Edgewell Personal Care Company (NYSE:EPC) Q1 2023 Earnings Call Transcript

Edgewell Personal Care Company (NYSE:EPC) Q1 2023 Earnings Call Transcript February 8, 2023

Operator: Good morning everyone. And welcome to the Edgewell’s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. At this time, I would like to turn the floor over to Chris Gough, Vice President of Investor Relations. Sir you may begin.

Chris Gough: Good morning, everyone. And thank you for joining us this morning for Edgewell’s first quarter fiscal year 2023 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 update to the full year 2023 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, promotional spending, product launches, savings and costs related to restructurings, changes to our working capital metrics, currency fluctuations, commodity costs, category value, feature 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 30, 2022, as may be amended in our quarterly reports on Form 10-Q, 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.

Rod Little: Thanks Chris. Good morning, everyone. And thank you for joining us on our first quarter earnings call. This was a good start to the fiscal year with organic growth in line with our expectations and marking our seventh consecutive quarter of year-over-year organic growth. And despite significant currency headwinds and persistent cost inflation, we delivered strong bottom line results that reflected good commercial execution and highlights the underlying structural improvements we’ve made across our business. As we discussed last quarter, there are four key components for success in fiscal 2023. First, delivering continued organic sales growth, enabled by better brand resonance and stronger presence on show. Second, strengthening our gross margins leading to rate accretion for the full year.

Third, making meaningful investments behind our brands. And finally, continuing to execute on our productivity and efficiency initiatives. We made good progress against each of these elements this quarter, a testament to the hard work and dedication of our teams, all of which reinforces the confidence we have in our business going forward. Organic net sales growth was broad-based and in line with our expectations. Price execution has been solid across our business and we continue to see elasticities in line with our modeling and below historic levels. Our international market growth was strong and delivered through both volume and price gains, reflecting a strong start to the sun season and continued strength in Women’s Shave. And the Billie brand continues to outperform with clear momentum for its national retail launch that is just now beginning.

In fact, with three strong brands including Intuition and Hydro Silk, Edgewell is now the market leader in women’s systems at Walmart. Feminine Care grew 12% with both price and volume gains benefiting from continued heightened demand in the category and our improved in-stock position. These results led to further progress in market shares across our business. In North America, we’ve broadly held share in aggregate across our portfolio. And in key international markets like Germany, we saw noticeable market share gains, both of which included strong performance in our leading Women’s Shave business. This broad-based organic growth across categories and geographies along with stabilized market share results in key markets is further evidence of our healthy top line and offers clear proof points of our ability to deliver sustainable growth for this business.

Dan will take you through the details, but I’d like to call out the progress we made on gross margin in the quarter, essentially fully offsetting inflationary headwinds through the realization of price actions and the ongoing execution of our productivity initiatives. So, while the operating environment remains highly challenging, we are on track to deliver margin accretion in the second half and for the full fiscal year. Importantly, we also remained in investment mode with AMP spend of over 11% of net sales, excluding our custom brand’s private label shave business. Our focus was on early season sun execution internationally, strengthening our digital activation and e-commerce presence and supporting innovation and new products, including our Barber’s Style launch across Europe and grooming product expansion in the United States for the Edge and Cremo brands, a growing top line, strengthening gross margin profile and a demonstrated focus on cost reduction, all enable a sustained ability to invest in our brands and we are seeing the return from our investments.

Lastly, we continue to simplify our business and deliver meaningful gross cost reduction across both cost of goods sold and G&A. And we expect this will continue as we move through the year. We are operating in a challenging, volatile and uncertain marketplace. Inflationary and foreign exchange pressures remain significant headwinds to our business. The labor market remains tight with the potential to again complicate manufacturing and distribution efforts and perhaps most importantly, there are some initial signs of weakening consumer sentiment in the face of likely economic challenges ahead. We therefore need to be cautious as we consider the balance of the year, act with urgency and continue to focus on controlling the controllables. Our brands are healthier and better represented on shelf than at any point since we began as an independent company.

The early read on distribution outcomes for 2023 is very encouraging. Supply chain service levels improved in the quarter and we’ve taken the necessary steps to ensure good execution, particularly related to the upcoming U.S. Sun season. Consumer centric innovation and new product development is playing an increasingly important role in our portfolio. With the acquired brand building capabilities of the Cremo and Billie teams now benefiting our broader portfolio. With the progress we made this quarter, we are confident that we are taking the right actions to deliver sustained value creation over the long-term and we are well positioned to deliver our previous outlook for the fiscal year. And now I’d like to ask Dan to take you through our first quarter results and to also provide additional details on our outlook for fiscal 2023.

Dan?

Dan Sullivan: Thanks, Rod. Good morning everyone. As Rod mentioned, operational and commercial execution in the quarter was strong. We delivered organic growth as expected and the quarter provided a solid foundation for fiscal 2023, giving us confidence in our ability to deliver full year results in line with our previous outlook. For the quarter, organic net sales grew 3% with broad based growth across categories and geographies. International market growth was noteworthy, driven by both price and volume gains and reflective of strong early season Sun Care performance. In this challenging operating environment, we’ve remained focused on execution. Commercially, we’ve now mostly finalized our price and shelf set discussions with our retail partners with strong outcomes on both fronts.

In the quarter, price gains contributed approximately 4.5% to organic growth. And price elasticities were in line with our expectations. As Rod alluded to earlier, we’re also very pleased with the initial shelf set outcomes across not only the U.S., but key international markets as well, with solid results both in level and quality of distribution for our brands. Operationally, supply chain performance strengthened as well, delivering both improved service levels and strong productivity savings. In fact, the combination of both our pricing and productivity efforts underpin the structural strengthening of our gross margin profile, delivering about 500 basis points of tailwinds in the quarter and essentially fully mitigating year-over-year inflationary pressures.

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And finally, we saw lower G&A costs in the quarter. In part due to our accelerated efforts to simplify ways of working, reduce complexity and drive productivity across the business. As we’ll discuss shortly, we anticipate that these heightened savings will help strengthen our operating profit margin and help serve as an important offset to higher than expected below the line cost, enabling us to maintain our constant currency outlook for the year. Despite the significant inflation and currency headwinds, we delivered adjusted EPS of $0.31 an adjusted EBITDA of $64 million in the quarter, both above expectations. Now let me give you some insight into what we saw across our business in the quarter. In North America the consumer remained resilient and we continued to see underlying category growth in Wet Shave, Grooming, Sun Care and FEM Care.

Pricing drove organic growth and elasticities were healthy and below historical norms. Promotional levels remained fairly consistent to last quarter and still below year ago. So overall, we were pleased with the revenue dynamics across categories and we will be vigilant in evaluating this environment as we progress through the year. In international markets we are seeing improving category health in many markets, especially in key Sun Care markets within Oceana and Latin America. As travel and leisure continue to return to pre-pandemic levels. However, in Japan and China wet shave consumption trends remain negative reflecting forward related closures. Finally, while a dollar softened in the quarter providing an immediate boost to our full year net sales outlook due to translational currency gains.

The in-year benefit from easing currency headwinds related to transactional FX is less pronounced as these benefits are trapped in inventory until released. Now let me turn to the detailed results for the quarter. As mentioned, organic net sales increased 3% as 2.5% price gains were offset by volume declines of approximately 1.5%. International organic net sales increased nearly 6% with price and volume gains. While in North America organic net sales increased 1.2% as almost 5% growth from increased pricing was partially offset by lower volumes. Wet shave organic net sales decreased 1.9% inclusive of an estimated 210 basis point headwind from cycling last year’s men’s Hydro relaunch in Japan. Wet shave organic sales in North America declined mid-single digits driven by volume declines in part a reflection of heightened inventory management across certain U.S. retailers.

Wet shave organic net sales in international markets were essentially flat despite cycling the aforementioned Hydro relaunch in Japan. We saw a notable performance in Germany with healthy organic growth and market share gains largely as a result of our strong women’s portfolio in drug. And our branded shave in dispo businesses across LatAm performed well. In U.S. razors and blades consumption increased 2% in the quarter, while our market share in aggregate declined 60 basis points, which was in line with 52-week trends. The Billie Brand continued to deliver strong results at Walmart and served as the catalyst for our broad market share gains across women’s wet shave. As Rob mentioned in the quarter, we began to execute the national retail launch for the brand with product now in-store in certain drug and grocery retailers, and the rollout is scaling in the current quarter.

Sun and skincare organic net sales increased 10% driven by strong global sun care results. International sun care sales increased over 68% as a return to travel and leisure activity drove demand recovery led by key markets in Latin America and Oceana. December marked our strongest sun care month in Australia since pre-COVID and the sun category continued to grow at over 30% in Mexico. In the U.S. the sun care category grew nearly 11% for the quarter as competitive products returned to shell following last year’s recalls our Sun Care brands predictably lost share in the quarter. Men’s grooming organic net sales increased just over 4% led by strong Cremo growth. FEM Care organic net sales increased 12%, driven by higher pricing and improved product availability on shelf.

Growth was delivered across Playtex Sport, Carefree and Stayfree brands. Our portfolio saw over 8% consumption growth and our share was effectively flat in both the quarter and latest 52-week period. Now, moving down the P&L. Gross margin on an adjusted basis decreased 150 basis points or 20 basis points at constant currency as strong price gains and productivity savings essentially offset a 500 basis point headwind from higher commodity, labor and transportation related costs. A&P expense was 9.8% of net sales. Excluding the favorable impact of currency, A&P would’ve increased almost $2 million and about 20 basis points in rate of sale compared to the prior year. Adjusted SG&A increased 90 basis points versus last year as the benefits of operational efficiency programs, good cost discipline, favorable currency and operational leverage were more than offset by higher compensation expense and the impact of the Billie acquisition, including amortization costs.

Adjusted operating income was $36.7 million compared to $46.7 million last year, a decline of 21% or 2% at constant currency. GAAP diluted net earnings per share were $0.23 compared to $0.20 in the first quarter of fiscal 2022, and adjusted earnings per share were $0.31 compared to $0.42 in the prior year period, including an estimated $0.05 negative impact from currency and $0.02 favorable impact from share repurchases. Adjusted EBITDA was $63.9 million compared to $69.7 million in the prior year, inclusive of an estimated $3.6 million unfavorable impact from currency. Net cash used in operating activities for the quarter with $86 million compared to $79 million in the same period last year. We ended the quarter with $184 million in cash on hand, access to the $164 million undrawn portion of our credit facility and a net debt leverage ratio of about 4 times.

In the quarter our share repurchases totaled over $15 million. In addition, we continued our quarterly dividend payout and declared another cash dividend of $0.15 per share for the first quarter. In total, we’ve returned over $23 million to shareholders during the quarter. Now turning to our outlook for fiscal 2023. As Rod mentioned earlier, the operational fundamentals of our business are strong and we are confident that the strategic choices and actions taken over the past several years have put us in a better position to drive sustained growth. Additionally, we are executing well on the levers that we can control, driving increased productivity and efficiency across the business, thoughtfully executing price increases across the globe, incrementally investing in our brands, and importantly improving supply chain service levels and on-shelf product availability for our customers.

Before speaking to the specific elements of our outlook, I’d like to offer two broad comments. First, we are operating in a challenging volatile environment. Inflationary and currency pressures remain elevated. The labor market continues to be highly constrained, COVID reopening and APAC remains choppy and there are meaningful unknowns with respect to the future state and overall sentiment of the consumer. Second, in the face of this environment, our constant currency outlook for the year is unchanged despite higher than expected below the line costs most notably interest and pension costs. Good cost control across all aspects of overheads will offset these expected increases and serve as a catalyst for slightly better operating margins than previously contemplated.

For the fiscal year, net sales are now expected to increase between 2% and 4% with the change versus our previous outlook due entirely to lower form currency translation headwinds than originally contemplated. We still anticipate organic net sales growth to be 3% to 5%. Our outlook for gross margin is also unchanged. As we continue to anticipate about 30 basis points of year-over-year rate accretion with declines in the first half of the year driven by continued inflation and negative currency, partly mitigated by price realization and productivity savings. There is also no change to our view on inflationary headwinds and pricing and productivity offsets for the year, and we expect the Q2 gross margin profile to be similar to Q1. Adjusted operating profit margin is now expected to increase slightly on a full year basis, mostly results of increased realized cost savings across the business.

The impact of currency on operating profit is now expected to be an approximate $26 million headwind, an $8 million improvement over our prior outlook. Below OP, interest expense is now anticipated to be approximately $79 million, an increase of $5 million over our previous outlook and other income is now expected to show combined income of approximately $1 million as compared to $11 million income in our prior outlook reflecting higher pension costs and lower hedge gains. Adjusted EBITDA is still expected to be in the range of $320 million to $335 million. On a constant currency basis adjusted EBITDA growth at the midpoint of the range would still be approximately 8%. Adjusted EPS is still anticipated to be in the range of $2.30 to $2.50 inclusive of approximately $0.45 per share of currency headwinds.

Constant currency adjusted EPS growth at the midpoint of the range would still be approximately 12%. In terms of phasing, we now expect the organic sales rate in half one to be slightly higher than half two as we expect to shift in Sun Care shipments into Q2 and we now expect to generate just over a quarter of our full year EPS in half one. For more information, related to our fiscal 2023 outlook I would refer you to the press release that we issued earlier this morning. And now I’d like to return the call to the operator for the Q&A session.

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Q&A Session

Operator: Our first question today comes from Chris Carey with Wells Fargo Securities. Please go ahead with your question.

Chris Carey: Hi, good morning.

Rod Little: Hey, Chris.

Chris Carey: So a lot of moving parts between bottom line getting worse and some areas perhaps a bit better, top line margins; but do you have a sense perhaps of where you think you’re going to be landing within this, this earnings outlook range for the year?

Dan Sullivan: Yes. Hey Chris, good morning. It’s Dan. Look, I think you’re right, there are some moving parts, OP will get better versus our original outlook, and that will help offset some of the below the line challenges that we see around less hedge benefit, higher interest expense, higher pension. So if you put all of that together not all of those below the line headwinds affect EBITDA, right? So I think mathematically you can certainly say that the OP flow through is helpful and mathematically points you towards the higher end of the EBITDA range. I think that’s just €“ that’s just math. I think look, we’re one quarter in very good quarter lined up the way we thought it would, and so we’ll stick to the range right now, but to acknowledge the point I think mathematically you would point to the high-end. And then on EPS, I think you don’t have some of that mathematical challenge. I think you can, you can stick at the midpoint.

Chris Carey: Okay. All right. It sounds good. And just from a phasing standpoint, you talked about some shift of sun into the front half of the year. Obviously international seems to be delivering on recovery. So how much of that shift is occurring in your international versus your U.S. business? And then can you perhaps just comment on, on your market share in the U.S., we’re seeing a lot of noise just with some players recovering and we’re hearing headlines around some recalls. Just maybe contextualize how you feel about U.S. share in addition to talking about where this €“ where this shift seems to be occurring?

Dan Sullivan: Sure. I’ll take the first part; I’ll hand it to Rod on the share point. In terms of the shift that’s a specifically a U.S. comment. We’re just seeing order flow on initial sun care phasing more into 2Q than we had originally thought. And sort of you’re challenged with that every year in terms of when that phasing will happen. What I would say though, and your point I think underpins this, we saw tremendously strong sun performance across our international business. We’ve seen Mexico now growing 30% to 35% as a category. We’ve seen Oceana now open up and we had our biggest month since pre-COVID in December. So we’re quite bullish on Sun outside of the U.S. it’s about 25% of our sun business but that’s not what drove what our anticipated shift in Q2, it’s purely a U.S. comment. Rod?

Rod Little: Yes. And Chris on the second piece on the U.S. sun question, we’re feeling really good about the upcoming season and what we have line of sight to as we’ve built share the last couple of years. We’ve gone to the leadership position with Banana Boat last year as the number one brand in the U.S. and off of that retailers have rewarded us with better distribution outcomes, more distribution, higher quality across the board. And so we, we feel really good about the season that’s set up and to come. And in terms of, of recall and safety, what you’re calling out, we took another lot, one final lot of Hair & Scalp as a recall. It was actually part of an action last summer in benzene, and the good news is there’s nothing to recall.