Edgewell Personal Care Company

Good morning and welcome to Edgewell's third quarter fiscal year 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To try your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Chris Goff, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us this morning for Edgewell's third quarter fiscal year 2024 earnings call. With me this morning are Rob Little, our President and Chief Executive Officer, and Dan Sullivan, our Chief Financial Officer. While we'll kick off the call, I'll hand it over to Dan to discuss our results in full year fiscal 2024 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 and performance. This might include future sales, earnings, advertising and promotional spending, product launches, savings and costs related to restructuring and repositioning actions, acquisitions, integrations, 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 the 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 risk and uncertainties, including those described under the caption risk factors in our annual report on Form 10-K for the year end of September 30th 2023, 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 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 is shown in our press release issued earlier today, which is available at the Investor Relations section of our website. This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to measures of financial performance prepared in accordance with GAAP. However, 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. Thank you, Chris. Good morning, everyone, and thanks for joining us on our fiscal 2024 third quarter earnings call. The results we posted today and so far this year continue to demonstrate that our strategy is working. and that the transformation we began just over three years ago has had a profound impact on our business and results. We've exited a prolonged period of unmatched macroeconomic challenges and global business disruption as a stronger, healthier, better positioned business. It's also important to note that we are far from done and that the transformation of our business continues. Before I turn to our third quarter results, I'd like to discuss the key changes to our leadership team and organization structure that we announced earlier today. These changes will further strengthen our operating model, streamline decision-making, and improve enterprise execution, all of which will better position us to deliver on our overarching strategy to drive sustainable top and bottom line growth. we have five overarching areas of critical focus for our business that serve as the context for the announced changes. First, strengthening our U.S. business, specifically in our right-to-play categories, to better compete for the long term. Second, fortifying and accelerating our consumer-centric innovation platform. Third, continuing to strengthen and leverage our international businesses. Fourth, doubling down on a clear strength and accelerating efforts to drive meaningful year-on-year gross margin accretion as a catalyst to increase commercial investment as we continue on our path to become a world-class supply chain organization. And fifth, strengthening critical underlying commercial capabilities across the enterprise to drive continued organic top-line growth. In order to increase the speed of progress across these areas of focus, Today we announce a series of leadership changes. The first is the creation of a Chief Operating Officer role, to which Dan Sullivan has been appointed. This role will help to streamline and strengthen our existing leadership structure, narrow spans of control, enhance the speed of decision making, and improve enterprise execution that grants critical business priorities to maximize performance. Dan has been with Edgewell since 2019, serving as Chief Financial Officer and President of Europe and Latin America, he has proven to be an exceptional results-driven leader, making him the perfect candidate for the position. While continuing to have purview over finance, IT, strategy, M&A, and business development, he will now also oversee our entire international business, global operations, and supply chain and corporate sustainability. As Dan moves into his new role, Francesca Weissman, who has been a key member of our finance team since 2019, will assume the role of Chief Financial Officer, effective December 1st. Fran is a very talented finance leader and deserving of this promotion. As CFO, she will continue to lead all aspects of commercial and operational finance and global FP&A, with additional responsibilities for controllership and accounting, investor relations, internal audit, tax, and treasury. These internal appointments are a reflection of our incredibly talented team that I am so proud to work alongside. As I mentioned, Dan will head our international businesses, which include Japan and China, in addition to Europe, Latin America, Oceania, and Armenia. Our current president of North America, Eric O'Toole, will be leaving the company. I want to personally thank Eric for his contributions to Edgewell and wish him well in his future endeavors. I will assume direct responsibilities for the North American region in the interim, and an executive search is currently underway to fill the position. Once the role is filled, it will continue to report to me. Importantly, moving forward, in addition to focusing on strengthening our U.S. business, I will also focus more of my time on accelerating our innovation agenda. While I am pleased with the progress here, as evidenced by the very successful execution behind our Banana Boat 360 coverage launch, which has reached the number one and number two new products in the category in the third quarter, I want us to move faster and increase our disruption. I'm confident that these changes to enhance our leadership team and simplify our structure will strengthen our business and ultimately better position Edgewell for sustainable top and bottom line growth. over the longer term. Now let's turn to our results for the quarter. We delivered strong financial results again this quarter, with gross margin accretion of 160 basis points, 7% year-over-year adjusted EBITDA growth, and 23% adjusted earnings per share growth, all of which were above our expectations. Our teams executed well on the pillars of our strategy. as gross margin expansion in the quarter was underpinned by a healthy balance of our productivity initiatives and disciplined execution of our strategic revenue management efforts. Our strong third quarter margin results serve as the catalyst for the increase in our profit outlook for the full year, while reinforcing our commitment to return to pre-COVID level gross margins over time. Top line results were mixed. Our international businesses sustained their momentum achieving organic med sales growth of over 6%, driven equally by price and volume gains, with growth realized across nearly all regions and markets. Sales in North America declined just over 2%, largely driven by our film care business. Organic med sales growth in the quarter featured continued strength in our right-to-win portfolio, which grew over 5%, propelled by our industry-leading sun care and grooming businesses. Double-digit organic nut sales growth in grooming was underpinned by incremental distribution in new product rollouts in Cremo and Billy in North America. Suncare organic nut sales increased mid-single digits in the quarter, with modest growth in North America as it cycled double-digit growth a year ago. Though early season unfavorable weather dampened the start of the sun season in the United States, Category consumption trends in our share position strengthened across the quarter. We remained bullish on the balance of the season with around 30% of the season's consumption still to go, and the teams are focused on ensuring strong execution in the summer's final months. Our right-to-play categories declined 2% in the quarter as broad growth across international was not enough to offset declines in the United States. In North America, our wet shave and feminine care businesses continued to face challenging category, channel, and competitive dynamics, with heightened promotional levels further pressuring growth. Our wet shave business performed largely as we expected, with organic net sales down about 1%. However, our thin care performance was well below our expectations, as persistent sluggishness and sport tampons and a delay in our care-free pads roll out. materially impacted sales. With the shelf resets now finally complete and the new Carefree Master brand having received solid retailer support, we expect organic sales growth to return for Femcare in the fourth quarter. In summary, looking at our year-to-date performance, our broad and diverse portfolio of global brands and excellent execution across our strategic priorities has enabled us to deliver 180 basis points of year-on-year adjusted gross margin accretion and realized 25% adjusted earnings per share growth. And we continue to be disciplined in our approach to capital allocation, putting our healthy cash flow generation to work, supporting our brands, and returning $63.5 million to shareholders while lowering our net debt leverage to 3.1 times this quarter. With just one quarter of the fiscal year left, as we look to next year, particularly with the changes we announced today, our priorities are clear. We will continue to make gross margin accretion a priority to both fuel brand reinvestment and deliver increased profitability. We will invest behind consumer-centric innovation as a core catalyst for the differentiation of our brands on shelf. And we will continue to deliver top and bottom line results in line with or above our stated algorithm. I'm confident that the changes announced today better position us to achieve our goals. And now I'd like to ask Dan to take you through our third quarter results and discuss our outlook for fiscal 2024. Dan? Thank you, Rob. Good morning, everyone. First, let me say that I'm thrilled to take on the role and responsibilities of COO. I also want to add my congratulations to Fran, who I've had the privilege of working with for over two decades. She's been an invaluable asset in her four years here at Edgewell, and I know she'll build on her strong track record of success in the CFO role. As Rod outlined, the changes announced today will simplify operating and reporting structures, expedite decision-making, and better leverage commercial and operational capabilities across our organization, all of which will better position us to capitalize on future growth, improve core operational performance, and maintain our commitment to grow our business responsibly. I appreciate the trust placed in me by Rob and the board, and I'm excited to work more closely with our talented teammates across the globe. Now, moving on to our results in the quarter. As Rob mentioned, execution of our broader strategies continues to yield good results. The inherent strength of our business model was again demonstrated this quarter, as modest top-line growth of about 1%, which was largely in line with our expectations, translated into 23% adjusted EPS growth. driven by another quarter of meaningful year-over-year gross margin accretion. While the macro environment in the U.S. remains choppy and increasingly promotional, our continued momentum across international markets and strong operational fundamentals and cost discipline enabled us to raise our full-year adjusted EPS and EBITDA outlook, which I will discuss shortly. Overall, the external environment in which we are operating is challenging. Inflation, though easing, remains stubbornly persistent, while the imbalance of labor, supply, and demand pressures wages. The strong dollar and higher interest rates continue to be headwinds, and importantly, consumption across U.S. shave categories, and in particular women's shave, softens. Gains from pricing have eased compared to a year ago, and volumes were down slightly in our segments. These trends are most notable in the drug channel, where we're seeing lower foot traffic, retailer execution challenges, and a highly competitive environment on shelf. We also continue to see a highly promotional environment, especially and though not limited to the wet shave and femcare categories. We've responded in kind, reallocating top-of-the-funnel brand investment into retail execution spend with increased focus on promotions and value offerings for our consumers. Importantly, our manufacturing and supply chain organization continue to execute at a high level and once again realize better-than-expected productivity savings. which fueled strong year-over-year gross margin gains despite the increased promotional spending in the U.S. Now, let me turn to the detailed results for the quarter. Organic net sales increased 0.6%, as strong performance across international markets and global growth in sun care and grooming were offset by declines in North America wet shave and fem care. International growth of over 6% was equally fueled by price and volume gains of 3%. High single-digit growth across Latin America and greater China, coupled with mid-single-digit growth in Europe and Oceania, were notable. Market share gains in wet shave in Japan and strengthening trends across key European markets and in Mexico's sun care were highlights in the quarter. Organic sales in North America were down 2.4% as double-digit growth in grooming and 1% growth in sun were offset by declines in wet shave and femcare. Wet shave organic net sales were down 0.6% as growth in our men's and women's systems businesses were offset by declines in preps and disposables. International wet shave grew mid-single digits with price and volume gains, reflecting continued category health, solid distribution outcomes, and strong in-market brand activation. In North America, wet shave organic net sales declined mid-single digits, largely as expected, and continued to be negatively impacted by weakening category and channel dynamics, particularly in the highly promotional drug channel. Women's Shave remains highly competitive and extremely promotional, particularly in the mass channel. We also faced transitory supply challenges in our Shave Preps business in North America that caused widespread stockouts on shelves as we transitioned to a new supplier and executed a packaging replatforming of our Edge brand. We've taken the appropriate steps with our supplier to remedy the situation, so we will likely incur further headwinds in 4Q, which is contemplated in our outlook. In the U.S., razors and blades category, consumption was down 3.2% in the quarter, driven mostly by the drug channel, with declining traffic, weaker retailer performance, and heightened promotional levels, pressured results. While our market share decreased 150 basis points overall, the leading driver of this decline is in the drug channel. were we over-indexed. The Billy brand again gained share, delivering 180 basis points of share growth as it continues to outperform at retail. The brand has reached a 16 share at Walmart and over a 10 share in drug in that target. Sun and skincare organic med sales increased about 5% as 14% growth in grooming and 4% growth in sun was partially offset by declines in skin. North America and international each grew in sun care, with international leading the way delivering 16% growth through a combination of volume and price gains. Results in Mexico were notable, with improved share trends in dollars and units and strong performance across the mass and derma channels. In the U.S., the sun care category consumption increased approximately 2% despite a sluggish start to the quarter, with material consumption declines through May. Our portfolio reached a 24.5% share, a 10 basis point gain year-on-year, and our 360 coverage spray innovation claimed the top two new items in the category. Grooming organic net sales increased by 14%, largely driven by strong U.S. caramel sales, as well as the continued rollout of Billy's Body Care Launch at retail. Wet ones organic net sales declined 2%, and our share declined 210 basis points to approximately 77%. Semicare organic nut sales were down 8% for the quarter, and the decline was more than expected. Consumption in the category was up 1.9%, though entirely driven by pads, as tampon consumption declined just over 1%, and liners were flat. Overall, the category remains highly promotional, with increasing breadth and depth of promotions from the market leader. We've now cycled through the new planogram executional delays at retail, and broader retailer inventory buy-downs that started last quarter, both of which disproportionately impacted our carefree master brand launch. As the brand scales up on shelf, we are encouraged by the initial response from consumers, with pads gaining over a point of share in the quarter. In tampons, despite the sluggish consumption, the launch of our Playtex Sport high count was strong, but largely offset by some clean comfort delistings. Now, moving down the P&L. Gross margin rate on an adjusted basis increased 160 basis points, inclusive of 15 basis points of unfavorable currency. We delivered approximately 225 basis points of productivity savings and realized 110 basis points of net price and strategic revenue management gains, which more than offset core gross inflation and volume absorption of 60 basis points and makes another headwinds of 100 basis points. A&P expenses were 11.8% of net sales, down from 12.3% last year as we responded to the increased promotional environment by reallocating core top-of-the-funnel brand investment into increased promo and shelf activation spend. Adjusted SG&A increased 50 basis points in rate of sale versus last year as higher people-related costs and legal fees were only partly offset by savings realized from ongoing operational efficiency programs. lower bad debt, and favorable currency. Adjusted operating income was $94.8 million compared to $84.1 million last year, an increase of approximately 13 percent. Adjusted operating margin increased 170 basis points, reflecting higher gross margin and lower A&P costs, partially offset by higher SG&A expenses. GAAP diluted net earnings per share were 98 cents compared to $1.02 in the third quarter of fiscal 23, and adjusted earnings per share were $1.22 compared to 99 cents in the prior year period. Currency movements had an approximate 6 cents per share unfavorable impact in the quarter due to translational currency headwinds to operating profit and lower year-over-year hedge gains within other income and expense. Adjusted EBITDA was $117.2 million inclusive of a $4 million unfavorable currency impact compared to $109.7 million in the prior year. Net cash provided by operating activities was $157.3 million for the first nine months, compared to $168.3 million in the prior year period. We ended the quarter with $196 million in cash on hand, access to the $370 million undrawn portion of our credit facility, and a net debt leverage ratio of 3.1 times. To date this fiscal year, We've paid down $72 million of our revolver as we continue to execute our capital allocation strategy with discipline and with a clear priority to de-lever the balance sheet. In the quarter, share repurchases totaled $10 million, and we continued our quarterly dividend payout and declared another cash dividend of 15 cents per share for the third quarter. In total, we returned $17.4 million to shareholders during the Now, turning to our outlook for fiscal 2024. With strong financial performance to date, we are raising our full-year outlook for both adjusted EVTA and EPS. We're also updating our expected organic and sales growth to be approximately 1% for the year. We now expect full-year adjusted gross margin accretion of 140 basis points with no impact from currency. This represents a 20 basis point improvement over our previous outlook. Our outlook for gross margin expansion in Q4 has improved by approximately 10 basis points, as we expect stronger productivity gains and continued easing of FX to be partially offset by the impact of increased promotional levels and the negative effects of lower capacity utilization. Our outlook now reflects higher SG&A expense than previously contemplated, reflecting today's organizational announcement. Adjusted EBITDA for the full year is now expected to be approximately $356 million. Adjusted EPS is now anticipated to be approximately $3 per share, inclusive of an estimated $0.12 per share impact of currency headwinds, for a year-over-year increase of approximately 15% or 20% at constant currency. For more information related to our Fiscal 24 Outlook, I will refer you to the press release that we issued earlier this morning. And now I'd like to turn the call back over to the operator for the Q&A session.

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 in your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question today comes from Chris Carey with Wells Fargo Securities.