Yahoo Finance Edgewell Personal Care Company (NYSE:EPC) Q2 2024 Earnings Call Transcript
Edgewell Personal Care Company (NYSE:EPC) Q2 2024 Earnings Call Transcript May 8, 2024
Edgewell Personal Care Company misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.74. Edgewell Personal Care Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to Edgewell’s Second Quarter Fiscal Year 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Gough, Vice President of Investor Relations. Please go ahead.
Chris Gough : Good morning, everyone, and thank you for joining us this morning for Edgewell’s second quarter fiscal year 2024 earnings call. With me this morning are Rod Little, our President and Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call and then hand it over to Dan to discuss our results and full year fiscal 2024 outlook before we transition to Q&A. This call is being recorded and will be available for replay via our website, www.edgewell.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 and repositioning actions, acquisitions and integrations, changes to our working capital metrics, currency fluctuations, commodity costs, category value, future plans for return of capital to shareholders and more.
Any such statements are forward-looking statements 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 or 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 30, 2023, as may be amended in our quarterly reports on Form 10-Q, which has been filed 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.
Rod Little: Thank you, Chris. Good morning, everyone, and thanks for joining us on our fiscal ‘24 second quarter earnings call. We've delivered strong financial results in the quarter. Flight sales growth and accelerated gross margin gains of over 300 basis points drove 19% year-over-year adjusted EBITDA growth and over 50% adjusted earnings per share growth, both of which were above our expectations. Our strong margin results serve as the catalyst for the increase in our profit outlook for the full year, while reinforcing our commitment to return to pre-COVID level gross margins over time. I'm particularly pleased with the execution of our teams as margin expansion delivered in the quarter and embedded in our updated full year outlook is underpinned by a healthy balance of both accelerated realization of our productivity initiatives and disciplined execution of our strategic revenue management efforts.
Combined these two initiatives drove over 400 basis points of gross benefit in the quarter. Organic net sales results in the quarter included a double-digit increase in our right to win portfolio, driven by our market leading Sun Care and Grooming businesses and continued growth across our international markets, reflective of both price and volume gains. I continue to be excited about the results we are seeing in our international markets. After posting 6% growth this quarter, these businesses have a two year stack growth rate of over 9%, driven by better execution, improved commercial capabilities, and importantly, stronger leadership. In Japan, our second largest standalone market, we had meaningful organic growth while gaining almost a market share Wet Shave.
In Europe, our momentum continues with growth across both branded Wet Shave and our custom brands group. As we have begun to execute the relaunch of the Wilkinson Sword brand in market. And in Latin America, growth was driven by higher pricing and volumes reflective of a strong start to the Sun Care sees. In North America, as category consumption softened, sales and our right to play businesses of Wet Shave and Sun Care declined. Whether were certain transitory factors of play, including the cycling of last year's MPD pipeline fill at Costco and Shave and retailer efforts to further reduce safety stock levels across Sun Care. The results in these categories for North America were below our expectations. Importantly, our results in North America across our right to win portfolio were very strong and in total we grew over 11% in the quarter, with gains in both with gains in both volume and price.
Solid planogram outcomes, and good early season execution drove 13% growth in Sun Care and incremental distribution and new product rollouts in Cremo and the Billie launching the Body fueled over 20% organic sales growth in grooming. In summary, we operate a broad and diverse portfolio of global brands and our first half results are further proof that our strategy is working. For half one, we delivered 1.4% organic sales growth, 190 basis points of gross margin accretion invested over $111 million in support of our brands and increased operating cash flow by $54 million and realized over 26% adjusted earnings per share growth. As we turn to the second half of the year, our priorities are clear. We will continue to execute with excellence in support of our productivity program.
We'll invest behind meaningful innovation and MPD across, Sun, grooming and body care, as well as our Carefree master brand launch. And finally, we will continue to deliver top and bottom-line growth across our international markets. With this, I'm confident in our organization's ability to be successful. And now, I'd like to ask Dan to take you through our second quarter results and discuss our outlook for fiscal ‘24. Dan?
Dan Sullivan: Thank you, Rod. Good morning, everyone. Despite what continues to be a challenging macro environment, strong operational and commercial execution has led to robust adjusted gross margin, EPS and EBITDA expansion in the quarter. Strong international results partially offset by the challenging performance of our right to play categories in North America led to slight organic sales growth, which was below our expectations. Continued excellent productivity performance and realization of our price and revenue management strategies, once again, unlock notable gross margin accretion, enabling us to raise our full year adjusted EPS and EBITDA outlook ranges, which I'll discuss shortly. For the quarter, organic net sales growth was largely driven by higher pricing and strategic revenue management actions, while volumes were lower.
International organic growth was just under 6%, underpinned by both price and volume gains. As previously mentioned, the external environment is challenging. The dollar remains stubbornly strong while interest rates remain elevated. And importantly, consumption across U.S. categories has slowed. Aggregate consumption across our U.S. segments declined 0.4% in the quarter, a meaningful sequential step down from last quarter's 2%, 13 week growth and the 5% trailing 52 week trend, as gains from pricing eased compared to a year ago and volumes declined across most categories. The change in trend was most pronounced in Wet Shave and reflective of the drug channel, where we're seeing lower foot traffic, retailer execution challenges and a highly competitive environment on shelf.
Operationally, our teams continued to execute at a high level. The supply chain organization realized better than expected productivity savings and our commercial teams drove strong gains from both price and revenue management. In total, these efforts combined to provide 430 basis points of gross margin tailwinds in the quarter, which more than offset core inflationary pressures and unfavorable mix. Notably, we delivered 320 basis points of adjusted gross margin accretion, adjusted EPS of $0.88 per share and adjusted EBITDA of $99.7 million, all of which were marked improvements over the previous year and above our expectations. Now, let me turn to the detailed for the quarter. Organic net sales increased 0.1% as strong performance across international markets and double-digit global growth in Sun Care and Grooming were offset by declines in North America Wet Shave and Fem Care.
The strong international performance was driven by price gains of over 3% and volume gains of over 2%, resulting in just under 6% organic growth. Performance in Japan continued to be a highlight as a return to healthy category consumption was met with price execution and supported by incremental brand investment. Mid-single digit growth in Europe and high single digit growth across LATAM were noteworthy as well. Organic cells in North America were down 2.8%, as double-digit growth in Sun and Grooming was offset by declines in Wet Shave, Fem Care and Skin. North America volumes were down 5.4%, while pricing and revenue management delivered nearly 3 points of growth. Wet Shave organic net sales were down 4.5% with declines in men then women's systems and preps offset by slight growth in disposables.
International Wet Shave grew mid-single-digits and from both price and volume gains, reflecting improved market conditions, solid distribution outcomes and strong in-market brand activation. In North America, organic net sales declined double-digits and were negatively impacted by cycling last year's MPD pipe fill in the club channel. Excluding the impact of the product launch cycling, total Wet Shave sales would've declined just under 2% in the quarter, which was in line with our expectations. In the U.S., razors and blades category consumption was down 3% in the quarter, driven mostly by the drug channel were declining traffic, weaker retailer performance and heightened promotional levels all dampened results. While our market share decreased 80 basis points overall, this was entirely driven by the aforementioned drug channel where we over index.
Outside of drug, total category consumption was only marginally down and we gained market share including share expansion in mass. The Billie Brand continued to gain share, delivering 360 basis points of share growth as it continues to scale at retail. In the quarter, the brand reached a 16 share at Walmart and over 10 share at drug. Sun and Skin Care organic net sales increased approximately 12% as nearly 13% growth in Sun Care and 18% growth in Grooming were partially offset by declines in Skin. North America and international each grew Sun Care over 12% with both delivering volume and price gains. In the U.S., challenging early season weather was evident in category performance, which was down approximately 4% and our share declined 190 basis points.
Grooming organic net sales increased over 18%, led by over 26% growth in Cremo in the U.S., over 12% growth in Bul Dog internationally and the rollout of Billie's Body Care launch at retail. Grooming organic growth excluding the Billie launch was a robust 11%. Wet ones organic net sales declined 11% and our shared decline slightly to approximately 73%. Fem Care organic net sales were down 12% for the quarter and the decline was more than expected. Consumption in the category was up 1.9%, though entirely driven by pads, as tampon consumption was flat and liners declined. The category continues to be impacted by retailer destocking and heightened promotional intensity, and we saw some executional delays in the changeover to the new planogram sets, which was a headwind in the quarter as we deploy our new Carefree master brands.
Playtex Sport continues to be a drag with sluggish consumption and share performance. Now, moving down the P&L. Gross margin rate on an adjusted basis increased 320 basis points inclusive of 10 basis points of unfavorable currency. We delivered approximately 240 basis points of productivity savings and realized 190 basis points of price and strategic revenue management gains. This was partially offset by core gross inflationary pressures of about 60 basis points and 40 basis points of negative mix and other items. A&P expenses were 10.5% of net sales and flat to last year. Adjusted SG&A increased 20 basis points in rate of sale versus last year, as higher people related costs were only partly offset by savings realized from ongoing operational efficiency programs.
Adjusted operating income was $80.7 million compared to $63.1 million last year, an increase of approximately 28%. Adjusted operating margin increased 300 basis points, reflecting higher gross margin, partially offset by higher A&P and SG&A expenses. GAAP diluted net earnings per share were $0.72 compared to $0.37 in the second quarter of fiscal ’23, and adjusted earnings per share were $0.88 compared to $0.56 in the prior year period. Currency movements had approximately $0.02 per share in unfavorable impact in the quarter, as translational currency benefits within operating profit were more than offset by transactional headwinds in operating profit and lower hedge gains within other income and expense. Adjusted EBITDA was $99.7 million inclusive of a $1.3 million unfavorable currency impact compared to $83.6 million in the prior year.
Net cash provided by operating activities was $56.1 million for the first half compared to $1.9 million in the prior year period. We ended the quarter with $196 million in cash on hand access to the $309 million undrawn portion of our credit facility, and a net debt leverage ratio of 3.4x. In the quarter, share repurchases totaled $15 million and we continued our quarterly dividend payout and declared another cash dividend of $0.15 per share for the second quarter. In total, we returned $23.5 million to shareholders during the quarter. Now turning to our outlook for fiscal 2024. Our strong half one financial performance highlighted by accelerated year-over-year gross margin accretion provides the catalyst for our raising of the full year outlook for both adjusted EBITDA and EPS.
We continue to expect organic net sales growth to be in the range of 2% to 4% so now anticipate the full year growth to be at the lower end of our previously provided range. This is largely reflective of 2Q results as our half two organic growth outlook remains mostly in line with our previous expectations and with a higher growth profile in Q4 than in Q3. We now expect full year adjusted gross margin accretion of 120 basis points, inclusive of 10 basis points of FX headwinds, and this represents a 40 basis point improvement over our previous outlook. Our outlook for margin expansion and half two is largely unchanged, as we expect stronger productivity gains and continued easing of inflation and FX to be offset by increased promotional levels and the negative impact of lower sales on capacity utilization.
As mentioned, we're also increasing our outlook for adjusted EPS and EBITDA, essentially flowing through the over performance from 2Q to the full year, and holding half to generally consistent with our previous outlook. As modestly improved, FX is offset by the impact of slightly lower sales. Adjusted EBITDA is now expected to be in the range of $348 million to $360 million. Adjusted EPS is now anticipated to be in the range of $2.80 to $3 inclusive of approximately $0.17 per share of currency headwinds. Adjusted earnings per share at the midpoint of the range is now expected to increase approximately 12% or 18% at constant currency. For more information related to our fiscal ‘24 outlook, I would refer you to the press release that we issued earlier this morning.
And now I'd like to turn the call back over to the operator for the Q&A session.
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