Short Energizer Holdings, Inc - NYSE:ENR Sohn Conference - May 2017 - SOHN - Conference Foundation
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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
batteries into commodities. With The products are not
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
This low-priced alternative should realizing it
lead to declining share, pricing, and
margins for branded players, Energizer and Duracell have cut
regardless of what they do their advertising budgets
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 11Retail 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 12Energizer’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 13Energizer 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
Tropic Energizer now has to bid against
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 15Energizer’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
The Energizer retailers which don’t
carry HandStands likely don’t really
sell automotive products
Source: Energizer Investor Presentation, Deutsche Bank Page 16Energizer’s Recent Results Confirm Weakness
1st Quarter – 2017 2nd Quarter – 2017
Stock traded up due to 7% On May 3rd, 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 2nd 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 17Several 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’s Distribution Gains Energizer Added New Displays In Stores 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 20Energizer 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 21Several Catalysts Can Lead To Energizer Shares Declining
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
Page 22Thank 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.You can also read
