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Energizer Holdings, Inc. (NYSE:ENR)

February 21, 2013 5:30 pm ET

Executives

Ward M. Klein - Chief Executive Officer, Director, Member of Executive Committee and Member of Finance & Oversight Committee

Unknown Analyst

Good evening. For our final presentation of the evening is with Energizer Holdings. So I'm pleased to introduce from the company, fellow St. Louisans, Ward Klein, CEO; Dan Sescleifer, CFO; and Jackie Burwitz is here in IR. We look forward to an update from the company on its restructuring actions as well as its new product activities. So Ward, I'll turn it over to you for the presentation. I will note that we're going to have -- we're going to finish the presentation today at 6:30, and then, we'll move on to the breakout session for Q&A.

Ward M. Klein

Okay. Very good. Thank you, Chris. And again, welcome to all of you who hung in here all day for this presentation. I am Ward Klein, Chief Executive Officer of Energizer Holdings; and Dan Sescleifer, our CFO, is up here on the podium with me.

To get the legal items out of the way upfront. There are some forward-looking statements in this presentation and there are a fair number of non-GAAP measures. So please take note, accordingly, the qualifiers.

The agenda for my presentation is pretty straightforward. I'm going to spend the first part of it talking about a number of initiatives, actually, 7 different initiatives we have underway at Energizer to improve shareholder returns. And then, after going through that, I will give you a brief update on the business, both the Household Products division and our Energizer Personal Care division, and a fair amount of innovation that we're literally in the process of launching.

So improving shareholder returns. The initiatives we have going on here are a little extraordinary for us, especially doing them all at once. We certainly -- I'll talk briefly about successful innovation, it is a very important component of adding shareholder value to Energizer Holdings. And I'll take just one example to illustrate what we've been doing in that area and how it has enhanced shareholder value.

But I will also discuss about how we broadened the Personal Care portfolio over time. We have a meaningful restructuring project underway, primarily in the Household Products division, but it does stretch over into the Personal Care division in corporate.

We have a working capital initiative underway, that I will touch on. We did initiate a dividend in the last quarter of our fiscal year, last fall, and I'll talk about that briefly. We have a new compensation plan starting fiscal year 2013. It's tied into a lot of the initiatives that I'll cover. And finally, I'll touch briefly on some enhancements we've done in terms of talking to the Street, talking to the owners of this company.

First, the successful innovation. And probably, the single best example certainly, not the only example at Energizer Holdings, is the launch of the Hydro laser platform. It was actually 3 years ago at CAGNY that we announced and launched our Hydro men's system, a revolutionary technology in terms of offering moisturization, in terms of offering comfort and still, offering a close shave. Many of you are, I'm sure, familiar with the story over the past 3 years as it's unfolded. But as you understand the razor and blade business and when we launched Hydro, it wasn't just a new product, it was a new platform. And so following that launch 3 years ago of the men's system, we followed that up with the launch of a power version of Hydro, as well as a woman's system version of Hydro, Hydro Silk, which has done quite well. And then, we're in the process right now of introducing Hydro disposable, which I will touch on a little bit later when I get into the divisional discussion.

The Hydro franchise sales is, at this point, up over $300 million. This fiscal year, 3 years out, it is still growing at a rate of approximately 30%. It is a very high margin, high-quality product that is not just in the U.S. but of course, we rolled out, and are still rolling out, across our global platform. It's been a very, very successful product for us.

Our market share in men's Wet Shave in the United States before launching Hydro was under 8%. It was 7.7%. That was with the legacy men's Quattro and some other legacy systems we had. Since launching this, the Hydro, the incremental increase to our total share in razors and blades has gone from 7.7% to 10.9%.

The Hydro Silk, again, this is the women's systems version of Hydro, has also grown our total share of the Wet Shave market, up 210 basis points, really, just in the past 12 months. This product, again, is unique and demonstrably more comfortable than virtually anything on the market and has been very well received by women and is being rolled out globally. We do roll these products out globally over time in a measured pace, so we can control our capital costs going in and then, roll out over time. And so Hydro Silk is still being introduced in a number of parts of the world. That's an example of innovation. We have other examples I'll come back to a little bit later.

But another way of enhancing shareholder value at Energizer has been broadening the Wet Shave portfolio, this being through acquisitions. One of our most successful acquisitions we've done on the Wet Shave side has been the acquisition of Edge and Skintimate's shave preps, the #1 men's shave prep in the United States and the #1 women's shave prep the United States. And since acquiring that in the depths of the great recession, literally, in the spring of 2009, we have grown the market shares of both. Here, you'll see in terms of Edge share of men's preps, we've increased share 370 basis points versus the year before we owned it. In terms of value, we've increased the unit share of Edge 470 basis points since we acquired it.

Importantly, not only have we grown our presence in the Wet Shave business, we've grown our share in the Wet Shave -- in the shave prep business through this acquisition. But it's benefited back on our razor and blade business in terms of increasing the amount of crossover we've been able to achieve between those people who've been using Edge in the past and those who were using Schick. And in fact, that overlap has gone from about 29% of users to 43% of users.

Another benefit out of the Edge acquisition was it lowered our cost of goods. We did have a shave prep business -- we do have a shave press business in Europe, we do have shave prep business in Japan. With the acquisition of Edge and Skintimates, we picked up the lower-cost production facility for shave preps in the world and expanded our margin based on those businesses in both Europe and Japan by over 1,000 basis points. So overall, any way you look at it, the Edge and Skintimates acquisition have been very successful, broadening our Wet Shave presence.

It's not the only broadening of our Wet Shave presence. We also later acquired, out of bankruptcy, what was known as American Safety Razor. This is the leading private label purveyor of razors and blade products in the world. We now call it the Private Brands Group. It's been fully integrated into our Personal Care division. It is -- the strategies and marketing activities between the Private Brands group and our branded Schick group reside in one location, one common group. This has given us substantially greater scale in Wet Shave. If you look at just unit volume, number of blades going out the door, the American Safety Razor acquisition really doubled, and we now account for about 36% of the category in the U.S. and large Western European markets from a unit point of view. Obviously, not from a value point of view, but from a unit point of view.

That has also broadened our portfolio in terms of technological reach in both product and customers. It has -- the business we acquired over 60% share of private label worldwide. A good 1/3 of this business, if not more, is actually outside your developed markets, so good further inroads into developing and emerging markets. And the biggest, I think, handicap of this business that we bought out of bankruptcy was the quality of their products. And we have redone the innovation pipeline for the Private Brands Group and frankly, are starting to roll out later this year, improved versions for Private Brand customers with this piece of the business.

So that's broadening the Wet Shave business, but we haven't stopped there. Again, back in 2004, you'll see from the chart, our Wet Shave business at that time was around $750 million. Actually, when we acquired Schick, it was around 600 -- $650 million. But we've organically grown that Wet Shave business through the innovations you saw and then, added 2 of the acquisitions you saw. So now our Wet Shave business amounts to about $1.7 billion, again, coming off from the $625 million original business we acquired in 2003.

On top of that growth in Wet Shave, we've also further grown our presence in the Personal Care space, primarily through the acquisition of Playtex back in 2008. With that acquisition, we picked up the #1 share position in the Sun Care in the United States with the Banana Boat and Hawaiian Tropic brands, a very healthy, dynamic category to be in. We continue to grow that business in the U.S but even more excitingly on Sun Care, where we've been achieving double-digit growth of Banana Boat, Hawaiian Tropic, Sun Care products internationally since the year we acquired the business. We also picked up a Feminine Care business that includes the Gentle Glide and Sport plastic tampons, a very narrow part of overall Feminine Care, but one we focus on very well. And in that space, is a very strong competitor. And then, a bit of an Infant Care business under the Playtex name. But you can see in terms of broadening Wet Shave and also broadening overall Personal Care, how we've grown really our presence in the Personal Care space from again around $700 million in 2004 to close to $2.5 billion today.

I'm going to jump into another area where we are adding value for shareholders, and it's a restructuring project that we've announced and is well underway. And it's a restructuring project that is primarily over on the household product side of the business. And that's primarily due to what we call out as a Battery category that is in slow but secular decline. The Battery category, traditionally, has grown 2% to 3%, 4%. Again, we're talking primary batteries, that is those throwaway batteries, not the rechargeable batteries. But traditionally, it was growing 2%, 3% or 4%. We saw devices that take our batteries start to decline actually pre-great recession. The great recession exacerbated that problem, both on devices and on the category. We saw a slight uptick in the category in 2011, but we do now call out about a 2% to 3% secular decline. In light of that, we -- when we saw the first drop in the category, we initiated a restructuring in 2011 where we took out an alkaline production facility in Switzerland and a carbon zinc battery production facility in Cebu, in the Philippines. Reduced SKU counts as well, and we're able to realize $34 million out of that.

We didn't do more at the time because actually, we saw some growth coming back to the overall category, to the devices that our batteries go into. That was sufficient. But like I said, around 2011, we were well out of the great recession and the secular decline renewed. And it forced us to go back and take a look and really, I think, fundamentally redefine the role of the Household Products division at Energizer Holdings. And in light of that redefinition that I'll get into when I talk about the division level that led to the second and much more massive restructuring that we're -- that's underway right now. This is a restructuring that is on target to yield $200 million in savings starting in the year 2015. It's costing us about $250 million to execute this. We're reducing global headcount in the organization by 10%. That's 1,500 colleagues. And we will be dropping about 75% of that savings to the bottom line. But we will be holding back about 25% of that savings, or roughly $50 million or roughly 100 basis points, to be put back into A&P support behind our innovation pipelines.

Another initiative we have underway is, and separate from the restructuring I just described, is a working capital initiative. It's a specific project approach. It was on DSOs. We identified 6 of our major markets where we felt we had some major opportunities to rein in terms, and are doing so. In terms of inventory, we identified opportunities in Sun Care, Wet Shave, alkaline and Lights. In terms of paring back some various new product activities that weren't panning out, plus just greater discipline on SKU count and change in organizational structure and approach. And then, DPO, days payable, implemented standardized center-led term policy across the globe. We are targeting a 400-basis-point reduction in working capital as a percent of sales. This is roughly $200 million in savings. We still feel very confident on that number.

Another shareholder enhancing step we've taken over the last couple of years is the initiation of a dividend. We spun off from Ralston Purina, as many of you know, in 2000. We were -- from 2000 through 2011, primarily getting cash back to shareholders through aggressive share repurchase, which we still do as we did last year. But in talking to shareholders and talking to the owners of the company, there was a desire for a dividend. And so we initiated the dividend with a 25% payout of 2012 earnings, 40% payout of current domestic cash flow. Again keep in mind, half our businesses are offshore.

We did meaningful share repurchase throughout our history. We've done some pretty aggressive share repurchase in 2011, 2012. 84% of free cash flow returned to shareholders through stock repurchases primarily and then, dividends towards the end of that time frame. This current year, obviously, with board approval, the dividend policy will continue. Share repurchase, as we get through the costs associated with the restructuring project that I just talked about, we need to get through some of that cost and I -- and then, from a share repurchase point of view, that always is at the top of our list.

Another shareholder advancing step we've taken, and it's really this year, is a new compensation plan. Traditionally, management was compensated based on an all-in earnings per share. It was a full target, it was focused on EPS and it served us well for a number of years. But with the major restructuring effort, an all-in number doesn't make sense versus an adjusted number. With a working capital initiative underway, we felt it important to hold the management accountable for hitting those targets, so that's been incorporated into the compensation. With the restructuring projects underway, again, critical to have management held accountable for that. And so that's been working in the compensation structure. So what you see in 2013, in the current year, is a restructuring -- is a compensation program quite different from what we've traditionally done. It reflects the times and reflects where we are and it reflects the activities we're taking. So the annual plan is an adjusted EPS number, adjusted pretax operating profit, hitting the cost savings targets we have and hitting the adjusted net working capital targets we've set.

Our 3-year plan is also different. It's an adjusted return on invested capital, adjusted cumulative EBITDA and a relative TSR modifier, so you look at our total shareholder return after 3 years versus our peer group and modify up and down based on how you do versus the peer group.

And then finally, in terms of the portion of this presentation about enhancing shareholder value, is our enhanced IR efforts. Again, when we spun off from Ralston Purina in the year 2000, and for a number of years, we were quite reticent as a company. We really -- we did not do earnings calls. We would do maybe 1 or 2 of these meetings per year, and that was it. We understand that we're not a $1.7 billion battery company anymore. We're a $4.5 billion to $5 billion consumer packaged goods company and have enhanced our shareholder communications accordingly. So we have improved transparency. We revised our earnings format, so -- to help investors better understand the bridge between GAAP earnings and adjusted earnings. We initiated an annual financial outlook. We don't give quarterly guidance, but we are at least giving annual guidance at this point in time. We started that last year. We've reinstituted quarterly conference calls, additional investor conferences and just getting out more and talking to investors and potential shareholders of this company. So again, a number of initiatives underway, really all focused on enhancing shareholder returns.

I will now move into describing a little bit of the things going on in the 2 divisions, some of which may be a little competitive but hopefully, will not be. First, on the Household Products division. Again, their mission has been redefined to really have stable profitability in a declining environment. And they continue to generate great cash. As you can imagine, the amount of capital investment going into this business is pretty minimal, and we have been investing well below our depreciation rate for quite some time. The cash flow off the battery business is outstanding. The challenge is to maintain that profitability in an environment that's declining 2% or 3%. And that is what this division is now focused on. Short-term drivers of that are a couple of projects I just talked about, and I won't reiterate them. But the restructuring effort provides a short term boost in terms of rationalizing and streamlining our operation facilities, less plants; refocusing on the core product lines, less new product profit efforts in ancillary activities; bringing the overhead cost down and a centrally led, locally executed marketing approach globally. Also from a short-term driver point of view, for this division is -- a lot of the work on improving the working capital has actually taken place from the Household Product side. With days in the inventory coming down, again, through the plant rationalizations, to SKU reductions and days payable outstanding going up.

Longer-term drivers for the Household Products division remains, really, just focused on these 2 mega brands. We're committed to the brands. We continue to drive cost leadership across the business and they are reinvesting in these brands themselves in the portfolio. Again, we have 2 brands to talk about here: Eveready and Energizer. I know Eveready sounds a little odd because we don't sell much Eveready in the United States. But Eveready, still, is a very resilient and powerful brand, especially in the emerging world, especially in places like the Philippines; places like Egypt, where we have market share still over 80% for the Eveready brand. And then of course, the Energizer brand. These 2 brands account for the #1 and #2 market share position in batteries in 28 out of the 31 Nielsen-measured markets that we compete in. Now we have affiliates in actually 50 countries. A number of these countries, we don't use Nielsen or they don't have Nielsen. And in many of those, we're also #1 or #2 as well.

Again, some of these market shares for the battery business are quite healthy. You see Singapore at 76%, Malaysia, Australia, 70% and 60%, Argentina, 60%, very strong franchises. They've been overseas and very strong for a very long time.

And again, the brands, the Energizer Bunny is still going and going and going. And outside of the Energizer Bunny markets, we have the Energizer guy who's been a consistent campaign for over 10 years, that's equally effective in markets especially in places like Asia. What do I mean by strong? Well, we put over 100 billion TV impressions in the past 24 years just in the U.S. behind the Bunny. The Q score for the Energizer brand is the 17th highest out of 175 brands measured. So it's one of the top 10% of strong brands in the United States. The Energizer Bunny is the fifth most liked icon in America. It's in the top 3%. So not many companies, I think, today have come up and had brands that rank in the top 3% in terms of likability or top 10% in terms of strength. The Energizer Bunny is one of those, and we'll continue to nurture that.

Another strength of ours remains our broad portfolio, even though we've eliminated a number of miscellaneous SKUs. We have the right products in the right price points in battery business. Both the Energizer brand, which goes from standard alkaline all the way up to high-performance alkaline, all the way up to lithium, and then, of course, Nickel Metal Hydride offering. And on the Eveready brands from what we call low-level blue label carbon zinc. That's kind of your down and dirty carbon zinc in places like Indonesia, all the way to Eveready alkaline, which we use in some U.S. accounts and Canada. Again, a broad portfolio for us to manage trade-up by market, by classic trade and by customer. The broadest portfolio of anybody in the battery market. Our major competitors, for example, is not in the carbon zinc side. That's a detriment when you're working in many parts of the world. And so we -- this has been traditionally a strength for us, or remains a strength for us, it is one of the primary reasons why we're #1 or #2 in most of all the markets we compete in worldwide.

So winning the batteries, it's a large profitable position that generates significant cash with leading share positions around the world. With 2 world-class brands, comprehensive portfolio, we still see distribution potential especially in emerging markets and certain customers and classes of trade. And we are the most focused competitor in the battery business worldwide.

Personal Care. The other half of the company, actually now have grown to about 56% of the company, and still growing. Again, to satisfy consumer and customer needs better than anyone else in the categories in which we choose to compete through insight, innovation and execution. I'm sure a lot of people say that. But the amount of innovation that has contributed to the growth I showed you earlier, the amount of innovation that I'll show you in a few minutes, I think we really walk this talk on the Personal Care side. And its role is to generate top line growth. We are not going to get top line growth out of the Household Products division, we're going to get strong, stable profits in cash, a lot of that to fund the top line growth on the Personal Care side, to continue the top line growth that you've already seen.

One of those initiatives is a marketing alliance that has just been recently announced between Energizer and Unilever. And it is in a Schick-AXE razor and blade line of products that fits in with Unilever's efforts in the overall men's Personal Care area. This is being tested in the United States, literally, starting as I speak. It's a licensing agreement between Unilever and us. We licensed the Unilever brand for the razor and blade market. It is our product. We manage it. We sell it in. We market and support it. But obviously, in tandem with the folks at Unilever, and what a brand to line up with. AXE, as you know, is a global leader in male grooming, very loyal consumer base and importantly, a very loyal consumer base of 16- to 24-year-old young men, something very attractive, obviously, for Schick.

Influential advertising, I don't need to tell the AXE story. I think everyone knows it and it's an amazing story. The Schick-AXE portfolio is being tested. It's 10 SKUs launching this month. There's a sensitive and smooth variance to the product, there is a system, a power and disposable format. So it's a full range. It is -- works off the Hydro platform, really, the Hydro 3 platform. So again, you have a moisturizing reservoir that lubricates unlike anything else on the market. We have the signature Skin Guard technology that reduces bending of skin when the blades pass over the face, improves comfort. And again, the independent suspension on the blades, all going against comfort, a great comfortable shave for men or boys, 16 to 24 years of age.

There'll be a large amount of out-of-store support for this as we test it and interestingly, where does it go in the store? It does not actually go in the razor and blade department, it goes adjacent to it. Primary fixture in line and adjacent to the shaving planogram will carry this. So in terms of cannibalizing SKUs or phasing, there's none of that with this initiative.

Changing, going from AXE and 16- and 24-year-old men shaving to cats. We have launched a product called Litter Genie.

Now this may be an odd product, only in a sense that it's going into a category that doesn't exist. It comes out of our technology and our expertise in Diaper Genie, which came with the Playtex acquisition some time ago. Again, Diaper Genie, just to inform you, is a diaper pail and liners that go into it for -- and you put your dirty diapers in it. It's a way to seal in the smell. It's very convenient. It's very popular, and has been for a number of years with new moms. We have 85% market share of that category with the Diaper Genie.

Well, there's about 4 million live births per year. And as I understand it, kids are in diapers for about 2 years. So think about 8 million kids that are pooping every year. And then you go to cats. There's about 80 million cats in the United States. Now they're not wearing diapers, obviously. They're using the litter box. And the homeowners are having to scoop that stuff out of that litter box and dispose of it in some way. And is a very -- anybody who owns a cat or has been in a house of people who own cats, it can be quite a smelly affair. A lot of problems, a lot of problems looking for a solution, and Litter Genie is the solution. It is taking the Diaper Genie concept and applying it to kitty litter.

We launched this, did a soft launch this past fall and are now supporting with A&P. The amount of -- the level of product satisfaction with this product is some of the highest I've seen in -- of all the testing, basis 1, basis 2 testing we've done. People love this product.

In fact, our refill conversion is phasing faster than expected. It's early, but so far, so good. And each pail, again, as you understand how this model works, you buy the pail, and then the first set of refills, but then you keep coming back to buy more refills when you need them. It's a little bit of the razor and blade analogy, again, with an additional twist. Instead of that child who is in diapers for 2 years, that cat's pooping for 15 to 18 years. Not a bad annuity stream to try to set up. And based on the product satisfaction we're seeing, it's full speed ahead with this innovation.

With a strong marketing support, TV ad awareness is being put behind this -- I'm sorry, TV advertisers are being put behind it, digital campaigns are on displays.

Moving back to razors. We are introducing using the Hydro disposables, both the Hydro Silk disposable for women and the Hydro Men's disposable. And they are unique and different products, it's not just a different handle. This is kind of the further extension of that Hydro platform I talked about in the beginning of this presentation. First ship date is -- was this past month. We've had nearly 100% retail acceptance on both of these products. We're going to be shipping 80,000 displays in the first 3 months. This is all just U.S., again primarily a U.S. launch, and have a sampling of the bonus packs and sampling programs. Again, a premium-priced product, a further leveraging out of the Hydro platform. And again, as in the past, we tend to introduce these into the U.S. first and then roll them out over the next 2 to 3 years internationally.

We also have a piece of innovation in women's shave, that we actually introduced the first day we owned the Schick business in 2003, called Intuition. For those of you who were around back then, you may remember it. Intuition, again, offers a unique benefit. It is true innovation, and that it has the soap around the blades. It's an all-in-one system. Women don't need to apply shave cream to shave with an Intuition. You get in the shower or on the sink, all you do is wet it and shave. It was an innovation now that's 10 years old, almost 10 years old, and continues to be the leading women's shaver in our franchise, and one that's not been able to be matched by competition, even though it's 10 years old. And it's continuing to grow.

So the most recent refreshment of this innovative product is Pure Nourishment, shipping again this month. Introduced globally 10 years ago, I've already talked about, is Pure Nourishment, again, focusing on moisturization. And moisturization is a common theme you'll see in a lot of the innovation coming out of Energizer Personal Care, because it matters. Especially for an aging population, it's relevant and it matters.

So Sun Care. Again, this is the Banana Boat and Hawaiian Tropic franchises that we picked up with the Playtex acquisition. We have 3 really exciting new products coming out in this moisturization area, and with a couple of them, I'll go through them just briefly. Banana Boat, protect and hydrate, a 2-in-1 sunscreen, has the common UVA/UVB protection all sunscreens have, but also has a unique capacity to moisturize the skin while you apply it. So when you're going out into the sun and you're looking for that protection, you're also now getting moisturization. It's a Ribbons technology. It's obvious, in terms of appearance to the consumer, it's certainly obvious when they put it on. And premium pricing.

Second innovative product in Sun Care right now is CoolZone. It's under the Banana Boat label. And what's unique about this product is it actually provides instant cooling when it's applied to the skin. Again, if you're out on the beach, out on a hot day this summer, it's 85 degrees or 90 degrees, and you're looking for sun protection, you apply this product. And not only it will give you that protection, it will actually cool your skin.

And the third product, Hawaiian Tropic, again, Silk Hydration, providing 12 hours of moisturization once it's applied. So protection, moisturization, 2 areas that we have found resonate quite a bit with consumers.

Innovation continued. Again, I mentioned earlier that we did it -- we're in the tampon business with Gentle Glide and Sport. Sport has been growing ever since we made the acquisition. It's properly targeted to younger women, active women, and has done quite well. Gentle Glide was more on the legacy part of the plastic tampon franchise. And was under some share pressure, as it was getting caught in between nuclear war of larger competitors in the overall space. We have refreshed Gentle Glide and reinforced its positioning through a true innovation. It's the only 3 -- it's the only triple-layered tampon product in the marketplace. Triple layer means more protection, more assurance, more surety. This is a target audience for Gentle Glide. And this is rolling out this year as well.

So that's the innovation we have going on for a company our size. We have a lot of going on, a lot going on in the back half. We're excited about it. It's been our life blood for quite a number of years. It remains our lifeblood as you can see. And you look over the past 10 years, came back when we were that battery company of about $1.7 billion, delivering about $178 million in earnings and an earnings per share of $1.92. And then flash-forward to this past fiscal year that ended for us, September 30, a $4.5 billion company, over $400 million in earnings and earnings per share at $6.22. With a top line CAGR of 10% and a bottom line CAGR at 12.5%, through a combination of acquisitions and organic growth through innovation. Our continuing focus is to consistent -- is to continue to generate consistent earnings growth while investing in our businesses to fund that long-term growth, maintain capital allocation emphasis on both dividends and opportunistic share repurchase, and continue to engage investors.

With that, that concludes the formal presentation, and we'll open it up to questions. Yes?

Question-and-Answer Session

Unknown Analyst

Just talking about the Battery business and the current round of restructuring. I realize you don't have a crystal ball. But how long does this buy you in terms of the market declining? I mean, is this something where you're expecting the top line or the overall battery market to decline indefinitely, 2% to 3%? And so, you've now rightsized your footprint, so that if 5 years from now you won't have to do anything, how do you look at that? Or is this a longer-term solution?

Ward M. Klein

The restructuring we're doing now is certainly not just a short-term solution. We're taking out more capacity with this restructuring than we would need to. We have identified some outside sources where we can start to variable -- variable-ize the capacity. What does that do? If we guess wrong and this market is not in a long-term 2% to 3% per year decline, if it actually stabilizes or for some reason, some new devices come and start to grow again, we've identified third-party sources where we can meet that demand. We don't have to have our own production facilities to do that. If on the other hand, this decline continues, ad infinitum, at some point in time, we can take out the purchased part of our capacity. We don't have to go through another one of these restructurings. I would say after doing a restructuring in 2011 and then seeing where the category turned on us again, this was a restructure, say, let's take care of this once and for all. And that's really been the approach. Where the category will go? Again, my best guess is 2% to 3% decline, and it's based on devices. Now you're going to have some parts of the world that are still growing. We're still seeing battery growth in parts of Asia, parts of Latin America and Central Eastern Europe, but they're not big enough en masse to offset the declines you see in North America and Western Europe. So did that answer your question? Yes?

Unknown Analyst

So 2 questions, one is just a very quick update from when we last chatted with all this, on 2 things. One is the shelf space changes or net gains in batteries, have you seen anything they finalized at this point than you had in the last time? And then also, from competitive perspective on razor and blade, the intensity was very high in your last quarter. You expected that to dissipate a little bit. Do you have any updates on that, because that's kind of one big bucket?

Ward M. Klein

Okay, you want me to answer those 2 first?

Unknown Analyst

Sure.

Ward M. Klein

In terms of the space issue on batteries, there's primarily one customer in the U.S., and you all know about it. I really don't want to comment on the customer. Actually, the negotiations for a lot of contracts and space and holidays is taking place right now. So I really won't have anything firm to say, and if I did, I wouldn't say it anyway. Let me just say that we remain very focused in terms of holding or growing our market share in batteries. And I think we know how to do it better than anybody else. In the case of razors and blades, the level of competitive activity coming out of our major competitor, we have called out in the prior earnings quarter, I'm not sure there's any reason to expect for that to abate. I will say this, that again, we prefer to compete on innovation. Hopefully, that came through loud and clear again today, when you saw all the additional innovation we're launching literally this quarter and next. We think innovation is a way to build and sustain long-term share increases, as again I showed in the presentation, rather than running share. So that remains our strategy. We think we have a lot of innovation to bring consumers, not just in the U.S. but worldwide. We're going to focus on them.

Unknown Analyst

And then going back to batteries a little bit, it seems like you are taking a little bit of a step back from an investment perspective on batteries, as certainly Rayovac is adding capacity.

Ward M. Klein

Is -- Rayovac is what?

Unknown Analyst

Is adding capacity, battery capacity, disposable battery primary capacity. They're spending more in the business, they're looking for more distribution. Duracell, as well as Procter, has suggested, is spending more lease on the brand, kind of upping the brand. So they're doing that just as you're pulling back a little bit. So what do you see in that, you being stuck in the middle and the risk that it kind of furthers your share loss or your volume decline?

Ward M. Klein

Yes, well, whether our competitors are adding capacity, that's their call. We're -- we have plenty of capacity available that we don't have to own. So to invest in capacity, in a market where it's pretty clear it is declining 2% or 3% per year, it doesn't seem to make sense to me. I don't need to invest in the capacity. I can buy it. In terms of being caught in the middle, again, I don't actually see it that way. Again, as we've described in the past, the battery market in particular, there's really premium brands, us and Duracell, which account for 70% or so of the value of the market and there are the value brands, which is private label and value brands. And those still pretty much tend to hold, and that ratio will vary depending on the part of the world. Obviously, value brands are more in Europe, than say in the U.S. But it's really not a caught-in-the-middle situation. It is a competition between 2 premium brands on one hand, with each other, and it's a competition among a lot of value brands on the other hand, with each other. That's been the dynamic for many years. That remains the dynamic now. Well, that's how we see it. Yes?

Unknown Analyst

So is there like a plan you have, in terms of contribution between Personal Care and the Battery business over time? I know you've never really shared it publicly, but like what percentage of sales in 5 years will be Personal Care versus what percentage you think will be Household Products?

Ward M. Klein

Not specifically that I would share, per se and in 5 years out, who knows anyway? Obviously, there is a migration towards Personal Care as a company, from being under 40% to 45% to 50%, now to 55% or 56% of total company. I think you can see that progression continue. Behind all the innovation you saw on Personal Care, behind how we've stated we're going to handle Household Products. Where it would be in 5 years, could be anyone's guess. It could be materially affected by another acquisition in Personal Care space. If we don't find the right acquisition for Personal Care space, we have enough organic growth taking place that it's going to grow and continue to grow.

Unknown Analyst

Got you. And then the launch of this Personal Care wipes thing, does that mean there's sort of more focus placed on the Fem Care business? And would you look at this J&J business as being on the market right now?

Ward M. Klein

I can't comment on that. Okay. The Fem Care business, we've always viewed as strategically challenged, in the sense that you have really 2 big players. When you look at pads and liners and the whole 9 yards, that are battling each other quite a bit. Now we're in kind of good space with plastic Tampons, the space that in itself is growing and we're strong within that space. So I see us -- and with the problem of Gentle Glide, I think, solved with this innovation I'd introduced -- talked about today, we're very comfortable in that space. Again, it's less than 5% of total company sales, so it's not really a strategic initiative. But we want to deliver solutions to our consumers better than anyone else in every space we're in. And that includes plastic Tampons and the Gentle Glide innovation is part of that, continued growth on Sport's part of that, and I will leave the rest to your question at that point. Yes?

Unknown Analyst

Can you talk a little bit more about the AXE launch and maybe the economics behind that? Is it just a licensing agreement? Is Unilever going to bear some of the burden of advertising? And how far could that, whatever branding relationship go? In other words, did you say they're going to do -- you're going to do shave preps as well or just the actual razor? Would you go into other -- since you're in Skin Care? With the suntan lotion, would you go into an AXE suntan lotion and that kind of stuff?

Ward M. Klein

Yes, a lot of questions. We're not doing the -- there is AXE shave prep, we're not doing that. We are doing the AXE razors, the 10 SKUs that I talked about.

Unknown Analyst

So they did shave gel or shave...

Ward M. Klein

They'll do a shave gel as part of that overall men's Skin Care module that they're doing. This is really them pulling together, as I see it and you -- we better talk to Unilever, but what they're doing. But they're going after that men's Skin Care grooming area in a big way with an AXE brand. And what we can offer, as part of that effort, is the best shave those men can get. I mean, the Hydro 3 technology that is being used as part of this, is the best thing they can get in the marketplace. And so it's a test. It's a test in the U.S. for this year. Can it grow beyond that? I hope it does. But we need to see how the test plays out.

Unknown Analyst

Okay. And then on the Battery business, some of the distribution losses last year, are there other classes of trade or channels that you say, "Gosh, maybe those are low margin, we don't need to be there." I mean, is part of the rationalizing of that business, is there an argument to downsize it intentionally further?

Ward M. Klein

Look, first of all, on the distribution losses, there's also been distribution gains. If we lose in a major customer in the U.S., we actually picked up preferred space and a larger customer in Europe, and picked up preferred space and the largest customer in Australia. So there's a yin and yang to this business, there always has been. For the first part. The second part is if I'm interpreting your question right, in terms of going after some low-price high-volume sort of business, the kind of private label kind of business, and that is how you would describe private label. We have no desire to go after that. Come over here. Yes?

Unknown Analyst

I'm trying to understand better your strategy in razors. On the one hand, you are increasing the quality of private label razors. So to what extent, by narrowing the quality gap between branded razors and private label razors, you are undermining or you're treating the risk of undermining your pricing power on the branded side? So that's question number one. And if you can -- again, coming back to the AXE, it seems to me that you mentioned that you are going to have incremental shelf space for AXE that is not going to be detrimental to your Hydro business. So who is paying for these incremental shelf space? And is the quality of AXE equivalent to Hydro? And if it is, are you better off, if I am as a user, by a Hydro razor or an AXE razor, economically for Energizer? I just don't understand what you are doing with so many pieces in the razor business.

Ward M. Klein

Okay, well, the beauty of it is, and we do this really well, it is a whole portfolio. And again, as I showed on the Battery example, the carbon zinc batteries and alkaline batteries and lithium batteries, and since we're global, the right portfolio for the supermarket in your town or a mass merchandiser in the U.S., is not the right portfolio for traditional trade in Ecuador. With the private brands group, we now have a lot more tools in our tool kit, so to speak. In terms of increasing the quality of the razors in the private brands group, we control that. We coordinate that. So you don't do it intentionally to improve the quality of a private brand, so much that it materially eats maybe into your branded offering. We control that. We control the quality, the cost and the pricing and the planograms. Schick has never been in that position before, by the way. It used to be just a little Schick and a big gorilla. But with private label, as part of our portfolio, we have a seat at the table with the buyers. So we're able to -- and as it is private label, it is customer by customer. Craft the right offering for that customer in a way that we think can grow the whole category. That is a capacity, like I said, we never had before. In terms of AXE, it's a little bit of a similar thing. It is separate space from the in-line. That's what's being tested. It is a different packaging product offering versus the Hydro 3. And I would venture to say, it's a little bit more of a tighter and different target audience. It really is these teenagers who are AXE users. Hydro is a much broader brand. And so yes, there will be some overlap, but we think there's upside opportunity. Again, as much as we've grown our share of men's systems in that chart I showed you earlier, mid-teens, there's still a lot of market there. And we think that with this approach and this collaboration with Unilever, it's an incremental opportunity for Schick. Over here?

Unknown Analyst

I guess, can you talk a little bit about, I guess, what the economic proposition is for the retailer on things like an Edge blade or like an AXE piece? Or let me just -- right now, I'm a retailer, I have a large proportion of my category tied up in a super high-end business and trading that down even with -- whether with KSR down the road, right? How are those guys, how do you think, and how are you pitching this to those guys who might see your degradation in their ring, in the category, if they were to commit too much capital to this category or too much shelf space to the lower end of the category?

Ward M. Klein

It really is just part of that management planogram. And when you manage a planogram, you're managing for certainly sales, helping the customer maximize their sales. But many customers are also interested in maximizing their ROII, return on inventory investment in margins. And even though you may have a very expensive razor blade offering in the planogram, it may not actually be delivering that much of a margin to that particular retailer, whereas something that's more mid-priced or lower-priced could actually deliver equal to or higher margin. And so you work with the retailer in terms of trying to -- the multiple -- it's a multi-variant calculation, and it depends on what that retailer is looking for out of that category. Is it a category where same-store sales growth is key? Or is it more of a profit generator for the department? And again, we have now, in our tool kit, more tools to help them answer that than we've ever had before.

Unknown Analyst

I guess I'm just on another note. So the Diaper Genie, it was maybe $50 million in sales, $70 million? I mean, is that the ballpark?

Ward M. Klein

I don't think we've disclosed that.

Unknown Analyst

But -- so -- but the cat Litter Genie, I mean, is it going to be bigger than that? I mean is that the idea?

Ward M. Klein

I hope so. I mean, you can tell from my math, I think it should be. And it's a matter of us executing. It's a unique challenge. Again, it's not often you actually are creating a category. And then that's what we're doing here. With Litter Genie, we're creating a category. How big can it be? We're going to go find out. Other questions? Way in the back.

Unknown Analyst

It's not that far back. But I guess it's been a couple years since you've broken out the razor and blade margins because you consolidated into Personal Care. But you've already had a disadvantage versus your larger competitor out there, arguably for maybe the mix and the scale issues. So can you just talk maybe in the next 3 to 5 years, where do you see that razor blade margin going to relative to your largest competitor? How can you bridge that gap?

Ward M. Klein

I don't know if I can -- really want to talk about bridging that versus a competitor, but let me talk about within our P&L. The biggest influencer on margins, on the razors and blades, is razor blade mix. The razor handles, which are used early on in innovation, to get out there as you know, sample, and get people familiar with the system, carry much lower margins than the cartridges. And so when you -- when we look at our business, you just have to plan for that accordingly. When we introduced Hydro 3 years ago and over the next 18 months, our margins are certainly challenged because of all the razor handles that were in the plan to get out the door, which we got out the door. And which has delivered sort of size and growth that we've shown. But it's a natural progression issue, go through the platform, one, your mix goes from more razor handles to less and less cartridges to more. That's very accretive to margin. Two, just as you build scale, you're building scale up at your production facility. And it's kind of your typical cost curve on a new product or new technology. You bring your cost down pretty quickly over those first 2 or 3 years, if you have a successful ramp-up on volumes. So you have kind of 2 engines helping you on the margin side, from a gross margin side on razors and blades. You look at where we are on the Hydro platform, and these platforms traditionally have lasted for 6, 7, 8 years, if not longer. They lasted out longer in the past. But take 7 or 8 years, and we're into year 3 of that 7-year platform. So we expect our margins to improve, have improved and continue to improve, as you -- really for those 2 reasons.

Other questions? Have they gotten worn out? I think we're going to call it a day. Thank you, everybody.

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Source: Energizer Holdings' CEO Presents at 2013 Consumer Analyst Group of New York Conference (Transcript)
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