Energizer Holdings, Inc.
Q1 2013 Earnings Call Transcript

Published: 31 Jan 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Energizer Inc. Earnings Conference Call. My name is Lisa, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Jackie Burwitz, Vice President, Investor Relations. Please proceed.

[Jacqueline E. Burwitz:]

Thank you, Lisa, and good morning, everyone, and thanks for joining us on Energizer's first fiscal quarter earnings conference call. With me this morning are Ward Klein, Chief Executive Officer; and Dan Sescleifer, Chief Financial Officer. This call is being recorded and will be available for replay via our website, energizerholdings.com. During our prepared comments and the question-and-answer session that follows, we may make statements expressing the expectations of management regarding our future plans and performance, including

[Daniel J. Sescleifer:]

Thanks, Jackie. For the first quarter of fiscal 2013, adjusted net earnings per diluted share increased $0.15 or 7% to $2.20. Organic sales, gross margin and adjusted net earnings, excluding unusuals, were essentially flat, while shares outstanding were lower in the quarter. Turning to divisional results. In Personal Care, organic sales declined 1.4% due to a number of offsetting factors. On the positive side, the Hydro franchise, which includes the Hydro men's and Hydro Silk women's system products, continued to show top line momentum, growing 26% versus prior year, reflecting the strength of these global new product launches. The rapid sales growth in Hydro reflects strong repeat purchases of cartridges as we are reducing promotional spending and advertising to more of a run-rate level as full distribution is realized. Overall, men's and women's systems sales were flat, as the growth in the Hydro franchise was offset by legacy declines, primarily in the Quattro franchise. These legacy declines reflect the negative impact of heightened promotional activity across the systems category, as well as trade up to the Hydro franchise. With sales in men's and women's razor blade systems essentially flat, the modest organic sales decline within the total Personal Care division was a result of 3 general factors

[Ward M. Klein:]

Thank you, Dan. I will walk you through each of our businesses and key factors that are impacting them. In Personal Care, our key priority for 2013 is to roll out innovation across all of our categories. As you will recall from our Investor Day in December, we have a robust innovation pipeline. New product launch activity is ramping up this quarter and will extend through the balance of the fiscal year. Let me begin with Wet Shave. Our top line growth in the overall Wet Shave segment was depressed this past quarter by significantly heightened levels of promotional spending across all wet shave segments in the United States. Specifically, our major competitor in Wet Shave executed 19 free-standing insert coupons, including 2 buy-1-get-1-free coupon events this past quarter versus 11 FSI coupons with no BOGOs the previous year quarter. The unprecedented level of promotional spending in the U.S. impacted our disposable razor’s and legacy system's U.S. market share. Despite this onslaught, our U.S. Hydro franchise continues to deliver very solid results. Furthermore, we continue to see strong mid- to high-single-digit growth in disposable razors in our markets in Asia and Latin America due to trade up in distributor gains. Though one can wrench share through ramping up promotional spending and discounting, we have always preferred to grow our business through introducing innovative new products. This remains our long-term strategy in Wet Shave and is evident by the following

[Operator:]

[Operator Instructions] Your first question comes from the line of Wendy Nicholson with Citi Research.

[Wendy Nicholson:]

My first question has to do with the profitability in the Personal Care segment. And I would have expected that with the lesser level of advertising and the shift towards more blades and the particular strength of Hydro, that margins would have been maybe a little bit more insulated, even if sales came in a little bit light of your forecast. So I guess, can you explain that a little bit. Am I not thinking about potential contribution to EBIT from the Hydro Blade, but more importantly, if we look out over the next few quarters, to the extent Personal Care continues to be a little bit challenged and if you fall short of that mid-single-digit, top line growth target, is there a risk that the negative operating leverage clips your earnings outlook for the year would you say? Or do you feel like you've got enough offsets for that?

[Ward M. Klein:]

On the profit question part of your question, I'll have Danny answer that. I think really from the sales top line perspective, we really are feeling pretty confident still about achieving that mid-single-digit sales growth for the Personal Care division. And again, a lot of that is attributed to all the innovation that we went through and that we're launching, as well as some additional innovation that we'll be talking about. So we still are feeling pretty good on the top line projections we've been providing for Personal Care. As for the margins, Personal Care for the quarter, I'll let Dan answer that.

[Daniel J. Sescleifer:]

Yes, Wendy, if you recall, a year ago this quarter is when we really pulled back on spending within Personal Care as the Hydro launch has essentially matured. So in reality, spending within Personal Care, we actually had slightly more A&P spending in this quarter versus year ago. So it really wasn't a favorable comparison. And that's why if you look on a consolidated basis, the A&P spend is pretty much the same as it was year ago. And just to kind of echo what Ward was saying, when we look at our organic sales forecast within Personal Care, and a lot of it is related to the products that Ward talked about -- we talked about in Investor Day, it's really across the portfolio. There's not -- there aren't 1 or 2 big areas. It's across all of Wet Shave, clearly within Sun Care and even within -- inside Fem Care. So we feel pretty good about the plans we have in place and that's going to generate incremental organic growth.

[Wendy Nicholson:]

And can you give us any sense for -- I think at Analyst Day, you talked about planograms kind of being changed at the beginning of the year. Just how much of that is a sure thing? How much of it is orders in hand, the stuff's on the truck and it's going out the door this month or next versus, oh, we're hoping to get distribution over the next 6 months and that sort of mid-single-digit is going to come at the very end of the year? Because I think that's obviously where most investors are sort of most skeptical, if I could say.

[Ward M. Klein:]

Yes, in terms the distribution listings for most all the new products that we've outlined at this point, those are pretty much locked in. As we worked carefully with our customers and especially this is the time of year a lot of these planograms get reset. The sell in of these promotions really took place -- products to place last fall. The distribution, we know what distribution we've had. We know in most cases what planograms are going to be set. These products are shipping, and so a lot of those decisions are already behind us. So our projections again are based on what we know we've already achieved, both in terms of listings and planogram sets for 2013.

[Operator:]

Your next question comes from the line of Christopher Ferrara with Bank of America Merrill Lynch.

[Christopher Ferrara:]

Guys, I guess on Edge, can you talk on the razor -- I mean, can you talk about I guess the early on takeaways out of Costco? And can you talk a little bit about the retailer's incentive to stock it. Or I guess what I want to understand is, how is it doing, kind of expand, right, because I mean where I saw it's $25 basically for a handle and $17, blades. How do I think about the margin for a retailer versus the ring for a retailer, and what their incentive would be for it to go somewhere else besides Costco?

[Ward M. Klein:]

I don't want to go into customers specific opportunities, per se. Let me just say that with Edge, it's early in the game. It is a joint opportunity with this customer that the customer is as eager about as we are, and so proceeding accordingly. Whether and when it's an opportunity that could roll out elsewhere is really kind of premature to talk about. We do know that the Edge brand has quite a bit of staying power in this particular space. And it's kind of an innovative way to crossover from simply shave press into the razor and blade business with a brand name that does have that saliency . So we're early in the game. We're optimistic in working with the customer to see how well we can grow it and see where it goes.

[Christopher Ferrara:]

And I guess, as a follow-up. I mean, it's more philosophically. I mean, would it be fair to say, would you have a view that there's lots of profit to be made in the blades and razor category, perhaps below the $3-per-blade price point in that category?

[Ward M. Klein:]

I think there is. I think there is -- the overall category remains one of the higher-margin, most profitable categories in the entire Personal Care space. And the tradition of growing profitability through offering better innovation that people are willing to pay for at all price points, I think remains intact. I think maybe where it started to get a bit frayed is when you get to the very, very high end of that price-value relationship. I think we've seen a little bit of balking by consumers the last couple of years at the top end. So we don't really play at the top, top end, even with our Hydro 5 and Hydro 3 which offer best shaves out there. From a pricing value proposition, I think we're more in line to what consumers are willing to pay.

[Operator:]

Your next question comes from the line of Bill Chappell with SunTrust.

[William B. Chappell:]

Just a little bit more on the Battery business. I'm actually surprised that your volumes were kind of in line with worldwide volume trends despite losing some share in the U.S. And just wanted to dig into that in terms of going forward. I know you don't lap that shelf space loss until after this current quarter, but are you expecting share to stabilize after that? Are you seeing with the planogram resets, you might lose some more or gain some of that back?

[Ward M. Klein:]

I think we'll see at a minimum, our share stabilize as we annualize through that one particular distribution loss that we took early last year. And I think our Household -- Battery division management's intent on growing some share back. But I don't see further declines like we've seen over this past year. We continue to, I think, offer some of the best brands and best category solutions for our customers in the category. I think we have more focus on the category than anybody else out there. And those are the reasons, as I'm looking forward anyway in terms of our share performance in Household, that would be my view.

[William B. Chappell:]

Okay. And just a follow-up, maybe Dan, on the FX side, as you look now with regards to your guidance, I would assume there's a little more of a cushion, I don't know how kind of your hedges work and how much cushion? Or if there's any versus what you're original guidance was 3 months ago.

[Daniel J. Sescleifer:]

Yes, Bill, we're not seeing a whole lot of change. But the liens negatively impacted us and so that's -- in a big way with our razors and blade business. Later in the year, we would see some positives with the year also. We don't see FX year remaining or year total being a big driver of ups or down.

[Operator:]

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

[William Schmitz:]

Hey, when you look at the Personal Care growth target of the sort of the mid-single-digits for this year, have you ever said how much of that do you think is going in new product versus the base business? And then there's some scuttle in the industry that you're co-branding an AXE razor with Unilever and I'm just wondering how big of an impact that'll be on the top line?

[Ward M. Klein:]

Yes, the -- intended for the first part of your question, I'd say you could -- about 2/3 of that organic growth for the Personal Care division this fiscal year is going to be attributable to the innovation pipeline. The other 1/3 coming from just some of the normal growth we're experiencing on Sun Care and the continued expansion of Hydro, the original Hydro products. In terms of this -- the AXE product, this is something really that we're going to, I think, spend more time talking about at CAGNY. So I really don't want to get into details right now. Although obviously, there's some information out there and so just to be clear, this is a product that we're offering. It's owned by us, so it would be managed by us. It is a co-branded opportunity, so we, in effect, are licensing the AXE brand for this particular product. And obviously, we're coordinating the use of that brand with Unilever's use of that brand globally. We think it's a wonderful opportunity for us. We think it's a wonderful opportunity for Unilever. I think for our retail customers, we're trying this out and I think consumers will respond well to it. But we're really not ready to get into the details of it. I hate to kind of balk at that point, but further details certainly will be forthcoming over the next 30 to 60 days on that.

[William Schmitz:]

Okay, I mean it won't be this year, just for modeling purposes, if we want to sort of like build the growth in the Personal Care business. And I have one more follow-up, if I can.

[Ward M. Klein:]

Well I think I would lump it in to the overall comment about innovation contributing about 2/3 of that organic growth on Personal Care. But we're not going to dissect it out any further than that.

[William Schmitz:]

Okay, that's -- and then there was some commentary in the press release about cost for contract renewals, or higher costs for contract renewals. Does that mean it's costing you more to stay in existing accounts or is there incremental distribution in batteries that you kind of had to pay up for?

[Ward M. Klein:]

I think it's really just a combination of all that. And it's a matter of negotiations with customers in various parts of various classes of trades, frankly in various parts of the world. And the cost of business is not going down. I will put it that way. And yet, it's always a negotiation with the retailer in terms of how do we kind of grow both our businesses and grow profitability of both our businesses, which I think we have a pretty good track record of doing.

[William Schmitz:]

Got you. Will the ACV be higher or lower in batteries this year, do you think?

[Daniel J. Sescleifer:]

All commodity volume?

[William Schmitz:]

Yes.

[Ward M. Klein:]

In distribution?

[William Schmitz:]

Yes.

[Ward M. Klein:]

I think in our distribution, it's pretty broadly distributed now. I mean, it may go up or down a couple of basis points, but that's not a material change for us one way or the other.

[Operator:]

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

[Dara W. Mohsenian:]

So I wanted to touch on your long-term top line growth expectations. And if you look out over the next few years, do you think it's realistic you can grow corporate organic sales growth beyond 2013? If you look at the last few years, you've been relatively flat even with the Hydro benefit and it looks like the competition's increasing. So I'm just curious for your expectations for corporate top line growth beyond this innovation-driven year in fiscal 2013?

[Ward M. Klein:]

Sure. Well obviously, we'll see some very healthy growth in Personal Care this year behind the innovation we talked about. We certainly are not going stop innovation after this fiscal year, so innovation remains in our long-term plans, 2, 3, 4 years out. And we're in some categories that has some nice category growth rate especially in the developing parts of the world. And we're in a good position in many of those places to take advantage of that. So we have a number of nodes of growth especially in the Personal Care side that we continue to pursue. I don't think we give actual guidance for long-term organic sales growth at this point in time. But based on what we're doing this year, and again, just the Personal Care division becomes a larger and larger portion of the overall company as we go forward through that growth, and it has had more of an influence to the overall growth number for the total company as we go forward. And I would expect that to continue.

[Dara W. Mohsenian:]

Okay. And then has there been some type of change in terms of the way you approach your innovation process or the R&D process that you think drives a greater innovation pipeline as you look out over the next few years?

[Ward M. Klein:]

I don't know if I would say a change other than maybe an expansion of. I would say we've always had one of the strongest innovation pipeline and disciplines coming out of the razor and blade group and razor and blade business, where we really are working on 7-to-10-year innovation pipelines growth that roll forward. And that discipline and that expertise we have applied over time to various businesses we've acquired. And again, when you acquire a business, and I reflect back on the acquisition of the Playtex businesses we acquired '07, '08 and more recently, the ASR business we acquired, getting that innovation pipeline full, developed and then executed is probably always the longest lag of those. And what you're seeing now is the R&D razor and blade discipline being applied to category after category after category. And so you're seeing Sun Care, we really I think stepped up the innovation a couple of years ago and you continue to see that. In Fem Care, you're seeing that with the Gentle Glide 360. Infant Care, we have some stuff on horizon we're not ready to talk about quite yet, although the Litter Genie is a nice example of that. So I think you're seeing just some kind of inherent strengths we have as it relates to innovation that stemmed out of razor and blades, of being rolled out and with time, executed across all our personal care categories. And this is a great year where we're really just in almost category, we have something going on.

[Operator:]

[Operator Instructions] Your next question comes from the line of Nik Modi with UBS.

[Nik Modi:]

So just wanted to quickly ask on cost cutting. So you've outlined obviously a lot of initiatives. Just curious kind of where trade spending falls into the whole mix of -- as you look out over the next couple of years. And if you could just comment on, if you think there's any opportunity there?

[Ward M. Klein:]

Well I think there's always opportunities to get more for the trade spending dollars we spend. And we've actually put some resources, it's really outside the restructuring program per se that we've been talking about. But we have redirected some resources, went out towards customer analytics, customer P&L management, helping our customers improve their efficiencies, improve their return on inventory investment, that sort of thing. I think we've always been pretty good at that, especially actually on the household battery side, although our Personal Care people, I think, are also pretty good at that. And it's an area of strength, but I think we're strengthening even more. But I wouldn't necessarily cite that as part of this $200 million in savings that we're citing as part of the restructuring program per se.

[Nik Modi:]

So it would be additive if you did find some efficiency there.

[Ward M. Klein:]

Absolutely. And sometimes that's offsetting other cost in other parts of the business, whether it's raw materials or labor or health care cost or whatever. I mean, it's not all additive. We always have cost pressures in some parts of the business, and always looking for efficiencies and other stuff [ph] setback.

[Operator:]

Your next question comes from the line of Ali Dibadj with Bernstein.

[Ali Dibadj:]

Want to zoom in on batteries for a second. Just with a quick follow-up and a broader question. From a follow-up perspective, you do now have a sense of planograms, as you mentioned. Can you talk about any shifts there or any price changes or increases you'd expect going forward? Because the way you're describing it, it sounds like this is negative 2, x Sandy number in Household probably gets worse from here. But the broader question is, and I apologize for this, I guess I'm kind of confused about your positioning in batteries at this point. Because -- so Duracell very clearly spending more money to stay at the high end of prices and the high end of kind of brand. And Spectrum is doing the opposite, which is coming in at the low end to gain share. But your priced aligned with Duracell, but it feels like you're kind of abandoning in some sense the investment in the Batteries category and it doesn't sound like you're going to change that. So won't you have to invest more in the Battery category. You might not want to. But won't you have to invest more in the Battery category to maintain your price premium in line with Duracell or risk it kind of tipping point in some sense from a share perspective -- a price perspective, maybe margin perspective. So I guess I'd love some more clarity there and in the follow up upfront.

[Ward M. Klein:]

There was a lot of questions there and let me see if I can get some of them for you. In terms of -- you asked about planograms setting. The previous comments were really kind of more in the context of all the new products that we've sold in and in those planograms and most of it -- most of that obviously being on the Personal Care side. Those listing decisions kind of already being made and locked in, that's the case. I would say in the Battery side, we're in the midst, really, of planogram discussion, customer opportunities that with batteries, you tend to have more of a seasonality, OND

[Nik Modi:]

It does. It helps. Shifting gears to Personal Care, it sounds like you're pretty confident actually in the kind of 6% to 7% organic growth you need in that business to get to your mid-single target for the next 3 quarters. And are you anticipating that the level of investment your competitors have put in the marketplace this past quarter, which sounds like a little bit of a surprising level, a high level, dissipates over time or you assuming that's sustainable? And then, are you in that category also looking forward broadly, looking for anything to boost that growth. So for example, we hear the media press out of J&J looking to sell fem care, is that something that'll be of interest to you. So 2 questions there, again. I apologize.

[Ward M. Klein:]

Yes, we can't really -- we don't really care to speculate on what our major competitors are going to do promotion-wise going forward. You look at the impact of the some of the categories from their promotional effort, and you see razor and blade value, growth rates in the U.S. where a lot of these promotions taking place, is down significantly on a 12-week basis, the first-52-week basis. Value growth, the data I'm looking at for razor and blade is like only under 1.5% for the category for the quarter during all this promotional activity. That's versus a 52-week run rate of over 3%. And that's versus a really kind of an ongoing global growth rates in the same category of 3%. So you have to wonder how sustainable that model is, if you're really trying to grow your value and the profitability of that category. But you'll have to talk others about their strategy there. Our strategy, very clearly, is based on innovation. And as we laid out in San Bernes [ph], we laid again in this call, and as we lay out further in CAGNY, we have a lot of innovation to bring. And so that is the source of the guidance we're giving on this mid-single-digit organic growth of Personal Care for this year and I think sets us up well for continued growth. And I forget what was the second part of your question. Oh, are we're looking at the J&J opportunity. I think, obviously, we've always focused on just plastic tampons. It it's not in a strategic business for us, but it's been a nice business for us, not without its challenges. It's kind of nice to see both the Sport and Gentle Glide brands of plastic tampons growing right now. We're excited about Gentle Glide 360. It is real innovation again that we're bringing to the category that's right on in terms of the product proposition. And we're going to let that run until and so we're pretty much focused on that. And whether there are opportunities outside that from an M&A point of view, we really just don't comment on that at all. So I can't help you on that.

[Operator:]

There are no additional questions at this time. I would now like to turn the presentation over to Mr. Ward Klein for closing remarks.

[Ward M. Klein:]

Well, we really don't have anything else to cover today in the call. So thank you, everybody, for joining us. And, operator, I'll turn it back over to you.

[Operator:]

Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.