Short Energizer Holdings, Inc. NYSE:ENR Sohn Conference May 2017 - PowerPoint PPT Presentation

Short Energizer Holdings, Inc. NYSE:ENR Sohn Conference – May 2017

Company Overview Core Battery (~90% of Sales)  2000 – Spun off by Ralston Purina  2015 – Spun off by Edgewell Personal Care  May 2016 – Acquired HandStands (Auto Care)  Batteries (Alkaline): #1 or #2 HandStands (~10% of Sales) 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) Page 2

When Did You Last Buy Batteries? Page 3

Alkaline Batteries Are In Long-Term Secular Decline Source: Deutsche Bank Page 4

Secular Decline Of Alkaline Batteries Likely To Continue European Battery Sales (Y/Y)  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 Page 5

High Customer Concentration With Major Retailers  Some argue that, with Berkshire’s Battery Retailers 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 Retailers will continue to beat up the branded players, resulting in declining prices and margins for battery suppliers. Page 6

Costco Case Study 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. Discharge Duration [Gray = Kirkland Signature, Orange = Duracell] The identical bottoms of the batteries reveal that they were made by the same company (Duracell) Source: http://www.paulallenengineering.com/blog/kirkland-signature-alkaline-batteries Page 7

Private Label Vs. Branded Batteries: Value Proposition 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  Private Labels have 10-15% share  Brand doesn’t carry the same in the US and ~30% share in weight for batteries as it does for Europe other products, like detergent or shaving razors  Private Labels have turned  The products are not batteries into commodities. With little overhead and no advertising, differentiated, and consumers, they offer essentially the same given the availability of product at a much lower price information, have begun realizing it  This low-priced alternative should lead to declining share, pricing, and  Energizer and Duracell have cut margins for branded players, their advertising budgets regardless of what they do accordingly Source: Clark.com, Batteryshowdown.com Page 8

Private Label Vs. Branded Batteries: Performance 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 Source: Batteryshowdown.com, Deutsche Bank Page 9

Private Label vs. Branded Batteries: E-Commerce Source: Amazon.com Page 10

Retail And The Amazon Effect “The times they are a changin ’.” – Bob Dylan  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 Page 11

Retail And The Amazon Effect (Continued) In addition to declining pricing and margins, the ascendancy of E- Commerce should also result in share loss for branded players Source: 1010data Page 12

Energizer’s Cost -Cutting Prospects Are Minimal  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 Source: Energizer Investor Presentation Page 13

Energizer Hyped As An Acquisition Platform . . . After 2000 Ralston Purina Spin After 2015 Edgewell Spin  Leveraging their distribution  The battery business has platform, Energizer acquired a declined, reducing Energizer’s great set of brands leverage to introduce new products  Shaving: Edge, Schick, Skintimate  The good brands are spoken for  Sun Care: Banana Boat, Hawaiian  Energizer now has to bid against Tropic the likes of P&G, Unilever,  Feminine Care: Playtex, Stayfree, Nestlé, and Edgewell for deals Carefree, and O. B.  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 Page 14

. . . But Energizer Is Now A Fundamentally Worse Platform After 2000 Ralston Purina Spin After 2015 Edgewell Spin Highly Do you know Recognizable these brands? Brands Page 15

Energizer’s First Acquisition Was Unimpressive HandStands Shrinking Market Share  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 HandStands’ fragrance) and sales recently share dropped from  HandStands is already in ~70% of 26% to 18% the retailers where Energizer is in fragrance already featured, leaving minimal in just one room for growth year  T he Energizer retailers which don’t carry HandStands likely don’t really sell automotive products Source: Energizer Investor Presentation, Deutsche Bank Page 16

Energizer’s Recent Results Confirm Weakness 1 st Quarter – 2017 2 nd Quarter – 2017  Stock traded up due to 7%  On May 3 rd , 2017, ENR reported organic growth, whose primary NO ORGANIC GROWTH drivers were temporary  “Inventory Deload ”: This sounds  3%: shelf space gains, to be a lot like channel stuffing lapped in the 2 nd quarter  “Price Increases”: With the rise  3%: incremental holiday activity of Private Labels, especially Amazon, this isn’t sustainable  Margin improvements due to favorable commodity prices and holiday sales improvements Temporary factors (shelf space gains, commodity prices, hurricane sales) have enabled Energizer to beat street estimates on poor quality earnings Source: Energizer Earnings Transcripts Page 17

Several Near-Term Headwinds For Energizer  “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 US Treasury Yield Curve expected) would make yield companies like Energizer less attractive Source: IMF, US Treasury Page 18

Channel Stuffing, Anybody? Energizer Added New Displays In Stores 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 Energizer’s Organic Growth 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 Page 19

Energizer’s Private Market Value Warren Buffett, Berkshire Acquires Duracell Berkshire Hathaway CEO  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 Given that Energizer is the #2 player in the space, an 8x forward EV/EBITDA multiple is very conservative Page 20

Energizer Is Exceedingly Overvalued 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% This is assuming that multiples don’t compress below 8x Page 21