Edgewell Personal Care Company

Good morning and welcome to the Edgewell Personal Care Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this call is being recorded. I would now like to turn the conference over to Chris Goff, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us this morning as we discuss Edgewell's first quarter 2020 earnings. With me this morning are Rod Little, our President and Chief Executive Officer, and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call, and then we'll hand over to Dan to discuss quarter one results in our full year 2020 outlook. We will then transition to Q&A. This call is being recorded and will be available for replay via our website, www.edgewell.com. During the call, we may make statements about our expectations for future plans and performance. This might include future sales, earnings, advertising and promotional spending, product launches, savings and costs related to restructurings, changes to our working capital metrics, currency fluctuations, commodity costs, category value, future plans for return of capital to shareholders, and more. Any such statements are forward-looking statements which reflect our current views with respect to future events. These statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption risk factors in our annual report on Form 10-K for the year ended September 30th, 2019, as may be amended in our quarterly results on Form 10-Q. These risks may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances. Expect as required by law. During this call, we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are shown in our press release issued earlier today, which is available at the investor relations section of our website. Management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business. With that, I'd like to turn the call over to Rod.

Thanks, Chris, and good morning, everyone. In our call this morning, I'm going to focus my comments on two core topics. First, I will address the Harry's transaction, including our release this morning announcing that we have terminated the merger agreement. Then I will talk more broadly about Edgewell business, the journey that we are on, the positive results we continue to see, and our go-forward strategic priorities. Dan will then take you through our operational financial performance for the quarter, as well as update the full-year outlook. As I stated a week ago, we're obviously disappointed by the FTC's decision to seek to block the proposed transaction with Harry's, and we continue to disagree with the merits of their position. We believe that the consummation of the merger would have brought together complementary capabilities for the benefit of all of our stakeholders, including consumers. That said, given the ongoing uncertainty about the potential outcome and the required investment of resources, time and resulting distraction to our business is a continuing legal battle with the FTC would entail. And after detailed deliberation with our board of directors on these factors, we have terminated the merger agreement. As was stated in the press release, Harry's has informed us of their intent to pursue litigation. We believe that such litigation has no merit, and I won't be commenting on this matter any further. As such, we are moving forward with the improving underlying performance of our business, underpinning our confidence in our path ahead. We will build on our core strengths in technology, IP, and innovation, strategically adding to our capabilities in support of brands that resonate and increase engagement with consumers and retailers, enhancing our ability to drive growth and value creation. We are committed to building a next generation consumer products company. And while the path there will not include the Harry's business and brands, our strategic objectives remain unchanged. So let me now provide a perspective on our business, our ongoing transformation, and share some insight on where we are headed. Starting with where we are today, we have a strong foundation augmented by the progress we have made over the past three fiscal quarters and built on our global infrastructure, our best-in-class blade making and formulation capabilities, and our compelling brands that maintain meaningful share positions across diverse global categories. Edgewell is a company with global scale, operating in more than 20 countries with extensive retail reach across 50 markets. As such, we have a diversified revenue profile, with North America representing about 60% of our global revenue and our international business contributing 40%. This diversity is also seen across segments. And while we are well known for our wet shave business, the sun and skin care and feminine care segments contribute more than 40% of our revenue. It's important to remember that while we spend considerable time discussing the U.S. men's branded wet shave category. It represents only 3% of our global revenue. Underfitting our business is our technology stack and intellectual property, which provide us clear competitive advantages and an ability to repeatedly bring innovation to the categories in which we compete. Consistently producing high-quality, durable blades is a requirement for sustainable growth in the wet shave category. And we know that we have the ability to do that. Additionally, we have three different R&D facilities and a leading sun care formulation capability. The actions we have taken to reshape and refocus our portfolio have enhanced our position in our core categories, grooming, sun and skin care, and feminine care. With the successful divestiture of our infant care business now completed, We are narrowing our focus and further investing in growth in support of our stable of brands, including Schick, Wilkinson Sword, Banana Boat, Hawaiian Tropic, and Playtex, and some very exciting new brands, including Bulldog and Jack Black. As you know, the wet shape category has encountered significant headwinds over recent years, most notably in North America. But I am encouraged by where we stand today. We think consumers care about quality and consistency of shave and believe that our high-quality products position us well in that respect. We believe there are growth opportunities in the broader men's grooming category when you consider shave preps and soft products. Bulldog acquisitions have played an important role for us in expanding our presence in men's grooming, and Bulldog and Jack Black are performing exceptionally well. both delivering double-digit growth and maintaining leading positions in their respective markets. Outside of the grooming category, we have compelling growth opportunities in both Sun and Femcare. Femcare is a healthy category, and our brands maintain strong equity with consumers across the globe in meaningful market positions, especially here in the U.S. Innovation will continue to play an increasingly important role in expanding our participation in this exciting category, leveraging our strong existing portfolio of brands, while we also contemplate organic and acquired additions to the portfolio. And in our Femcare business, we are in the early stages of our efforts to redefine our commercial and operating model for the future. We've made significant steps in filling key leadership roles across sales, marketing, and finance, that will be an important catalyst for helping define the optimal strategic path forward for this business. We've seen some initial stemming of the top-line declines, which I'm encouraged by, although we know significant work remains. And repositioning this business for more stable top-line performance and profit delivery will take time. Project Fuel remains an important catalyst for our continued evolution, both in mindset and in economics. This organization is reshaping itself, rooting out waste, and driving greater productivity in all that we do. And we have executed well, delivering over $150 million in growth savings to date. These savings have provided us with resources to invest in innovation and growth and build our brands and capabilities. Specifically, we focused our investments on our most compelling growth opportunities across key retail channels. We've also worked to reshape our portfolio with an eye towards simplifying and refining our brands and offerings and beginning to enhance our commercial capabilities across the entire company. Work remains here and we are progressing with urgency and focus. We've also revamped our senior leadership team over the last 18 months and added new members to our board of directors. My management team brings a significant track record of success and experience operating in this industry in our categories. Over the last three quarters, including this fiscal Q1, I am pleased with the results we are seeing in our business. Organic top-line growth trends continue to stabilize, with the last three quarters down approximately 40 basis points compared to the prior year period. And these results were underpinned by improved results across all segments and all geographies. Gross margin rates are stabilizing. as we execute Project Fuel and moderate trade and promotional spend. After a year of muted brand investments, in 2020, we are leaning in on investment, including both advertising and promotion and R&D, increasing our collective spend by $20 million and supporting our commitment to maintaining healthy leading brands. Project Fuel is maturing, and we have a clear track record for execution. having realized over $150 million of gross savings to date, inclusive of $15 million in Q1. Pre-cash flow generation remains a core strength of our business model, fueling consistent and systemic deleveraging. Over the last year, we have reduced our leverage by one full turn of death, providing the necessary drag powder to support accretive M&A activity. Our outlook for the year reflects our expectation of continued progress, with organic net sales flat to slightly negative, gross margin rates stable, further execution of project fuel, and free cash flow over 100% of GAAP net earnings. Dan will discuss this in more detail shortly. But we should not confuse progress with achievement. Foundational studying of our business is a required first step, and three fiscal quarters of results indicate we are on the right path. We are working with urgency to further strengthen our business and ensure sustainable value creation for our shareholders. This is a time when we must be bold in our thinking and disciplined in our actions. Our priorities are as follows. First, we must increase our ability to innovate and build brands consumers love. Our recent efforts in this area have not provided the level of impact needed, and consumer-centric, occasion-based thinking needs to be at the center of our approach. We have recently added resources in our R&D organization and will continue to seek to augment our existing team with the necessary infusion of talent where needed to meaningfully strengthen our capabilities in this area. Enhancing our innovation roadmap and developing a robust pipeline of opportunities for the business going forward is a clear strategic priority. Second, we will build on our strategic partnerships with our most important retailers to win at the shelf. This was the first task that I initiated upon becoming CEO, and it's become increasingly important that we maintain strong, mutually beneficial relationships. Whether it's through stronger brands on shelf, robust innovation, or exploring unique exclusivities in certain categories, we are committed to further solidifying our strategic relationships with our key retail partners. Third, we will continue to drive efforts to strengthen our competitiveness through project fuel and other initiatives to further simplify our ways of working and drive efficiency in our operations. maintaining our focus on the strategy that brought us to this point in enabling continued investment in growth opportunities. Fourth, we will continue to maintain a strong balance sheet, utilizing our healthy free cash flow profile in a balanced and disciplined manner, investing in our business while also returning value to our shareholders. Ensuring an efficient capital structure that enables a balanced capital allocation strategy is critical. and Dan will elaborate on this in a moment. And finally, talent profile and work environment for our employees matters, and in fact, are key drivers of sustainable success. We will invest in top talent in critical commercial roles, with North America commercial leadership our biggest priority. As you know, Colin Hutchison has been dual-hatting as both the COO and head of North America for quite some time, And we knew this was not sustainable. And so we will act quickly to identify a new leader for our North American business with focus on a seasoned, dynamic leader who has the right complement of sales and marketing expertise required to lead our business forward in this important geography. Additionally, we are committed to creating a culture that attracts and retains world-class talent and drives engagement among our teammates. We are focused on strengthening our culture, which is built on values of inclusivity and sustainability so that we can be a company where people love to work. Before I turn the call over to Dan, I want to emphasize the most important takeaway from this call. Our business is healthier today than it has been in quite some time. We are executing with urgency and focus, and our mission to become a world-class CPG company remains unchanged. We understand where our strengths lie. We know the areas of our business that we need to continue to address, and we are pleased with the progress we are making. In short, we believe we are well positioned to succeed, and we look forward to redirecting our focus towards the opportunities that lie ahead. And now I'd like to ask Dan to take you through our first quarter results and updated outlook for fiscal 2020.