Edgewell Personal Care Co (EPC) 2007 Q2 法說會逐字稿

Thank you for your patience, ladies and gentlemen, and welcome to the second quarter 2007 Playtex Products, Incorporated earnings conference call. My name is Candace and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Ms. Laura Kiernan, Vice President of Investor Relations. Please proceed, ma'am.

Good morning, everyone. Welcome to our second quarter 2007 conference call. With me today are Neil DeFeo, our Chairman, President and CEO; and Kris Kelley, our Executive Vice President and CFO.

I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. This same language applies to any comments made by management during today's call. We encourage you to read the Company's SEC filings and earnings release which discuss in full factors that could cause actual results to differ from those made in any forward-looking statements. Our remarks today will refer primarily to our results excluding certain charges and gains as outlined in yesterday's press release and accompanying financial statements.

For your convenience, a reconciliation of the results as reported, which is in accordance with GAAP to results excluding charges and gains which is a non-GAAP measure, is included in the Consolidated Statement of Income Data attached to our press release and on our website at playtexproducts.com. A digital replay of the conference call will be available through Friday -- through next Friday and the replay number is 888-286-8010 and the pass code is 57859212.

Now I'd like to hand it over to Neil DeFeo.

Good morning, everyone. Thank you for participating in the call. For today's call, we will discuss a summary of the second quarter results which I presume everyone has read. I'll give you a short update on the Hawaiian Tropic integration and Kris will talk about the numbers in more detail and then we'll do some Q&A. We should be able to wrap this up around 11:45.

Now please note that today I will not be taking questions related to the proposed merger between Energizer and Playtex and not taking questions about our proxy or closing timelines, synergies, et cetera.

So to summarize our third quarter -- our second quarter results, we are pleased with a strong second quarter. When taken together with the first quarter, our results continue to look quite good. As we said on our last two calls, our results would vary by quarter and that has proved out to be the case and we think it will continue to be the case as the year goes on. We don't give quarterly guidance but for the full year, if not for the pending sale obviously of Playtex to Energizer, we would still expect to meet our original going-in guidance of net sales up somewhere in the $95 to $100 million range for the year, including Hawaiian Tropic, and earnings of $0.51 to $0.55 cents for the year.

Now on to results. In the quarter, we posted our 14th consecutive quarter of growth in a challenging competitive environment. Sales in that income grew versus the prior year during the quarter. The Hawaiian Tropic integration is ongoing and going well and the business is performing about as expected.

Now I'd like to look at the business in some more detail. First our results, as indicated in the release, net sales are up 31% in the quarter to $236 million. Without Hawaiian Tropic, net sales were up 13%. That's organic growth. Then sales grew 17% in the first half to $417 million or 8% up without Hawaiian Tropic. Just as there's some variability to the trends in the first quarter, there is variability to the trends in the second quarter, obviously on the positive side. So on a year-to-date basis, the trends are in line with our fourth quarter results last year which were also up 8%. So for the fourth quarter last year and for the year-to-date this year, we're up 8% versus the prior year.

New products continue to be the driver of our growth with about 30% of our net sales made up from these new products. Operating income grew 28% in the second quarter to $41 million and 12% year-to-date to $74 million versus last year including the Hawaiian Tropic business. In total, our net income increased 51% to $17 million in the second quarter versus the prior year and diluted earnings per share were up approximately $0.50, 50% excuse me, to $0.26 per share. Year-to-date net income increased 27% to $29 million and diluted earnings per share increased 28% versus the prior year to $0.46 a share. Net income is trending as expected on a year-to-date basis.

Now to talk about our largest segment, Skin Care, which includes Hawaiian Tropic since its acquisition on April 18th of this year. This category continues to grow, especially in the sun care portion of it. In the latest four weeks, for example, IRI data shows that the category in total was up 4%. Excuse me, up 10% in the last four weeks, I said it wrong. Skin Care net sales for the Company grew 52% in the second quarter of 2007 to $130 million and up 31% to $213 million in the first half. Excluding Hawaiian Tropic, Skin Care sales were up 15% in the quarter and 12% year-to-date.

This growth was driven by Banana Boat and was partially offset by some softness in both the Wet Ones and glove businesses due to increased competitive activity in the quarter. Banana Boat sales were strong even though the weather in parts of the country was quite mixed. You all recall the major flooding in the middle part of the country, especially Texas. Banana Boat benefited from continued strong new product sales including our high UVA/UVB products with patented AvoTriplex technology and our convenient, continuous spray products as well as our unique tear-free offerings.

The Hawaiian Tropic business is performing essentially as expected and we are pleased with the high quality of their products. Their full line of UVA/UVB products featuring the patented Sun Sure technology is also performing quite well.

While we have just launched our Wet Ones Sensitive Skin in the quarter, gaining good distribution, Wet Ones experienced some softness due in part to weak category performance as well as continued pressure from private label. The launch of our new Sensitive Skin product should address this challenge.

In total, Skin Care operating income, that is excluding the inventory -- one-time inventory step-up of $1.5 million associated with the acquisition of the Hawaiian Tropic business, was up 34% in the quarter to $30 million and up 20% year-to-date to $54 million. In addition, to the additional operating income from Hawaiian Tropic, this growth also reflects the effects of higher Banana Boat sun care sales and lower returns.

Now on to Feminine Care. Net sales of Feminine Care increased a strong 9% in the quarter to $59 million and increased 2% year-to-date to $110 million versus the prior year. This business in total tends -- continues to be a modestly growing business for us over the long term. Growth in the second quarter was partially due to timing of shipments versus the first quarter of 2007 but was also mainly due to strong new product sales including large count Playtex Sport. Partially offsetting this growth were lower sales of Beyond due to decreased distribution and discontinued SlimFits and Portables plastic products along with the cannibalization of Sport on the Gentle Glide business.

Our tampon shares are holding steady as they have for the last three years. In fact, the latest IRI share for the last four weeks, which is 25.5, is within the 25 share range that we've had during that period of time.

On a positive note, we've begun to see growth in our bread and butter plastic tampons which is our primary focus. Our July shares of 25.5 were, in fact, up 1.4 share points versus the prior year.

Feminine Care operating income in the second quarter of 2007 declined 13% to $15 million and declined 16% to $27 million in the first half. This decline largely reflects the increase in marketing investment and negative mix impact of new products. We believe that we are positioning the business well for the future and that operating income should improve over time as we begin to grow ahead of the category.

We're also in the process of introducing a new product on Gentle Glide tampons which is our best protection yet. Once this improved product is in full distribution, it should help our Feminine Care franchise, so overall we feel the Feminine Care business is improving.

Now turning to Infant Care. Infant Care had a very good quarter. Net sales were up 16% to $47 million. For the year-to-date period, Infant Care grew 9% to $94 million.

While we saw growth in virtually all of our infant categories during the quarter, growth was driven primarily by Diaper Genie 2. You will recall this product was introduced about this time last year. Diaper Genie 2 has been performing very well at retail due to the strong consumer acceptance and preference for this product which, in fact, is actually priced higher than its predecessor. Recall also that the growth achieved in the quarter compares to a heavy promotional period during last year's second quarter.

Year-to-date growth of our other Infant Care categories continues to be driven by new product introductions in several of our infant feeding categories.

Infant care operating income increased 65% to $13 million in the quarter and increased 28%, $25 million year-to-date versus the prior year. The growth in the quarter was driven by higher sales and higher pricing with lower promotions. It also reflects stable raw material costs.

Now to discuss the Hawaiian Tropic integration. So far the integration is going well and about as planned, gone quite smoothly. In June, we advised on an individual basis most of the Hawaiian Tropic employees of our specific intentions with regard to their employment. We are still on target to achieve our synergies. As we've said previously though, the integration of Hawaiian Tropic into Playtex as well as the growing of our existing business using Hawaiian Tropic infrastructure will take time.

Now I'd like to turn the call over to Kris Kelley who will talk you through some more of the numbers. Kris?

Thanks, Neil. Since Neil has covered off our net sales and segment operating income, I'll focus on the rest of the P&L, the balance sheet and cash flow items. Again, my comments relate to our results excluding charges and gains.

Excluding the step-up for the Hawaiian Tropic acquired inventory, gross margins declined by about 100 basis points in the second quarter of 2007 to 53% versus the comparable prior year period. Year-to-date gross margins are also running at about 53%, which is where we previously guided you to. The decline in gross margin for the quarter was due to the overall growth in our Skin Care segment and in particular, the impact of the lower margin Hawaiian Tropic business that we acquired including their private label sun care business.

Raw material costs for the quarter netted out to be about even with the prior year quarter and were not an impact.

SG&A expenses ran at about 35.3% of net sales in the second quarter 2007. This was down about 70 basis points versus the comparable prior year quarter. On a year-to-date basis, SG&A is running at about 35% of net sales, about 60 basis points below last year. The improvement as a percentage of net sales to SG&A for both the quarter and year to date period is due to the leverage effects of our higher net sales. This improvement is in spite of higher non-cash equity compensation expenses of about $1 million as well as some integration in M&A costs that we incurred this year. The results to date do not include any synergy benefits that we will start achieving in the near future as we continue integrating Hawaiian Tropic.

Total operating income grew 28% to $41 million in the quarter and grew 12% to $74 million year-to-date versus the prior year. The growth in operating income is largely due to the higher net sales as the lower gross margins mostly offset the SG&A leveraging.

Interest expense increased by $0.4 million in the second quarter of 2007, declined by $1 million in the first half 2007, both versus the prior year. In the second quarter 2007, the financing costs associated with the Hawaiian Tropic acquisition more than offset the benefits of the Company's previous deleveraging program.

Driven by major sales gains in the quarter in our historical business and the benefits from the Hawaiian Tropic acquisition, our net income was up 51% to $17 million or $0.26 per diluted share in the second quarter and up 27% to $29 million or $0.46 per diluted share in the first half 2007 versus the prior year.

Now on to the balance sheet. Receivables are up more than 60 million from June of 2006 primarily due to the acquisition of Hawaiian Tropic, which also as you know, has longer terms, as well as the impact of generally later sun care season versus the prior year due in part to the weather that Neil mentioned. The majority of this receivable balance will be collected in the third quarter as the sun care season winds down.

Inventories are about $45 million for the same period, again due primarily to the acquisition of Hawaiian Tropic, but also due to slightly higher than anticipated levels of Banana Boat inventory due in part to the delayed seasonal sell-in as previously mentioned.

Total debt increased about $85 million to $664 million in the first half versus year-end and net debt increased by $103 million versus year-end. This includes the $83 million we paid for Hawaiian Tropic plus the $25 million working capital adjustment payment we made on the Hawaiian Tropic acquisition.

Additionally, you may recall that we are still at a seasonally high working capital period and so debt balances go down significantly as we move out of the sun care season and collect on our sun care sales.

Cash flow and liquidity. Our liquidity in the end of the quarter was $74 million comprised of cash of $11 million and availability under our ABL revolver of $63 million. Free cash flow, defined as operating cash flow less CapEx, was $5 million for the first half of 2007 compared with $16 million as higher cash earnings of about $5 million were more than offset by increased working capital usage and slightly higher capital spending. Working capital was a use of about $37 million in the first half of 2007 or about $14 million higher than the first half of 2006 due to the higher receivables and inventories I just mentioned. Capital spending was $11 million year-to-date versus $9 million last year and is still anticipated to be about $18 million for the full year.

Due to the pending transaction with Energizer, we did not buy back any stock in the open market during the quarter and are not able to do so other than normal employee stock repurchases related to option exercises. As a result, diluted shares outstanding of 64.4 million shares during the quarter were 1 million shares above the prior year quarter and slightly above our 2007 plan of 64 million shares. The pending sale also put our refinancing plans on hold.

As Neil mentioned, we will take questions on our results but we will not answer any questions related to the proposed merger between Energizer and Playtex. Operator, will you please begin the Q&A?

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Kathleen Reed of Stanford Financial. Please proceed.

Good morning, everybody. Just a question on Hawaiian Tropic. I know you reiterated your full-year sales expectation for the total Company but at least versus my model, the Skin Care division seemed to do much better with organic sales kind of right in line with my numbers so with Wet Ones and gloves kind of down at least versus again my model, Hawaiian Tropic appears to be better. Is it still on track to add about $50 million in revenue for the year? And then I have a follow-up question.

Yes, we're generally on track to meet our prior guidance, Kathleen. I just point out to you that as we said in the first quarter, some of our sales for the sun care business were delayed because of later ordering by some of our accounts into the second quarter and that's what we actually experienced. So that's why the second quarter, in part, shows such strong gains in the Skin Care business.

And with the -- is the dilution for Hawaiian Tropic still about $0.10 for the year and is more of that in the gross margin line as opposed to the SG&A line, because I think on your prior call, you had thought SG&A would be up as a percent of sales this quarter just when you add in the Hawaiian Tropic business and it was actually down like 70 basis points. Can you just talk about the dilution for Hawaiian Tropic and if that's still all on track?

Yes, we're not changing our dilution impact for Hawaiian Tropic for the total year. And yes, the majority of the gross -- it'll hit the gross margins as we mentioned reducing them from 54% to the 53%. But SG&A -- the impact of Hawaiian Tropic on our SG&A quarter to quarter changes -- varies depending on how much sales they obviously put through on the quarter to offset those SG&A spending.

So does that mean because so much more of their shipments are in the first half of the year, the SG&A impact will be more second half weighted?

Correct.

Okay. And then just finally, can you just give us some more information on the strong 16% growth in Infant Care? I didn't quite understand the Diaper Genie. If you shipped it last year, why that you're really benefiting from that this year if you anniversaried it? And just some of the other -- maybe just color on the new products and the cups or what's really driving that impressive growth?

First of all, the Diaper Genie was launched last -- it was launched in the third quarter of last year, end of July, so we didn't anniversary it. We'll start anniversarying it this coming third quarter.

Okay. And just more comments on the cups or the bottles, what other new products?

Well, we have a lot of new products that hit the shelf in the quarter. Diaper Genie benefits from two things. First of all, it's higher priced. It's priced -- the pail is priced at $29.95 at retail, on sale sometimes at $24.95, and that compares to $19.95 for the original Diaper Genie. So you get the benefit of higher pricing. And then secondly, actual unit sales are also up in the quarter, and that's as a result of the preference for the product. The product simply is preferred by consumers. As you look across the other parts of the business, we introduced some new products in some of the other segments. I'm not going to go over them in detail. And the benefits of these introductions we're seeing in the quarter. Obviously, we'll have to see how they sell through to see what the effect on the future quarters will be.

Okay. Thanks.

Sure.

Our next question will come from the line of Bill Chappell of Suntrust Robinson Humphrey. Please proceed.

Good morning.

Hi, Bill.

I guess first question if you can break out, was Hawaiian Tropic accretive to the current quarter and is all the dilution just expected in the second half or how did that kind of work as we go through the rest of the year?

Yes, it was accretive to this quarter, and we're still looking at the $0.10 dilution for the full year.

Can you tell me how accretive?

No.

Fantastic. I guess second, maybe talk about the Gentle Glide -- the new products coming out. What's kind of the timing on that, and are there additional expenses for the roll out incurred or that have been incurred for that?

Bill, we're in the process of launching that as we speak. I will now give you a detailed explanation of the marketing plan. Did you like it? Obviously we're not going to discuss it. This is an upgrade to the current Gentle Glide product and you'll see it in the marketplace and we'll just have to let history tell us what the marketing efforts will look like.

But the sell-in would occur in the third quarter?

It's begun shipping now and you'll see it mostly in the third quarter, yes.

And then in terms of the Infant Care, I think you had said in the past you wanted to continue the pretty steady group of new products going into '08. Is the timing still the same where it would be in kind of the late third quarter, fourth quarter and ship in the new products like you did last year?

Bill, it varies by the new products that we launch and the cycles of the trade retailer resets. Yes, in general, though, the answer to your question is yes. It also varies on the level of when our retail partners want to reset their store shelves, some delays, some products are available. So it's variable.

Okay, great. Congratulations.

Thank you.

Our next question will come from the line of Jason Gere of A.G. Edwards. Please proceed.

Thanks. Good morning.

Good morning, Jason.

Can you just talk a little about Wet Ones, maybe about the competition with the private label. What's the price differential and with the new product that you just launched, can you talk about shelf space and where that may be coming from?

Let me do that in reverse order. We just launched a new product, Sensitive Skin. It's gotten very good distribution and is resulting in, I think, a net increase in our distribution, although we had very good distribution going in. The competition has come from private label and the pricing difference in private label varies, of course, account by account, but can be anywhere between, I'm just making a guess here, 10% to 30% pricing difference.

Did that change, though, over the last maybe three to six months?

No, the pricing difference hasn't changed. I think there's just been more private label activity. The way you win versus private label as a branded manufacturer is you introduce innovation and Sensitive Skin is an innovation because it gives -- it provides distinctivety and value to consumers.

Okay, and then on the topic of competition, can you talk a little just about Fem Care, what you're seeing maybe some of your larger competitors out there and now with the new product in Gentle Glide, hopefully the good trends you saw in the second quarter, at least the first half of the year, is sustainable.

Well as you know, this marketplace is very competitive and our competitors are high quality and they do a good job and we expect the competitive activity in the marketplace to continue. There's no reason to believe that will somehow go away overnight. We also believe, however, that our products, especially our new Playtex Gentle Glide product and Sport, are very high quality and preferred often versus the competitive entries. We expect to continue to market these aggressively, give consumers reasons to try them. And if they like the products and we're doing our job, then they'll buy them. The latest four-week shares through mid-July, and this is IRI data without mass channel, show our shares at 25.5, which were up 1.4 share points versus the prior year. Obviously this varies four-weeks to four-week period. Sometimes we'll do better, sometimes we'll do poorer. But I say on balance, as we've said over the past nearly three years, our share at 25 has maintained and we're actually seeing a little growth. Sport's doing quite well for us. Latest Sport share during that period of times was at 5.7.

Okay, and then the last question, a housekeeping probably for Kris. Can you talk about what the free cash flow targets are for the year, if that has changed? And the tax rate is, I think your guidance was 38% but it's been coming in 36.5%?

The free cash flow, no, we're still thinking that we'll hit our guidance in total. I don't see any changes to that. And as far as tax rate goes, it's probably going to be closer to 37% than 38%, but not -- it'll come back up a little bit in the back half.

Okay, so 37% for the full year?

Yes.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Connie Maneaty of DMO Capital Markets. Please proceed.

Good morning.

Hi, Connie. How are you?

Good, thanks. A question for Kris. You mentioned that inventories for Banana Boat were higher than normal because of the late start to the season. Is the season normal at this point? I mean, are you clearing out the inventory in the month of July or do you think you'll be left with higher than normal levels of Skin Care inventory?

Tell us if the sun will shine. We'll tell you how much inventory we'll have. Right. We plan the business to a certain level that came in later so the inventories are higher. The weather seems to be good. We're having -- we had a good second quarter so we'll just have to see, Connie.

So are there signs that the shipments are going later into the year or it's just hard to figure on this end.

No, I mean we're just saying obviously it was a later season from a consumption standpoint and was also we're seeing -- another reason for the inventory is a mix issue is that the takeoff -- the sprays versus tube usage this year appears to be taking off in the market more than we anticipated so the combination of mix of inventories in tubes versus sprays also impacts our inventory. But none of this will be a problem and none of this will be just -- this is not obsolete inventory. This is something that whatever is left at the end of the season with our stock, we would have started producing again in November anyway so.

Okay. Why is Playtex Sport still dilutive? I mean I would have thought by now the volume would be up, the premium price that it has should offset any manufacturing efficiencies, but do you still have those at this point?

Connie, we're not -- I'm not going to discuss the individual cost structures of our products with you. All I'll say is Playtex Sport is a terrific product and it's expensive these days to launch new products into the marketplace.

Okay. So it's dilutive to the bottom line, not just at gross profit or maybe not even at a gross profit, is what you're saying, right?

I'm not going to comment further, Connie.

Okay. The last question is why are you still holding guidance at $0.50 to $0.55 when you beat the estimates in the second quarter and the tax rate's going to be lower than expected?

My guidance for the full year had nothing to do with -- we don't give quarterly guidance. So the fact that we beat whatever the Street thought we were going to do in the second quarter doesn't make me change my numbers, how we thought the quarters would come in. The tax rate difference is minor and it's within rounding of our range of $0.51 to $0.55.

Right. I remember now you don't give quarterly guidance but that then suggests if we were all underestimating how the second quarter was going to come out, are we overestimating the second half I suppose? Okay. Thanks.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Linda Bolton Weiser of Oppenheimer. Please proceed.

Thank you. Sorry, I missed the first part of the call so if you already gave this, I'm sorry, but did you give the inventory and receivables balances, excluding Hawaiian Tropic?

No.

Could you give that?

No, I don't want to break that out. It's too much level of detail.

Okay. And can you just -- somehow my cash flow estimate was off even though I knew there was some issue with the mechanics of how the acquisition flowed through the operating cash flow. Can you just like refresh on how that flowed into operating cash flow?

Obviously, the working capital impact, obviously Hawaiian Tropic, similar to our sun care season, has no working capital usage during the first half of the year, so when we had it picked up at April 18th forward, their working capital increased and the moneys will start coming in from Hawaiian Tropic in the third quarter similar to the way our Banana Boat comes into the third quarter, but even worse with them because they have the longer terms under their previous management.

So is there any way to quantify the unusual effects on operating cash flow in the quarter?

I don't want to get into quarter by quarter, but it'll wash out in the third quarter.

Okay. And just on the Fem Care margin and I'm sure you talked about this, but it was down pretty significantly year-over-year. I would assume because of promotional support activities?

It was significantly increased advertising and marketing in the quarter, yes.

And so was the thought that that timing would change in the second half? I mean really, this is quite significant margin decline in the Fem Care business. Would it have been expected to improve in the second half?

Again, we don't give quarter by quarter guidance. We're just maintaining our guidance for the year. Obviously, we have programs in place and we're quite pleased actually at how we're doing in this business so I'd like to leave it like that. I know there are a lot of people in Cincinnati listening to the call who'd like me to answer that question very specifically but I just can't.

Okay, all right. Well, thank you very much.

Sure.

Ladies and gentlemen, this concludes the question and answer portion of today's conference. I will turn the call back to Mr. Neil DeFeo, Chairman, President and Chief Executive Officer of Playtex for any closing remarks. Sir?

Yes. Thank you all for your questions and I'd like to wrap this up. We've closed our books now on the 14th consecutive quarter of growth for the Company driven by our focus on new products, careful cost control and the Hawaiian Tropic acquisition. Our strategy has paid off and we will continue to pay dividends in the future.

This is our 75th year anniversary and for 75 years, Playtex has been bringing America's consumers great products and we celebrate that today. Yesterday we celebrated at the New York Stock Exchange.

As always, I want to thank our associates worldwide who deserve the credit for our success as a Company and who so successfully help us achieve our goals.

I also want to thank all of you for participating. It's been a pleasure working with you. As we go through our process of selling to Energizer, I may not speak with you again so thank you for your support during the past three years. Have a great summer.

Thank you for your participation, ladies and gentlemen. You may now disconnect. Have a great day.