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WIKI ANALYSIS
Best known for its tireless mascot, the Energizer Bunny, Energizer Holdings, Inc. is engaged in the manufacturer of primary batteries, flashlights, and men's and women's wet-shave products. The company derives more than 50% of its revenue from outside the United States, and with its two main brands, Energizer and Eveready, marketed and sold in more than 165 countries and operations in 23 manufacturing and packaging facilities on five continents, the company is nothing if not global. One of the primary concerns facing Energizer is the cost of raw materials. Zinc, a key component in its batteries, has more than doubled in price since 2005. To maintain margins, Energizer, has had to raise prices, potentially lowering demand for its products.
The acquisition of Playtex in October 2007, a top player in the feminine hygiene industry that holds number top two spot in every industry in which it competes, represents a foray into a wholly new business line. Playtex could benefit from Energizer's broader distribution (165 countries vs, Playtex's 15). The combined enterprise could also benefit from greater leverage with retailers.
Segment Information
Energizer has two two operating business segment: Household Products and Personal Care Products.
Household Products
With 19 plants in 14 countries and 6 billion batteries produced in 2006, Energizer is one of the world’s largest manufacturers and marketers of batteries and flashlights. The company's Battery segment consists of household batteries (alkaline, carbon zinc, lithium and rechargeable) and specialty batteries. The company markets its batteries under the brands Energizer and Eveready.
Alkaline batteries are the predominant household battery type in developed parts of the world, while carbon zinc batteries continue play a major role in less developed countries. Demand, however, for higher power, higher priced lithium and rechargeable batteries has grown significantly in response to the need to power newer devices such as digital cameras. The company’s portfolio of products allows it to compete in less wealthy markets and take advantage of trading consumers up to performing products as the macroeconomic trends improve. Energizer estimates its share of the total U.S. retail battery category was approximately 39% in 2008, 39% in 2007, 37% in 2006, 36% in 2005 and 34% in 2004.
In fiscal 2008, this segment grew its revenue by 4% and contributed approximately 57% of revenue.
Personal Care
In 2003, the Company acquired the worldwide SWS business from Pfizer, Inc. SWS is the second largest manufacturer and marketer of men’s and women’s wet shave products in the world. SWS operates four manufacturing facilities worldwide and its products are marketed in more than 125 countries. Its primary markets are the U.S., Canada, Japan and the larger countries of Western Europe. SWS estimate its overall share of the wet shave category for these major markets at approximately 21% in 2006 and 2005 and 22% in 2004.
In 2007, the Company acquired Playtex Products Inc., a leading manufacturer and marketer in North America of well-recognized branded consumer products, for approximately $1.9 billion.
In Skin Care, Playtex holds the #1 US market share of the sun care category with its Banana Boat and Hawaiian Tropic brands. In addition, Playtex also owns the #1 market share position in the US hands and face wet wipes category with its Wet Ones brand and the #1 market share position for branded US household gloves with its Playtex household gloves.
In Feminine Care, Playtex sells tampon products under the brand names Playtex Gentle Glide and Playtex Sport. Playtex owns the 2nd largest market share of the US tampon market for more than 40 years.
In Infant Care, Playtex owns the leading US market share in infant feeding products under the Playtex brand name and the leading US market share in diaper disposal system under the Playtex Diaper Genie brand names.
In fiscal 2008, this segment grew its revenue by 10% on a pro forma basis, and contributed approximately 43% of revenue.
Geographic Segment
In fiscal 2008, Energizer derived 51% of its revenue from the US, and 49% outside of the US.
Product Segment
In fiscal 2008, Energizer generated 34% of its revenue from alkaline batteries and 25% of its revenue from wet shave products.
Trends & Forces
Raw material prices are key to profitability
Energizer is vulnerable to fluctuations in the cost of raw materials such as zinc, a key ingredient in batteries. The company uses roughly 75 million pounds of zinc a year, so a 1-cent cost increase has a negative impact of $750,000 annually – and the price of zinc escalated from 64 cents a pound at the end of fiscal 2005 to over $2.00 a pound in November 2006, making the cost challenge significant. Energizer has been maintaining its margins by increasing the price. This makes the company’s products less attractive with respect to competitors in the absence of other distinguishing features, although it should be noted there is a limit to the elasticity of battery demand.
Lagged Value Growth
The battery category continues to be highly competitive as brands compete for consumer acceptance and retail shelf space. Overall battery consumption has been increasing for many years, but category value growth in the U.S. lagged unit sales until 2006 as consumer purchases have shifted to larger package sizes, which sell at lower per unit prices. Retail outlets experiencing the strongest battery category growth in the U.S. are those, which feature larger package sizes.
Foreign currencies
With half its sales outside the United States, Energizer face the risk of weaker foreign currencies. For example, a 10 percent weakening of the euro or yen translates into a negative impact on Energizer of approximately $10 million on an annualized basis.
Acquisition of Playtex Products
Energizer acquired Playtex Products in August – 2007. Playtex Products is a Personal Care Products Manufacturer and deals in Feminine Care Products and Diapers. With the acquisition, the Company is entering into different kind of business line and now competes more intensely with consumer products giants like P&G. Playtex claims the top or second-place spot in every category in which it competes. More than 80% of Playtex revenue is derived from US market. With a presence in over 160 countries, Energizer may be able reap a significant level of synergy from the acquisition.
Strategy for Growth
Energizer has developed following strategies to gain the market share in the competitive market scenario.
1. Broad Portfolio – Offering the broadest range of portable power solutions that gives multiple opportunities to meet diverse consumer and customer needs with a strong platform to trade up consumers to more premium products.
2. Brand Support – Brands matter in the battery category, and the company aggressively supports its well-known Energizer® and Eveready® brands with meaningful advertising and promotional support.
3. Minimize overhead – A lean overhead structure enables the company to fund its brand building efforts, while delivering healthy operating margins and generating strong cash flow.
4. Geographic Expansion – The company continues to expand the global presence and sales of Schick-Wilkinson Sword (SWS), introducing shaving solutions in more countries and classes of trade where it currently market batteries.
5. Encourage Trade-Up – Through continuous product innovation and strong brand support, it seeks to trade up consumers to new improved products in each area where we compete – men’s and women’s wet shaving systems and disposables.
6. Innovation - Creatively focusing on innovation in products and technology, Energizer is able to compete successfully against larger rivals. Some of the examples of innovation are: world’s first four-bladed razor and first all in one razor, battery line harnessing the power of lithium in a 1.5 volt cell, an alkaline battery with patented titanium technology, advanced titanium blade-coating technology, world’s only hearing aid battery dispenser and the proprietary intelligent power management technology in new cell phone charger.
P&G's expected exit from Battery
Procter & Gamble Company (PG), Energizer's main competitor is said to be considering a spin off Duracell division. The deal has yet to be completed, but a successful spin-off, depending on the terms of course, could create a better competitive environment for Energizer.
Restructuring
Lean Transformation: The essence of Energizer's lean transformation is to focus on value adding activities and eliminate the least important. These efforts have resulted in significant cost savings over the past three years, helping offset the impact of rising material and fuel costs.
European restructuring: The company has initiated a cost-reduction program to streamline its commercial structure in Europe and use its resources more efficiently. The initial phase, restructuring of European supply chain, was substantially completed in the fourth quarter of 2006 at a total cost of $24.1 million, pre-tax, and is expected to produce annual cost savings of approximately $6 million beginning in fiscal 2007. Energizer is also combining its battery and blade commercial management, sales and certain support functions within selected countries. This phase is expected to cost $27-$33 million and expected to result in annual cost saving of $15-$20 million.
Competition
Energizer competes with Procter & Gamble Company (PG) , SANYO Electric Co, Exide Technologies, Greatbatch Inc., China BAK Battery, Spectrum Brands and GP Batteries (in Asia) in batteries.
The main competitor to Energizer's Blades and Razor segment is P&G. P&G is several times the size of Energizer, affording it far greater marketing and production resources than the latter. P&G has is, however, to withdraw from the battery business.
Recent Performance
On May 15, 2009, the Company completed an equity offering of 10.9 million shares at $49.00 per share. Proceeds of the equity offering ($510.2 million net) will be used for general corporate purposes and for debt repayment.
On June 5, 2009, Energizer completed the acquisition of Edge and Skintimate shave preparation business for $275 million, which includes $48 million of estimated tax benefits. The acquisition values the target company at approxmiately 9-11x TEV/EBITDA, based on post-integration EBITDA of the acquired business.
For fiscal Q3 ended June 30, 2009, Energizer reported pro forma net earnings of $72 million ($1.12 per diluted share) on revenue of $997.5 million. This is compared with pro forma net earnings of $72.6 million ($1.23 per diluted share on revenue of $1,066.7 million.
Total net sales declined by 6% y-on-y for the current quarter, or less than 1% on a constant currency basis. Net sales of the Household Product division declined by 13% y-on-y, or 6% on a constant currency basis. The lower net sales for the segment was due to sales volume decline across all region and was driven by a reduction in Energizer Max premium alkaline and low margin non-Energizer branded products volume. The was partially offset by favorable pricing and product mix. Net sales of the Personal Care business remained flat y-on-y, or increased by 5% on a constant currency basis. The increase in net sales on a constant currency basis was driven by increase across all product lines.
The Company's Debt/EBITDA ratio for the last four quarters was 3.15. Under the terms of the company's debt facilities, the Company's Debt/EBITDA ratio cannot exceed 4.00 at all times, and cannot exceed 3.50 for more than 4 consecutive quarters. If the ratio exceeds 3.50, Energizer will have to pay an additional 0.75% in interest, which would amount to an increase of approximately $6.5 million (or $4 million after-tax) of cash interest expense per quarter.
References
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