This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good day and welcome to the Agile Personal Care Conference Call. All participants will be in a 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. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I'd like now to turn the conference over to Chris Goff, Vice President, Investor Relations. Please go ahead.
spk10: Good morning, everyone, and thank you for joining us this morning for Edgewell's third quarter fiscal year 2022 earnings call. 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, then hand it over to Dan to discuss our results and full year 22 outlook before we 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 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 for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events, plans, or prospects. 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. 2021, as may be amended in our quarterly reports on Form 10Q, which is on file with the SEC. 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, except 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. The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is 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.
spk02: Thank you, Chris. Good morning, everyone, and thank you for joining us. We grew organic net sales 9% this quarter, delivering our fifth consecutive quarter of organic net sales growth, driven by solid consumer demand for our products. Importantly, our growth was broad-based, with North America increasing 9% and international markets increasing 8.4%. Growth was also well-balanced, coming from all segments of the business and fueled by strong volume growth. The 9% growth in the quarter was above our expectations as we've benefited from a strong and earlier start to the peak sun care season in the U.S., and from both heightened demand and improved supply in our feminine care business. Our omni-channel strategy continues to deliver strong results, as we saw growth in both brick and mortar as well as e-commerce channels. E-commerce growth in North America was 31%. Consumption growth for our brands in the United States was over 7%. reflecting increased volumes in price as we grew market share in aggregate. The sun category in the U.S. remains strong, and our share gains accelerated. In fact, Banana Boat is now the number one sun care brand in the United States in the latest 52-week period, reflecting all of the critical factors required to win in this category. Consumer-focused innovation underpinned by great product formulation capabilities, strong distribution both in aisle and out, and a supply chain that ensures availability on shelf. Billy contributed approximately 370 basis points to top line growth, driven by continued strong execution in Walmart, where the brand has maintained its nearly 19-point share of the women's shave category. While organic growth this quarter was strong, currency headwinds increased significantly in the quarter, negatively impacting reported sales by $22 million in the quarter, which is nearly $9 million or 150 basis points worse than our previous expectations. With the strength on the top line, we overcame incremental foreign exchange headwinds and delivered 86 cents of adjusted earnings per share and $97.1 million in adjusted EBITDA, both above our expectations. While the external environment remains challenging and volatile, we believe our results this quarter reflect the continued execution of our strategy and the underlying structural improvement in our business. And while we've benefited from a stronger than expected start to the peak sun season, consumer demand for our products across all of our key categories in the United States remains strong, driven by the impact of new distribution, a more stable supply chain, and incremental price actions. While COVID-related closures continue to impact Asia and certain parts of Europe, we were encouraged to see improved category and volume growth in several other key international markets, particularly in Latin America, largely driven by an increase in travel. Dan will take you through the specifics shortly, but we also saw improved performance across our supply chains. with increased production output and service levels across femcare and wet shave, as expected. Inflationary pressures in aggregate were relatively unchanged to our previous expectations, although choppiness remains in certain commodity baskets and labor levels remain tight, though manageable. However, with the dramatic strengthening of the dollar during the quarter, currency is now expected to be an increasing headwind, to top and bottom line results in the fourth quarter. Despite these ongoing macro market challenges, we continue to make a lot of progress in the transformation of Edgewell to achieve our objective of sustained top and bottom line growth. This progress is a result of our continued focus on fundamentals and good execution and is evidenced in four specific areas. First, our ability to deliver meaningful consumer-centric innovation. Second, our improved presence on shelf. Third, stronger capabilities across the organization, and most notably in brand building, direct to consumer, and digital execution. And finally, we remain committed to our efforts to drive cost out of the business and structurally simplify our operating model. As we discussed last quarter, our brands are healthier than they have been at any time in recent years. We are executing well at retail, led by our leading Sun portfolio of brands, aided by our recent acquisitions, and underpinned by the best distribution outcomes we've seen since our split from Energizer in 2015. We believe all of this puts us in a great position to deliver on our outlook of 4% organic net sales growth for the fiscal year, which would be our second successive 4% growth year. and builds confidence that we can deliver on our growth ambitions for the future. And now I'd like to ask Dan to take you through our third quarter results and also provide details on our outlook for the full fiscal year.
spk09: Thank you, Rod, and good morning, everyone. In the quarter, we delivered strong top-line and earnings results in the face of persistent cost inflation and increasing FX headwinds. As Rod discussed, we saw strong underlying demand for our brands and accelerated organic sales growth. underpinned by improved shelf presence, great retail execution, and incremental pricing. We again had category-leading performance in U.S. SunCare, where we saw some phasing of sales into the third quarter as many retailers responded to favorable weather and stronger demand with earlier-than-expected replenishment ordering. Our wet shave performance was noteworthy, with both organic growth and share gains well above recent trends. And in FemCare, Our success in getting product back on shelf, timed with stronger than expected demand and tampons, drove double-digit organic sales growth in the quarter. Finally, improved digital execution was again a catalyst for growth, as our e-commerce business in North America grew over 30%, with global e-commerce sales now representing approximately 13% of total revenue. Amazon consumption gains were also strong, led by Femcare and seen across all core categories. Importantly, we made meaningful progress in stabilizing our supply chain and improving on-shelf availability, especially across femcare and women's shave. Labor levels and commodity availability improved, allowing us to accelerate production scheduling and product flow and materially improve service levels. We also continued to effectively navigate the challenging and uncertain inflationary environment, where initial signs of easing in transportation-related costs were mitigated by continued volatility across many aspects of the commodity basket, including sun chemicals and pulp. However, our productivity muscles are well-developed, providing material offsets to inflation-related pressures in both COGS and G&A. Additionally, we remained opportunistic and focused in our approach to pricing. realizing the incremental benefits from our most recent price execution last quarter across much of our U.S. shave and grooming portfolios. In the quarter, inflationary headwinds, productivity savings and price offsets were in line with our expectations. The U.S. dollar also strengthened considerably in the quarter, most notably against the yen and the euro, And while we execute currency hedges to help mitigate the impact to the P&L, this created a headwind in the third quarter, and we anticipate a further drag in Q4. Now I'll turn to the detailed results for the quarter. As mentioned, organic net sales increased 9% while cycling about 13% organic growth last year, driven by both volume and price gains, and inclusive of about 150 basis points of combined headwinds from negative mix and higher trade spend. Most of the realized price increases were attributable to femcare, wet shave, and grooming, and drove over 2% of the organic growth. North American organic net sales increased just over 9%, driven by strong performance in suncare, femcare, and women's shave. International organic net sales increased just over 8%, driven by strong growth in wet shave and suncare. Looking deeper into our segments, wet shave organic net sales increased 6%, with growth seen across all categories. Notably, our women's systems business delivered organic sales growth for the eighth consecutive quarter, increasing about 10% while cycling 12% growth last year. Growth was strong across both North American and international markets and was led by intuition and private labels. Women's private label grew 44% in the quarter, despite cycling 31% growth last year, reflective of accelerated growth with DTC partners, new distribution, and modest price increases. Our men's systems business grew 5% in the quarter, with accelerated sequential growth in both North America and international. For the fifth consecutive quarter, U.S. razors and blades category consumption increased, growing just over 3%. The category growth in the quarter was widespread and seen across men's and women's systems and disposables. Daily performance at Walmart remained strong, with the brand still holding a nearly 19% share of the category and becoming the number two brand in the set. With the new in-store display activity now fully activated, we expect that momentum will continue ahead of our retail expansion in fiscal 23. For the 13-week period, our shave market share decreased 50 basis points, while branded share increased 30 basis points, driven primarily by share gains of 260 basis points in women's branded shave. Sun and skincare organic net sales increased about 13%, driven by strong global sun care results and solid men's grooming performance. Sun care organic net sales in North America increased nearly 14%, despite cycling almost 50% growth last year, driven by continued strong execution on shelf and aided by a slight shift in sales to 3Q in response to strong early season consumption. International sun care sales increased over 19% as increased travel and leisure activity drove some demand recovery. In the U.S., the sun care category declined nearly 1% for the quarter, and our brands meaningfully outperformed the category, led by Banana Boat, which delivered consumption growth of 11% and gained 200 basis points of market share. Our strong execution and prominent on-shelf and all-file positioning drove 150 basis points of share gains at Walmart, and we saw sequentially improved results across both the drug and grocery channels, where we also realized heightened share gains. Over the last 52 weeks at Walmart, our SunCare portfolio has grown consumption 19%, and realized 260 basis points of share gains. And Banana Boat now stands as the number one brand in the category in the U.S. Men's grooming organic net sales increased almost 8% despite cycling 17% growth last year. Cremor results remain strong with 18% growth fueled by a healthy combination of new products, distribution gains, and pricing actions. Wet One's organic sales increased about 8% in the quarter, while category consumption declined 29%, as the category further resets from the COVID-driven demand spikes in the prior year. Wet One's consumption was flat, leading to share gains of almost 19 points and a share position of over 63% of the category. As the category continues to consolidate on shelf, reflective of a more normalized demand environment, We believe that the brand's well-earned equity and trust with consumers will continue to be a catalyst for durable growth. However, in response to the moderating near-term demand and continued progressions on shelf, we are right-sizing our offering and eliminating certain non-core SKUs that were added at the peak of COVID-driven consumer demand. In the quarter, we recorded a pre-tax charge to cost of goods sold of $22.5 million associated with the write-off of inventory and a related production contract termination charge. Femcare organic net sales increased about 11%, largely driven by heightened category demand and improved product availability on shelf. Strong growth in the Playtex Sport and Carefree brands was offset by slight declines in StayFree. Our portfolio saw nearly 12% consumption growth and share was flat in the quarter and for the last 52-week period. Now, moving down the P&L, gross margin rate on an adjusted basis decreased 500 basis points compared to the prior year. In the quarter, inflationary pressures of about 600 basis points were partially mitigated by 270 basis points of price and productivity offsets. Additionally, there were about 170 basis points of headwinds driven equally from negative channel and segment mix and higher trade spent. In the quarter, we reallocated planned above the line media into incremental feature and display activation, driving greater returns on our investment and supporting our sun season retail execution. AMP expense was 13% of net sales with over 86% of the working dollars geared to digital execution. A&P spend in the quarter was slightly below original expectations, reflective of the shift to trade activation in the U.S. and the pullback in investment in certain international markets, where COVID recovery remains unsettled and therefore return on investment inefficient. Adjusted SG&A decreased 40 basis points versus last year as gains from sales leverage, operational efficiency programs, and favorable currency translation more than offset the impact of billy expenses, including amortization, and higher year-over-year compensation expense. Adjusted operating income was $70.3 million compared to $80.6 million last year, reflecting the impact of inflationary pressures on gross margin. GAAP diluted net earnings per share were 57 cents compared to 74 cents in the third quarter of fiscal 21. and adjusted earnings per share were 86 cents compared to 89 cents in the prior year period. Adjusted EBITDA was $97.1 million compared to $101.2 million in the prior year. Net cash from operating activities for the nine months ending June 30th was $72.4 million compared to $155.9 million over the same period last year. Working capital bills to improve service levels in the current year have resulted in the increased working capital outflow versus a year ago. We ended the quarter with $182 million in cash on hand, access to the $298 million undrawn portion of our credit facility, and a net debt leverage ratio of about three and a half times. In the quarter, our share repurchases totaled nearly $35 million. bringing our year-to-date repurchases to just over $110 million. In addition, we continued our quarterly dividend payout and declared another cash dividend of 15 cents for the third quarter. Now turning to our outlook for fiscal 22. Despite operating in perhaps the most challenging macro environment on record, we have increased confidence in our ability to deliver half to performance that is in line with our prior expectations, despite incremental currency headwinds. We believe the supply disruptions that impacted the business in 2Q are largely behind us. The inflationary environment, while still volatile, did not worsen over the course of the quarter, and we've successfully executed incremental pricing in the U.S. across wet, shave, and grooming, as previously discussed. So for the fiscal year, we continue to anticipate approximately 4% organic net sales growth. As mentioned earlier, Q4 growth will be impacted by the unexpected Sun and Femcare pull forward into Q3. Reported net sales are still anticipated to increase by mid-single digits, including 340 basis points net tailwinds from the Billy business and 310 basis points headwinds from currency. As we look to gross margin, we now anticipate approximately 390 basis points of year-over-year decline an increase of 40 basis points over our previous outlook. The incremental year-over-year decline reflects the estimated negative effect of unfavorable FX and increased negative channel and category mix. The impact of inflationary headwinds, productivity savings, and price realization are expected to be largely in line with our previous outlook. We now expect A&P spending to be about 11% of net sales for the year. Adjusted operating profit margin is now expected to contract approximately 270 basis points year over year. Adjusted EBITDA is now expected to be in the range of $335 million to $340 million. Adjusted EPS is now expected to be in the range of $2.50 to $2.60 and includes the benefit from shares repurchased through June 30th. And finally, free cash flow conversion is still expected to be above 100% of GAAP net earnings. For more information related to our fiscal 2022 outlook, I would refer you to the press release that we issued earlier this morning. And with that, I'd like to turn the call back over to the operator to begin the Q&A session.
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press start then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question comes with Olivia Tong with Raymond James. Please go ahead.
spk01: Thanks. Good morning, everybody. I want to get a little bit more detail in terms of your expectations on price. It looks like price was a good contributor this quarter. I think in the past year, it's been sort of amidst a high single-digit range. And it sounds like you've got some pretty decent momentum there with respect to that. So just if you could talk a little bit about that and your expectations, not only for this year, but whether there are any incremental plans to combat some of the cost headwinds that you're seeing. Thanks.
spk09: Yeah, hey, good morning, Olivia. It's Dan. Thanks for the question. Yeah, so price certainly contributing in the quarter. If you look at the 9% organic growth, a little over two points of that came from price, the rest through volume. What we have executed so far is what we had alluded to in our last call, which was essentially men's and women's branded shave have gone up in price, sort of the mid to high single digits. Most of our grooming category went up in price as well, high single digits. So I think we alluded to that last call. That has all been priced through now on shelf. We also have communicated the price increases in FemCare, mid to high single digits, and we have communicated price increases in SunCare here in the U.S., again, in that mid to high single-digit range. FemCare will work through on shelf probably in early to mid-October, and SunCare will be more like November. So that's kind of what we have. And again, the last two, FemCare, SunCare, would be incremental as we think about 2023. Great.
spk05: That's helpful.
spk01: Sorry. Sorry, go ahead. Talking a little bit about the banana vote recall and You know, you mentioned that you had some pull forward in sales. So just if you could talk a little bit about that, what it's impacting, what your expectations are, and then just generally speaking about SunCare from here. Thank you.
spk02: Yeah, let me just give a couple of thoughts around SunCare overall. First of all, we're the number one player in SunCare. We now have the number one brand on past 52-week basis here in the U.S. with Banana Boat. 200 basis points of share this year on multi-years of good, strong performance in the category. We like the category. We think it sets up well for the future. As you look at how we play in the category, one thing we will always do is do the right thing by consumers and take a conservative view on anything that gets in the zone of health and safety. And ultimately, as you overlay all of that, as the leader in the category and take a view towards health and safety from time to time, you'll come upon cases where you'll recall some product. In this case, I don't anticipate it to have any impact on the business, either in the quarter coming up or in the year ahead. This is one SKU. It's three lot codes. It represents less than 0.1% of the volume in the business. And effectively, there's nothing to recall because it's older product from a third-party manufacturer from these three batch codes. And so we don't put benzene in our products. We're very, very serious about health and safety. We follow all FDA guidelines. We collaborate with the Personal Care Products Council on ingredient formulations. And so I think, you know, it's an unfortunate headline always. But we're doing the right thing here, and it won't have a business impact.
spk10: Thank you, Olivia. Operator, next question, please.
spk05: Thank you. The next question comes with Jason English with Goldman Sachs. Please go ahead.
spk04: Hey, folks. A couple quick questions. Let's build off the last one real quick. 2% price realization in context of the magnitude that you had already put in on men's and women's and grooming seems a bit muted. Is it just timing? Should we expect this to build to that mid to high single-digit level that you're talking about across most of your portfolio? Or is the shift to spend out of A&P and into trade going to continue to dampen it?
spk09: Hey, good morning, Jason. It's Dan. Yeah, look, the price went in over the course of the quarter, so I certainly think timing and realization play a slightly different piece in Q3 than what you'll see going forward. So I think that's a fair comment. I'm not going to project what the tailwind will be in organics for next year. I mean, we've got, as I mentioned, more price coming in FEM and in SunCare We'll also cycle off pricing, right, and wet ones now. We've sort of lapped the pricing that we took a year ago, and we've realized the level of pricing across wet-shave and international markets as we had expected. That was in for most of the year. So, again, we'll say more about the role of pricing for 23 in our next call, but we feel very comfortable that we've been really thoughtful, really responsive in categories where we follow price lead and also in areas where we're the leader in the category, we've taken the lead on price. So I think overall, we feel really good about the pricing that we have taken around the conversations we've had with retail and the environment that we're in.
spk02: And Jason, good morning. I would just add two thoughts to that. We do have some pricing to come in some international markets in wet shave. And so the comments we've made around wet shave pricing has been primarily the U.S., and there's a couple of big markets where we'll make some moves up there as well to come in the future that will help. And then the point you made around the A&P trade, how do we think about that in Suncare? We did intentionally shift spending out of A&P into trade spend around our display activity in Suncare this year. It was a very intentional move around return on investment. It's part of what's given us the 200 basis points of share gain this year. As we cycle out of that into the future, again, I think you'll see that be more balanced as we think about the sets for next year.
spk09: But Dan, I don't know. at about 13% again in Q3. So we're not at all here in a position where we're taking money out of the brands. We actually like the levels that we're spending at, but we're also going to be really thoughtful and disciplined around what return we can get. And so in the quarter, you saw that not only in Rod's point around reallocating into better retail execution on Sun, but we pulled money out of international, namely China and Japan, where the market just remains choppy and we just didn't think we'd get the return we needed.
spk04: Yeah, it makes sense. It's good to see the market share momentum. One small question on Billy. You guys have lowered the full-year sales contribution from a 400 basis point growth contribution to 340. It implies around a 15% call-down on overall sales you expect to come from that brand. Can you give us some color around what caused the reduction?
spk09: Yeah, certainly. Look, I think the main thing that caused this in our mind is just kind of going back to where we were in January, February, when we tried to estimate this business. And at that time, we had owned the brand for only a few months. We hadn't begun the integration with the team there. And we hadn't yet obviously seen any demonstrated results in Walmart. So it's a nice way of saying we were obviously forecasting against a lot of uncertainty. Now, as we've worked through it, I wouldn't read the reduction in impact as anything less bullish on the brand. You heard Rod's comments around success at Walmart, which we're super excited about reaching a 19 share DTC business still performing well. And at the end of the day, this is a brand that's going to contribute, you know, $90 million or so to the top line in a year one start. So again, I would chalk it up more to, you know, just trying to estimate the impact back in February with a tremendous amount of uncertainties. and no real result of performance because we really like where the brand is.
spk02: Jason, I just want to add a couple of points on Billy. The team is retained in place doing their thing. There's no weakness structurally in terms of the Billy team that's built that brand as they come into Edgewell. We've retained the team. They're motivated. They're doing great work. Walmart is super happy with the execution. Walmart's gained share. We've maintained the share and, in fact, had increasing momentum here in more recent periods. So I think we feel good about that. And then all the expansion potential that we had envisioned at the time of the acquisition around broader retail footprint distribution, that will happen. Every retailer wants the brand. And we also have the category expansion potential. away from a primarily wet shave business today into more of a fulsome woman's body brand. So all that potential is there, and it's not cycles away. It's near term.
spk04: Understood. Good stuff, and congrats on the market share momentum. I'll pass it on.
spk02: Thank you.
spk10: Thanks, Jason. Thanks, Jason. Operator, next question, please.
spk05: The next question comes with Bill Chappell with Truth Securities. Please go ahead.
spk08: Thanks. Good morning. Just circling back to Suncare, I think you had very strong results and market share gains, but with the category being down 1%, probably if you took it, your performance ought to be down more mid single digits. Is that all weather? And I guess the question is, could you have done better or were you kind of running at full capacity? to kind of meet the demand in the quarter?
spk02: We're running full capacity, Bill. We have been. I think we talked in prior quarter calls about being prepared for what we anticipated would be a big season around material supply, around how we run staffing levels in our manufacturing plant. Again, we're the only manufacturer here in the States that is primarily in-house manufacturing. So we have control of that more so than some of our competitors. And that's benefited us in this season. TSV up 15% in the quarter when the category is down one. Part of that is weather. Part of it is also this great execution by the team and availability and fast cycling and production and inventory builds to meet demand that's there. And so it's great execution by the team. There was also a phenomenon we saw in the quarter, again, theoretically, all competitors should see it the same, where the peak season came a little earlier this year as compared to last year. And reorders have profiled earlier, which benefits us specifically in Q3 at the expense of Q4. It's just a different profile than we had in the prior period.
spk08: Got it. And then looking at wet shave and I guess in particular razors, I mean, you have kind of all the price points that consumers would trade down to from kind of premium and mid-tier to disposable to private label. I guess the question is, on the current consumer, are you seeing any benefit from trade-down? Do you expect there to be a benefit, or do we need kind of a deep, long recession for a meaningful kind of drop in these categories?
spk02: I think it's more the latter, Bill. In short, we have not seen any meaningful trade-down. in Weche to this point. As you point out, we have a really nice portfolio across all of the price points with 25% of our portfolio playing in that private label space. So if we do get into a deep recession or the consumer becomes more challenged over the coming quarters, we actually think the portfolio sets up well for that at a time when our base branded business is as strong as it's been in years. You know, we had men's up five, women's up ten in the quarter, up six in all of wet shave, right? I think our ability to do that, you know, a few years ago, I don't think we would have thought we could have done that. So we like the portfolio across all of the tiers. And, again, I think regardless of where the consumer goes, we're well positioned.
spk10: Great. Thanks for the color. Thank you. Thanks, Bill. Operator, next question, please.
spk05: The next question comes with Nick Modi with RBC Capital Markets. Please go ahead.
spk03: Yeah, thank you. Good morning, everyone. Actually, I have two questions. Just, you know, guys, maybe you can just give us some context on how you're thinking about the economy. I mean, so many polarizing points, data points out there. So just wanted to kind of understand what you're assuming as it relates to the rest of the year. And then the second question is for you, Rod, is really, The last couple of years, I know you've spent a lot of time, you and the management team, on reestablishing and reconnecting with retailers. Clearly, the business is starting to perform. So I just want to understand kind of what's different now in terms of your discussions, the opportunities, the willingness to take new products, et cetera. I just would love to kind of get a state of the union on today versus a couple of years ago. Thanks.
spk02: Yeah, thank you, Nick. Appreciate the questions. On the state of the economy, your guess is as good as ours, I think. The mindset we've been in is control what we can control. And so be very disciplined on cost. Be very focused on things that are going to create and build long-term value. We do generate a lot of cash flow. We do feel like we have a structurally healthy business with categories that even if the economy goes into a deep recession or we have some contraction or difficult consumer environment, the fact is our portfolio is everyday use products at primarily a value or mid-tier pricing orientation. And if the economy goes south, we feel like the consumer in our categories will be there and our portfolio will match up well against that. I do personally expect some headwinds to increase, whether that shows up in reducing basket size or some trade down as we were talking to Bill's question. I think we do expect some of that to happen. It's logical. Both here and in Europe would be the markets that I think we would see that. So That would be the comments around the economy. From a retailer perspective, I think the simple way to think about where we were a couple of years ago with retailers is we were very transactional with retailers. We filled a role in the category and it was a very transactional conversation. As opposed to today, where I think retailers view us as a partner, and view us as people that can help them predict where the category is going, shape the category for the future, what shows up on shelf at retail to create growth and value, not only for ourselves, but for the retailers and all the people that participate in the category as a whole. And it takes time to earn that credibility and trust. We've got a better team that calls on retailers. We've got better capabilities that bring data to retailers. The simple thing we do, we help them arrange taxonomy on their own websites around e-retail. We have people that are really good at that. We bring that to bear. That's nothing about a transactional price point or margin discussion. We've gotten the margin right, sure. And so when you put all that together, what ends up happening is you have better participation in long lead discussions, and you have better line of sight to the future. And it also doesn't hurt that you have brands that consumers like more and want to buy more of, like Cremo, like Billy, like Banana Boat now being the leader in the category. So our portfolio is better, too, and that helps. Thank you.
spk10: Thank you. Next question, please.
spk05: The next question comes with Kevin Grundy with Jefferies. Please go ahead.
spk06: Hey, Greg. Good morning, everyone. So we've covered a lot of ground. To clean up on the guidance, I guess, Dan, I think we've covered this. The implied slowdown in your organic sales growth to low-sum digits in the fourth quarter, strictly timing-related, sound relatively positive on the categories at this point, plasticity, brand strength. Is this all just shipment timing? in the quarter that is leading to the deceleration in the upcoming quarter?
spk09: Yeah. Hey, good morning, Kevin. Short answer is yes. As we thought about half two, right, we profiled about a 5% organic, and we thought Q3 would be a bit better than Q4. We saw that accelerating Q3, Rod pointed it out, just around timing of sun care shipments, which is always difficult to predict. When are we going to get the replenishment orders? But then also we saw a bit of accelerated demand in femcare in tampons, largely around the somewhat media-constructed out-of-stock availability issues. So that moved into Q3. That's the short answer. I think the other thing we have to keep in mind is, you know, we're cycling a sun care season last year that had a really strong Q4 consumption-wise, almost 20%. consumption growth in the quarter. So that was also in our mind as we built our forecast. Having said that, we're quite encouraged one month into the quarter in the sense that our sales profile is largely what we thought it would be. And if you look at consumption growth in those two categories, FEM and Suncare both had strong Julys. So encouraging for us, but again, I think phasing into three out of four is the easiest way to think about it.
spk06: Got it. Thanks, Dan. Rod, quick one for you. Just on the FemCare business, which is a historic business which has struggled. You guys considered exiting. I think there was, you know, it didn't work out, I guess. No strategic interest or it made sense to keep it. But the results are a little bit better. The market share looks a little bit better. Maybe just comment on updated views there, some changes that you've made, and then I'll pass it on. Thanks.
spk02: Yeah, just one correction to the assumption in the question, Kevin. We could have sold the business. We had interest in the business. We could have transacted. One of the things we looked at in the process, it was a strategic alternatives assessment. It wasn't a process to sell the business. And as part of the assessment, we looked deeply at our ability to run the business differently, run it better, and create value. And we determined we could create more value by keeping it and transacting at a price, frankly, that people would have understood and been fine with externally. It wasn't the right call for the business. So I just want to make sure that that's clear as we think about history and how we get here. But you go from mid to high single digit declining business over time to now what we think is a business that we can sustainably grow. in the future by first getting the team right, we've got a great team on that business. It's a team that's better at the individual level, position by position. It's a team that has focus. We, as you know, we took it to a business unit structure internally, separated off from the balance of the business to give it priority and focus. Part of the learning in that exercise was that it actually applied to the rest of the business, and it led our thinking to move to business unit structure across the balance of the business. So the team is right, the focus and structure is right, and the team has done an amazing job in re-architecting the marketing and the consumer's connectivity to the brand to give the brand's meaning and purpose. Playtech Sport is the first brand in the portfolio that's had the focus and attention. It's been the fastest growing tampon brand in the segment. It's led to consistent, sustained share growth in the tampon segment without the number two player in tampons versus number three historically. And so we've got the flywheel going now with great marketing and brand building, a strong team that's focused. And I think, again, we think very positively about the future of that category for us.
spk06: Thanks for the clarity and congrats to you and your team on the progress there.
spk10: Thank you, Kevin. Thanks, Kevin. Operator, next question, please.
spk05: The next and final question comes with Chris Carey with Wells Fargo Security. Please go ahead.
spk07: Hi, good morning.
spk10: Hey, Chris. Good morning.
spk07: So just one quick follow-up, Dan, on the comment around July. I think you implied it's tracking ahead of your implied organic sales guidance for the quarter, but that's just in the context of the overall tough comps and pull forward. You think on a total quarter basis, you're more comfortable with where you're setting the outlook. So I just wanted to confirm that specific comment. regarding July and just related, do you expect your sun and skin care business to decline on an organic sales basis in Q4 as you reverse some of the pull forward? Then I just have a quick follow-up.
spk09: Yeah, sure, Chris. What I was getting at with the July comment was twofold. Internally, our organic sales in line with our own expectation, not above, in line with. And then I was commenting on consumption expectations. on those two categories where we did see the sales pull forward into Q3, Q4, Q3 from Q4. Suncare consumption up 5% solid result. Femcare consumption up 7, 7.5% solid result. So it was more just context around strength of consumption and organics in line with what we had pegged. In terms of your second question on organic growth implied in Q4, It's mixed. I would say we would expect sun care organics to be negative, again, largely based on cycling 60% growth in Q4 last year. We would expect fem care organics actually to still be positive growth in Q4.
spk07: Okay. Thank you. And then, you know, you had alluded to some comments on pricing and productivity. I think you had said that your expectations for the contribution to gross margin haven't changed. I wonder if you could maybe dimensionalize the impact you're expecting from pricing and productivity. And really what I'm trying to do here is get a sense of your underlying run rates as you head into fiscal 23, as, as inflation potentially eases, and then just get more at the end of the call. If I could sneak in one more, just, you know, there was some commentary or press reports since a quarter that Amazon is, you know, going to be shuttering some private label categories. Is there, is there any way you can just frame your exposure and, any potential risks you see there as well. So thanks for all that.
spk09: Sure. Yeah, so on the margin profile, I'm glad you picked up the point. I think what we were trying to say is the structural elements of gross margin, which is all about the inflationary headwinds, the productivity savings, and then the price realization. You know, that's lining up largely as we thought it would when we spoke back in May. Inflationary headwinds are in the, you know, plus or minus 600 basis points. And then you're getting 175 to 200 basis points of productivity savings and price realization that's just over 100 basis points and scaling based on the comments we made around timing of when price went in. I think that's a really important point, though, is that one quarter later in a really challenging and volatile environment, we feel really good about structural margin. I think the new news that I do want to call out, you didn't mention it, but I think it's relevant, is FX. And that does put an added headwind on the business. In the fourth quarter alone, you know, we see that as probably about 70 basis points of margin headwind that we hadn't contemplated previously. So hopefully that helps you with, you know, with the comments and the margin profile. On Amazon, yeah, look, we've seen the articles, obviously. We've seen the response from the Amazon team as well. All I can tell you is our teams have had really good discussions with with their counterparts at Amazon. If you look at the category itself, the category's growing double digits. The Solomon brand is number five in the set over the last 52 weeks. It has really interesting economics for both us and them. So, you know, we don't see this as a category that they would look to destock on or trim the portfolio, given those numbers.
spk07: Thanks so much.
spk02: Thanks a lot, Chris.
spk10: Operator, next question, please.
spk05: Again, if you have a question, please press star then one. It appears we've got no further questions and this concludes our question and answer session. I would like to turn the conference back over to Rob Little for any closing remarks. Please go ahead.
spk02: Yeah, thank you. I guess just to close this out, you know, we're happy with the performance we had in the quarter. I think there's been a lot of hard work that the team's put into making that happen and the structural improvement that we're seeing in the business at a time where we know things are choppy around us. I think we're increasingly confident in the future and what we have line of sight to. So thank you for that. We'll work to continue to deliver consistent, reliable results, and we'll talk in three months.
spk05: This concludes our conference for today. Thank you for attending today's presentation. You may now disconnect
Disclaimer