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

Hi, good morning everyone. I'm Dara Mohsenian, Morgan Stanley's Household Products & Beverage analyst. Very pleased to welcome you to Morgan Stanley's Virtual Global Consumer & Retail conference. And we're pleased to welcome Edgewell's management team here today to present at the conference. So before we begin, some important disclosures. Please see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures, for disclosures. And if you have any questions, you can reach out to your Morgan Stanley sales representative. So the format today, we're going to shift to a video to begin with. I'll come back in intro and then turn things over to Dan for Edgewell to speak for a bit, and then I'll come back with Q&A. So with that, we'll start the video. [Presentation]

Okay, great. Well, with that, we're very pleased to have Edgewell here today. Joining us from the Company are Rod Little, Chief Executive Officer; Dan Sullivan, Chief Financial Officer; and Chris Gough, VP of Investor Relations. Thank you so much for being here today, guys. We appreciate it. The Company has shown a lot of progress recently as their strategic plans put in place under Rod and Dan's leadership start to bear fruit. And they've got some exciting news as of last night with the Billie acquisition. So we appreciate you guys making some news here today at our conference. And I'm going to turn things over to Dan, as I mentioned, and then we'll come back to Q&A.

Yes. Thanks, Dara. Good morning, everyone. We're really excited to be here. We've got some really compelling news to share both in the update on our core business on Edgewell, and as Dara mentioned, the journey that we've been on strategically and operationally to change the performance and the results of the business, coupled with some really exciting acquisition news that we released last night. We're going to talk about both of them over the next 20 minutes or so. I'm going to skip us ahead to Page 5, just to begin the discussion. And if I had to put the story of Edgewell on one page, this would be the page that I would share. On the left side of the page, you see a very simple representation of how we think about our go-forward strategy. It's based on the belief that we have a really interesting and compelling portfolio of brands. They operate across really interesting categories, and we bifurcated our portfolio to be against categories where we have a clear right to win. So this is our sun, our grooming and our skin business. These are categories that are growing; where we are market leaders; where we believe we had a double-digit growth algorithm opportunity and share gains. And then the other side of our portfolio, which we call right to play, this would be our Shave and our Fem Care business. Category is starting to recover, get healthier. We believe we have the right here to grow in line with category and hold share. And certainly, that aspiration became easier in the last 24 hours with the news that we released on Billie. So that's our strategy in a nutshell. That then translates to the right side of the page in terms of how we run this business, sustainable growth at the top, productivity throughout the P&L, really attractive cash flow, and you put all of that together and you get to an algorithm on the far right side of the page. This is what we're committed to delivering over the medium and long-term for the business. And you'll hear me talk in a minute how we already exceeded this in 2021. And the model here is based on the premise of sustainable 2% to 3% organic growth at the top and then profit and EPS growth that outpaces that, all coupled with really compelling cash profile and cash conversion. So if we turn to Page 6, we've been on this journey now for a couple of years. We think we've made significant change in how we run this business and the results that we deliver. And this page highlights a few of those. On the commercial side of the business, we have become far more consumer-centric in how we think about innovation. Rather than letting technology drive our actions, we're letting the voice of the consumer inform how we think about innovation, new products and brands. That is coupled with a new approach to digital. We've been on this journey now for about 18 months around capabilities, around technology, around how we architect and operate online. Again, that journey got a significant tailwind in the last 24 hours. So commercially, we're very different and then we will continue to rely on the right side of the page, things that we've done since the day we were born that are in our DNA, which is be ruthless on cost and be disciplined on capital. Let's turn to Page 7, though. So with those 2 in mind, how would we present 2021 results? We delivered about 4% organic growth for the year. And as you can see, double-digit growth in that right to win component of our business I mentioned earlier and 1% growth in our right to play portfolio. As you look at the health of our business, we estimate that about 70% of our portfolio is either holding or winning share. That is a very different picture than where we were 18 or 24 months ago. So the business, our brands, the categories are healthier and we're performing better. The digital evolution for us is seen on the right side of the page, on top of 80% growth in 2020, we delivered 25% growth in '21 that takes our e-commerce business up to about 9% of our total business. And then down at the bottom, sort of how does that translate economically. We delivered gross margin accretion in a year that was incredibly challenged across the spectrum, given the supply chain and inflationary pressures. We did it on the back of year 3 of our fuel program, and we delivered a $175 million in free cash flow, and I'll talk in a bit about how we think about capital allocation. Turning to Page 8, I think as important as the results we're delivering, as important as the capabilities we're creating; we are running a very different Company than we have in the past, guided by a very new purpose statement by values and behaviors. And these underpin all that we do. When you come to work for Edgewell, you line up behind this purpose and values and behaviors. You know what is asked of you to be in this organization. And it's underpinned by some significant evolution that we've made across sustainability, and you would have seen that in our Sustainable Care 2030 program around diversity, equity and inclusion and putting that to the forefront of how we think about our global organization. And then, not surprisingly, in a world of COVID, putting wellness at the top of how we deliver a people first ambition. So let's turn to Page 9. How do we put all of that together in line with our algorithm? As you can see in 2021, we've over-delivered 1 year into our strategic journey, that which we committed. We delivered 4% growth at the top. We delivered 7% growth in adjusted EBITDA. We delivered 11% growth in adjusted EPS, and we brought our net leverage down to about 2x. As we look to 2022 and turning to Page 10, this is where we're really excited because you're starting to see the fruits of the labor that we've put in place, many of which I described earlier. On the left side of the page, you can see clear proof of the journey we are making in terms of innovation and product development, becoming more consumer centric. It's seen in the complete redefinition and repositioning of the Schick brands here in the U.S., creating that emotional connection with our core consumer-based on their needs from our product. You can see it in new product development, whether that is a new roll on in Banana Boat or a really exciting razor entrant in Cremo, the acquisition that we made a year ago. So now you get the tremendous brand credibility of Cremo that had predominantly operated in grooming, and the unmatched technology of the Edgewell business coming together in an exciting new product in shave. Or you can look at in 2 new brand launches that will come to market in 2022, one in our Sun business and one in our grooming business. And just to think about that, since the split, we have not introduced any new organic brands to the portfolio. And here, we will bring 2 to market next year. Equally, on the right side of the page, ultimately, in our business, it all plays out on shelf. We continue to get stable -- more stable and in fact stronger on shelf, and you see some of the examples on the right side of the page. The club channel is a significant win for us in '22. We have full distribution of Banana Boat in Sam's and Costco. We have Wet Ones now gaining distribution in Sam's. And equally, in the Sun Care segment, where we have now put 2 consecutive seasons of meaningful share gains on the docket for us, that translates on shelf. We're gaining in-aisle exposure at Walmart as well as secondary placements. So really exciting results now starting to play out on shelf. For 2022, then turning to Page 11, we expect to deliver an algorithm and we've communicated an outlook that calls for about 3% organic net sales growth and similar growth in profit and EPS. Now the latter will be slightly below our longer-term algorithm, obviously, faced with inflationary pressures that all are being faced with. We believe this is a really important time to stay in investment mode, which we will continue to invest behind these brands and ultimately, still deliver profit growth in line with top line growth. And then lastly, around our business, if you turn to Page 12; I want to spend a minute just talking about how we think about capital allocation. And this is a particularly important topic in light of yesterday's announcement. And we've said this over the last year, we've said that we intend to be extremely balanced. We intend to be disciplined and we intend to be thinking about capital allocation with an "and" mindset, not an "or" mindset. And you've actually seen that play out over the last 12 to 18 months, because over that time period, we continue to prioritize investing in growth, smart, accretive acquisitions, Cremo and now Billie that strengthen our portfolio that give us access and greater participation in growing categories. We then coupled that with the initiation of a dividend 1 year ago, really attractive yield and pay-out ratios. And then we complemented that, in our recent earnings call, with the announcement that we will initiate a systemic share buyback program of about $300 million over the next 3 years, and we've already been executing against that in the market. And we've done all of this while maintaining a leverage profile of about 2x at the lower end of our long-term range. So that's how we think about capital allocation. And again, yesterday's news is a really good example of how we've executed against these priorities. So that's the Edgewell business in and of itself, super exciting, a very different business than what it's been over the last 18 to 24 months. If you turn then to the next page, the story is not done yet. In fact, we have a really exciting announcement, which we made last night that we have acquired the Billie brand. And if you turn to Page 14, I'll kind of run through the transaction highlights quickly and ultimately get to the strategic rationale. Look, Billie is the leading digitally-native brand in this category. It's the clear share leader online. There's no one close to it. And we are super excited to take our strategic supply relationship and broaden it now and give us the opportunity to make a very compelling acquisition at exactly the perfect time. It's a $310 million acquisition, it will turn out to be just under 4x in terms of revenue multiple. There is no anti-competitive risk here. The deal has closed. And if you think about the Billie business itself, it's got about a $90 million top line profile TTM September. It's been growing at about 50% CAGR over the last 3 fiscal years, 30% in the most recent year, and it aligns perfectly with our M&A strategy. It gives us the growth. It gives us attractive capabilities in the digital space, which I'll talk about in a minute. And as I said, it is perfectly timed as the Billie brand prepares for an exclusive retail launch beginning in about a month. Now we're not going to get into today the specifics around the business, our outlook for the year. We have time to talk about that, and we'll do so in detail when we get to our earnings call in February. But what we do anticipate is that this is a slightly profitable business for 2022 and therefore, will be accretive to our adjusted cash earnings per share in fiscal 2022. Turning to Page 15. I think this is what makes this acquisition so interesting and so compelling for us. We are taking the leader in digital activation in this space. If you think about the left side of that page and how Billie has built this brand and become the leading DTC player. And you see the metrics there on the left side of the page, I'll only add one more, which is that this brand has the highest social engagement, likes and comments, than the rest of this industry combined. So it fuels tremendous brand loyalty and unmatched repeat rates. You then take that brand and you bring it to the right side of the page, exclusive retail launch in January, national distribution, dedicated in-aisle display and signage and multiple pulses for NCAP activation throughout the year; truly bringing an omnichannel strategy in the next month. If we think about how it fits into the portfolio and turn to Page 16, we're really excited about this page. And I won't go into all the details in there, but the page clearly shows 2 things; one, our portfolio now activates against very different consumers. It is a very differentiated portfolio now from Intuition at the top of the spectrum to Skintimate in the value space, all operating with different consumers in mind, against different consumer needs. And then as the picture clearly shows, from a price tier perspective, Billie fits in beautifully in the one piece of the price ladder where we were not operating, in that mid-tier space. Turning then to Page 17 and the last page that we have before we get into the Q&A. Just to go back and really highlight what's the strategic rationale for this transaction. And we've applied this here against our M&A filters, what we look for in deals with the obvious reality, no-deal crosses off on everything we would look for, but boy, this deal comes pretty close. It provides us a real growth opportunity, obviously, on the heels of retail activation. It brings us demonstrated digital capabilities. It will help us accelerate all that we've already been doing and building over the last 18 months. It brings us added tailwinds in true consumer-centric, brand building mind-set and activation. It's profitable as a stand-alone business. So this will be accretive to our business model going forward. And in terms of M&A, it fits in perfectly in how we think about the ideal transaction, tuck-in acquisitions that are relatively easy to integrate, low risk, and in this case, funded all through cash and existing revolver. Really exciting and I'm sure we'll talk about that more in a minute. So that's the Edgewell story. We're all super excited to be here to share it with you. And Dara, with that, I'll hand it back over to you.

Great. Thanks. That was very helpful. Maybe we'll start on the Billie business, Rod. Can you talk about the retail expansion that's planned here over the next few quarters? What gives you confidence that will go well? How incremental should that be to the franchise versus cannibalistic? How do you think about that?

Yes. So, good morning, everyone. As Dan said, we're super optimistic on the business itself. I think the confidence we have in the retail launch that's happening is high. You saw some of the imagery that was out there. There's lots of retailers that want this brand. It's the #1 insurgent brand that has the highest level of social engagement. And arguably for many retailers, an attractive new core consumer -- accretive consumer that's outside the core. So it has the opportunity to be very incremental in terms of category growth. So it'll be a retailer, but I fully expect over time that this brand will travel. So high level of confidence.

Great. And the strategic fit is very clear with the business for Edgewell. Maybe can you talk a little bit about what Edgewell can bring to the business? And I'm thinking specifically about geographic expansion over time, channel expansion. Obviously, we just talked about a brick-and-mortar launch. So maybe just talk about what you guys can bring to the business and the growth opportunities longer term?

Look, there's a lot of complementary capabilities here, both ways, actually. They're based in New York City. There is a strong culture fit. We've known Jason and Georgina from the very beginning. We -- they're just 4 year old business, right, that we're talking about. We help them create the brand with the partnership along the way. And so there's a high level of trust already with the teams with the background and relationships we have. What Jason and [ Georgina ] don't have today is a big team, right, to help them think about retail planning and execution. I mean, I think they've got a good plan for year one. We can help them and bring that broader retail rollout capability not only in the U.S., but as you point out, potentially to other markets. The other thing we bring, obviously, is the whole technology IP opportunity around innovation in the blade and razor space. We also bring resources to build out what we think can be a very powerful Women's Personal Care brand, more broadly, to have this be a full lifestyle brand and play in other segments today where they don't have big participation. And there is very much an aligned view on where that can go. And we have unique capabilities to bring to them to help them do that.

Great. That's helpful. And then Rod, maybe taking a step back, obviously, a lot has changed since you became CEO a few years ago. You've implemented numerous strategic changes. We've been through the COVID environment and are hopefully coming out of it at this point. Can you review where you stand on those changes, how happy you are with the traction that you've made and just a bit of a state of the union here on the base business?

So Dara, this context here matters, I think. You have to go back in time. We were blocked by the FTC on the Harry's transaction in February of '20, which was going to be a transformational transaction for us. One month later, COVID hits March of '20. We got together as a leadership group and declared we are going to exit pandemic stronger than we entered, right? And so we were focused from the very beginning of the pandemic on building our business aggressively going after strengthening every element of the business and there's a couple of core things that matter most. One is you've got to have the right team and the right people on the team. We have recruited in new talented leaders that we got in the early days of the pandemic that historically, maybe we don't get because we were aggressive going after people when there was a lot of disruption. We've been hired entirely new teams in the digital space. We have an in-house content creation team. We do social in-house now. We're building a search team out in-house. And so getting talented people in key leadership positions, until you have that in place, nothing else really goes so well, right? So we've got the team right. You've seen us get the portfolio to a much better place. Industrial business is gone; gloves business, infant business is gone. We've acquired Jack Black, Cremo, Bulldog, and now Billie. So a very much stronger portfolio in areas that have growth tailwinds with them and a much more modern portfolio that resonates with consumers. And so the portfolio is right. And then innovation is the lifeblood of this business. I think Dan laid out very well. What the team has been working on. The innovation is just flat out better. And in the back end of it, you've got to have great retailer relationships. And we had a period of time post the Edgewell separation from Energizer, where we became fairly transactional with retailers. And you can't have that. And so we're now back in position where we're more strategic in our partnering with retailers. We're going up in the retailer surveys, around how they view manufacturers and it is landing and better distribution outcomes. And so I think Dan laid it out very well what's happening in terms of the results. They are materially better. 70% of our business is holding or growing share. Again, we -- it was almost 0 couple of years ago. And -- so I think we feel really good about where we are. At the same time, we're just getting started. This is the early innings, and we're hungry for a lot more.

Great. And just to follow-up, as you think about market share, 70% of the business is now holding or gaining share. How confident are you that that's sustainable going forward? And maybe you can talk about the other 30% also and plans to improve that. Is the focus more on the growth areas and the 70% and you manage the other 30% per cash flow or profitability? Or are there strategies that work in the 70% you can apply to the other 30% of the business?

Starting where you ended, I think there are definitely strategies to take where we're winning and having success to apply to the areas where we're not. The biggest area that we've been challenged in from a market share perspective has been in Men Shave and disposables, primarily. And when you look at those areas, Men Shave were challenged for a reason. We haven't been very good there. We lost our way with Schick. We got to a place in our men's business where the Schick brand has stood for nothing. And Dan flagged that we're re-launching the brand in a very holistic, authentic way where we're going to bring Schick back to prominence, make it stand for something. We've got a great holistic plan around that. And so I think that will address the Men's issue. Women's, we've been very resilient, very strong in that area. The overall shares are good. Billie brand will only help us in that segment. So we feel good about Women's. The whole private label private brands group is an area of strength for us. We've been growing double digits. We expect that to continue. That's not measured, but that's another tailwind that we have in the business. Sun Care, we've grown share 2 consecutive years. We expect to do at a third with what we have line of sight to in terms of distribution. Fem Care has gone from down 100 basis points plus year-on-year, beginning of the pandemic through to the summer of '20 to a place now where we've stabilized share, and we're flat on share. And we're seeing growth, nearly 100 basis points in tampons behind Playtex Sport. And so we've got momentum in Fem Care with improving share position. And then Wet Ones, we've recovered the share position lost a year ago when the secondary brands came in and filled the space that branded manufacturer just couldn't fill to meet the demand. That's now worked its way out. And the final piece is grooming, and we've been growing share in grooming. We've been up double-digits in sales in those brands, and we expect that to continue in the year ahead. So I think the challenge here primarily is around Men's and also Shave Preps, which I didn't mention earlier, and that's been primarily impacted by some supply chain disruption, which we have line of sight to and we'll get beyond here very soon. So I think we know where the issue areas are, and we think they're fixable.

Okay. And then, Dan, maybe we can switch to the margin side. Obviously, a very difficult cost environment across the CPG industry. You guys have outlined 7% COGS inflation for this upcoming fiscal year. First of all, how much visibility do you have around that guidance? We've obviously seen a lot of volatility in the last 1.5 years here, so level of visibility. And if costs were continue to get worse, can you highlight if you have any additional levers you can pull on to help offset that? And maybe what the biggest risk factors would be from a cost perspective from here?

Yes. Look, we think, in principle, we have a very good line of sight to the cost profile. I say in principle, because you hit it right, Dara, I mean we're in uncharted waters here in terms of mostly commodity-related variability. If I go back to Q4, I mean, we anticipated and communicated that we would see about 300 basis points of cost headwinds in the quarter. And that's exactly what we saw. Now it may play out differently by commodity category and the like, but our teams have clear line of sight at the commodity level as well as across distribution, across labor. So I feel really good about our ability to understand it, track it, anticipate it. Again, I'll flag with just the comment that on the commodity side, things change by the hour. As the world gets more complicated, I think what you can expect from us is exactly what you saw in 2021, which is we do more. We find ways to accelerate cost savings programs, if that's what's required. Now we've got about 200 basis points of cost savings embedded into our 2022 COGS. Clear line of sight, programs in place, we're executing. We'll look to escalate that if we can, try to bring some of those programs forward, try to get more full run rate benefit. And then you got to think about it at the variable level. Like labor, we've been really aggressive in hiring. We've been really aggressive in meeting the needs of the market. We put 2 discretionary bonuses in place in the last 2 years to reward those folks who've been on the frontline for us. We'll continue to look for opportunities like that. In manufacturing and distribution, we're always looking at footprint optimization, how can we ship the product differently, how do we balance road versus rail. I mean there are so many things that we think about all coming back to the point you made. It's a really tough environment, but I think what you saw from Edgewell last year, 30 basis points of margin accretion is a really good proxy for how we show up when these cost pressures rise.

Okay. Great. And last year, you took a price increase on Wet Ones. You recently announced a price increase in Feminine Care. It sounds like pricing will be more selective in Wet Shave, but maybe you can take us through your thoughts around pricing in that category and also how you think about the Sun Care business looking out from a pricing standpoint?

Yes, I think you're right. We've been out ahead of it on price. In fact, I'd go back 1 turn Dara, we took price in Sun a season ago led the category through with a mid-single digit increase, followed by Wet Ones in the spring of last year, followed by Fem, as you pointed out, in October of this year. So there are clearly areas of our portfolio where we will lead in price. I think around Shave, I would say it's more of a mixed picture. I think internationally, we think about price on much more of a broad brush basis. Now broad brush meaning by market, of course, because what happens in Japan is very different than in the U.K. But there, we do anticipate much broader price increases across the Shave category. I think in the U.S. is where you would see us be much more selective in how we think about it, women's versus men's and then subcategory, whether that's on the branded side of the business, on the prep side of the business, et cetera. And there, I think we'll implement a lot more precision, which you would expect we would, given our brands play differently with different share positions in those categories. Rod, anything you would add to that?

No.

Good.

Great. Well, that was very helpful. Congrats again, gentlemen, on the Billie acquisition. And thanks to the 3 of you for joining us. And with that, we're out of time, so we'll end things there. Thank you.

Thanks, Dara.

Thanks, Dara.