Edgewell Personal Care Co (EPC) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Edgewell Personal Care First Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) Please note that today's 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. Good morning, everyone, and thank you for joining us for Edgewell's First Quarter Fiscal 2018 Earnings Conference Call. With me this morning are David Hatfield, our President, Chief Executive Officer and Chairman of the Board; and Elizabeth Dreyer, our Interim Chief Financial Officer. David will kick off the call, then hand the call over to Elizabeth for the earnings and outlook discussion, followed by Q&A. This call is being recorded and will be available for replay via our website, edgewell.com.

During the call, we may make statements about our expectations for future plans and performance. This might include future sales, earnings, advertising and promotional spending, product launches, savings and costs related to restructuring, 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 that are subject to various risks and uncertainties, including those described under the caption Risk Factors in our Annual Report and Form 10-K for the year ended September 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 in the Investor Relations section of our website. 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.

Thanks, Chris, and good morning, everyone. Before Elizabeth takes you through the financial results, I'll briefly comment on the first quarter results, address our full year outlook and conclude with some comments about our recent acquisition of Jack Black.

Our results in the first quarter came in generally as we expected, with declines in both net sales and operating profit, reflecting continued challenging category trends, competitive pressure as well as certain cost pressures that impacted us in the first quarter. Given that we do not provide quarterly outlooks, we recognize that this was a difficult quarter for you to assess. And although these first quarter headwinds were in line with our previously provided first half fiscal '18 outlook, we'll spend some time this morning addressing the details within the quarter as well as our rationale for improvement over the remainder of the year.

From a top line perspective, sales were impacted by declines in Wet Shave and the Feminine Care. Sun and Skin Care net sales grew and Infant was flat versus prior year. In Wet Shave, continued competitive promotional and pricing pressures deflated the overall razor and the blades category, which was down over 6% in the U.S. and down over 4% globally, as measured by Nielsen. Although we continued to compete well and have held Nielsen share, we were also impacted by lost promotional presence in unmeasured club channels in the U.S. Our recently launched innovation was -- it was not a factor in the quarter as most of the benefits began in the second quarter. As a result, our organic net sales were down 5%.

Turning to profitability. Adjusted operating profit in the quarter declined nearly $30 million due to lower sales and gross margin but was generally in line with our expectations and the outlook we provided last quarter. Many of the factors impacting gross margin were unique to the quarter, and we expect gross margin going forward and for the full year to be in line with year-ago levels. Elizabeth will expand on gross margin in a few minutes.

Now turning to our outlook for the full fiscal year. As I said, results for the first quarter were in line with our expectations, and our general assumptions remain consistent with the outlook we provided last quarter. So therefore, we're maintaining our previous outlook for organic net sales to be down roughly 1% for the full fiscal year, and we're increasing our outlook for adjusted earnings per share, reflecting the benefit we expect from a lower U.S. tax rate.

Within our top line assumptions, we expect the U.S. razor and the blades category to decline for the year and the competitive intensity to remain though that's somewhat unpredictable. We also expect soft category trends in the developed international markets. However, we're optimistic about the new products we're bringing to market this year and expect them, supported by increased marketing spend, to offset category softness over the remainder of the year.

Innovation is the central aspect of our first strategic pillar focusing on the fundamentals, and there is a great deal to look forward to on the innovation front this year, spanning across all of our categories and value tiers.

In Wet Shave, they include the introduction of INTUITION F.A.B., the first bidirectional razor that safely shaves forward and back; Hydro Sense, the only razor with a shock-absorbing handle that adjusts based on how you shave, along with a range of 3 new cartridges with different skin conditioning gels designed for different skin types; and Xtreme4 disposables, our newest addition to our middle-tier Xtreme master brand.

In the wet -- or in Shave Preps, we're introducing shave creams for men and women with Skintimate 2-in-1 cream and skin conditioner and Hydro Sense Hydrate cream.

In Sun Care, we're delivering on the less is more belief and desire among Personal Care consumers with Banana Boat Simply Protect, a line of products that provide a strong, worry-free protection available in our sport, kids and baby lines.

Our second strategic pillar is reconfiguring the business against growth opportunities, recognizing the changing landscape of our consumers, customers and competition. Here, again, we continue to make progress. We're well along in establishing a digital center of excellence, which is helping to accelerate our growth in e-Commerce, where we continue to gain share. We grew and gained share in China, and Bulldog's international expansion continues to increase momentum.

Our third strategic pillar is to fuel growth through cost savings, productivity initiatives and continuous improvement. We remain on track to deliver on our ZBS savings for the year, much of which will be reinvested to support product launches and investments in growth initiatives. We expect to deliver $25 million to $30 million in savings this year, adding to the $20 million this initiative delivered last year.

Looking beyond 2018 for a moment. As we talked about in last quarter's call, we've launched the next round of ZBS and productivity initiatives for fiscal year '19 and beyond. In this next round, we're enlisting the support of external consultants and we'll address all aspects of our business and cost structure in order to drive additional cost savings and greater efficiency and to ensure we have the skills and capabilities needed to compete in a rapidly changing world. We anticipate that these savings will be used to adapt to a changing category dynamics, increase our competitiveness and provide additional fuel for our investments in strategic growth initiatives and brand support. We expect this to be a multiyear initiative, yielding meaningful benefits in fiscal year '19 and beyond. We'll provide additional details in the coming months.

Before handing it over to Elizabeth, I'd like to touch on our acquisition of Jack Black. We haven't closed quite yet, but we expect to do so shortly. And I couldn't be more excited about bringing the Jack Black brand and team into the Edgewell family. This marks additional progress against our accelerated growth pillar of our long-term strategic plan and meets all of the criteria we use for evaluating acquisitions.

Jack Black is a great, authentic, masculine brand. It delivers head-to-toe solutions designed specifically for men, and it offers simplicity and outstanding product quality and performance. The business has attractive category dynamics, with prestige men's skincare growing nearly 10% in the U.S., and it has a strong competitive position as the #1 men's personal care brand in the U.S. among prestige retailers. We believe we can accelerate Jack Black's growth by, one, increasing online sales through investment in capabilities and user acquisition; two, accelerating international growth by leveraging Edgewell's international footprint; and, three, exploiting obvious synergies with shaving.

And it's been about a year since we've acquired Bulldog, and since then we've exceeded all of our sales, distribution and organizational goals. We believe Jack Black is complementary to Bulldog in its brand imagery, price positioning and the channel strategy and is a great addition to our growing men's skin and grooming segment.

Thanks. And with that, I'll hand it over to Elizabeth.

Good morning. Let me turn to the first quarter business performance.

Reported net sales in the quarter were $468 million, down 3.4%, or 5.2% on an organic basis. Organic net sales excludes benefit from the Bulldog acquisition, the impact from the Playtex Gloves divestiture and a benefit from currency.

From a geographic perspective, organic net sales in North America declined 7% and 2% in international. The organic net sales decline was largely driven by volume and unfavorable price mix in Wet Shave, where the razors and blades category continued to decline, and in Feminine Care due to volume declines and competitive intensity. I'll discuss these segments in more detail in a moment.

Gross margin declined 420 basis points or 450 basis points excluding favorable currency and the combined impact of Bulldog and Gloves. Gross margin in the quarter was in line with our previous outlook and was impacted by a unique combination of factors in the quarter, including unfavorable volume and mix, unfavorable price mix and higher costs. Let me walk you through each of those drivers and why we believe margin will return to more historical norms in the second quarter and for the full year.

About 100 basis points of the gross margin decline was due to unfavorable product mix in Wet Shave and Feminine Care. With new product launches starting in Q2 and more favorable comparisons in the second half, product mix is expected to be neutral for the full year compared to 2017.

Next, about 100 basis points of the gross margin decline was due to unfavorable price mix. This was driven by Wet Shave, specifically higher coupon activity in the U.S. and higher promotional support in Asia, and also in Sun and Skin Care due to higher promotional activity in North America to close out last year's season as well as higher promotional support in Asia.

Price mix will continue to be a headwind in the second quarter for Wet Shave but should improve in the second half of the year. For the full year, we expect price mix to be neutral to slightly down.

About 1/2 of the gross margin decline was due to higher product costs compared to the prior year, most of which we don't expect to repeat for the remainder of the year as they relate to manufacturing footprint changes that are now complete. We had difficult comparisons to the prior year where production volumes were at a higher level in advance of manufacturing footprint changes. You will recall that a year ago, we were still building products in our Montréal facility in advance of shutting that plant down and moving all Feminine Care production to Dover. We also had higher transition spending related to our Wet Shave footprint changes, higher transportation costs, unfavorable transactional currency and higher commodity costs related to packaging. Although we do expect higher transportation and commodity costs to continue throughout the year, we expect to offset those increases through ongoing efficiency and usage initiatives. With the impact of production volumes and higher transition spending behind us, we expect our gross margin to return to more historical levels and be relatively flat for the full year compared to the prior year.

A&P expense as a percent of net sales was 10.5%, up 10 basis points over the prior year. This included a $4 million reinvestment of savings generated by our Zero-Based-Spending initiative as we aggressively managed nonworking spend and increased support of our brand.

SG&A, including amortization expense, was 20.8% of net sales compared to 19.3% in the prior year quarter. SG&A, excluding currency, increased by $2 million in the quarter, driven by investments in e-Commerce, executive severance and a charge related to one of our ZBS initiatives that will yield benefits going forward.

Other expense, net, was $3 million of expense compared to $1.9 million of income in the prior year primarily due to foreign currency contracts and revaluation of nonfunctional currency balance sheet exposures.

The effective tax rate for the first quarter was 79.8% as compared to 25.4% in the prior year quarter and included a net charge of $16.2 million related to the Tax Act. This was comprised of a $97 million onetime transition tax on foreign earnings, offset in part by an $81 million benefit from the remeasurement of U.S. deferred tax assets and liabilities.

The adjusted effective tax rate was 34.1% as compared to the prior year adjusted rate of 26.3%. The current period rate was favorably impacted by the lower U.S. tax rate, offset by unfavorable tax adjustments, including the adoption of the new share-based accounting and changes to the prior year provision.

GAAP diluted earnings per share were $0.12 per share compared to $0.58 per share in the first quarter of fiscal '17. Adjusted earnings per share were $0.20 per share as compared to $0.66 per share in the prior year period.

Net cash used by operating activities was $21 million for the first quarter of fiscal '18, favorable to the prior year by $30 million. As a reminder, the first fiscal quarter is typically our lowest operating cash flow quarter of the year due to seasonality in our Sun Care business. The improvement over the prior year was driven by changes in working capital, primarily accounts receivable and inventory. We continue to anticipate that fiscal 2018 free cash flow will be above 100% of GAAP net earnings.

In terms of capital allocation, we completed share repurchases of approximately 1.9 million shares during the quarter for $115 million and signed an agreement to acquire Jack Black, a leading men's prestige skincare company. In addition, the board issued a new 10 million share repurchase authorization. The shares that were repurchased in the quarter fell under the prior authorization.

Let me now turn to our segment results.

Starting with our Wet Shave segment, organic net sales were down 6.4% in the quarter, largely driven by volume declines in branded Men's Systems in North America and, to a lesser extent, Disposables and Shave Preps. Net sales in Women's Systems were essentially flat and private label grew. The volume decline in North America Men's Systems was due to category softness and a large prior year promotion in the unmeasured club channel that did not repeat. As a reminder, total Men's Systems in North America increased 28% in the prior year quarter.

In Men's -- excuse me, in Women Systems, North America net sales increased 2%, driven by modest volume growth and slight category improvement. Disposables declined 3.5%, with growth in international more than offset by an 8% decline in North America, driven by lower promotional support this quarter and inventory reductions at a key retailer.

Wet Shave segment profit decreased $17 million, or 24%, driven by lower volumes, unfavorable product mix, higher promotional spending, higher transition costs associated with manufacturing footprint changes, higher commodity costs and unfavorable transactional currency impacts.

Turning to the Wet Shave category. We continued to see category softness in the U.S. and international. As measured by Nielsen, the U.S. manual shave category was down 6% in the latest 12-week data, with men's manual shave down nearly 11%, women's down 8% and Disposables down 1%. 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 4%.

From a market share perspective, our share in manual shave was essentially flat versus a year ago in both U.S. and in global track data.

Sun and Skin Care net sales increased 2.6% on a reported and organic basis. Organic sales adjusted for the impact of the Bulldog acquisition and the Gloves divestiture. North America organic net sales increased nearly 7%, driven by growth in Banana Boat and strong performance from Bulldog, offset by higher promotional support. International organic net sales decreased 2%, driven by volume declines and increased promotional support in Asia.

Within the U.S. category, consumption was up about 50 basis points in the quarter, with our share of about 70 basis points. Our Bulldog men's grooming product line continued to perform well from a sales and a market share perspective as we continued to increase the number of store launches in both the U.S. and international.

Segment profit decreased $6.9 million due to increased promotional support as we closed out the prior Sun Care season and higher production costs compared to a year ago when we were first in-sourcing aerosol production at our Ormond Beach plant.

Turning to Feminine Care. Net sales decreased $6.5 million, or 7.3%, driven by volume declines in tampons and pads related to prior period distribution losses. Liners showed volume growth driven by Carefree.

Feminine Care segment profit decreased $3.3 million due to lower product volumes and higher product costs compared to the prior year when production volumes were higher as we continued to produce in our Montréal facility that has since been closed while ramping up production in our Dover plant.

Overall, the Feminine Care category was up slightly, with growth in pads mostly offset by declines in tampons and liners. Our market share declined about 1.5 points.

And finally, in our All Other segment, which is primarily Infant Care, organic net sales were essentially flat in the quarter and segment profit increased 4%.

Now turning to our full year outlook. We estimate that reported net sales will be flat to up 1% versus the prior year, including a currency benefit of about 200 basis points, partially offset by a 50 basis point impact from the Gloves divestiture, net of acquisition.

Organic net sales are expected to be down roughly 1%.

Our outlook for the segments remains in line with our previous outlook. We expect Wet Shave organic sales to be relatively flat for the full fiscal year. This outlook assumes continued Wet Shave category declines in the U.S. and softening category trends in international. With the recent launch of innovative products across Wet Shave, we estimate that we can grow share in this decelerating environment and gain distribution and share in e-Commerce.

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.

We expect continued sales declines in Feminine Care as distribution losses and competitive pressures negatively impact net sales for at least the first 3 quarters.

Our GAAP EPS outlook is in the range of $3.80 to $4, including the provisional net charge for the U.S. Tax Act and the gain related to the sale of the Playtex Gloves business.

We've increased our adjusted EPS outlook range by $0.10 to reflect our expected benefit from the new tax rate assumptions for the full year. Adjusted EPS is now expected to be in the range of $3.90 to $4.10, reflecting gross margin in line with historical norms, flat operating income margin, higher below-the-line expenses as we anniversary the Other net income from 2017 and the new adjusted tax rate of 22% to 24%.

Wrapping up our outlook, we believe we've taken a balanced view of the remainder of the year. We faced clear headwinds due to category dynamics and competition, and we've included those in our assumptions. However, we believe we have the innovative new products to help us win in the marketplace and mitigate many of those headwinds. We also have good visibility into improving profitability trends as we are finally through most of the footprint change dynamics, and we will see benefits from those as well as from additional productivity efforts. In addition, our ZBS initiative is on track to deliver substantial savings that we'll use to fuel growth initiatives and increased marketing spend.

So thank you. And with that, we will open it up for questions. Operator?

(Operator Instructions) Our first question comes from Wendy Nicholson of Citi Research.

My first question has to do with the launch of the new women's product, the one that goes back and forth. I can't wait to try it. But what's the response been from retailers on that? It seems like it's a pretty different product relative to what you've seen before. How much incremental marketing spending, how much promotion do you think you need to do to kind of show consumers what it is and have that be successful once it launches? Thanks, Wendy. Yes, it is different, and we're really excited about it. I think that the customers really look forward to it because it's a chance to really bring the value to the category. We like it, and all the testing we had done has kind of indicated that there's product benefits that are obvious and are perceptible. So we're really optimistic about it. Early days, but the trade reaction has been good, and we're really going to certainly support it with media, digital media and trial promotions.

Thank you, Wendy.

And as you think about...

I'm sorry, go ahead, Wendy.

No, my question was also just thinking about the razor blade category. It's just been so tough for both you and Gillette. I know Dollar Shave Club is now launching in the U.K. Are you doing anything different in that market to sort of stave off maybe bigger inroads from Dollar Shave Club as they launch in that market? Obviously, it's much, much, much smaller in the U.S., but I'm just wondering if there's anything that you would do differently now going forward, either with your own direct-to-consumer offering or at point of sale to prevent that from being another troubled market.

Thank you, Wendy. In the U.K., we've actually been supplying several shave clubs for the last 2 to 3 years. So it's a market that's actually fairly mature, and we play in the Shave Club business in that market. We also grew our e-Commerce sales in the U.K. by almost 50% for the quarter, so we're well represented in that channel, and we're going to continue to focus on it. We're also working with our bricks-and-mortar customers to launch Hydro Sense, to launch Intuition and all of the other innovation we've been talking about.

Our next question comes from Kevin Grundy of Jefferies.

David, I wanted to start on the guidance for the year and then weave that into sort of your longer-term outlook. So I guess, I'm struggling a bit, the target now implies sort of flattish organic sales growth versus the down 5% in the first quarter. And what's your level of visibility with that? Why should we be confident that things get that much better here for the balance of the year? And then similarly with margins, some of the components that you broke out were helpful. I think one of them was unfavorable price mix of like 100 basis points in the quarter. If I'm not mistaken sort of back of the napkin, your guidance implies like 150 basis points of margin improvement for the balance of the year. So what drives that? What gives you confidence in this environment that the trade promotion environment gets materially better? And then I'll just throw this in now and then hop back in the queue. But David, the 2% to 3% organic sales growth guidance longer term and 50 basis points of margin improvement, it's -- looks a little bit ambitious, I guess, relative to what the company has been able to do, I guess, in recent years and certainly the target for this year. Is that something you're going to revisit? And then what do you think is more reasonable now in the current environment?

All right. Thanks, Kevin. First of all, from an outlook point of view, let me preface this by saying that we acknowledge that given our reluctance to give quarter-to-quarter outlook, this was a tough quarter to model. And our gross margin was a big reason, but also some of the untracked sales decline that we had for the quarter. But it fully met our expectations, and we continue to focus on bringing in the year as we've indicated. To do so, first of all, we believe in our innovation. It's consumer centric with obvious product benefits, and we believe that that'll help, along with the increased marketing support. I will say also that while we don't believe that the competitive environment will get better, we also don't project that the P&G will double down on their reset, the pricing and the product reset. And if that plays out like that, then we should see some of the category negative price mix moderate in the back half. So when you add that up, when you look at the quarter to the year remaining, the negative comp versus year ago promotional waves in the unmeasured club channel, that'll moderate and then go away as the year progresses. We have innovation rolling in all price tiers around the world, and we should see some moderation in the category negative pricing mix. So that's Wet Shave. Certainly, we're gaining share in, and we're growing within Sun and -- both in the U.S. and also internationally and that we should see a solid year on that front behind innovation and more distribution. Bulldog's in our base now, and we grew that 48% for the quarter. And we see continued growth at that rate around the world. And our e-Commerce efforts also, I mean, generated sizable growth. So you add that all up, and we remain confident in our year's outlook. But I think that you asked also about gross margin. I think we could touch on that in a minute later, but you also asked about the medium-term algorithm. Certainly, that looks challenging at the moment. But we've just gone through a huge competitive reset from a pricing and a product point of view. When that settles, what we have here is a different market than it was. And it's more of a normal category characterized by consumer segments, by products segments and pricing tiers. Frankly, it's a model that we've been actually competing in and executing, and I think we're well positioned to compete in that kind of a market. We think when it gets there, I think, we will get back to a point where innovation's valued within each of the product tiers and there's room to actually grow within each of those pricing tiers. When that happens, I can't forecast, but I think we will get back to where that's the category. To win in that market though, we believe that we can't just execute the way that we've been doing it. We need to really reconfigure both our organization and our capabilities against some of the new growth opportunities like e-Commerce, like digital marketing, international growth and all of that. So that's one of the reasons that we're really looking to accelerate on our track record of cost reduction and productivity. And we're going to look to accelerate that across the company-wide look to generate more funds, to provide margin flexibility but also -- to fund brand building but also to build capabilities against those growth opportunities.

Our next question comes from Ali Dibadj of Bernstein.

So I want to go back to this -- just a quarter to start of the jumping off point. You mentioned a couple of times it's generally as expected for the quarter or you said that it's a tough quarter to model. How wide is that generally [berth], I guess? I'm just trying to think, look, we're not perfect, obviously, on the sell side, but it's like a massive, massive miss, top line and bottom line. And so I'm just trying to understand like is this precisely what you thought would happen 3 months ago? Is there anything that got a little bit worse? I'm just trying to get underneath the generally as expected for the quarter.

No, it was generally where we saw it. And Chris, I don't know if you wanted to comment on that at all.

No, there was a -- on an operating profit level, gross margin level was right where we modeled it. There was a little bit of headwind from tax and a little bit of headwind from other expense due to currency. But from an operating level, it was right on our target.

Okay, okay. And then as you go forward, can you talk a little bit about the share positioning you expect in Wet Shave? It sounds like you're effectively saying, look, we're going to lap these price declines that Gillette took, and that plus innovation, we should be okay. I'm assuming in innovation, you have a very clear kind of guarantee placement and planogram already set. So I guess that should be something that you're anticipating in the numbers given the modeling. But from a share perspective, I want to get the sense of where you guys think you'll be in Wet Shave over the course of the rest of the year.

Okay. Yes, we are confident about the trade plans, and we're rolling out as we speak. Generally, we're forecasting modest share growth in the back half, where we still see North America Men's -- the men's category down 5% to 10%. We see our sales down mid-single digit women's. And then Disposables categories, flat to down mid-single digit, and we see growth there. In international, we see a fairly flat total market, and we see modest growth. So modest share growth there as well.

Okay, okay. And then the last question, if I can just throw one in, is a different topic, which is the share repurchase, the new authorization. Can you give us a sense of what time frame -- I apologize if I missed it, but what time frame that share authorization is for? And how you think about actually executing that share authorization? I know you said before, look, we're opportunistic. I never really like that word. I don't really know what it means. Is there a better process now in terms of how you think about when to actually trigger repurchases? I mean, gosh, if you guys -- if this was exactly on point in terms of what your quarter was expecting -- what we were expecting in the quarter, and we're the ones making the mistake here, the market's potentially making the mistake here, it seemed to me that you might be more aggressive in buying back. So I just want to get a sense of what the mechanics or the process are to decide to use that incremental 10 million in authorization.

Yes, I don't think there is a time period or I'm not aware of the answer to that. So I think there isn't one set. And I -- we really don't want to give a forward-looking algorithm to when we buy shares. And I think opportunistic is sort of the word that I'd use. But we look to buy back shares to create value for our long-term shareholders, and we balance that with other uses of cash like putting cash back into the business, M&A, and we balance that against debt levels, ratios and liquidity. So I can't really give you a better algorithm than that at the moment.

Our next question comes from Bill Chappell of SunTrust.

As you were walking through the different hits to gross margin, one was pricing due to increased couponing on the Wet Shave side. The comments were, we expect that to improve or be offset in the back half. Didn't really know why that would be the case or what you're seeing to be the case. I guess, the bigger question is, I think when P&G initially cut list prices, the thought was they were just going to go down to kind of coupon or promotional price points, and it shouldn't have as big of an impact. But now appears that there's more couponing going on in the categories. So didn't know if that is an extra kind of double down, but an extra leg of pricing in the category that we'll see this year or if you see that actually ending and so that's maybe a cushion.

Well, we think that it won't go away, but I don't see it accelerating any. We've been couponing a lot, so have they. And we see anniversarying as we get farther into the year in the back half.

Okay. And just also to understand, on the commodity increases that you see this year -- or actually, I'll just make it even simpler. Can you quantify what a de-stock had in terms of an impact on the quarter?

Oh, okay, from a...

Inventory sale.

Inventory? It was actually modest, Bill. It was only -- it impacted us only modestly in Disposables but -- what, a couple million?

Yes.

Yes, it was about that. So it was a modest impact. The only relatively big change, if you look at consumption versus sales, was that we -- as we mentioned, we didn't anniversary a large promotional wave in the unmeasured club channel. That was a relatively major impact in the quarter. It'll be a little bit of a hurt for the next couple quarters, but not nearly to the same degree, and that's in our outlook. So yes.

Our next question comes from Faiza Alwy of Deutsche Bank.

So 2 questions for me. One is just on your outlook for the remainder of the year. Has anything changed? Because I think since we -- you last talked about your outlook, P&G came out with some new innovation. So I'm just curious if that changed your outlook at all with respect to share gains or the category growth or just anything related to the Wet Shave business.

We were aware of those new items, and they were in our outlook. So nothing's changed on that front.

Okay. And then just my second question is, it's curious to me that you decided to apply sort of the tax saving to the extent that there are cash tax benefits to, it looks like, share repurchase versus sort of investing in the business just given the difficult sort of category and competitive environment. So could you talk about that decision? And as you do that, maybe how you think about ROI on some of the investments that you've made. And do you think you wouldn't have gotten a good return if you decided to reinvest those savings in the business?

Yes, thank you. No, we're actually comfortable with the marketing pressure that we're putting against the brands and the innovation that we're launching. We're comfortable with our plans, and we're executing. I think the outlook range that we've given you gives us flexibility as the year progresses to modify spends if we need to. But right now, we're just planning to execute our annual plans.

Our next question comes from Iain Simpson of SocGen.

A couple of questions for me, if I may. Firstly, at the full year '17 stage, you talked about delivering 40% of your adjusted EPS this year in the first half. Now you've talked about how the first quarter unfolded pretty much as you expected. That leaves you on my math, just taking the midpoint of your guidance, something like $1.80 or thereabouts to do in the second quarter. That's up 50% year-on-year if you were to -- sorry, $1.60, up 30% year-on-year. I'd be interested if that's the number you kind of feel comfortable with and what's going to drive that big expansion EPS in the second quarter. More generally, you're always pretty clear that the second quarter is where we'd see your blockbuster innovation plans. Well, we're 5 weeks into that quarter. I was just wondering if you could provide any color on how they're doing. And finally, your consumer-facing website, schickhydro.com, that's been up and running for a little while now. Is there anything you can share on its performance?

All right. Yes, thank you, Iain. First of all, for the -- what I'll say about phasing is that our outlook for the first half remains intact. For the most part, I think that remains, as it is for the year. In terms of the new product rollout, it's early days, but we're seeing a traction, and we're working the plans. So we're pleased with how things are rolling out. And then finally, for the website, we've -- the goal wasn't to drive -- or we didn't expect it to drive a lot of top line, but we were -- but we did use it as a laboratory to learn. We've been building the organization, and I think that the new team has been doing a great job. We've been testing media mix, different marketing approaches. They're working now on a version 2.0 that I think will work even stronger, both for the Hydro brand but also for our other product lines where -- and we can take that technical platform and also use it for our new men's grooming lines and also move it internationally. So I think that we're making a lot of progress on the platform.

So just to add a little bit more color about your first question on the first half, I would say that 40% split, it would be slightly less than that. We're really operationally on track for what we guided to originally, but things like tax changed it a bit, but look for that to be slightly low.

Okay, that's very helpful. And if I could just clarify your comment on the consumer-facing website. You're saying that it's more of a laboratory than anything that's expected to drive revenue at this stage. When do you expect your online presence in the U.S. to start being a meaningful source of incremental revenue? Is this the version 2.0 that you're talking about? And if so, when is that launching, please?

I think it won't be nearly as meaningful over the medium term as our efforts with other online partners. So pure-play e-Commerce customers, we've been growing there very rapidly, and it's several order of magnitudes larger than the DTC. And I see that remaining over the medium term.

Our next question comes from Olivia Tong of Bank of America Merrill Lynch.

I understand why you think things get -- don't get worse is because of moves by Gillette and your response lab. But your outlook is for things to get materially better. And I guess, I'm still struggling with what drives that material improvement as opposed to things simply just stabilizing. You talked about the new products, and it seems like your second half outlook or at least your rest of your outlook seems fairly reliant upon those. But since then, obviously, you're not alone in terms of introducing some new products. So have you been allocating any incremental shelf space? How do the price points compare to your existing line? And then, of course, the other issue, while that helps in terms of price or at least stabilizes price, is there anything that you can do or is there anything that you're doing to influence the issues driving the volume drag in the category? Can you -- can any of these innovations that you've made help stem the downward pressure not just on price but just on fewer units moving in general, too?

Thank you, Olivia. The -- let's talk about it this way. What -- within Nielsen, we've been seeing trends where units are down 2%, 3%, 4%, but the category value has been down 8%, 9% due to the competitive reset that -- what we're saying is it'd be reasonable to believe that, that gap of 3%, 4%, 5% of a negative price mix ought to moderate toward the end of the year. So that's -- so we're not really saying that things will get better. It's just that they're going to stabilize and that negative price gap should moderate. Also, what we're doing, almost all of our innovation that we've been talking about are premium products, at least higher than the category average. So we think that we'll be delivering value to both consumers and our trade partners. And I think that that's pretty unique versus what's out there now, and that's why we're getting the support that we are. On the unit question, I don't know that we will be driving more consumption per se. But as we look to the total market, we see the e-Commerce and the shave clubs slowing down in their growth, and that's -- and we see unit declines in the measured market slowing down. So that's a scenario. That's not really in our outlook. But that's -- but that would be the way that units would come back to the category.

Our next question comes from Bonnie Herzog of Wells Fargo Securities.

It's actually Joe Lachky on for Bonnie. So correct me if I'm wrong, but you pointed out a tax benefit of $0.10 and, obviously, you're raising your EPS range by $0.10 as well, so essentially dropping the entire tax benefit to the bottom line. And I guess, given that you're reinvesting a significant portion of the cost savings this year to support growth initiatives, why not similarly reinvest significant portion of the tax benefits, right, I guess, considering we have a heightened competitive environment and -- to support the new innovation?

Thanks, Joe. We built our plans from the bottom up from the brand level. We built the marketing plans with the proper share of voice trial generation and all that. So we're comfortable with our plans. We're going to execute those plans. There's lead time for the market, for our customers. And to change them suddenly, I think you get a lot lower ROI. So we really think just executing the plan makes the most sense. What I'll say is if we see changes in the marketplace and we need to adjust plans, I think there's room in the range for us to do so.

Our next question comes from Kate Grafstein of Barclays.

So I was wondering if maybe you can talk a little bit about and quantify your ongoing cost productivity savings program outside of ZBS. What are the major cost savings buckets? And I was wondering if you're stepping up your savings efforts this year because of the weaker external environment.

Yes. No -- so we have several buckets. We have ZBS that we've talked about, where we're on track for $25 million to $30 million. We also target COGS on a continuous improvement basis, and we target 4% gross with offsets because of commodities and all that. But gross continuous improvement savings of about 4%, which adds up to about $40 million. And then we had an additional $15 million in the productivity savings for the year. And that's how the big buckets line up. And again, we're planning to execute that plan. We're on track. And then we're actively looking to fill the funnel for '19 and beyond, and we're broadening the cost buckets to total company-wide organization and operating model.

Our next question comes from Jonathan Feeney of Consumer Edge.

This is Armani Khoddami on for Jon today. I was hoping you could give some more color on the international outlook. It's a little bit surprising to see organic declines in both Wet Shave and Sun and Skin Care. Seems like there's pricing pressure in Asia. But I guess, it was our expectation. There was price increases recently in Japan, and you're relaunching on Tmall. So it seems like that should have been a big benefit. And then just on Skin Care internationally, distribution gains seemed to have been a big driver. Is there anything we should have in mind as an update from just Sun and Skin Care internationally, maybe slower -- slowing down broadly going forward?

Well, maybe the second question first. No, we think Sun and Skin internationally, I think we're lined up to grow that double digit for the year, fueled not only by new markets and new doors, but also velocity per door where we're growing well internationally. On the price mix that you mentioned from Asia, we think that that's a little bit of a timing through the trade and promotional actions taken before our innovation is launched. So that's the background to the price mix for Asia.

Go ahead, Armani. Sorry, do you have another question?

Yes, absolutely, just on the club channel. So you guys lost a promotional event, but later on the call, you talked about this kind of being a continuing headwind for a couple of quarters. So is this also sort of like some distribution that's also going to be coming out of nonmeasured channels in the U.S. going forward? Or is it just sort of onetime promo?

Well, it's in and out. It's waves of in and out promotions. And the largest one last year this quarter we didn't anniversary. There were some other smaller waves that we did last year that we won't anniversary either. And we're working with the customer to revise category plans going forward.

This concludes our question-and-answer session. I would like to turn the conference back over to David Hatfield for any closing remarks.

Thank you all for your interest in Edgewell. Thank you for your time, and have a great day. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.