and target your consumers more and more and that's what we're investing in to make sure that we can do it and really what that does is just sustainable foundation to be able to drive future growth well into the future.
Got it that makes sense a quick follow up Mark if I can squeeze in another one I know this is a difficult question to answer but long term demand for batteries. So post spin the outlook was on its closing in on six years ago hard to believe but was down low single about three years ago.
The company cited stable on improving trends and optimism about growth potential. So we move to flat to up modestly as.
As we sit here today and I know you guys have just been through a period of trying to keep up with demand and all the costs in the supply chain related to that but as we kind of consider a post vaccine world across categories. I wanted to get your updated thoughts on how you see global category demand both from.
With respect to the U S and then potentially any regional differences from ill pass it on thank you.
Yeah. It's a great question. It's one we think about a great deal and it's we have our long term outlook that we updated a couple on novembers ago to flat to slightly positive.
In the middle of the pandemic, obviously <unk> seen incredible demand for batteries. Unlike anything we've seen and really for an extended duration.
Tumors are acting differently in their daily lives. They are spending more time at home nearing or.
They're buying more devices. They are using those devices more which causes increased change out of those batteries and therefore, increasing the buy rates for consumers all of those sound positive impact on the battery category.
But I don't think it would be prudent for us to call. The long term trajectory based on what we're experiencing today I think we need to see what the post vaccine world looks like where consumers settle in from their habits and their routines certainly.
Our feeling is that consumers a lot of the habits. They picked up during the pandemic are going to continue.
And I believe this should have a positive impact on the battery category globally.
For consumer demand.
But there is a transition period, we also want to make sure that those that hypothesis holds.
But I can assure you from our from an internal standpoint, we're ready for just about any scenario that plays out.
I believe that the pandemic should have long term positive impact on the battery category. It's just a question of magnitude and then once we get a handle on that we can update on long term outlook for the category.
Fair enough. Thanks, guys. Good luck.
Yeah.
The next question comes from Andrea to share up at J P. Morgan. Please go ahead.
Andrew are you muted.
I believe she is neither of these loss Andrea disconnection.
We can move to the next on let's circle back to Andrea.
Okay.
Sure.
The next question comes from size all volume.
With Deutsche Bank. Please go ahead.
Yes, hi, good.
So on firstly I just wanted to clarify the outlook for net sales, which I think youre, saying higher end of two to four firsthand.
Is that organic or does that include acquisition and FX and if it does include acquisitions could you just help us sort of frame out how big the acquisition impact might be and sorry, if I missed this in your very detailed press release.
Thanks.
It is it is inclusive of acquisitions and.
The currency tailwind so.
If you look at both of those.
Relative to acquisitions it was about 130 basis points in Q1.
You can use that as a proxy for the balance of the year and then likewise.
We do expect currency to be a tailwind over the balance of the year.
Okay, Great and then just.
I wanted to talk a little bit about.
Our outlook for the international business.
No.
In batteries it had emerging markets I think specifically you had lagged all year.
And it was up significantly this quarter was there.
Seeing sort of significant retailer replenishment sort of how do you think about underlying demand trends there.
And how are you thinking about the gorilla about growth in that business for the rest of the year, maybe both for for batteries and for auto care.
For the international business, which you saw the benefit of the market's opening up back again in a more meaningful way. So we saw strong growth across all of our.
Segments and international with develop developing in the distributor markets all showing growth.
I think we would expect that to continue you are seeing some disruption and some of the markets in January February with more restrictive Lockdown. We don't think those will have the impact on our business like they did last year.
And that there was probably a little bit of pull forward into December from January because of Brexit as well as our system above the lockdowns as well.
So I think we would expect to continue to see the trends in Q3 in Q2 much like we.
So on Q1 in terms of growth.
Q3, obviously, then youre going to start to get into differentiating comps between international and what we saw on the Americas segment.
And so I would expect the <unk>.
Hattery business to be less.
Negatively impacted in Q3, and Q4 than what Youll see in the Americas from a comp perspective on auto care smaller base.
We're seeing healthy growth rate in auto care.
As you've heard us talk about in the past International auto care growth is an exciting opportunity for us.
It's off to a great start and I think we would expect to see nice growth in 'twenty, one for international for the auto care business.
Okay, Great and then just another clarification on the on the sales outlook. I think previously you had talked about a battery is being at the low end of the two to four and auto care being at the high end.
Is there and how should we think about that.
Given that now you are at the high end is the upside coming from batteries effectively.
That's right, it's really being driven by the.
Strong demand in batteries.
So where we had it at the low end of the range. It's now moving towards the high end of the range.
Got it thank you so much.
Thank you.
One of my question is on gross margin and if you could talk a little bit more about the keen interest in the year because clearly some of the COVID-19 related caution happened synergies are also helping moving about Pcs and commodities logistics Costco on for everyone. It sounds like visibility on pricing is a bit challenging right now so.
Certainly sounds like you're hinting that gross margin should be worse than the prior expectation for flat from fiscal 'twenty. One. So I just wanted to see if you could give a little bit more color there. Thank you.
Yeah. So Olivia we didn't change the outlook for the balance of the year. When we gave our outlook in November we indicated that gross margin would be flat versus year ago.
We're holding to that same outlook for the full year, you're right. We do we do have the benefit of lapping the COVID-19 costs that occurred in Q3, and Q4 as well as synergies.
Offsetting that is the cost pressures that we talked about relative to tariffs commodities and transportation cost I think youre seeing that across the number of companies and then we also have the mix impact that we called out in November as well and so those those two factors are offsetting the benefits of.
Lastly on the Covid costs on the synergy benefits that we expect over the balance of the year.
Got it.
And then can you talk a little bit about that.
Household disinfecting acquisition that you mentioned in your prepared remarks, how you plan on leveraging it.
And are you considering expansion outside of auto related channels as well or is it specific to.
Auto care. Thank you.
Thanks, David we're really excited about that acquisition I mean, it was a it's a formulations company.
<unk>, which really provides a great addition to the auto care innovation pipeline that was the primary focus as some of the technology and formulation expertise that they have on disinfectant, but also odor elimination cleaners decreases there is a.
A nice portfolio that they had they had an existing business, which is expected to generate roughly in the 4% to $6 million range and EBITDA and that was where they commercialize their disinfectant technology through a licensing arrangement with major retailers and other household CPG companies.
And so we expect that part of that business to continue.
We will help them drive that further licensing to additional additional counterparties to drive that business. Our interest is really taking their technology infusing it on our auto care portfolio.
In helping us lead in shape that into the future, but a lot of exciting opportunities. There. Our focus right now is helping them on their core business, which is that licensing arrangement with retailers, but.
Then also making sure we lean in and invest behind our portfolio on auto care.
Got it thank you.
The next question comes from Andrea does share with J P. Morgan. Please go ahead.
Thank you and I apologize from four I Hope you can hear me now so I have a clarification.
I have a clarification mark on the outlook for them.
Also per and then for the senior James as a follow up on the synergy.
First I appreciate the color on potentially going negative on batteries, but then auto care with holdings innovation.
Help us understand how you're going to cycle obviously.
The changes that you've made and.
And I think in the earlier question I think is that the upside has been coming from batteries mostly.
So if you can give us on IGF auto care and then on the Cogs wage.
More on the synergy side like you had a pretty good outcome from the synergies how we should be thinking going forward.
On the outlook that you gave how we should be thinking of the margin component. Thank you.
I can cover the first one and turn it over to Tim for the second part of that Andrea.
I think the battery and auto care.
Phasing from a top line perspective look similar I mean, it's just different orders of magnitude given that percentage is in there in our business but.
Q3 and Q4.
Have tough comps I would say auto care has an easier comp at the very beginning of that in that March April time period.
But then as they get further end of the summer you had really favorable weather last year, but you also had elevated demand from the pandemic as well.
With an increase of cleaning also more do it yourself activities. So we would expect a tough comps for both auto care and batteries in the Q3 Q4 time period, which is why we provided that phasing.
Guidance that we did on on the top line, yes and on synergies.
Synergies.
In Q1, we realized $20 million 13 of that was in Cogs and seven was in SG&A.
Over the balance of the year, the remaining $20 million to $25 million will be roughly that same composition. So roughly two thirds in cogs and the balance on SG&A.
That's helpful. Thank you.
The next question comes from Jason English with Goldman Sachs. Please go ahead.
Hey, guys.
Good morning.
Just a couple of quick housekeeping questions here left first working capital you mentioned that you've got higher EBITDA lower interest expense, but we are holding free cash flow steady I think you referenced working capital.
In the press release can you explain what's happening there.
Yeah, Kevin just with the <unk>.
<unk> demand that we've had.
We're expecting to make an investment in inventory to get our safety stock levels back to kind of.
Normal levels.
So that's what we had anticipated in the balance of the year.
And Thats why we are holding the free cash flow range, where it was in November.
Okay, Okay, and then on SG&A I think you asked.
$7 million of synergies this quarter.
And then you also had $2 $2 million of Covid related costs really from SG&A, then implies that your SG&A on a underlying basis subsequent 14% year on year.
Excluding those benefits, what's causing SG&A to replace so much.
Yes.
A variety of components.
The first being the <unk>.
Top line growth that we're seeing is driving higher SG&A.
We're also seeing just normal inflationary pressures and then if you look at year over year the timing of.
Cost being incurred.
There is some timing differences as you look quarter over quarter. So.
SG&A is in line with the outlook that we provided in November.
For the full year outlook.
Consistent with what we provided in October and November.
Okay.
Thanks, a lot from I'll pass it on.
Thanks, Jason.
The next question comes from Rob on Stein with Evercore. Please go ahead.
Great. Thank you very much.
First question can.
Can you please give us a little bit more detail on the distribution gains I think sort of mid last year.
Sam's club for batteries, obviously very prominent and important.
Retailer can.
Can you talk maybe a little bit about the magnitude or the size of the distribution gains in terms of who you're entering <unk>.
<unk> auto.
And in batteries in the U S and internationally.
Well I can provide this sort of some directional in terms of retailer distribution because it comes from a couple of different places obviously, we were able to enter clubs last year.
But also as you saw play out over the balance of 'twenty, we were able to expand distribution and get more favorable distribution in a number of retailers that are out there, we don't like to speak to specific customer distribution wins or losses or development.
Broadly speaking, we were able to expand distribution and improve our space on a number of major retailers in both measured and unmeasured channels and Thats true both on batteries as well as auto care and auto care, we were able to.
Jump into the home center, we were able to get expanded distribution there and then in the Unmeasured Universe. It's also online and our digital commerce team has been able to make great headway in growing our auto care business online and we would expect that to continue.
Same is true in international markets as well you just don't have the distribution gains that size and scale that you do in the U S. But.
Very similar.
In markets like the U K, we were able to get better distribution expanded distribution in many major retailers in that market.
Rob to combine between battery and on appear we've called out that distribution is driving about five 5% of the.
Organic growth that we had this quarter.
Terrific and then.
Second.
Last quarter I think you mentioned that you thought the channel mix and package mix would be about a 50 basis point headwind to margins.
Is that still your current read of things and is there anything that you can do.
With revenue management or any other tools to try to mitigate that thank you.
Yes, Rob.
With the elevated demand continuing we are seeing a little bit more pressure from a mix standpoint.
In terms of where consumers are shopping.
Youre spot on I mean, the things that we're going to be looking at or.
Managing that mix.
From total package standpoint.
<unk> point as well as a revenue standpoint.
So teams are first and foremost was working on surety of supply and we're moving to longer term for other mitigation tactics that we can employ.
Terrific. Thank you very much.
Thank you.
The next question comes from William Reuter with Bank.
Bank of America. Please go ahead.
Good morning, I, just have two quick ones the first one.
Toy sales have been really strong I think that's one of the categories, which.
One of the device categories.
It is important to you guys do you have a sense for how much of the sales growth you've experienced is due to that category specifically.
It's hard to decompose it at that level I mean that what we can see in the device universe that consumers have in their home continuing to buy.
More devices, a lot of it's related to home office trends home health trends.
Home hygiene trends Youre seeing devices increase in the home related to those items certainly toys gaming controllers, obviously plays a role in it as well.
But we haven't provided sort of our internal debt.
By surveys and how are those broken down there is.
Page in the Investor day deck from.
Two novembers ago, where we provided debt and we can send that to you. If it is helpful.
Okay I can search for that.
The other one is.
You're still going to continue to be integrating the auto care acquisition through this year are you at the point, where now you are evaluating additional M&A opportunities given that leverage still is above five times or will you wait to get through the integration this year before looking for additional opportunities.
I think we are always looking at opportunities I think we are mindful of leverage levels. When we're doing that we're also mindful of what the organization has on its plate and whether they can handle an acquisition I mean, the two bolt on acquisitions that we were able to do last quarter were manageable from a debt standpoint, they are a manageable from an organizational standpoint.
<unk>.
And any future deals we would put the same lens on to make sure that.
It was strategically important it was manageable within debt levels and manageable from an organization standpoint, those are all always lenses, we make sure. We take these these opportunities through.
Great helpful commentary, that's all from me. Thank you.
Okay.
The next question comes from Carla Casella with JP Morgan. Please go ahead.
Hi, just a little bit more clarification on your thoughts here on working capital for the year. So you mentioned the inventory rebuild.
Do you have coming but did you have you also changed your payable terms at all Andy.
Tomorrow normal.
On days as we go through the year.
We haven't changed our terms.
And so <unk>.
Teams continue to manage all components of working capital including.
Accounts receivable on accounts payable.
We haven't seen any.
Noticeable changes on on payment cycles.
Okay, Great and then also on cash flow on your Capex. This quarter was running a little bit below the rate that you're guiding to for the year.
Can you give us a sense for timing and any special projects that would come in one quarter versus another.
No no significant.
Outlook in terms of the cadence over the balance of the year.
We call that the full year amount.
And the amount in Q1 was in line with our expectations.
Okay, and I have one business question on the auto care side, given the recent increase in gas prices from some of the state restrictions.
Do you see much impact on sell through when when do we see this as kind of stressed assets.
You can I mean, I think the key driver for that is going to be number of miles driven.
And to the extent that increased prices are going to keep people from from driving as many miles and you can see an impact but right now theres a lot of counterbalances to that including just travel in general in terms of <unk>.
<unk> method of travel and right now you are seeing more and more people.
Driving as opposed to flying to the miles driven is increasing but.
Elevated gas prices can have an impact.
If it ultimately takes people off the road.
Okay. Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Mark Levine for any closing remarks.
Thanks for joining us today and your interest in Energizer.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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Yes.
Yes.
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