Energizer Holdings reports fiscal Q2 net earnings of US$98.5M, up 16% from year-ago period; net sales fall 3.1% to US$1.06B

Nevin Barich

ST. LOUIS , April 30, 2014 (press release) – Energizer Holdings, Inc. (NYSE: ENR) today announced results for the second fiscal quarter, which ended March 31, 2014. The Company reported net earnings per diluted share of $1.57, an increase of 16.3% and adjusted net earnings per diluted share of $1.88, up 4.4%, compared to the prior year second fiscal quarter.

Second Fiscal Quarter Highlights (Unaudited)

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

Net earnings per diluted share of $1.57, up 16.3%

Adjusted net earnings per diluted share of $1.88, up 4.4% (a)

Net sales of $1,062.4 million, down 3.1% (down 6.1% on an organic basis) (b)

Gross Margin decrease of 60 basis points (up 150 basis points exclusive of (1) currencies (110 basis points); (2) the impact of lower feminine care acquisition margins (80 basis points); and (3) acquisition inventory valuation adjustment (20 basis points))

SG&A as a percent of net sales improved 40 basis points (or 60 basis points exclusive of acquisition costs and restructuring related charges).

(a) See Net Earnings/Diluted EPS tables below

(b) See Net Sales — Total Company table below

"Second quarter adjusted net earnings per diluted share were in-line with our expectations as we continue to make excellent progress with our cost savings initiatives," said Ward M. Klein, Chief Executive Officer. "Our focus on cost optimization has provided the financial flexibility needed to offset top-line challenges, increased competitive pressures and continued currency headwinds. We expect that top-line performance will improve in the second half for our Personal Care Division behind strong execution of our innovation plans and anticipated improved category performance. Although the top line will remain challenging for Household Products, we believe that continued focus on cost optimization, cash flow generation and sustained investments in support of our brands will help position the business for future success. We have maintained our adjusted earnings per share outlook of $7.00 to $7.25," continued Mr. Klein.

Energizer reported second fiscal quarter net earnings of $98.5 million, or $1.57 per diluted share. This compares to net earnings of $84.9 million, or $1.35 per diluted share in the prior year quarter. Included within the current quarter reported results are restructuring related pre-tax costs of approximately $26.3 million (including certain information technology enablement costs (included in SG&A) and inventory obsolescence charges (included within Cost of products sold)) and approximately $1.0 million of pre-tax acquisition/integration related expenses. Adjusted net earnings per diluted share were $1.88 for the second fiscal quarter as compared to $1.80 in the prior year quarter. Second fiscal quarter results reflect the continued benefit of cost savings from the 2013 restructuring project, strong margin performance across both segments, the favorable impact of incremental segment profit from the recently acquired feminine care brands and lower advertising and promotion spending. The favorable impacts of these items were able to offset the anticipated net sales shortfall within the Household Products segment, lower sales within the Personal Care segment, and the unfavorable impact of currencies.

Net Sales - Total Company (In millions - Unaudited)

Net sales for the second fiscal quarter decreased 3.1% primarily driven by the previously disclosed loss of distribution within two U.S. retail customers in the Household Products segment, unfavorable foreign currency rates, timing of sun care shipments due to the calendar shift of the Easter holiday, pricing controls and import restrictions in certain Latin American countries and soft category dynamics and increased competitive pressures across both segments. Incremental sales from the feminine care brands, acquired in October 2013, provided a partial offset to the aforementioned shortfalls.

Gross margin for the second fiscal quarter decreased 60 basis points to 47.8%. The decrease in gross margin was primarily due to the impact of unfavorable currencies (approximately 110 basis points), lower margins (in relation to the Company's overall blended margin) from the recently acquired feminine care brands (approximately 80 basis points) and the acquisition inventory valuation adjustment (approximately 20 basis points). Excluding the impact of these items, gross margin increased 150 basis points versus the prior year fiscal quarter driven primarily by savings from the 2013 restructuring project and pricing gains within the Personal Care segment.

Advertising and sales promotion expense was $97.1 million in the second fiscal quarter, or 9.1% of net sales. This represents a decrease of approximately $5.4 million versus the prior year quarter, and down 30 basis points as a percent of net sales. Decreased spending versus prior year was primarily due to the shift in timing of product launch activity and advertising and promotional programs.

Selling, general, and administrative expense was $200.2 million in the second fiscal quarter, or 18.8% of net sales, compared to $209.9 million, or 19.2% of net sales, in the prior year quarter. Included within the current quarter results were approximately $3 million of information technology enablement costs that are recorded within SG&A, but are considered part of the overall 2013 restructuring project, and approximately $1 million of incremental acquisition/integration costs. Excluding the impact of these items, SG&A as a percent of net sales improved 60 basis points versus prior year levels.

Interest expense was $31.3 million for the second fiscal quarter as compared to $32.8 million in the prior fiscal year as a result of lower average debt outstanding.

Other financing income was $1.5 million for the second 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 $10.3 million in the prior fiscal year quarter. The prior year quarter was inclusive of the Venezuela devaluation impact of $6.3 million and foreign exchange losses related primarily to the strengthening of the U.S. dollar in relation to the Japanese Yen.

The effective tax rate in the second fiscal quarter was 27.5% as compared to 24.9% in the prior year quarter. The change in tax rate was primarily driven by the favorable impact of the retroactive reinstatement of the R&D tax credit and foreign tax adjustments 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 year-to-date effective tax rate was 29.3%, which is within the range of our full year outlook.

Average (trailing 4 quarter) working capital as a percent of sales was 16.1%, a 200 basis point reduction versus the end of fiscal 2013 and a 680 basis point improvement versus the fiscal 2011 baseline established at the beginning of the initiative. The Company continues to realize improvements within Days Sales Outstanding and Days Payable Outstanding across both operating segments.

Capital spending in the quarter was approximately $16 million, a decrease of $7 million versus the prior year quarter. Depreciation expense, excluding accelerated depreciation on assets impacted by the 2013 restructuring project, was approximately $27 million in the second fiscal quarter, a decrease of $3 million versus the prior year quarter. The charges for accelerated depreciation are included in the 2013 restructuring line in the Statement of Earnings (Condensed).

Dividend payments in the quarter were approximately $31 million, or $0.50 per share, as compared to $25 million, or $0.40 per share, in the prior year quarter.

Share repurchases totaled approximately 1 million shares in the quarter at a cost of $94 million.

Key Segment Results (Unaudited)

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

Personal Care

Net sales up 5.6%

Organic net sales down 1.6%

Segment profit of $170.7 million, up 25.1%, or up 20.6% excluding currencies and the incremental impact of the feminine care acquisition

Incremental net sales and segment profit from the feminine care acquisition totaled $59.7 million and $15.1 million, respectively, excluding the acquisition inventory valuation adjustment and acquisition/integration costs

Net Sales - Personal Care (In millions - Unaudited)

Quarter and Six Months Ended March 31, 2014

Organic net sales in the second fiscal quarter decreased 1.6% due primarily to continued soft U.S. category trends in the men's razor and blade system, shave preps, and infant care segments, increased competitive pressures and timing of sun care shipments. The Company was able to partially offset these category declines through increased pricing, growth within the Hydro franchise and distribution of product innovation within the feminine care business.

Segment profit in the second fiscal quarter increased $34.3 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 $28.2 million as the favorable impacts of improved margins, strong cost controls and timing of A&P spending were able to offset the top-line shortfalls mentioned above.

Household Products

Net sales down 15.8%

Organic net sales down 12.7%

Segment profit of $62.1 million, down 38.4%, or down 28.9% excluding the impact of currencies

Organic net sales decreased 12.7% in the second fiscal quarter versus the prior year due to the previously disclosed loss of distribution within two U.S. retail customers, higher promotional spending, the exiting of certain non-core product lines in fiscal 2013 as part of the Company's 2013 restructuring project, increased competitive pressures and pricing controls and inventory import restrictions in certain Latin American countries.

Segment profit in the second fiscal quarter declined $38.7 million due primarily to the gross profit impact from the net sales shortfall discussed above, higher A&P spending, and unfavorable foreign currency rates. These declines were partially offset by continued favorability resulting from the 2013 restructuring project.

2013 Restructuring Project

Restructuring savings in the second fiscal 2014 quarter increased approximately $50 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 $190 million.

For the full fiscal year, the Company estimates that gross savings will increase approximately $100 to $125 million versus the prior year. As a result, the estimated cumulative total project gross savings is expected to be in the range of $200 to $225 million at the end of fiscal 2014.

In addition, the Company continues to make progress on the expanded scope initiatives announced at the end of last quarter. As a result, the Company continues to estimate that the total project gross savings will be approximately $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 second fiscal 2014 quarter were approximately $26.3 million. Total project-to-date costs are approximately $211.0 million. These amounts are inclusive of certain information technology enablement costs (included in SG&A) and inventory obsolescence charges (included in Cost of products sold), both of which are considered part of the overall restructuring project.

It is estimated that fiscal 2014 restructuring costs will be in the range of $100 to $130 million. Total project restructuring costs are estimated to be approximately $350 million, consistent with the estimate provided last quarter.

Fiscal Year 2014 Financial Outlook

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

Total Company low-single digit net sales growth, including the impacts of the feminine care acquisition and currencies

Total Company organic net sales declines in the low-single digits

Personal Care organic sales are expected to be flat versus the prior fiscal year

Household Products organic net sales are expected to decline in the mid- to high-single digits; slightly worse than the revised assumption provided at the end of our first fiscal quarter due to heightened competitive pressures

Gross restructuring savings of approximately $100 to $125 million versus the prior fiscal year; an increase versus the revised assumptions provided at the end of our first fiscal quarter
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

Adjusted EPS accretion of approximately $0.30 to $0.35 from the acquisition of the feminine care brands, excluding the impacts of acquisition/integration costs and the acquisition inventory valuation adjustment; an increase versus the revised assumptions provided at the end of our first fiscal quarter

Estimated restructuring related charges of $100 to $130 million; 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; The Company's year-to-date and balance of year outlook for its
Venezuela operations are reflected at the official exchange rate equal to 6.30 per U.S. dollar. In the event of a devaluation or change in accounting position, additional unfavorable currency impacts would result

Effective tax rate, excluding unusual items, in the range of 29% to 30%

Webcast Information

In conjunction with this announcement, the Company will hold an investor conference call beginning at 9:00 a.m. eastern time today. The call will focus on second quarter earnings, the earnings outlook for fiscal 2014 and to review the proposed separation, which was also announced in a separate press release today. 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://www.media-server.com/m/acs/14f9883b40dae3a938f28517d7f44e1d

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.

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