Description

Summary

Playtex products is a North American-focused consumer products company that operates in three major segments: feminine care, suncare and infant feeding. Playtex is an opportunity to buy a high quality consumer products company that produces significant cash flow at an attractive valuation. The company, which made a number of acquisitions during the late 1990s, is concentrating on running existing businesses and using its free cash flow to pay down debt. This debt pay down will result in significant accretion to equity holders each year, allowing a solid rate of return before any multiple expansion. The Company is essentially a public LBO that, in the short term, has benefited greatly from lower interest rates and, in the longer term, will likely be sold as its controlling owner, Haas Wheat, needs to exit this investment.

Business

Playtex operates in three major segments: feminine care, suncare and infant feeding. #1 or #2 market share products account for 95% of revenues.

Femine Care, or Playtex tampons, comprised 34% of 2001 sales. This division has a strong #2 position, with 31% market share versus Tampax (#1 player), which is owned by Proctor & Gamble. Notably, in the six years since P&G purchased Tampax from Tambrands, Inc., Playtex has increased market share by roughly five points, while Tampax share has declined from 48% to 40%. Playtex has gained share by converting pad users to tampon users and also by gaining share among teenagers. Tampon users are extremely brand loyal (my wife has helped with due diligence on this segment!) and as these teenagers grow older, they are staying with Playtex.

Playtex has historically been the category innovator, having introduced the plastic applicator, deodorant tampons and odor absorbing tampons, portables as well as new product extensions. Management is attempting to grow the category through new product introductions, including personal cleansing cloths, heat therapy and portables.

Sun Care, or Banana Boat products, comprised 15% of 2001 sales. This division has a #2 market position at 22% share behind Coppertone (Schering-Plough) at 30%. Other competitors include Neutrogena (14%) and Hawaiian Tropic (9%). Management has consistently increased Banana Boat share over the past seven years.

Infant Care is 38% of 2001 sales. Products include internally developed infant feeding products in addition to more recently acquired brands, such as Wet Ones, Mr. Bubble, Diaper Genie and Baby Magic. Dominant market share brands include Wet Ones (51%), Infant Feeding (35%) and Diaper Genie (94%). This division has lost share over the past three years as Gerber has made an aggressive push into the market.
Finally, the company’s portfolio of other products (household products and personal grooming) comprise 13% of 2001 sales. Brands include Ogilvie (#1 position; 71% share); Woolite Carpet Cleaner (#2 position; 22% share); Playtex Gloves (#1 position; 31% share) and Binaca (#1 position; 49% share). Each of these brands is profitable and generates significant cash flow.

Financials/Valuations

Playtex has 64.3 million fully diluted shares. At the most recent close of $8.88, the equity market value is roughly $571 million. Adding in $800 million of long-term debt ($350 mn fixed at 9.375%; $450 mn floating at 4.09% currently; 1% increase is $4.5 mn change in interest expense) and subtracting $40.2 million of cash yields an Enterprise Value of $1.363 billion. I estimate the following operating results for 2002, 2003 and LTM Q2:

2002 2003 LTM (Q2)
Revenue 729.5 752.1 723.8
EBITDA 172.5 180.0 169
Less: Capex -21.9 -22.6 -14.3
Less: Taxes -32.8 -35.8 -33.8
Unlevered FCF 117.8 121.6 120.9
Less: Interest -62.3 -61.0 -66.0
Levered FCF 55.5 60.6 55.0
Net Income 49.6 61.5 57.0
Net Income/Share $.89 $.97 $.89

EV/EBITDA 7.7x 7.4x 7.9x
EV/(EBITDA-CX) 8.8x 8.4x 8.6x
EV/UFCF 11.3x 10.9x 11.0x
EMC/FCF 10.3x 9.4x 10.4x
P/E 10.0x 9.2x 10.0x

Margins:
EBITDA 23.6% 23.9% 23.4%
Unlevered FCF 16.1% 16.2% 16.7%
Levered FCF 7.6% 8.1% 7.6%

Other Financial Data:
Average Volume 152,000 shares
SI Ratio 2.48
52-Wk. High $14.25 (6/18/02)
52-Wk. Low $8.88 (Current Price)
Book Value -$0.10
Tangible BV -$9.96

Comparables

The companies peer group include Church & Dwight (Arm & Hammer); Clorox; Kimberly-Clark (Kleenex; Kotex); Colgate-Palmolive; Gilette; Estee Lauder; Proctor & Gamble; Avon; Alberto-Culver; Dial and Newell-Rubbermaid. The following table lists current trading multiples:

TEV/EBITDA P/E Net Debt/EBITDA
Alberto Culver 9.9x 20.1x .61x
Avon Products 11.9x 20.4x .90x
Church & Dwight 10.7x 20.7x 2.23x
Clorox 10.3x 20.5x .86x
Colgate Palmolive 13.9x 25.1x 1.60x
Dial Corp 9.2x 18.1x 1.27x
Estee Lauder 11.0x 27.6x .61x
Gilette 14.7x 25.9x 1.37x
Kimberly Clark 9.5x 16.3x 1.15x
Newell. 9.8x 19.9x 2.63x
Proctor & Gamble 12.7x 23.3X 1.28X

Playtex 8.1X 9.88X 4.85X


Shareholders

Two large shareholders own over 50% of the company: Haas Wheat & Partners, a private equity firm, owns 32.7% and appoints three of the eleven members of the Board. Blum Capital owns 17.7% and appoints two of the eleven members. Blum has been selling stock recently [see Weaknesses below]. Other notable shareholders include Shapiro Capital Management (9%), David J. Greene (3%) and Farallon Capital Management (1.4%). Officers and Directors, excluding Haas Wheat and Blum, own approximately 4.0% of the outstanding shares.

Strengths
1. At 7.5x EV/EBITDA (2003) and 9.4x earnings, Playtex has a very attractive valuation for a pure-play consumer products company with significant free cash flow and strong management.
2. Playtex has minimal capital requirements and strong earnings, which leads to significant free cash flow every year.
3. Management is focused on delivering PYX’s balance sheet and has been using free cash flow to pay down debt. CEO Michael Gallagher has been at the helm for seven years and has strong consumer products experience (Reckitt & Colman, Eastman Kodak, Lehm and Fink and Clorox).
4. Over 95% of the company’s revenue comes from brands that are #1 or #2 in share in their segment.
5. Management has been executing its strategy well over the past few years and has impressively grown share in its feminine care and suncare divisions.

Weaknesses
1. The company has a significant amount of leverage, at 5.0x Debt/EBITDA on trailing 12-month figures. However, the company has been aggressively paying down debt and has no significant near-term maturities. Therefore, there is little risk of a liquidity crisis and the company has no issues with covenants.
2. The top three shareholders own approximately 60% of the stock and the company’s market capitalization is currently only $565 million, so the common stock is not very liquid.
3. Beginning in August 2002 through mid-September, Blum Capital sold 750,000 shares. They are now in a quiet period where they are restricted from selling, but it is unclear if they will continue selling once they get unrestricted again.
4. Gerber’s entry into the infant feeding market has taken share from Playtex. However, other competitors (including J&J) have lost share and are exiting the business, which should help PYX regain share over the near-term.
5. Competition will increase in Feminine Care segment with Tampax’s introduction of the Pearl. Rollout is just beginning now, so the outcome will be uncertain for the next few quarters.

Catalyst

Accretion of value thru focus on debt pay down will provide attractive returns. Current free cash flow yield is 10.6% and management should be able to grow this cash flow by 5-10% per year with low-single digit top line growth. In addition, the cash flow multiple should expand as debt is paid down.

The ultimate catalyst is Haas Wheat deciding to sell the business. Potential buyers include several of the above competitors and perhaps a large European consumer products company seeking better access to the US market (i.e. Unilever).