Edgewell Personal Care Co (EPC) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Edgewell Personal Care Fourth Quarter Fiscal 2018 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. Good morning, everyone, and thank you for joining us for Edgewell's Fourth Quarter Fiscal 2018 Earnings Conference Call. With me this morning is David Hatfield, our President, Chief Executive Officer and Chairman of the Board; and Rod Little, our Chief Financial Officer. David will kick off the call then will hand over to Rod to discuss quarterly results and the fiscal 2019 outlook, 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, 2017, as amended and supplemented in our quarterly reports on Form 10-Q for quarters ended December 31, 2017, March 31, 2018 and June 30, 2018. These risks may cause our actual results to materially -- to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances except as required by law.

During this call, we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are shown in our press release issued earlier today, which is available at the Investor Relations section of the website. Management believes these non-GAAP measures provide investors with valuable information on the underlying trends of the business.

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

Thank you, Chris, and good morning, everyone. Let me touch on a summary of the quarter and year, and then I'll have Rod take you through our detailed financial results, Project Fuel and our view for next year.

During the fourth quarter, we made significant progress on several key initiatives that will contribute to our success as we look to fiscal '19 and beyond. We accelerated the pace of the changes we're making under Project Fuel, our enterprise-wide initiative to transform the company's business and cost structure.

We achieved savings ahead of schedule in the fiscal '18 and increased our outlook for gross savings in the fiscal 2019. We also continued to invest in our strategic growth initiatives, particularly in e-commerce. These initiatives, which include Wet Shave in developing markets, International Sun Care, global e-commerce and our Bulldog and Jack Black Skin Care brands, accounted for about 20% of total company sales in the fiscal '18 and posted double-digit organic sales gains in Q4 and the fiscal year.

We took steps to enhance our competitiveness in Men's Systems and Feminine Care in North America. We continue to benefit from the compelling product innovations we launched during the past year, including Intuition f.a.b., Hydro 5 Sense, Xtreme4 Disposables, Bulldog razors, Banana Boat Simply Protect and Stayfree all-in-one.

The success of Intuition f.a.b. enabled our Women's Systems business to return to growth in the quarter and for the full fiscal year. We met our adjusted EPS objective for the quarter, growing adjusted EPS 11%, driven by effective cost and expense management in a tough sales environment. And we generated $265 million in operating cash for the year, and repurchased just over 2 million shares during the year.

However, the quarter also reflected the challenging sales and competitive environment we've faced the whole year, particularly in the North America Wet Shave and Feminine Care. The North America Men's System business continued to be pressured by a decline in category, pricing deflation and increased competition. Additionally, we're facing a challenging input cost environment globally, driven by higher commodity and transportation costs.

As we look to fiscal '19, this challenging environment further underscores the importance of the work we're doing to execute on Project Fuel. To succeed, we know that we must execute at an accelerated pace and take the difficult actions necessary to improve our portfolio and competitive positioning. We've developed a clear and achievable plan for fiscal 2019. To address multiple headwinds, we're aggressively attacking our cost structure through Project Fuel, which will enable us to reinvest in our most profitable brands and fuel our strategic growth initiatives.

To execute this plan, we've revitalized and strengthened our senior leadership team with the skills needed to address this rapidly changing consumer and competitive environment. We've also bolstered our Board of Directors with additional expertise and experience in the areas most critical to the business, having appointed 4 new directors in the past few months.

We're doing all of this with a sense of urgency, and we are confident that the actions that we're taking will position Edgewell as a stronger, leaner and more agile competitor and enable us to deliver enhanced value to shareholders. Thanks.

And with that, I'll have Rod take you through the results.

Thank you, David. Good morning, everyone. I'll start with some of the key fourth quarter business performance metrics, then I'll provide an update on Project Fuel and close with our fiscal 2019 outlook.

Reported net sales in the quarter were $537 million, a decrease of 4.9% or 4.7% on an organic basis. Organic net sales exclude the benefit from the Jack Black acquisition, the impact from the Playtex gloves business divestiture and the translational benefit from currency.

The decline in the quarter was largely driven by North America Wet Shave and Feminine Care, while Sun and Skin Care grew. From a geographic perspective, North America organic net sales declined nearly 8%, while International declined 0.7%.

I'll discuss the segments and the drivers of sales performance in more detail in a moment. Gross margin on a GAAP basis was 43.1%, including a $25 million onetime impact from Sun Care reformulation cost. Excluding those costs, gross margin was nearly flat, decreasing by 20 basis points.

Favorable cost mix help by -- helped margin by approximately 160 basis points, driven by reduced operational spending and favorable transactional currency impacts. This was partially offset by higher commodity and warehouse and distribution costs.

Price mix was unfavorable by about 140 basis points, driven by lower overall pricing in Wet Shave and Feminine Care. Finally, lower volumes impacted margin by about 40 basis points.

Let me spend a moment on the onetime Sun Care reformulation cost that impacted our GAAP results in the quarter. As a result of discussions during the quarter with one of our suppliers about anticipated regulatory changes related to REACH, the European chemical control law, we made certain supply chain and procurement decisions related to an inactive ingredient used in select Sun Care products. To align with our internal ingredient selection process, we chose to substitute that agreement (sic) [ingredient] with a readily available alternative.

As a result of this change and due to the significant lead times needed in Sun Care production, we experienced production delays to allow for the substitution, and we recorded charges primarily for the write-off of finished goods inventory for those select products. We chose to make those changes in the quarter well in advance of next year's Sun Care season to minimize potential impact during the peak fiscal 2019 season.

A&P expense this quarter as a percent of net sales was 11.8%, down 80 basis points compared to the prior year. The decline was primarily driven by a $5.5 million reduction in nonworking spend generated by our Zero-Based Spend initiative and a shift in marketing spend from advertising to trade promotions in Wet Shave and Feminine Care.

SG&A, including amortization expense, was 16.9% of net sales. Excluding IT-enablement charges for Project Fuel, costs associated with Jack Black and favorable currency translation, SG&A decreased $6.9 million, or as a percent of net sales improved 40 basis points over the prior year.

The operational improvement in SG&A was largely driven by savings generated through our Zero-Based Spend initiative and lower compensation expense, offset, in part, by higher e-commerce investments. We also incurred $20.3 million in pretax restructuring expenses in the quarter in support of Project Fuel.

The adjusted effective tax rate for fiscal 2018, excluding the tax associated with the impairment and restructuring charges, was 23%, in line with the prior year adjusted rate of 22.9%. GAAP diluted earnings per share was $0.36 per share, including a $0.34 after-tax impact from the Sun Care reformulation charge.

Adjusted earnings per share was $1.11 per share, an increase of 11% compared to the prior year period.

Now let me turn to our segment results. Starting with our Wet Shave segment. Organic net sales were down 4% in the quarter. The decline was largely driven by competitive pressure in North America, resulting in volume declines and unfavorable pricing in Men's Systems and by heavy promotional spending in Disposables. Women's Systems grew 5% globally, growing in both North America and International, driven by Intuition f.a.b. Additionally, our Private Label men's business grew organic net sales 2% in the quarter, driven by new distribution in Europe, although we saw a decline in North America due to new competitive distribution in the United States.

Wet Shave segment profit was flat to the prior year, as lower product costs and lower spending offset the impact of unfavorable pricing and lower volumes. In the Wet Shave category, as measured by Nielsen, the U.S. razors and blades category was down 2.2% in the latest 12-week data, with Men's Systems down just over 1%, Women's up 1% and Disposables down 4.4%. When factoring in nonmeasured channels, we believe the U.S. men's category was up 4%, with the overall razors and blades category up about 1 point with growth coming from off-line, unmeasured channels.

From a market share perspective as measured by Nielsen, in our latest 12-week data, we are at a 26% share in razors and blades in the U.S., down 90 basis points versus a year ago, with about 60 basis points of the decline coming from Private Label. Our estimated global share was down 60 basis points.

Sun and Skin Care net sales increased 6% on a reported basis and increased nearly 2% on an organic basis. Organic sales adjust out the impact of the Jack Black acquisition and the Playtex gloves business divestiture.

International organic net sales increased nearly 12%, driven by volume growth in Banana Boat, Hawaiian Tropic and our Bulldog Skincare brand. North America organic net sales decreased $2 million or just over 4%. Global Bulldog sales increased over 40%, and we launched the Bulldog direct-to-consumer site in the United States.

Within the U.S. Sun Care category, 12-week consumption increased 4% and we grew share by 20 basis points. Segment profit decreased just under $1 million, with gross margin essentially flat over the prior year with higher A&P spend.

Turning to Feminine Care. Organic net sales decreased $10 million or 11%. The decline was driven by volume declines in tampons, primarily in our Gentle Glide brands and a decline in pads. Pricing in the quarter was unfavorable due to increased promotional spend.

Feminine Care segment profit increased $0.4 million as lower manufacturing costs and lower A&P spend more than offset the impact of higher promotional support and higher commodity and warehouse and distribution costs. Overall, the Feminine Care category was relatively flat, with growth in Pads offset by declines in tampons and liners. Our market share declined approximately 1 point.

And finally, in our All Other segment, which is primarily Infant Care, organic net sales decreased 9%, impacted by the Toys R Us liquidation. All Other segment profit decreased $2.5 million, driven by lower product volumes and higher A&P spend.

Now a few highlights on the full year results. Net sales decreased 2.8% or 4.5% on an organic basis. Consistent with our fourth quarter results, the sales decline for the year was largely driven by North America Wet Shave and Feminine Care.

From a geographic perspective, North America organic net sales declined just over 6%. International organic net sales declined just over 1%, with Wet Shave down 2.3%, entirely driven by the third quarter inventory reduction in Japan; while Sun and Skin Care increased 4.7%. Excluding the impact in Japan, International organic net sales would have increased by 0.5%.

Gross margin, excluding the Sun Care reformulation cost, was 47.6%, a decline of 160 basis points compared to the prior year as a percent of net sales. The decrease in gross margin percentage was primarily driven by unfavorable price mix in Wet Shave, which was impacted by increased coupon and trade promotion spend in Sun and Skin Care, which was negatively impacted by higher levels of returns during the year.

Margin was also impacted by unfavorable cost mix, primarily driven by lower sales volumes in Wet Shave and Feminine Care and higher commodity and warehouse and distribution costs.

A&P expense was 13.1% of net sales, down versus the prior year spending of 13.8%. Normalizing for $19 million in nonworking A&P savings, A&P as a percent of net sales was up slightly compared to the prior year at 14%.

SG&A expense was $392 million, 17.6% of net sales, including $17.7 million of intangibles amortization. Excluding costs associated with the acquisition of Jack Black, information technology-enablement charges for Project Fuel and unfavorable currency translation, SG&A was 16.9% of net sales in fiscal 2018. The decrease in SG&A was primarily driven by lower incentive compensation as well as savings realized from our Zero-Based Spend initiative, which more than offset increased amortization expense.

Other expense net was $5.4 million compared to income of $10.2 million in the prior year. This primarily reflects the impact of foreign currency exchange contract gains and losses and revaluation of nonfunctional currency balance sheet exposures.

Adjusted net earnings were $191.6 million, a decrease of 16% as compared to the prior year. The decline was primarily driven by lower gross margin percentage, partially offset by lower advertising and sales promotion expense.

GAAP diluted earnings per share was $1.90 in fiscal 2018 as compared to earnings of $0.10 in the prior year. Adjusted EPS was $3.52 for fiscal '18 compared to $3.97 in the prior year, largely driven by lower adjusted operating income.

Net cash from operating activities was $264.7 million for fiscal '18 as compared to $313.6 million during the prior year. The decline in operating cash flow of $49 million was primarily driven by the benefit received in fiscal 2017 in connection with entering into accounts receivable facility, resulting in higher cash collections in the prior year. This impact was partially offset by other changes in working capital.

For the full fiscal year, we completed share repurchases of approximately 2.1 million shares; completed the acquisition of Jack Black for $94 million; and paid down our revolver, lowering our debt-to-EBITDA leverage ratio to 2.9x.

Before getting to our outlook, let me make a few more comments on the progress we're making on Project Fuel. As we mentioned previously, Project Fuel is an enterprise-wide effort touching every line of the P&L. It is designed to generate the flexibility needed to fuel investment in our brands and to also transform how we work, creating a more capable and agile company.

Significant progress was made on Project Fuel in the fourth quarter, as the cumulative gross cost savings projection for fiscal year 2019 increased from $80 million to approximately $130 million and the timeline for savings overall was accelerated.

With the acceleration, fourth quarter Project Fuel-related savings were nearly $9 million, bringing cumulative savings over the third and fourth quarter to just over $15 million. These savings will enable us to offset significant inflationary headwinds and will allow for an expected reinvestment of approximately $45 million into our brands in fiscal 2019.

Additionally, we continue to make significant progress in simplifying and transforming our organization, structure and key processes that will enable us to achieve our desired future state operations. Some accomplishments to date include: by the end of September, we reduced nonmanufacturing headcount by 4.5% and focused on delayering our organizational structure to increase speed and agility; we announced the closure of our Israeli manufacturing plant; and we have announced the actions related to the outsourcing of some transactional work to third-party partners.

We now expect Project Fuel will generate $225 million to $240 million in total annual gross savings by the end of the 2021 fiscal year, and we now estimate onetime pretax charges to be approximately $130 million to $140 million with an additional capital investment of $60 million to $70 million through the end of the 2021 fiscal year. We expect total company capital expenditures, including Project Fuel, to be approximately 4% of net sales in fiscal 2019 and fiscal 2020.

Fiscal fourth quarter 2018 Project Fuel-related restructuring charges and capital expenditures were $20.3 million and $2.3 million, respectively, bringing cumulative charges and capital expenditures to $39.9 million and $2.3 million, respectively, for the fiscal year. Fourth quarter Project Fuel-related savings were $8.9 million, bringing cumulative savings to $15.4 million for the fiscal year.

Now turning to the full year outlook for 2019. Fiscal '19 represents a rebuilding year for our business as we remain focused on Project Fuel execution. Beyond the cost reductions, we are shifting brand investment to accelerate our top line growth while also aggressively transforming the company to ultimately deliver significant value creation.

We expect reported net sales to be down low single digits compared with the prior year, including an approximate 100-basis point unfavorable impact from currency translation and a 60-basis point combined benefit from the Jack Black acquisition and the Playtex gloves divestiture.

Our outlook reflects an assumption of continued category declines and competitive intensity in Wet Shave. Our outlook for GAAP EPS for fiscal '19 is in the range of $2.20 to $2.50. It includes Project Fuel restructuring charges, Sun Care reformulation costs and Jack Black integration costs. The outlook for adjusted EPS is in the range of $3.30 to $3.60. Adjusted operating income as a percent of net sales is anticipated to be in line with fiscal 2018.

Please note that because of the adoption of ASU 2017-07 in the first quarter of fiscal '19, we will retrospectively reclassify certain pension expenses and benefits from cost of products sold and selling, general administrative expense to other income and expense net. This will have no impact on earnings before income taxes, however, it will impact adjusted operating income.

In the press release, we have included a footnote showing the impact of the adoption on fiscal 2018 earnings before income taxes and adjusted operating income. The outlook for adjusted operating income margin provided above is based on these revised metrics.

Project Fuel is expected to generate approximately $115 million in incremental gross savings in fiscal '19. Approximately 45% of the expected savings will be used to offset anticipated operational headwinds from inflation and other rising input costs, and another 40% will be reinvested back into the business to fuel brand-building and strategic growth initiatives, e-commerce infrastructure development and price. The remainder will flow to the bottom line and help offset the impact of loss profit contribution from declining sales.

For fiscal 2019, Project Fuel-related restructuring charges and capital expenditures are now expected to be approximately $70 million to $80 million and $40 million to $50 million, respectively. The effective tax rate for the fiscal year is estimated to be in the range of 23.5% to 25.5%.

In terms of phasing for the year, we expect the organic net sales rate decline through the first half of the year to be comparable to the fourth quarter of fiscal 2018, and we expect the quarterly adjusted earnings per share profile to be similar to fiscal 2018.

Fiscal 2018 was an unprecedented year in terms of sales headwinds, with category declines and competitive disruption in our largest segment, Wet Shave. We also had over $50 million in onetime negative sales impacts over the course of the year.

In response to that, the company has moved aggressively to implement Project Fuel, an enterprise-wide initiative to drive significant savings and transform the way the company operates. Project Fuel will support our foundation of profitable brands, enhance our strong innovation and manufacturing capabilities and enable us to generate the growth and cash needed to invest in the business.

With a strengthened senior leadership team and Board of Directors, we are confident that we are taking the actions needed to better position us to tackle the competitive pressures we face, win in the marketplace and improve sales and profit growth going forward, ultimately increasing shareholder value.

With that, we'll open it up for questions. Operator, over to you.

(Operator Instructions) Our first question comes from Nik Modi with RBC Capital Markets.

So just a couple of quick ones for me. Can you provide a little more perspective on the International business? Just curious how that initiative is progressing. You talked, I think, about a year and some change ago about focusing on a few countries. I just want to get an update there. And then on the Project Fuel, maybe you can help us understand where some of the upside is coming from and how you might think about potential, more opportunity as you kind of think of this program over the next 2 to 3 years.

Yes. Thanks, Nik. I'll let Rod touch on Fuel. On the International markets, ex Japan, the Japan trade inventory issue that we faced, we were up in sales for the year, and I think, generally competitive. We've grown, developing in emerging markets pretty significantly. In the developed shave markets, we faced some of the issues that we see in the U.S. with soft categories and very high competitive spend, but we've successfully held share in general there. And -- so that's shave. Also, we've made great progress on the Sun and Skin area. For the quarter, we were up 11.5%; and we're up over 6% for the year, behind both Sun Care innovation and expansion in markets, plus rolling out Bulldog in several new markets. So we're fairly pleased with the progress that we've made internationally.

Yes, Nik. Rod here. On the Fuel upside question, we -- frankly, as we looked at the environment, as we were building out the '19 plan, we had to be more aggressive than we were initially looking at with the $225 million. So we bumped it up $225 million to $240 million on the gross savings range, really driven by being a little more aggressive on headcount in a couple of areas, but across operations, supply chain and also raw and packed material input costs. We've got a very robust procurement capability around substitution of products, reformulating nonmeaningful changes, nonconsumer noticeable, and so we've looked at all those levers and found some additional upside. And if you look at -- and what we've laid out this year with the inflation of input commodities cost and covering that off, it's important we do that as we're record highs on commodity pricing, as you know. But equally important, we tried to plow back in investment. 40% of those gross savings of investment going back in to e-commerce capability, driving e-commerce growth, Jack Black, Bulldog, full reinvestment of the incremental gross margin year-over-year going back into A&P support. And then, as David mentioned, the progress in International, we have a really nice profile in China right now. It's e-comm-driven and we're continuing to fuel that as well. So it's required to be more aggressive. We have been and we'll continue to look for opportunities to continue that trajectory.

Great. Just -- if I can squeeze one more in there, I mean, should we -- as we think about the next couple of years on the top line, I mean, is there a hope that you can get back to growth after this kind of 2019 reset year on the top line? Is that how we should be thinking about it?

Yes, I'd say. I think as we exit fiscal '19, we expect to be a much, much stronger company and competitor. We've been tackling Fuel with urgency, and we've been investing against both the fundamentals, with improving the value propositions on men's, women's and fem; but we're also investing against marketing spend behind the growth initiatives. And so we see ourselves, by doubling down on those existing strengths but also increasing our agility, flexibility and our digital capabilities, we see ourselves exiting '19 as a stronger, more competitive company.

The next question comes from Ali Dibadj with Bernstein.

I have a couple of questions. One is just on men's Wet Shave in North America. I certainly thought saw the price mix down but didn't see a lot of volume decline for you guys. Can you talk about what your expectations are for that going forward in North America first and then globally? Particularly -- again, you're seeing Harry is obviously taking shelf space. I'm surprised there wasn't a lot more volume impact on your business here. And then what you anticipate, again, globally for that segment from a price mix perspective versus volume. And then secondly, ad spend, clearly down. Get that. A lot of it -- vast majority of it was nonworking. Can you talk about the balance between trade spend and ad spend, where you're at today? And also, we've seen a lot of companies fall flat on that in the past, and I want to understand your process and making sure you've got the right balance.

Okay, great. First, on your first question in men's Wet Shave, we've been rolling out an improved value proposition, primarily on Hydro, where we've decreased prices by low teen percentages. It's not an across-the-board program. It's a mix of retail price reduction plus promotion spend and it varies -- and it's tailored by customer and by channel. So that's begun in Q4, and I guess, that's what you see from a price mix. We see that continuing on. I didn't catch the second part of that so...

Well it was just -- it was just I was surprised that the volume wasn't down more given the shelf space shift that we see, particularly from Harry's.

Yes. I think, Ali, just building on David's point, we have -- we've continued to have good growth globally, if you look at the business -- in the Private Label business, which is skewed more towards volume versus price. And so between that phenomenon plus the pricing investments we've made that David referenced, that's helping the volume hold up a bit better than it otherwise would, all else being equal. And that's something we'll continue to look at and remain very sharp on going forward, in terms of the pricing relationship.

Yes. And on your ad spend question, we're all for equity spend and increase in A&P, but given competitive category dynamics, we're taking a hard look at the incrementality and the ROI of all of our spending, balancing, short and longer term. So bottom up, we create marketing plans and we balance the marketing spend between A, P and trade. There are 3 segments where we feel like, from a pricing ladder and fundamentals, we had to adjust and devote more trade to them. That's men's -- U.S. men's, like I mentioned. It's also proactively Women's Systems. We think that the competitive pressure is going to build there, and we proactively looked at our pricing ladder there; and then finally, Feminine Care, where we needed to fix some fundamentals. So those are bottom-up plans where we felt like we had to adjust brand spend versus trade.

If I could just -- that's helpful. If I could just ask a follow-up in terms of the investments and kind of your idea of ROI. And then you mentioned fem care, why don't you get rid of the fem care business? It's still something that's confounding to me. This is not the first quarter of having to reset. So I'd just love your perspective on that, and I'll get off.

Yes, okay. Thank you. We continue to look at our product portfolio like we always do and everything remains on the table. So we'll continue to look at it. I will say that we feel better about the Feminine Care outlook going forward. We've suffered several years here of planogram changes, distribution losses, and we feel like we're down to a level where all of the -- we've lost a lot of the legacy business and the marginal SKUs and we're down to really core, and we think that the planogram is going to hold this next year. And while I don't see it going to grow, it should improve sequentially, so.

And Ali, just a couple of other additional points on fem care. Fem care business actually delivered the budget objectives for the year in total. So there's a little more choppiness than we would have liked between the quarters, I think that's some of you're seeing this quarter, but they delivered the plan. We're confident in the plan we have in form this year, and as David said, it's going to be skewed a little more towards trade investment, really working on shoring up the planogram sets and our position within them, which we're confident that we can come with a better outcome. So again, going forward, we're on track with our expectations for the category. You see the improving profitability, and now the goal is to bring the top line along with it.

The next question comes from Jason English with Goldman Sachs.

This is actually Cody on for Jason this morning. Just wanted to stick on the ROI for advertising real quick. Previously, you stated that your goal is for advertising expense to be in the range of 14% to 15% of sales. This year, you made significant cuts to your advertising expense. However, when we look at your share of voice compared to your share of market, we noticed the ratio has shot up higher this year, implying that your share of voice is much higher than your share of market compared to previous years. Is our analysis directionally correct? And do you think you're generating the right return on your investment in media spending right now?

Yes. We don't -- or I haven't seen an aggregation of our share of voice, but the -- but your algorithm is kind of how we build it bottom up. And in several of our segments, share of voice is higher than share of market, which we like. I'll say that our A&P is, as a percent of sales, after you back out ZBS savings, our Zero-Based Spend savings, working A&P as a percent of sales has held year-on-year, and that 14% is about what we plan to see it for next year also.

And if I can just ask one follow-up. Your guidance for FY '19 implies 2H '19 improves from the first half. What are the underlying assumptions that you guys have for this improvement? And does it assume your Wet Shave share losses abate?

It does, Cody. We -- if you look at the timing of the most significant impact on us in fiscal 2018, it was the Harry's rollout and launch at Walmart, which was in early summer. And so we're anniversarying that rollout where we were in full distribution. We now have less shelf space until we anniversary that in June. And so the first couple of quarters are a little more negative than we see in the back half when we lap that. The other impact in the first half, we talked about the Sun Care reformulation. As we've reformulated and we get back into full up-and-running production, there's a little bit of a negative in the first half on Sun Care as well. But it's fair question. We've been through the details and are comfortable with the profile.

The next question comes from Faiza Alwy with Deutsche Bank.

So I wanted to delve a little bit deeper on your organic growth guidance. So I was hoping you could disaggregate for us a little bit in terms of category and region. So within Wet Shave, sort of what are you embedding, just to follow-up in terms of what type of share losses are you embedding and what type of category declines are you embedding? And just given the surprising strength in the category in off-line untracked channels, which seems to be more driven by specific programs run at Costco, what impact do you think this will have on the Wet Shave category growth going forward? And then if you could just talk a little bit more about your category expectations for fem care and Sun Care.

Yes, okay. Thank you. So yes. So from an outlook point of view, we're -- we see sales down low single digit. So that's better sequentially than 2018 but obviously not where we want it ultimately. Wet Shave, we see only modestly better than '18, and we're not really counting on any real improvement within North America. We see categories may be getting somewhat better, but as Rod mentioned, we see ourselves, I mean, getting back some share, particularly in the first half of the year. International, we see improving modestly. Developed markets, we don't see a whole lot of change from a category or a share, but we don't plan to repeat the Japan inventory drawdown. And then we see increased growth in emerging and developing markets behind our investment spending. Moving beyond Wet Shave, we see Sun and Skin improving modestly a couple of points, largely behind investments against growth initiatives, and North America also benefits somewhat by comping year ago return charges. Feminine Care, yes, as I mentioned, we see it improving somewhat, mainly behind baseline sales as we don't lose meaningful planogram space going forward. Don't -- I don't see that getting to growth, but it should be positive versus year ago. Infant, we also see getting, I mean, getting better. And in fact, actually growing, as we get the Toys R Us impact behind us and as we see -- we have line of sight for solid improved distribution, mainly behind a new license in the mealtime segment. So that's kind of a walk-through.

The next question comes from Bonnie Herzog with Wells Fargo.

I had a question on your FY '19 guidance. I'm wondering why you're anticipating such a large organic sales decline in the first half, especially, I guess, given the Hydro relaunch. I guess, I'm wondering why you guys aren't expecting a bigger lift from that. And then I had a second question on your medium-term algorithm, which I think you reviewed during your annual planning process. So do you guys still have the confidence you can achieve it, especially considering the changes in competitive environment in the Wet Shave category that you've touched on? And then also from a profitability standpoint, given the higher cost to compete in Wet Shave, do you think that high single-digit EPS growth is achievable?

Yes. Thank you. On the first question, I think Rod really touched on it. We think that a lot -- we think that we've really, I mean, strengthened the Hydro program, both with the investments against the value proposition plus the new The Man I Am campaign and the digital -- and the targeted digital media that we're putting behind it. So I think that we really, I mean, strengthened it. But we are going up against the -- Harry's rollout within Walmart, and we see that continuing to pressure men's through the first half. So that's our viewpoint there. From a longer-term growth point of view, there's a lot of moving parts and all I can really say is that we're confident exiting '19, yes, that we're going to be a much, much stronger competitor and set up to compete well. We're not really ready to forecast beyond there from a category and a competitive point of view. There's a lot of turns in the path between now and then, but we're optimistic going forward.

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

Wanted to talk a little bit about the Hydro relaunch, and then, also, when -- first, when does the incremental Hydro spend start to drop in? Has it started already or does it start in Q1? And then what -- Gillette is obviously launching their SkinGuard product, which seems directly targeted towards the Hydro customer, so is -- how flexible are you in terms of your spending, should that product gain some traction against Hydro?

Yes. The investments against Hydro began actually Q4 from a pricing point of view, and the equity spend kind of begins Q1 now and it goes forward. We'll remain agile with respect to competition and we'll see how that plays out, I guess.

The next question comes from Kevin Grundy with Jefferies.

Two questions for me, if I may. First is the Wet Shave business and your Private Label strategy. So Wet Shave declined 5.5% organically this year at the total company level. If I'm not mistaken, Private Label is about 20% of mix in the U.S. So one, can you split the 5.5% decline between Private Label and your branded portfolio? And how does that shape up for '20? And then secondly, just broadly, maybe talk about how important your Private Label strategy is in terms of your value proposition now to retailers, given the pressure on the Schick business. And then I have a follow-up on M&A.

Yes, let me begin. Then, Rod, you can chime in. But Private Label actually grew for this fiscal year, modestly in the U.S. but fairly significantly internationally, and we're pleased with it. Going forward, I think that it will be impacted somewhat in the U.S. with the Harry's rollout and the planogram losses there, but overall, International continues to the grow and we see it holding in there the next fiscal year. It's a key part of our portfolio. It allows us to tailor-make category solutions for all of our customers and our channels, and we see it continuing going forward. Rod?

And maybe if I could just -- go ahead, I'm sorry.

Go ahead, Kevin.

Go ahead.

Yes, I mean, Rod and for David, I was just going to ask -- just pivoting to M&A and if you could touch on that a little bit. What's the appetite for something bigger? Would that be too much disruption at this point, given the undertaking with Project Fuel? If you want to talk about geographies or potential areas of interest, or is it more likely here this is sort of a tuck-in strategy over the next 2 to 3 years, call it, with any excess free cash flow put towards buybacks? And that's it for me.

Okay, thank you. We continue to look at the top of the funnel at all adjacencies, so anything in the categories in which we compete, plus adjacencies through Skin Care, grooming, that kind of thing. So we continue to look for adjacencies. We'd love International to get more scale there, so we continue to look. I will say that as part of the decision-making process about whether we pull the trigger, I actually do think that integration risk is a factor that we'll consider carefully with all the change going on. I wouldn't see us jumping at another small tuck-in unless it fits well and we think we can integrate it easily. So we continue to look hard. We'd love to add something, but we'll be disciplined about it.

The next question comes from Bill Chappell with SunTrust.

Just 2 quick questions. One, just trying to understand the U.S. Wet Shave kind of market share as we go into spring resets next year. Obviously, Harry's has had a din as it moved into Target, what, 2 years ago and Walmart this year. I didn't know if you expected that or Gillette or anybody else. Can you kind of -- now that I would imagine you have a good idea what resets look like, if we should expect sales to kind of -- or market share to improve sequentially as we go into the spring or if there would be more pressure? And then the second question, just maybe some color on variable comp. It sounded like you didn't have the full amount in 2018, didn't know what kind of add back that is in terms of pressure on 2019.

Okay, on the -- yes, on the first question, yes, we see continued pressure on us through Q1 and Q2. Don't know from a sequential point of view, I'd say that it should be relatively flat versus where we're at now, but there's certainly pressure through Q2.

Yes, and Bill, if you look at it by channel, where we will continue to see the pressure is the mass, specifically at Walmart, as the sets roll through and Harry's gets expanded until we lap that in the summer. If you look at food/drug, the other segments, we're actually performing well. We're growing share in those channels. And so it's a bit of a mixed bag, but net-net, in total, it should -- we should see pressure on share over the next 2 quarters. Relative to variable comp, simple math is you need to throw $9 million back to get the target into 2019, so $9 million ahead of where we landed in 2018. That's included in our roll-up.

The next question comes from Jonathan Feeney with Consumer Edge.

One more of a clarification and then a question about A&P. First, clarification, David, you mentioned -- I would love to know your total company e-commerce. You mentioned a 20% number, that sounds high to me based on what I've heard before, in your prepared remarks. So what does that 20% include that you had mentioned was growing double-digit, and what's total e-commerce for the company right now? That would be my first question. And second question would be, you -- and I think, Rod, you delineated between working A&P and nonworking A&P that's being addressed by your ZBS program. Where does total A&P, in your mind, in 2019, with respect to your guidance? Is that up as a percentage, like, what's the give-and-take there? And what does that mean for the trend and what you described as working A&P, '19 versus '18?

So on your first question, we -- when we talked about 20% of the company sales, we were referencing not only e-commerce but also Wet Shave in developing markets, International, Sun and our Bulldog and the Jack Black brands. We don't -- we don't real -- we haven't commented specifically about e-commerce, and I don't really want to divulge that right now. On the A&P question, Rod?

Yes. On the A&P, Jon, and the way we're thinking about it for '19 versus '18, it's flat as a percent of sales, '19 versus '18. However, within that flat, there's fairly significant reallocation within that, based on some ROI metrics that we've driven.

Can you give an example of what you're talking about, Rod, when you say working versus nonworking A&P?

Yes, so thanks. Yes, for the clarification, nonworking A&P, think of that as the cost to create the advertising, so agency cost, actual creation cost of that. It's nonworking in that it's not consumer eyeballs on an ad that we're running. As part of our Zero-Based Spend initiative, we took nearly $20 million of that production cost out of the system, and that's a structural go-forward reduction. So year-over-year, '19 versus '18, that nonworking base is now set. That's unchanged. And the working A&P, the actual advertising spend that we run out there is flat year-over-year as a percent of sales, so it's very comparable year-to-year.

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

Yes. Thank you all for your time and your interest in Edgewell. Have a nice day.

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