EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: - - PDF document

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #1 EdgewellPersonalCare November 14, 2017 11:20 AM EST Dara Mohsenian:

• Hi. Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household

products and beverage analyst, and I'm very pleased to welcome Edgewell to our conference with their CEO, David Hatfield, as well as CFO, Sandy Sheldon. For people new to the story, Edgewell spun off their battery business a little more than two years ago, and they're now a pure play personal care company. So we'll start out with brief remarks and an overview from David, and then we'll move into a fireside chat from there. David Hatfield: All right, very good. Thank you. Before going into Q&A, I'd like to briefly provide some background and some context to our strategies and our outlook for fiscal 2018. Before I do that, I want to note that we will be making forward-looking statements, and that we will be presenting non-GAAP financials. By way of background, for those who aren't familiar with us, Edgewell personal care is a pretty unique company in this industry. At $2.3 billion in sales, we're a relatively small pure play personal care company. And for our size, we have a relatively broad footprint, competing in over 50 countries and generating over 50% of our sales outside of the U.S. We have great brands and a diversified portfolio, and we're the only wet shave manufacturer that can provide solutions across the full category. In describing our results, strategies and outlook, I'd like to use our strategy on a page. This lays out our medium term financial algorithm, and our portfolio objectives along the top and our three strategic pillars below, namely focusing on the fundamentals of reconfiguring into growth opportunities, and freeing up resources and productivity to fuel investments into growth initiatives. We'll be revisiting these throughout my comments. In the terms of results, in fiscal 2017, we gained share in our two global segments: wet shave and sun and skin care. However, challenging competitive conditions and the weak category performance dampened topline growth. Nonetheless, we delivered targeted growth in operating margins where we grew margins 50 basis points; EPS, where we grew adjusted EPS double digit; and cash conversion, which was over 100%. And we also over delivered targeted savings and reinvested in innovation, ecommerce initiatives, and other strategic growth initiatives. Looking forward to fiscal 2018, our first pillar is focusing on the fundamentals, reflecting

• ur strategies of building brands, delivering compelling innovation, and providing

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #2 category solutions. In fiscal 2018, we'll be delivering compelling new products across all

• f our product segments.

Over the last several years, we've emphasized becoming even more consumer centric and impactful in our innovation roadmap. We start by generating consumer insights, informed by emerging trends like personalization, customization, convenience, et cetera. And we marry those insights and those need states with new-to-the-world technologies that are obvious and -- with obvious and perceptible benefits. And finally, we link product innovation with our underlying brand promise to strengthen brand equity and reputation. I think you'll recognize these three characteristics in our fiscal 2018 innovation, which as I've mentioned, spans all of our product segments. Today, I'll just touch on three of them. First, we're reimaging women's shave, making it simpler, easier, and less of a chore with the introduction of Intuition Fab; the first bidirectional razor that safely shaves forward and back, hence the sub-brand Fab. This concept tested extraordinarily well in BASES, generating concept scores in the top 10% in all the markets that we tested. This product innovation fits well with the Intuition brand, which had been successfully built around all-in-one, convenient, simple shave proposition. Secondly, we're bringing significant innovation to our Hydro 5 franchise under the Hydro Sense sub-brand. This is based on the insight that guys have different skin types, facial contours and shaving routines. Hydro Sense is the only razor with a shock absorbing handle that adjusts based on how you shave. We're introducing it with a range of three new cartridges with different skin conditioning gels designed for different skin types. So the new Hydro 5 is the only shaving system customized for your skin and your routine for a more comfortable, irritation-free shave. This concept also tested very well internationally and in the U.S., and it serves to reinforce Hydro's reputation for skin care efficacy. Third, we're the first major sun care manufacturer to deliver on the trending less is more belief and desire among personal care consumers. We're introducing Banana Boat's Simply Protect; a line of products that provide strong, worry-free protection with no

• xybenzone, no added oils or fragrances. This line will span our sport, kids and the

baby's lines in the lotions, aerosols and sticks. So in summary, we believe our lineup of NPD is quite compelling to consumers, and is delivering value and the growth to our Customers categories. Moving to our second strategic pillar, reconfiguring our business against growth

• pportunities. We recognized a while ago that our world, and the world of consumer

products in general, was changing rapidly, and that growth in the future would require more than just mastery of the fundamentals. We needed to restructure and reconfigure, moving dollars and people resources to new growth opportunities including ecommerce, digital and international. We've made a lot of progress this past year not only in the terms of the sales and in the share, but also in the terms of organization as we've established a center of excellence for digital marketing and commerce. We will continue to invest against these growth initiatives through fiscal 2018, including further solidifying our ecommerce and digital marketing capabilities; continuing to gain share in omnichannel and the pure play channels; continuing to expand our international sun care footprint and the share we're handled; building and expanding upon our Hydro Connect launches in China, Italy and Central Europe; and continuing our rapid growth of

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #3

• ur new Bulldog Skincare business and its expansion into new geographies and

customers. Our third pillar is to generate the resources and the funds to fuel our growth and expand

• margins. Systematic cost reductions and productivity enhancements are key strategies in

this pillar. As I mentioned, we made terrific progress on this front in the part by launching and institutionalizing zero-based spending. In fiscal year 2018, we're targeting $25 million to $30 million in ZBS savings, with another $20 million in restructuring plan for 2018 and 2019. We're deep into planning to fill the funnel with further cost reductions and the productivity for 2019 and beyond. In terms of outlook for fiscal 2018, we expect our category and the competitive conditions to remain challenging. Our outlook for organic sales is flat to slightly down for the year, as we believe the strategies I outlined today, including our strong innovation plans for the year, will allow us to largely offset expected negative category trends. We'll continue to aggressively drive costs and expense savings through our ZBS and restructuring initiatives. But to maintain competitiveness in this environment and sustain the investments in our growth initiatives, we're reinvesting a significant portion of the savings this year, thus, we are anticipating more a modest operating margin expansion for 2018. Our outlook for adjusted EPS is in the range of $3.80 to $4.00 per share, and for cash conversion greater than 100% as we continue focus on working capital. And with that, if you have some context, I'd be happy to answer questions. Thank you. Dara Mohsenian:

• Thanks. First I thought maybe we'd start off by reviewing your topline outlook. As you

mentioned in fiscal 2018, you're expecting organic sales to be flat to slightly down. That does imply a pretty significant improvement versus the down 2.8% result in fiscal 2017. So, can you give us more sense of what's driving your confidence there? Is it mainly the innovation that you mentioned or some of the other factors, particularly given you've got a challenging industry environment in both the U.S. and Europe? David Hatfield: Yes, thanks. When you look year on year, there's three main factors that help us to offset the weak category trends that you mentioned. Certainly innovation that I walked you through, that innovation that spans the full product line, much of it coming in Q2, with some feminine care innovation coming Q3. So that's a major bucket. Secondly, all the second pillar growth initiatives that I mentioned, anywhere from ecommerce and digital marketing, international, international sun, et cetera. And then the third point is that we are raising marketing spend in support both innovation around the world, but also those growth initiatives. That's the major factor year on year. Dara Mohsenian:

• Okay. And as you think about the innovation contribution, can you put it in perspective

versus a typical year, or maybe versus the last few years, how much innovation you're expecting this year either quantification or conceptually? David Hatfield: We believe in our innovation this year, and view it to be a stronger than normal year, let's

• say. And to maybe put it into context, we estimate that the global wet shave category

will be down about 2%. And we think that based on the innovation in the growth initiatives that we mentioned, we can come in flat to modestly up. So it's not a huge share gain, but we will offset the overall category decline. Dara Mohsenian:

• Okay. And then sticking to wet shave, we've obviously seen a very heightened

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #4 competitive environment over the last few quarters here, which looks like it'll continue, and to some extent, it's factored into your guidance. Can you help put in perspective for us just how severe the competitive activity is, A) maybe reviewing Dollar Shave Clubs and the pressure there, B) the activity you're seeing from the leader in this space in terms

• f price cuts, and your thoughts on if that's something that lingers beyond fiscal 2018, is

there visibility it gets better at some point, or are these pressures more longer term in nature? David Hatfield: Okay, great. We see the wet shave category going under a fundamental change as the largest competitor is going through an unprecedented reset, using their estimates, taking price down by a couple hundred million dollars in the U.S. That was in reaction to us, but also certainly the Dollar Shave and the shave clubs. And I think it represents a moment in the category where the old business model of continual super premium trade- up has sort of hit the end of its logical days here. And the leader is really hitting a major reset and treating the category more like a normal

• ne where you have price tiers, going after consumer segments and product segments all

the way from opening price point to private label to middle tier to high. I would note that we've been actually going after the category like that for many years now and have flat to rising share since the spin. So we recognize that world, and we're comfortable with it. On the shave club side, we think we see them, hear them slowing down kind of sequentially in the U.S., trying to broaden maybe their product line and/or moving to

• Europe. So to answer your question about where we see the U.S. going, it's hard to
• speculate. But at some point, I think the reset's over, and everyone in a more traditional

category will need to compete by bringing value, innovation in the brands in all the

• segments. And I see it turning back to a normal category then.

Dara Mohsenian:

• Okay. And in response to my original question around topline trajectory, you mentioned

a few growth areas. Can you give us an update on the direct-to-consumer pursuit in wet shave, T-Mall launch in China, Hydro Connect and how those initiatives are going so far, and if they're big contributors to your topline outlook as we think about fiscal 2018. David Hatfield: They all begin small, but they're growing rapidly. T-Mall, I was just watching Singles' Day the other day, and we hit unprecedented sales levels. From what I read, I think everyone did. It was quite a day. So T-mall's progressing well for us. Within the U.S., omnichannel pure play we continue to grow rapidly, gaining share. I think that we mentioned that we grew 45% the last year, and we look for similar growth levels next year. Direct to consumer, we never really got into it as for major sales growth, per se, but for learning, and I think -- we built a new center of excellence that's working hard at that, using that as a lab to learn more and more about digital marketing that's helping us to compete better within the ecomm space. So I'm pretty comfortable with all of those as a whole, and they're getting large enough in aggregate to mean something within the business. Dara Mohsenian: And looking at the industry from a broader perspective, household products, clearly one

• f the concerns in the U.S. in the investment community has been as brick and mortar

retailers look to compete versus online and ecommerce, and even to some extent lower priced retailers that are burgeoning in the U.S., is there a lot of pushback from a pricing perspective that you guys feel from your retailer customers? And are they looking to use price as a weapon to better compete in that environment, as well as push private label

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #5

• ver time? So, how much pushback have you experienced from that? Is that something

you worry plays out to a greater extent overtime and has an impact on your business? David Hatfield: I think that the pressure's always been there, and it always feels worse this year than the last, and so I think the trend kind of continues. I can't really speak to the broader CPG

• world. Some of the read-throughs sounded soft, and I think we had a little bit of that.

And I don't know if it's just hurricanes or it's other stuff; I'm not sure either. Within the categories that we compete, I think there is more interest in all the segments down through private label and opening price point. And I'd only make the point that we're positioned very well for that kind of a world. And we're used to having category conversations with our customers, talking about how they index with their shopping profile, where they're getting traffic, where they're missing conversion, and how their product and their marketing plan needs to change to optimize the category. And we provide all the levers for them to do so. So I think that in this age, I think that we're positioned well. Dara Mohsenian:

• Okay. And have those conversations gotten more aggressive over the last few quarters

here with the threat of ecommerce, or would you say it's more status quo versus what you've typically had? David Hatfield: It's always tough, but I wouldn't say the trends were really bended that much. Dara Mohsenian:

• Okay. And then another big industry topic is ecommerce. Can you spend a bit of time

reviewing your strategy in ecommerce, your market share compared to brick and mortar, margin structure of your business, and how do you think that evolves over time, looking

• ut over the next few years?

David Hatfield: Well, I won't go into detail on a lot of those questions. I would like to know P&G's answers and Bic's answers to those, too. So I won't go too far in that. But we're committed to follow the consumer and the shopper wherever they go. Certainly our shares in the digital world are under what our brick and mortars are. We don't see that as a barrier, and in fact, we've actually gained share for each of the last three years. And we're going to continue to follow shoppers wherever they go. I think we're learning more and more about how to manage digital content, being more and more topical, picking the right media, providing the right product offerings. All those things,

• ur center of excellence is really, it's one of those things where while we were somewhat

late getting there, we've been able to leap frog learning via bringing experts in from

• utside, and I think that we're making up ground very fast in that world.

Dara Mohsenian:

• Okay. And then your margin structure online versus offline and how that might evolve
• ver time versus today?

David Hatfield: With each of our customers, we have a full and equal marketing offering, so I think we view it as commensurate across channels. I think there's certainly learning curve on the supply chain within direct to consumer that we're working out, but that should work out

• ver time.

Dara Mohsenian:

• Okay. And then earlier you highlighted some of the cost savings under zero-based

budgeting and your restructuring program. Can you discuss post fiscal 2018 -- obviously there's some savings embedded this upcoming fiscal year in the guidance, but post-2018, how much room do you think there's left for cost cutting? Is it the programs in place that you're focused on, or are there other initiatives that play out to a greater extent over time

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #6 as you look beyond fiscal 2018? David Hatfield: Just a couple notions on that. I think one of the secrets to ZBS is to turn it into a way of

• life. And so every year is a blank page where you go looking at what you do and how

you can do it better, more efficiently, et cetera. And I'm confident that we're getting there to where every year, we're going to find savings again. I'll also say that in these tough times and in this changing world, it also forces you to look at all the areas differently, and ask the questions of whether past service levels, past resource allocations make sense, or if you have to change them, and I think we'll be doing

• that. So the combination of both of those things, I'm confident we're going to find

significant savings beyond 2018. Dara Mohsenian:

• Okay. And in fiscal 2018, it sounds like a decent chunk of the savings will be reinvested

back in the business. As you think out longer term, is there need to reinvest behind the business, or more of that can drop to the bottom line? And as part of that discussion, A&P spend was down almost 10% in the back half of last fiscal year. In 2018, you mentioned a re-boost in spend. Is that something that's significant? Can you help us with some more quantification around that? David Hatfield: I think 2018, I think we really believe in the innovation that we have coming to market, and with the competitive situation, I think that we felt the need to reinvest. As you go forward and as things normalize, category maybe gets to modest growth, I think we would move back to our medium-term algorithm, and A&P would probably be set in a reasonable place versus sales going forward. Dara Mohsenian:

• Okay. We have a few minutes left. Why don't we open it up to the audience if there are

any questions. If not, I'll jump back in. Unidentified Participant: David, when the spin happened over two years ago, the stock was $90 to $100. Now it's below $60. There's no dividend. On Wall Street, we tend to be like, this ain't working. Can you help me going forward, is there M&A optionality? Is there -- do we just get it back slowly? Obviously some of what's happened was out of your control with Gillette and so forth, but it also bothers me when you talk about 2% decline to the category, that's just a U.S. number, right? David Hatfield: No, that was actually global. Unidentified Participant: The global number's down, too. David Hatfield: Yeah, yeah. U.S. we're actually calling down mid-single digit this next year. So, certainly P&G's thrown a curve ball, and I think that we're competing well, gaining share around the world, delivering EPS growth. So we're -- I'm actually comfortable that we're competing well. We also generating savings, and are really trying to reconfigure to build the company for the medium term. And that's kind of where my head's at and the

• rganization. In terms of share price, we work every day to build value, and our goal

remains to increase that share price. Dara Mohsenian: In terms of cash flow priorities, can you discuss the balance between repurchases versus dividends versus M&A? Is M&A a big focus here? Are there a lot of opportunities out there for you to potentially add value on that front? David Hatfield: Yes, the priorities for use of cash remain first putting it into the business to drive either innovation and brands or else productivity. So that's kind of job number one. The

EdgewellPersonalCare November 14, 2017 11:20 AM EST Speaker ID: Page #7 second would be M&A, and it's an opportunistic thing. And I forgot to mention, but we continue to look and to fill the funnel, and are looking for smart bolt-ons, particularly in the skin care, the men's grooming area, sun care, those sort of close in adjacencies. Third then is opportunistic share buybacks. And that's, again, that's kind of where we're at on those. Dara Mohsenian:

• Okay. And then last, sun care's been an area with a lot of momentum for you guys over

the last few years. In Q4, we saw some uncharacteristic weakness. Are you comfortable that's more temporary in nature, or are some of the factors there, could that depress forward growth also? David Hatfield: Q4 for sun was pretty much on our plan, and we saw that coming, given the year-on-year

• comp. It was a very, very large previous year comp. We ended the year right about

where we wanted. And in fact, we were very proud of the year growing significantly in both the U.S. and internationally, and in the U.S. growing both Banana Boat and Hawaiian Tropic. So we had a good year, and we're happy with the innovation that we're taking into the next year. So we like sun and are pleased with our trends there. Dara Mohsenian:

• Okay. Well, with that, we're out of time, so thank you very much for being here. And

we'll do the breakout in Breakout Room 1 after the lunch presentation at 1:00. Thanks again. David Hatfield: Very good. Thank you.