Third Bridge专家访谈称Energizer消费电池业务面临渠道降价、私有品牌竞争和成本节约递减压力

[[00:01:16]]
Could you highlight 2-3 key current trends in the consumer battery industry? What should we be paying attention to?

[[00:01:31]]
A couple of things to pay attention to. First is this ongoing shift of consumers shopping outlets to e-commerce or value-oriented channels. That has an impact on the volume and really the revenue for the category as there is constant incentive for consumers to trade up to more value-added or larger pack sizes where the consumer realises a savings per cell, but that savings then trickles down back to the retailer and ultimately manufacturer like Energizer in terms of realising less revenue per cell. Second thing that is happening is private label or store-owned brands continue to have an impact on the category because that performance gap, which is what national brands like Energizer and Duracell have grown their business on, is shrinking. The failure rate or fear of failure of private label batteries is becoming less because they're becoming better manufactured. The days of cells leaking with a higher frequency, not lasting as long are really diminishing and private label is becoming a more acceptable replacement for the branded business.

Then a third thing happening, which is happening a little bit more under the surface, is the installed base of devices is really shifting. 20-30 years ago, you had a lot of high-frequency, high-drain devices using batteries like digital cameras, toys, game controllers, etc. A lot of that has shifted into the rechargeable area, but there have been new devices coming into the market like Blink cameras, unconnected Internet of Things that require batteries, but those are very different usage occasions, which require a different power output and a different cell life cycle to make those devices run the best. The manufacturers are constantly looking at how do they optimise the performance of the cells to fit the future-looking installed device space that batteries are going to use.

[[00:04:25]]
Energizer Holdings is leveraging its restructuring initiative Project Momentum to boost gross margins and protect earnings per share guidance. Are these productivity and cost-cutting measures reaching a point of diminishing returns, potentially compromising innovation, marketing or any other key function?

[[00:04:56]]
I think a good question. Project Momentum, I was there for the first several years of that. Initially, it was built a lot around improving the efficiency of the manufacturing and moving to a more regional structure and redeploying assets vs Energizer historically had made all the AA cells in one location and AAA cells in a different location. You had a lot of deep technical knowledge and efficiencies there, but then you were transporting these batteries across longer distances. If you look at the big buckets that Energizer first attacked with Project Momentum, there were real savings there on the manufacturing side, the trade investment side, the FTE people side. They went through several rounds of essentially lay-offs, improving the people capital efficiency equation. A lot of those have played out from my observations. I think they're going to struggle to continue to realise that same rate of savings. I think they've extended it into a fourth year now. They've been counting some things in there like tariff mitigation and cost avoidance, but the real savings, a lot of that's in the rear-view mirror now.

[[00:06:29]]
The recent results showed a strong earnings per share beat alongside sales contraction. How durable is this divergence, and how long can cost management and that kind of engineering mask the stagnant core?

[[00:06:49]]
I think there's an old saying, you can't save your way to growth. Energizer, they've got a very good finance team who helps figure out how to come in and hit that EPS number. They've had some help. I mentioned the tariffs before, some manufacturing credits under the recent administration have also helped there. If they don't get back to actually growing units and growing the revenue, they're not going to be able to continue this EPS growth that they've been able to achieve over the last several years. Part of the challenge, again, going back to those trends is you're seeing a slow shift to less revenue per cell. The number of cells needed out in the universe of battery consumption is not growing significantly. It's low-single digits and it has been really for years. How to realise more earnings from a very low growth base of the fundamental unit you're selling unless you can go find some new cost savings somewhere is going to be challenging.

[[00:08:09]]
Did you want to add something to that?

[[00:08:21]]
I was just going to add, I think there's still a path, call it, the next 3-6 quarters that they can continue to engineer respectable-looking earnings per share. I would say within the end of 2027-28, it's going to be challenging unless there's a fundamental shift or they determine a way to go win more share within the category. That's the other way. If the category is, again, a low-growth category, which it is, they need to figure out how they're going to go win more share vs Duracell or vs private label.

[[00:09:06]]
Cash flow in 2025 was heavily tied up in inventory accumulation for the plastic-free packaging conversion. Why did this packaging overhaul trigger such a working capital drag?

[[00:09:26]]
There are several different factors there. First, the plastic-free packaging is made on separate lines that required really a redesign of the packaging part of the line, which is over half of it, if you think about making a battery, you make the cell and then you put it in a package. Those are often disconnected processes. There was only a limited capacity to make the new plastic-free packaging for North America. They had the balance of maintaining customer business with the old packaging and figure out how they could ramp up customers on the plastic-free. Then compounding that is this, what's called a hard conversion in the industry, where the size of the selling package is changing, the EPC code on the package is changing. Retailers will only execute that type of change on, call it, their timing for category review.

You had to overlay when retailers are planning to redo their category and plan out your production to either have enough of the old product to hold them through until they were redoing their planograms or figure out how you're going to bring more plastic-free on into capacity and make those cells to hit the retailers' timing. You also had to, in essence, do this in coordination with Duracell who's doing the same plastic-free conversion right now. The retailer timing is another reason why they had to hold a lot more inventory than they normally would. The third is there's a lot of cost in doing this changeover. You've got to buy back old inventory. You've got to put new fixtures into stores because, again, the pack sizes have changed. That's going to drive cost, which is why they wanted to spread out this transition over several years. There's still customers out there that are not transitioned to plastic-free and you probably won't see some of them transition until sometime in 2027. They also had to deal with the issue of what I would call pack proliferation or shipping and selling SKU proliferation. Even though you've got a standard eight-pack battery, different customers ask for that to be shipped to them in different ways.

Some want it in a 24-master case. Some want it in a 48-master case. Some want it in shelf-ready packaging. Some want it, you put it up on the peg hook right away. Working through all of those different pack-specific shipping configurations, again, it's hard to time out getting all of those buckets of inventory right for the retailer conversion date of when they're going to be changing their planogram. Then the final piece of this is while this is going on, they're also, again, redistributing their manufacturing lines. You had to bump up against what's the AA capacity in each region, the AAA capacity, the C cell, the D cell capacity. It's essentially a huge puzzle that you're having to manage and you're not going to get every piece of it right and carrying more inventory is a way that you buffer against having significant customer service issues and service-level issues.

[[00:13:17]]
Could you compare the unit economics of selling 48-, 60- or 100-packs through an online marketplace such as Amazon or a club channel vs traditional 4- or 8-packs at bricks-and-mortar retail?

[[00:13:32]]
I looked up some pricing online, so this will be current. As of this morning, you could buy an eight-pack of Energizer AA batteries for USD 6.24 from Walmart. You can buy that same battery in a 48-pack from either Amazon or Sam's. They're price matching each other right now for USD 20.98. Walmart is selling that eight-pack at USD 0.78 per cell. Amazon and Sam's are selling that 48-pack at USD 0.43 per cell. Then you apply essentially all these retailers are making around a 50% gross margin. Energizer's revenue from that Walmart eight-pack is USD 0.39 per cell, but the revenue from that Amazon and Sam's 48-pack is only USD 0.215 per cell. That's 45% less revenue per cell. As, again, people are searching for value and they're shopping online or they're shopping in value outlets more like Sam's, that revenue that Energizer and the same thing happens for Duracell and private label manufacturers is less. You're cutting your revenue on a per cell basis.

That cell cost essentially the same, whether it's in a Walmart pack or an Amazon Sam's pack. There's some slight packaging savings, but your revenue takes a pretty significant decline as you trade up people in pack sizes. If you don't do that, if you say, for example, "I don't want to sell a 48-pack. I only want to sell an eight-pack," you're opening yourself up to essentially the own brand or private label world where, as an example, Amazon Basics, the Amazon private label battery, you can buy a 100-pack for USD 26. That's only USD 0.26 per cell. Now, it's a bigger cash outlay, which is why not every consumer just goes and buys 100 batteries at once. The economics are pretty staggering in terms of the amount of savings the consumer can realise vs the revenue that ultimately the manufacturer is going to realise.

[[00:16:12]]
As digital platforms continue to use algorithms that elevate the lowest per-cell unit pricing, how effectively can Energizer slow down the erosion of its top-line pricing power?

[[00:16:29]]
The brands, Energizer, Duracell, they exist because of the marketing and the benefits that they provide to the consumer and convincing the consumer that their product is worth more than a no-name private label product. Again, that performance gap is shaping. What some of the strategies that have been employed over the last several years include are things like partnering with the retailer on their own media network. Your larger retailers, Walmart, Amazon is really the one who started this. It's even going through to retailers like Home Depot, Lowe's, Dollar General. They offer manufacturers the opportunity to essentially purchase commercial placement, media placement through their network, which really is saying it's on their website, but also, they'll run banner ads, pop-up ads, etc, on other sites, directing people to that retailer.

Those retailers will then favour whoever is investing with them in their own retailer media networks in terms of how they place the products on the page, how they direct consumers to them with things like Amazon's Choice or Overall Pick or a sponsored ad placement on Amazon. Walmart does the same thing. Home Depot does a similar thing. What the brands like Energizer and Duracell have figured out is I'm having to shift some of my retail investment into these retailer media networks in order to protect my volume with those customers. Another thing is offering the different retailers their own pack size or their own exclusive product type offering because that allows them to offer something that consumers can't get in another outlet. It creates a sense of scarcity, not scarcity so much, but they're getting something they can't get anywhere else and it's going to be marketed as better or better value or better performance. This exclusivity strategy is another way to protect them from the private label or the per cell erosion of these larger packs.

[[00:19:16]]
To counter household multipack commoditisation, Energizer has pivoted to high-margin specialty cells, including the early 2026 Ultimate Child Shield coin lithium launch. Can volume growth in these speciality formats scale fast enough to offset the ongoing e-commerce bulk dilution?

[[00:19:44]]
I think it's going to be challenging. It will help on an overall basis, and I don't remember the specific numbers, but the syndicated data would provide this to folks who are analysing the industry. It's unlikely that pure speciality cell growth will be enough to offset the costing revenue pressures per cell on the household batteries. The real strategy that Energizer believes is there's a halo benefit of this innovation in speciality with the three-in-one Child Shield that will benefit the household batteries. Even though it doesn't contain that technology, consumers will associate Energizer now with being more safe for children, even though it's not necessarily part of the benefit of those household cells. There is absolutely a halo effect that's been measured before at Energizer that you market what your most effective message is even if it's only relevant to a part of your portfolio, you get the halo benefit to the balance of your portfolio. That's almost as important or probably more important in the long term, the benefit perception of the speciality cell innovations than the actual volume gains that are going to be realised from them.

[[00:21:32]]
How do recurring digital auto replenishment programmes change the long-term CAC [customer acquisition cost] and brand stickiness for Energizer in comparison to private labels?

[[00:21:48]]
It helps, but there's also a cost to that. When you sign up to be part as a manufacturer, part of the Amazon subscription programme or Walmart, I think, has started something similar, you realise a little lower cost per cell. You've got to pay to be part of that programme, but it does have the benefit of essentially locking your competitors out of the purchase cycle for that particular end user. Again, it's a challenge from the economics of the revenue per cell, but there's a pretty firm understanding that it costs more to go acquire new consumers than it does to essentially keep the consumers that you already have, the brand users. What it can also help do with these auto replenishment programmes is for that purchaser, it shields them from seeing other lower-priced alternatives or looking at other lower-priced or different brand alternatives. It helps really improve the share of requirements, household requirements that the consumer is going to fulfil with your brand vs other battery brands.

[[00:23:34]]
Energizer and Duracell bid for high-volume store brand private label contracts but could face intense margin competition from Asian manufacturers. What is the fundamental floor cost for Energizer's legacy manufacturing, and why can't the company match the margins of international competitors?

[[00:23:59]]
Good question. I think depending on the particular cell line and not to disclose confidential information, it's not necessarily the case that they can't match their pricing. It's just not the best business strategy overall for the health of the organisation's revenue. If you're working on bidding on the Sam's business, for example, or the BJ's business or the Kroger business, if you have too much of a divergence between what the cost you offer them on a private label AA cell that you're going to make vs an Energizer Max AA cell, the customer is going to start pushing back on your pricing of your branded product and say, "If you can make a private label cell, I understand it maybe lasts 10% less longer or something, but if you can make that, if you can sell that to me for only half of what you want to sell me the branded cell for, you're overcharging me on the branded cell." The way that these multiyear agreements and these private label bids with the large customers have been approached is we can't tip our hand too much in terms of our true cost structure because it's going to come back to hurt us on our branded business with retailers essentially pushing for cost concessions there or not accepting future price increases.

It's not so much that they can't match the price. It's that it exposes the branded business to potentially retailer pressure to have a better price there. Also, if you go really, really low on the private label offer that you're going to make to the retailer, it hurts your ability to invest in that business. What Energizer likes to do is presented as a package deal. We'll make your private label, you'll carry these branded items. We will invest, for example, in your retailer media network. We'll have a volume growth rebate programme across both the businesses. We'll do this exclusive packaging for you. We'll do some in-store marketing activation like demos or handouts or coupons or mail and rebate offers, etc. We do sell it as a package deal to help, which is things that that private label manufacturer in Asia just can't match on only the private label volume that they would be selling.

[[00:27:13]]
As technical performance gaps narrow, what commercial levers do retail sales teams within Energizer use to justify preserving premium shelf space over the private label brands?

[[00:27:28]]
Good question. What we've developed is essentially the selling story or selling strategy is positioning things with the retail in terms of the absolute sales dollars they're going to realise revenue and the absolute gross profit dollars they're going to realise as revenue vs focusing on the gross margin rate, which is where private label will typically offer a higher gross margin rate. We will do the maths for that. Currently, you're selling one million AA Energizer batteries at USD 7. If you convert 20% of those to a private label eight-pack AA at USD 5, you've just given up USD 2 of revenue. Even though your gross margin rate on that private label is higher, your overall gross margin dollars that you're getting is going to be lower. We'll do the maths for them on that conversion rate. Then we'll talk about that's going to drive down the efficiency of the space you have dedicated to the battery section in your store. You're going to take, for example, your sales per peg and your profits per peg and they're going to decline by X amount. Again, we'll do the maths for them. The first thing we do is show them the absolute essentially dollars and cents of trading people down from branded business to private label.

Now, we'll still acknowledge private label as a part because some customers are only going to shop at price. If you don't have a pack available at an extremely good value, they'll walk out of the store and go somewhere else that they can buy the cheapest battery possible. We'll also use that consumer dynamic to support why they need branded because, again, everybody knows the Energizer battery. We spend a lot marketing our batteries as nothing lasts longer. If you don't have the Energizer offering that the loyal Energizer user is expecting, they're going to walk out of your store and into another retailer where they can get that Energizer pack or product type that they've been looking for. We use the financials of trading down. We use consumer loyalty. Then we'll also, again, try to shape a programme where, hey, we're willing to invest in some promotional events. We're willing to invest in providing you floor stands for holiday surge activity. We're willing to invest in doing some of your marketing programmes, your multi-brand family events, etc, and try to essentially show them why the package of what we're offering them is going to outperform an expansion of private label space at the expense of branded space.

[[00:30:50]]
Energizer has discussed rising trade promotions to defend retail volume share. How would you evaluate the durability of the company's volume relative to the promotional spending spikes?

[[00:31:03]]
I think it's relatively short term. It's really you're either stealing share or you're stealing time. Promotion is going to help you win with the price vs Duracell or private label, if it's someone who's a brand switcher, but that's very short-lived because the next time around there in the store, they'll just again look for whoever is the lower price in terms of whatever value tier that they shop in. It also basically essentially pulls purchases forward. Batteries are an item that has a significant amount of pantry inventory or pantry loading in consumer households. You offer a good enough deal, even though somebody really didn't walk into the store needing batteries that wasn't on their shopping list, they'll see a good deal. They think, "I'm not sure how many batteries I have at home. They don't really go bad." It's not like bread or potato chips or something else, so they'll buy, pick up a pack because they think it's a great deal.

You've essentially just pulled that purchase forward from what would have happened in a future timeframe. Now, you have captured the share for yourself. There's a little bit of value of that, but there's only so much share you can steal and there's only so much pantry loading that you can incent before the volume dries up essentially. Then at some point in the future, and I've seen it happen historically, there'll be a quarter or two where it resets where there's no more promotional. You did it in Q4 2025. You're not coming up to Q4 2026 and you just can't anniversary that artificial demand that you created. At best, you're going to equal it, but a lot of times, that's when you'll see some of the dips is where volume was engineered in the prior year and you just can't repeat that same level of growth and you find it really challenging to even just maintain it.

[[00:33:29]]
How vulnerable is Energizer's impulse purchase model to bricks-and-mortar retail changes such as self-checkout terminals?

[[00:33:44]]
That's an interesting question because a number of retailers have been doing different testing and a lot of it in conjunction actually with the plastic-free conversion. This is public information. I know it's been published in different trade journals, etc. Walmart, for example, when they were testing plastic-free, they actually tested removing essentially all of the impulse locations from stores. The results were pretty striking in terms of the sales decline that they saw. If you go into Walmart today, you're still going to see a lot of, we call them an outpost or impulse areas of battery placement. There is some risk there that the move to self-checkout, there's less space there for some of that impulse. Energizer had a saying or a philosophy, we wanted to be the first battery seen and we wanted to be the last battery scene in the retail store. It is a little bit of creating a challenge of where that space, particularly at self-checkout is becoming more scarce and the retailers are recognising the value of it. Essentially, they ask for a premium in terms of placement fees or other incentives to be able to get that space.

[[00:35:20]]
Energizer's primary strategy against Duracell relies on winning multi-year customer commitments and exclusive retail agreements. What commercial concessions, such as volume discounts, marketing funds or proprietary packages does Energizer use to win these deals over its peers?

[[00:35:42]]
What we would typically put together when we're bidding on a business and club channel is a great example, large grocery chains also, is you start with some growth rebate opportunities. You basically want to create a situation where you're not going to pay the retailer incremental dollars unless you grow the business and the retailer is incented to grow the business to collect this trade funding that a lot of buyers and merchandising departments are incented or rewarded on. It's one of their measurements for, call it, their end of your bonus process. You start with the growth rebate. You'll also agree to partner with them on, again, retailer media investment and a minimum amount of promotional funding to run price reductions, put product again in those secondary locations like checkout, etc. You'll also include some planogram fees to help with the labour changeover in the stores, particularly if you're taking out Duracell product, putting in your own product.

Then you'll also look at, how can I maximise the pack mix in terms of pricing for the retailer, trying to get them to put in packs that are more profitable for you and then that you can, therefore, afford to put more money into these growth rebates, retailer media, promotional funding, planogram changeover fees? Then what you typically do that is you show, "Here's the overall value of this five-year programme or three-year programme to you and it's X percent higher than the last programme that we did with you." On paper, the buyer is believing, "I'm getting a better deal than the last deal I got from Energizer. I'm going to get this many more margin dollars, this many more revenue dollars." What we're building in there is assortment changes to help our internal revenue and profitability to offset what the retailer is seeing as their growth. We want to mix in, for example, more speciality cells into the assortment and we'll want to mix in more of the lithium household AA batteries that both us and the retailer realise more top-line revenue and also more gross margin rate and dollar revenue.

[[00:38:45]]
Energizer has moved production closer to regional end markets. Considering the operational realities in Europe, South America and Africa, to what extent does this geographic fragmentation structurally degrade the gross margin efficiencies associated with more centralised, domestic mega plants?

[[00:39:24]]
I think the thought process there was, again, moving the production closer to the end user. As you looked at what percent of the cost is actually making the battery vs what percent of the cost is transporting the battery around the world, the analysis showed it's more efficient to be closer to the end user, even if you don't get some of the efficiency of making all of your AA batteries in one location where you just turn on the line and let it run and not have as many changeovers, etc. I know that's the thinking behind some of the investments Energizer made the last three or four years to buy the plant in Belgium and the plant in Poland. They've maintained their facilities in Indonesia, Singapore, Egypt, Brazil. It just came down.

Also, if you're making the battery closer to the end user, you're inventorying it there closer, you've got less product in transit. At least financial analysis thought process said you should be able to drive down your working capital with less essentially inventory in transit because batteries are not shipped by air, they're all shipped via ocean. You're tying up a couple of months, whether it's across the Pacific or at least several weeks across the Atlantic. The real key then is you've got to get the product mix right at each of these regional plants such that it's still efficient and there are still some particularly speciality cells. They don't make speciality cells at a lot of these plants. You're still mixing and matching shipping some of the speciality cells and the lithium cells essentially across the world.

[[00:41:34]]
With industrial metal commodities coming under inflationary pressure, how effectively does Energizer’s international sourcing or international localised sourcing insulate gross margins from raw material spikes?

[[00:41:53]]
I think it helps. Again, transportation is a big piece of… Really, a component like EMD, the electrolytic manganese dioxide, that's essentially what gives the battery, the electrons that you're using to create a current. That's essentially a bulk material. It's a powder that you've got to ship around, so having the plants in more places. I'm not a supply chain expert, but I know it cuts down any manufacturing costs. It also opens you up to have multiple sources of that material. Some of the metals, zinc, nickel, lithium, there's always inflationary pressures back and forth on those. I think Energizer has cited the build-out of data centres is impacting that. I don't know if that's really true or not, but it fits the headlines in today's world. Having, again, the plants more spread out, you potentially shorten the supply chains of those raw materials if you can get them in the different locations. Again, I wasn't in the purchasing department, so I don't know all the specifics of that, but that was the thinking.

[[00:43:20]]
Initially, Energizer set aggressive growth targets for its auto care business acquired from Spectrum Brands. Why has this division structurally underperformed? Where did the integration encounter challenges or break down?

[[00:43:56]]
This is my background. I actually worked on that auto care business 20 years back when Clorox owned it and then we went through a couple of ownerships, Spectrum Brands and then Energizer purchased from Spectrum Brands. Fun fact, this is public, when Clorox sold this business in 2009, Energizer was actually the second bidder on the business. Ultimately, it went to private equity, but Energizer had their eye on this business for a long time. What actually happened is Energizer or Spectrum and Energizer made a deal to sell the Rayovac business, public information, Energizer bought Rayovac from Spectrum. During those discussions, Energizer essentially made Spectrum an offer they couldn't refuse on the auto business, which was not for sale at Spectrum at the time. They really coveted this business because as you looked at the long-term economics of this, the auto care business with the ageing vehicle population and increase in DIY across a lot of different categories, it made a lot of sense for them. It broke down in a couple of areas, but probably the biggest area is Energizer wasn't prepared for the pace of innovation necessary to sustain the business.

We started using an analogy at Energizer, where the battery business is driven in first gear, very slow, very steady, not a lot of change. You only do a new product upgrade once every four or five years on basically the same product, just in a lot of different pack configurations. The auto care business needs to be driven in fifth gear. It's fast. Every year, you have to have new product innovation. When you look at the auto care categories, specifically the appearance category, the air freshener category, 20% of the SKUs on the shelf change every year because there's always constantly changing consumer preferences and there's also a very steady stream of innovation in terms of product technology. Energizer tried to essentially establish the same product development model for batteries in auto care instead of using essentially the product development model that was brought over when they purchased the business and it didn't work. We lacked a lot of innovation the first several years. We weren't introducing enough new products to replace the products that were being removed from the shelf due to slower sales. That innovation cycle was a real challenge when they bought the business. They've tried to make up with it and they've gotten a little bit better, but it did create a hole.

Some of it was masked by essentially the COVID years. Energizer bought the business 2019, COVID 2020, really 2021, you had a huge upswing in DIY activity. Everybody was stuck at home. You could literally see in the numbers, people were taking care of their cars more themselves. They were washing their cars more. They were taking on more car maintenance projects. That artificially bumped the category value and pulled all the brands up with it for those first couple of years. That more underlying structural issue of not having enough innovation was masked. Therefore, Energizers didn't start to take action on it until really 2023-24. You still got a year or two cycle time to get that innovation to market. The other area that they assumed that selling auto care was the same as batteries where it's all just about the product performance, how long does the battery last. For a number of the categories, again, auto care, appearance category, air fresher category, even performance category, there's more of an emotional connection that consumers have with the products they buy. Your car and how it smells is a personal reflection of you. The battery you buy is not really a personal reflection of you. The products that were being developed, they lacked a little bit, call it, that emotional benefit communication in an effective way vs what other brands were doing.

The other couple of challenges is it wasn't really apparent when they bought the business, but there was some new up-and-coming brands, particularly in appearance chemicals and in fragrances, air fresheners that weren't really on the radar in 2018-19. Again, because of this COVID uptick, you had some digital to bricks-and-mortar conversions like Chemical Guys and then Febreze. P&G really stepped up their support of the Febreze car fresheners that started stealing share from some of the more mainstream brands like brands that were part of that auto care portfolio that Energizer purchased. These, I would say, new competitors in the traditional bricks-and-mortar world, which, for the most part, the amount of auto care products bought in bricks-and-mortar as a percentage is much higher than batteries. It hasn't gone as much to e-commerce. It's going there but just not at the same rate, not at the same level. Brands coming from e-commerce into bricks-and-mortar have seen a lot of success over the past 3-4 years and that has really been a challenge to establish bricks-and-mortar manufacturers like an Energizer. like a Turtle Wax, like an ITW in terms of losing share to some of those newer brands.

[[00:50:46]]
Given that the auto care segment does need to navigate some regulatory shifts concerning raw materials, what kind of product lines or chemical restrictions would be driving those compliance costs?

[[00:51:00]]
The biggest one, which is actually the biggest of the segments for Energizer, is the refrigerant segment. The key brand there is A/C Pro. What's happening is there is a regulation on the refrigerant to use in the vehicle. This is a broader regulation, not just to vehicles but to home HVAC business and industrial uses, etc. Essentially, there is a shift happening from the current refrigerant, which is called R-134a, R-134a to a new refrigerant known as 1234yf. Essentially, the new refrigerant is better for the environment because it's a lower global warming potential gas. Prior to R-134a, there was R-12, which destroyed the ozone layer. We got rid of the R-12, brought in R-134a, it doesn't hurt the ozone layer, but it still is a high global warming potential gas like carbon dioxide. Once it gets to the atmosphere, it blocks sunlight, creates global warming. 1234yf is a low global warming potential gas. What's happening is that 1234yf, there are only two manufacturers in the world who make it right now. It's patent-protected. It's a lot of IP protection. It's a 5-to-1 cost increase vs R-134a, so a significantly higher cost for this new gas. You have a large installed base of R-134a vehicles out there.

Again, the vehicle population is ageing. Manufacturers are only allowed to make so much R-134A each year and it gets cut down every three years. This is a law that was passed in 2020, the AIM Act. R-134A is now costing more because there's a limited supply and everyone's fighting to get that supply to service older vehicles. 1234yf costs more because it's the newer product, IP protection. The two people who make it are keeping prices high. This has had a significant impact on how the do-it-yourself refrigerant market, which Energizer is the leading manufacturer and has 70% market share or more, goes to market because retailers are now looking for ways of offering a lower-cost option to shoppers vs accepting essentially a significant number of price increases that Energizer and other current DIY refrigerant providers have been putting into the market. There's a lot more private label pressure now in this area. There are some new brands coming in from Asia that are making inroads at key retailers like AutoZone, like O'Reilly. It's really starting to squeeze the shelf space for the Energizer products and also create pricing discrepancies that are squeezing Energizer's margin in these areas.

[[00:54:31]]
How should Energizer address particular challenges along with the entire auto care segment? Would a spin-off or divestiture effectively streamline its portfolio?

[[00:54:51]]
I think that's an option on the table. I think the thing that they need to look at before they do that is really setting up the business to run a little bit more independently of batteries. Energizer made the choice when they bought the auto care business to not have it as essentially a division but to fully integrate it into essentially Energizer. Energizer emphasised functional, call it, silos, for lack of a better word, vs divisional expertise. You have everything from R&D leadership to supply chain leadership to finance leadership to sales leadership, working across both the battery business and the auto care business. They lost a lot of that auto care expertise instead of having here's our auto care business with its dedicated supply chain leadership, finance leadership, R&D leadership, sales leadership. That would be the first step I would recommend to them, put it more into its own division and let that division really run the business at a faster speed (1) and (2) with a more closer connection to the consumer and understanding the consumer insights. There's a pretty big gap in the consumer insights. I think they need to be culling and uncovering and utilising and developing products against vs what's happening today, which has helped exasperate some of the sales challenges they've had on it. Then if that didn't work, now you've already got it set up as a division, which would make carving it out a much simpler process.

[[00:57:01]]
What are you expecting for Energizer's growth and profitability in the next 12-18 months?

[[00:57:11]]
Outside of inflation, I still expect they're going to be relatively challenged on growth. There will still continue to be some tailwinds from tariff mitigation, production credits, getting working capital back in order once they finally get the plastic-free packaging conversion behind them, I would expect towards H2 2027. They should still be able to have respectable, call it, earnings per share numbers. Until they can fundamentally identify either a new growth lever, which I think is going to be challenging in batteries, I think auto offers more opportunity there or how they're going to steal some additional share from Duracell or private label. Long term, it's going to be challenging to get above that, call it, 0-2% growth rate.

[[00:58:18]]
What are the top 2-3 key strategic priorities for Energizer to stay on track?

[[00:58:24]]
I think, number one, they've got to, at some point, be able to show sustainable organic growth. Where are the buckets that they can get this? Speciality batteries is a piece of it. I think lithium, their lithium product is something that nobody else can replicate right now. There's some IP protection there and also the manufacturing process is very specialised. They need to, I think, figure out, how do we show consumers that it's worth the premium price for the premium benefit? Second is really get behind or get past the entire packaging-free conversion, get the working capital back in order, make sure that they got the lines in the right place based on the initial assumptions they did, fully integrate the facilities that they picked up in Belgium and Poland. Then third is this auto care question out there. It's really been a drag vs what they projected it would be. Doing the same thing over and over is not going to produce different results. I really believe they need to strategically look at how they're managing the auto care business, change potentially how that business is structured and also potentially look at, is there a better use of the capital? What could they realise from selling that business that could be redeployed against something else?

[[01:00:13]]
What are the top 2-3 risk factors or headwinds that could impact Energizer?

[[01:00:20]]
I think the value pressure out there is going to continue, particularly as disposable incomes continue to be under pressure with uncertainty of inflation and gas prices. That's just going to drive more and more people to seek more value. There's going to continue to be the risk of people seeking value, which means trading up to larger pack sizes or trading down to private label. Then also, are they able to fully get to a steady state at the same or better cost structure in terms of the plastic-free and the operational changes they made? They've still got inefficiencies in the system from going through the plastic free, which hasn't been completed yet. Are they able to get to a steady state that's actually meets what Project Momentum says it's going to be and also what the initial plan that it was going to be from the cost to produce a battery?

Then third is there's this regulatory exposure out there. We talked about the refrigerant example, but something that it's a little bit under the radar, but all of these ERP regulations, which is more common in Europe. In North America, you've now got a number of different states implementing extended EPR, extended producer responsibility regulations. Right now, they're mostly focused on packaging. You could play that forward to say, at some point, it's going to be focused on the actual battery cell. What happens to the battery cell once it's been used? People don't want it ending up in a landfill. If there is, at some point, the regulatory need to establish a recycling process for household batteries that falls on the manufacturer, that's going to be a huge pretty significant investment required and change in the business model.

[[01:02:41]]
That's a perfect place for us to end off then. Thanks so much for providing all that great insight to Energizer. Really appreciate you spending this hour with us and have a great rest of your day. We'll be in touch.

[[01:02:49]]
No problem. Thank you.

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