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

Thank you all for joining us. I know the room feels a little empty because it is a little empty. A lot of folks are out there in the one-on-ones. We do have a big audience today or bigger people, and thank you all for coming. It's a big day for us. So we got a lot of companies on stage. We've got a reception after the close, if we wrap this all up. So a quick reminder, free cocktails right outside. So -- I mean, who doesn't like a free cocktail, so stick around for that. But it's a fun time to be here talking consumer staples. The group has been on fire, as many of you know. We're seeing a top decile-type valuation. So the group is hot. We all just lived through earnings season, and we move towards the [ banner adding ] season. I don't think I remember -- I've been doing is for a long time. I don't think I remember earnings season as robust as what we just went through, whenever the number of top and bottom line beat that happened. And let me also point out that consumer staples has the largest, hottest IPO of the year right now. So there is no better sector to be in right now. Fundamentals on fire, stocks are working well. IPOs going out the door up. So within that vein, we're happy to host you all. Now let me use that quick intro to transition, I don't know, is the webcast line for Edgewell? I want to make sure that we have -- we don't kick it off before we got the webcast going. Well, either way, let me get going. So consumer staple is on fire, been on this a long time, many of you may know us for a long time. As you know, one of the best ways to make money in this space is to get involved with the turnaround story. Companies that successfully turns itself around, the stock ultimately follows, investors make money. These stocks though, ahead of the turnaround, they're usually cheap and there's a crisis of confidence. But like any great epic story, a heroine or a team of heroines emerged to defy the odds, [ overcoming ] those obstacles and ultimately proved victorious, is within this vein, I'm thrilled to have the Edgewell Personal Care company kicking off our conference this year. Gather around because what you're about to hear is a story of an epic turnaround adventure. And to tell the tale firsthand are two of the heroines in the story, CEO, Rod Little; CFO, Dan Sullivan. Gentlemen, heroines, thank you.

I don't know how you follow that, Jason. That's a great kick off. Well, good morning, everyone. I'm going to quickly spend about 5 minutes just giving you the headline of Edgewell. I want to spend most of our time, obviously, in the Q&A with Jason. But there's two topics that I do want to hit on fairly quickly. One is exactly where Jason started, which is this strategic turnaround that we began about 3 years ago. There's a couple of underlying pillars to that strategy and that transformation that I'll share. And then secondly, get to the proof points. We have seen a significant change in the trajectory of the business, top and bottom line. I'll share with you some of that. That's us. You know these statements, and now we get to the story. If I had to put 7 months of work redefining our strategy on one page, this would be the page that I would use because at the core of our transformation is rethinking our portfolio. There's quite a bit on the page. Headlines are this: healthier portfolio brands, diversifying away from a heavy-shave, heavy-fem care business, which is who we were 3, 4 years ago; using acquisition to move into interesting categories like grooming with a much more attractive growth profile and a clear right for us to win. That's what the strategy calls for, I think importantly, underpinned by a commitment to enhance capabilities across the organization, most notably in becoming a more forward-thinking CPG organization. So brand building, DTC execution, innovation platform, all underpinning this notion around moving our portfolio from shave-, fem-heavy to groom- and sun-heavy. Underpinning this business is how we operate. And this is probably a really good summary of how we think about running the business. We are maniacal on cost. If you know our story, you've seen that 200 basis points a year in offsets coming out of COGS, which feeds a really attractive gross margin profile, exchange and inflationary pressures notwithstanding. And then we're a business that has really attractive operating and free cash flow, which gives us great optionality in terms of how we think we want to allocate capital for the business. This is the algorithm that we put out 2.5 years ago at our first-ever Investor Day. We'll talk about it over the next 20, 25 minutes. It was met with skepticism, for sure. But what it called for was consistent top line growth, organic 2% to 3%. And it talked about a P&L that grew at a faster rate. So you see EBITDA productivity, you see EPS productivity. And you land in a model that says 2% to 3% translates into 6% to 7%. That was the algorithm. I'll show you in a minute how we perform that. So what are the proof points? Is the strategy working? And is the transformation gaining traction? This is a really simple way to look at our top line story. If you were to rewind a couple of years ago, we were a company that was declining at the top low to mid-single digits. Over the period leading into the pandemic, it was closer to mid-single digits. And in the 3 years running now, we're at about a 4.5% 3-year stack, obviously, playing out differently by portfolio. But we're seeing healthier brands in healthier categories with an organization that's far more capable with really interesting and compelling M&A that's helped us along the way, the Cremo and the Billie brands, which we'll talk about, being at the top of the list. Here's our first-half results on a page. We just released our 2Q results a week ago. I won't go through all of the data points, but you can really get a sense for some of the things Jason was alluding to. We've grown the business almost 8% for the first half of the year. We've grown EPS 16% on a constant currency basis. And the next 2 points you see what we brought to the table not only in cost savings, which is bottom left of the page, but in price gains. 2 quarters in a row, we have fully offset inflationary pressures within gross margin. So we have a really clear line of sight now back half of the year to see year-over-year margin accretion. We think we've done the right things around capital and returning money to shareholders. We've seen some pretty interesting TSR results. For the full year then, if you look at the Edgewell business, we just took our top line outlook up to the high end of our range, so 5% organic growth. You can see some of the numbers there. We didn't talk about it earlier, but we think about a right-to-win portfolio and a right to play. We think right to win, we'll grow double digits. We think right to play, we'll grow low to mid-single digits. I mentioned the margin profile is now starting to turn. We expect somewhere between 175 and 200 basis points of year-over-year margin accretion in half 2. We're going to continue to invest, obviously, behind the brand, start to generate OP margin accretion despite FX. This is the story that we are building in year 3 of our journey. So key takeaways, it's a different company being run in a different way with a different portfolio of brands and not surprisingly, delivering a much different outcome. So with that, I'll pause. Jason, I'll turn it back over to you so we can get into the Q&A.

Awesome. That's a great intro. Thank you, Dan. So I wanted to open up with a bit of a preamble in terms of pre-imposed to the company since you guys joined, you gave us some of that, particularly around the portfolio front. I think you detailed the portfolio. You also mentioned that you've got an organization that's now more capable. I'm hoping that you can expound upon that a little bit because I think there's been also not just a change in portfolio, but a lot of change in terms of people and process and the way you do the business. Can you elaborate more on that front?

Yes, I'll take that one. So Dan and I took our -- we're in our positions that we're in today, as of 2019, just ahead of the pandemic. And at that moment in time, where we met and came together, we were in the middle of trying to get a transaction done to acquire the Harry's business. You'll recall that. Ultimately blocked by the FTC on that transaction in February of '20, and then the pandemic hit the next month in March of '20. At that moment, we were going to acquire some capabilities, right, via acquisition. But with that being blocked and the pandemic hitting, we used year 1 of the pandemic to radically transform the talent we had in the company because in those early days, a lot of interesting talent around D2C companies, more digitally oriented companies that didn't have a lot of cash flow, people were dislodged in the early moments of the pandemic. And we went out very aggressively and hired essentially the bulk of our digital team that we have in place today in those early days of the pandemic. Our North American President, who spent time at Jet.com, for example, we brought in the early phases of the pandemic. So a lot of what we were going to acquire to be more modern, more capable, younger in profile, we ended up building out in that first year of the pandemic. And so I've got a leadership team that's better at every single position than what it historically was. We have a strategy that's clear. We have proof points that are out there now, and the type of talent we can acquire is just fundamentally different. The final thing I'll say just around people and talent because we -- our purpose values and behaviors are all oriented around people first. People are the most important thing you have in a business. And we say that publicly with our team. We treat our team in a way that we've got to live up to that or they leave, people have options. And so we've had better than industry turnover by far over the last couple of years. We're well below where we were pre-pandemic in terms of our turnover and the profile of who we're bringing into the company. It Is just different and better. We don't have to chase people to come to the company. We used to have to chase people, convince them. We are going to be successful, come be part of the turnaround. There's a certain person that responds positively to that, I did, Dan did. But there are other people who want to see the proof points before they jump on and join. And we have the proof points now. And so our recruitment of who we're bringing in is just better. And then we've got a really clean structure. It's efficient. It's simple it's effectively global to local. We've eliminated some layers in between. And so we're empowering local teams to do great things without all the bureaucracy in between. Straight line to us, for example, with Europe, Latin America, Japan and China. They direct reports into us now.

Okay. That's a lot of change. So the people you're hiring want proof points, investors always want proof points as well. Clearly, they've seen enough proof points to drive some relative [ re-rating ] in your stock in the last couple of years. But frankly, your stock is still cheap relative to other HPC companies. Yes, substantially cheap. It's a hefty discount, suggesting, of course, that investors still want more proof points. And many can look and say, "Oh, this organic sales growth, it's like it's a [ Cobe ] balance." Clearly, Wet Shave's coming back sunscreen's coming back, and it's a lot of inflation. So you've got transitory price in the system that's causing top lines to be inflated, this isn't durable. When the dust settles and the COVID rebounds behind us, which it probably is already, but then the price moderates, there's not a lot of access to grow, like -- and what would you say to those skeptics, who don't really believe that there's real true durable growth underpinning this?

Yes. It's an interesting question. I think we're sort of excited. We get asked more when are we going to rethink the algorithm and take up the top line versus can you deliver it. But it's a fair question, with all the noise in the system, the rebound, the price, et cetera. I would say a couple of things. One, on proof points. I think all of the capabilities that Rod talked about, all of the talent we've brought into the organization manifest itself in the first way, which is we have a much better portfolio of brands that we architect and execute in a much better way than we ever have. The communication is different. The brand strategies are different. They're being executed in a different way. Our DTC platform is different. So I think the first thing I would say, Jason, is the portfolio has healthier brands in it today that are executed better. I think the second thing is the innovation platform is better. It is based much more on consumer insight than on technology. The program has been re-architected. We're faster now from concept to shelf, and we've seen actually that we've delivered some pretty interesting and compelling innovation. And when you get the two of those, right, I think it leads to the third point, which is shelf outcomes, far more positive, far more predictable. In the early years, when I showed you that number of declining top line growth, that was fueled by losses on shelf easily, right? That was the driver. We've now gotten to a position where -- not only in categories like Men's Shave or Fem Care, where we hold position on shelf, but in Women Shave, both here in the U.S. and globally, where we're gaining on shelf. And so I think it's about brands and portfolio, it's about an innovation platform, and it's about shelf outcomes. The three of those, in total, make the growth profile sticky for us. We're confident that we can deliver.

I think one other thing that's changed a lot from -- you showed like your mid-single-digit declines back pre-COVID is the category backdrop, particularly around Wet Shave in the Men's category was in a tough position beforehand. Can you -- I'm not sure that everyone in the audience is familiar with that. So maybe can you give us, first, a little bit of a history lesson on what was going on in the category? And then, give us some context of what you're seeing in terms of category dynamics, particularly around Wet Shave, in the U.S., maybe walk around the world because you are a global company and would love to hear some context of what you're seeing in Europe, and maybe what you see in Japan, the other markets that matter.

Yes. Let me start with that, and then we'll go. The history lesson is important here on the category. And by way of background, I was at Procter & Gamble for 17 years. One of the things I was part of there is when we acquired Gillette, I was part of the group that brought Gillette in, and I was one of the lead people on the integration of Gillette into the business. I know Gillette very well. I know the people that work there, I know the technology, it's formidable, right? Gillette is Gillette. And that's -- we try to buy Harry's, we're blocked by the FTC. We had a good look around Dollar Shave Club. So I feel like I, as much as anyone, have a lens into this category from a competitive angle from all the different lenses. You have to go back to historically, this is a 2-player category, right? That's the historical dynamic. And in much of the world, that is still the case. Outside of the U.S. and U.K., you still have primarily a 2-player set here. When Dollar Shave and Michael Dubin launched their campaign in 2013, '14, and Harry's came into the scene, there was massive disruption in the category that had never been disrupted before. And at that moment, both of those entrants were at low price points, value-oriented price points, lacking technology, IP, manufacturing excellence, which is still true today, but that was the case then. But the price was right, and the tech was good enough for a certain set of consumers, who chose to go to the disruptive brands. Gillette's response to that was to take a 13%, 1-3 percent, list price reduction across the board just to drop the price on the value-oriented players. So on top of that, you had increase in promotion spend and promotion rates. So from 2015 to 2018, '19, you had a declining category, double-digit declines in some cases because at the same time, you have that competitive dynamic. With the pricing, you also had more beards being worn, more relaxed habits around grooming. So less shave frequency on average. In some cases, no shave frequency, right? So you have that going on leading into the pandemic. We have cycled most of the badness of that by 2019 in the very early part of 2020, where the category in the U.S. had actually come back to growth. It was growing low single digits because we were more like-for-like on the shave incidents and pricing has stabilized and the promotional intensity was out. Then the pandemic hit, everybody went home and grew beards or shave less often. The category was down mid-single digits in that first year of the pandemic. But now 2 successive years, it's continued to grow. And it's a lot through price. We've had two rounds, in our case, of price increases in the category. The category is less promotional. And you have a shave incident rate that is now flat to maybe even slightly up, depending on which segment you look at. So the category, not only in the U.S., is now fundamentally healthy and growing consistently quarter-on-quarter. You have that in Europe. You have that in Latin America back to growth. And Japan and China have been in decline for 3 years. The categories haven't recovered there. That's starting now with the reopening. Japan just removed masks in March, was the mandate change there, and people were wearing them. And so those are lagging categories. But what I'll tell you, beyond the category being healthier, some of the things Dan was mentioning, our ability to compete and win and actually grow share in the category has never been better. And we're doing that now in many markets, in Japan, in Germany, Latin America. And here in the U.S., we have been growing share in shave the last couple of quarters with real strength in our women's portfolio. And so if you just take a snapshot of where are we today, categories are healthier. We're in a position where the disruptors have done their thing. There's no more IP or innovation to go. It's like they are where they are. And from here, it's who can innovate better, who can create better solutions for consumers, who can connect with consumers more and more digitally and via social media ultimately to drive sales and share. And we've got scale, and we've got IP, and we've now got know-how to connect with consumers, and you're now starting to see that come in the results. Final thing I'll say, when money is free and you're not making money, it's pretty easy to go out and build the business to a certain level of scale. But when money becomes more expensive and you've got to make a profit, it levels the playing field back, and that's where we are now. We're in a much better competitive position, and the category is stable. We're the disruptor, by the way, with Billie. We're the ones getting new distribution, not other people. And that's fundamentally different.

Well, let's expound upon that because first, for context, I think a lot of people still think about the business as a men's branded Wet Shave business, U.S. branded Wet Shave business. What percentage of sales is that for you, roughly, U.S. branded men's Wet Shave?

2%, U.S. men's.

Marginal...

Total company. Wet ones is bigger, like quite a bit.

I don't think -- I think there's a big disconnect between perception and reality on that, which is why I want to shed a spotlight on that. But you're having success in women's, Billie is leading out now. But you've been having success for a number of years. This isn't just a Billie story. It's a multipronged story. Let's expound upon that. Like what have been the levers you've been pulling the momentum we've had there, then let's maybe finish off with Billie, which is your most recent addition of the portfolio, and where we stand with the progress of building that out?

Women's Shave has always been the strength of our shave portfolio. We've historically had 2 really good brands, Hydro Silk and Intuition. Hydro Silk, more of a -- think of it like-for-like for [ venous ] price point. It's our best technology, very, very high-performing razor. We've made that a head-to-toe hair removal, hair maintenance brand as women are taking hair off in more places and managing here, whether it be dermaplaning to take peach fuzz off the face or other body parts. Hydro Silk is the complete solution brand. We've got tools within that range to take care of all of that. Intuition is a one-of-a-kind brand. It's very unique, very differentiated. It's got the soap bar and the bigger handle around the razor cartridge for ease of use in about -- or a shower, very differentiated, protected with IP. Nobody else has that format or range. And so if you think from a price point standpoint, Hydro Silk's the highest, Intuition is next. We did have an opportunity in the more value-oriented category, that's where Billie comes in. We've been supplying Billie blades from the beginning, so we know it's great tech. And it's beautifully crafted at a demographic and a target that is younger, more diverse and a value price point. So we now cover all the price ladders, very differentiated propositions, with outstanding blade technology across the three, and it's a global business for us, not Billie today, but Intuition, Hydro Silk are global. And our shares, in many cases, are higher outside the U.S. than inside the U.S. Almost 60% of our shave business happens outside the U.S. ex-Billie, so predominantly outside the U.S.

And we're going to hear from Harry's later today, and Harry's is going to tell a story of how they're more than just a shave business. They took a brand. They have big shoulders, and they turned it into a whole grooming portfolio. Do you see similar opportunities with Billie?

Yes. Yes. So Billie, year 1 last year, DTC-native brand, launched in 2017, so a quite young brand. We went into Walmart last year, exceeded our expectations, exceeded Walmart's expectations, was the driver of growth in the category that then became a very portable story as we come into year 2, effectively a national launch that's happening now and will carry out over the next couple of years to be fully launched, not only in blades and razors, but over time, much broader, more diversified. I think the Harry's playbook there on how they've expanded and extended the brand directly applies to Billie, and we're already in long lead conversations with the retailers you would want us to be talking to about logical and natural adjacencies, where we'll lead some disruption in some new categories.

And we've seen you do something similar with Cremo and Jack Black, too. I guess, this is a playbook you've deployed and deployed success before.

And it's not theoretical. It's happening.

Another success story that's a turnaround story, the other component of your portfolio that is really a turnaround story, it's been momentum and success, building upon success has been Sun and Skin, broadly. I think you're going into maybe a fourth season of share gains in [ Sun ]. And many of us initially said odd, it's a J&J or now we've got to start seeing [ Kenvue ], same with the [ ReCo ], but d***, like year upon year, you're just building momentum. What's the secret to success? And as we look forward to this upcoming season, I mean, [ although ] this season is kind of one early because you get the distribution and merchandising, what's in the cards, based on what you secured already?