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

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

• r 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

• ther 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

• f 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%
• rganic 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
• f 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

• rganic 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.