ENR Energizer Holdings Inc

ST. LOUIS, Aug. 9, 2021 /PRNewswire/ -- Energizer Holdings, Inc. (NYSE: ENR) today announced results for the third fiscal quarter ended June 30, 2021.  

"In our third quarter, we delivered nearly 10% Net sales growth and nearly 50% Adjusted earnings per share growth behind strong auto care results, solid execution across our business, and the benefits of synergies and reduced interest expense," said Mark Lavigne, Chief Executive Officer.  "Like other organizations, we are facing cost pressures and supply chain disruptions, but our team has taken the right steps to ensure we are able to serve customers and consumers.  The strength of our brands, the breadth of our portfolio, and the resilience of this organization in the face of the continuing pandemic position us well for success as we look forward."

Top-Line Performance

For the quarter, elevated auto care demand in both geographical segments resulted in strong Net sales of $721.8 million compared to $658.0 million in the prior year period.

• Organic Net sales increased 5.8%, or $38.3 million, due to the following items:
• • Increased year over year volumes globally contributed approximately 3.0%, primarily driven by elevated demand and timing of orders in our auto care business;
  • New distribution, predominately in North America, contributed approximately 1.8%; and
  • Favorable pricing contributed approximately 1%.

Gross Margin

Gross margin percentage on a reported basis was 37.9% versus 40.0% in the prior year.  Excluding the current and prior year costs related to acquisition and integration, adjusted gross margin was 39.2%, down 160 basis points from the prior year.

The Gross margin decrease was primarily driven by higher operating costs, including higher labor costs, tariffs and transportation, consistent with ongoing inflationary trends.  Additionally, gross margin was negatively impacted by the lower margin rate profile of our auto care business, which comprised a higher mix of our business as it experienced strong organic growth in the quarter.

Partially offsetting these margin impacts were synergies of approximately $14 million as well as favorable currency exchange rates.  

Selling, General and Administrative Expense (SG&A)

SG&A, excluding acquisition and integration costs, for the third quarter was 14.8% of Net sales, or $106.6 million, compared to 16.2% of Net sales, or $106.7 million in the prior year. The decrease, as a percent of Net sales, resulted from higher sales and synergy realization while SG&A expense remained consistent with prior year.⁽¹⁾

Advertising and Promotion Expense (A&P)

A&P was 6.1% of net sales for the third fiscal quarter, compared to 5.7% in the prior year or a $6.8 million increase due to planned incremental investment in our product portfolio as we continue to invest in support of our brands and innovation.

The changes in Adjusted EBITDA and Adjusted diluted net earnings per common share - continuing operations for the quarter reflect organic revenue growth and synergy realization, slightly offset by higher A&P, on an absolute dollar basis. The prior year quarter also included net incremental COVID-19 costs of approximately $9 million, or $0.11 per share.

In June 2021, the Company refinanced its €650 million 4.625% Senior Notes due 2026 with €650 million 3.5% Senior Notes due 2029. As a result of the Company's refinancing activity over the past 15 months, the Company reduced its interest expense in the quarter by $12.2 million as compared to the prior year.

Free Cash Flow and Continued Return of Capital

• Generated year-to-date cash flows from continuing operations of $17.5 million, as compared to $231.9 million in the prior year's third quarter, and Adjusted free cash flow from continuing operations of $42.6 million in the current year. Contributing to the decrease was the expected impacts of quarter-over-quarter working capital changes, largely driven by an increase in inventory levels. During the year, we've invested in inventory to ensure we can maintain high service levels through the first quarter of fiscal 2022, which is peak battery selling season. In addition, we have taken a proactive approach to invest in incremental safety stock given the continued volatility of the global supply network– including uncertainty around product sourcing, transportation challenges and labor availability. In addition to the working capital changes, the prior year's first quarter benefited from a $30 million receipt of a valued added tax refund settlement. (1)
• Dividend payments in the quarter of approximately $20.5 million, or $0.30 per common share, and $4.0 million, or $1.875 per share of mandatory convertible preferred stock.
• Net debt to credit-defined EBITDA was 5.0 times as of June 30, 2021.
• The Company intends to enter into a $75.0 million accelerated share repurchase (ASR) program in the fourth quarter of fiscal 2021, which, based on the August 6, 2021 closing price of the Company's common stock, equates to approximately 1.8 million shares and represents approximately 2.5% of the Company's fully diluted outstanding stock. The Company expects to fund these repurchases using available cash on hand and revolver borrowings, and anticipates that the ASR program will be completed before the end of the calendar year 2021. Any repurchases will occur under the Board of Directors' existing November 2020 repurchase authorization.

Financial Outlook and Assumptions for Fiscal Year 2021⁽¹⁾

We are updating our full year fiscal 2021 outlook for the following key metrics: 

• Net sales growth is now expected to be between 8% to 9%, attributed to distribution gains, elevated demand and favorable currency impacts;
• Adjusted gross margin rate is expected to decrease 80 to 110 basis points on a year over year basis as inflationary cost pressures continue to increase. Additional productivity management efforts, synergies and the impacts of favorable currency are expected to help offset some of the increased operational costs.
• Adjusted free cash flow is now expected to exceed $225 million. As noted above, this is a result of our investment in inventory to support the upcoming peak battery season and to ensure we maintain high service levels for our customers. We believe the steps we are taking to make these investments are prudent given the potential disruptions which continue to persist in the global supply network. We view this investment as short-term in nature, and expect our inventory balances to normalize in 2022.

We are maintaining our previously communicated full year outlook ranges for Adjusted earnings per share of $3.30 to $3.50 and Adjusted EBITDA of $620 to $640 million.

Webcast Information

In conjunction with this announcement, the Company will hold an investor conference call beginning at 10:00 a.m. Eastern Time today. The call will focus on third fiscal quarter earnings and recent trends in the business. All interested parties may access a live webcast of this conference call at www.energizerholdings.com, under "Investors" and "Events and Presentations" tabs or by using the following link:

https://www.webcaster4.com/Webcast/Page/1192/41697

For those unable to participate during the live webcast, a replay will be available on www.energizerholdings.com, under "Investors," "Events and Presentations," and "Past Events" tabs.

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This document contains both historical and forward-looking statements. Forward-looking statements are not based on historical facts but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, the future sales, gross margins, costs, earnings, cash flows, tax rates and performance of the Company, as well as the Company's entrance into an accelerated share repurchase program. These statements generally can be identified by the use of forward-looking words or phrases such as "believe," "expect," "expectation," "anticipate," "may," "could," "intend," "belief," "estimate," "plan," "target," "predict," "likely," "should," "forecast," "outlook," or other similar words or phrases. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this document are only made as of the date of this document and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances. Numerous factors could cause our actual results and events to differ materially from those expressed or implied by forward-looking statements, including, without limitation:

• Global economic and financial market conditions, including the conditions resulting from the ongoing COVID-19 pandemic, and actions taken by our customers, suppliers, other business partners and governments in markets in which we compete might materially and negatively impact us.
• Competition in our product categories might hinder our ability to execute our business strategy, achieve profitability, or maintain relationships with existing customers.
• Changes in the retail environment and consumer preferences could adversely affect our business, financial condition and results of operations.
• We must successfully manage the demand, supply, and operational challenges brought about by the COVID-19 pandemic and any other disease outbreak, including epidemics, pandemics, or similar widespread public health concerns.
• Loss or impairment of the reputation of our Company or our leading brands or failure of our marketing plans could have an adverse effect on our business.
• Loss of any of our principal customers could significantly decrease our sales and profitability.
• Our ability to meet our growth targets depends on successful product, marketing and operations innovation and successful responses to competitive innovation and changing consumer habits.
• We are subject to risks related to our international operations, including currency fluctuations, which could adversely affect our results of operations.
• If we fail to protect our intellectual property rights, competitors may manufacture and market similar products, which could adversely affect our market share and results of operations.
• Our reliance on certain significant suppliers subjects us to numerous risks, including possible interruptions in supply, which could adversely affect our business.
• Our business is vulnerable to the availability of raw materials, our ability to forecast customer demand and our ability to manage production capacity.
• Changes in production costs, including raw material prices, freight and labor, could erode our profit margins and negatively impact operating results, and reactions to our pricing actions.
• The manufacturing facilities, supply channels or other business operations of the Company and our suppliers may be subject to disruption from events beyond our control.
• We may be unable to generate anticipated cost savings (including from our restructuring programs), successfully implement our strategies, or efficiently manage our supply chain and manufacturing processes, and our profitability and cash flow could suffer as a result.
• Sales of certain of our products are seasonal and adverse weather conditions during our peak selling seasons for certain auto care products could have a material adverse effect.
• A failure of a key information technology system could adversely impact our ability to conduct business.
• Our operations depend on the use of information technology systems that are subject to data privacy regulations, including recently effective European Union requirements, and could be the target of cyberattack.
• We have significant debt obligations that could adversely affect our business and our ability to meet our obligations.
• We may experience losses or be subject to increased funding and expenses related to our pension plans.
• The estimates and assumptions on which our financial projections are based may prove to be inaccurate, which may cause our actual results to materially differ from our projections, which may adversely affect our future profitability, cash flows and stock price.
• If we pursue strategic acquisitions, divestitures or joint ventures, we might experience operating difficulties, dilution, and other consequences that may harm our business, financial condition, and operating results, and we may not be able to successfully consummate favorable transactions or successfully integrate acquired businesses.
• We may be unable to realize the anticipated benefits of the 2019 acquisitions of the global auto care and battery, lighting and power businesses from Spectrum Brands.
• The 2019 auto care and battery acquisitions may have liabilities that are not known to us and the acquisition agreements may not provide us with sufficient indemnification with respect to such liabilities.
• Our business involves the potential for claims of product liability, labeling claims, commercial claims and other legal claims against us, which could affect our results of operations and financial condition and result in product recalls or withdrawals.
• Our business is subject to increasing regulation in the U.S. and abroad, the uncertainty and cost of future compliance and consequence of non-compliance with which may have a material adverse effect on our business.
• Increased focus by governmental and non-governmental organizations, customers, consumers and shareholders on sustainability issues, including those related to climate change, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.
• We are subject to environmental laws and regulations that may expose us to significant liabilities and have a material adverse effect on our results of operations and financial condition.
• We cannot guarantee that any share repurchase program will be fully consummated or that any share repurchase program will enhance long-term stockholder value, and share repurchases could increase the volatility of the price of our stock and diminish our cash reserves.

In addition, other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements. The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Additional risks and uncertainties include those detailed from time to time in our publicly filed documents, including those described under the heading "Risk Factors" in our Form 10-K filed with the Securities and Exchange Commission on November 17, 2020.

ENERGIZER HOLDINGS, INC.
Reconciliation of GAAP and Non-GAAP Measures
For the Quarter and Nine Months Ended June 30, 2021

The Company reports its financial results in accordance with accounting principles generally accepted in the U.S. ("GAAP").  However, management believes that certain non-GAAP financial measures provide users with additional meaningful comparisons to the corresponding historical or future period. These non-GAAP financial measures exclude items that are not reflective of the Company's on-going operating performance, such as acquisition and integration costs, an acquisition earn out and the loss on extinguishment of debt.  In addition, these measures help investors to analyze year over year comparability when excluding currency fluctuations, acquisition activity as well as other Company initiatives that are not on-going.  We believe these non-GAAP financial measures are an enhancement to assist investors in understanding our business and in performing analysis consistent with financial models developed by research analysts. Investors should consider non-GAAP measures in addition to, not as a substitute for, or superior to, the comparable GAAP measures.  In addition, these non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in methods and in the items being adjusted.

We provide the following non-GAAP measures and calculations, as well as the corresponding reconciliation to the closest GAAP measure in the following supplemental schedules:

Segment Profit.  This amount represents the operations of our two reportable segments including allocations for shared support functions.  General corporate and other expenses, global marketing expenses, R&D expenses, amortization expense, interest expense, other items, net, the charges related to acquisition and integration costs and an acquisition earn out have all been excluded from segment profit.

Adjusted Net Earnings From Continuing Operations and Adjusted Diluted Net Earnings Per Common Share - Continuing Operations (EPS).  These measures exclude the impact of the costs related to acquisition and integration, an acquisition earn out and the loss on extinguishment of debt.

Non-GAAP Tax Rate. This is the tax rate when excluding the pre-tax impact of acquisition and integration costs, an acquisition earn out and the loss on extinguishment of debt, as well as the related tax impact for these items, calculated utilizing the statutory rate for where the impact was incurred.

Organic.  This is the non-GAAP financial measurement of the change in revenue or segment profit that excludes or otherwise adjusts for the impact of acquisitions, change in Argentina operations and impact of currency from the changes in foreign currency exchange rates as defined below:

Impact of acquisitions. Energizer completed two acquisitions in the first fiscal quarter of 2021, a battery plant in Indonesia on October 1, 2020 and a formulation company in the United States on December 1, 2020 (Formulations Acquisition).  These adjustments include the impact of the acquisitions' ongoing operations contributed to each respective income statement caption for the first year's operations directly after the acquisition date. This does not include the impact of acquisition and integration costs associated with any acquisition.

Change in Argentina Operations. The Company is presenting separately all changes in sales and segment profit from our Argentina affiliate due to the designation of the economy as highly inflationary as of July 1, 2018.

Impact of currency. The Company evaluates the operating performance of our Company on a currency neutral basis.  The impact of currency is the difference between the value of current year foreign operations at the current period ending USD exchange rate, compared to the value of the current year foreign operations at the prior period ending USD exchange rate, as well as the impact of  hedging on the currency fluctuation.

Adjusted Comparisons.  Detail for adjusted gross profit, adjusted gross margin, adjusted SG&A, adjusted SG&A as percent of sales, adjusted R&D and adjusted Other items, net are also supplemental non-GAAP measure disclosures. These measures exclude the impact of costs related to acquisition and integration and an acquisition earn out.

Free Cash Flow and Adjusted Free Cash Flow. Free Cash Flow is defined as net cash provided by operating activities from continuing operations reduced by capital expenditures, net of the proceeds from asset sales. Adjusted Free Cash Flow is defined as Free Cash Flow excluding the cash payments for acquisition and integration expenses and integration capital expenditures. The expense cash payments are net of the statutory tax benefit associated with the payment.

EBITDA and Adjusted EBITDA. EBITDA is defined as net earnings before income tax provision, interest, loss on extinguishment of debt and depreciation and amortization.  Adjusted EBITDA further excludes the impact of the costs related to acquisition and integration, acquisition earn out and share-based payments.

Energizer Holdings, Inc.
Supplemental Schedules - Segment Information and Supplemental Sales Data
For the Quarter and Nine Months Ended June 30, 2021
(In millions - Unaudited)

Operations for Energizer are managed via two major geographic reportable segments: Americas and International. Energizer's operating model includes a combination of standalone and shared business functions between the geographic segments, varying by country and region of the world.  Energizer applies a fully allocated cost basis, in which shared business functions are allocated between segments. Such allocations are estimates, and do not represent the costs of such services if performed on a standalone basis.  Segment sales and profitability, as well as the reconciliation to earnings before income taxes, for the quarter and nine months ended June 30, 2021 and 2020, respectively, are presented below:

Supplemental product information is presented below for revenues from external customers:

Energizer Holdings, Inc.
Supplemental Schedules - GAAP EPS to Adjusted EPS Reconciliation
For the Quarter and Nine Months Ended June 30, 2021
(In millions, except per share data - Unaudited)

The following tables provide a reconciliation of Net earnings from continuing operations and Diluted net earnings per common share - continuing operations to Adjusted net earnings from continuing operations and Adjusted diluted net earnings per share - continuing operations, which are non-GAAP measures.

For the quarter ended June 30, 2021 and the quarter and nine months ended June 30, 2020, the conversion of the mandatory convertible preferred stock is not dilutive and the mandatory preferred stock dividends are included in the adjusted dilution calculation.