Q1 2020 Earnings Call
[music].
Good morning, and welcome to the Edwin personal care Q1, 2020 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance, placing more confident specialists are pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note. This call is being recorded.
Now I'll turn the conference over to Chris cost Vice President Investor Relations. Please go ahead.
Thank you good morning, everyone and thank you for joining us. This morning, as we discuss edge was first quarter 2020 earnings.
With me this morning, Erad Little our President and Chief Executive Officer, and Dan Sullivan, Our Chief Financial Officer, Rod will kick off the calling them, we'll hand over to Dan to discuss quarter, one results and our full year 2020 outlook. We will then transition to queuing <unk>. This call is being recorded and will be available for replay via our website www dot as well dotcom.
During the call we may make statements about our expectations for future plans and performance. This might include future sales earnings advertising and promotional spending product launches savings and costs related to restructuring changes to our working capital metrics currency fluctuations commodity costs category value future plans for return of capital to shareholders and more.
Any such statements are forward looking statements, which reflect our current views with respect to future about these statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption risk factors in our annual report on form 10-K for the year ended September Thirtyth 2019, as may be amended in our quarterly results on form 10-Q.
These risks may cause our actual results to be materially different from those expressed or implied by our forward looking statements. We do not assume any obligation to update or revise any of these forward looking statements to reflect new events or circumstances.
Back to school, except as required by law. During this call we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are shown in our press release issued earlier today, which is available at the Investor Relations section of our website.
Measurement believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business with that I'd like to turn the call over to Rod.
Thanks, Chris and good morning, everyone in our call. This morning, I'm going to focus my comments on to court topics.
First I will address the Harry's transaction, including our released this morning announcing that we have terminated merger agreement.
Then I will talk more broadly about edgewell business. The journey that we are on the positive results, we continue to see and our go forward strategic priorities.
And we'll then take you through our operational financial performance for the quarter as well as update.
Full year outlook.
As I stated a week ago, we're obviously disappointed by the FTC his decision to seek to block the proposed transaction with Harry's and we continue to disagree with the merits of their position.
We believe that the consummation of the merger would have brought together complementary capabilities for the benefit of all of our stakeholders, including consumers.
That said given the ongoing uncertainty about the potential outcome and the required investment of resources.
Time, and resulting distraction to our business that continuing legal battle with the FTC would entail after detailed deliberation with our board of directors on these factors we have terminated the merger agreement.
As we've stated in the press release areas has informed us of their intent to pursue litigation.
We believe that touched litigation has no merit and I won't be commenting on this matter a further.
As such we are moving forward with the improving underlying performance of our business.
Underpinning our confidence in our path ahead.
We will build on our core strengths in technology, IP and innovation strategically, adding to our capabilities and supportive brands that resonate an increase engagement with consumers and retailers enhancing our ability to drive growth and value creation.
We are committed to building a next generation consumer products company.
And while the path there will not include the Harry's business and brands, our strategic objectives remain unchanged.
We now provide perspective on our business, our ongoing transformation and share some insight on where we're headed.
Starting with where we are today, we have a strong foundation augmented by the progress we have made over the past three fiscal quarters and built on our global infrastructure are best in class played making the formulation capabilities and our compelling brands that maintain meaningful share positions across diverse.
Global categories.
As well as a company with global scale operating in more than 20 countries with extensive retail reach across 50 markets.
As such we Havent diversified revenue profile with North America, representing about 60% of our global revenue in our international business contributing 40%.
This diversity has also seen across segments and while we are well known for our wet shave business.
Southern skincare and feminine care segment contribute more than 40% of our revenue.
It's important to remember that while we spent considerable time discussing Pos mens branded wet shave category. It represents only 3% of our global revenue.
Underpinning our business is our technology stack and intellectual property, which provide us clear competitive advantages and an ability to repeatedly bringing innovation to the categories in which we compete.
Consistently producing high quality durable blades is a requirement for sustainable growth in the wet shave category and we know that we have the ability to do that.
Additionally, we have three different R&D facilities, and a leading some care formulation capability.
The actions, we have taken to reshape and refocus our portfolio have enhanced our position in our core categories grooming Sun and skin care and feminine care.
With the successful divestiture of our infant care business now completed we're narrowing our focus and further investing in growth in support of our stable of brands, including Schick Wilkinson sword, Banana boat, Hawaiian Tropic, and playtex, and some very exciting new brands, including both.
Doug and Jack Black.
As you know the wet shave category has encountered significant headwind over recent years, most notably in North America.
But I am encouraged by where we stand today, we think consumers care about quality and consistency of shape and believe that our high quality products position us well in that respect.
We believe there are growth opportunities in the broader men's grooming category when you consider shave preps and soft products.
Bolt on acquisitions have played an important role for us and expanding our presence in men's grooming and Bulldog inject black are performing exceptionally well, both delivering double digit growth and maintaining leading positions in their respective markets.
Outside of the grooming category, we have compelling growth opportunities in both son in Fem care.
Sun care as a healthy category and our brands maintained strong equity with consumers across the globe and meaningful market positions, especially here in the U.S.
Innovation will continue to play an increasingly important role in expanding our participation in this exciting category leveraging our strong existing portfolio of brands. While we also contemplate organic and acquired additions to the portfolio.
And in our Fem care business, we are in the early stages of our efforts to redefine our commercial operating model for the future.
We've made significant steps in filling key leadership roles and cross sales marketing and finance that will be an important catalyst for helping define the optimal strategic path forward for this business.
We've seen some initial stemming the topline declines, which I'm encouraged by.
Although we know significant work remains and repositioning this business for a more stable topline performance in profit delivery will take time.
Project fuel remains an important catalysts for our continued evolution.
Both in mindset in an economics.
This organization is reshaping itself routing outweighs in driving greater productivity in all that we do.
We have executed well delivering over $150 million in gross savings today.
These savings have provided us with resources to invest in innovation and growth and build our brands and capabilities, specifically, we focused our investments on our most compelling growth opportunities across key retail channels and we've also worked to reshape our portfolio with an eye toward simpler.
Fine refining our brands and offerings and beginning to enhance our commercial capabilities across the entire company.
Work remains here and we are progressing with urgency and focus.
We've also revamped our senior leadership team over the last 18 months and added new members to our board of directors.
My management team brings a significant track record of success and experience operating in this industry and our categories.
Over the last three quarters, including this fiscal Q1.
I am pleased with the results we are seeing in our business.
Organic topline growth trends continue to stabilize with the last three quarters down approximately 40 basis points compared to the prior year period.
And these results were underpinned by improved results across all segments in all geographies.
Gross margin rates are stabilizing as we execute project fuel the moderate trade and promotional spend.
After a year of music brand investments in 2020, we're leaning in on investment, including both advertising and promotion and R&D, increasing our collective spend by $20 million and supporting our commitment to maintaining healthy leading brands.
Project fuel is maturing and we have a clear track record for execution, having realized over $150 million of gross savings today inclusive of $15 million in Q1.
Free cash flow generation remains a core strength of our business model fueling consistent and systemic deleveraging.
Over the last year, we have reduced our leverage.
By one full turn of debt, providing the necessary dry powder to support accretive M&A activity.
Our outlook for the year reflects our expectation continued progress with organic net sales flat to slightly negative.
Gross margin rate stable further execution of project fuel and free cash flow over 100% GAAP net earnings.
Dan will discuss in more detail shortly.
But we should not confuse progress with achievement.
Foundational setting of our business is a required first step and three fiscal quarters results indicate we are on the right path.
We're working with urgency to further strengthen our business and ensure sustainable value creation for our shareholders.
This is a time when we must be bowls in our thinking and disciplined in our actions.
Our priorities are as follows.
First we must increase our ability to innovate and build brands consumers love.
Our recent efforts in this area have not provided the level of impact needed.
Consumer centric location based thinking needs to be at the center of our approach.
We have recently added resources in our R&D organization.
And we'll continue to seek to augment our existing team within necessary infusion of talent where needed to meaningfully strengthen our capabilities in this area.
Enhancing our innovation roadmap and developing a robust pipeline of opportunities for the business going forward is a clear strategic priority.
Second.
We will build on our strategic partnerships with our most important retailers to win at the shelf.
This was the first task that I initiated a bond, becoming CEO and it's become increasingly important that we maintained strong mutually beneficial relationships.
Whether it's through stronger brands on shelf robust innovation, we're exploring unique exclusivities in certain categories. We are committed to further solidifying our strategic relationships with our key retail partners.
Third we will continue to drive efforts to strengthen our competitiveness through project fuel and other initiatives to further simplify our ways of working and drive efficiency in our operations.
Maintaining our focus on the strategy that brought us to this point in enabling continued investment in growth opportunities.
Fourth we will continue to maintain strong balance sheet utilizing our healthy free cash flow profile in a balanced and disciplined manner investing in our business. While also returning value to our shareholders.
During an efficient capital structure enables balanced capital allocation strategy is critical and Dan will elaborate on this in a moment.
And finally talent profile in work environment for our employees matters and in fact, our key drivers of sustainable success.
We will invest to top talent in critical commercial roles with North America commercial leadership, our biggest priority.
As you know column Hutchison has been dual heading as both the COO and head of North America for quite some time and we knew this was not sustainable.
Until we will act quickly to identify new leader for our North American business.
With focus on a season dynamic leader, who has the right complement of sales and marketing expertise required to lead our business forward in this important geography.
Additionally, we are committed to creating a culture that attracts and retains world class talent and drives engagement among our teammates.
We are focused on strengthening our culture, which is built on values of inclusivity and sustainability. So that we can be a company where people love to work.
Before I turn the call over to Dan I want to emphasize the most important takeaway from this call. Our business is healthier today than it has been in quite some time.
We are executing with urgency and focus and our mission to become a world class CPG company remains unchanged.
We understand where our strengths sly.
We know the areas of our business that we need to continue to address and we're pleased with the progress we are making in short we believe we are well positioned to succeed.
And we look forward to redirecting our focus towards the opportunities that lie ahead.
Now I'd like to ask Dan to take you through our first quarter results an updated outlook for fiscal 2020.
Thank you Rob and good morning, everyone as Rod mentioned, we're very pleased with how we started the year I'm a solid Q1 results reflect the continued focus on our fundamentals good execution on shelf efficient balance of brand and trade spend and further progress on becoming a more productive and effective organization.
With project fuel now entering mature execution and core to how we run this business.
Our topline results continued to improve with flat organic net sales and importantly, underpinned by our return to growth in North America.
We estimate that on an underlying basis run rate sales for the business. In Q1, we're also flat adjusting for the impact of the Japan VHP loading in Q4 last year and cycling the Sun care Reformulations headwinds of a year ago.
Gross margins were also strong benefiting from improved market and product mix and the continued execution of project fuel.
Q1 was therefore, a good demonstration of our full year objectives to deliver stable organic net sales and gross margin results year over year.
We also successfully closed on the infant and pet care divestiture utilizing the proceeds to further strengthen our balance sheet.
This was an important step in the transformation of our portfolio, enabling us to focus on our core brands and new growth opportunities.
Business was simply not a strategic fit for us where we lacked a clear right to win as evidenced by the significant profit erosion, we experienced over the past several years.
Although the foregone segment profit and associated stranded costs from the divestiture negatively impacts earnings per share. This streamlining of our portfolio better positions us to be a stronger company in the long Ron while freeing up capital that can be potentially deployed elsewhere at higher returns.
We've updated our full year outlook to reflect the divestiture and the lower full year tax rate.
Outside of those changes the full year outlook for the business is unchanged and I'll discuss this in more detail shortly.
So let me start with a discussion of our operational performance in the quarter and then move to our outlook for the full year.
As mentioned net sales in the quarter were flat on an organic basis and slightly ahead of our expectations.
The further sequential top line improvement was supported by organic net sales growth in North America of 60 basis points, representing the first year over year quarterly growth since Q4 fiscal 2016.
Growth was also seen in the Sun and skin care and Fem care segments.
And although wet shave organic net sales declined 3% in the quarter. This represented an improvement as compared to recent trends.
International organic net sales declined 90 basis points in the quarter cycling mid single digit growth last year, and reflecting the negative impact of the Q4 2019 loading ahead of the VIP increase.
Ecommerce growth accelerated in the quarter as we further expanded our capabilities and presence driven by strong holiday execution and growth in our gifting business.
Looking at organic sales by segment wet shave organic sales declined just over 3% in the quarter with declines in men's systems and disposables, partly offset by growth in women's systems and shave preps.
We continued to see solid performance in two of our most recent product offerings Bulldog razors and skin submit disposables.
Women's private label also posted strong growth in the quarter.
From a geographic perspective, North America continue to face competitive pressure with share losses over the last 12 weeks largely in line with 52 week trends.
Despite our progress we anticipate that our wet shave business in North America will remain somewhat challenged over the course of 2020 with the spring plan a gram resets, providing mixed results in key retailers. We therefore focused on improving our innovation capabilities and continuing to invest incrementally in our brands, which Ron discussed earlier.
Turning to skin care organic sales increased over 12% aided in part by the cycling of last year's Reformulations headwinds.
Adjusting for this we estimate underlying run rate sales for the segment to be up about 6% with strong performance in grooming and wipes.
Our weapons business grew over 20% in the quarter driven by distribution gains improved placement additional secondary displays and added seasonal demand.
Bulldog continue to realize mid single digit growth in our grooming business with improved velocity in the U.S. and achieve the leading market share position in the mass channel in Canada for both the beard and face care categories.
In our Sun care business, although largely off season here in the US our retail price increases were successfully executed across masson drug and we're cautiously optimistic heading into the summer season, where we will deploy increased DMP spend across both digital and traditional media venues.
Internationally Sun and skin grew 8.5% on a run rate basis.
Fem care organic sales increased 70 basis points with stable distribution, largely result of our increased trade spend and stronger Amazon shipments and consumption.
Looking for positive across Ob sport tampons and carefree liners.
We continued to see declines in Stayfree pads.
As Rob mentioned, while we're pleased with the initial progress seen in our efforts to reposition this business for sustainable success. We also know the path forward will be challenging as evidenced by some distribution losses at Walmart that will be felt in half two of this year from the recent planogram resets.
Changes to our Fem care business will take time, but we remain confident that once implemented they will improve the performance of this business over the medium and longer term.
Briefly looking at the category dynamics in the quarter in wet shave as measured by Nielsen The us razors and blades category decreased 130 basis points in the last 12 week data with men's systems decline of 3.2% women's increase of 4.6% and disposables declines of 2%.
Including both E Commerce and off line on measure, we estimate that us razors and blades increased about 1.5% driven by continued growth online and offline on measure.
From a market share perspective, as measured by Nielsen and our latest 12 week data we are at a 23.4% share in razors and blades in the us down 150 basis points versus a year ago and in line with 52 week results on a global basis, we estimate our share was down about 50 basis points.
Gross margin increased 20 basis points year over year to 42.5%.
Excluding cost associated with Sun care re formulation gross margin was flat.
Feeding our expectations due to a combination of timing tailwinds and improved structural performance.
Gross margin rate benefited from favorable market and product mix sourcing gains lower warehouse costs and more efficient trade spend which helped mitigate the impact of the final stages of the North American wet shave price investments and other investments in trade spend mostly in our fem care business.
AMC expense this quarter was 9.1% of net sales as compared to 11.3% of net sales in the prior year period.
The decrease in AMC was largely expected as we cycled the MPD activation of hydro sense and intuition called a year ago.
Our plan step up investment name peak spending this year will be highly seasonal and largely seen in the second and third quarters, where we anticipate investing about $25 million incremental year over year in conjunction with our Sun care season in the us as well as in support of our new women's wet shave campaigns and behind our.
Hold on brands.
Cdna, including amortization expense was $95 million or 20.9% of net sales as compared to 19.1% of net sales in the prior year period.
Excluding the impact of restructuring related charges Harry's related costs and other charges SDMA as a percent of net sales increased 50 basis points, two thirds of which relates to a one time item in Q1 last year related to a favorable vacation accrual adjustment.
Q1 results on a like for like basis increased roughly 20, bips driven by higher equity compensation, partly offset by savings from project fuel.
R&D expense increased 30 basis points as a percent of net sales over the prior year quarter as we added resources as part of our planned efforts to increase capabilities and reach in support of a more robust innovation pipeline.
GAAP diluted net earnings per share were 41 cents per share compared to a loss of one cents per share in the first quarter of last year.
And adjusted earnings per share were 55 cents per share compared to 37 cents in the prior year period with the increased equally driven by improved operating profit and favorable tax and interest costs.
Net cash used by operating activities was $46.9 million for the quarter as compared to a use of cash of 46.4 million during the prior year.
As a reminder, due to the seasonality of the company's business primarily in Sun care. The first fiscal quarter is typically the lowest operating cash flow quarter of the year.
The company's current net debt leverage ratio is about two and a half times, representing a full turn reduction over the last 12 months and further evidence of this business is strong free cash flow profile.
Now I'd like to turn to project fuel.
Our teams continued to execute the core drivers of this program delivering $15 million, an incremental gross savings in the quarter, which was inline with our expectation.
These savings helped to partially offset year over year inflationary headwinds across operations and increased investments in R&D and provide the catalyst for reinvestments behind key growth brands and markets.
Turning to our updated outlook for fiscal 2020.
We've adjusted our outlook to only reflect the impact of the infant and pet care divestiture on profitability and free cash flow and a new assumption for our full year effective tax rate.
20 to 20 EPS is now expected to be 15 cents less than prior guidance driven by the sale of infant and Pat with a partial offset from a lower effective corporate tax rate.
The sale of the infant Pat is expected to result in a 25 cents gross headwind to EPS with approximately half the impact coming from the reported segment results and half from stranded costs.
We are already developing plans to address these stranded costs and at this time is too early to comment on what we will be able to structurally offset.
For the remainder of the business our outlook is unchanged.
As are the three pillars I discussed last quarter.
For the first pillar topline stabilization, we anticipate flat to slightly down organic sales results.
The second element is gross margin stabilization supported in part by further fuel savings selective price actions and moderated trade spend.
And finally Choiceful brand reinvestment. This outlook continues to contemplate meaningful reinvestment in key growth initiatives and overall increase DMP spend particularly in quarters, two and three as I mentioned earlier.
Now to the specific elements of our outlook for 2020.
We estimate net sales declines to be in the range of down 4% to 5%.
This reflects a 440 basis point impact from the infant and pet care divestiture.
Currency at spot rates does not impact full year growth.
The outlook for GAAP EPS is in the range of 2040 cents to $2.60 and includes project fuel restructuring Nic enablement charges the gain on the infant and Petcare sale and other onetime charges.
Our adjusted EPS outlook is in the range of two hours in 95 cents to $3.15.
Adjusted EBITDA is estimated to be in the range of 350 to 360 million, reflecting approximate $20 million reduction due to the infant and pet care divestiture.
Products fuel is expected to generate about $70 million an incremental gross savings.
Despite anticipated easing in many commodity categories, we still expect that approximately 70% of the fuel gross savings will be used to offset continued wage inflation meaningful tariff headwinds and other rising input costs with the remainder invested back into the business.
Project fuel related restructuring charges are expected to be approximately $35 million.
The adjusted effective tax rate for the fiscal year is now estimated to be in the range of 20% to 22% and our outlook for fiscal 2020 free cash flow is now expected to be an excess of 100% of GAAP earnings with Capex estimated to be 3% to 3.5% of net sales.
While the total cash benefit from the infant in pet care divestiture will be approximately $60 million for the year. The transaction will result in a reduction in expected free cash flow as transaction taxes and other balance sheet adjustments will be reflected in cash from operating activities as well as lower net income while the proceeds from the transaction will be reflected in cash.
From investing activities.
And finally, I'd like to address our capital structure and comment on our capital allocation strategy going forward.
We have already proactively be done the process of addressing our financing leveraging our strong credit history attractive cash flow profile and recent success in obtaining the financing for the Harry's transaction and we're highly confident in our ability to put in place the required capital structure necessary to support the business going forward.
While addressing near term maturities.
In terms of our capital allocation strategy, our strong free cash flow generation, coupled with the fact that we anticipate being below two and a half times levered by the end of this fiscal year provide us with considerable optionality.
Since spin we have taken over a turn of debt off the balance sheet. While also returning over $650 million to shareholders in the form of stock buybacks and investing over $100 million in a successful acquisitions of Jack Black and Bulldog. Our primary objective will continue to be investing appropriately in the long.
Long term sustainable growth of this business, both organic and acquired.
With a longer term desired net debt leverage ratio between three and 3.5 times. We also will consider the potential to Opportunistically return capital to our shareholders.
With that I'll turn the call back over to the operator and open up for questions.
Thank you we will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
Hi, guys Speakerphone, please pick up your handset before pricing in that case.
Your question. Please press Star then too.
Hi, we'll pause momentarily to assemble the roster.
And the first question comes from Jason English with Goldman Sachs.
Hey, good morning, folks sorry, tardiness Sir.
A couple of questions from me first the organization I imagine has been and state of paralysis. The degree of turmoil I suspect in the wake in anticipation of the Oh, the merger with Harris with the decision to not move forward that obviously in light of the Fccs pressure on this can you.
Give us a state of the union on on on current status. It organization, how much turnover you had.
Whether we've seen in excess of good talent and.
And whether or not we should expect to see you how to encourage some cost to go out there rebuilt.
Hey, good morning, Jason Thank you for the question.
The organization has been very resilient.
We have.
The focus of the organization on building the business executing our plan.
I think you see that in the continued improvement of our results from a trend perspective.
Yeah.
The team we had working on the transaction we pulled some people all full time to work on integration planning.
To do that to do that work, we've had no meaningful change in turnover.
No no loss of any key talents in fact.
The organization was energized.
And moving forward.
With with or without a transaction, we're making a lot of changes here and how we work how we operate what we value what we expect people to do when they come in the office around accountability and focus and with that I think the organization has been resilient and the results show that.
Thats encouraging to hear and maybe related to that energy and amortization in the press release.
You mentioned that you're committed to building on next generation CPG company, maybe I missed it but I don't I don't remember that that language being used by you in the past.
What does that mean few and what are the implications as we think about the strategic direction eventual going forward.
Yes, I think the next generation language is forward looking just simply said an organization that is built to win.
Based on the current landscape.
Where the consumer is what he or she want from a product and experience.
How the consumer shops, they want to buy online.
Late in the evening to Havent delivered to their home that they want to buying a brick and mortar retail store.
And being able to offer our products up in an efficient way.
Wherever that consumer wants to shop and as part of that.
How you reach consumers with marketing messages that are on point in target that are relevant that are interesting.
That drive the consumer to do want to try the products that have a great experience when they do it architecting all of that where the eyeballs are in in a world where increasingly us online and digital.
[music].
It takes a modern forward looking skill set to go architect all of that and ultimately drive residency at the consumer all the way through to purchase.
And it's very different than the legacy consumer products model, certainly that I grew up in over the last 2025 years and so thats, what we mean by that and again, we were on that path.
Before the Harry.
Acquisition opportunity came along and will remain on that path as we go forward, albeit being transparent on us it's going to take us longer to get there in some cases.
Than what we would have had with plug and play DTC for example, with the areas expertise there.
Got it thanks, a lot guys.
Thank you. Thank you. Thank you Jason Operator next question. Please yes and that comes from Ali Dibadj with Bernstein.
Hey, guys I had a few questions one is.
Just as you step back from that Harry deal.
Many CPG investors look at CPG companies along kind of.
Spectrum are continuing on the on one hand, it's real high growth, so something like a luxury or Peter cut nice company on the other end of the spectrum, it's something like.
Good free cash flow driver a good margin driver good return to shareholders story like think of tobacco almost in that sense.
It certainly sounds like you guys decided to to take a shot quite risky shock you don't have your leverage, but but a shot at moving from one end the spectrum to a faster growth.
Part of that spectrum and thought you might be rewarded.
With Harry's with this change and not doing harried, how should investors think about you guys I've heard kind of to almost conflicting pieces of language in your prepared remarks here about where you want to sit so just wanted to get a sense of where are you on that spectrum. I think the answer is always were in them.
Middle, but where do you tend to lean one way or the other more growth the or more return of cash to shareholders free cash.
Yes, good morning Alley, Thanks for the question.
I think where we where we sit today, we we do have characteristics.
This strong free cash flow generator, consistent reliable delivery of cash flow.
And so we're very much I would say just in that place in terms of the profile.
Although we do aspire to be more of a growth oriented company and we think in our in our core categories, where we play.
Certainly beyond wet shave wet shave is stabilized now to flat to up one one and a half.
In absolute growth so its healthier than where we were.
One two years ago, but beyond that that the growth is really going to come from skin.
Skincare and mens and womens women's grooming when you look at growth rates.
High single digits, Stephen double digits in some areas. Some cares growing so work we're in categories that are actually growing.
And getting healthier and so as we look at our ability to innovate and partner with retailers and green.
Better ideas and innovations that are that the consumer wants that we absolutely can grow on top of generating strong free cash flow.
Stability and so I think we still aspire to be let's call. It very much in that middle consistent reliable predictable player.
I do think the opportunity with Terry's.
It was to even be a little more than that and to be at the top of the pack on consumer products certainly versus that peer set in what we could have done together just uniquely with the combination of assets and capabilities that frankly as there's not another combination out there that I see that that would match that and so it will just be a.
Different plan going forward.
And probably less aggressive on topline.
That's very helpful in terms of kind of setting guard rails up.
In that context.
How should we think about the role of M&A.
Now going forward versus returning cash to shareholders part one part two is how should we think about sustainable level advertising right that you want to put back into the marketplace given that it sounds like rod.
Attempt to move a little bit more growth the although not a lead product that you would have imagined with Harris.
Yes, I'll cover the M&A one.
Dan on how we're thinking about the advertising support for the business.
Yeah. It starts it starts M&A wise with.
That's having a successful track record with bolt on acquisitions frankly, this companies put together over time from the beginning via a series of acquisitions, most recently with Bulldog Jack Black.
Which are both performing very very well.
Founder led businesses the founders remains with us flourish stride.
And we were able to bring incremental capability to those businesses due to not only keep the growth going but accelerated in some cases, it's absolutely a case for continued bolt on M&A acquisitions I.
I think we're we're out of the market for Big transformational things. This was a unique opportunity for us here, but bolt on M&A is absolutely part of the plan going forward as Dan mentioned, we have very clean.
Balance sheet and leverage to go do that and and I also think we have a unique capability of integrating.
Companies into into our organization.
The final thing I'll say.
Actually two more points is we'll do this in a very disciplined way as we move forward being financially disciplined with within the as we move forward is important.
The second piece of this is it's not all about the U.S. and it's not about wet shave.
We've got opportunities globally, when we look at the map, we've got opportunities beyond wet shave, particularly in some care is an interesting category for us.
Yes, and then on the on the AMC model going forward.
We've said 2020 is a lean in year for us we expect to spend about a 100 basis points more our rate of sale than we did a year ago, we expected to largely be seasonal in Q2 and three.
And I think what we're seeing is our willingness to invest heavily behind campaigns that we believe it and we're seeing that now in some care, where we will invest behind both banana boat and Hawaiian Tropic, we will have new women shave campaigns coming to the market to be activated in two and three and were going up.
An incremental money behind Bulldog, because we are seeing great results on the shelf. So I think our thinking on AMC is now as we seek campaigns, we really like that we've got the plans in place to invest behind we'll do that and you'll see that step up largely into.
Okay. Thanks very much.
Thank you I'll. Thank you operator next question. Please thank you and that comes from Nik Modi with RBC.
Yes, good morning, everyone.
Two questions first Rodney you touched on some of the.
Brand streamlining work that you've been getting can you just give us an update on where you guys on that process. I mean are you have you completed transferrable demand analysis to kind of understand which switch skew should be coming off the shelf slow the first question.
And the second question is just bigger picture as you've been speaking to retailers and kind of re engaging them I'm just curious what what they're saying to you what are they asking edgewell to do what are they really want from you. What do you think you need to do in order to gain back some of the lost shelf space over the last few years.
Yep.
Thank you Nick and good morning on the under branch streamlining point I think were started down the path, we're not complete yet where we made meaningful progress.
Isn't disposables.
As you know we had multiple disposable brands in lines.
Across both men's and women's and we've consolidated our entire disposables business on the men side under the extreme brand.
The women side, we've consolidated all of our disposables under the skin intimate brand.
The big simplification around SKU reduction.
It's it's a big focus around just two brands now versus what was six or seven brands in terms of of putting support and building those brands out.
And so we feel good about that progress.
There's more work to be done.
On on men's and women's systems again were on the path to do that and I think will you'll see us continue to make progress towards.
Fewer but yet bigger brands that we can put support behind as we go forward. So I'd say, we're starting to far from complete there.
In terms of retailers in what they want I think it's actually quite simple they want partners.
That can help them grow the category.
And deliver products and innovations that consumers want.
And are willing to to buy in higher demand than what we have today and.
I think if you look at the landscape.
And what would ultimately made made Harry successful and.
And get to where where they got was they were able to take propositions to the retailer that grew the category.
And if you look at what's your line is doing in this space now.
With a focus on innovation value to consumer consumer insights, leading us to where growth can be had in the category. That's what retailers want and I think as we look at our innovation pipeline and roadmap and what we have coming.
We're very encouraged with what we have.
As we look at our strategy to move forward in a more consumer centric way with data analytics insights, leading our thinking on what we take to the shell, we feel good about where that setting and certainly as an overall corporate priority and commitment, including my time with retailers.
We are serious about partnering with retailers and delivering across all three of those.
And so I think is pretty simply if they want we need to help grow bring value back into the category.
Great. Thank you very much.
Okay. Thanks, Nick Operator next question. Please thinking that comes from Bill Chappelle with Suntrust.
Thanks, Good morning.
We are building.
Two questions first can you took a little bit more about just international wet shave kind of the outlook can mean that seems to be fairly stable and maybe I didn't know if there's any if it's more products or new product introductions marketing or or if there's just some you know it's just much more stable than the U.S.
Yes. Good morning. It it is more stable in the U.S, particularly in the last 12 weeks in Europe, where you might recall coming out of Q4, we saw challenging wet shave category in Europe, we saw a heightened competitive pressures.
We see a slightly more stable outlook today, there and the results in Europe.
Reinforce that we also as you know have a very strong presence in Japan.
And so good results in the quarter when we normalize for the VIP impact of Q4. So we feel like we've got the right brands were executing better we are spending incrementally your one Q1, rather year over year and yes, we saw more stable what shape category and bill if I could add to build on this not only is the category more.
Stable.
But this is something we've gotten better around our innovation capability and how we architect and build our brands to resonate with local consumers. Historically, we were in a very global average.
Innovation model.
And under the new leadership, we have in place.
Globally, we've gone to a much more regional local tailored model.
With our innovation, where there is a global menu.
Of innovation that frankly resonates more local consumer I'll give you a couple of examples.
In.
In Germany, we started to work on a regional rebrand and relaunch of the Wilkinson sword brand that was not led by the global team Global team helped do that but the regional team in Europe led that execution and activation in a way that's much more interesting to the local consumer.
Another example is we're launching schick five in China.
It's a razor system.
Architected for the Chinese consumer with local Chinese design firms and insights.
Being put into the market in the past that would have been a.
Something.
Built for the us market have other than travel into those markets and so our regional tailoring and our focus on local insights is starting to show up in the market in the results.
Got it and then just follow up on.
Sun care skin care fuse remind us.
The pricing that went into effect I assume everyone followed the that pricing within the industry and then is there anything I need to we need to keep in mind last year was kind of with the reformulations funky on the quarters. So just what the what the next two quarters kind of the flow looks like.
Ill take the first question.
So we won't get into too much of the specifics around the pricing.
We took a bold steps in both mass to put us on par.
From a from a frontline pricing standpoint and in drug.
To our knowledge no. One has followed yet, but we had extremely strong execution in selling or with the retailers as I said in my remarks, we're quite comfortable now.
Cautiously optimistic as we think about the Sun care season.
We think we've got the pricing right based not only on our brand equity, but also based on significant cost that the entire category has seen.
Overtime. So we feel good about that sorry, what was this can you repeat the second question I've got just over the next two quarters health sales flow.
Yes on the on the timing of the sales flow the.
Last year, we started the year. The first couple of core is essentially on allocation as we went through the reformulations.
We don't have that headwind this year.
The simplest way to think about it is.
We're we're more on a like for like.
Matching selling consumption as we go this year, we just weren't there last year due to be on allocation.
Got it thank you.
Thank you Bill Operator next question. Please thank you and that comes from Citrus equivalent was GBS.
Hi, good morning.
So.
So Rob My question is.
I heard earlier in the call you downplaying the U.S. mens shave business. So I'm curious as you think out like the next few years, what should investors think about in terms of your top category country combinations, where the company's most focused on a lot of larger multinationals will talk about whether their focus on U.S. law.
Foundry or German wet shave et cetera. So what are the three big platforms, you would kind of point investors to that matter. Most as you look out whether it's you as private label, you know, Japan shave use skin care or Sun care anything or would it would be helpful. Then cleanup question would be.
Can you comment on the cash break up fee.
Sure taking a reversal in the there was no cash breakup fee.
And on the first question.
The priority is going to be around grooming.
In some care.
From a category perspective geographically us in Canada.
And then broadly international with a particular emphasis on Asia.
And outside of Japan, do you have to scale in house to really deliver on lot of this platforms that.
You look out over those regions or is there any kind of change into how you think about scale specifically outside of the U.S. Thank you.
I think our infrastructure outside the us is reasonably good particularly in Europe. We we've got good infrastructure. There I think as you get to Asia and as you point out outside of Japan, which is a real area of strength for us in terms of our scale. The team there the talent we have on.
The ground.
We don't just have that level of scale in terms of market share in other markets around Asia.
We're in the process of building some of that out.
Already we have some good distribution partners, we work with.
However, it's one of the areas. If you think about M&A and where we would put some focused there's the opportunity to to accelerate our progress and building some scale.
Via the M&A lever.
As we move forward over time, so I think it'd be a mix essentially organic and M&A as we think about Asia.
Thank you thank you Steve.
Operator next question. Please yes, not comes from phase out way with Deutsche Bank.
Yes, hi, good morning.
So two questions. One is just I was wondering if you could give us.
A few more comments around the Harry's litigation that you referenced sort of what's the prop premise of that are they saying that you operated out of that faith or just sort of like what is that litigation about.
And then my second question is just around gross margin, maybe if you could give us some color around you know the impact of mix input costs volume to de leveraging tariff so trying to corridor and how we should be thinking about those metrics on a go forward basis.
Hi, good morning flies I'll take the first one on litigation.
Gross margin.
On the litigation 0.1st to clarify to our knowledge.
We do not.
We do not know that that Harry's has filed a lawsuit.
As a meat coming into this call we don't have knowledge that they filed a lawsuit.
But they are council sent us a letter, saying that they do intend to pursue litigation.
Yes, our view as we stated in the press release.
Is we believe that any litigation that would be brought.
From Aries towards US has absolutely no merit.
EBITDA.
In terms of the the gross margin question as I mentioned in my prepared remarks.
The margin performance in the quarter was slightly stronger than than we had anticipated there were so a combination of what I would call tailwinds.
We mixed out quite well both in product and market, which certainly helped the margin profile promotional intensity in the quarter eased a bit from what we anticipated.
And then we also performed really well in terms of the fuel program.
And executing to help mitigate inflationary pressures. So it's a good quarter. There are some timing and unique tailwinds there, but it keeps us feeling comfortable with our full year outlook, which is a much more stable gross margin profile than we've seen.
Thank you. Thank you present operator next question. Please yes.
Tom with Bank of America.
Great. Thanks.
Happening I was hoping you could.
Two different areas first in terms of sales mix, which you expect it looks like going going.
Going forward.
Further diversification.
Skin have been growing Fortunately so just your view in terms of how you're calling for count mix and then what kind of investment.
Thank you have to make to build out some of the areas that you expected Harry to help you on specifically digital capabilities and can go to market.
Good morning, Olivia Thanks for the questions.
On the sales mix I think.
As we look forward, we would continue to expect in broad terms moving forward.
The Sun and skin care, so that grooming and.
And skin care area, we'll continue to lead the growth for us.
We know we've got some headwinds as Dan mentioned on Fem care around distribution and the Planogram set changes.
For this year, but overtime, we would expect to have that continue to improve trend wise, but certainly.
Grooming skin Sun care would lead away from a from a wet shave business I think we still feel really good about our international business and we expect those trends to continue to improve.
In the U.S. is an area, where we just know with in particular, what you see in Nielsen.
The.
The distribution changes as we look at that where we're going to continue to have some headwinds that's all factored in to what we've thought about and we would be optimistic over time.
That we can improve those trends in the us in shape and we would expect to do that.
The other thing I'll tell you.
About trends and you don't you don't see it in all the measured Nielsen data, but E commerce in the quarter just finished for US was up 47%.
And so there's an increasingly large base of sales that are not captured in Nielsen. So when you when you put that together our trends obviously look better.
But but those would be the areas.
And then in terms of investment required to build out.
Around direct to consumer digital marketing.
And the infrastructure capability to make that happen we were on its journey to do that it had made significant investments.
Leading up to the Aries transaction.
We'll continue to put investment.
In that area and that looks like.
Technology choices in what the technology stack that we use to run any detail DTC channels that we have it'll be incremental resources in in direct to consumer managing the E Commerce channel.
We'll add people in there and I think we also thought about some incremental resources.
In the marketing area around digital marketing specifically in some areas, where we know we want to take control of some of the value chain around social media management.
How we do some design work today that is third party manage for us.
Well look at bringing some of that in house. So thats all contemplated in our go forward investment plan I will put a number on it but its contemplated within the project fuel work in how we looked at reallocating, where we put investment in the company.
Great. Thanks, Thank you.
Yes.
Thank you and the next question comes on Kevin Grundy with Jefferies.
Thanks, Good morning, everyone or two quick ones from me first one maybe for down capital deployment and the balance sheet now with the Harry's news and debt leverage it at about two and a half times or even less than that so why three to three to half times. The right level for this business and then second in light of the Heritage News was there any thought to pivoting more agree.
Massively toward share repurchases with the stock down here and then of course in the process, you're moving more towards your target leverage ratio and then I have a follow up on Eric. Thanks.
Yes. Good question, So I guess I put my remarks in context, we're quite comfortable.
That this business can easily handle a leverage ratio of three to three and a half times, we think that gives us a very healthy balance of of ammunition to invest in this business.
And to think about a healthy balance sheet that allows us to.
Be aggressive where we want to be aggressive in terms of acquisition reinvest in growth and Opportunistically return capital shareholders as you've seen through the Harry's potential deal. We were also comfortable leverage leveraging up even higher than that if something was attractive to us. We just we don't see that right now I think rob's comments are clear.
Sure we're looking at acquisitions more through the lens of sort of bolt on complimentary acquisitions. So we have to think about all of those elements as we think about what's the right profile for this business going forward.
And again because of the healthy balance sheet, three 3.5 times for US is a place of comfort.
Okay. Thank you quick follow up is just for Ron what are the key leadership positions now in North America that needs to be filled there we're going to be assumed by the Harry's management team I know, there's a lot of enthusiasm around what the founders and what their team was going to bring what are the big roles.
Any at this point that that need to be filled and I'll pass it on thank you.
Yes. Thank you go on the.
I'm going to talk about one role is the North America leadership role.
We mentioned Collins been double added now for over a year in running the global operations.
And also.
Running to North America business.
As we said that that was on sustainable columns kind of great job. When you can see from the from the North American results the results of improved stabilize.
We've got a better team in place.
You know in North America, now across sales and marketing and the Big Big thing. We do is getting a dynamic leader in there that's experience it can come in and really pick up the work that did any and Jeff we're going to lead and so as you look at that.
Profile, we're going to go get.
It's a leader that dynamic and experienced and that is the physician that we need to Phil.
And then from from that point forward. If there are other changes that need to be made will work hand in hand with that leader.
Accordingly to to make further changes but.
At that time portray it starts with the leader.
Thank you Kevin. Thanks, Operator next question, please unless when it comes from Jonathan Feeney with consumer edge.
Good morning, Thanks, very much two questions for me first on.
Wet shave you commented on a number factors on margin within the wet shave, but I'm trying to understand mix. When you think about men CIT men's systems disposables women's system shave preps.
It's been my understanding that men systems are by far the most profitable not expect that's been a major issue, but if you can count anyway. You can comment are you mentioned alive, what mix looks like between those brands specifically how critical it is to get men systems flat to growing again and the overall margin plan that would be great and.
Question is.
It strikes me that yes.
You have now over 60% of your business and wet shave at your manufacturing capabilities are quite unique in there it's really any as anybody else out there who has those kind of the capability to while there's one other and they're not.
No there are a lot bigger a lot more diversified I mean are there other ways of taking advantage of that strategic position. Your end, whether its partnership deals can manufacture or are there ways, you could think of where that could get yet that quantum improvement in and in execution that you were looking forward there he's made.
The without all that call. Thank you.
Yes. Thank you Jonathan good morning, and thanks for the questions.
On wet shave from from an overall margin structure.
Men's and women's systems.
The most profitable are the most profitable segments within Webshare.
Disposables and that in private label or below that so your points right is when you are declining in the systems business.
Economically it has an outsize impact.
And so that that's correct.
As we.
As we look forward.
The uniqueness of the assets that we do have around not only IP technology patent space, but manufacturing know, how and technology around manufacturing process.
It is quite unique.
Two of us habit.
And so is is we look forward.
Where does don't take anything away from our conversation.
Grooming inside we think have nice growth rates in areas that we can grow when in.
We still fundamentally believe we can be successful in wet shave.
Partly because of the structural dynamics in the assets we do have.
And so as we move forward and allocate investment and look at where we can grow and develop.
Filling up our manufacturing plants with more volume.
Is a big idea and so thats something were looking at organically is as we make investments where marginal dollar in return can behalf.
And I think that goes across private label disposable men's and women's systems, all the way through other partnerships or other ways to to create value with those assets.
I would look at all of those things as we move forward.
Thank you thanks John.
Operator next question please.
Actually there is something else the present time and that goes a question answer session started to return the Florida, well little for any closing comments.
No. Thank you all for your time today, we appreciate the continued interest that investment.
Thank you Hey conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.