Edgewell Personal Care Company (NYSE:EPC) announced its Q3 2022 financial results during a Conference Call on August 4, 2022, at 8:00 AM ET. This call provided insights into the company’s performance and strategic outlook.

Meet the Leadership Team

Rod Little – President, Chief Executive Officer & Director

Chris Gough – Vice President, Investor Relations, Corporate Development & Treasury

Dan Sullivan – Chief Financial Officer

Engage with Our Financial Analysts

Olivia Tong – Raymond James

Jason English – Goldman Sachs

Bill Chappell – Trust Securities

Nik Modi – RBC Capital Markets

Kevin Grundy – Jefferies

Chris Carey – Wells Fargo Securities

Operator’s Opening Remarks

Good day, and welcome to the Edgewell Personal Care Conference Call. All participants are currently in a listen-only mode. [Operator Instructions] After the presentation, participants will have the opportunity to engage in a Q&A session. [Operator Instructions] Please note that this event is being recorded.

I would like to now hand the call over to Chris Gough, Vice President of Investor Relations. Chris, please proceed.

Chris Gough’s Welcome Message

Good morning, everyone, and thank you for joining us for Edgewell’s Third Quarter Fiscal Year 2022 Earnings Call. Joining me are Rod Little, our President and Chief Executive Officer, and Dan Sullivan, our Chief Financial Officer. Rod will start the call with some opening remarks, then Dan will provide a detailed overview of our financial results and the outlook for the remainder of fiscal year 2022 before we transition to the Q&A segment. Please note that this call is being recorded and will be available for replay on our website, www.edgewell.com.

During this call, we may share forward-looking statements regarding our future performance and strategies. These statements may address expectations for sales, earnings, promotional spending, product launches, cost savings, currency fluctuations, and more. Such statements are forward-looking and are intended to comply with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, reflecting our current perspectives on future developments.

These forward-looking statements are based on current assumptions and are subject to a range of risks and uncertainties, including those detailed in our annual report on Form 10-K for the year ended September 30, 2021, and in our quarterly reports on Form 10-Q, which are filed with the SEC. Actual results may differ significantly from those projected due to these risks. We do not undertake any obligation to update these forward-looking statements unless required by law.

During the call, we will reference certain non-GAAP financial measures. It’s important to note that these measures may not be prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP measures to the nearest GAAP measures is included in our earlier press release, available in the Investor Relations section of our website. Management believes that these non-GAAP measures offer valuable insights into the underlying trends of our business.

With that, I will turn the call over to Rod.

Rod Little’s Business Overview

Thank you, Chris. Good morning, everyone, and thank you for joining us today. We are excited to report that we achieved a remarkable 9% organic net sales growth this quarter, marking our fifth consecutive quarter of growth. This increase is primarily driven by robust consumer demand across our product lines. Notably, growth was well-rounded, with North America contributing 9% and international markets achieving an 8.4% increase. This balanced growth was supported by significant volume increases, particularly as we experienced a strong start to the peak Sun Care season in the U.S. and improved demand coupled with better supply in our Feminine Care division.

Our omnichannel strategy continues to yield impressive results, as evidenced by the growth in both traditional retail and e-commerce sectors. Specifically, e-commerce growth in North America soared to 31%. Additionally, we observed a consumption growth of over 7% for our brands in the United States, which reflects both increased sales volumes and pricing strategies that have helped us gain market share overall. The U.S. Sun Care category remained strong, and we are proud to note that Banana Boat has emerged as the top Sun Care brand in the latest 52-week period, thanks to our consumer-driven innovations and effective product distribution strategies that ensure product availability.

The Billie brand significantly contributed to our top line, adding approximately 370 basis points to our growth, particularly through effective execution in Walmart, where it holds nearly 19% market share in the women’s shaving segment. Although the organic growth was robust this quarter, we faced substantial challenges due to currency fluctuations, which adversely impacted reported sales by $22 million—approximately $9 million or 150 basis points worse than our previous expectations. Despite these foreign exchange challenges, we achieved adjusted earnings per share of $0.86 and adjusted EBITDA of $97.1 million, both exceeding our prior expectations.

While the external environment remains tumultuous and unpredictable, our quarterly results underscore the successful implementation of our strategic initiatives and the ongoing structural improvements within our company. Although we benefited from an unexpectedly strong start to the peak Sun season, consumer demand for our products across our main categories in the U.S. continues to be robust, driven by strengthened distribution channels, a more stable supply chain, and strategic pricing actions.

Despite challenges posed by COVID-related closures in some Asian markets and certain regions in Europe, we were pleased to see improved category and volume growth in several key international markets, particularly in Latin America, which has seen a revival in travel-related demand. Dan will delve into these specifics shortly, but we also noted improved supply chain performance with enhanced production output and service levels across our Feminine Care and Wet Shave categories, as anticipated. While inflationary pressures have largely remained consistent with our prior expectations, certain commodity and labor challenges continue, though they remain manageable.

However, the dramatic appreciation of the dollar during the quarter is expected to create increasing headwinds for both our top and bottom line results in the upcoming fourth quarter. In light of these ongoing macroeconomic challenges, we are proud of the progress we have made in transforming Edgewell to achieve sustained growth on both fronts. This transformation is evident in four key areas: our focus on delivering impactful consumer-centric innovation; our enhanced shelf presence; improved capabilities across our organization, particularly in brand building and digital execution; and our ongoing commitment to drive cost efficiencies and simplify our operational model.

As we noted last quarter, our brands are healthier than at any point in recent years. Our retail execution has improved significantly, driven by our leading portfolio of Sun brands, bolstered by recent acquisitions and supported by the best distribution outcomes we’ve achieved since our separation from Energizer in 2015. We believe this positions us well to achieve our goal of 4% organic net sales growth for the fiscal year, marking our second consecutive year of achieving this growth and reinforcing our confidence in our future growth aspirations.

Now, I’d like to hand the call over to Dan to discuss our third-quarter results and share insights on our outlook for the full fiscal year.

Dan Sullivan’s Financial Insights

Thank you, Rod, and good morning, everyone. In this quarter, we delivered strong top-line results and earnings despite facing persistent cost inflation and rising foreign exchange headwinds. As Rod highlighted, we experienced strong underlying demand for our brands, resulting in accelerated organic sales growth, supported by a better shelf presence, effective retail execution, and strategic pricing initiatives. We achieved category-leading performance in U.S. Sun Care, where we experienced an early phasing of sales into the third quarter as many retailers responded to favorable weather and heightened demand with earlier-than-expected replenishment orders.

Our Wet Shave category demonstrated noteworthy performance, with both organic growth and market share gains significantly above recent trends. In the Feminine Care segment, our efforts to ensure product availability on shelves coincided with stronger-than-expected demand for Tampons, resulting in double-digit organic sales growth this quarter. Additionally, our digital execution remained a key growth driver, as our e-commerce business in North America surged over 30%, with global e-commerce sales now accounting for approximately 13% of total revenue. Amazon consumption figures were also strong, particularly in the Feminine Care category, which saw growth across all core categories.

Crucially, we made significant strides in stabilizing our supply chain and enhancing on-shelf availability, especially in the Feminine Care and Women’s Shave categories. Improved labor levels and commodity availability allowed us to accelerate production schedules and enhance product flow, thereby materially boosting service levels. We continue to navigate the ongoing inflationary landscape effectively, with initial signs of easing in transportation costs, although we still face volatility in several commodity segments, including sun chemicals and pulp. However, our productivity initiatives are well-established and have provided substantial offsets to inflation-related pressures in both cost of goods sold and general administrative expenses.

Furthermore, we have adopted an opportunistic and focused pricing approach, reaping the benefits of our recent price adjustments across much of our U.S. Shave and Grooming portfolios. In this quarter, we aligned inflationary pressures, productivity savings, and price offsets with our expectations. The strengthening of the U.S. dollar during the quarter, particularly against the yen and euro, has created a headwind for our financial performance. Although we employ currency hedges to mitigate the impact on our profit and loss, we anticipate this will continue to be a challenge in the third quarter.

Now, let me provide detailed results for the quarter. As mentioned, organic net sales increased by 9%, cycling approximately 13% organic growth from last year, driven by both volume increases and pricing strategies, which included about 150 basis points of combined headwinds from negative mix and higher trade spending. The majority of realized price increases stemmed from our Feminine Care, Wet Shave, and Grooming categories, contributing over 2% to organic growth. North American organic net sales grew just over 9%, fueled by strong performances in Sun Care, Feminine Care, and Women’s Shave, while international organic net sales rose slightly over 8%, primarily driven by strong growth in Wet Shave and Sun Care.

Diving deeper into our segments, Wet Shave organic net sales grew by 6%, with growth across all categories. Notably, our Women’s Systems business has now achieved organic sales growth for the eighth consecutive quarter, increasing by about 10% while cycling 12% growth from the previous year. We saw strong growth in both North American and international markets, particularly from our intuition and private label offerings. Our Women’s private label segment surged by 44% this quarter despite cycling 31% growth from last year, indicating accelerated growth with direct-to-consumer partners, new distribution, and modest price hikes. Our Men’s Systems business also grew by 5% this quarter, with notable sequential growth in both North America and international regions.

For the fifth consecutive quarter, the U.S. razors and blades category consumption increased by just over 3%. This category growth was broad-based, spanning both Men’s and Women’s Systems as well as disposables. Our performance at Walmart remains robust, with the brand holding a nearly 19% market share and achieving the status of the number two brand in the category. With new in-store display initiatives fully activated, we anticipate this momentum to continue into our retail expansion for fiscal 2023. For the 13-week period, our share in the shaving market decreased by 50 basis points, while branded share increased by 30 basis points, primarily driven by a 260 basis point increase in women’s branded shaving products.

In the Sun and Skin Care segment, organic net sales increased by approximately 13%, driven by strong global Sun Care results and solid Men’s Grooming performance. North American Sun Care organic net sales rose nearly 14%, despite cycling almost 50% growth from last year, supported by effective on-shelf execution and a slight sales shift into Q3 due to strong early season consumption. International Sun Care sales increased over 19%, as a revival in travel and leisure activities fueled demand recovery.

In the U.S., the Sun Care category saw a decline of nearly 1% for the quarter, yet our brands significantly outperformed the category, with Banana Boat delivering consumption growth of 11% and gaining 200 basis points of market share. Strong execution and prominent shelf positioning contributed to a gain of 150 basis points at Walmart, with sequential improvements across both drug and grocery channels that resulted in notable share gains. Over the past 52 weeks at Walmart, our Sun Care portfolio has achieved a 19% increase in consumption and gained 260 basis points in market share, establishing Banana Boat as the leading brand in the U.S. Sun Care category.

Men’s Grooming organic net sales increased by almost 8%, despite cycling 17% growth from the previous year. Cremo performed particularly well with an 18% growth rate, driven by an effective combination of new product introductions, distribution gains, and pricing actions. Wet Ones organic sales also grew by about 8% this quarter, although category consumption declined by 29% as it continues to reset from COVID-driven demand spikes experienced in the prior year. Wet Ones consumption remained flat, leading to share gains of nearly 19 points, resulting in a share position exceeding 63% in the category.

As category consolidation continues on the shelf, reflecting a more normalized demand environment, we believe that the brand’s established equity and consumer trust will remain a significant factor for sustainable growth. However, in response to moderating near-term demand and ongoing adjustments on the shelf, we are rightsizing our offerings and eliminating non-core stock-keeping units (SKUs) that were added during the peak of COVID-driven consumer demand. This quarter, we recorded a pretax charge of $22.5 million related to inventory write-offs and a corresponding production contract termination charge.

Feminine Care organic net sales increased by approximately 11%, mainly driven by heightened category demand and improved product availability on shelves. Strong growth in the Playtex Sport and Carefree brands was slightly offset by declines in Stayfree. Our portfolio experienced nearly 12% consumption growth, with market share remaining flat during the quarter and over the past 52-week period.

Now, let’s review the profit and loss statement. The adjusted gross margin rate decreased by 500 basis points compared to the previous year. This decline was influenced by approximately 600 basis points of inflationary pressures, which were partially offset by 270 basis points of pricing and productivity gains. Additionally, we faced about 170 basis points of challenges stemming from negative channel and segment mix, as well as higher trade spending. During the quarter, we strategically reallocated planned above-the-line media investments into incremental feature and display activations, driving improved returns on our investments and enhancing our execution during the sun season.

Advertising and Promotion (A&P) expenses constituted 13% of net sales, with over 86% of these funds directed towards digital initiatives. A&P spending for the quarter fell slightly below our initial expectations, reflecting a shift toward trade activation in the U.S. and a reduction in investments in certain international markets, where the recovery from COVID remains uncertain and, consequently, less efficient in terms of return on investment.

Adjusted Selling, General & Administrative (SG&A) expenses decreased by 40 basis points compared to last year, as gains from sales leverage, operational efficiency programs, and favorable currency translations outweighed the impact of Billie-related expenses, including amortization and increased year-over-year compensation costs. Adjusted operating income was recorded at $70.3 million, compared to $80.6 million last year, reflecting the inflationary pressures on gross margin. GAAP diluted net earnings per share were $0.57, down from $0.74 in the third quarter of fiscal 2021. Adjusted earnings per share were $0.86, compared to $0.89 in the same period last year. Adjusted EBITDA stood at $97.1 million, compared to $101.2 million in the previous year.

Net cash from operating activities for the nine months ended June 30 was $72.4 million, down from $155.9 million during the same period last year. Working capital builds aimed at improving service levels have resulted in increased working capital outflows compared to a year ago. We concluded the quarter with $182 million in cash on hand, access to $298 million of undrawn credit facilities, and a net debt leverage ratio of approximately 3.5x. In this quarter, our share repurchases totaled nearly $35 million, bringing our year-to-date repurchases to just over $110 million. Additionally, we maintained our quarterly dividend payout, declaring a cash dividend of $0.15 for the third quarter.

Now, let’s discuss our outlook for fiscal year 2022. Despite operating in one of the most challenging macroeconomic environments on record, we are increasingly confident in our ability to deliver solid performance in the second half of the year, in line with our previous expectations, even amid incremental currency headwinds. We believe that the supply disruptions that affected our operations in the second quarter are largely resolved. While the inflationary environment remains volatile, it has not worsened since the last quarter. We have successfully implemented incremental pricing adjustments in the U.S. across our Wet Shave and Grooming categories, as previously mentioned. Therefore, for the fiscal year, we continue to anticipate approximately 4% organic net sales growth. As highlighted earlier, fourth-quarter growth will be influenced by unexpected pull-forwards in the Sun and Feminine Care sectors into the third quarter.

Reported net sales are still projected to increase in the mid-single digits, inclusive of 340 basis points of net tailwinds from the Billie brand and 310 basis points of headwinds from currency fluctuations. In terms of gross margin, we now anticipate approximately 390 basis points of year-over-year decline, which is 40 basis points worse than our previous outlook. This additional decline reflects the unfavorable effects of currency and negative channel and category mix. Inflationary headwinds, productivity savings, and price realization are expected to align closely with our prior expectations.

We now project A&P spending to account for about 11% of net sales for the year. Adjusted operating profit margins are expected to contract by approximately 270 basis points year-over-year. Adjusted EBITDA is anticipated to fall within the range of $335 million to $340 million, and adjusted EPS is expected to be between $2.50 and $2.60, inclusive of the benefits from shares repurchased through June 30. Finally, free cash flow conversion is still expected to exceed 100% of GAAP net earnings. For more details regarding our fiscal year 2022 outlook, please refer to the press release we issued earlier this morning.

With that, I will turn the call back to the operator to initiate the Q&A session.

Engage in Our Q&A Session

Operator

[Operator Instructions] The first question comes from Olivia Tong with Raymond James.

Olivia Tong

I would like to delve deeper into your pricing expectations. It appears that pricing played a significant role in this quarter’s results. In previous discussions, you indicated a mid- to high single-digit range for pricing. Given the current momentum, could you elaborate on your expectations for this year and whether there are any additional strategies to mitigate the cost headwinds you are observing?

Dan Sullivan

Yes, Olivia, this is Dan. Pricing has indeed been a strong contributor this quarter. Of the 9% organic growth, just over two points were derived from pricing, with the remainder from volume increases. As we previously indicated, we have implemented price increases in both men’s and women’s branded shave products in the mid- to high single-digit range. Similar price adjustments have been communicated in our Feminine Care segment and in Sun Care in the U.S., also within that mid- to high single-digit range. We expect these pricing adjustments to be reflected on shelves by early to mid-October for Feminine Care and around November for Sun Care. These price increases will contribute incrementally as we look toward 2023.

Olivia Tong

Regarding the Banana Boat recall, you mentioned a pull-forward in sales. Could you elaborate on that? What are your expectations moving forward, specifically in the Sun Care category?

Rod Little

Certainly, let me provide some context around the Sun Care category. As the market leader, we are proud to report that Banana Boat is now the top brand in the U.S. Sun Care sector, achieving a growth of 200 basis points in market share this year, supported by strong multi-year performance. We are optimistic about the future of the category. Our commitment to ensuring consumer safety means that when necessary, we prioritize health by recalling products if needed. This particular recall involved only a single SKU and three lot codes, representing less than 0.1% of our overall volume. Importantly, there is no significant recall as it pertains to older products from a third-party manufacturer. We take consumer health seriously and adhere strictly to FDA guidelines, working closely with the Personal Care Products Council to ensure safe ingredient formulations. Thus, I do not anticipate this recall to have any material impact on our business, either in the upcoming quarter or in the year ahead.

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