Energizer Holdings Inc. (ENR) reported fourth-quarter fiscal 2014 non-GAAP earnings of $1.87 per share, which comfortably beat the Zacks Consensus Estimate of $1.60. Earnings per share (EPS) increased 35.8% year over year, which was primarily attributable to robust revenue growth.
Revenues
Revenues increased 7.1% from the year-ago quarter to $1.14 billion, which marginally beat the Zacks Consensus Estimate of $1.12 billion. The year-over-year growth was driven by additional sales from the feminine care brand acquisition and organic growth within the Personal Care segment.
Personal Care (57.4% of revenues) increased 10.5% year over year to $654.7 million. Organic net sales decreased 0.6%, as increases within Sun Care, men's systems and disposables sales were offset by declines in women's systems and Infant Care.
Household products increased 2.8% from the year-ago quarter to $486.7 million. Organic net sales increased 4% due to space and promotional gains primarily in the United States.
Margins
Gross margin for the quarter expanded 350 basis points (bps) to 50.5%, driven by savings from the 2013 restructuring program and higher pricing within the Personal Care segment.
However, Energizer’s results were negatively impacted by higher expenses. Selling, general & administrative expense (SG&A) climbed 180 bps, while advertising & sales promotion expense expanded 240 bps in the reported quarter.
Personal Care segment profit increased 5.5% year over year to $117.4 million. Household products segment profit increased 49.8% year over year to $118.5 million.
Adjusted net income was $116.9 million or $1.87 compared with $87.0 million or $1.38 reported in the year-ago quarter.
Working Capital Data
In the fourth quarter, working capital as a percentage of revenues was 15%, a 310 bps reduction from 2013 year-end results but a 790 bps improvement from the 2011 baseline period established at the beginning of the initiative. Total cash flow generated by the working capital initiative now exceeds $350 million.
2013 Restructuring Project Update
Restructuring savings in the reported quarter increased approximately $32 million versus the prior year quarter. The primary impacts of the savings were reflected in improved gross margin in Household Products and lower overhead expenses. Project-to-date savings total was approximately $255 million.
The company expects to achieve $300 million of savings prior to the anticipated closing of the planned spin-off transaction. Estimated total project savings have been increased to $330 million through fiscal 2016.
Restructuring-related charges for the fourth quarter were $21.8 million. Total project-to-date costs are approximately $260 million. Total project restructuring costs are projected to be approximately $350 million.
Spin-off Program
On Apr 30, 2014, Energizer announced its intention to spin-off the Household Products business and thereby create two independent, publicly traded companies. As a result, the company is incurring incremental costs to evaluate, plan and execute the transaction. In fourth quarter fiscal 2014, $37.7 million of pre-tax charges were incurred. Total spin-off transaction costs totaled approximately $45 million in fiscal 2014. The company will incur additional costs to execute the transaction.
Energizer believes that creating two public companies offers a number of benefits to the standalone businesses. Following the separation, each standalone company will be able to focus on its distinct commercial priorities and allocate its own resources to meet the needs of its business.
Household Products, with batteries and portable lighting products, is expected to generate strong margins and significant cash flows going forward. Personal Care, on the other hand, is expected to be a leading pure-play consumer products company with an attractive portfolio of well-established brand names.
Guidance
For fiscal 2015, organic net sales are expected to remain flat on a year-over-year basis. Personal Care organic net sales are expected to increase in low-single digits while Household Products organic net sales are expected to be down low-single digits in-line with the category.
Gross margin is expected to remain flat on a year-over-year basis. Advertising & sales promotion expense as a percentage of net sales is expected to increase 100 bps on a year over year basis.
2013 restructuring project savings of $300 million are expected to be realized by Jun 30, 2015, resulting in an incremental savings of $5 million in the first nine months of fiscal 2015.
Our Take
We believe that product innovations coupled with higher pricing and restructuring initiatives will drive results in the long run.
Moreover, its prudent product mix would expand margins in the near term. Also, the company’s partnership with Unilever’s (UN) AXE brand is expected to result in market share gains, going forward. Apart from this, the company’s acquisition strategy is expected to reap benefits.
However, the expected decline in volumes in the Household product segment, unfavorable foreign exchange and increasing competition from companies such as Kimberley-Clark Corp. (KMB) and Procter & Gamble Co. (PG) are the near-term headwinds.
Further, heightened spending on advertising and promotion will hurt profitability in the near term.
Currently, Energizer has a Zacks Rank # 4 (Sell).
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