We have observed a good bit of NWL CEO Mike Polk’s professional career, from the old Kraft to Unilever and now NWL – we like the story he told and the way he thinks about the business.
International Flavors & Fragrances (IFF)
Since HNZ apparently couldn’t get out of CAGNY fast enough, IFF stepped up to the plate and took the morning presentation. It’s a good story, and to the extent that innovation has been a consistent theme throughout the conference (we call it the cost of doing business), IFF is the innovation backstop for most of the companies in the staples universe. Total business grows 2-3% globally, and IFF tends to be a consistent share gainer over time (16% share of market). Scale matters in this business (IFF has it) as the global companies that IFF partners with want the ability to deliver local solutions on a global scale. What also struck us was that IFF was an underappreciated emerging markets story, which only stands to reason as the global CPG companies drag preferred suppliers along as the business expands into emerging markets. The company is at a low point in the leverage cycle in a global consolidating industry – possibility exists for accretive deals.
Procter & Gamble (PG)
Company focused on some overdue innovations – again we go back to our comment that innovation is the lifeblood of the staples sector. Company seems to realize (finally) that you can only take pricing or price at a premium when you offer compelling value to the consumer and communicate that value. Value needs to be communicated to retail partners as well – make it a win/win (really hate that phrase). Rate of change of innovation is increasing, and thinking globally about those innovations. Company basically admitted that productivity had taken a back seat when results were more robust – I see productivity as a process of constant improvement, and it will be interesting to see just how ingrained this process becomes in PG once the big savings program runs its course. There are some bad habits that have been ingrained in this company over a long period – pricing without value and using that pricing umbrella as an excuse to be less diligent about costs. The process of change at PG is well-begun, let’s see how well the lessons of the past are learned. At least the company is no longer relying on sales growth in order to leverage the company’s SG&A base.
The presentation started out as your basic business overview – yawn. Some of the global demographics were interesting, for example - sweet spot between $10,000 and $20,000 in GDP per capita in terms of adoption of the company’s products – a number of emerging markets entering into and currently in the sweet spot for the company. Company followed up with familiar chart – the opportunity to get per capita consumption up to the levels seen in Mexico – this charts never sit all that well with us, truthfully. A single number never seems to do justice to the substantial differences between consumers in different geographies. Next we move on to the obligatory commentary on innovation – have to say that the Doritos/Taco Bell shells rock hard. And what do you know – commentary on productivity. No need for large scale M&A – stated twice, it was so nice.
Avon Products (AVP)
I like leading in with the mea culpa for years of disappointing stakeholders – probably understated the level of frustration a bit. The company has some very aggressive financial goals, but seems to have the strategy in place to execute against the plan, starting with – you guessed it – innovation. The company has seen some market share challenges across multiple categories – but the categories are attractive in terms of the long-term growth, but need to get fair share of growth. Innovation for AVP is a little more complicated, because there is a component of educating the representatives as to the benefits of the innovation. Representative is social connection between product and consumers and need to upgrade the capabilities of the representative. All things considered, it was a very comprehensive and confident presentation with a focus on products, people and places.
The company basically took a victory lap for what it had accomplished since 2008 - double digit EPS growth, 2-3% consistent top line growth. Interesting, and obviously true, but we are not big on rear-view mirror stuff. The company shared some very interesting data on bleach compaction and incremental advertising on bleach, with the data on advertising suggesting that advertising targeted at adults under age 35 actually drove an uptick in usage of bleach. Who says advertising doesn’t work? The “give your home a flu shot” campaign and healthcare solutions make sense and are certainly on trend. Further, the company’s opportunity outside the U.S. appears reasonable and on trend with respect to health and wellness. Management seemed very confident about the margin opportunity and the ability to execute against those plans for the foreseeable future, in part because of a more benign commodity environment.
Newell Rubbermaid (NWL)
The company outlined a fairly compelling investment thesis to start, a tail wind behind categories - housing starts is a relevant indicator for 1/3 of NWL's categories. Second, cost savings provide a reasonable clear line of sight to EPS growth. Next, innovate and invest to move closer to the virtuous cycle to which all staples companies aspire. The company is focusing efforts behind key categories that represent material growth opportunities with superior margin structures. The rest of the portfolio has to run lean and mean (used to be run as autonomous business units with associated cost structure). This year will be a transition year, with progress accelerating throughout the year – NWL, weak Q1, stronger Q2 – just pacing. Good management, good story.
Church & Dwight (CHD)
CHD boasts that they are a smaller player at CAGNY (2012 Rev. $3B, Market cap $8B) and are “Total Shareholder Return (TSR) Junkies” with 12 consecutive years of 10%+ EPS growth. The company describes its portfolio of brands as recession resistant, 40% in the value category, with a compelling offering to meet the “new normal” consumer. Alongside its 8 Power brands that equate to 80% of profits, CHD is looking to make condoms, lubricants, and vibrators its next megabrand and grow its recent acquisition of Avid Health in vitamin gummies. Its 2013 Outlook is 3-4% Organic Sales; GM 44.2% (core business ex-Avid +25-50bps vs ’12); and 14% EPS growth to $2.79 on a marketing spend that is flat at 12.2% vs last year. CHD’s balance sheet is “under levered” at 1.4x. The company did not signal any acquisition targets but is confident in its ability to find targets that it can make earnings accretive within the first 12 months.
Successful innovation and restructuring projects – it certainly sounds familiar, but it is a fairly new concept for ENR. A familiar name to most of us (Schick Hydro) is the example of successful innovation provided by CEO Ward Klein – multiple market share examples were provided across various line extensions. Presentation moves to a build-up of the organic growth and acquisition growth that has created the Energizer of today – moved on to the tale of woe that is the secular challenges of the battery category. Interesting that it appears that restructuring was forced on the company by the challenges of the category, rather than any discipline with respect to costs. The meat of the presentation was familiar – manage batteries for cash, generate growth from personal care. At the end, it was also nice to see the company continue to acknowledge the bare minimum required of them as a public company in terms of investor relations, eschewing the company’s prior history where it acted more like a quasi-private company. Golf clap?
HEDGEYE RISK MANAGEMENT, LLC