Energizer Holdings, Inc. (ENR) Earnings Call Transcript & Summary

Good morning. This is Bill Chappell. I'm the Senior Equity Analyst, covering consumer at Truist Securities, and I appreciate you joining us for our first Truist Consumer Symposium. I chose symposium versus conference. It's not a more highbrow, but it's good quality slate of companies. In this way, you'll get a lot out of these over the next few days. Our start is with Energizer Holdings, based in St. Louis, Missouri. Energizer is a leading player in batteries, personal lighting, in Auto Care category. Key brands includes Energizer, Rayovac, Armor All, Nu Finish and STP. The company finished fiscal 2020 with just about $2.7 billion in revenue and has a current market cap of about $3 billion. Today, we have Mark LaVigne, Chief Executive Officer; Tim Gorman, Chief Financial Officer; John Drabik, Chief Accounting Officer; and Jackie Burwitz, VP of Investor Relations.

So Mark, let's just kick it off, and start [ the quick chat ]. Help us understand kind of the [ state ] of the North American battery market. And when I say that -- I think excluding COVID, since obviously, [indiscernible] about that. But just where we stand [ competitive ] landscape, why the industry has actually grown ex COVID for the past 5 years when [indiscernible] declined for the prior 10? And just kind of -- just thoughts around that and then I'll have some more questions as a follow-up.

Bill, thanks, and thanks for having us here today. Look, I'll be happy to kind of walk through. I think it's important to really walk through because the battery category demand has gone through significant fluctuations since the early 2000, but the one consistent thing that's really been driving that is around devices. We frequently talked about devices, demographics and disasters driving the demand for the category, but even demographics and disasters funnel that demand through devices. And if you go back to the early 2000, you had digital cameras, you had portable music players, they were pervasive with consumers. And those high-drain devices used a significant amount of batteries. Then you had the iPhone, which was introduced around 2007. But as smartphones became more pervasive, you started to see a consolidation of those high-drain devices into the smartphone. And as a result, the number of battery-powered devices declined and they -- the use for batteries. That consolidation stabilized around 2016 with -- when the smartphone reached saturation levels. And that really created a new baseline and -- as consumers sort of settled into that new [indiscernible]. In recent years, we've seen technology continue to advance. Consumers have acquired new devices, which require batteries, and that was the number of electronics people have that have remote control, the adoption of connected smart devices. If you look at 2015, the number of total battery-powered devices has increased roughly 14%. Smart devices have increased 28% and about 40% of those devices require primary batteries. There's been an influx of devices that are driving some of the demand for batteries. We've seen doorbell cameras, smart lights, nested cameras, blood pressure monitors, those are some examples of devices that have become more prevalent with today's consumers than in the past. We expect that growth in smart devices to continue. We expect roughly the same proportion of devices that take primary batteries to be roughly [indiscernible]. And so as the device universe is constantly changing, the growth of the new devices that take our product is more than offsetting any decline as you've seen consumers consolidate with the smartphone. If you want to, Bill, we can sort of fast forward into like the pandemic and what was then driving some of that or if you want to pause there for a second and take it in a different direction.

Before we get to the pandemic, [indiscernible] the other aspect of growth in the past few years has been competition. [indiscernible] decade plus, where buy one get one free, bonus packs, [indiscernible] sizes. And so saw volumes [indiscernible] -- as you talked about, volumes picked up, it seems like that the industry's gotten pricing [indiscernible] years and [ you ] only got price cuts for the prior decade. What changed?

Well, what I think you saw from us as well as our competitor is an emphasis on investing in brand building, investing in innovation. What you don't want to do is bonus pack promotional -- extensive promotional activity, just degrades the category value. And I think as category fundamentals have taken over, this is a relatively inelastic category. And so as a result, you don't need to give batteries away, you don't need to go on heavy promotions, you just invest in innovation lines of product, communicating the benefit of that and the demand will be there. So I think what you've seen is a newfound discipline in the category to invest in the items that expand category growth and don't [ subtract ] from it. And that's certainly the way we run the business, and that's certainly what we've seen our main competitors do as well.

Got it. So -- and that largely goes to not coincidentally when Duracell was sold from P&G to Berkshire that dynamic changed pretty quickly.

We have seen a different competitive dynamic since that transaction took place. [indiscernible] it's maybe because they were just focused on different things. But we like the way [indiscernible] and when we think it's healthy for the category.

So just kind of understanding on your device comment, why -- if everything -- everybody wants to go with an iPhone and rechargeable [ class ] batteries why -- if I have a $30, $40 product, why don't I just want to put a lithium high-end rechargeable inside of it instead of doing [indiscernible]?

It's a question device manufacturers ask themselves every time they're bringing a new device into the market. I think a lot of it will come down to cost, cost of putting that rechargeable battery. Is it -- is the space suitable in the device to be able to do that? But then how is the consumer going to use it? I mean there are consumer preferences around whether they want to take the time to recharge or whether they just want to pop in new batteries. And so it's both cost, but then it's also the consumer experience and whether a rechargeable battery is suitable for that or whether a primary battery works better.

And speaking on just more pre-COVID, help me understand AmazonBasics and private label, in general. I mean, again, the thought is batteries are [indiscernible], they're disposable. And I can go on to Amazon and get a [ 80 ] pack for $5. But at the same point, private label hasn't changed in terms of penetration over the past decade. Why is that? I mean why wouldn't it make more sense? [Technical Difficulty] So welcome back. Sorry for the interruption. It was an overall technical issue, not the fact that -- as I explained that my WiFi does actually reach to my basement office. But -- so let's just jump back in. I'm not sure where everybody got cut off. But what I was asking, Mark, was talk about private label and AmazonBasics. And why -- if I can go to Amazon and get a 80 pack for $5, why doesn't private label continue to grow? And why doesn't that take more market share, but not just from you, but also from your competitors in the whole category? It never seems to have changed.

I think that's right, Bill. I mean it has been a part of the category for a long time. So I would say both we and our largest competitors are adept at dealing with private label. I think one of the reasons it hasn't continued to take market share is that both we and Duracell have continued to innovate our products and we've continued to advertise. And so as a result, consumers are migrating and continue to migrate to brands in the category. Brands continue to matter to consumers when they're engaging with the battery category, and we expect that to continue. What you saw during the pandemic was consumers gravitated to trusted brands over that period of time. I think the question will be, as the pandemic subsides, economic issues maybe take hold, depending upon the level of stimulus, do consumers revert back? And I would say that's where we're uniquely positioned as a company to be able to mitigate any of that impact because we have value brands in our portfolio with Rayovac and Eveready. So we can leverage those. To the extent that there's a desire for consumers or retailers to lean in on the value side of the category, we can fill that need with value brands if there's -- our preference, obviously, is to emphasize Energizer with our flagship brand, but we have the ability to meet that need if it heads that way. But -- and it's continued in the category to ebb and flow a couple of share points here or there.

Talk about [indiscernible] the category has improved -- the health of the category with pricing and volume, but you've also gained share. And talk about -- we can go to online in a second. But I'm interested, it seems like a lot of [indiscernible] be it getting in more of the club channel, getting into the DIY channel. Like if it's not on price, why is Energizer winning? What's giving you this incremental share?

I would say it's going in with the right story. And so it was 1.5 years, 2 years ago when Duracell introduced their new innovation. And at that time, you saw market share losses for us for a period of time. And what we said is we wanted to continue to respond in the right way, which is respond with innovation, respond with the right category story to help retailers grow their overall category. We went in with that story. We've been able to get some of that space back, which has resulted in the share gains that you've seen. So it is about communicating our message to consumers. It's about having the story that's going to drive the battery category for the retailer. And then if we grow the category, and then obviously, our brands are going to be there to benefit from that. And it's just about taking that holistic story and basic fundamentals of innovate, communicate and build brands. And it's been a successful approach for us over the last couple of years, and you're seeing in share gains.

And how important is having a lithium and having a Rayovac, Eveready into that message?

It just -- it allows us to fill any need that a retailer or a consumer may want. You can start with an opening price point and go all the way up to the best product out there in lithium. And you can -- you have that full complement of products to offer, and then you have an assortment of brands that you can mix and match the brands with the product to be able to fill the need that a retailer may be looking for.

And going back, you don't seem -- or the company doesn't seem to be particularly worried about AmazonBasics in particular or just cheap batteries overall. Is that just -- even before the pandemic.

I mean -- and you'll recall, Bill, a couple of years ago, there was a bit of a frenzy around Amazon, particularly AmazonBasics, and it was going to take over the category. We had invested a long time ago with our digital commerce team to make sure that we were going to be able to win on Amazon as well as on other omnichannel platforms, and that investment has paid off. I think at the time, it was just -- if Amazon chooses to invest in a category, then they're going to ultimately take over and dominate it. But what we're seeing is -- play out online is what you see in brick-and-mortar, which [ your ] brands matter. And if you invest in communicating those brands online, you're going to end up getting your fair share. From a share standpoint, private label is a little bit higher than what you would see in some brick-and-mortar retailers, but not disproportionately so. And we think over time, you're going to settle in where brands continue to have the majority of the sales online, just like they do today.

And can you talk a little bit more about -- I mean -- I know Energizer started early and probably earlier than competitors with Amazon and with e-commerce. And you continue to grow faster than your branded competitors or online, like -- but I don't necessarily walk in store and see the difference. And you're not -- it's not necessarily -- so what do you do? Or what was so important about being in early and how that continues the momentum?

It's a fairly -- just a fundamental approach. We focused the team on it. We made sure that it was important to the organization and that they had the support that they needed. We made it a priority to invest time and effort into digital. We put a dedicated team against it. We incubated the team to make sure that they could function autonomously. And they weren't impeded by some of the longer processes, maybe that brick-and-mortar. I mean it's a very different dynamic. You have to be able to move at a speed that's much faster. So we just -- and basically, we just started pursuing quick, meaningful wins online. We didn't wait and try to come up with a holistic plan across all portfolios. We basically just dove in and started testing and learning. And we were willing to fail. And I think what we did is we learned a lot in those early stages. We took chances and have paid off. I think having the dedicated resources, the dedicated headcount to digital commerce is critical. You've got to invest with the right outside partners who are going to give you the insights, the infrastructure, the tools and the data you need to be able to do it. And then it's just basic blocking and tackling in terms of getting the content right, making sure that you're going to own search at the right time, making sure you get the right product online the consumers are going to be seeking. And it's that balanced appetite for rapid growth with the right commercial decisions so that you're creating the right value creation. But at the end of the day, it was about putting the right team in place, empowering them to get after it and to fail fast, learn from it, move on. And as a result, we've had a lot of success. In batteries, we've continued to be the branded share leader for a long time over the last couple of years. What we're asked -- what we've tasked the team now is expand categories, do the same thing in lighting, do the same thing in Auto Care and now also expand it to international markets as well. And so really start to get that breadth and expand it, and we look forward to that growth for years to come as well.

And actually, on that, talk a little bit about the international market. I mean we, as investors, focus so much on U.S., and that's where your business is, that's where we consume, and that's understandable. But I know there was a longstanding belief that -- especially developing markets that you had the zinc carbon to alkaline would drive markets faster. There was opportunities as Duracell was sold that they kind of exited some markets with the distributors. And so -- but with volatile currency, it's kind of tough to see how good or bad you're doing. So maybe you can -- and there's not the same DIY channel. Online is a little bit tougher for us to see international. So maybe help us understand how big is this market. Is it -- how does it do compared to the U.S. or North American market and kind of initiatives there?

The international markets, we have broken down into 3 different areas. We've got the modern markets, which are largely similar to the U.S. And so a lot of our commentary with the U.K., Australia and New Zealand would sound very familiar. Then you have developing markets: Malaysia, Philippines. In the fractal data that you'll see out there, a lot of times, that data is going to be largely influenced by China and India, and those are 2 markets where we don't have meaningful businesses today. So I think some of that data -- but you are seeing those developing markets convert from carbon zinc batteries into alkaline, and that does create some growth in the underlying market dynamics. You're also seeing demographic shifts where those consumers will buy more devices. So there's increased demand. So you get the benefit of increased usage, increased device ownership as well as then the conversion from carbon zinc into alkaline. Over a 5-year recent time period, we probably saw developing markets grow at roughly 2% over that time period. But they -- like you said, they also tend to have some volatility. I think that the pandemic hit some of those markets much harder and you saw some more severe lockdowns. But the international business for us, and I'm back to sort of the all 3-market groupings, it's just a unique strategic advantage for us, I believe, because we have an international platform that is unique for a company our size. I think we have a -- the international business won't tend to move dramatically from a business standpoint because you don't have a market of scale, you don't have a retailer of scale similar to what you have in the U.S. So I think what you're just going to see is slow and steady growth out of the international markets. But it's a great infrastructure to have. And I think what you're going to see is some of the rapid growth you're going to see in Auto Care this year is largely driven by using that international platform to grow that business.

Got it. And then last kind of on the battery, talk about this past year. I mean, obviously, you've gone from 2% growth to 20% growth, at least in consumer takeaway, virtual school, work from home. So how do you view as we get -- let's go for herd immunity and inoculations, how do you plan for that? It's more -- not -- I'm not asking where does growth drop down? It's more like how do you plan from a production, from a marketing, from other standpoint for at least some pullback?

I mean -- so fast forward today, we talked at the beginning of the session, Bill, like kind of what were the device trends that were leading to some of the recent growth, which was a differentiator from what you saw for about a 10-year period up to 2015. But then you fast forward into the pandemic and the device growth accelerated as well as device usage. And as we all have talked about, the way we changed our lives in connection with the pandemic, it wasn't just where you live anymore. It was where you work, it was where your kids go to school, where you entertain. And some of those activities are going to continue, but not all. But I do think the way people use their homes is going to continue to some extent. If you think about consumers during the pandemic, those with health concerns, they bought more health care devices and those -- more than 50% of those take primary batteries. You've had people with kids at home where they would have needed more home office equipment or school equipment, more than 50% of those take primary batteries. And then you've got the gamer generation, where gaming just continues to expand as well as the use of those batteries. So you had consumers at home using more devices, using them more often. How do we get ready for what's on the other side of this? I mean you and I talked offline, what does January of '22 look like? I mean that's the big question that we need to be able to answer, and it's the biggest question as a company we need to be able to answer. And right now, what we're doing is we have our hands full in meeting the demand of today. So we're focused on continuing to meet the elevated demand today. But what we're doing is watching pockets around the world to say where are the vaccines gotten to a critical point, where has consumer behavior gotten to a point where it's more open, where we think they're representative of what consumers will do in the future. And then what's happening in those pockets to battery demand. And let's isolate on those micro data points, and then that way, inform how we're thinking about things in the future as more and more of the world gets to that point. So it's -- and this is all about -- you hear a lot of companies talk about data and analytics, about making sure that they have the right insights. That's what these types of exercises are really important. We've got to make sure we are ready for where the consumers are going. I think our personal belief as a company is you are not going to have the elevated demand that you have today permanently. But because of the habits and the way that the home is viewed differently today than it what has in the past, you're going to settle somewhere in between. Now there's a lot of room between where we were and where we have grown now. And the critical question we need to be able to answer from an investment standpoint, but also from just a supply chain standpoint is what [indiscernible] demand we need to be ready for, utilizing that every day.