Edgewell Personal Care Company (EPC) Earnings Call Transcript & Summary

Good morning, all. This is Bill Reuter. I'm the High Yield Consumer Products Analyst here at Bank of America. Thank you all for joining us. We're very pleased to have Dan Sullivan, the CFO of Edgewell with us here this morning. Dan is going to make some prepared remarks, go through the slides, which hopefully, you all have in front of you. Then, we will have a brief Q&A section. In the event that any of you have questions, please feel free to ask them through Veracast, and I will try and get them asked by Dan -- answered by Dan. And with that, I'll turn it over to Dan.

Thanks, Bill. Good morning, everyone. Thanks for joining this morning here on an early start. Before we jump in, I do want to say that it would be helpful, please take a look at Slides 2 and 3, since we will be making forward-looking statements and referring to non-GAAP financials and measures. But with that out of the way, as you may know, about a week ago, we held an Investor Day Event followed -- proceeded by an earnings call. So we've been out in the market quite a bit. We've put a lot of information out there. So for today, what we've put together is, we think some of the really salient points and highlights that I certainly want to spend time taking this team through. I'm going to go through it, though, with a bit of pace because there is quite a bit here, but there's also quite a bit of information out on our website. And obviously, we'll try to get to the Q&A as best we can. So I'm going to flip everyone ahead to Page 4, the overview page, there's really sort of 3 topics that we want to hit on today. One is exactly this, the overview kind of who are we here at Edgewell? And maybe more importantly, what have we been focused on over the last 15 or 18 months? We will then talk about our go-forward strategy and then the long-term financial algorithm that accompanies that strategy. So that's the agenda. And again, I'll try to keep it to about 20 minutes max and allow time for Q&A. So if we turn to the next page, Page 5, 4 fundamental takeaways from our discussion today that I want to leave you all with. The first 2 are kind of the horizontals on the page. Number one is the strong core that we have in this business, quality brands, really healthy financial fundamentals that obviously become a really important part of our go-forward strategy. Point 2, to the right there, over the last 15 to 18 months, we've been on an incredibly important journey to stabilize this business top and bottom line. We think we've gotten to that point, which is why the points on the bottom of the page are so important. It is the right time for us to now come forward with a clear and compelling strategy for this business, and I'll take you through that and why we're so convinced that this is the time for this business to deliver and to succeed. So these are the 4 points that I hope at the conclusion of our session are clear to all of you. If we then turn to the next page, Page 6, so who are we? As a quick reminder, we're a pure-play personal care company. We operate across essentially 4 core categories: the Shave category, the Sun and Skin category and the Fem Care category. As you can see on the page, we have a stable of strong brands that play important roles in these categories with consumers. And a topic that you will hear me talk more about as we go through the presentation, we've also used acquisitions both in the formulation of this company and how these brands have come together and now more recently to help us shift our portfolio into exciting, compelling growth categories, namely Men's Grooming is a really good example of that. And that's a really good proxy for how we think about the go-forward of this business, which is continuing to position the portfolio in more attractive, more growth-oriented categories where we think we have a clear right to win. If you turn to the next page, which is Page 7, I think it is important to underpin some of the compelling capabilities that we have as an organization. And this is mainly around both operational and commercial capabilities that really sit at the core of Edgewell. From an operations point of view, we have a largely regionally focused but globally scaled supply chain network. We source and produce products locally. If you look at the U.S. as an example, almost the entire portfolio of products that serve the U.S. is manufactured here in the U.S. We also have local manufacturing hubs, I would call them, operating around our Asia Pacific and Europe regions. We are highly skilled in the capabilities of sourcing of product. It's been a focus for us, certainly, over the last 2.5 years, where product formulation, sourcing capabilities also met with a much higher degree of product sourcing, scaling economic benefit, which I'll talk about in a bit. So you blend together formulation in NPD and innovation capabilities with best-in-class economic sourcing and scaled sourcing of product. And then lastly, I think as a commercial organization, we're quite a diverse business in how we operate, in where we put resources and how we match those resources in different go-to-market strategies which could involve hub organizations, Western Europe is a good example, could involve distributor networks and the like. And so we think that we found the right balance here of efficiency and effectiveness. If you then turn to Page 8, so that's sort of an important piece of who we are. What have we been doing over the last 15 to 18 months? And I'm going to hit on 5 specific areas of focus for us. The first is on Page 9, which is the reshaping of this leadership team. Obviously, Rod took over as CEO about 18 months ago. He has focused on sort of the rebuild of the executive team, which has happened sort of in 2 different ways. One, as you see sort of on the left side of the page, Rod has elevated to executive levels folks deeply ingrained in the Edgewell business with a tremendous balance of commercial experience, senior leadership experience and have provided and performed in many roles across Edgewell in many markets globally. And that's Nick Powell, who runs our international business; Anne-Sophie Gaget, who is in charge of growth and innovation; and then John Hill, who is running HR. And that's balanced with the right side of the page, where Rod has brought in executives, including myself, who weren't with the Edgewell organization, who've come from different walks of life, who spent time in consumer and retail organizations, global international organizations. So you've got a really healthy blending now of sort of the legacy Edgewell experience, knowledge, know-how and new executives from outside the organization. So that's sort of been Focus 1. Focus 2 on Page 10 is over-delivering on what were really aggressive gross cost takeouts. It's a program you probably all know by name here called Fuel. It is a 3-year program. We're entering Year 3 in fiscal '21, and we're on track to deliver about $270 million of gross savings, which is about 15%, 16% above what we thought at the beginning of the program. It's a broad program, it's covered all aspects of manufacturing, supply, procurement. So therefore, COGS but also SG&A, and you can see in the chart there, a fairly healthy labor takeout in the middle of the P&L. I'll talk more about this going forward, but it is important to say that in addition to the economics, this has become core to how Rod and I certainly want to run the organization going forward, focus on continuous improvement, focus on productivity and continuing to take costs out of the business. So you'll hear more about that when we talk about the future. That was Focus #2. Focus #3 then on Page 11, and I would suggest maybe this was probably, if not #1 on Rod's list, #1a, which is getting back into a high level of engagement and partnership with the trade. We'd lost our way on this quite candidly, coming out of the spin, and Rod has spent considerable time, effort and, of course, power in this area in the last 15 to 18 months. It's about building strong, lasting retail partnerships based on open 2-way dialogues and communication. And for us, it's underpinned by our focus on partnering with the trade, co-creating in terms of SKU development, innovation that can grow the category, really putting to work our unique manufacturing, sourcing and formulation capabilities to drive value creation for the trade. And I think the proof here and the work that we're doing is seen in most recent results. As we look at the 2021 planograms and kind of say, how is the shelf shaping up for us? While not final, of course, we're super encouraged by the 2021 outlook. And for the first time, probably in the last 3 to 4 years, we're looking at on the Shave side of the business, a very stable distribution outcome, both men's and women's. And we're looking at some pretty interesting gains in both Skin and Sun. That's an outcome that may seem modest, but it's very different than what we'd seen over the last 3 to 4 years. Now obviously, it's underpinned by better product, better communication, timely and insightful innovation. There's a lot that happens here but it is a good first check mark for us as we think about partnering differently with the trade. So again, that's topic #3. Topic #4 is on Page 12, which is around the portfolio. And we've been pretty active on both sides of the ledger here. I'll start on the right side of the page. We made it quite clear the Infant business for us was not a fit, just as an example, didn't fit strategically. We didn't think we had a compelling technology right to win, and we divested. And that's a really good example of how we thought about reshaping the portfolio. On the left side of the page and more recently, you can really see our M&A strategy in full bloom here. We have, over the last, I guess, 3, 4 years, gone from very little participation in Men's Grooming to we would argue being category leader now with 3 super compelling leading insurgent Grooming brands, all acquired, all with a similar formula here of small acquisitions, low risk, high right to win for us, high growth. And you see that with Bulldog, Jack Black and then most recently, CREMO, and I'll talk more about that in a minute. And then Topic 5, on the next page, is really focusing on capability deployment and enhancing our own internal capabilities. And you can see the full suite of things that we're focused on there on the page. I'll just hit on the first one in the name of time, which is digital and e-commerce because this has been a real focus for us. And what we've done here in a very short period of time has made significant investments in building out our teams here in the digital e-commerce space. You see this in a couple of interesting ways. One, in terms of, I'll call it, the infrastructure and the platform, we've hired developers. We've entirely redeveloped our DTC infrastructure. We've improved the visuals and quite candidly, the shopping experience on the site. We've significantly enhanced our abilities in terms of tagging so we can now measure traffic and conversion and the like. So a lot of sort of behind-the-scenes efforts there. And then additionally, we focused on digital creative and content development, right? And so we brought in digital designers and copywriters. We've increased our capabilities in SEM and SEO. These were things that either we weren't doing very well or we were relying on a third party to do, and we brought this now in-house, and we think a compelling opportunity for us here. So those are the 5 things we've been focused on. And if you turn to the next page, as a result of all of that, we think we've got this business in a much different place than it's been. And the word here, I think, is stable. We've got a top line now on an organic basis, and again, the impact of COVID notwithstanding, that we think is flattish. That's a difference from where we've been in sort of low to mid-single digit declines. We've got a gross margin profile that after years of decline has now essentially been flat for 2 years, despite headwinds around COVID, which are unfavorable at the margin line in terms of cost and mix. And as you all probably know very well, this is a business that has tremendously healthy cash flow profiles and generates a ton of cash, $190 million in 2020, averaging about $180 million over the last 3 years. So that's the journey that we've been on. So that gets us then to Page 15, and what does it mean going forward? What's our strategy here, which we unveiled, if you will, at the Investor Day just over a week ago. Page 16 is our attempt to call down about 6 months' worth of intense work into a single page, and I'll spend a minute here and then we'll get into the details. Our compelling purpose statement is at the top of the page, we make useful things. Joyful, that is who we are and what we do. The mission statement underneath that describes an organization that is growth-oriented, that is stable in its performance and that has predictable cash generation. And what underpins our strategy then is 5 strategic priorities, which you see in the middle of that page, and I'll touch on these quite quickly. We want to continue the journey that we've begun on expanding our presence, our activeness in categories that have interesting growth profiles where we can win. Grooming is a really good example of that. We want to continue to build brands that consumers love and become much more consumer-centric, when we think about not only our innovation, but how we activate our brands on shelf and with consumers and through DTC. We want to be a trusted partner to retailers. I touched earlier on the beginning of that journey and more work to do. We're going to be ruthless on cost and simplify everything, and we want to be a company that is endeared with its people, that people love to come to work for. And while we won't talk about it here today, in addition to the strategy work, we have spent quite a bit of time redefining and now sort of leading into a new culture of who we are as an organization. And that leads to a couple of strategic outcomes at the bottom of the page. I won't go through them now because we're going to spend some time on them going forward. Page 17 then. Okay, so what does it all mean? We think about our portfolio through 2 very different lenses. On the left side of the page, we think about it as where do we have a right to win? And as such, we think we can accelerate growth, and this is going to line up behind the Men's Grooming portfolio, the Sun and Skin space and Personal Hygiene, categories that are growing, categories where we are growing and we will continue to outpace the categories and gain share. And then we have a portion of our portfolio where we believe we have a clear right to play. And here, Wet Shave and Fem Care being the 2 examples. And here, the objective for us is all about stabilization, delivering a top line that is in line with category, therefore, holding share and as a result, stabilizing an important piece of the profit pool for Edgewell. That is our top line outlook. If you then turn to Page 18, quickly, I won't read through all of this, but you can see, look, we think we are well set up in the area of our business where we have a right to win. We're the market leader across every one of these categories, as you can see, the share positions that we have. And you can see the middle of the page, what are our expectations for this business, doubling the Wet Ones business, growing with category across global Sun and double-digit growth in grooming, which is what we have been doing with this portfolio and just added the fastest-growing brand in the category in CREMO. So it leads to a piece of the business then that is poised for accelerated growth and becoming a more and more important part of our portfolio. If you turn then to the next page, similarly on right to play, we see categories are improving here in Shave and Fem, albeit, slowly. Our performance is improving, and our expectation here is that we will be flat to slightly positive and holding share in these categories going forward. So the next page, Page 20, what does it all look like? It looks like a business that was declining low single digits and heavily skewed about 75% of the portfolio to Fem and Wet Shave, over time, a business that has a different profile to it and that has a 2% to 3% growth algorithm going forward. If you turn then to the next page, Page 21, what does it all mean then in terms of our financial profile? Page 22, I won't spend a lot of time on, but it just reinforces this journey that we've been on towards stability, a more stable and predictable top line, a much healthier and stable gross margin profile, and as I mentioned earlier, robust cash flow generation. And then the next page, Page 23, that's translated into sort of our belief, the next step for this business in fiscal '21, which is growth, a top line that is poised to grow low single digits, a bottom line that is poised to grow mid-single digits and 2 really important catalysts to our performance continuing to be costs take out. We have a clear line of sight to about $60 million in gross cost savings in fiscal '21 and continued healthy cash flow, north of $150 million in free cash flow generation for the year. So we've got stability. We've got now a growth outlook for '21. And if you turn to Page 24, as we think about this business going forward, these are the 4 drivers that we are focused on and measuring ourselves against, again, top line -- sustainable top line organic growth for the business, continuing to drive cost out of the business, expanding our gross margin profile and having a very clear, disciplined capital allocation. [Technical Difficulty]

Operator, this is Bill. It seems we have lost Dan.

Yes, his call dropped.

This is Chris Gough. I'll text him right now.

Thank you all for standing by. Hopefully, we'll get Dan back to finish these last couple of slides.

Bill, can you hear me?

I can. Hey, Dan.

I'm sorry, I lost power here. And -- but I'm back now. So if you can hear me, I'll just pick it up.

Yes. Absolutely. Go ahead.

Okay. So Page 25 was the top line growth. Page 26 and 27, I think, are super important, and I'll summarize it in a sentence. We are on the verge of completing a meaningful cost takeout in fiscal '21. We will end a 3-year program that calls for $270 million of gross savings. And we are adding to that, on Page 27, a new program that calls for an additional $125 million of gross savings in 2 years, 2022 and 2023. And you can see the drivers of the program, hopefully reinforcing to everyone on the line: Number one, that this is a core competency for us in our business; and number two, it speaks to the discipline upon which Rod and I will manage the business going forward. The next driver or the next important point here is the savings play an important role in fueling investments, and Page 28 is a good summary of the investment stance we have for this business. Now it will be incredibly disciplined and highly focused. We've set growth objectives, investment levels, return levels across the entire portfolio. We're going to invest behind our strategic priorities, but we're going to do it in an extremely thoughtful and highly measured way, largely funded by the cost savings I mentioned earlier. Page 29 then gets to the next driver of our business, which is continuing to improve our gross margin profile, really coming from 3 factors: continued cost takeout, I mentioned earlier; increasing our capabilities around revenue management, price/mix management, promotional effectiveness management and then innovation that is accretive to the enterprise; and then the last driver of our value creation is around capital allocation and being really disciplined and balanced as we think about this. We have a unique opportunity and a unique advantage because our business delivers such strong cash generation. And so we think about capital allocation, therefore, in terms of a multipronged strategy for us. And if you turn to Page 31, you can see the strategy come to life. Our first priority will continue to be investing in the growth profile of the business, largely organically on the heels of the CREMO acquisition. Our second priority is going to be to provide strong return of capital to shareholders through a combination here of a dividend, which we announced a week ago and remaining opportunistic in terms of share buybacks. And we're going to be pretty thoughtful in the debt level we put on this business. We'll continue to be disciplined in our approach. We're going to aim for a ratio -- a leverage range here of 2 to 3x. Page 32 then sort of puts it all on a page, and the only thing I'll highlight here speaks to what we're really excited about, which is initiating the dividend, which we think is a structural return of capital to shareholders that speaks to our commitment to delivering on the business and financial objectives. But looking at the far right side of the page, after investing in this business, after investing in CapEx to the level of around 3% of sales, after a dividend, we still have ample excess cash here and that can certainly help us as we think about opportunities, as we think about buybacks and the like. So for last page, Page 33, what does it all translate into? It translates into what we think is a compelling financial algorithm for the business that we're committed to delivering, that calls for 2% to 3% organic top line growth, 4% to 6% adjusted EBITDA growth and 6% to 7% adjusted EPS growth, while returning free -- while converting free cash flow to over 100%. So strong results there. So the last page was just a summary of kind of where I started. In the spirit of time and in my technology issues here, I'll pause there and, Bill, I'll turn it over to you.

Dan, thanks for all of your comments. A couple of questions. The first is that the business obviously does generate tremendous free cash flow. You've shown a net leverage expectation of between 2 and 3x between '21 and '23. Most of your M&A has been disciplined, they've been opportunistic. But after Harry's not overly large, I guess how large an acquisition would you consider? And how high would you take up leverage for the right opportunity? Would you be willing to go above 3x?

Yes. I think when you look at M&A, Bill, I think the CREMO deal is a much better proxy for what you can expect from us going forward than the Harry's deal. The 2 are totally different circumstances with 2 totally different strategic rationales. I think, as I look at M&A, it is going to be much more in the small, low beta, tuck-in where we have a high right to win, high degree of confidence. And I would also say the bar right now for further M&A coming out of the CREMO acquisition is very high. It doesn't mean we don't have an exciting pipeline of opportunities that we're looking at, but the -- our desire to pull the trigger is going to be based on -- it would have to be overwhelmingly convincing. On leverage, yes, I mean, we've said 2 to 3 is the desired range. We know the business can operate above 3. We know the cash flow can afford that. I don't see acquisition being the potential driver of that increased leverage, Bill. It's just -- for us, strategically, it's not a priority right now. And I don't see anything that fits that size of acquisition for us.

And then one last one in our last minute here. So 2 categories that had a lot of headwinds in 2020 based upon COVID were Sun Care and Wet Shave. Sun Care with a pretty steep decline early or, I guess, in the early to mid parts of the year. How do you expect that, that will bounce back this year? Do you expect that there are category tailwinds as, hopefully, we all get back to a little more normalcy at some point this year?

Yes. I think the answer on both categories is yes, although difficult to totally predict, given the uncertainty of COVID. Sun is an interesting one because it was down 18% in Q3. It was down as much as 30% within that quarter. It was down a couple of points in Q4. We had a longer season. We benefited from that. We gained tremendous share. So I think Sun, timing will be interesting this year, vaccine and the like, but I think it all points to a healthier Sun season than we saw a year ago. I think Wet Shave will probably take a bit more time, particularly, if we are in a work-from-home environment, school-from-home environment, but the fundamentals of Wet Shave remains strong. I think we do anticipate a recovery here to a more flattish look, it may take a little longer to get there in light of COVID, but that's the outlook.

Great. All right. Well, Dan, thank you so much for your participation and the team, all of you, we thank you for dialing in and participating in our conference. I hope everyone has a good rest of their day.

Thank you, everyone.