Q3 2021 Edgewell Personal Care Co Earnings Call
[music].
Good day, and welcome to Edgewater Snow care, Q3, 2020.1 earnings call all.
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I would now like to turn the conference over to Chris Gough Vice President of Investor Relations. Please go ahead and good morning, everyone and thank you for joining US. This morning for <unk> third quarter fiscal year 2021 earnings with me. This morning are Rod Little our President and Chief Executive Officer, and Dan Sullivan, Our Chief Financial Officer, Rod will kick off the call Daniel I'll hand, it over.
To Dan to discuss our results and updated full year outlook and we will then transition to Q&A. This call is being recorded and will be available for replay via our website www dot Edgeworth dot com 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 and product launches savings and costs related to restructurings changes to our working capital metrics currency fluctuations commodity costs category value future plans for return of capital to shareholders and more and.
Any such statements are forward looking statements, which reflect our current views with respect to future events. These statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption risk factors and our annual report on form 10-K for the year ended September 30th 2020 as may be amended and our quarterly reports on form 10-Q.
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, except as required by law.
During this call we will refer to certain non-GAAP financial measures. These non-GAAP measures and are 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 on our press release issued earlier today, which is available at the Investor Relations section of our website management believes these non-GAAP measure.
<unk> provide investors with valuable information on the underlying trends of our business with that I would like to turn the call over to Rod.
Thanks, Chris Good morning, everyone and thank you for joining us on our fiscal third quarter earnings call.
This was a strong quarter.
Organic net sales increased 12, 5% with growth across all segments.
This broad based performance was driven by good execution across the business and underpinned by consumption growth in all 3 segments in North America as many of our categories continued to strengthen as we cycled last year's COVID-19 headwinds.
We saw particular strength and Sun care, where global organic net sales increased nearly 50% exceeding our own expectations and the quarter.
We also saw improved consumption and our international markets, where organic net sales increased 9% despite ongoing uncertainty and further COVID-19 restrictions and many of our core markets.
Adjusted operating profit and the quarter increased $23 million driving 35% adjusted earnings per share growth and we generated $163 million of free cash flow in the quarter.
We are pleased to increase our full year outlook driven by our strong performance to date and expectations for continued Sun care category strength over the remainder of the season.
Our organization continued to execute well against our strategic priorities, making meaningful investments and our brands and products incrementally investing and our innovation roadmap, both near and longer term driving increased digital engagement and activation and importantly, delivering $19 million and grew.
Most project fuel savings in the quarter, helping to mitigate significantly higher commodity and other input costs.
And July we also issued our 2020 sustainability report, which reflected strong progress to date and said increasingly ambitious goals and as part of our sustainable care 2030 efforts.
Before we review our segment results I want to make a comment on the broader operating environment.
While the demand environment is clearly benefiting from initial reopening and other stimulus efforts. Our success. This quarter demonstrates the focus of our global teams to execute our strategic initiatives, including our commitment to invest commercially and growth and to remain agile and resilient resilient and the face of a.
Fly chain environment that is increasingly challenging and volatile.
We continue to see accelerated cost pressures across most commodity categories, especially resins and resin derivatives as.
And as well as higher wages and transportation costs.
Gross savings from project fuel year to date, a $52 million have enabled the business to offset many of these unprecedented increases.
We have built a strong core competency of continuous improvement is seen in the success of project fuel. This discipline is embedded in our go forward plan as discussed at our Investor Day last November.
Our teams will continue to execute on productivity and efficiency efforts and the entire business will work all cost and revenue levers at our disposal to mitigate the effects of these cost headwinds.
Now let me take you through a few of our segment highlights.
Our wet shave business delivered another quarter of growth with.
With organic net sales, increasing nearly 6% reflecting growth in North America, and international markets with strong growth and women's systems and disposables.
And the Sun and skin care segment organic net sales increased by almost 30% and the quarter.
Primarily driven by nearly 50% organic net sales growth and Sun care.
You all by very strong consumption gains in North America, and 17% organic net sales growth and men's grooming driven by Jack Black.
And personal hygiene wet ones organic net sales decreased 32% against a 50% year over year increase and quarter 3 last year.
Consumption for wet ones continues to be impacted by high levels of inventory at retail, particularly in the food and drug channels.
While consumption at mass retailers increased and the quarter as we began to see a return to more normalized branded product distribution profile on shelf.
We remain confident both and the underlying category demand over the mid to longer term and the desire of both retailers and consumers to choose trusted category, leading brands like wet ones.
And feminine care organic sales increased 6%, reflecting increased consumption compared to a year ago as the category begins to gain traction after a prolonged period of declines cycling and the COVID-19 pantry load effects last year.
I'm encouraged by our performance this quarter and to see our core categories, starting to return to growth, although largely not yet back to pre COVID-19 levels.
While the past year has been unprecedented with COVID-19 negatively affecting all of our key categories as well as ongoing supply chain challenges. Our teams have worked relentlessly to execute against our initiatives to transform the company.
Our strong profit growth and cash generation and the third quarter is a testament to their disciplined execution I want to thank each and every 1 of our edge while teammates for their valuable contributions and helping us reach this inflection point for the company.
In summary, with 3 quarters of the fiscal year behind us and as our key categories are now showing initial signs of returning to growth. We are increasingly confident and our full year sales outlook and our ability to deliver on our updated profit outlook importantly back in November of 2020, we outlined a bold path.
Word for edge, well reflective of sustainable top line growth healthy free cash flow generation and accelerated adjusted EBITDA and EPS growth. Despite.
Despite being faced with unprecedented challenges associated with COVID-19, our 2021results line up well against this ambition and the progress. We've made this year as an organization will continue to position us well to deliver on our long term financial objectives.
And now I'd like to ask Dan to take you through our fiscal third quarter results and provide detail on our updated full year outlook.
Thank you Rod and good morning, everyone as Rob discussed we're pleased with the strong sales and profit performance this quarter and we continue to make good progress against our strategic initiatives through the first 3 quarters of the fiscal year.
These include increasing commercial investment and a targeted way and support our brand equity building innovation and stronger digital activation Kantar.
Continuing to strengthen our internal capabilities and the areas of E Commerce and brand marketing and seamlessly executing our fuel cost savings program.
As a reminder, our framework for sustainable value creation is to generate consistent organic topline growth to make efficiency and continuous improvement core to how we run our business and a catalyst for investing and our growth objectives to strengthen our gross margin profile with focus on both cost and revenue management.
And to direct our attractive free cash flow and a disciplined way to improve shareholder return.
Against the backdrop that is still COVID-19 impacted in many of our markets as well as an increasingly challenging supply chain environment. Our results demonstrate good progress against these objectives organic net sales for the quarter increased 12, 5% aided by strong category consumption as compared to last year's COVID-19 impact.
Quarter year.
Year to date organic net sales have turned positive increasing 2%.
Organic net sales and our right to win and Sun and skin care segments increased 29% and the quarter with strong Sun and grooming performance.
Shave organic net sales increased nearly 6% and the quarter with growth and both our North American and international markets as the category begins to gain traction following the COVID-19 disruptions of last year.
These improving consumption trends combined with our focus on brand building investment consumer centric innovation and improved plant and Graham outcomes position us well moving forward.
Both on the third quarter and on a year to date basis, we delivered 40 basis points of adjusted gross margin rate accretion versus last year, despite intensifying cost headwinds and the last quarter.
Our project fuel program continues to excel, while underpinning our profit growth with gross savings to date and fiscal 2020.1 of approximately $52 million.
And our increased focus on effectively managing price promotion and mix is also helping to mitigate and increasingly complex cost environment.
Importantly in the quarter, we remained in investment mode, and the $82 million of A&P spend represented the highest level of investment and over 2 years and a $14 million increase over the same quarter last year.
And we focused our investment on digital activation and supporting new product innovation and key brand Relaunches.
And strong cost discipline remains central to our business model with adjusted SG&A growth of just over 3% year over year, when excluding the impact of the chromo business as we invested and enhancing organizational capabilities, most notably and ecommerce brand marketing and data and analytics.
Now turning to our supply chain.
All of our global manufacturing plants and distribution centers remained open and fully operational despite the broader operating environment, becoming increasingly challenging.
From a cost perspective, rising resin prices and accelerated wage pressures have created increased near term margin pressure.
Additionally, COVID-19 continues to negatively affect the macro operating environment.
<unk> suppliers, extending port delays and adding distribution complexity across the supply chain all.
All of which brings both operational challenges and added costs are.
Our teams remain highly focused on navigating this challenging landscape and are working collectively to mitigate the impact to our business.
Now I'll turn to the detailed results for the quarter.
As mentioned organic net sales and the quarter increased 12, 5% with growth and all 3 core segments fueled by higher consumption compared to last year's COVID-19 impacted quarter on.
Organic net sales in North America increased 14, 7%, while international markets increased 8.8%.
Our ecommerce business declined by 6% and the quarter compared to very strong 77% growth a year ago, but was up over 30% on a 2 year CAGR.
With reopening and increased foot traffic at retailers not surprisingly, we saw some sales shift back to brick and mortar.
Looking deeper at our segments.
Wet shave organic net sales increased 5.8% and the quarter largely driven by strong performance and women's systems and disposables and in both North America and international markets.
Our women's systems business continues to be the primary catalyst for growth with organic net sales, increasing nearly 12% driven by our key brands, including hydro silk intuition and skin intimate as well as private label, which grew over 30% and the quarter cycling, 40% growth last year and Q3.
Disposables organic net sales increased 11% and we gained share and the category.
And the highly competitive men's systems business in North America organic net sales increased by about 3% largely driven by private label, while international markets lagged.
And the U S razors and blades category consumption increased 8.8% and improvement from the previous quarter and 52 week trend.
The category growth and the quarter was seen across men's and women's systems and disposables.
For the 12 week period market share for the Schick franchise declined 40 basis points, which was consistent with our 52 week trend.
Branded disposable share increased 80 basis points, driven by gains and sugar original and she'll touch up.
While and branded women's systems near term supply chain challenges negatively impacted our intuition and hydro silk brands on shelf, resulting in share loss and the quarter we've.
We've taken additional steps to improve product flow to shelf as we work through the network wide supply chain challenges and have already seen improved availability and the current quarter.
Sun and skin care organic net sales increased over 29% driven by strong Sun care and men's grooming sales.
Sun care organic sales in North America increased about 50% and the quarter and over 3% on a 2 year CAGR.
In the U S Sun category consumption increased 34%, a sharp improvement over last quarter and 52 week trends.
Hawaiian Tropic and banana boat, both experienced modest share declines largely reflective of last year's strong Q3 performance, where our brands gained 140 basis points of market share.
On a 2 year basis, our portfolio has gained 60 basis points of share as compared to the 2019 baseline.
Importantly, the category remained strong and July with consumption, increasing 14% and the 4 week period, ending July 17th and our combined brands gained 50 basis points of market share.
Men's grooming organic net sales increased 17, 2% in the quarter. The total men's grooming category and the U S ex razors and blades increased 12%.
Wet ones organic net sales decreased 32% and the quarter as compared to an increase of over 50% and Q3 of last year.
Category growth was 27% versus a year ago as the category lapped the lowest point of consumption during the pandemic due to constrained product availability and prior to new entrants hitting the shelves.
Wet ones consumption declined 11% driven by declines in food drug and club channels Importantly, we're beginning to see signs of brand consolidation on shelf as retailers cycled through high levels of alternative brand inventory.
Wet ones consumption at mass retailers increased 13% and the quarter and our share grew by 160 basis points and this channel.
Fem care organic net sales increased 6.1%, while the U S category increased 12%.
This quarter market share declined 90 basis points and improvement over last quarter and 52 week trends.
Playtex sport gained share in the quarter reflective of new product launches and stronger retail support on the heels of the positive distribution outcomes, we discussed last quarter.
Now moving down the P&L.
Gross margin rate on an adjusted basis increased 40 basis points compared to the prior year. Despite the challenging macro cost environment as further fuel savings improved pricing and promotion and favorable mix offset rising commodity labor and supply chain costs.
A&P expense increased $14.4 million this quarter and was 14, 3% of net sales, reflecting increased investment and focus on critical commercial efforts supporting the shack hydro relaunch stubble eraser and skin care brand launches and increased and fees and Sun care support.
Digital spending represented over 70% of overall advertising spend and the quarter.
SG&A, including amortization expense was $97.5 million or 17% of net sales and.
Adjusted SG&A as a percentage of sales decreased 200 basis points versus last year as sales leverage more than offset increased costs associated with the chromo business and unfavorable FX.
Adjusted operating income was $80.6 million compared.
Compared to $58.1 million last year, reflecting the benefit of increased sales and gross margin, partially offset by higher A&P and SG&A costs.
GAAP diluted net earnings per share were <unk> 74, compared to 9 and the third quarter of fiscal 2020 and adjusted earnings per share were <unk> 89.
Compared to <unk> 66, and the prior year period, primarily reflecting increased operating income.
Adjusted EBITDA was $101.2 million compared to $82.8 million and the prior year.
Net cash from operating activities for the first 3 quarters was $155.9 million or <unk> $37 million more and the corresponding period last year driven by higher earnings.
And the third quarter alone, we generated $163 million and free cash flow.
Both our capital structure and liquidity position remains strong we ended the quarter with $438 million and cash on hand, and access to a $425 million credit facility and our net debt leverage ratio at June 30 was 2.4 times trailing 12 month adjusted EBITDA.
That brings us to our outlook for fiscal 2020.1.
We're raising our outlook for the fiscal full year for both adjusted EPS and adjusted EBITDA reflective of our strong performance to date and encouraging signs of traction and certain categories.
Balanced against the reality of heightened inflationary and operating cost pressures across our operations.
For the full fiscal year, we still expect organic net sales to increase low single digits and reported net sales to increase mid single digits and both are now expected to be at the higher end of their respective ranges.
Adjusted EPS is now expected to be and the range of $2.80 to $2.90.
Adjusted operating profit margin is still expected to be largely in line with 2020 levels and adjusted EBITDA is expected to be and the range of $358 million to $366 million.
The adjusted effective tax rate is still expected to be and the range of $23.5 to 24, 5%.
We're increasing our full year outlook for project fuel gross savings to be approximately $70 million for the fiscal year and $280 million for the full project and as we've discussed all year. We continue to be mindful that we're operating in an environment that has greater uncertainty than normal, making flexibility and agility a key focus for our organization.
Innovation.
Now, let me provide a bit more insight into the core elements of our expected <unk> performance.
Our outlook for the quarter reflects a transitory product return charge and Japan ahead of our planned hydro a relaunch and fiscal quarter 1.2022.
This charge negatively impacts both organic net sales and gross margin rate for the quarter by 150 basis points and 70 basis points respectively.
Inclusive of this 1 time charge, we anticipate mid single digit organic sales growth, which on a 2 year basis would deliver about a 1% CAGR.
And our gross margin rate will likely be down about 70 basis points in the quarter year on year.
Excluding the impact of the onetime charge and Japan, the underlying run rate organic net sales growth in fiscal <unk> would be about 6% and our adjusted gross margin rate would essentially be flat versus the prior year.
And finally, we anticipate operating profit margin for the quarter to be above 14% inclusive of continued investments and our brands and organization and.
In closing as Rod mentioned, we are very pleased with our Q3 results and corresponding increase and our full year outlook.
Our organization remains focused on executing against our go forward strategy that we outlined at our Investor Day last November and while work remains we are encouraged by the demonstrated progress we are making.
And for more information related to our fiscal 2021 outlook I would refer you to the press release that we issued earlier this morning and.
And with that I'll turn the call back over to the operator to start the Q&A session.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone and.
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David.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jason English with Goldman Sachs. Please go ahead.
Yeah.
Jason English with Goldman Sachs. Your line is open.
Hey, Thanks, sorry about that.
You had said over here and I'm trying to navigate through.
A couple of quick questions you mentioned, you've got some you've seen cost escalate.
And I think you called out resins, and you called out some labor and freight.
All in all when we look at your P&L, it seems to be relatively modest and context to what many others in the industry are facing so I guess my question is.
Is this a byproduct of your cost basket.
Or is it just a question on timing and as we roll into next year and I'm, not asking and give guidance into next year, just general context and cancer and inflation.
Is there a is there a sharp step up and cost inflation that we should be contemplating or thinking about as we think about the next few quarters and into next year.
Yes, good morning, Jason.
It's rod here.
It's a good question right. It's a key thing we're all looking at.
In this sector and and certainly within edge well.
I think we are.
And we're optimistic that we are pulling all the levers that are available.
To deal with higher input cost, it's just the fact the resin issue wages.
Airfreight with all the port congestion to get inventories and product where it needs to be.
Is more expensive than ever.
There's not a timing difference here for us I think the biggest thing is we were proactive with project fuel and.
And we've talked about the success, we've had with the cost takeout.
And we started that program 3 years ago. It's now part of how we work of looking for efficiency every day.
But that was and aggressive and robust program.
The teams have have built a new capability around strategic revenue management.
Looking have and our innovation team is looking at bringing accretive innovation to market very specific actions towards managing accretive mix and the product portfolio.
And then being.
Dresses and thoughtful around all levers of pricing.
Promotion discipline and promotion return and payout.
And building levers around that we have targets against all of those pieces.
All of the gross margin puzzle and so it's a proactive approach.
To managing the gross margin line and I think it's on our P&L reflects the great job. Our team has done to this point in all.
Offsetting the headwinds now theres more to come no doubt and.
And we're going to be pulling all those levers as we move forward. So I don't think there is.
A sharpening of Steepening of the curve.
But it's here and we're going to have to deal with it and we'll continue to pull the levers and I don't know if you'd add anything.
The only thing I would add maybe just for context, because we're certainly not immune to it Jason as you can imagine we're looking at in <unk> North of 300 basis points of headwind in the margin profile due to the cost environment Rod described so.