Short Energizer Holdings, Inc.
NYSE:ENR
Sohn Conference – May 2017
Company Overview
Page 2
2000 – Spun off by Ralston Purina
2015 – Spun off by Edgewell Personal Care
May 2016 – Acquired HandStands (Auto Care)
Batteries (Alkaline): #1 or #2 player in most/all markets, #2 in US with 30% share
Lighting (flashlights – ~15% US share, headlights, and lanterns)
Auto Care (fragrance – ~20% US share, appearance)
HandStands (~10% of Sales)
Core Battery (~90% of Sales)
When Did You Last Buy Batteries?
Page 3
Alkaline Batteries Are In Long-Term Secular Decline
Page 4 Source: Deutsche Bank
Secular Decline Of Alkaline Batteries Likely To Continue
Page 5
Global Alkaline Battery Market expected to decline at 0.16% CAGR from 2015 to 2019
In the US and Europe, battery sales have been declining in the ~3-4% range over the last several years
Products, like mobile phones and smart watches, now featuring lithium-ion batteries
Lithium-Ion Market forecast to grow at 11.6% CAGR from 2016 to 2024
OEMs and their suppliers provide lithium-ion batteries, not Duracell or Energizer
Source: Research and Markets, Transparency Market Research, Deutsche Bank
European Battery Sales (Y/Y)
High Customer Concentration With Major Retailers
Page 6
Some argue that, with Berkshire’s acquisition of Duracell, the players in the space will act more rationally
The Problem: All of the power lies in the hands of retailers
In the US, ~90% of battery sales are concentrated among only 8 or 9 retailers
Retailers have all the leverage over their suppliers, forcing them to drop their margins, threatening to give preference to other branded players or private players
Battery Retailers
Retailers will continue to beat up the branded players, resulting in declining prices and margins for battery suppliers.
Costco Case Study
Page 7
Costco beat up their suppliers so much that the winner in the competition to be their exclusive supplier, Duracell, was forced to also make a private label battery for them. The kicker is that the private label lasts longer as well.
Source: http://www.paulallenengineering.com/blog/kirkland-signature-alkaline-batteries
The identical bottoms of the
batteries reveal that they were
made by the same company (Duracell)
Discharge Duration [Gray = Kirkland Signature, Orange = Duracell]
Private Label Vs. Branded Batteries: Value Proposition
Page 8 Source: Clark.com, Batteryshowdown.com
Private Labels have 10-15% share in the US and ~30% share in Europe
Private Labels have turned batteries into commodities. With little overhead and no advertising, they offer essentially the same product at a much lower price
This low-priced alternative should lead to declining share, pricing, and margins for branded players, regardless of what they do
Brand doesn’t carry the same weight for batteries as it does for other products, like detergent or shaving razors
The products are not differentiated, and consumers, given the availability of information, have begun realizing it
Energizer and Duracell have cut their advertising budgets accordingly
Private Label Branded
Basic Technology Patent Date 1960 1960
Pricing Lower (25-40%) Higher
Cost Per Unit Energy Lower Higher
Variable Production Costs Same Same
Overhead Bare Bones Sizable Offices and Sales & Marketing Teams
Advertising Budgets Virtually Non-Existent Sizable
Page 9 Source: Batteryshowdown.com, Deutsche Bank
Even in the European market, which has Private Label share in the ~30% range, which reflects the increased competition there, Private Labels like Ikea Alkalisk and Costco Kirkland Signature are still the best deals
Private Label Vs. Branded Batteries: Performance
Page 10
Private Label vs. Branded Batteries: E-Commerce
Source: Amazon.com
Retail And The Amazon Effect
Page 11
E-Commerce currently makes up about 2-4% of total battery sales
E-Commerce has grown 75% in the past year, and will likely continue to grow at a very fast pace
Private Labels can now circumvent the distribution and relationship advantages of the branded players
Source: 1010data
“The times they are a changin’.” – Bob Dylan
Retail And The Amazon Effect (Continued)
Page 12 Source: 1010data
In addition to declining pricing and margins, the ascendancy of E-Commerce should also result in share loss for branded players
Energizer’s Cost-Cutting Prospects Are Minimal
Page 13 Source: Energizer Investor Presentation
Some sell-side analysts indicate that there is room to cut costs
By all accounts, Energizer has been a well-run business over the last several years
As indicated to the left, Energizer’s 2013 restructuring recently streamlined their business
Speaking with Energizer’s IR, they indicate that there is no real cost-cutting opportunity
Energizer Hyped As An Acquisition Platform . . .
Leveraging their distribution platform, Energizer acquired a great set of brands
Shaving: Edge, Schick, Skintimate
Sun Care: Banana Boat, Hawaiian Tropic
Feminine Care: Playtex, Stayfree, Carefree, and O. B.
Page 14
After 2000 Ralston Purina Spin After 2015 Edgewell Spin
The battery business has declined, reducing Energizer’s leverage to introduce new products
The good brands are spoken for
Energizer now has to bid against the likes of P&G, Unilever, Nestlé, and Edgewell for deals
Energizer is not as well capitalized as these other businesses
Energizer plans to make more acquisitions, and this should result in a
squandering of shareholder value
. . . But Energizer Is Now A Fundamentally Worse Platform
Page 15
After 2000 Ralston Purina Spin After 2015 Edgewell Spin
Highly Recognizable
Brands
Do you know these brands?
Energizer’s First Acquisition Was Unimpressive
Page 16
HandStands
ENR paid 10x EBITDA (not cheap), with HandStands growing at low-to-mid single digits, although even this is questionable
Auto care is highly competitive, with HandStands losing share (going from 26% to 18% in fragrance) and sales recently
HandStands is already in ~70% of the retailers where Energizer is already featured, leaving minimal room for growth
The Energizer retailers which don’t carry HandStands likely don’t really sell automotive products
Shrinking Market Share
Source: Energizer Investor Presentation, Deutsche Bank
HandStands’ share
dropped from 26% to 18% in fragrance in just one
year
Energizer’s Recent Results Confirm Weakness
Page 17
1st Quarter – 2017 2nd Quarter – 2017
Stock traded up due to 7% organic growth, whose primary drivers were temporary
3%: shelf space gains, to be lapped in the 2nd quarter
3%: incremental holiday activity
Margin improvements due to favorable commodity prices and holiday sales improvements
On May 3rd, 2017, ENR reported NO ORGANIC GROWTH
“Inventory Deload”: This sounds a lot like channel stuffing
“Price Increases”: With the rise of Private Labels, especially Amazon, this isn’t sustainable
Source: Energizer Earnings Transcripts
Temporary factors (shelf space gains, commodity prices, hurricane sales) have enabled Energizer to beat street estimates on poor quality earnings
US Treasury Yield Curve
Several Near-Term Headwinds For Energizer
Page 18
“Inventory Deloading”
Lapping of shelf space gains in
2017 should result in little or no
organic growth
Commodity prices, recently at
historic lows, are rising and are
expected to rise much more
Rising interest rates (which are
expected) would make yield
companies like Energizer less
attractive
Source: IMF, US Treasury
Energizer’s Organic Growth
Channel Stuffing, Anybody?
Page 19
Energizer’s Distribution Gains
Some of this involves increasing
the number of displays at some of
their retailers
Though slightly beneficial, this
artificially improves sales by
saddling retailers with more
inventory
With their aggressive revenue
recognition, this is de facto
channel stuffing
In the most recent quarter,
“inventory deload” (-4%)
rendered their organic growth flat
Source: Energizer Investor Presentation and Earnings Transcripts
Energizer Added New Displays In Stores
Energizer’s Private Market Value
Page 20
Given that Energizer is the #2 player in the space, an 8x forward EV/EBITDA multiple is very conservative
Warren Buffett, Berkshire Hathaway CEO
Berkshire Acquires Duracell
February 2016: Berkshire Hathaway acquired Duracell, the #1 alkaline battery player, paying 7x EBITDA
Buffett traded his $4.7 billion worth of Procter & Gamble shares ($336 million cost basis) for Duracell and $1.8 billion in cash
Doesn’t include Berkshire’s ~$1.5 billion in tax savings from avoiding capital gains on the P&G shares. Including this, Berkshire actually paid more like 3.4x EBITDA
Energizer Is Exceedingly Overvalued
Page 21
This is assuming that multiples don’t compress below 8x
FY 2017E FY 2018E FY 2019E FY 2020E
Revenues 1,686 1,678 1,670 1,663
Growth % 3.2% (0.5%) (0.5%) (0.4%)
EBITDA 326 323 320 317
EBITDA Margin % 19.4% 19.2% 19.2% 19.1%
Market Capitalization 3,693 3,702 3,711 3,720
Net Debt 570 478 388 301
Enterprise Value 4,263 4,180 4,099 4,021
Forward EV/EBITDA Multiple 13.1x 12.9x 12.8x 12.7x
Assumed Forward EV/EBITDA Multiple 8.0x 8.0x 8.0x 8.0x
Implied Share Price $33.02 $33.98 $34.96 $35.95
Implied Return 44.7%
Several Catalysts Can Lead To Energizer Shares Declining
Page 22
Energizer’s investor appeal is its
2% dividend yield
Rising interest rates (which are
expected) would make yield
companies less attractive
Continued secular decline in the
alkaline battery space
Disappointing earnings as a
result of temporary factors
reversing
Poor acquisitions, which could
lead to debt or equity offerings
that could harm stock price
Thank You!
DISCLAIMER: THIS PRESENTATION IS NOT A RECOMMENDATION TO BUY OR SELL SECURITIES. PLEASE DO YOUR OWN RESEARCH.
DISCLOSURE: WE ARE SHORT SHARES OF ENERGIZER.