Energizer Holdings reports fiscal Q1 net earnings of US$107.9M, compared to year-ago earnings of US$129.8M, as net sales fall 6.6% to US$1.13B

Nevin Barich

ST. LOUIS , January 29, 2014 (press release) – Energizer Holdings, Inc. (NYSE: ENR) today announced results for the first fiscal quarter, which ended December 31, 2013. The Company reported net earnings per diluted share of $1.71, a decrease of 17.4% and adjusted net earnings per diluted share of $2.10, down 4.5%, compared to the prior year first fiscal quarter.

First Fiscal Quarter Highlights (Unaudited)

Following is a summary of key first fiscal quarter 2014 results. All comparisons are with the first fiscal quarter 2013, unless otherwise stated.

Net earnings per diluted share of $1.71, down 17.4%

Adjusted net earnings per diluted share of $2.10, down 4.5% (a)

Net sales of $1,113.9 million, down 6.6% (down 8.3% exclusive of the impacts of the feminine care acquisition and currencies) (b)

Gross Margin decrease of 120 basis points (up 50 basis points exclusive of the feminine care acquisition inventory valuation adjustment and currencies)

SG&A spending was below a year ago excluding IT enablement and acquisition/integration costs

(a) See Net Earnings/Diluted EPS tables below

(b) See Net Sales — Total Company table below

"First quarter adjusted net earnings per diluted share were in-line with expectations as lower spending and accretion from the recently acquired feminine care brands helped offset organic top-line softness," said Ward M. Klein, Chief Executive Officer. "However, we were disappointed by the sluggish top-line performance within our Personal Care Division. We believe heightened promotional activity over the past year has adversely impacted first quarter consumer demand and overall category volumes. In addition, our results were negatively impacted by unfavorable global currencies, and pricing controls and import restrictions in certain Latin American countries. We believe that many of these unfavorable trends will continue at least through the first half of our fiscal year. Despite these headwinds, we remain committed to maintaining our planned investment levels in support of our brands. As a result, we have modified our full year adjusted net earnings per diluted share outlook to $7.00 to $7.25," continued Mr. Klein.

"In addition, we have expanded the scope of our restructuring project in an effort to increase our financial flexibility to help enable us to offset future volatility and provide for increased investment funds. As a result of the excellent progress made thus far, and projected benefits from the expansion of scope, we have increased our total project gross savings estimate from $225 million to $300 million. The increased savings are expected to be realized throughout fiscal 2015 and 2016, and the total run rate impact is expected to be realized in fiscal 2016."

Energizer reported first fiscal quarter net earnings of $107.9 million, or $1.71 per diluted share. This compares to net earnings of $129.8 million, or $2.07 per diluted share in the year ago quarter. Included within the current quarter reported results are restructuring related pre-tax costs of approximately $26.7 million, including certain information technology enablement costs (included in SG&A) and approximately $11.5 million of pre-tax acquisition/integration related expenses. Adjusted net earnings per diluted share were $2.10 for the first fiscal quarter as compared to $2.20 in the prior year quarter. First fiscal quarter results reflect the impact of the anticipated net sales shortfall within the Household Products segment, lower sales within the Personal Care segment, and the unfavorable impact of currencies. These shortfalls were partially offset by the continued benefit of cost savings from the 2013 restructuring project, the favorable impact of incremental gross profit from the recently acquired feminine care brands, and lower advertising and promotion spending.

Net Sales - Total Company (In millions - Unaudited)

Net sales for the first fiscal quarter decreased 6.6% primarily driven by the previously disclosed loss of distribution within two U.S. retail customers in the Household Products segment, prior year hurricane Sandy storm-related volumes that did not repeat in this fiscal year quarter, soft category dynamics across both segments, pricing controls and import restrictions in certain Latin American countries, (primarily Venezuela and Argentina) and unfavorable foreign currency rates. Incremental sales from the feminine care brands acquired on October 23, 2013, provided a partial offset to the aforementioned shortfalls.

Gross margin for the first fiscal quarter decreased 120 basis points to 45.9%. The decrease in gross margin was primarily due to the impact of unfavorable currencies (approximately 110 basis points) and the acquisition inventory valuation adjustment (approximately 60 basis points). Excluding the impact of these items, gross margin increased 50 basis points versus the prior year fiscal quarter driven by savings from the 2013 restructuring project and favorable product costs.

Advertising and sales promotion expense was $81.0 million in the first fiscal quarter, or 7.3% of net sales. This represents a decrease of approximately $13.8 million versus the prior year quarter, and down 60 basis points as a percent of net sales. Decreased spending versus the year-ago quarter was primarily due to the timing of prior year product launch activities and the timing of current year advertising and promotional programs.

Selling, general, and administrative expense was $203.5 million in the first fiscal quarter, or 18.3% of net sales, compared to $200.5 million, or 16.8% of net sales, in the prior year quarter. Included within the current quarter results were approximately $5 million of incremental acquisition/integration costs and $2 million of information technology enablement costs that are recorded within SG&A, but are considered part of the overall 2013 restructuring project. Excluding the impacts of these items and the impact of currencies, SG&A spending was below prior year levels. Benefits realized from the 2013 restructuring project helped offset inflationary costs and increased expenses recorded due to the mark-to-market impact of the Company's unfunded deferred compensation liability. The increase in SG&A as a percent of net sales was due to the top-line declines discussed above.

Interest expense was $31.2 million for the first fiscal quarter as compared to $33.5 million in the prior fiscal year as a result of lower average debt outstanding.

Other financing income was $2.0 million for the first fiscal quarter primarily reflecting the net impact of hedging contract gains offset by revaluation losses on nonfunctional currency balance sheet exposures, as compared to an expense of $7.9 million in the prior fiscal year quarter. The prior year quarter results were driven primarily by foreign exchange losses related primarily to the strengthening of the U.S. dollar in relation to the Japanese Yen and a loss from the mark-to-market adjustment on certain commodity contracts.

The effective tax rate in the first fiscal quarter was 28.9% as compared to 31.2% in the prior year quarter. The decrease in the effective tax rate was primarily due to the tax impact of the curtailment gain recorded in the prior year quarter. Exclusive of the tax impact of the GAAP to non-GAAP reconciling items detailed in the earlier table, the effective tax rate for the first fiscal quarter was 29.5%, consistent with our full year outlook.

Average (trailing 4 quarter) working capital as a percent of sales was 17.0%, a 110 basis point reduction versus the end of fiscal 2013 and a 590 basis point reduction versus the fiscal 2011 baseline established at the beginning of the improvement initiative.

Capital spending in the quarter was approximately $20 million, an increase of $5 million versus the prior year quarter. Depreciation expense, excluding accelerated depreciation on assets impacted by the 2013 restructuring project, was approximately $29 million as compared to $33 million in the year ago quarter. The charges for accelerated depreciation are included in the 2013 restructuring line in the Statement of Earnings (Condensed).

Key Segment Results (Unaudited)

Following is a summary of key first fiscal quarter results by reportable segment. All comparisons are with the first quarter of fiscal 2013, unless otherwise stated.

Personal Care

Net sales down 0.7%

Organic net sales down 6.1%

Segment profit of $130.3 million, up 12.1%, or up 8.9% excluding currencies and the incremental impact of the feminine care acquisition

Incremental net sales and segment profit from the feminine care acquisition totaled $44.1 million and $13.7 million, respectively, excluding the acquisition inventory valuation adjustment and acquisition/integration costs

Net Sales - Personal Care (In millions - Unaudited)

Organic net sales in the first fiscal quarter decreased 6.1% due primarily to soft U.S. category trends in substantially all of the Personal Care categories in which the Company competes, pricing controls and import restrictions in certain Latin American countries and lapping prior year innovation launch volumes in North America.

Segment profit in the first fiscal quarter increased $14.1 million inclusive of the negative impact of currencies and the incremental impact of the feminine care acquisition. Excluding the impact of unfavorable currencies and the incremental impact of the feminine care acquisition, segment profit increased 8.9% as a result of lower A&P spending due to the timing of promotions and product launches as compared to the prior year and continued spending favorability driven by the Company's cost savings initiative.

Household Products

Net sales down 11.7%

Organic net sales down 10.3%

Segment profit of $133.4 million, down 16.9%, or down 12.8% excluding the impact of currencies

Segment Profit - Household Products (In millions - Unaudited)

Organic net sales were in-line with expectations and decreased 10.3% in the first fiscal quarter versus the prior year due to the previously disclosed loss of distribution within two U.S. retail customers, lapping prior year hurricane Sandy storm-related volumes that did not repeat in the current year quarter, continued category declines, the exiting of certain non-core product lines in fiscal 2013 as part of the Company's 2013 restructuring project, and pricing controls and inventory import restrictions in certain Latin American countries.

Segment profit in the first fiscal quarter declined $27.2 million due primarily to the gross profit impact from the net sales decline discussed above, higher A&P spending, and unfavorable foreign currency rates. Theses declines were partially offset by continued favorability resulting from the 2013 restructuring project and favorable product input costs.

2013 Restructuring Project

Restructuring savings in the first fiscal 2014 quarter were approximately $46 million, or an increase of $39 million versus the prior year quarter. The primary impacts of savings were reflected in improved gross margin in Household Products and lower overhead expenses. Project-to-date savings are estimated to be over $140 million. In addition, headcount reductions have totaled nearly 1,500 to date, equal to the original total project goal.

The Company estimates that gross savings will total approximately $100 million for the full fiscal year, bringing the cumulative total project gross savings to about $200 million at the end of fiscal 2014.

In addition, the Company has increased the scope of the previously announced restructuring program to include the balance of the organization. As a result of the expanded scope and success of the original project initiatives, the Company estimates that the total project gross savings will increase from $225 million to $300 million. The incremental savings amounts are expected to be realized throughout fiscal 2015 and 2016, and the total run rate impact is expected to be realized in fiscal 2016.

Restructuring related charges for the first fiscal 2014 quarter were approximately $26.7 million. Total project-to-date costs are approximately $185 million. These amounts are inclusive of certain information technology enablement costs (included in SG&A) and obsolescence charges related to the exit of certain non-core product lines (included in Cost of products sold), both of which are considered part of the overall restructuring project.

As a result of the expanded scope of the Company's restructuring efforts, incremental costs will be incurred to successfully execute the program. It is estimated that fiscal 2014 restructuring costs will be in the range of $100 to $130 million, an increase of $30 to $40 million versus original estimates. Total project restructuring costs are estimated to increase from the original outlook of $250 million to approximately $350 million.

Feminine Care Brands Acquisition

The Company acquired the Stayfree® pad, Carefree® liner and o.b.® tampon feminine hygiene brands in the U.S., Canada and the Caribbean from Johnson & Johnson, Inc. on October 23, 2013, for an aggregate purchase price of $185 million. The purchase price is subject to a working capital adjustment which is expected to be finalized during the second quarter.

Integration efforts are underway. In addition, preliminary valuation results have been recorded which included a pre-tax acquisition inventory valuation adjustment of $8 million, of which, approximately $6 million was amortized within Cost of products sold during the first fiscal quarter. This amount was excluded from segment results and was considered an unusual item within the non-GAAP adjusted net earnings per diluted share calculation.

Incremental net sales and segment profit attributed to the feminine care acquisition were $44.1 million and $13.7 million, respectively.

Fiscal Year 2014 Financial Outlook

The Company has lowered its financial outlook for adjusted net earnings per diluted share for fiscal 2014 to $7.00 to $7.25 and GAAP EPS to $5.70 to $6.10 per diluted share. The revised financial outlook includes the below assumptions. All comparisons are with the full fiscal year 2013, unless otherwise stated.

Total Company low single-digit net sales growth, including the impact of the feminine care acquisition; a decrease versus our original outlook of mid single-digit net sales growth

Total Company organic net sales declines in the low single-digits; a decrease versus our original outlook of flat organic sales

Personal Care organic sales are expected to be flat versus the prior fiscal year; as compared to our original low-single digit growth estimate. The revised outlook reflects the shortfall realized in the first quarter, anticipated category headwinds through the first half of the fiscal year and continued impacts from pricing controls and import restrictions in certain Latin
American countries

Household Products organic net sales are expected to decline in the mid single-digits; consistent with the original outlook

Gross restructuring savings of approximately $100 million versus the prior fiscal year; consistent with the high end of our original estimate. The savings impact of the scope expansion is not expected to have a material impact to fiscal 2014 results

A&P as a percent of net sales in the range of 10.5% to 11.0%, an increase of approximately 100 basis points versus the prior fiscal year; consistent with our original outlook

EPS accretion of approximately $0.25 from the acquisition of the feminine care brands, excluding the impacts of acquisition/integration costs and the acquisition inventory valuation adjustment; an increase versus our original modest EPS accretion estimate

Estimated restructuring related charges of $100 to $130 million; an increase of $30 to $40 million versus prior estimates due to the expansion of the project scope. Restructuring costs are reported on a separate line in the Statement of Earnings and will be excluded in the adjusted net earnings and adjusted net earnings per diluted share calculations, both of which are non-GAAP measures

Unfavorable foreign currency pre-tax profit impact of approximately $45 to $50 million, based upon recent rates; unfavorable $25 million versus our original outlook

Effective tax rate, excluding unusual items, in the range of 29% to 30%; consistent with our original outlook

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 first quarter earnings and updated earnings guidance for fiscal 2014. All interested parties may access a live webcast of this conference call at www.energizerholdings.com, under "Investors", "Investor Information", and "Webcasts and Presentations" tabs or by using the following link:

http://edge.media-server.com/m/p/tphzyfgc/lan/en

For those unable to participate during the live webcast, a replay will be available on www.energizerholdings.com, under "Investors", "Investor Information", "Webcasts and Presentations", and "Audio Archives" tabs.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.