Energizer Holdings, Inc. (ENR) posted increased profitability in the first quarter of 2010 on higher sales, beating the Zacks Consensus Estimate.
Excluding charges, earnings per share came in at $2.21 in the quarter, well above the Zacks Consensus Estimate of $1.84 and up 14.5% year over year from $1.93 per share.
Better-than-expected profit came from reduced spending on advertising and promotional (A&P) expenses, which fell 8.7% year over year (7.5% of total first-quarter 2010 revenue versus 9.3% in the year-ago period). The company had earlier projected higher spending on advertising and promotion.
Energizer Holdings expects to increase its investment levels in both advertising & promotion and other targeted growth initiatives. Advertising & Promotions, as a percent of sales, are expected to be around 12.0% in 2010. With falling A&P spending, the company may not be able to meet its target.
Total sales increased 12.9% (up 9% on a constant currency basis) to $1.18 billion, beating the Zacks Consensus Estimate of $1.15 billion. The sales increase was primarily due to an increase in revenue from Household and Personal Care Products.
Results were above expectation due to higher sales of batteries and razors in the quarter; however the company provided a cautious guidance for its battery business in 2010. ENR remains cautious regarding the battery category as consumption remains sluggish and the effect of device trends on the battery category remains difficult to assess due to the economic downturn.
Energizer’s batteries are up against increased competition from Procter & Gamble (PG) in the battery (Duracell), blade (Gillette) and feminine products categories (Tampax products), as the latter has also increased its promotion spending.
Results by Segment
Net sales in the Household Products category increased 8.6% year over year (up 5% on a constant currency basis), due to share gains, a more normalized shipment timing for the holidays and a soft prior-year quarter. However, the premium alkaline battery business remained sluggish and was down in the mid- to high-single digits as compared to the year-ago period.
Further, overall pricing and product mix currency impacted the top line unfavorably by $10 million. The top line was positively impacted by investments in North America and Europe, partially offset by price increases in other areas of the world. Segment profit increased in the quarter, due to favorable currency impact, the positive impact of higher volumes and lower advertising and promotion expenses.
Net sales in the Personal Care segment increased 19.8% (up 15%, on a constant currency basis), boosted by the shave preparation acquisition of the Skintimate and Edge shaving gels and creams business, which added approximately $34 million to the top-line. Revenue also increased due to a favorable currency impact. Excluding these impacts, net sales increased approximately 6%. Segment profit increased due to a favorable currency impact as well as the timing of advertising and promotion and overhead spending.
Revenue from Wet Shave, excluding the Edge and Skintimate brands, increased 9% on higher disposables and continued momentum in Quattro for Women Trimmer razors and Quattro for Women replacement blades. Skin Care sales increased 14% due to higher shipments of Wet Ones. Infant Care sales increased 5% due to continued growth in Diaper Genie and cups, partially offset by lower sales of bottles. However, Feminine Care sales decreased 12% due to lower shipments in the quarter of Gentle Glide, partially offset by increases in Sport.
Operating Performance
Gross margin for the quarter contracted 170 basis points (bps) to 47.6% versus 49.3% in the prior-year quarter, and was negatively impacted by the Venezuela devaluation. Capital expenditures amounted to $23.2 million in the quarter.
Energizer’s Debt to EBITDA Ratio for the last four quarters was 3.04 to 1.00. This ratio includes the negative impact of the Venezuela devaluation charge as a reduction of EBITDA. As of December 31, 2009, the company’s debt was $2.56 billion, with $2.23 billion, or 87%, at fixed rates averaging 5.19%. ENR exited the quarter with $408.2 million in cash.
Guidance
Management remains cautious on its battery business sales and did not provide any earnings forecast for the second quarter, nor did it update its forecast for the full year 2010. Energizer expects A&P spending of 12% in 2010.
In the fourth quarter of 2009, the company said that 2010 would be negatively impacted by approximately $15 to $20 million due to the use of the parallel rates to pay for newly imported products in Venezuela. The change in the Venezuelan currency exchange rate will further reduce operating profit by approximately $5 to $7 million for the remainder of fiscal 2010 as a result of this change in the translation rate. At current pricing and exchange rates, excluding Venezuela, management expects favorable material costs in the range of $12 million to $14 million, and favorable currency in the range of $35 to $40 million to the operating profit.
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