Q3 2022 Energizer Holdings Inc Earnings Call
Categories in estimated market share discussed on this call relates to the categories, where we compete and is based on Energizer is internal data data from industry analysis and estimates we believe to be reasonable.
<unk> category information includes both brick and mortar and e-commerce retail sales.
Unless otherwise noted all comments regarding the quarter and year pertained to energize, our fiscal year and all comparisons to prior year relates 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.
I wanted to start the call by thanking the energizer team for their continued commitment and passion for serving our consumers and customers across the globe.
Starting with a few headlines on our results in the quarter, where our business performed at a high level and we delivered another solid quarter on.
On the top line, our pricing actions and operational execution generated 4% organic revenue growth.
Combination of our pricing productivity and digital transformation initiatives are also creating momentum in gross margin driving 120 basis points of expansion in the quarter.
And adjusted earnings per share were <unk> 77.
An increase of 4% from the prior year.
Our strong earnings are a testament to our relentless focus on delivering results in a challenging environment.
Before turning it over to John for details on the quarter I want to provide some color on three areas.
Macro trends influencing consumer demand.
Health of our categories and our key focus areas for the balance of the year and into fiscal 'twenty three.
Starting with the macro trends, which emerged in the quarter.
Rising interest rates and increasing prices in virtually every aspect of consumers' lives have led to declining consumer sentiment and shifting shopping habits consumers.
Consumers started to prioritize their spending in the third quarter, putting critical categories like rent food gas and utilities first and then moving to essential categories like batteries, while de prioritizing categories. They deemed non essential.
More specifically in our categories.
And batteries, while category value decreased approximately four 5% in the latest 13 weeks.
Long term fundamentals remain strong.
Today consumers own more devices than pre pandemic and the average number of batteries a typical consumer purchases as increase in that time.
As a result of category is meaningfully larger than prior to the pandemic with value up over 14% on a three year stack basis.
In the most recent data the category trends are being impacted by the macro environment I just mentioned, although value was outpacing volume as a result of pricing taken across the category.
Our business continues to outpace the category, resulting in a two five share point gain versus the prior year.
During that same period, we experienced value growth driven by pricing expanded U S distribution and strong performance across our key international markets as.
As we begin to lap these distribution gains in the fourth quarter, we anticipate our performance to roughly mirror the category on both a volume and value basis.
Now turning to auto care, where the long term fundamentals of category health are also strong.
With growth in both the number and average age of vehicles in the car park, resulting in category value growth of nearly 26% on a three year stack basis.
In the most recent three month period, the category grew 4% in value primarily from pricing in refrigerants and growth of performance chemicals.
<unk> in the quarter were impacted by some of the same macroeconomic factors I previously mentioned, which caused consumers to defer certain types of vehicle maintenance.
As an example, our refrigerant segment experienced a volume impact from consumers differing maintenance.
When you combine this trend with the cool start to the selling season, we saw lower than expected replenishment. This drove nearly all of the year over year decline in our auto care net sales.
Looking at our other auto care segments.
We experienced strong growth in performance chemicals as consumers look to products to extend vehicle mileage and performance of.
Appearance chemicals, our largest sub segment also grew in the quarter behind our armor. All brands. This is on top of 16% organic growth in the prior year.
Fragrance declined as consumers prioritize spending away from this discretionary category in favor of more essential needs and finally, our international auto expansion plans continue to pay dividends, where we have driven double digit growth in the quarter.
While we expect volatility to continue we have the right portfolio of iconic brands to maintain our connections with consumers our broad range of offerings and batteries and auto extend from value brands like rayovac and tough stuff to premium brands like Energizer and armor all.
While private label is growing across many consumer categories. We saw private label declines in both batteries and auto appearance in the quarter.
Now turning to the progress we have made in the focus areas, we highlighted last quarter.
As we've previously noted we redoubled our efforts to address gross margin across our business and regions. This program has generated an extensive list of initiatives to drive improved gross margin, while continuing to capitalize on growth opportunities.
It has shown early signs of success and we expect additional gross margin expansion in fiscal 'twenty three.
Equally important the reduction of our working capital has begun with our improved visibility from our digital investments as well as stability in the global supply chain, we reduced our levels of inventory over the last two months by $50 million from the peak in May to the end of July .
We expect this trend to continue resulting in a resumption of our historical free cash flow generation beginning in the fourth quarter.
With that I will now turn the call over to John who will dive deeper into our financial performance for the quarter and provide more details about our outlook for the fiscal year.
Good morning, everyone.
First I will provide an overview of our financial performance for the quarter, followed by a discussion of our full year outlook.
With revenue reported sales this quarter were up 1% to $728 million.
And organic sales were up three 8%.
Breaking those results into our two segments.
Battery and lights organic revenue increased seven 4% as the favorable impact of pricing and distribution gains offset the elevated demand in the prior year as well as expected lower volumes due to our pricing actions.
As a reminder, the benefits of our pricing actions are broadly in place and fully benefiting our results, including the first round of increases executed by December 2021 in the second round, which were executed by mid March of 2022.
Auto care organic sales declined five 1% largely due to lower than expected sales of premium refrigerants as well as our decision to deemphasize low margin straight gas offerings.
Despite the very hot temperatures across the country in June we believe elevated gas prices had a negative impact on miles driven customer foot traffic in the category and a tendency for drivers to defer non critical maintenance despite.
Despite these challenges as Mark mentioned, our auto appearance business performed well and our performance chemicals led by STP delivered double digit growth in the quarter.
Adjusted gross margin increased 120 basis points to 44% as the price increases in both battery and auto care more than offset input cost inflation, which included material transportation labor and currency headwinds.
While we are seeing early signs of stability in many of our input cost inflationary pressures totaled roughly $130 million through the first nine months of the year and we anticipate continued headwinds to impact the fourth quarter.
With successfully implemented pricing, we expect full year gross margins to be roughly in line with our previous outlook of 37% to 38%.
A&P as a percent of sales was five 3% for the quarter compared to six 1% in the prior year on an absolute dollar basis, A&P spending was $5 $6 million lower.
We now expect A&P as a percent of sales for the full year to be slightly below our 5% to 6% range.
SG&A as a percent of net sales was 16, 3% up from 14, 8% in the prior year on an absolute dollar basis, SG&A increased $12 $3 million due primarily to environmental costs related to a legacy facility recycling fees and higher it spending related to our investments in digital transformation.
Total segment profit was up $10 million with battery and lights up $28 $8 million in auto care down $18 $8 million.
In battery and lights pricing and new distribution more than offset higher input costs and while pricing benefited our auto care segment higher input costs and lower volumes more than offset the benefit.
Interest expense increased $2 $5 million in the quarter related to the $300 million bond issuance in March.
We ultimately use the proceeds to term out our revolver balance.
Our debt capital structure is now 85% 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.
Adjusted earnings per share was <unk> 77, an increase of 4% from the prior year.
This is inclusive of $12 million or approximately <unk> 13 of foreign currency headwinds that we experienced in the quarter.
These results are a testament to our colleagues relentless focus on continuous improvement across the business.
Turning to our outlook for 2022, I would like to compare our original guidance provided in November on our key metrics to where we now stand.
In November we indicated that organic revenues would be flat, while reported revenues would be negatively impacted by foreign currency headwinds of 20% to $25 million.
In the second quarter, we revised our organic growth outlook up to low single digits, which still holds.
However, our reported revenues are now expected to be negatively impacted by approximately 60% to $65 million of currency headwinds for the full year of $40 million higher than our original outlook.
Adjusted earnings per share and adjusted EBITDA are expected to be in the ranges of our initial outlook of $3 to $3 30, and $5 $60 million to $590 million, respectively. However, we expect the impact of the rapidly strengthening U S dollar and our exit of the Russian market to result in headwinds for the full year of approximately $20 million or 22.
Inclusive of these impacts we are now expecting full year adjusted earnings per share and adjusted EBITDA to be at the low end of our previous outlook.
We are incredibly proud of the results that we've delivered in the first nine months of the year. Our team has done an excellent job holding to the original outlook, despite currency headwinds and the unexpected exit from the Russian market.
Now I would like to turn the call back to Mark for closing remarks.
Thanks, John our investment and the team's work and dedication are evident in our results and have transitioned us into a much more resilient and agile organization.
We are well positioned in the marketplace and remain confident that we are executing the right strategies to navigate the volatile macro environment and deliver on our long term objectives 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.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Bill Chappell with true Securities. Please go ahead.
Thanks, Good morning.
Morning, Bill Hey, Bill.
First on FX, and just kind of the expectation this year and maybe a little bit color on next year.
Is there a better way to break out FX versus the Russia exit and then.
I know there is a.
Or at least historically there has been a fair amount of hedging for currency.
That kind of rolls off as you move into the next fiscal year, So any way to kind of give us an idea with current spot rates kind of what the headwinds would be for 2023.
Yes, Bill I mean, so the dollar is really appreciated pretty rapidly against most currencies in the third quarter. In total we're now expecting about 150 to 200 basis points of headwinds for the full year, that's versus our original view of like 70 to 80, and Thats, resulting in about 25% to $30 million of earnings impact or about $15 million to $20 million more than.
When we gave our outlook last quarter as you look into longer term I think what I'd say is at current spot rates, we're probably expecting around 250 to 300 basis points of net headwinds on the top line.
For <unk>.
Going forward.
Kind of annualized.
Yes, yes on an annualized basis Thats, a current spot and how we're looking at three or four months away. So we'll continue to watch it but it's definitely a headwind.
And then move into auto care.
Mark maybe you could give us a little more color of kind of how you think it's performing.
With last year be viewed as a difficult comp as we were reopening for the first time.
Was weather a bigger impact than you expected or are you seeing trade down faster. It's just kind of there are a lot of moving parts. So China hard to see if this if this is <unk>.
<unk> B rated B, plus b minus that kind of thing.
In terms of expectations.
Bill I think as you know weather plays a big component in the auto care business. When we were talking last quarter. It was a colder start to the season and normally you have plenty of time to recover from that in this season, while we saw as consumer behavior shifted around the same time that some of the heat hit which as you know impacts our.
<unk> business, the most I would say most.
Of our organic declines in the quarter were related to the refrigerant business. So what happened is you had a colder start to the season.
<unk> had consumers shifting more of their behavior towards essential and vehicle maintenance not all vehicle maintenance is viewed as essential that consumers really migrated toward keeping their cars running in with refrigerants theres always the option to roll down the window. So I think from this standpoint, you did see consumers trade down a little bit in refrigerants. They also.
Deferred maintenance across the other part of the portfolio, though with performance chemicals, you saw consumers really migrate to that category as they were trying to get enhanced fuel mileage out of their vehicles and so you saw some nice growth in that business appearance grew as well.
And as we mentioned in fragrance.
Consumers move away from that because it's more of a discretionary purchase so I would say, it's a balanced performance by the auto care portfolio, you are going to be impacted by some of the consumer behavior.
At least half the portfolio perf.
<unk> performed quite well in the quarter and most of the most of the negative trends in this quarter were solely related to the lack of refrigerant replenishment that we saw.
Okay.
Our next question will come from Lauren Lieberman with Barclays. Please go ahead.
Thanks, Good morning, Adam.
Wanted to talk a little bit about batteries and I know you mentioned, specifically that private label, there's really been no change, but I was curious in how you've begun to possibly leverage our broader portfolio. If theres anything youre doing in terms of merchandising and putting more emphasis on rayovac or incremental distribution for rayovac or any switching youre seeing within the portfolio.
<unk>.
Yes, Lauren it's Mark I'll start there, having the consumer right now is being impacted by inflation and the macro factors and they are adjusting their shopping behaviors and focus on essential products batteries as a category is viewed as essential so from that standpoint, the category is strong.
Our broad portfolio of brands, obviously helps us and we can leverage eveready and rayovac has value brands within that portfolio.
To date, we are not seeing trade down in any meaningful way inside the battery category. You are seeing some evidence of pack size trade down, but from a brand trade down youre seeing rayovac grow slightly.
One share points.
Energizer continues to carry our share growth within the category. So thus far certainly not seeing it but it's something we're watching very carefully and as consumers or are retailers.
Wanted to sort of emphasize the value and the category. We certainly have a lot of assets that we can leverage to make sure that we're meeting their shopper needs.
Okay, Great and then on the advertising.
In millions of dollars its not.
A huge change, but I was curious why the change in.
In plans for spending, particularly its gross margin seems to be coming in stronger and faster than I'd expected maybe its rated as you had expected it to be.
Good question Laurent.
When we're looking for efficiencies within the organization, we really look everywhere and in this case I think the point to emphasize is there was no difference in consumer facing investment from an A&P perspective.
Those efficiencies.
Really came from non working dollars.
Back of the house type spend so from a consumer standpoint, they're seeing very much. The same this year as they did last year from us.
And so given those savings have been realized do you think now something closer to five is like a better range for you because you've just found better efficiency or do you think you maintained the range in <unk>.
Just had better quality spend at comparable levels to historical.
I think as we look ahead to future fiscal years, we always target to be in the range of 5% to 6% and adjust accordingly within that range. This year. Obviously, there were a number of moving pieces. So it will be a little bit below that range. This year, but for planning purposes, we always look at as a starting point to that 5% to 6%.
Okay, all right, great I'll leave it and come back in at this time. Thanks.
Our next question will come from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you good morning.
You, please elaborate a little bit more on <unk>.
Have you guys seen batteries and auto care categories consumption as you exited the quarter.
I know you mentioned from acceleration for him.
Auto camp, but just curious on batteries and can you also comment on the inventory allows us we all heard from the retailers.
So containers from the inventory levels there.
Given that you have a lot of shelf space, perhaps seeing how these retailers.
Ken with that and how do you see the levels there and also a clarification question on FX you did mention like that.
Nation.
Impact probably coming into fiscal 'twenty, three 200 to 300 basis points.
But if you look at how you address <unk>.
On the transaction side, how to think about that thank you.
I'll start and then maybe I'll turn it over to John just in terms of how we're looking at quarter over quarter trends within the categories, but let's start with inventory levels, but we're seeing at retail right. Now is I think we would define it as slightly elevated inventory levels.
Do understand retailers focus on inventory levels, and I think as we watch it it's not anything that we view of that is going to be problematic in future quarters, but it is something we're mindful of both batteries and auto care slightly elevated and auto care, obviously as we get towards the end of the season, and then retailers will start to wind down some.
Their inventory levels in some of our main categories, but we don't view that as an.
Extraordinary headwind or tailwind that we're fighting against in terms of our inventory levels. One thing I would note in the quarter as we did pivot and it has been a bit of an inflection point for us from a working capital standpoint in the third quarter. Our inventory levels peaked we brought them down into subsequent months and as a result.
<unk> heard in the prepared remarks, we do expect to resume sort of normalized free cash flow generation.
The fourth quarter as well as in fiscal 'twenty, three and then John in terms of the phasing with Q3 and Q4 within the categories.
Yes, I think as were projecting forward I think we're expecting the fourth quarter to look similar to the third quarter. So continued strong performance in battery and then some of that softness that we saw in auto we can expect to continue and then Andre on your transactional side we.
Exercise a fair amount of hedging below the line and so we usually don't project any changes based on transactional.
Currency impacts.
Great I appreciate all the color. Thank you I'll pass it on.
Our next question will come from Jason English with Goldman Sachs. Please go ahead.
Thanks for sneaking me in.
A couple of questions first.
Input costs.
And the degree of headwind drop materially this quarter.
Is this a turning point.
No longer looks like Youre $250 million forecast for the year is in the region. It looks like you're going to come in well below that is.
Is that right. If so what's the level and why are you guiding for sequential gross margin erosion, if we've turned a corner on cost.
Yes, it's a good question. We so we have made really good progress on gross margin improvement, Jason and we did see in the third quarter pricing.
Better than then the cost input pressure that we're feeling so we're on pace for the back half improvement of 200 basis points that we said last quarter, but that's really kind of over the six months, we're still expecting the full year to be 37%, 38% and what we've seen we've built this inventory kind of the elevated levels. We did that in a rising cost environment and will continue.
And you see some of those costs come through so we're expecting and.
And we've got pretty good visibility, that's going to come through in the fourth quarter and take us back to that sort of run rate 3700, 38, now we think thats really the baseline for us and then heading beyond.
This year, we think that that's where we're going to set the base and then we can improve from there to a lot of our programs to improve cost that does not factor in any sort of input cost changes were kind of neutral that right now, but we've seen those kind of level off and.
That's kind of baked into our 3700 38 rate.
Got it.
Actually I don't get it.
Kind of confused.
So is it a utilization factor than that drove your gross margins. This time and it sounds like youre, saying not only cost will actually bounce back in the fourth quarter.
I heard this right and if so like what are the dynamics, that's causing a bounce back it's.
Yes, it's not really utilization, it's we were carrying incremental inventory. So we're up to like 160, 170 days, we built that inventory and rising cost environment. So those costs are coming through.
Kind of phase and they are still growing into our fourth quarter and so that's why you saw pricing fully in place in the third youll see the pricing fully in place in the fourth but we're going to have some incremental costs come through in the fourth quarter.
Okay. Okay.
I'll pass it on thanks.
Okay.
Our next question will come from Robert Aten Stein with Evercore. Please go ahead.
Great. Thank you very much.
To kind of circle back to the private label question.
And I was just wondering if you could give us more of an insight into.
How your discussions are going with retailers in terms of managing the category.
Managing gaps between different.
Different segments.
Our retailers.
How are retailers thinking about private label, we were recently in some targets and we actually didn't see any so I'm not sure if theres been any change of strategy. There. So really just trying to get a sense of those discussions and what's going on.
And in terms of managing the category given the tightness.
Tightness for consumers. Thank you.
Robert I think the best way and I'll speak in a general sense without getting into any specific retailer discussions, but retailers all approach.
But label a little bit differently.
We'll approach private label within the battery category, a little bit differently.
Consumers are searching for value and value can can differ depending upon at the individual consumer at times that can be they want to trade down from a from a premium brand to a value branded or private label. It can be trade down in terms of taxes.
And so I think consumers an individual retail shoppers are looking for different things I think from a macro perspective, if you look at private label share globally. It was down 1.4 share points in the U S. It was down one nine share points. So consumers are still continuing to migrate towards premium brands like <unk>.
And in previous question some of those are trading down in terms of pack size, but.
In terms of the category emphasis within batteries premium brands, Phil our strong consumers are still seeking them out.
And I think when you see those types of trends certainly retailers will take notice.
File a suit so I think it's not anything we take for granted we're going to continue to invest in our brands and continue to invest with our retailers to find the right strategy for them, we're perfectly positioned to do that within the battery category with both premium and value brands.
I think we're the best partner that retailers can lean into at a time when they may start to change their approach with consumers because we can meet any need that they have.
I appreciate all of that what I'm trying to get at is is there any.
Attempt by you and retailers to shape.
How consumers are working with the category.
By managing.
The price pack architecture or is it more.
Reactive.
No. It absolutely is proactive management of the category, which is something that we do quite well and then we partner with our retailers very closely to shape.
Individuals.
Wrapping experiences and shape, how consumers interact with the category. We also have our pricing and revenue management teams that lean in from a price pack architecture and from a promotional strategy standpoint to make sure that we're getting the best return on the dollars and that we are maximizing our ability to generate.
Healthy category value growth for our retailers as well as for Energizer.
Okay. Thank you very much.
Our next question will come from William Reuter with Bank of America. Please go ahead.
Good morning.
On the question of input costs in the fourth quarter. It does makes sense to me that you've capitalized on the balance sheet.
Elevated levels based upon where input costs were several months ago, but it would seem like this may be a tailwind for fiscal year 'twenty three based upon what's happening with some of these is that the case and should we expect some expansion in next year, just based upon lower inventory costs flowing through.
Yes, what I would say is we've still got a fair amount of inventory. So we've got good visibility on the first quarter to two quarters into next year.
As far as input costs, we've seen some puts and takes and so I think right now we.
That they're sort of pausing at these levels or they'll sell elevated and we're keeping an eye on it as we get ready for 2003, but.
We'll continue to push to improve from here for sure.
Got it and then just a follow up in terms of you mentioned, you've generated $50 million of working capital from lower inventories at.
It sounds like you expect that these levels are going to continue to come down from here do you have any sense for either over the next quarter or maybe by the end of 'twenty three what we might see from a working capital benefit.
I don't think were going to look that far out, but what I would say is we expect to continue to have those inventory levels come down and really try to optimize for working capital as Mark said over the course of <unk>.
May we saw the peak June and then July after the quarter, we've decreased that balance in inventory by about $50 million will continue to push to improve that we think that as we get into the fourth quarter, we should start generating free cash more along the lines of the 10% to 12% of sales that we've historically generated and Thats. What we will look to continue to do going into 'twenty three.
Okay I understand it's difficult okay. Thank you.
Our next question will come from Carla Casella with Jpmorgan. Please go ahead.
Great. Thanks for taking my question.
I'm wondering if you could talk a little bit about labor and wage rates and it's QQ kind.
Kind of a stable level or are you seeing rates go up even as you look into the next couple of quarters.
Alright, I think right now we're seeing is relatively stable in Q3.
Rates over Q2.
Mhm, Okay and are you seeing you mentioned you talked a bit about elasticity does it vary and.
The change in Boston by category in a battery or auto and then also by segment within battery.
The elasticity it does change by Canada, I mean, our historical elasticity models have held in recent periods with a couple of maybe outliers on that is as I mentioned earlier I mean refrigerants.
Has proven to be a little bit more elastic.
What historical models would have shown performance chemicals, perhaps.
A little less elastic than what historical models have shown it in a lot of that I would say is you have to point to the moving pieces in the analysis in terms of the prior year comp period, you were dealing with a lot of COVID-19 driven demand from either new habits, and routines certainly financial stimulus as well as reallocation of consumers.
Spending in the current year period, youre dealing with increased prices not just in our categories, but pervasive.
<unk> store rising interest rates broad based inflation.
And those in both the present period in the comp period, you have a lot of moving pieces, but.
If I were to separate those out elasticity models on balance are holding with.
With maybe a few outliers within the auto care portfolio.
Okay, Great and then I think there's been some confusion over.
Your covenant level could you just give us where you stand in terms of both maintenance and.
Incurrence covenants on the debt.
Yes, we've got significant headroom, we refinanced our credit agreement last year Carla and.
I think what we currently have is.
Blink health during the quarter.
Two and a quarter senior secured.
Net.
So we have significant headroom, there really aren't there aren't significant maintenance covenants there.
Okay great.
Okay.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Mark Levine for any closing remarks.
Thanks again for joining the call today.
And your interest in Energizer hope everyone has a great day.
Okay.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.