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

Hi, everyone. And next up, we'd like to welcome Edgewell Personal on stage with us. Today, we have Rod Little, who joined Edgewell in 2018 as its CFO and was later appointed as President and CEO in March 2019. And joining him is Dan Sullivan, who has been serving as the company's CFO for over 5 years. Now following a volatile start for the first few years as an independent company post the spin-off from Energizer in 2015, Edgewell really has since found stable footing, delivering consistent growth over the past 3-plus years. Much of this can be attributed to the transformation brought about under their leadership, and we really look forward to better understanding their transformation journey. So both of you, thank you for joining today.

Now Ron, Dan, you've delivered solid growth of roughly 4% over the past few years. So maybe to start off, could you walk us through the notable changes you've brought about over these, I guess, probably 5 years that has really driven this growth and gives you the confidence in achieving the sustained momentum going forward? And then also, as you touch on that, curious just to hear maybe what areas might need a little bit more work in your view?

Yes, sure. Good morning, Bonnie, and good morning, everyone. Thanks for having us today. It's always good to be here. We just finished the earnings call. So it's good timing for us to be able to talk about things. But to your question, the Edgewell is a completely different company across almost every element than it was certainly when it spun out of Energizer in 2015 and by the time Dan and I arrived 2018, 2019. The thing I would start with is leadership. You always have to get the people right. And I think we have a highly capable executive leadership team today. If you go down to the top 100, top 200 leaders in the company, we have, what I would say, a new highly energized leadership group over the last 5 years. One of the things we look at is engagement, how engaged, how positive are our employees? And that metric is up 20 points versus pre-pandemic to right around 80%. So we have a highly engaged workforce. And it's not me just saying that we were voted -- rated by Forbes and Statista, the #2 best company in America to work for in the midsized company category, last year. We had no input into that. It's our employees, it's ex-employees, it's competitors talking about where is a great place to work. So we have a great team. We have a highly engaged and motivated team. We rolled out a new purpose values and behaviors in 2020. We also rolled out a new strategy in 2020. It's the same strategy that's in place today. We think it's working. One of the key tenets of that strategy was to improve the portfolio and have a portfolio more exposed to growth. So we've been acquisitive in grooming. We bought 3 grooming brands, Jack Black, CREMO and Bulldog and built out that part of our portfolio. That has been growing double digits over the last 3, 4 years. Sun and Skin Care is an important area for us, and we're building out the Billie brand now, which we acquired, fast-growing brand. Digitally native brand, all direct-to-consumer. When we bought it, we've rolled it out to retail. It's the fastest-growing brand in shaving over the last 2 years that we have as a disruptor. So people, strategy, portfolio. And now what you're seeing is the discipline that I think Dan really helps drive and bring where we have inflected gross margin has now turned positive. Profitability is now accretive. Cash flow is strong. We've got debt leverage projecting by the end of the year to be at 3x levered versus 3.8x a year ago. We bought back 5 million shares roughly, down net 10% in total outstanding shares over the last 3 years. So I think we've been good stewards with capital as well. In terms of what we could do better, like what we're focused on is really around innovation. We talk about innovation is the lifeblood of any company in CPG, and we've been okay at it, not great. And so in our journey, we're really focused on being great innovators and bringing things to market that consumers just love and have to have in their homes.

Okay. And so on that point, to improve some of the capabilities, what are you building out the infrastructure internally? Or how are you improving on some of the innovation and being better?

Yes. We -- so the -- the first thing we did is we eliminated the global team that was leading innovation. We had a global team creating innovation for our markets. And at the end of the day, what was happening is we had a bit of the United Nations of innovation happening where it kind of worked globally on average, but it works nowhere locally. And so we've pivoted to a very local approach to innovation. We recruited and built better local leadership teams who are really tuned into local consumer needs and identified lead innovation markets where we've had lead markets, so the U.S., Japan, a couple of other markets, actually leading and then building out the global rollout around that. So it's really flipping the mindset from a global approach that wasn't working to a very local consumer-centric approach.

Okay. All right. I wanted to talk next about -- you mentioned you just reported earnings. And in light of that, with your results, you did lower your full-year top-line guidance, now expecting to be at the low end, I guess, of your prior range of 2% to 4%. So could you talk a little bit about your expectations for that? And also in the context of that, thinking about U.S. trends, which have been a little bit weaker recently. And then I'm thinking or looking at this scanner data all the time, which does suggest maybe some accelerating sales declines within your branded business. So maybe help us understand what's going on there? Are there idiosyncratic factors that we should keep in mind for that part of the business? Or is that not capturing properly?

Yes. So look, it's -- we've grown 4% on average the last 3 years. We'll do 2% this year as our guide. Our range was 2% to 4% at the beginning of the year. We just guided to the bottom of that range on sales. The drag in terms of what's different really happened in the quarter that just finished. We expect the back half to be in line with where we thought we would be and guided to. It's primarily around two things. One, in our Fem Care category, we had retailers reducing inventory that they were carrying. It wasn't just us, our competitors had that issue as well. I think we're kind of in the period now where that is normalized, and I think that's in balance. And the second thing we had, we have the biggest innovation coming in Fem Care that we've had certainly in the time since we've been here that's launching right now and coming into the planogram sets under the Carefree master brand, we used to have a Carefree Stayfree brand. We've put everything under Carefree with new innovation around better performance for pads and liners in a much-simplified brand structure under a power Carefree brand and how we've architected this. Retailers have responded really positively to it. We've got an incremental distribution in shelf, additional display offline. That's just setting now. We had planned for that to set back in February, March, and retailers on average delayed the planogram changes. So we ended up losing time on that. And we had planned for the Stayfree brand to come out of the portfolio, so we actually missed sales on Stayfree with that delay. So that was the biggest driver that changed our guide outlook for the year. In addition, we had the drug channel suffering, double-digit decline in foot traffic in that channel. We're overdeveloped in drug. And then I think it's pretty well known, Rite Aid has gone bankrupt. That alone on an annual basis is a point of growth at the total company level. Well, ultimately, we think, pick that backup. But in the moment, the sales line goes to 0 for that account.

Those -- okay. So that puts it in perspective. And then as you think about the long-term algo, you still feel pretty good closer to that 4% growth out...

Yes. Well, the algorithm that we put out in November 2020 at our Investor Day was 2% to 3%. We were told at that moment, we were too aggressive. What were we thinking? And then we've done 4%. And so I think we've not changed our algorithm of 2% to 3%. We obviously want to outperform that. But I think we're still very, very confident in our forward-looking growth algorithm regardless of the midpoint going from 3 to 2 on the sales range. And what's behind that is we have grown double digits in Sun, Skin and Grooming, that what we call right to win set of categories in the last 3 years. We have line of sight. We think that will continue. Right to Win, Fem Care and Shave were around flat was the idea. We think we can actually be flat to slightly grow those categories globally. And what's leading our confidence at the moment is our international business, which has been on fire. We've been up nicely, most recent -- first half up double digits. Again, we expect to continue to have strength in international. Markets are less disrupted. Consumer trends are still pretty good. Consumer is pretty healthy. And increasingly, we have really capable teams on the ground that we've recruited in and built who are just having lots of success in market. Beyond the categories growing, we're actually growing share. For example, in Japan, we're up 150 basis points of share as the leader last quarter.

Okay. So that's future growth.

Yes.

All right. I wanted to ask a little bit about the consumer. You've been hearing a lot about pressures on the consumer here, specifically in the U.S. and potential trade down across several categories. So first, is that consistent with what you're seeing across some of your categories? And then second, what role do you expect your, I guess, Edgewell custom brands to play in this regard?

Yes. So Edgewell Custom Brands is private label. We do private label out of that group. And we also do some customized work with retailers to help them create their own brand. That's what that refers to. Yes, the consumer -- what we see, and I'll just -- I'll use a couple of data points for you to try to frame it. We do see a slowdown in consumer spending and in participation in our categories. If you take an aggregate category, Shave, Fem, Sun, Skin Grooming, where we compete, take that basket on a past 52-week basis on a sales value level, those categories in aggregate grew 5%. The quarter just finished, it was 2%. And the quarter we just reported on, it was essentially flat, up 0.4%. So we are seeing the sequential slowing. Now one thing driving that is Sun Care, bad early season start and primarily in the Southeast where volume would move, sales have been down year-over-year and Sun Care has been negative on the year versus prior year. We expect that to actually flip and Sun Care will become positive as we get into our fiscal Q3 and Q4. So you have that going on, which is dragging it down a little bit. We talked about the drug channel pretty openly. We're overdeveloped there. Drug has been down, and that has also impacted the categories, that drug has come down a bit. And then when you see drug come down, one of the reasons why is the price value equation is not good relative to maybe club or dollar channel or even mass where you have everyday low prices where you can get a better value. So we're seeing some level of shift, but we're also seeing within that consumers seeking more value as other parts of their basket are still really expensive. And so we're not seeing a huge shift down to private label in our Custom Brands Group. That area is outperforming branded a little bit. But we are seeing a little -- we think of some early signs of consumers also using product longer. So for example, a blade cartridge maybe getting 1 or 2 more shaves out of it. We're seeing trips on refills start to slow just a little bit, which tells us there's a value play going on. So in summary, a little bit of slowing, but not negative. Just the slowing of the growth.

Okay. And that's consistent with what we've been hearing and observing. And in the context of that, you mentioned the price value equation. Do you think there's more work to be done within some of your price ladders, within your different segments, categories? Or do you feel like you have the appropriate price points? Or do you foresee stepped-up promos to encourage increased usage?

I think our list prices are appropriate around the world. Outside of the U.S., we still are taking incremental pricing half and have new list price increases going in, in some markets. Asia is an example, both the big markets there, we're taking pricing. But domestically in the U.S., we are seeing what I would say a very normalized period around price and volume elasticity return. After a couple of years of pandemic where that, that got out of balance, the consumer is very much what I would say, normally price sensitive today. And we have, in a couple of instances, a primary competitor who's being quite aggressive around promotional spend in a couple of our categories. Women's Shave and Fem Care both, and we'll match it. And we've got that built into our forward-looking guide. And so we are becoming a little more promotional in those areas. And I think it's in response to Women's Shave just being a really competitive category at the moment. There's a lot of brands playing in that space. Kind of like men's was a couple of years ago. Men's has now stabilized. But women's is very competitive, which I think is driving the promotionality. Part of it is them reacting to our rollout of the Billie brand national taking share. Billie is now a 10 share brand national, 17 at Walmart and growing every period. And so we're driving a little bit of the intensity ourselves in that case.

Importantly, you just said, I think, the fact that, that is factored into your guidance and was already assumed the stuffed up potential promo spend...

Correct. Within what we put out last week, we had line of sight...

Got it. Okay. Now I would like to pivot to gross margins. And I want to do that maybe if we have time before I go deeper into some of the segments. So Dan, I would like to ask you, when you look at the gross margins that you saw in the quarter, it really seemed to underpin your increase full year profit outlook. So what were the drivers of that? And ultimately, how confident are you as you've worked through the year such that really you were able to take up your full year profit outlook? In the context of everything we just discussed.

Yes. Yes. Rod said it right. Q2 was an inflection point for us in the margin story. We delivered about 330 basis points of year-over-year gains. Those gains were structural, and they were underpinned by two core capabilities within the organization. One which is well lived, which is our ability to take cost out and run a better mousetrap. And that was about 250 basis points of year-over-year tailwinds in margin. And if you know our story well and you can go back to the fuel days of 2019, all the way through now our second execution of cost takeout. This is in our DNA, and it's what we do. The second piece is around revenue management. Pack price architecture, promotional returns, mix management, really good hygiene on shelf. That delivered 190 basis points of gains. So in total, over 400 basis points, Bonnie, came from our own ability to either drive cost out or drive better unit revenue economics. And you're absolutely right. That's what underpinned or that's what was the catalyst for us to take up our full year profit guide.

That's helpful. And then talk a little bit about productivity, which has also, I believe, been a key driver of your stronger gross margins. How do we think about the right level of savings for the rest of the year and maybe even beyond and where that could go?

Sure. Yes. We have a productivity organization. If you look back in time, you would see somewhere between 200 and 250 basis points a year in pure cost takeout. And what we have said is that's a pretty good proxy for where we would go from here. We'll deliver about 240 this year, slightly better than our original expectation. What sits beneath that, I think, is 4 core capabilities. One, we've stood up a global procurement organization. We now have category expertise, buying expertise, analytical expertise at the basket category level. I think secondly, we are much better at labor management. That's everything from shop floor scheduling to automation and taking labor off the shop floor. I think thirdly, we've begun to think more about footprint optimization. We manufacture, we assemble, we distribute, how do we organize that network in the most optimal cost-effective way. And then lastly is just in the DNA, right? How do we think about an absolute intolerance to waste? We have over 150 different programs going on at any point in time simply geared towards eliminating waste. So you put the 4 of those together, we're highly skilled in this area, extremely confident based on past performance, and I think 200 to 250 basis points a year is a really good proxy for how we think about it.

And one final question on this topic from me is input cost inflation is eased, but we're still seeing some lingering concerns also thinking about the geopolitical tension. So curious to see or hear what you're seeing across your cost baskets. And thinking about that in the context also, you mentioned some pricing earlier, but just where are you at with visibility there?

Yes. We're cautiously optimistic on the basket. We're coming out of a period like everyone else, where you saw massive disruption, supply-demand imbalance, cost inflation, the whole deal. I think what you saw in the quarter from our business is when inflation is 60 basis points and not 600, you see pretty nice margin accretion. We think we're over the worst of the inflation. We saw tremendous year-over-year inflation for about 18 months in Sun Chemicals, which is a highly engineered chemical. There's only 2 or 3 suppliers in the world. And then we live through what everyone else lives through around paper and pulp and steel and aluminum and the like. I think our outlook right now is largely stable, which is important. That's 50% of our COGS is sitting in the commodity basket. I think where there is still some choppiness like everyone is around labor and the current imbalance with supply and demand, but much more manageable than what we've lived through for the better part of 2 years.

And that's why in the context of that, still some pricing but not nearly as much as what we've seen in the past few years...

No, that's right. But I think what we've seen in pricing now is less inflation-based pricing and much more strategic where you can bring value to the consumer where you have a market-leading position with new news and excitement, which for the most part this year has been internationally, we have been able to take pride.

All right. Let's switch gears to your segments. I wanted to maybe start with Wet Shave. We're just -- I think over half of your business is international, and that's dovetails to what you mentioned earlier about the runway and opportunity you have for growth there. And that grew double digits in the first half of the year. Your -- but having said that, I think your North America results, they were down in Wet Shave. So Walk us through some of that. Maybe first, what's driving some of the softness within -- when you touched on the drug channel? And do you expect that to result in sustained declines in North America? Or do you see an opportunity for that to recover in North America?