Edgewell Personal Care Co (EPC) 2002 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter conference call. At this time all participants are in a listen only mode. (Inaudible) will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Glenn Forbes. Mr. Forbes, you may begin your conference.

Thank you. Good morning everyone and thank you for joining us today. Also on the call with me is Mike Gallagher, our Chief Executive Officer. Before we start, I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. The same language applies to any comments made by management during today's call. We encourage you to read the filings and last evening's press release which discuss in full factors that could cause actual results different from those made in any forward looking statements.

To recap yesterday's press release, we reported for ongoing operations for the first quarter 2002 net sales of $196.8 million versus $199.6 last year; operating earnings of $47.1 million versus $48.7 million last year, Eva Dow $50.8 million versus $52 million last year and earnings per share $.31 versus $.28 on comparable basis for the first quarter of 2001. These earnings presented in this recap are excluding unusual items impacting the first quarter of this year and have adjusted in the prior year for the new intangible accounting rules. We have provided a full reconciliation of all of these items within a statement of earnings. I will cover a little more about each of these items during the financial portion of this call. Now I'd like to turn it over to Mike Gallagher.

Thanks Glenn. Good morning. This morning I will briefly summarize the first quarter 2002 results including the highlight and and our key product segments. As an overview, let me start by saying that we are pleased with the overall results of the first quarter. (Inaudible) fundamentals of businesses in total are consistent with what we have seen over the past couple of quarters. What we see going forward has not changed. We expect that the impact of the products will build over the year, especially in infant care. Many of these items are just getting into the marketplace and the market support behind them will start earnings in the second quarter. So it is very early in terms of consumption and sharing fact.

As mentioned in our press release, we have raised the earnings per share expectation for the year. The base consistent view of the operating trends, further and the interest rate environment and finalization of the goodwill amortization impact, we are comfortable with the higher overall outlook. During the quarter, total company net sales were down 1% versus a year ago. Feminine care was up 7%. (Inaudible) care was up 6%. Infant care was down 9% and household products, personal grooming also trailed year-end levels. Within the business segment, feminine care sales were up 7.4% for the first quarter to $61.1 million. Our market share for the first quarter was $30.4 versus $29.6 in the first quarter a year ago.

Retail takeaway for Playtex was up 3.83% while overall category was up only .4%. Our feminine care business remained very strong as evidenced by the share and consumption results. Our total infant care sales were 65.6 for the first quarter versus 71.9 first quarter a year ago. While a year ago of $6 million, roughly $2 million of that was in the baby wipe segment which is not considered a core business going forward. The first quarter comparison versus a year ago is the most difficult problem we will face this year. We had a strong quarter a year ago. Excluding baby wipe and wet ones which is doing well but has a seasonal element within the quarters, the total infant care shipment trend is in align with what we saw on the fourth quarter of 2001 which was improved versus the previous six month period resulting in a stable picture that should improve with the new products and other initiatives in place for the year. In addition, there are signs that the competitive environment has about run its course earned programs will impact the market.

I will highlight some of the key sharing consumption trends and some of the market segments. Incomes, our share is 49.9 for the quarter versus 54.4 prior year and 50.4 in the fourth quarter of 2001 reflecting the decline over the past year due to the very competitive price promotion in the category as we discussed during 2001. The tidy began shipping broadly in mid February, initial movement in accounts has been very encouraging. Advertising for the insulator will start during the second quarter as we make consumers aware of this new innovation. In wet ones, our market share was 52.7 for the first quarter versus 61.4 our prior year. However, that is very misleading. Our consumption for the quarter was up 11.6%, the category was 30%, again as the result of significant new entries, which has been a dynamic in this category now for about 18 months. More importantly, wet ones remains the very strong number one brand and no other competitors seem to have built a solid footing that would allow in our opinion for a strong go forth competitive scenario in the future. We believe that wet ones actually will be strengthened as a result of all of this competitive activity growing in the category and leaving wet ones as a very strong dominant brand. Disposables, we continue to dominate this segment with the share of 85.3% for the first quarter versus 84.1 prior year.

Consistent with recent trends category consumption is off 12% partially attributed to innovation and hard bottle segment led by us and perhaps the cost factor of the disposable feeding versus hard bottles in today's economic climate. Our initiatives to stimulate category growth as the market leader are just taking share with the market with new packing graphics and a new premium nurture, which includes a formula string disc in the market now. Advertising leading positions are disposable nursing systems as the best supplement to breast-feeding will start during the second quarter. Diaper genie, we continue to have a dominant share of this category at 94.1% and have seen our consumption grow by 8.3% in the first quarter of this year. We expect the improved product with a new cutter cap system and the recently introduced toddler film will for our older aged children will continue to drive consumption gains to this business. In skin care we had net sales of $50.5 million versus $47.8 million in the first quarter a year ago. Our market share is up to 19.0 versus 17.4 a year ago.

Retail takeaway season to date consumption is up 11.7%. The overall category is up 2.4%. While the season is just underway, we are extremely pleased with our share gains and consumptions trends so far. The new products for 2002 season, especially skin and indoor tanning have contributed to our fast start. We look forward to an excellent sun care season this year. As I wrap up my comments, I wan to reiterate that we had a solid quarter and continue to believe the outlook for the total year remains very achievable. As a result of the first quarter results and continues to build on the interest rate environment, we have realized our earning estimate upward. We continue to expect to see an impact of our broader array of innovative new products as the year progresses. We have the programs, the brand building initiatives in place against all of our businesses. We also continue to focus our research against the next wave of new products for later this year and next year. Glenn will now provide the financial review.

Thanks Mike. During the first quarter, we reported Eva Dow down slightly from year ago level following the overall sales trend. Our gross margin improved to 56.4% versus 55.5% last year, a favorable product mix on our ongoing effective cost controls. SG&A expenses were higher than a year ago by roughly 3%. Promotion expenses within that category were in line with the historical trend for percent of sales. And other G & A expenses reflect the normal year-to-year levels and inflationary increases. Our total debt at the end of the quarter is $876.8 million, down $12 million from a year in 2001. In addition, we had a cash balance of $28.8 million. We had some revolver borrowings of $5 million with available borrowing standing at $117.8 million.

Our accounts receivable facility borrowing was at $75 million. Our accounts receivable DSO is above the normal average for this period. Unfortunately we were negatively impacted by the fact that a large payment due by a major customer was delayed until early April based upon an error within their systems that has since been resolved. Inventory of $87.3 million is in line with our normal resupply of roughly 14 weeks. Guidance for the year is pretty much the same as we have talked before from an operating point of view. Net sales will continue to target low single digit growth with feminine care and sun care at the upper ended range and all others at the lower end and the increase for the remaining quarter should be in the mid single digit range. Margins, we expressed our goal to modestly improve our gross margin and our overall margins through 2002. Interest expense, depending upon what happens in the second half of the year with interest rates, we should expect approximately $17-$17.5 million per quarter in a combination of interest and other expense related to the AR facility. Amortization will total approximately $1 million for the year and will have an effective tax rate of 36.5%-37%.

In the first quarter in taxes we also had a special item, we had a tax benefit of $14.3 million related to a recently issued federal tax regulation. More importantly, this will result in a cash tax savings of the same amount of $14 million late year in 2003. The new regulation relates to a capital loss on the sale of a subsidiary back in 1999 that will now be available to use to offset and defer capital gain that will occur in 2003, but will be triggered by the retirement of our related notes. Earnings per share on a quarterly basis, the earnings that we split have been reported in previous . As we mentioned, will be adjusted in the first quarter and the second quarter of this year and the balance of the year should be approximately the same as they are now. As in the past on a cash flow basis, we will continue to focus in generating cash and that. We would expect to reduce debt by approximately $35-$40 million over the course of 2002 and consistent with our past quarterly flows, most of this reduction occurs in the third quarter after the seasonal sales of sun care.

Let's take a couple of minutes now just to cover a couple of the unusual items, provide some further explanation. As we have said, we provide a full reconciliation of impact these items have taken on the earnings. To reiterate, we announced a facility back in March in our plastic molding facility in Waterview Lake, New York. We recorded the complete impact of 7.6 pretax and $4.8 million after the tax in the first quarter of this year. As a reminder we will achieve ongoing cost savings related to this closing of approximately $1.5 million in 2003 and the cash flow impact this year is a total of $1.5 million. The tax benefit was another item I covered above. We also had a cumulative accounting change for intangibles. As required by the new guidelines, we are required to conduct an assessment for the valuation of all intangibles . Any impairment in accordance of these new guidelines is recorded as a one-time change in accounting charge this quarter. We recorded a $12.4 million net of tax charge related to the trademark of certain acquired brands such as Chubbs and Diaparene. These brands were acquired in 1998 as part of the PCV acquisition and has subsequently been de-emphasized and replaced by Platex and Baby Magic name in certain markets. While the overall intangibles from this PCV acquisition have significant value in excess of the book value, unfortunately the new accounting rules don't let you offset the increase against the decreases, so we record this one time adjustment.

A replay of this call will be available beginning this afternoon and will run through the end of the day, Saturday, the 27th. The replay dial in number is 703-925-2533 and the pass code is 5921546. To access the Web cast replay of this call, please go to the investor relation's portion of our Web site at playtexproductsinc.dom.

Operator, could you please begin the Q & A?

Thank you. Ladies and gentlemen, if anyone should have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from from Salomon Smith Barney.

Hi. Good morning. Two questions. First, the gross margin, I think you said it benefitted this proportionately because of product mix and I was wondering if we should expect less gross margin expand as we go through the year as infant care business starts to do better. Is that a fair assumption?

I think that's fair . I think you'll see less of a gap from a year ago but in each quarter we'll target to meet or slightly exceed last years gross margin.

Okay. For the full year, you said sort of up.

Up slightly, yes.

Okay. Fine. And then the second thing, you said in your comments about infant care, that the competitive environment was easing, what do you mean by that? Are there just, is there less competitive pricing in promotion activity?

I think the best answer to say to that is that it's pretty much run its course. In other words, there was significant amount of pricing activity and new items brought into the marketplace by major competitors like Gerber and Johnson and Johnson in the infant feeding and toiletries. Gerber introduced solid line of infant toiletries. The J & J organization introduced a line under the Aveeno brand name in infant feeding. Gerber's been very aggressive in launching spill proof cups and Johnson and Johnson also introduced significant spill proof cup products. And in disposable feeding, J & J launched into that category about 18 months ago with their version of innovation in disposable feeding. So pretty much across the board, we had very significant type of competitive pressure from the standpoint of introducing new lines and from the standpoint of pricing specifically by Gerber in toiletries and in cups.

We said all along that the pricing pressure was a difficult environment, we would do what we could on targeted basis to defend ourselves, that we waited for a better day when we had more innovation and we have been slowly but surely introducing more innovative items into both lines and we're starting to now see these items show up at shelf and seen very preliminarily a good takeaway against it. Also the pricing activity tends to after a while run its course. It requires more and more trade dollars in order to get sustained high activity that you initially get when you offer price activity and that tends to become much more inefficient and actually it becomes questionable to whether or not its doable. Also the news worthiness of the items tends to wear out over time as consumers get used to the idea of a Gerber or a J & J launch into these segments. These businesses have by and large not done well. The Aveeno line has really peaked out at about a four share of infant and toiletries. The Gerber line looks like it's peaked out at about a four share and is very much splintered among a number of different skews. They continue to products aggressively but they tend to feed on their own businesses and capitalize at more than 100%.

Our shares on the other hands starts to show a pick-up on a quarter-to-quarter basis that shows just that we're starting to gain some momentum against our infant toiletry and our cup business. And given the other items that we have on the market place, we're very to see the results of the innovative ideas such as insulator against our business.

Preliminary results from the insulated cup show that it's probably going to be largely incremental to our cup business at retail and that's real encouraging to us. In addition, there are signs such as, well J & J is basically getting out of the infant feeding business. Not only have we beat the package disposables where they only have a .5 share of that segment, they basically have announced that they are going to give all of their infant feeding business over to Munchens, so they're backing out of hard bottles, cups and disposable feeding. They only have a four share of that overall segment and I think they probably got tired of getting beaten back and not making any headway in any of those segments. When you start to see things like that, I think it gives us encouragement. That strategy that we have persisted with of maintaining the high road and introducing innovative items and maintaining our franchise has worked pretty well and we think as we go into 2002, we don't see anything up on the horizon that we're aware of that suggests that there is going to be any great innovation that could upset our plans and so we're pretty enthusiastic about what's happening in each of the businesses and that this is going to be an excellent year for infant care.

Terrific. Thank you very much.

Thank you.

Our next question comes from from Cardinal Daschel.

Good morning. Nice to get some good new from you guys after the last couple of quarters there. Glenn, with the change in the taxes that you recorded, what did you cash tax ended up being for the quarter? And then what was your operating cash flow?

We're going to work through the rate so that little bit later. We did pay down $12 million in debt for the quarter, which is normally a high work capital season and on a cash tax basis we would have paid a minimum amount. That cash in, the adjustment that we made is really going to impact the cash next year as opposed to this year. It was just one of like a recording of an asset that really wasn't there.

Okay. And then finally, your trailing for 12 months has been declining for a couple of years now, have we reached the trough?

We anticipate that to be correct.

Okay. Great. Thank you so much.

Thank you.

Our next question comes from from Bank of America Securities.

Hi Mike. My question is .

That's an easy one.

Thank you. Our next question comes from from Winchester Capital.

Hi. Good morning. I just had a question, have you guys worked out the infant care segment on disposable feedings versus cups versus the infant toiletry ?

No we don't, on a shipment care basis? No we don't.

Okay.

Thank you. Our next question is a follow-up question from from Cardinal Daschel.

Could you talk a little bit about the sharp drop off in household products and personal grooming sales on a year over year basis? It just looks like they were a little small in dollars.

Yeah, I wouldn't read much into that, it's that we get a lot of holes into the segments on a quarter by quarter basis for obvious reasons is relatively small and promotional impact is a factor. But overall we're talking about in a household product segment $1.4 million below the year going and personal grooming $2 million. In the household product comparison for Woolite versus first quarter a year ago reflects pipe volume of the Woolite wipes last year. That business is really in great shape actually, Woolite's joint group consumption trends are very strong with an 11.4% increase over a year ago and good share growth.

Our in a defensive mode against the Magla/Mr. Clean line that has not generated a significant new share but has put some pricing pressure in the category and we're defending I think our business quite successfully. We do not expect by the end of this year that that competitive pressure will be as strong as it has been as the competitor realizes and really aren't getting the attraction and getting sizable business in this category.

In personal grooming, the primary variation versus a year ago is in the Ogilvie brand where our share remains very strong at a 70.9 share. The capital risk has stopped, we have taken steps to invigorate the category, we have introduced three new products which begin shipping this quarter and we've also developed updated packaging graphics and we're moving the line from the cluttered hair coloring segment in the retail outlets over to the styling segment which does not have packaged boxed products. So we ought to stand out, be more distinctive and be more findable by consumers.

We've also introduced I think very attractive new products. We have a body and volume booster, which should appeal to people who aren't necessarily interested in perming their hair, but would like to see more body in their hair. We introduced a de frizzer for the other half of the population who have too much body and want to see their hair a little straighter and we have introduced a form perm. And all of these items are here to do stand up franchise into our styling strategy and help grow the category.

Great. Thanks so much.

You're welcome.

Thank you. Our next question comes from from Goldman Sachs.

Hi. Good morning. A couple things. First of all, on the accounts receivable side, can you exclude this one time thing from this one retailer and tell us what the accounts people would have been without that?

Yeah, it would have been probably a couple days higher than what happened, in the sixties, mid sixties.

I'm sorry. So it would have been, it would have been higher than a year ago?

Yeah, a little bit. And with the timing of the shipments versus, you know, I would say our February, March is stronger than last year and then obviously whatever you ship into January gets already collected.

You know, the accounts receivable has been increasing repeatedly over the past two years and this is something I think we're had ongoing conversations about, when are we going to start to see this reverse at all, if at all?

Well, I don't, have you done a comparison of our accounts receivable versus that of other personal care companies?

Yes, but quite frankly Mike, I'm more concerned about the fact that yours is increasing on the year over year basis.

Well, the point I'm making is that our accounts receivable is significantly reduced versus that of our peers that's in personal care areas. So you're fighting a trend obviously with the trade which creates, you know, this creates pretty much similar way. We work against our accounts receivable, there has been a slight , but frankly we're still at the very admirable end of personal care products companies within this industry so we're not bothered by it, certainly not as much as you are, and we don't think that it means anything really significant to the condition of our business or the relationship with our customers.

But frankly most other companies are seeing declines, realizing that you're in an absolute lower level, but why are we seeing that increase? What's the reason?

I think they're probably trying to treat us the same way they're treating probably these other customers and pay us at a lengthened basis because we've been basically getting paid a lot sooner than our competitors who may be making improvements but are still significantly disadvantaged to us.

It sounds like you expect the trend to continue.

We only expect it to change dramatically from where it is and obviously quarter to quarter it bounces depending upon what you ship and when you ship it and what you collect and how you collect it, you know, but again, we have talked about this with gross margin where we can't improve it because we've already had, we've always had a very consistent track record here and we put a lot of effort against our receivables, work with our customers and you know, so in terms of how can we improve it? I think we're pretty good at it and it's just the function of , not really a function of the quality of the receivables or the effort that we're going through or how current we are. We look at it on what's current, what's past due and our trends within that range are always very, very exceptional.

Okay. And then what about inventory? Same thing, your datas are quite significant in first quarter.

That's versus fourth quarter.

Versus a year ago?

Yeah. Versus a year ago, absolute level is about, is a little bit lower and again, you've got to remember if you look at inventories against the future sales, not against the point sales. So that calculation is a little and inventories, we've always managed them very efficiently. We intentionally took our inventories up about a year and a half ago as we went to a better, more dispersed distribution system and that allowed us to improve our service with the customers dramatically. We do a lot, you know, we have very effective controls on our levels of inventory and, you know, from a management point of view and the quality of inventory, you know, we think that they're in terrific shape.

Um, two more questions. You mentioned that your Baby Wipes business , is that new information?

No.

Okay. So what's the plan there?

It's a small business and it's probably going to remain a small business.

Okay. Because I thought when you bought Chubbs that that was going to be a pretty big opportunity today.

Well, we had hoped that was the case, but as you know, it didn't work out, that was one of our efforts that we're least proud of. On the other hand, we were able to make significant progress with the companion business we bought with that which is Wet Ones and Wet Ones has been doing exceedingly well, so where we lost in one we gained on the other.

Are you going to sell that or just kind of keep it for the cash?

No, that was actually a companion product from the same plant that we're producing our hand and face type products and we'll continue to manage that business and look for attractive ways of having a significant presence in that category if we see there is an opportunity.

Okay. And then lastly on the feminine care business, can you talk about your growth expectations for the rest of the year given the expectation that P & G is going to launch a plastic product?

Yeah, our growth expectations haven't changed from the guidance that we have given you. We relish the opportunity to compete in this segment. As you know, we've been doing quite well from a share standpoint vis-à-vis the Tampax brand which had gone from a 50 share to most recently a 39 share market. We closed the gap from 25 share points down to nine. We think that Proctor's potential launch of a plastic tampon applicator basically is in addition to the marketplace that their original cardboard blunt end product is antiquated product and probably doesn't belong in the marketplace any longer and that will be our approach with the trade.

We think that to the degree that they have success on their plastic applicator that the vast majority of that will come out of the cardboard brand. We know that this product from a performance standpoint really has no major advantages vis-à-vis other products in the marketplace from a performance standpoint, that the tampon really is pretty much need to. There are some bells and whistles around the applicator and the wrapper, but we think they are more or less gimmicks rather than real advantages. From what we can tell in the mini market they're in, their pricing tends to be significantly above ours and if that's their intention, we are not concerned about it at all. This is a product by the way that we have known about for many years, it was an original concept of the brands company and we've been well prepared to defend our franchise against it. We see this as an opportunity to actually grow our franchise and eventually going to become the number one product in the marketplace as the original Tampax starts to wind down its presence in the market.

You, and just one other, you said that, correct me if I'm wrong, that the feminine care, you're takeaway was up 3.3 up seven, what's the disconnect there?

Just the basic kind of thing that happens between a worldwide business and a US share and a three month quarter where you can get any kind of a . We also put our personal cleansing wipes in that segment since it's a personal care, feminine care product and that adds, I don't know, I think it added a point of growth.

There is also a couple of classes of trades that aren't in those numbers in which we're doing very well which is Walmart and .

Yeah, so what we're reading from a share standpoint probably only covers at best to our overall US business and if you look at our worldwide basis, probably about just over a half of our overall worldwide business. I think the point to be made though is that our brand continues to be strong and to category and we're showing good share growth and we would expect that to continue.

Okay. Thank you.

You're welcome.

Thank you. Again ladies and gentlemen, if anyone should have a question at this time, please press the one key on your touch-tone telephone. If the question has been answered or you wish to remove yourself from the queue, please press the pound key. Our next question is from from Bank of America Securities.

Mike, can you just quickly tell us what the number for that temporary inventory was or in AR was?

About $7 million.

Thank you.

Thank you. Our next question is from from .

Hi this is , is actually between calls this morning. Going back to the infant care business earlier, can you just sort of give us some scheduled about new products introduction ramp and what you really see for this coming quarter?

Yeah, we have introduced in our needing and soothing segment I think a revolutionary new cup which is the insulator which really began shipping in the first quarter and starts to come to the shelf in late March. It started as kind of the shelf in late March and really is hitting now. We've just begun advertising for it. This is a product that has an advantage over the traditional spill proof cups in that it keeps the liquid inside fresher and cooler for between an hour and two hours longer. Initial takeaway on early accounts has been terrific and we think it's going to be a real driver in this segment. Baby Magic we launched two foaming products in the beginning of this year, which are now on the shelf. We have just launched a new milk bath line in three which is going in very well, the trade loves this concept, starts coming to the shelf at the end of this month and we'll have some advertising campaign.

In the beginning of the year we began shipping Diaper Genie with a better cap and we also started shipping a new film for toddlers so that we can extend the use of the Diaper Genie product in the house beyond the first year when people really tend to start dropping off the use of it. And this is a product that actually performs better against the kind of stronger, more industrial odors of a toddler. We have introduced a new product under the Wet Ones line called Flushables which begin shipping later this month and this product is aimed at essentially whole family use in the home. It's a terrific product and we think it will as big as the current Wet Ones line.

We graphic all of our infant line, we introduced some premium nurses which are just coming to shelf now and we've also introduced a premium version of our advanced hard bottle because there seems to be a trend in the marketplace towards more clear plastic, less cluttered, more sleek line. So we're offering those to the marketplace. In addition, we've developed a new nipple which is more like the human breast and firmer latch-on characteristic that aids in infants feeding. So across the board, we've introduced a significant amount of new products, more of which began to ship this last quarter, all of which should be coming to the shelves in the second quarter.

Okay. Thanks.

Thank you. Once again ladies and gentlemen, if anyone should have a question at the time, please press the one key on your touch-tone telephone. Mr. , at the time there are no further questions.

Okay. Well, good. Let me wrap up. Obviously you can tell by our comments that we're very on the things that we've done to stimulate our business. We're obviously very pleased with the state of our feminine care business and we're excited about the plans that we have for feminine care for the balance of the year. Sun care, no one asked us about that. We have a very strong early lift for the season in this business, takeaway is quite buoyant on this brand. Response to the new items has been terrific. If the weather is cooperative, it should be an exceptional season for Banana Boat. Obviously some of the about infant care, the market has to take on faith, but so far we've pretty well called the situation I think fair and square.

We have a lot of exciting things, we're starting to see some initial reaction to them. The competitive environment does not seem as intense as it was or it's starting to wear out a bit just as we're starting to get going against some terrific initiatives and all in all, you know, if the economy continues to get a little bit better everyday and the weather is good and we'll continue to , we think our strategy is working well and we now see the fruits of that this year as the quarter should be very strong and we've already raised our estimate for the year. We're excited so we thank you for your attention and look forward to talking to you at the end of the second quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect.

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