Q2 2022 Energizer Holdings Inc Earnings Call
Available on our website.
Information concerning our categories and estimated market share discussed on this call relates to categories, where we compete and is based on Energizer is internal data data from industry analysis and estimates we believe to be reasonable. The battery category information includes both brick and mortar and e-commerce retail sales unless otherwise noted all comments.
Regarding the quarter and year pertained to Energizer was fiscal year and all comparisons to prior year relate to the same period in fiscal 2021 with that I'd like to turn the call over to Mark.
Thanks, Jackie and good morning, everyone as.
As you saw in our release posted earlier today, we delivered a strong second quarter, which is a testament to our team's dedication and resilience.
Due to the hard work of our colleagues around the world, we are very well positioned and excited about the prospects for our business.
Let me start by highlighting some key themes and headlines to takeaway from today's call.
First we.
We successfully executed pricing actions and growth plan, which generated healthy organic top line growth.
As a result of our performance in the first half of the year and the benefits of pricing, we're increasing our topline guidance to low single digit growth for the full year.
Second while we remain focused on preserving gross profit dollars. The combination of our pricing efforts and internal cost savings initiatives should begin to drive gross margin expansion in the back half of the year.
From a category standpoint, we operate in categories that are meaningfully larger than pre pandemic levels with both volume and value of considerably on a two year stack.
And finally, the investments we are making in our global supply chain are paying off bill.
Fill rates are steadily improving and we have enhanced visibility and connectivity from our digital transformation. These.
These improvements are designed to drive efficiencies to reduce working capital.
Allowing us to return to normalized free cash flow generation in the back half of the year.
Let me take each of these in turn.
First we delivered organic growth of one 3% driven by a combination of global price increases and strong growth in auto care.
This is over and above the almost 13% organic growth we saw in the prior year quarter.
In the battery segment, we experienced normalization in net sales as volumes decline as compared to the elevated prior year period.
This volume decline was partially offset by pricing as well as distribution growth in key markets.
Our auto care business delivered organic sales growth of nearly 20% in the quarter with double digit growth across both North America and international more than offsetting the organic decline in battery.
This growth was driven by a combination of pricing timing of refrigerant shipments and expanded distribution, particularly internationally.
As we continue to execute our international growth plans behind armor, all and our portfolio of iconic auto care brands.
Turning to margins.
<unk> environment in which we are operating remains volatile.
We recognize the need to generate improved insights early in the pandemic and our investments in data and analytics have enabled steadily improving fill rates.
That improved connectivity is now, allowing us to see the inflationary impacts earlier and take quick action on pricing to ensure we are offsetting the dollar cost of these headwinds. Those insights are also highlighting areas, where we can be even more efficient, which will drive margin expansion over the balance of the year.
Our latest round of broad based pricing actions took effect in each of our categories towards the end of the quarter.
We also announced another round of targeted pricing in areas that continue to experience cost inflation.
In general these pricing actions have lagged the impact of the cost increases we have seen and as they take full effect, we anticipate meaningful margin improvement in the second half of the fiscal year.
Third our categories continued to perform well and remain larger than pre pandemic levels in the battery category, both volume and value remains up double digits on a two year stack basis.
While we saw declines in the latest three month data, we expect price increases executed across the category will drive an increase in value over the balance of the year.
Our iconic brands outpaced the category, resulting in a $2 eight share point gain versus last year with growth across each region and total batteries in particular, we experienced growth in the U S driven by expanded distribution as well as strong performance internationally, including share gains in <unk>.
17 of our top 20 markets.
Turning now to auto care.
Where the fundamentals of the category remain healthy.
The number of cars in the car park, the average age of vehicles and the number of miles driven are all growing compared to pre pandemic levels.
As we look ahead, we are excited about the growth engine, we are creating an auto or.
Our business continues to grow rapidly in the platform is designed to support our future growth aspirations, while also improving margins.
The growth will come from a robust innovation pipeline, which is full of products containing new exciting technology designed to deliver the performance value and convenience expected by our consumers.
We're also connecting with consumers through marketing communication and efforts to drive engagement with our brands.
Great example of how all of this comes together is our armor all partnerships with the Formula One champion Red Bull racing team in Formula One racing legend Jenson button.
Formula one is truly a global sport and resonates in every market and our sponsorship has led to millions of impressions through everything from new in store displays.
This presence in social media in markets around the world.
We have the right combination of product innovation marketing efforts and operational excellence to continue to grow this business in the years ahead.
And finally, we are starting to see some early dividends from our investments in digital transformation.
<unk> earlier about the benefits of greater visibility and faster insights on our margins. We also expect these investments to enable us to maintain acceptable fill rates, while prudently, reducing our inventory levels as we continued to see stability in the global supply chain.
While our heightened inventory levels remain important to serving our customers and consumers. We believe this combination of a stabilizing global supply chain and better data and analytics will enable us to decrease inventory towards the end of the fiscal year <unk>.
Unlocking free cash flow.
<unk> to invest in our business and reduce debt.
As you can see from our results.
Our business is strong and our strategy is paying off.
We have overcome significant challenges and the investments we have made position us well for the future and will allow us to emerge stronger than before the pandemic I.
I am incredibly proud of our colleagues around the world and the results. We delivered this quarter, which are a testament to our team's commitment to success.
Now, let me turn the call over to John to provide additional details.
About our financial performance.
Good morning, everyone I'll start this morning with some highlights on progress we're making in a few focus areas followed by an overview of our financial performance this quarter and our outlook for the remainder of the year.
We like many others have experienced significant cost pressures as inflation has proven to be more permanent and pervasive than many anticipated.
As such we are redoubling, our efforts to address the drivers of gross margin across our businesses and regions.
We have historically employed dedicated teams focused on pricing and revenue management as well as ongoing efforts to optimize costs in our supply chain.
Given the fast paced environment in which we have been operating we consolidated those efforts to prioritize the preservation and expansion of gross margin.
By bringing those teams together at the beginning of the year, we were able to execute incremental pricing and focused cost savings projects that we expect to help deliver the outlook. We initially provided in November despite continued inflationary pressures.
Further coordinating these efforts in expanding cross functional involvement we were able to deploy resources towards our highest ROI opportunities.
We have already identified a substantial pipeline that we can undertake over the balance of this fiscal year and future years to enhance our portfolio's improve pricing and reduce costs.
This program is designed to ensure we maintain the healthy growth in both batteries and auto care, while accelerating margin improvement.
Based on the work we've done to date, we already expect incremental gross margin improvement in the back half of the year and remain on track to deliver the full year gross margin rate as guided in our first quarter earnings.
Our working capital has been elevated throughout the course of the pandemic.
The increase was primarily due to incremental investments in inventory attributable to inflation the impact of a more elongated supply chain increased safety stock and more recently pre build for the auto care season.
These investments were critical to ensure customer service in the volatile environment in the last two years power.
However, improved visibility from our digital investments as well as improved stability in the global supply chain should allow us to reduce the heightened levels of inventory and lower our working capital needs.
As a result, we expect to return to more normalized free cash flow generation in the second half of the year and we'll prioritize debt reduction as our cash flows recover.
Finally over the last two years, we have made significant strides in our digital transformation, which has elevated the quality of our data the visibility we have over multiple aspects of our business and our analytic capabilities.
As you've already heard these tools are yielding substantial benefits and as we seek to implement new tools and capabilities. We will remain focused on areas with the highest return potential.
Instance, we have been able to greatly improve the quality of the analytics on our ocean freight spend and have identified areas to reduce transportation costs and optimize container utilization, which can lead to cost reductions as well as more efficient inventory management.
We've stayed disciplined and focused on short and long term priorities, while managing through the crisis.
Our digital transformation is starting to pay dividends by focusing our efforts on high priority areas like gross margin and working capital management and by continuing to develop our digital capabilities. We are confident that we will continue to generate improvement in our results in the quarters and years to come.
Now turning to our financial results reported sales of $685 $4 million were essentially flat, while organic revenues were up one 3%.
Pricing actions globally delivered roughly 5% to organic growth and additional distribution contributed another 1%.
While volumes were better than expected during the quarter. They declined roughly four 5% as we lapped elevated COVID-19 related demand in the prior year.
Looking at our two segments battery and lights organic revenue was down three 5%, primarily due to elevated comps with the prior year quarter as last year grew roughly 15% driven by that elevated COVID-19 related demand.
We were able to partially offset these volume declines with our first round of pricing actions and distribution gains.
As a reminder, our first round of pricing went into effect in the December quarter, and we have executed additional pricing that went into effect mid March.
<unk> continued its strong performance with organic sales up 19, 4%, primarily due to pricing actions.
Shifting timing of AC pro shipments from the third quarter to second quarter and distribution gains in both the U S International markets.
We have implemented numerous price increases across our portfolio with the most recent round going into effect in early April .
As expected adjusted gross margin decreased 560 basis points to 34, 9% as increased input costs, including materials transportation and labor were partially offset by the impact of our pricing actions.
A&P as a percent of net sales was two 9% for the quarter and four 7% for the first six months, while the second quarter is typically our lowest quarter for A&P spend due to the seasonality of both of our businesses. This year, we made a conscious decision to shift more of our auto care investments in the third and fourth quarters as both periods created higher ROI for our.
Investments last year.
As a result, we anticipate A&P spending for the full year to trend more towards our historical norm as we continue to prioritize investment in our brands.
Excluding costs associated with acquisition and integration and exiting the Russian market SG&A as a percent of net sales was 17, 2% up from 16, 7% in the prior year.
On an absolute dollar basis, SG&A increased $3 $5 million due primarily to higher spend related to our digital transformation.
Similar to the first quarter segment profit for both battery and lights and auto care benefited from continued strong demand pricing actions and distribution gains however, inflationary input cost pressures more than offset the stronger than expected topline performance, resulting in segment profit declines of $30 $1 million for battery and $4 6 million.
In auto care.
Interest expense declined roughly $800000 as the benefit of our refinancings over the last year more than offset an increase in debt, which was used to finance investments in incremental inventory.
In March we took the opportunity to term out our revolver and completed a $300 million bond offering at six 5%.
As a result, we expect slightly higher interest expense and the remainder of the year.
Our debt capital structure is now 86% fixed at a blended average interest rate of four 2% with minimal maturities prior to 2027, which positions us well in the current rising interest rate environment.
As we mentioned on our last call our mandatory convertible preferred stock converted to approximately $4 7 million common shares on January 18.
Weighted average shares outstanding were $71 6 million for the quarter.
And for fiscal 'twenty, two we are anticipating weighted average shares outstanding to be approximately $72 million.
Based on our outperformance on the top line in the first half of the year and the success of our pricing actions across the globe, we are increasing our outlook for net sales to low single digits.
While the operating environment remains volatile the pricing actions, we have taken along with cost management efforts are expected to offset inflationary pressures.
As a result, we are reaffirming our outlook for adjusted earnings per share of $3 to $3 30.
And adjusted EBITDA of $560 to $590 million I.
I do want to note that these results exclude any onetime charges related to the exit of our Russian operations during the second quarter.
Now I would like to turn the call back to Mark for closing remarks.
Thanks, John through the first half of the year. Our teams execution has been exceptional our categories continued to perform well globally and our pricing initiatives have delivered as expected we have laid the groundwork over the last several quarters to restore the profitability and cash flow generation. This business is capable of.
And we are optimistic about the days ahead.
We remain well positioned in the marketplace and have complete confidence in our team's ability to win the day by staying focused on the consumer delivering for our customers and doing so despite any challenges, which may come our way with that I will open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Wendy Nicholson with Citi. Please go ahead.
Hi, good morning.
Two questions. If that's okay first on the battery business. It sounds like your market shares are strong now which is awesome.
I'm curious if you see any sort of even just recently any tick up in private label shares just given the economic situation and maybe <unk>.
Increasing price sensitivity on the part of consumer so anything that youre seeing there would be helpful. And then on the <unk>.
Auto business again demand I know you said it was really strong but I'm wondering if you anticipate in the summer months when it's seasonally a bigger business again, just with the higher gas prices are you hearing from the trade any comments that they expect fewer people to be on the road fewer people driving for vaca.
Anything like that just given where gas prices are thank you so much.
Good morning Wendy.
Start and then I'll turn it over to John and then maybe talk about the growth expectations, we have in the bag.
<unk> on your first question as it relates to trade down we really haven't seen it yet we maybe have seen a slight trade down in terms of pack sizes, but the consumers are really sticking with premium brands. In fact private label in batteries were down in the U S. About two five share points in globally just over two share.
Points, that's obviously something we're not going to take for granted we're going to watch it carefully to the extent it happens.
Any trade down were to happen, we have value brands in our portfolio and can leverage those as we move forward on an auto care the underlying fundamentals of the category a really healthy number of miles driven exceeds pre pandemic levels. The size of the car Park also is going up as well as the age of the fleet now exceeds.
12 years old all of those factors are healthy drivers for category growth and as a result.
We expect great things for this business over the balance of the fiscal year with Johnny will talk about sort of growth in Q3, Q4, I think we called up organic growth for the rest of the year Wendy and that is driven in large part by what Mark had talked about so I think we're pretty optimistic about the pricing that we've taken and the continued performance. So we're expecting that growth to happen in the back half.
Terrific. That's very helpful. Thank you so much thanks Glenn.
The next question is from Bill Chapell, which was securities. Please go ahead.
Thanks, Good morning.
Good morning, Bill Hey, Bill.
On the.
Auto care certainly good start.
Can you maybe quantify the pull forward and maybe I missed that and also has there been any negative impact from weather, we've seen from the garden companies, even some of the pet companies that it's been of late.
Start to the spring season colder weather than expected, Kevin the southern half of the country and so.
Could the numbers even been better.
Well I think maybe it was breakdown so the growth on that 20% its about little more than half was pricing.
A little bit less than half was that pull forward of the AC pro and that's a shift from the prior year, where I think we were having trouble getting our hands on some of that so we shipped earlier this year than we did last year. So I think it was it was a good quarter I don't know if there were things left on the table and I haven't heard that we've really been impacted by weather to this point, although it has been colder Q3 Q2 Q3.
Bill, it's always tends to be a bit of an inflection point in terms of shipments for us and they tend to shift back and forth year to year. It has been a little bit from a weather standpoint, a later start to the season, but it's really starting to pick up youre seeing the weather turn and as long as if you recall a couple of years ago, we had an unusually long cold.
<unk>.
The spring and as a result.
Sales suffered we're not seeing that same dynamic play out retailers to the point of John on pull forward have continued to invest in inventory to be ready for when the season starts. So Q3 is really when it gets gets going and if the weather cooperates we should be fine.
Got it and then on the distribution gains.
I think you alluded. It's international are you seeing distribution gains in battery and then maybe kind of any thoughts on how.
<unk> is doing in terms of that trade down.
Rayovac has been holding steady as we mentioned we haven't seen trade down yes in the category to the extent, we've taken pricing and the pricing continues to go into effect typically you may see some some trade down we're prepared for that with both rayovac and eveready value brands in our portfolio distribution gains in batteries fairly broad base you are seeing in.
And every international trade group, you're seeing share gains across both modern developing and distributor markets. Youre also seeing share gains in the U S. Our distribution gains in the U S should start to cycle off late late Q3, and as a result, we should plateau, we wouldn't expect it to go down it will be in line with the category.
Great. Thank you.
Bill.
The next question is from Andrea <unk> with J P. Morgan. Please go ahead.
Thank you.
Just trying to break down that pricing that obviously you gave us.
The branch for the pricing of the quarter, but hoping to get a little bit of color into the second half.
What are you embedding pricing how much of that is already in the trade or are coming out.
And then on that also part of it like Yours, you got some distribution gains I was hoping to see.
We will play a price film from the battery side coming into positive and then if we should expect it doesn't look like you're county.
That also care will continue but you'll have a tough comp. So I was just trying to be.
It is a second question on the auto care and going back to Bill's question.
You mentioned that you see shipments from last year, how we should be thinking on auto care, the puts and takes and how to think about the auto care numbers.
So each of the third quarter. Thank you.
I'll start that Andrea I think.
In terms of pricing all pricing that we have initiated with retailers is built into the outlook. We've also built in the historical elasticity associated with price increases into that outlook.
In terms of auto care. We are as you mentioned, we do have tough tough comps in large part because of the pricing actions, we've taken on batteries and auto care, we do expect organic growth for both of those businesses going forward John any other color, maybe it's a little more color on the back half I mean, Andrea we were roughly flat through the first six.
Months were called up our top line, we're looking at.
Organic growth in the back half will probably mid to high single digits. So it does it does grow substantially with our pricing.
Uh-huh, that's great and best of luck. Thank you Paul.
Thank you.
The next question is from Lauren Lieberman with Barclays. Please go ahead.
Great. Thanks, good morning.
Two questions from me also first is just I was curious if you could articulate the degree to which your inflation forecast.
James So knowing.
How would the expectation for bottom line, but we think those.
The building blocks.
How much more of that.
Pro level inflation is impacting the business versus how much your hedge since theyre not experienced net inflation. So that was one and then the second one as you talked about starting to work through some of the inventory.
<unk> been holding how we should be thinking about operating leverage as we start down that path.
End of the year that starts to happen.
Look forward in 'twenty, three but should we be thinking about there being some drag on margin from that.
If I'm working through that inventory.
Yes.
I'll start with the first one real quick on what we've seen so last quarter, we had kind of called full year 2000 to almost $250 million of inflationary cost pressures as of today and kind of as we finish up the quarter. We still think we're roughly in line with that now there's been puts and takes and so some items have have gone up more but we've seen some pullback in others. So all in I think we've.
Plateaued a bit over the last quarter from an inflationary standpoint.
So I think we feel like.
We're in a pretty decent place there as you think about operating levels as we go forward there will be some.
Actions that will take time to work down inventory and we've taken that into account as we look at 'twenty two not going to give 'twenty three guidance, but we're mindful of the impacts of slowing things down in order to to get through that so.
We will give a better outlook as we get to the end of the year, but it is something that we're working on.
Okay, Alright, thank you thanks Lauren.
The next question is from Javier Escalante with Evercore ISI. Please go ahead.
Hi, Good morning, everyone. My question is to see whether you can give us a breakdown order breech of gross margin change in the second quarter versus year ago, the impact of commodities logistics.
The benefit of pricing and how that sort of look into the second half when margins since when you span.
Secondly, and related to that is there.
The run rate of pricing. So it's 5% in Q2, what was the exit rate.
What is the level that you are aiming that we distort round and whether that's a round is enough to get you back to gross margin recovery. Thank you.
On that last point heavier I'll cover that really quickly and then I'll turn it over to John for sort of talk through the bridges in the quarters, but on the third round of pricing that we mentioned.
It's a targeted price increase and a subset of our of our categories and we will continue to monitor those but I would say on in terms of all of our price increases the original expectation as we go into it is to preserve gross margin dollars and then over time, we'll be able to work on our gross margin rate going forward with John on the breakdown.
Yes, Javier so we had growth of about 920 basis points of cost increases that was really transportation of about $4 70 raw materials of $3 40, and labor of 110, we're able to offset about 60 basis points with productivity improvements and then we took pricing of a little under 300 basis points that came through.
And as Mark talked about earlier, that's rolling in over time. So we'll look for that to continue to improve as the year goes on I think what we were expecting if you look at our first half gross margin rate, we think that the back half will be up about 200 basis points.
And roughly in line with where we had said we'd be kind of at the end of the first quarter. So we're still calling for that mid.
Mid 37, and 37, 5% range.
And a follow up on the inflationary situation. When you talk about the political you are referring more about the logistics side.
The freight and the elongated supply chain or you're talking more about this book priced at spot prices for raw materials. Thank you.
Yes, I would say it's both so we have seen some flat towing and some opportunities on ocean freight and as I think we mentioned in the prepared remarks, there is a.
A lot of work, we're doing on ocean freight and other areas, where we've seen.
Dramatic increases over the last year to try to drive those down as much as we can so I think both macro and our own actions, we see some opportunity there. So I think were pretty.
Pretty good shape and Javier I think on the Ocean freight rates for instance, as well as the North America freight rates Youre, starting to see premiums come down you're starting to see a reduction in the accessorial fees that you will incur as a result of that to while the rate the base rates, maybe plateauing staying the same you are seeing some favorability in terms of the premiums you are having to pay.
In order to move goods.
Thank you very much.
The next question is from William Reuter with Bank of America. Please go ahead.
Good morning.
Last quarter, you had mentioned that.
You had about 40% of your cost fixed for the remainder of the year.
At this point based upon what either contracted inputs or hedges you have in place.
Where are you guys in terms of how much exposure is left on those items, that's right Bill for fiscal 'twenty two.
We should be mostly fixed we've got pretty good visibility to our cost structure for the rest of the year and Thats a combination of inventory on hand.
A little bit of hedging that we've got in place.
Okay, and then secondarily.
You had some increased shelf space.
I guess are you or is there an expectation that you think that you have an opportunity given the strong velocity of units that you've had that you may be gaining additional space do you have any ongoing RFP processes.
Any thoughts there.
Well I would say that's an ongoing effort of our commercial teams across the world. We're continuing to look for improved visibility as well as expanded distribution.
And partner with retailers to make sure that we can bring that to life.
All distribution gains.
Or shifts have been built into the outlook that we provided we do expect we've had very healthy.
Share gains over the last 12 months youre going to start to see some of that expanded distribution.
Start to plateau in Q3 towards the end of Q3 and as a result, we would expect our share gains to level off, but we wouldn't necessarily expect them to.
Slide either because we continue to have healthy distribution and we'll continue to fight for more.
Got it helpful commentary. Thank you.
Thank you thanks, Phil.
Again, if you have a question. Please press Star then one.
The next question is from Carla Casella with Jpmorgan. Please go ahead.
Hi.
Inventory did you give us a sense for how much of the increase is units versus cost.
We should expect that to be up through the remainder of the year and similar to stimulate a degree.
So as we break it down a fair amount of the increase this year is cost a lot of those cost increases came through in the fall into the next turn of inventory obviously went up so.
The other part would be more days, driven and thats the elongation of the supply chain.
That safety stock that we bill so I think a lot of thats going to hang around for the good portion of the year, Although we're looking to to address that as much as we can obviously in the macro environment.
That will be tough, but we're continuing to push there.
Okay, Great and then.
Revolver borrowings and.
Are you expecting are we should we be past the peak after.
At this point.
Yes, so revolver borrowings I think as of today are zero.
We termed out most of that short term debt.
During the quarter I think what we're expecting is to return to free cash flow generation in the back half and we're going to prioritize debt paydown as that starts to happen.
Okay.
Great and then just last one did you give that.
Comments on any comments on zinc I may have missed it.
Trends in the sequential trends in zinc.
Yes, zinc zinc is one of those commodities.
It's been pretty volatile it's gone up a lot over the last year continue to go up throughout the quarter, we've seen it come back a little bit but.
It has been one that has gone up.
Okay great.
But as raw materials still around 40% of Cogs or has that ticked up just given all of the raw material inflation.
I think it's roughly 40% that's right.
Okay, great. Thanks.
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, everyone for joining and have a good rest of the day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Yeah.