Edgewell Personal Care Co (EPC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Edgewell Fourth Quarter Fiscal 2017 Earnings Conference Call. (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.

Thank you, Allison. Good morning, everyone, and thank you for joining us for Edgewell's Fourth Quarter Fiscal 2017 Earnings Conference Call. With me this morning are David Hatfield, our President and Chief Executive Officer and Chairman of the Board; and Sandy Sheldon, our Chief Financial Officer. David will kick off the call then hand over to Sandy for the earnings and outlook discussion, followed by 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 restructurings, 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, which reflect our current views with respect to future events.

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, 2016, as amended and supplemented in our quarterly reports on Form 10-Q for the quarters ended December 31, 2016; March 31, 2017; and June 30, 2017.

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.

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 are shown in our press release issued earlier today, which is available on the investor website section of our website, www.edgewell.com. Management believes these non-GAAP measures provide investors valuable information on the underlying trends of our business.

With that, I'd like to turn the call over to David.

Thank you, Chris, and good morning, everyone. Before Sandy takes you through the financial results, I'll briefly comment on 2017, including the state of the categories in which we compete. And then I'll discuss our outlook and plans for fiscal '18.

Overall, we ended a difficult and challenging fiscal year '17 with a disappointing fourth quarter. In the quarter, we fell short of our objectives on net sales due to continued category declines, intense competitive pricing pressure, share declines on our fem care segment as well as hurricane impacts.

As a result, net sales for the full year declined 2.8% below our third quarter outlook. For the full year, the categories in which we compete in the U.S. declined, on aggregate, 4 points, with razors and blades down 5%, including untracked channels.

Despite that challenging environment, we competed well during the year, gaining dollar share on a 52-week basis in global wet shave as well as in sun and skin care.

And despite our top line softness, we grew adjusted operating profit 2.5%, expanded operating margin 50 basis points and increased adjusted EPS by 11%. We did so while maintaining the investments in our core growth initiatives and in working in A&P. And we held or increased promotional spending where appropriate, given the intense competitive environment.

We also made progress during 2017 against our 3 strategic pillars in support of our medium-term goals. Our first pillar is to focus on and improve our fundamentals, in part by providing compelling innovation for consumers. We've done so in wet shave, for example, where we launched innovation in all segments, including Quattro YOU disposables and the fits Mach3 private label offering in the many markets around the world.

And we gained value share in the U.S. on a 52-week basis and gained share in the key international markets. Given the difficult environment in this category, with unprecedented pricing and promotional activity in the marketplace, we're proud of our market share, brand, product and business resilience.

Our Sun and Skin Care results, both top and bottom line, were very strong this year driven by outstanding innovation, market expansion and executional focus in both commercial and manufacturing productivity. We grew net sales, market share and segment profit for the full year. We grew market share in both Banana Boat and Hawaiian Tropic in the U.S. and had 4 of the top 5 new items in the U.S.

In international, we grew net sales organically over 14% and grew market share in 6 out of 8 key markets. Our second strategic pillar is to rapidly reconfigure our business against growth opportunities that we see in the marketplace, such as e-retail, direct-to-consumer and growth channels. And in 2017, we invested significantly in these growth initiatives, including e-Commerce. In the U.S., we launched our direct-to-consumer site and in China, we accelerated sales through brick-and-mortar expansion and the successful launch of our Tmall homepage.

And although these businesses are still small, we made significant progress. For the full year, total e-Commerce sales were up 45%, and we gained share for the third consecutive year. In China, total e-Commerce and brick-and-mortar sales increased nearly 15% as we gained share as well. And nearly a year after acquiring the business, Bulldog exceeded our top line goals as we expanded into Germany and the Netherlands and increased the number of stores in the U.S. from 4,000 to 15,000 in the year.

Our third pillar is to build organizational capabilities and generate resources to support and fund these growth initiatives. In 2017, we delivered on the challenging cost savings goals and we've developed aggressive productivity plans for '18 and beyond. Balanced against these 2017 achievements, we recognize there's more work to do in several areas in fiscal year '18, particularly in feminine care and in Europe to address our customer service and supply chain issues in wet shave.

Turning to fiscal year '18. At a macro level, our business will continue to face significant category pressure, particularly in wet shave. In the U.S., we expect the categories we compete in to be down approximately 2% to 4% in aggregate, with manual shave down mid-single-digit percent in the U.S. and remaining soft in several key international markets.

From a competitive perspective, we don't see any let up from our largest competitor as they continue to reset their wet shave business in the U.S. And we expect to see additional actions from them over the course of the year.

With that as a backdrop, we're planning for organic net sales to be flat to down slightly for the year, with significant new product launches acting as an offset to the category softness.

Beginning in the second quarter of fiscal '18, we'll be launching new products in every segment of wet shave, including a major innovation in our Intuition brand in the women's shave as well as significant upgrades to men's Hydro, including the only razor with shock absorbing handles and new cartridges featuring a range of skin conditioning gels.

In sun, we'll launch a new Banana Boat global platform, Simply Protect, that leverages the better-for-you consumer trend. We also have innovation planned in disposables, shave prep, feminine care and infant care.

Turning to profitability, we'll continue to aggressively drive cost and expense savings through our ZBS and restructuring initiatives, and we've launched the next round of savings targets beyond 2018 that will firm up as we go through the first half of the year.

But to maintain our competitiveness in this environment and sustain the investments in our growth initiatives, we're reinvesting a significant portion of the savings this year. Thus, we're anticipating more modest operating margin expansion for 2018.

In arriving at our outlook, we've assessed the announced actions from Gillette and others, and we believe we have the innovative new products and the strategies in place to enable us to compete effectively. We'll continue to balance operating margin with the appropriate level of investments to -- in support of core growth initiatives and innovation to ensure the long-term success of the company.

Thanks, and with that, I'll hand it over to Sandy.

Thanks, David, and good morning, everyone. I'll start with the fourth quarter results. Reported net sales in the quarter were $565 million, down 7.5% and down 8.4% on an organic basis with declines in each of the segments.

From a geographic perspective, organic net sales in North America were down 13.4% and essentially flat in international. Organic net sales exclude a $4.5 million benefit from the Bulldog acquisition and a $1.1 million benefit from currency.

The organic net sales decline was largely driven by lower volumes in wet shave and feminine care. Although we expected net sales in the quarter to be down, we came in below our outlook, primarily due to sustained negative category trends in women's systems and disposables in North America, European supply chain issues that persisted into the fourth quarter, wet shave category softness in Europe as well as additional share losses in feminine care and some weather-related impacts from the hurricanes.

Gross margin was 48%, a decrease of 280 basis points, driven by lower volumes and unfavorable price mix in sun and skin care and unfavorable cost mix in wet shave, reflecting negative transactional currency impacts, lower volumes and an unfavorable product mix.

A&P expense as a percent of net sales was 12.6%, down 90 basis points, with lower spending in feminine care, specifically related to a prior year Carefree media campaign that we did not repeat. The decline also reflects a shift of some advertising spend to trade promotion support, which is reflected in the net sales results. ZBS savings on nonworking spend also contributed to lower A&P in the quarter.

SG&A expense was 16.8% of net sales compared to 17.7% in the prior year quarter. The improvement was a result of lower incentive compensation expense this year and cost savings from our ZBS initiative, which more than offset increased investments in support of our growth initiatives.

During the quarter, we recorded a noncash intangible asset impairment charge of $319 million to adjust the carrying values of indefinite lived trade names related to the Playtex and Edge brand names. $312 million of the charge was related to the Playtex brand name.

While the company continues to support the Playtex-branded business in both feminine care and infant care, and its strong heritage and brand equity, declining performance impacted the growth in share and cash flow projections used to value the trade name. These brand names were changed to amortizable assets, resulting in $1.8 million of additional amortization in the quarter and $7.1 million annual amortization going forward.

Other income was $0.1 million compared to $2 million of expense in the prior year, primarily reflecting the result of foreign currency contracts and the revaluation of nonfunctional currency balance sheet exposures. Interest expense was down compared to the prior year, reflecting lower debt levels this year. The adjusted effective tax rate for the full year was 22.9%, slightly below the prior year period of 23.1%.

GAAP diluted EPS was a loss of $2.61 in the quarter and adjusted EPS for the quarter was $1 as compared to $1.06 in the prior year.

Let me now turn to our segment results. Starting with our wet shave segment, organic net sales were down 6% in the quarter. The sales decline roughly mirrored what we're seeing in the categories with declines in men's and women's systems as well as disposables. In North America, organic net sales decreased 11% in the quarter with declines in men's due to nonrepeat of prior year promotional activities as well as women's systems and disposables.

The decline in women's systems was largely category based, while disposables was category based, along with some added retail inventory reduction, which more than offset incremental net sales of Quattro for YOU.

International organic net sales decreased just over 1%, which was below our expectation due to continued softness in EMEA as supply chain issues related to our wet shave footprint project persisted. We also saw category softness in EMEA's developed markets. Wet shave segment profit decreased 10% due to lower volumes, unfavorable cost mix and negative currency impacts, slightly offset by lower spending.

In the wet shave category, we continued to see material softness across both men's and women's systems as well as disposables. As measured by Nielsen, the U.S. manual shave category was down 9% in the latest 12-week data, with men's manual shave down over 11%, women's down 13% and disposables down 4%.

When factoring in non-measured channels, we believe the U.S. men's category was down about 5% with the overall razors and blades category down about 5% as well. From a market share perspective, our share in manual shave was essentially flat versus 1 year ago in both U.S. and global track data.

Sun and skin care net sales decreased 8.4%, including the positive impact from the Bulldog acquisition. Organic net sales decreased 14.7% in the quarter, largely as expected, due to the difficult comparison to the prior year, which had more favorable weather and consumption in the U.S.

Keep in mind that this category's consumption is highest during fourth quarter, but shipments are curtailed as the season winds down to help manage down trade inventory levels.

Our Bulldog men's grooming product line performed well from both a sales and market share perspective as we continue to increase the number of store launches in both the U.S. and international. Segment profit decreased $9.6 million, driven primarily by lower volumes and higher sun care returns.

Within the U.S. sun care category, consumption was down about 2% in the quarter primarily driven by cooler weather and hurricane-related issues. Our U.S. market share improved by 1.5 points in the quarter, gains in both Banana Boat and Hawaiian Tropic brands, driven by new products and incremental distribution.

Turning to feminine care, organic net sales decreased 13.7% driven by volume declines in tampons, pads and liners related to distribution losses, heightened competitive pressure and some retail inventory reductions.

Feminine care segment profit increased $7.8 million, driven by lower A&P and overhead spending as well as improved cost mix, which more than offset lower volumes. Overall, the feminine care category was down slightly with declines in tampons and liners, mostly offset by growth in pads. Our market share declined 1.6 points.

And finally, in our All Other segment, which is primarily infant care, organic net sales decreased 2.7%, driven by declines in infant feeding. All Other segment profit decreased $1.8 million, driven by lower product volumes and unfavorable cost mix.

A few highlights on the full year results: net sales decreased 2.7% or 2.8% on an organic basis; North America organic net sales decreased 4.4%; and international organic net sales increased 0.3%.

From a segment perspective, organic net sales decreased 2.8% in wet shave, driven primarily by lower volumes due to heightened competitive activity and category declines.

Feminine care organic net sales declined 9.7% driven by lower volumes. Sun and skin care net sales increased 3.2% on higher volumes, favorable price mix and lower returns, partially offset by an $8.2 million decline related to the exit of private label.

Gross margin was 49.2% of net sales, roughly in line with the prior year on a reported basis and improved on an organic basis by about 20 basis points as lower material costs, productivity and restructuring savings were partially offset by higher fem care cost related to the move of production from Canada to the U.S.

Full year A&P expense was 13.8% of net sales down versus the prior year spending at 14.3%. Normalizing for the shift of advertising spend to trade promotion spend and lower nonworking spend, support for our branded products was in line with the prior year.

SG&A expense was $390 million, 17% of net sales, including $17.8 million of intangibles amortization. Excluding the amortization in '17 and spin cost in '16, SG&A as a percent of sales improved by 20 basis points over the prior year.

Lower incentive compensation along with savings from our ZBS productivity program more than offset investments from growth initiatives this year. Other income was $10 million compared to $3 million of expense in the prior year, driven by foreign currency contracts and the revaluation of nonfunctional currency balance sheet exposures.

Net earnings in fiscal '17 were $5.7 million compared to $178.7 million in fiscal '16. Adjusted net earnings were $228 million compared to $213 million in the prior year. Excluding the intangible asset impairment charge, restructuring costs and spin costs, the increase in adjusted net earnings was driven primarily by higher adjusted operating profit and favorable other income, offset in part by negative currency translation.

GAAP diluted earnings per share were $0.10 in fiscal '17 as compared to earnings of $2.99 in fiscal '16. Adjusted EPS was $3.97 for fiscal '17, compared to $3.57 in fiscal '16.

Net cash from operating activities was $296 million for fiscal '17 as compared to $176 million during the prior year. The improvement reflects the $100 million of discretionary funding of pension plans in fiscal '16 and higher current period adjusted net earnings.

In terms of capital allocation, we completed share repurchases of approximately 2.2 million shares during the year. We opened fiscal year 2017 with the acquisition of Bulldog, and we closed the year with the divestiture of the Playtex gloves business. While individually both are relatively small, this reflects our ongoing focus on both M&A and portfolio optimization as we look to the future to accelerate our top line growth and improve our margin structure.

Finally, during '17, we completed significant multiyear restructuring initiatives, which will continue to drive benefit to our cost structure over the next 2 years. These were large, operations-based efforts that took significant resources and focus and we're pleased with the outcome despite some of the difficulties we faced this year. In '17, we also completed a significant effort instituting zero-based spending and budgeting across our global business with great savings delivery in '17 and even more significant cost savings to come in '18.

As David noted, we'll continue to focus on our productivity programs as fuel for growth, and we'll be focusing on identifying additional opportunities for '19 and beyond.

Now turning to our full year outlook. We estimate that reported net sales will be generally flat with the prior year, including a currency benefit of approximately 150 basis points, partially offset by a 50 basis point impact from the Playtex gloves divestiture, net of acquisitions.

Organic net sales are expected to be flat to down slightly compared with the prior year. This outlook assumes ongoing wet shave category declines in the U.S. and softening category trends in international. It also assumes distribution losses and heightened competitive pressures in feminine care will continue to negatively impact net sales through at least the first 3 quarters, leading to a mid-single-digit decline in net sales for the year.

However, in wet shave, we estimate that we can grow share in this decelerating environment, enabled by significant innovation we're bringing to market this year, as David described earlier. We also expect to continue to gain distribution and share in e-Commerce. Therefore, overall, we expect wet shave organic sales to be relatively flat.

And in sun and skin care, we expect to grow organic net sales low to mid-single digits through strong innovation, market expansion and distribution gains, including robust organic growth in Bulldog.

Our GAAP EPS outlook is in the range of $4 to $4.20, including an estimated pretax gain of $16 million for the gloves divestiture. Adjusted EPS is expected to be in the range of $3.80 to $4, reflecting modest adjusted operating income margin expansion of 20 to 25 basis points and a higher adjusted tax rate of 24% to 26%. The 2018 adjusted tax rate assumes a similar mix of U.S. to foreign earnings as well as a negative impact from the adoption of new employee share-based payment accounting rules. In addition, we will have higher below-the-line expense as we anniversary the other income from '17.

Our zero-based spend initiative is anticipated to deliver $25 million to $30 million in net savings, which will principally fund investments in core and strategic growth initiatives. Incremental savings from our restructuring projects are estimated to be approximately $20 million over the '18 and '19 fiscal years. In terms of quarterly phasing, we anticipate that sales and earnings growth will not be uniform by quarter, largely driven by timing of product launches, sales mix and higher investment in the first half of the fiscal year.

In arriving in our outlook, we've assessed the announced actions from our competitors and at this point, our outlook includes organic net sales declines of 2% to 3% in the first half. And we're currently estimating we will deliver approximately 40% of our 2018 adjusted EPS in the first half, reflecting the lower sales as well as higher marketing spend and product cost headwinds.

As I wrap up, I want to reiterate that we believe we have the innovative new products, portfolio and strategies in place to enable us to compete effectively in this difficult environment. We will continue to balance operating margin with the appropriate level of investments in support of core growth initiatives and innovation to ensure the long-term success of Edgewell Personal Care.

With that, we'll open it up for questions.

(Operator Instructions) Our first question will come from Ali Dibadj of Bernstein.

So a couple of things on my mind, at least. One is, that there's just so much uncertainty that you described in the category, competition, sounds like retailer shelf space, certainly on commodities as well. So I guess on a scale of kind of 1 to 10, 10 being completely solid, we think this is all good, or 1 being, we really don't know. How certain are you about the 2018 guidance that you've given? And look, you may want to kind of give that 1 to 10 for top line and margins and EPS separately, but just trying to get a sense of your certainty given all the uncertainties.

That's an interesting question. I think it's certainly not a 10. As you indicate, there's a lot of factors in a flux, and it's certainly not a 1. I think that we're comfortable with how we're approaching the market, so we're very, very comfortable that we know the levers that we're trying to attack. I think we're very confident in our innovation, so confidence of the plans that we've reviewed are very high. Less certain, frankly, about the outside world and the categories, and we're going to need to monitor them and be agile. So that's how I'd characterize top line. We think that we're going after the right levers from cost and productivity, and we'll keep banging on those, because we know we're going to need to be agile. And depending on how categories change, we're going to need to be flexible. So I think that we're pretty confident in the middle of the P&L. And so therefore, reasonably confident on the bottom line. So that's kind of my best answer, Ali.

Okay. So maybe 5-ish on the top line, then progressively towards 10 on the bottom line, given the flexibility you have. So on the guidance again, you certainly expect the back half to be a little bit of resurgence, so [6%] on the EPS. Positive low single-digit type organic sales growth to offset the first half. Can you talk a little bit more about the innovation? It certainly sounds like it's in a lot of categories. Is it really a reliance on all of that innovation to drive your top line? How does it work with retailers? So at this point, do you have kind of agreed to shelf space or launches agreed to in the category with the retailers already? And then do want to ask about A&P's phasing and investment phasing as well throughout the year.

First of all, on the innovation front, yes, we're very optimistic on the innovation front, and I can go into that more throughout the call. To your point, I think we're very comfortable with our plans with the retailers for the launches, both in the U.S. and in Europe and around the world. So I think that those launches are pretty well put to bed. I think, certainly there's some details to work out, but they're pretty much put to bed. Beyond innovation, certainly, there are planogram changes coming in the different segments at different times of the year, generally Q2 to Q3 in fem care. And I think there's still room for those to change and in fact, room for us to rectify some of the weaknesses that we've had in -- particularly in fem care. So beyond innovation, we need category management, we need to gain share of the shelf throughout the year beyond innovation. I guess there was a question about phasing A&P, maybe, Sandy, if you could touch on that for me?

Right. So versus '17, we are phasing more of our A&P into the first half of the year. I would also say, when we talk about spending, we're really talking about spending across the entire P&L. So both in A&P and against gross sales for different trade promotional and couponing and pricing activities. And I would say we certainly have aggressive plans on that as well in the first half. Some of that is obviously behind the innovation that's launching in Q2, and some of it's really behind the rest of our core products and portfolio.

Our next question will come from Kevin Grundy of Jefferies.

First question I'd like to start with, kind of coming back to the guidance. I think we're all trying to bridge the gap a bit, I guess between what was clearly a challenging quarter and year to where you expect to land in fiscal '18. But I was hoping to touch on the innovation a bit. And without asking you to front run anything, as we look at some of the brands that had success in blades more recently, in Dollar Shave and Harry's, it's been around price point, it's been around packaging, it's been around building strong brands that resonate with consumers. So what's sort of the unmet need that you're sort of targeting here with this innovation that would give the market confidence that you can get back to sort of flat to down 1% sort of growth? So that's the first question. Maybe anything you can help us with there, with innovation to kind of give us a little bit more confidence on the top line.

And then second question, if I could just squeeze this in also, is on M&A and capital allocation broadly. And does some of the difficulties in the business provide a greater urgency to diversify away from the base business? Or alternatively, there's a disruptive brand out there in Harry's that's had tremendous success in both B2C and brick-and-mortar retail that resonates well with millennials. So I wouldn't ask you to comment on that business specifically, but how you're maybe thinking about diversifying away from the base business versus potentially bolting on to the existing businesses?

All right. Thank you, Kevin. On innovation, we've actually put a fair amount of effort over the last several years to become even more consumer-centric and to develop more impactful innovation. And what we've done is, we've really tried to work on consumer insights informed by emerging trends, call it customization, personalization, but also convenience. Marry up those insights with technologies that are obvious and perceptible to consumers. And then thirdly, marrying that up with -- in an offering that reinforces our brand equities. Let me bring that to life with 2 of our launches coming over the next year. One is on Intuition f.a.b. We don't mind if folks think that f.a.b. is short for fabulous, but it actually means forward and back. And it's a new, unique bidirectional razor for women that is the only razor that safely shaves forward and backwards. We think that it's great for women, particularly for legs. Concepts scored in the top 5 -- 5% to 10% in all the markets that we've tested it. And it also fits the Intuition brand, which is built as an all-in-one, convenient, simple proposition and this just reinforces that brand equity.

Secondly, let me talk for a second about Hydro Sense. We're actually coming out with a new razor handle that can be personalized. It's a shock absorbing handle, to follow the contours of your face, but there's also a switch that allows you to operate it in a more rigid way. I actually like that for below the nose, so you can change it, depending on what you're trying to do with it and personalize it to your taste. We're also launching 3 new cartridge ranges with different skin conditioning gels, so you can customize the shave that's best for your skin. This all reinforces the Hydro brand. It's all about skin care, skin performance, and we think that it'll reinforce the brand and help us greatly in the market. So that's just 2 examples. We can go down every segment within the product line has innovation coming in the next year.

On the M&A front, we continue to look for bolt-ons to reinforce and to complement our product lines with a particular emphasis on skin care, grooming, close-in adjacencies, and that's a key priority for us.

Our next question will come from Bill Chappell of SunTrust.

Actually a couple of questions not on wet shave. Just on -- first on fem/sun care. Just trying to understand the fourth quarter performance if that was meaningfully different from what you expected? Because I thought you have pretty good line of sight to returns after a season. So just trying to understand how that impacted you. And then also on feminine care going forward, I mean is there any R&D, anything that we can see that will slow the declines? I mean I understand we're going to continue at this rate for the next 3 quarters, but I mean, is there anything kind of like wet shave, where you're hoping that it'll stabilize? Or should we just kind of expect it to be in decline for the foreseeable future?

Yes, okay, great. Thanks, Bill. On the sun care, the quarter played out about where we thought, actually. For a little context, in the fourth quarter, sales are roughly 25% of consumption, so it's a very light sales quarter that is therefore, very, very susceptible to small changes being a large percentage relative to consumption. And we kind of said that last year, we had a very strong, strong quarter. We knew coming into this that, that comp wouldn't be favorable. You take the quarter out of it, and I'll point out again, we think we had a very good year, both in the U.S. from a share point of view and also international. And we were happy with our innovation and our market growth, and we look forward to progress in the future there. So sun care was kind of where we thought.

Feminine care came in softer. We actually lost a little more share than we thought and looking forward to your question, we do see declines continuing now through Q3 until we anniversary the planogram losses that we suffered this year. We actually do look to work to stabilize fem beginning at that point. We have innovation planned for that time frame, and a road map for future innovation over the coming several years. We also -- what we'll also -- it isn't just an innovation play through category management, working with the trade. We need to increase share of shelf and the quality of placement. And we've been making changes organizationally to help support both, with our new COO. I think that organizational change, it will bring better operational focus against the business. And we've also just gone to a new business unit organization with a GM. It'll also help on agility and alignment. It's an organization model that has proved to work well for us in the infant category, another one that's kind of uniquely U.S. North America based, and is different from shaving or sun. So for those reasons, we will aim to, I mean, stabilize them over the medium term.

Our next question will come from Jonathan Feeney of Consumer Edge Research.

Just a couple quick ones. What role do you think household inventory is playing in North America wet shave, particularly around systems? I mean we're getting deep into, (inaudible) period here of your leading competitor discounting, and just kind of wanted your take on, is there some -- is what's happening here just some level of overhang? And do you have any visibility into household, and are people trying different systems, having lots of different razors around? I mean, I can't be the only one who -- that wasn't the case 3 or 4 years ago. And my second question was, incentive compensation, obviously, is there anything funny going on with that, that could affect the pacing of 2018, which, presumably some new targets for that?

Thank you, Jonathan. On the household inventory, it's a question we've tried to figure out how to answer for a long time. But I got to tell you, I don't think we have very good visibility so my comments will be anecdotal. We -- even household panel data, you just -- it's just not something we've been able to put a fine point on. And I really do think every year, in each of the last 10 years, household inventory of razor handles has gone up. To your point, every launch, with all the effort of every launch of a new handle and all the trial and stuff, everybody gets a handle. And I'm sure in most households, there's 2 or 3 handles sitting around. Now I don't know that it's gone up. I think it's been the case for many, many years. The other place where I could see an inventory overhang, frankly, is in the shave clubs, where they've been sending a lot of cartridges every month, more than I think people use. So as that segment slows, I could see inventory going up there. But as I say, that's only anecdotal. And then I have no real comment, no insight about the sales, that's your second question. I don't think that, that's playing at all in the phasing.

Our next question will come from Katie Grafstein of Barclays.

I just wanted to confirm that private label is still roughly 20% of your wet shave business. And as you look into the next few years, what are your growth aspirations for this business? And are you open to making it a bigger piece of the overall wet shave portfolio, despite the negative mix it has within wet shave?

Great. Yes, I don't have the exact number, but it's about that. So that's a good order of magnitude number. And we have plans to grow private label, but roughly in line with overall shave. And it's less of a goal than we're going to compete, and we're going to satisfy consumer needs, whatever they want to buy. So I think that it's an output, not an input. We're going to support it. We're going to work with our customers to get great category solutions, where private label certainly plays a big part, but it's only part of it. We're going to bring in innovation at the super premium level, at the premium level, at the value level and at private label, and it'll be a balanced effort that will be market-driven.

Our next question will come from Wendy Nicholson of Citi.

I just had a question about the distribution losses in fem care. Because Playtex, in particular, is still a big brand. So I'm just wondering where you're losing distribution? And when the retailer tells you you're losing distribution, why is it? Do you have a supply chain issue? Is it just that they're just trying to take brands out of the category? Are they keeping the Playtex brand on shelf? Or is it more in the Stayfree business? Just if you could leave us a little bit more color there, so that we can anticipate, okay, are there -- is this a problem that could afflict or affect more of your portfolio, or is it really limited to fem care, et cetera.

Yes, the fem care planogram issues are fem-only related. They're not -- are those kind of buying decisions and the merchandising decisions are, I mean, category-specific. So that's -- what we lost was generally when we're referring to that, we're actually talking about the loss of the sport pads and the liners products that we launched, what, 1.5 years or 2 years ago. And the reason for it was fairly simple: we didn't get to the threshold turn metrics that the trade wanted fast enough, and so it was a fairly objective decision. It also reflects -- there's continued efforts to try to consolidate space, brands, whatever across CPG, not just fem care, and that's a pressure that we faced, and that's where we lost basics.

Our next question will come from Jason English of Goldman Sachs.

Two questions. First, you talked about the slowdown you're seeing in the international market. Can you contextualize that, give us a little bit more color? Because obviously, we don't have the same degree of visibility in those markets as we do in the U.S. And then I want to come back to a question I think has been asked multiple ways, and that's just the path to how you get to your guidance in the back half. You're talking 2% to 3% organic sales declines pivoting to 2% to 3% growth in the sort of midteens earnings decline, pivoting to double-digit growth in the back half. I suspect there must be some sort of transitory drag this year that will be cycling, in addition to sort of your aspirations with innovation. But maybe you can contextualize those puts and takes so that we can build up a little more confidence behind that divergent trajectory from first half to second half.

Okay, great. Thank you, Jason. The slowdown that we referenced internationally was primarily Western Europe, so let me comment about Western Europe. The categories have been a little sluggish over the last year and got a little worse in the most recent quarter. The more medium-term issues are, one, that the hard discounters that are famous in Europe continue to grow and accelerate growth, and they're taking it out of what's the Nielsen-measured part of the market. So part of the drag in the measured channels is due to that channel shift. More recently, the -- it was a soft quarter, softer than we thought it would be. As one competitive niche -- niche competitor launches, like Veet and a Phillips One Touch, they launched a year ago and they didn't cycle, and they didn't comp that, so the categories look soft.

The other thing in the marketplace is that the trade's really going to less off-shelf promotion and are emphasizing the category less. And in the short term, we actually suffered in that, and lost some share against what was a, I mean, strong year ago period. Looking forward, we're going to work on our commercial tactics to succeed in a world where there's less off-shelf merchandising. We have innovation coming that I talked about, greater investments and then better supply chain. And those are the reasons we think we'll come back next year.

In terms of the glide slope for the second half being a bit stronger, we talked about innovation and we talked about fem care trying to attack planograms and launching innovation. And there's a big other one here, which is the category has really been buffeted by the -- by our largest competitor who has thrown over $200 million in price cuts. And that really began, call it Q2, and that should anniversary roughly Q2 of next year, at the end of that, let's say. And there is an expectation that at some point, they're going to want to grow and this category will be a little bit transformed with this reset, but it will go into a more normal category where there's segments. And they're launching new price tiers and all that, and it's going to get to a place where everybody's going to compete in all the different segments, through innovation, brand equity, et cetera, and are trying to bring value back to the category. So there's an expectation here that this reset will moderate in the back half also.

Our next question will come from Iain Simpson with Societe Generale.

Two questions from me, please. Firstly, just looking at the years as a whole, I know you've talked a lot about phasing, but you're guiding for, it sounds like maybe flat, minus 1% organic in 2018. You did minus 2.8% in 2017. It doesn't sound like P&G's getting less aggressive in the U.S. anytime soon. It sounds like razors, ex the U.S., is sequentially getting meaningfully worse, especially in Europe. So I'm just struggling, on a full year basis, what's going to drive the improvement here? Is it just kind of better innovation and execution and thus share gains against an end market that's kind of static or as bad or worse? And secondly, just on that, you're cutting marketing spend by a meaningful amount as your top line growth is deteriorating. Now I would have thought in response to slowing end markets, you'd kind of be looking to step up A&P, try and gain share to cover your fixed costs. And I just wondered if you could kind of talk through the rationale on where you see A&P stabilizing.

Okay, thank you. Again, the expectation going forward is that innovation, better category management and absence of negatives in fem care will help in the back half. And then like I had just mentioned, the reset, the competitive reset anniversaries later in the year. So all those factors play into a belief that the current trends will continue pretty severely through the first quarter and into the second quarter and then moderate in the back half and our competitive wins begin later in the year.

On an A&P point of view, our plan is to reinvest all of our savings of nonworking A&P, plow it back into A&P, and then even more so, plus increased trade spend. So when you add up the total marketing pressure, we're actually planning a healthy increase next year in support of that, of innovation, but also of the legacy brands to support planogram changes.

Having no further questions in our queue, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. David Hatfield for any closing remarks.

Thank you all for your time and your interest. Thank you all. Have a super day.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.