Edgewell Personal Care Company Q2 2023 Earnings Call
Good morning, and welcome to the actual POS Sarcasm Q2, 2023 earnings conference call.
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I would now like to turn the conference over to Mr. Chris Gough Vice President of Investor Relations. Please go ahead.
Everyone and thank you for joining us this morning, <unk> second quarter fiscal year 2023 earnings call.
To me. This morning are Rod Little our President and Chief Executive Officer, and Dan Sullivan, Our Chief Financial Officer.
That will kick off the call then hand, it over to Dan to discuss our results and update to the full year 'twenty three outlook before we transition to Q&A.
This call is being recorded and will be available for replay via our website www dot <unk> 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 product launches savings and costs related to restructuring acquisitions, and integrations and changes to our working capital metrics currency fluctuations commodity costs category value future.
Our plans to return of capital to shareholders.
More.
Any such statements are forward looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events plans and prospects. 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 32022, as may be amended in our quarterly reports on Form 10-Q, which is on file with the SEC.
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, 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 is shown in our press release issued earlier today, which is available at the Investor Relations section of our website.
This non-GAAP information is provided as a supplement to not as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. However management 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.
Thank you Chris Good morning, everyone and thanks for joining us on our second quarter earnings call.
This was a very strong quarter with organic net sales increased over 11%.
Our growth was broad based coming from all major geographic regions and all segments of the business.
Growth was also balanced coming in equal parts from higher volumes and price execution.
Enabled by better brand residents and stronger presence on shelf.
Our operational execution also improved enabling us to deliver better in stock positions and me.
Meet accelerated retailer demand in the quarter.
We delivered against our productivity and efficiency initiatives, which coupled with price execution served to mostly offset significant inflationary headwinds.
And we continue to realize the benefits from our ongoing efforts to strengthen our commercial teams and capabilities, most notably in our international markets.
This strong top line performance translated to the bottom line as well.
What continues to be a challenging operating environment adjusted earnings per share increased 12% <unk>.
Despite facing a 16 cent headwind from currency and over 500 basis points of gross inflationary headwinds and cost of goods.
On a constant currency basis adjusted earnings per share increased over 40%.
Looking to the drivers of our performance. This quarter. We saw further evidence of meaningful progress in our transformation demonstrated by fundamental improvements across our brands, which reinforces our confidence going forward.
This structural improvement is most evident in our ability to generate consistent topline growth as we delivered our eighth straight quarter of year over year organic sales gains are.
Our ability to consistently and sustainably grow the top line is fueled by the strides we have made across brand building product innovation and retail execution.
There's probably no better example of this than in our Fem care business.
It doesn't get as much attention as some other segments, but the turnaround in fem care has been instrumental to our success.
With a focus on better innovation, consistent investment and better shelf outcomes.
We've seen meaningfully better sales and share results and our position in the category in the U S has strengthened.
In the quarter, both North America, and international markets delivered double digit organic net sales growth driven in equal parts by volume and price.
And while healthier categories and favorable phasing of demand were contributors.
The fundamental change in our business trajectory as a result of better execution on shelf.
Our retail relationships are stronger our commercial execution and on shelf positioning is better and our innovation is more centered on the consumer.
As I mentioned last quarter, our brands are healthier and better represented on shelf.
Any point since we began as an independent company.
Our focus on consumer centric innovation and new product development is playing a vital role in our strengthened portfolio.
With the acquired disruptive brand building capabilities of the criminal and Billy teams now benefiting our broader portfolio.
Importantly growth this quarter was also underpinned by better supply chain execution.
We improved stock levels, and fem care, particularly in tampons and in Sun care, we were able to meet increased retailer demand across the United States, Australia, and Mexico, largely due to our strategic decision to build product early in the cycle in anticipation of another strong season.
Market share performance across the total portfolio was solid.
Supported again by meaningful share gains in key markets for a leading women's shave portfolio.
Importantly, the Billy brand has now expanded across the retail landscape here in the United States and early results are very positive.
While our efforts to improve service levels are critical equally important is the work our teams are doing to simplify our business and to deliver meaningful gross cost reduction across both cost of goods and overheads.
This quarter, we delivered $18 million in gross savings, providing a significant offset to the inflationary headwinds we faced in the quarter.
This work is not only important to help deliver on our earnings commitment, but also strengthens our business over the longer term.
We continue to operate in a challenging and uncertain marketplace inflationary and foreign exchange pressures, though easing remain significant headwinds to our business.
The labor market remains tight and perhaps most importantly, we are closely monitoring the market for signs of weakening consumer sentiment in the face of likely economic challenges ahead.
We therefore remain cautious as we consider the balance of the year.
With urgency and continue to focus on controlling the controllable.
This being said we are increasingly confident in the underlying fundamentals of our business.
With the benefit of a strong second quarter, we are increasing our full year outlook for organic net sales growth to the high end of our range or 5%.
Importantly, we still see our fiscal third quarter. The April to June period, as being an inflection point for gross margin accretion.
And through the realization of price actions.
Ongoing execution of our productivity initiatives and some moderation in inflation, we continue to expect gross margin accretion for the full fiscal year.
So I'm confident that we are taking the right actions to deliver sustained value creation over the long term.
And as we move beyond this period of significant inflation and foreign exchange headwinds as well as other supply chain challenges I believe we will realize the full potential of our fundamentally improved business model driven by top line growth gross margin expansion.
Free cash flow generation.
And now I'd like to ask Dan to take you through our second quarter results and also to provide additional details on our outlook for fiscal 2023, Dan.
Thank you Rob Good morning, everyone. As you just heard this was a strong quarter top to bottom commercial and operational execution across all segments in key geographies accompanied by a backdrop of healthier categories led to a quarter that exceeded our expectations.
Despite the ongoing macroeconomic challenges strong operational and commercial efforts in the quarter drove double digit organic net sales growth and double digit adjusted EPS growth.
Giving us increased confidence in our ability to meet our full year outlook.
Before getting into the details of the quarter I would like to discuss three main tenants of our success thus far.
First is the importance of winning on shelf with greater quantity and higher quality shelf presence, serving as a key catalyst for the eight consecutive quarters of organic net sales growth, we've delivered and our increased full year outlook for organic sales.
Second we remain on a path to return to year over year gross margin expansion in <unk>.
As in the first quarter in Q2, we again essentially fully offset the headwinds from gross inflation with a balanced combination of further productivity delivery and ramping benefits from price increases.
And finally, we are committed to incrementally investing in our brands through a thoughtful combination of above the line and below the line investments through.
Through half one we've been both strategic and intentional in the support of our brands prioritizing those investments that offer the highest return and we will maintain this return on investment discipline as we meaningfully increased A&P spending in the second half of the year.
Now let me give you some further insight into what we saw across our business in the quarter.
In North America, the consumer environment remains robust and we saw underlying category growth across all segments.
Pricing continued to contribute to organic growth and elasticities remained below historical norms.
In our international markets categories are strengthening in most geographies, especially in key southern care markets within Southern Europe , Oceana and Latin America.
Travel and leisure activity remain robust.
However, shave categories across Asia remained soft and below pre pandemic levels.
Now, let me turn to the detailed results for the quarter.
As mentioned organic net sales increased 11, 4% with price and volume gains contributing equally to our growth.
International organic net sales increased over 13% while in North America organic net sales increased just over 10% with both international and North America growth achieved through nearly even price and volume gains.
And as we previewed last quarter. We also benefited from the phasing in sales from three Q to the second quarter delivering an estimated three points of growth largely due to timing of global Suncor shipments.
Even after adjusting for this phasing tailwind underlying organic growth was a robust 8% in Q2.
Wet shave organic net sales increased four 6% with North America organic net sales, increasing 5% driven largely by price as volumes were essentially flat.
Both in men's systems, including the launch of a new <unk> razor and Costco disposables and shave preps were partly offset by declines in women's systems.
<unk> organic sales declined in the quarter as expected, reflecting the churn associated with the year to plan O Gram reset at Walmart as we cycled the launch a year ago.
The year over year impact of consumers transitioning from starter kits to blade refills, and they're still building expansion across retail channels.
Importantly consumption results for the brand are strong and we're very pleased with initial performance on shelf.
<unk> reached the number four position at target in its first four weeks. Despite a crowded set with similarly strong performance across grocery and drug.
Organic net sales in international markets increased just over 4%, mainly driven by realized price increases in all key regions.
Men's and women's systems and disposables all grew mid single digits, driven by European strength in branded and custom brands.
Importantly, we will take steps in Japan in the fourth quarter to simplify ongoing operations and reduced business volatility across our wholesale partners.
The result is a structural reduction in wholesaler inventory levels, which will be executed in Q4, and we will provide improved operational and commercial execution in our second biggest market.
These actions were not previously reflected in our outlook and I will discuss the expected impact for fiscal 'twenty three shortly.
In U S razors and blades consumption increased 3% in the quarter, while our market share in aggregate declined 30 basis points as gains across our women's systems portfolio led by Billy and Hydro silk were offset by modest declines in men's systems and disposables.
So on and skin care organic net sales increased 15% driven by strong global Sun care and grooming performance.
Results exceeded our outlook and come on top of double digit growth a year ago.
North American growth was led by better distribution outcomes, both in quantity and quality innovation through banana boat protection, plus vitamins and Hawaiian Tropic line extensions and incremental price.
As expected Q2 benefited from favorable phasing of some replenishment orders as retailers focused on stronger in stock positions into and out of spring break and the Easter holiday.
International Sun care sales increased nearly 60% driven by both price and volumes and some tailwind from similar shipment phasing.
International Sun care saw strong underlying growth in southern Europe , Latam and Oceana as a return to travel and leisure activity drove demand recovery.
In the U S. The Sun care category remains healthy growing nearly 12% for the quarter.
As competitive products returned to shell following last year's recalls our Sun care brands Predictably lost approximately 190 basis points market share in the quarter.
Grooming organic net sales increased just over 12% led by Bulldog growth internationally and criminal growth in North America.
Fem care organic net sales increased 35% driven by a healthy category incremental pricing and lapping prior year supply chain challenges.
<unk> two year stacked organic growth was over 9%.
Growth was delivered across playtex sport carefree and stay free brands.
Category consumption increased 7% and our share was effectively flat in both the second quarter and the latest 52 week period.
Now moving down the P&L.
Gross margin on an adjusted basis decreased 170 basis points or 75 basis points constant currency.
As an approximately 500 basis points of combined strong price gains and productivity savings were more than offset by 550 basis point headwind from inflationary pressures and a 30 basis point impact from negative category and market mix.
A&P expense was 10, 5% of net sales, excluding the favorable impact of currency translation.
<unk> decreased about $6 million compared to the prior year quarter, primarily due to timing of brand investments and marketing campaigns versus a year ago.
Adjusted SG&A decreased 110 basis points versus last year as the benefits of leverage operational efficiency programs and favorable currency movements more than offset the impact of higher people costs.
Adjusted operating income was $62 5 million compared to $46 $7 million last year and.
An increase of nearly 34% or a 50% constant currency increase.
GAAP diluted net earnings per share were <unk> 37.
Compared to <unk> 43 in the second quarter of fiscal 2022, and adjusted earnings per share were <unk> 56.
Compared to <unk> 50 in the prior year period, including an estimated 16 negative impact from currency and <unk> <unk> favorable impact from share repurchases.
Adjusted EBITDA was $83 million compared to $73 7 million in the prior year inclusive of an estimated $10 $3 million unfavorable impact from currency.
Net cash from operating activities was $1 9 million for the first six months compared to an outflow of $39 9 million in the same period last year.
We ended the quarter with $155 million in cash on hand access to the $243 million Undrawn portion of our credit facility and a net debt leverage ratio of about three eight times.
In the quarter share repurchases totaled over $15 million. In addition, we continued our quarterly dividend payout and declared another cash dividend of <unk> 15 per share for the second quarter.
In total we returned nearly $23 million to shareholders during the quarter and $46 million over the first half of the year.
Now turning to our outlook for fiscal 2023 as.
As we've discussed the commercial and operational fundamentals of our business are strong and we are increasingly confident that we're on track to deliver another year of mid single digit top line growth coupled with a return to gross margin accretion in the second half of this fiscal year.
However, it is important to note that we continue to operate in a challenging environment inflationary and currency pressures remain elevated the labor market continues to be highly constrained.
Covid reopening in APAC remains choppy and there are meaningful unknowns with respect to the future state and overall sentiment of the consumer.
Now for the fiscal year net sales are now expected to be at the high end of our previous 2% to 4% range inclusive of slightly less currency headwinds than our prior outlook.
Reflective of the stronger unit performance across most segments. We now anticipate organic net sales growth to be at the high end of the 3% to 5% range and inclusive of an estimated 50 basis points full year headwind related to our intentional steps to structurally reduce wholesaler inventory levels in Japan in the fourth.
Quarter, which was not previously contemplated in our outlook.
Our outlook for gross margin is unchanged as we continue to anticipate about 30 basis points of year over year rate accretion and there is no material change to our view on inflation headwinds and pricing and productivity offsets for the year.
We continue to anticipate adjusted operating profit margin accretion on a full year basis, mostly as a result of gross margin rate gains.
The impact of currency on operating profit is now expected to be an approximate $24 million headwind of $2 million improvement over our prior outlook.
Adjusted EBITDA is expected to be at the high end of the $320 million to $335 million range.
Tax rate is now expected to be approximately 25% compared to 24% in the prior outlook.
Adjusted EPS is still anticipated to be in the range of $2 32.
Controllers 50.
We will now slightly above the midpoint inclusive of approximately <unk> 43 per share of currency headwinds.
This upward revision to our outlook reflects our expectation for stronger sales and slightly lower currency headwinds, partially offset by the higher tax rate.
In terms of phasing, we now expect 3% organic sales growth in half two of the fiscal year with the overall rate of growth, reflecting the shift in sun care shipments from <unk> into <unk> and the structural reduction of wholesaler inventories in Japan in the fourth quarter.
Given both of these dynamics are half to organic growth is expected to occur entirely in Q3 with.
With the fourth quarter organic sales expected to be flat to last year.
For more information related to our fiscal 'twenty three outlook I would refer you to the press release that we issued earlier this morning.
Now I'd like to return the call to the operator for the Q&A session.
Thank you.
We will now begin the question and answer session.
Last quick question you May Press Star then one on the telephone keypad.
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At this time, we will pause momentarily to assemble.
Our Austin.
First question is from the line of.
Chris Kelly with Wells Fargo Securities. Please go ahead.
If you can hear me I just wanted to understand how the quarter came in relative your expectations and I hear you on low single digit organic sales growth in the back half of the year.
Sure.
Yeah.
How much of that would huge cockup to hey, this is.
Ill turn it back row.
Youre kind of unwilling to flow through some of the momentum you're seeing right now relative to well that that's just the size of the ship that we see that I guess, the two point hit from Bob inventory work down in Japan. In Q4. So just quick perspective on that then I have a follow up.
Hey, Chris Good morning, it's Danielle Thanks for the for the question I think the quarter was largely in line with our expectations at the core level in terms of growth margin profile and overall profit flow and then I think what we called out in the quarter as phasing.
<unk>, we profiled it a bit last quarter was sun care shipments globally, not just in the U S, which which we would say was probably are worth about three points in the quarter. We did see some A&P spend.
Shift into the back half of the year, mostly in international markets, but that was a bit of a small adjustments. So I think largely.
In line with expectations at core level and again quite pleased obviously with the balance of growth from both price and units as we look to the back half of the year on your question around flow through I think there are three three.
Three core reasons why you don't see the full flow through let's say at EPS level.
Although you do see some as we've taken our guide up one is just the phasing of sales that I talked about earlier it doesn't.
The back half of the year and Sun care I think <unk> is the strategic choice, we've made in Japan to strengthen.
Our position with wholesalers and take some inventory out of the system and then three is that A&P spend which we shifted out of half one that comes back in half two so.
Obviously, we're still operating in a in a bit of an unknown market and a bit of a challenging macro environment Sun care being so important to us and we're in the heart of the season right now feel really good about where we are but still a lot to learn about the season here in the U S. So all of that sort of factors into how we thought about the full year guide.
Chris I would just add add to it.
We did take the sales guide up to the top five.
The 5% number.
The other thing we look at when we look at EPS is we still don't know what we don't know about the Sun care season.
<unk> had a very good sell in.
Sell out will happen here over the next couple of months and depending on how weather impacts that.
We will ultimately determine where we land and so we don't want to get ahead of ourselves.
And on that assumption and then the other thing I think we look at is just the overall broader macro environment still remains very uncertain and highly volatile.
If we learned anything over the last couple of years, we can't predict what's coming at us and so I think wanting to keep investment in we also want to be prudent as we thought about the bottom line.
Thanks, Chris Okay Thats helpful.
Just one follow up if I can.
Can you hear me.
Can you just expand a bit on Billy.
I think you mentioned organic sales decline in the quarter, but consumption strong is that just lapping year ago.
Pipe fill in maybe just elaborate on.
<unk> that youre, continuing to see what where you expect seattle to be offering. Thanks.
Yes, so I think on Billy we remain.
Very optimistic.
With where the brand can go and very happy with what we've done the last couple of quarters here.
We got.
The team in place and so the ability team that.
We brought in via the acquisition remains in place the team has integrated the business. So it's fully integrated into the Ed dwell.
Order shipping billing systems.
We exceeded expectations with Walmart if you go back and look at what we thought we would do in year, one at Walmart as well as what Walmart thought it would do Walmart was incredibly happy which has led to a great national rollout, which has just begun.
And there is more to come in terms of that national rollout beyond that.
The innovation pipeline is working.
There is a new SKU for example, billing body buffer. It's appreciative explore leading bar is already won multiple awards as a new interesting piece of innovation and when you think about the portfolio and where it can go over time into a broader lifestyle brand not just the shape brand. We also have a very interest.
<unk> portfolio and long lead discussions going with a few retailers around category Adjacencies. So I think we're super excited with what we're seeing and where the brand can go Dan Yeah. Good point, Ron the only thing I would add Chris just to put some finer points on the map I think youre right I think there's a little bit of an imbalance.
<unk> organics and consumption, we know we're cycling a strong Q2 last year for womens branded of about 7% part of that as Billy obviously at Walmart part of that is intuition going into Cosco Derma planning getting national.
Hi, Phil So there was there were some things happening last year when you ladder back, though when you look at the shelf to Rob's point, we couldnt be more pleased with what we're seeing the building brand has risen to about a four five share in the category, it's up over a point versus a year ago, it's performing consistently well across <unk>.
<unk>.
And grocery and then you look at the full portfolio Hydro silk is up almost a point in share over the same period and intuition is flat. So youre seeing incredibly strong shelf performance by Billy on equally additive for the portfolio of <unk>. So I think there you do point to a little bit.
A an imbalance between organics and consumption.
Thanks, Chris.
Operator next question please.
Thank you. Our next question is from the line of Susan Anderson from Canaccord Genuity. Please go ahead.
Hi, good morning, nice job on the quarter. Thanks for taking my question.
I was wondering if you could maybe expand on gross margin you said return to expansion in third quarter should we think about that sequential improvement from third to fourth and <unk>.
So basically more fourth quarter <unk> leverage and then also if you could talk about the drivers there will we have fully cycled the inflationary pressures and yet are you expecting that to basically be flattish year over year.
Hey, Susan.
Can you restate the first part of that question. The line was choppy and we didn't pick up the first part of that.
Yes, just how should we think about the progression of the gross margin the rest of the year.
Got it Tim Yes, good morning, Susan <unk> look I think we are increasingly confident in the way that we have profiled the margins over half one and half two right. We feel really good about how we thought about the inflationary pressures largely as we had expected in the first half of the year a bit higher in Q2, but that's mostly due to <unk>.
<unk> penetration right, where you saw exaggerated cost inflation on some chemicals.
Pricing has now and in scaling productivity savings really consistent so we sit here at the halfway Mark having delivered what we thought would be a margin profile exactly as we've seen in the first half of the year.
And really good line of sight to half two so what youre going to see happen. We believe in half two as the productivity savings consistent that's in that 200 basis point range.
Youre going to see the pricing tailwind scale up a bit we expect to be for the back half of the year closer to 300 basis points and then I think the real unlock is that gross inflation number which has been about 500 basis points is likely have that over the back half of the year. So you put all of that together and we start to see.
In Q3, the business turned towards margin accretion and we expect that that rate accretion will actually even increased in Q4, so increasingly confident back half of the year.
Okay, Great. That's really helpful. And then also you talked about better execution on shelf driving the gains.
Maybe if you could just give some color on kind of what youre doing better now versus historically whats change there or is it better merchandising more space et cetera.
I think Susan is a few things going on there one is just better branding.
Better innovation and going all the way back to the very beginning of whats the consumer insight, what's the need or what's the pain point to be addressed with our innovation.
How we then craft that how we communicate that that's just all working better.
Seems are better at that for example, I'll just give you. One example shift right now in both men's and women's the number one brand on tech tuck in terms of followership and activation and so we've gotten much better on the brand building and our marketing into this in terms of activating our brands to create real consumer pull in.
The second piece is then we've been talking about this for a while.
To be great partners.
With our retailers and our retail partners at brick and mortar as well as the online partners.
<unk> sell us through to the end consumer.
We've just gotten better at that our teams are.
Our very.
Seasoned and also very fresh and new with insights they bring to retailers.
We're partnering with retailers in a bigger way not only with what's happening in the set this year, but the longer lead conversations already with where we see the category going for 'twenty four and 'twenty five.
We are now part of those longer lead conversations in a way that we werent.
One and two years ago. So it's all of that put together.
You have to have both of those happening to ultimately have the shelf outcomes improve which which we've seen.
Great. That's helpful. And then just wanted to follow up on delayed did you say how it performed in DTC I was curious if youre seeing.
Any impact as you roll out roll it out more broadly to retail or retail or maybe also been helpful. If you kind of gain more on consumer eyeballs too.
Yes, we.
We've seen some impact as you would expect I think all brands, who starting that digitally native space and move to this level of retail expansion are going to see impact what we have seen from a sales perspective actually as DTC has been actually a bit above our expectation now that's a bit of an early read we're now entering the.
Season for women's shave and the brand is fully stood up at retail.
We'll see we will obviously continue to monitor I think the other thing the ability team has done an excellent job of is optimizing spend in that space, which at times can be a bit irrational. So all in all we like how the total portfolio is performing.
But obviously a ways to go here in the season to evaluate both retail and in DTC.
Great. Thanks, so much good luck Rcs.
Thank you. Thanks, Susan Operator next question please.
Thank you.
Question is from the line of Peter Grom from UBS.
Please go ahead.
Thanks, operator, and good morning, everyone.
I wanted to ask about gross margin, but more from a longer term perspective, obviously the.
The guidance Embeds, some nice improvement in the back half of the year, but if I kind of just take the building blocks that were just providing responses to your question 300 basis points of pricing 200 basis points of cost savings and inflation roughly half of the 500, you're kind of exiting the year.
Our gross margin rate approaching the mid 40% range. So I just would be curious how should we think about that exit rate.
How we should think about gross margin recapture opportunity as we look longer term right. A lot of your peers are really starting to step up margin improvement.
Return to pre pandemic levels. So just.
Any comments on how we should think about the recapture opportunity longer term and when we can kind of get back to pre pandemic levels of profitability.
Yes, Peter first welcome good morning, Thanks for picking up coverage.
On the question I think we very much see <unk>.
Our line of sight towards getting back to pre pandemic gross margin levels.
That's a focus for us it's something we're committed to doing we think we can do.
The unknown for US is just where do we go from here on inflation.
Around input costs specialty materials labor.
Still very much inflationary as you look at where we are from here, where we're seeing continued inflation there some of the commodity baskets are moving lower which is good.
We need that to continue but I can't predict what's going to happen with that element. The other piece I think that we can't predict and we have been very much impacted by in this year that we're in is foreign exchange and the relative strength of the dollar because we have big long exposures for example, in Japan, and frankly against a lot of the Gea X year.
Where we're a little more balanced and so we can't.
Can't control that either those two things aside and I think they will normalize over time I would suspect.
We are going to remain aggressive on pricing.
Where we can take pricing and there is there is a little more pricing to come in certain select markets and we will continue to monitor inflation in price, where we can going forward. There is a new muscle we have been building in the company around revenue management looking at mix accretive innovation.
The teams basically build the business out with a better revenue profit mindset that will be a contributor we're going to continue to stay after the cost productivity work.
Dan referenced that's something we've done very well over the last three years. Thank goodness.
We will continue that and we've got line of sight for that to continue over the next couple of years as well. So when you put that all together in the back half here, we're going to be in a gross margin accretive environment.
Good to predict what that will look like in 'twenty four at this point.
Around inflation and foreign exchange, but those two things aside I think we've got line of sight to getting back to pre pandemic margins not necessarily by 'twenty four but it's very achievable, we think over the let's call. It the mid term.
That's super helpful and I guess, maybe just a follow up on that.
Just to the extent.
That those gross margin recovery does begin to play out I mean, how does the company think about.
Reinvestment versus allowing some of the upside to flow through it just would seem as.
As a percentage of sales in particular, given that you are stepping up investment in the back half to hear that you are pretty well invested which would potentially allow for more floaters. So just any thoughts on how you.
We should be thinking about the potential bottom line tailwind that would come from this gross margin recovery.
It will it will be mix, Peter I would like to spend more.
On marketing support for our brands, particularly around working media.
We are getting better with our innovation is we're getting better with our messaging and communication and just the proposition we are bringing to consumers.
It's worth talking about more consumers knowing about.
And so I do think there is an opportunity to invest more on the media and from here as we go forward.
But equally I think we've got a margin opportunity as we look at it.
Both and so I think if we build our plan right for the future you will see net incremental investment going into the brand support line and Youll see a net margin build from here.
That's super helpful. Thank you so much I'll pass it on.
Thank you. Thanks, Peter Operator next question please.
Thank you.
Next question is from the line of MS. Chapman from <unk> Securities. Please go ahead.
Thanks, Good morning.
Good morning Bill.
A couple kind of follow ups I guess one on the.
Japan kind of wholesale a reduction of wholesale reduction.
<unk>.
Understood.
The impression that the Japanese market had been fairly depressed for wet shave now for quite some time, but we're starting to recover. So is the thought that you are waiting to kind of see how it recovers in <unk> and then did the reduction from there or.
I'm just trying to understand why there was while there is still so much inventory. It seems like it's been depressed for quite some time just trying to understand.
Behind that.
Yes.
So bill we have new leadership in Japan.
As you know, we put new leadership in there last fall.
And so with that new lease leadership in the market.
Increasingly capable team who's very plugged in to the market with the priority.
Having strong partnerships with wholesalers I was there in the fall met with wholesalers met with our team.
And one of the things we talked about was what does it take to unlock the future growth from here on the market as you rightly calling out the market has not recovered as recently as last month. It was still in decline for three consecutive years in the pandemic, we very much expect that to change for the future. So recognizing we.
The share leader in Japan, our share position is strong we see great growth coming in the future in that market around market recovery from Covid.
We wanted to be in the best possible position to work with our wholesale partners to go after that growth.
One thing getting in the way of that was historical inventory levels with retailers. This is nothing new to what's happening right now historically the wholesaler model there Terry.
<unk> the number of days of inventory.
Where we're going to end this year and as we worked with our wholesale partners to really get behind us in the future.
We have more effective spending simplify the execution for our growth in the future, we agreed and needed to take this action now.
Unlock real growth and have wholesalers with us in the future. So we've done that within the guidance range, it's a fairly significant change.
But we think it sets us up well for the future and.
Again I think it's.
It's a positive step as we look at it.
Got it and then switching to.
Tim care I mean, certainly I think it's probably the strongest performance that I can remember in that business and so I'm just trying to understand where that was with your expectations I know it had.
Kind of going back several years fairly.
Thompson. So I was just trying to understand how much of that is as real market.
<unk> shelf space gains that are that are permanent versus just kind of favorable comps and how it how it splits between kind of the tampons versus pads and liners as well on the different brands.
It's a combination bill in the quarter. Just finished we were lapping a period that was fairly impacted by supply chain disruption in the prior period.
And so from a comp standpoint.
I would say it was an easy comp quarter. If you will however that said.
The results achieved by the team the absolute growth in that business ahead of expectation.
Even better than what we had planned which was a healthy recovery.
Two thirds of that volume of thirds price. So it's a very healthy in terms of the mix.
And we're seeing growth across all of the three key strategic brands Playtex sport carefully stay free and as we mentioned in the.
In the remarks, not only is the category healthy our relative competitiveness in the category is better and so consumptions up on the brand sell.
Shelf positioning is holding if not better almost everywhere and what's behind all that is a team that is laser focused on the category has done an amazing job at brand building and connecting with the target consumer under three brands and has really interesting things ahead of us as we look at the future.
With more of that to come.
Alright, thanks for the color.
Thank you Bill operator.
Operator next question please.
Thank you. Our next question is from the line of Kevin Grundy from Jefferies. Please go ahead.
Great. Thanks, good morning, everyone.
Thanks, Kevin.
Two questions for me first on the promotional environment and expectations. There. The second follow up question will be around for the longer term outlook. So first on trade promo looking at the U S Nielsen data.
It's generally down across the board in new categories.
These increases, albeit more so on household product categories versus personal care, but.
That seems unlikely to hold we'd probably agree on that particularly as commodities moderate which is not lost on your retail partners either.
Also as I look at some of your market share trends tend to be down in most categories probably.
As Dan mentioned, the suntan prep dynamics sort of expected. So that's all kind of a big windup, one what are expectations here on trade promotion gears commodities moderate FX less of a drag and then two what have you included in your outlook and then I have a follow up thanks.
Yeah, Hey, Kevin It's Dan. Thanks for the question I think Youre Sightline, there is largely how we're seeing it as well from a promotional intensity standpoint, and so we haven't seen any level of increase year.
Over the course of this fiscal year and the consumer remains from our point of view pretty resilient. The category remain categories remain structurally healthy from that standpoint.
At some point, though we do believe that this level of inflation that's been put on the consumer.
Does start to play out in different ways than what we've modeled in the back half of the year is an increase in certain categories in inflation and promotional.
Tensity and likely in percent sold on deal that we think that will largely be in North America to a smaller degree in Europe . So we have factored that in to our outlook. It is a slight step up from where where we've been we don't see it though getting back to what I'll call pre pandemic levels. We think that there is enough rationale in Ms.
System, and a healthy consumer that while we've modeled the step up we don't see a material increase that takes us off our margin profile.
Got it that makes sense. Thanks, Dan broad for you just a quick follow up here or maybe it's not quick but just the longer term algorithm of the 2% to 3%. We can all appreciate it's sort of difficult maybe to unpack everything that you contended with the past three years from COVID-19 to supply chain issues.
Historic inflationary environment, but as you do that and you guys are running the company now for the next quarter of course, but for the longer term. How are you thinking about the outlook now for this company relative to the 2% to 3% long term growth you've made substantial efforts behind increases advertising marketing you made some good additions to the portfolio Fem care at least for now I'm not sure out of the wood.
But no longer drag at least in recent quarters. So you still have the core business and <unk>, which is up modestly about 1% or so.
Over the past few quarters, including the first half of this year. So when you kind of pull all that together.
Are you thinking about the growth rate for this company longer term, 2% to 3% still the right place to be are you feeling more optimistic.
Kevin you've done your homework on our company.
You understand that piece is very well look when we put our our algorithm out it was November of 'twenty.
We had the Investor day, where you put the 2% to 3% top line growth algorithm out that was off of a period, where we had declined.
Low to mid single digits for multiple years.
There was a view that we actually could not achieve the algorithm that we were being too aggressive.
In that moment, but frankly, it was required ultimately to be successful and be a player in our categories.
We did 4% two years ago organic we did 4% last year organic we're guiding to 5%. This year. So greatly it something we should be looking at and thinking about for the future.
We're not in a position to change our forward looking algorithm I think what we've put out there holds at 2% to 3%.
In this moment.
We are looking at from here.
What happens with FX.
How does the consumer behave how do units move versus price.
And how do we go forward with all of that and frankly, it's quite dynamic it's quite unknown and I think we want to be thoughtful of if we're going to revise an algorithm to be very confident that we can do it.
But I think what you can takeaway as people should be confident we can do the algorithm that we've put out there at the top end even based on what we've demonstrated with an open question of should we revise that and I think thats something we will look at.
For the future.
Okay very good I appreciate thoughts I'll hop back into queue. Thank you both very much.
Thanks, Kevin Operator next question please.
Thank you. Our next question is from the line of Jason English from Goldman Sachs. Please go ahead.
Yeah.
Hey, good morning folks. Thanks, So let me I am wondering Jason.
Okay. This is still quite a few questions out there.
Real quick I guess I'll fire off a few.
Criminal Costco launch was that national and how much did adds for the quarter.
Yes national.
I wouldn't comment on the quarter, it's more of a.
It's more of a Q3 Q4 going forward.
<unk> just launched towards the end of the quarter.
Okay, but you picked up the pipeline fell this quarter.
Not entirely yeah partial.
Okay, and you mentioned price will be a 300 basis point tailwind to gross margins in the back half from what was it in the front half.
I don't have specific front half, but we can probably do the math on the first quarter. We saw a 250 basis points in the second quarter. We saw 285, so somewhere in that 75 is probably a good proxy.
Yeah, Thanks out to the math and I appreciate that and then currencies confound Amy you've got it about a $25 million revenue headwind for the year.
Somehow is amplified through a 20 million $29 million EBITDA headwind.
So over 100% margin flow through on that.
How does that math work why is the amplifier, so big and we've got currency turning into a tailwind if spot rates hold later this year should we expect the same type of gearing when it flips from headwind to tailwind.
Yes, we've given pretty prescriptive implications for FX for the year, Jason side I would ask you to look back at the release and the <unk>.
Script, we did talk about an easing inflationary environment, we've quantified that at topline at margin and at EPS, and we did call out <unk>.
Favorability in our outlook now as a result of easing inflation I think the challenge and we've talked about it last quarter as well as the timing effect of when you realize sales headwinds due to FX versus movements in Cogs.
Sitting on four months of inventory for example creates a timing difference of when do you realize the relief from from favorable FX moments and so movements and so that's likely.
Likely what youre seeing happen here in terms of when we realized that in net sales versus when it flows through to the box.
Got it yes, the inventory makes sense I'm, sorry, I missed all of that comments on the inventory in your press release in prior comments.
So sorry to have you restate that.
Thats It for me I'll pass it on.
Thanks, Jason Thanks, Jason Operator next question please.
Thank you. Our next question is from the line of Olivia Tong.
With Raymond James Please go ahead.
Hi, Good morning, Devin Weinstein on for Olivia I appreciate taking my questions and congrats on the quarter.
First I wanted to ask just a little bit.
<unk>.
Piggy back on Kevin's question around pricing and promotion.
If you can comment specifically on what you saw during the quarter in your Sun care and Fem business.
Just given the fact that sun care resumption of competition.
Supply from your competition and health.
A healthier supply dynamics in Fem care, but maybe if you could comment specifically on the amount of promotion you saw there and how it evolved versus your expectation.
And any thoughts on your ability to price in those categories going forward.
We are.
Devin where the.
We're the leader in Sun with our two primary brands we.
We took pricing.
Back in the fall ahead of the season.
The pricing went in as expected.
Competition.
I think largely followed the pricing or was in a similar position with pricing so and sudden price realization is stable. The category is off to a very good start as we've talked not only our position in the category, but the category in whole as.
As we come into the more occasion based season here, we expect our brands from a share perspective.
To start to pick up as we come into the Morro occasion based outdoor sun.
Each.
Pool.
<unk> tied to usage.
There hasnt been a lot of promo and frankly, we've I think the manufacturer base has been struggling to keep up with demand. The last couple of years and so I don't see a heavy load.
Promo happening there similarly on Fem care, we took price back in October .
At the beginning of the fiscal.
Prices held and I think we've not seen any any net change in that promotional environment similar to Sun care and Fem care.
As a manufacturer I think we've been working to try to catch up to demand.
Throughout the year, and which has an implication on promo environment.
Just given that dynamic and so I think we see.
Pricing holding steady in both categories.
No significant change in promotional environment.
Very helpful. Thank you and if I could ask one more just wanted.
A little bit about your fiscal your EPS guide.
Nice to see you guys raised on the topline and understood on some of the dynamics of the.
Shipment phasing for Sun care from <unk>, QQ, Japan higher Tac.
Could you maybe comment on why you aren't expecting.
More momentum given the strong Q2 was strong.
<unk> should accelerate which I think would continue to fuel the top line.
And maybe balanced some of that momentum you are seeing with increased A&P against just the level of conservatism given the.
<unk>. Thank you.
So the combination of those two Devon.
Japan.
Pes and the Sun care profile shift as we look at it.
The range of 25% to $30 million right, Japan is more of a onetime event.
That will we will look at in Q4.
And some carriers just a profile shift we've talked about and so I don't think we see anything that suggests momentum.
Our business will decline in the second half. It's just we're in a period, where it's a short term and our profiling piece of not only those elements, but what happened in the base I think from a consumption standpoint based on what we have line of sight to and an overall share position and we feel really good about the back half equally as good.
As we did the front half it just sets up a little bit differently on some of those drivers and certainly youre seeing us have conviction.
On the sales number in total taken the guide up to five Dan.
That's the important context, we took the sales number up to five that's inclusive of we estimate 50 basis points of headwinds based on Japan and.
And we have flown through that increased sales through to EPS now you've got easing FX and you've got higher tax, which puts probably two to three in the EPS line I think so I think <unk> points or are spot on there is there is tremendous confidence and conviction in the underlying structural elements of the business. We also have to be.
Fair, we're sitting here on May nine with default some season in front of US 50% of the Sun category in the U S happens in this quarter. So not that we're not confident in not that we don't believe in the brands and the shelf, but theres a lot to go here and whether it becomes an increasingly important variable in our business. So we're not being.
Conservative I think we're just trying to be thoughtful.
Understood and appreciate it thanks, so much for your time.
Thank you.
Thanks, Kevin Operator next question please.
That concludes our question and answer session I would like to turn the conference back over to Mr. Rod listen CEO for closing remarks.
Thank you everybody have a great day, we'll talk to you in three months.
Thank you the conference has now concluded.
Attending today's presentation you may now disconnect.
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