Edgewell Personal Care Announces Second Quarter Fiscal 2019 Results

PRNewswire 9-May-2019 6:01 AM

SHELTON, Conn., May 9, 2019 /PRNewswire/ -- Edgewell Personal Care Company (NYSE:EPC) today announced results for its second fiscal quarter ending March 31, 2019.

Executive Summary

• Net sales were $546.7 million in the second quarter of fiscal 2019, a decrease of 10.1% when compared to the prior year quarter. Organic net sales were down 8.9% for the quarter. (Organic basis excludes sales impact from the Jack Black acquisition and the translational impact from currency movements.)
• GAAP Diluted Earnings Per Share ("EPS") were $0.89 for the second quarter, including an after tax $0.21 impact from Project Fuel. Adjusted EPS were $1.13 for the second quarter, compared to $1.31 in the prior year quarter.
• The Company is maintaining its previously announced financial outlook for fiscal 2019.
• In a separate press release issued today, the Company announced that it has entered into a definitive merger agreement to acquire Harry's, Inc. in a cash and stock transaction valued at $1.37 billion. The combination of Edgewell and Harry's brings together complementary businesses and capabilities to create a next-generation consumer products platform with an expansive runway for growth and value creation.

The Company reports and forecasts results on a GAAP and Non-GAAP basis, and has reconciled Non-GAAP results and outlook to the most directly comparable GAAP measures later in this release.  See Non-GAAP Financial Measures for a more detailed explanation, including definitions of various Non-GAAP terms used in this release.  All comparisons used in this release are with the same period in the prior fiscal year unless otherwise stated.

"As expected, we faced several timing and transitory headwinds in the fiscal second quarter that negatively impacted our top line performance.  We are continuing to execute on Project Fuel and make aggressive changes across the organization to realize meaningful cost savings that will increasingly be re-invested in support of our topline growth objectives.  With many of the headwinds now behind us, and as a result of the actions we are taking, we expect improved performance in the second half of our fiscal year," said Rod Little, Edgewell's President and Chief Executive Officer. "We are maintaining our previously announced financial outlook for fiscal 2019 and expect to deliver $115 million in Project Fuel savings for the full fiscal year."

Accelerating Portfolio Transformation
In a separate press release issued today, Edgewell announced a definitive agreement under which Edgewell will acquire Harry's in a cash and stock transaction valued at $1.37 billion. "The combination of Edgewell and Harry's represents a pivotal step forward in our portfolio transformation," said Mr. Little. "Combining Harry's best-in-class brand building, design and direct-to-consumer (DTC) expertise with Edgewell's best-in-class product technology in shaving, personal care and sun care, global scale and iconic consumer brands will enable our new company to win across categories and channels with greater agility and an enhanced ability to connect with the modern consumer. We are excited about the future of Edgewell with Harry's and believe this combination will create new avenues for growth and enable us to deliver superior returns for investors."

The Company is continuing its previously announced exploration of strategic alternatives for the Feminine Care and Infant Care businesses, including the potential sale of one or both businesses.  There can be no assurance that the Company's exploration of strategic options will result in any transaction or other action by the Company, or the timing thereof.  The Company does not intend to comment on or provide updates regarding these matters unless and until it determines that further disclosure is appropriate or required based on then known or material facts and circumstances.

Fiscal 2Q 2019 Operating Results (Unaudited)
Net sales were $546.7 million in the quarter, a decrease of 10.1%, as compared to the prior year period.  Excluding a $5.3 million benefit from the Jack Black, L.L.C. ("Jack Black") acquisition and a $12.6 million negative impact from currency translation, organic net sales decreased 8.9%, driven by declines in Wet Shave, North America Sun and Skin Care and Feminine Care businesses, partly offset by growth in the Infant Care and International Sun and Skin Care businesses.  As expected, several timing and transitory issues impacted total net sales in the second quarter, including commercial distribution changes in Japan, the impact on Sun Care of Easter shifting into the fiscal third quarter and the impact of Sun Care reformulation in North America.  These contributed to nearly 600 basis points of the overall organic net sales decline in the quarter.

Gross margin decreased 360 basis points to 45.9%, as compared to the prior year period, and was largely impacted by transitory issues in the quarter.  Excluding $0.4 million of costs associated with the Sun Care Reformulation, gross margin decreased 350 basis points to 46.0%.  The lower margin was driven by the impact of unfavorable product volume mix (90 basis points) mostly in Asia Pacific and North America, unfavorable price mix in Wet Shave and Feminine Care (140 basis points) in North America, and unfavorable cost mix (120 basis points.)

Advertising and sales promotion expense ("A&P") was $47.9 million, or 8.8% of net sales, as compared to $75.6 million, or 12.4% of net sales in the prior year period. The decrease in A&P expense was primarily a result of fewer new product launches as compared to the prior year, fewer promotional slots this fiscal quarter, a mix shift to trade spend in certain segments, as shift in timing of spend and a continued focus on eliminating non-productive spend.

Selling, general and administrative expense ("SG&A") was $98.1 million, or 17.9% of net sales, as compared to $104.3 million, or 17.2% of net sales in the prior year period. Excluding $1.9 million of I.T. enablement charges for Project Fuel, $1.0 million in advisory expenses incurred in connection with the evaluation of the Feminine Care and Infant Care businesses, $1.5 million in costs associated with Jack Black acquisition costs and $1.9 million in favorable currency translation, SG&A decreased $8.5 million compared to the prior year. The operational improvement in SG&A was largely driven by strong cost management initiatives, driving lower compensation expense in the quarter and prior year one-time expenses such as severance and asset write-offs.  These savings were offset in part by higher e-commerce expense.

The Company recorded a pre-tax restructuring expense of $15.4 million in the quarter in support of Project Fuel consisting of consulting, program management, severance, and IT enablement costs.

Other income, net was $2.7 million during the quarter compared to $2.0 million in the prior year quarter.  Favorable foreign currency exchange contract gains and losses in the quarter and the revaluation of nonfunctional currency balance sheet exposures were offset by lower pension income and higher accounts receivable factoring expense.

Earnings before income taxes was $63.7 million during the quarter compared to $85.8 million in the prior year period.  Adjusted operating income decreased to $94.7 million in the quarter from $108.3 million in the prior year period.

The effective tax rate for the first six months of fiscal 2019 was 33.0% as compared to 39.7% in the prior year.  The effective tax rate for the first six months of fiscal 2019 includes a net adjustment of $4.7 million related to the fiscal 2018 one-time transition tax on foreign earnings from the U.S. Tax Cuts and Jobs Act (the "Tax Act"), recorded in the first quarter of fiscal 2019.  The effective tax rate for the prior period includes a $17.4 million increase in tax expense related to net charges from the Tax Act.  The adjusted effective tax rate for the first six months of fiscal 2019 and 2018 excludes the one-time impact of the Tax Act, restructuring charges, advisory expenses incurred in connection with the evaluation of the Feminine Care and Infant Care businesses, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, and the sale of the Playtex gloves business.  The adjusted effective tax rate for the first six months of fiscal 2019 was 24.9%, compared to the prior year period adjusted rate of 24.8%.

GAAP net earnings for the quarter were $48.2 million or $0.89 per share compared to $65.1 million or $1.20 per share in the second quarter of fiscal 2018.  Adjusted net earnings in the quarter were $61.5 million or $1.13 per share, as compared to $70.9 million or $1.31 per share in the prior year period.

Net cash used by operating activities was $31.9 million for the first six months of fiscal 2019 compared to cash from operating activities of $61.6 million in the prior year period. The decline in operating cash flow in the first six months of fiscal 2019 was primarily driven by working capital changes largely as a result of higher inventory levels in our Sun Care business as a result of the shift in Easter into the third quarter. Additionally, accounts payable were higher at the end of fiscal 2018 as compared to March 31, 2019, resulting from the timing of payments and reduction in spending.

Project Fuel

Project Fuel is an enterprise-wide transformational initiative, launched in the second fiscal quarter of 2018, designed to address all aspects of the Company's business and cost structure, simplifying and transforming the Company's organization, structure and key processes that will provide the necessary catalyst for further re-investment in the Company's growth objectives while enabling the Company to achieve its desired future state operations.

The Company expects Project Fuel will generate $225 to $240 million in total annual gross savings by the end of the 2021 fiscal year. It is expected that the savings generated will be used to fuel investments and brand building in strategic growth initiatives, offset anticipated operational headwinds from inflation and other rising input costs and improve the overall profitability and cash flow of the Company.

To implement the restructuring element of Project Fuel, the Company estimates one-time pre-tax charges to be approximately $130 to $140 million, with an additional capital investment of $60 to $70 million through the end of the 2021 fiscal year.

Fiscal second quarter 2019 Project Fuel related restructuring charges and capital expenditures were $15.4 million and $7.6 million, respectively.  Fiscal second quarter 2019 Project Fuel related gross savings were approximately $29 million, bringing cumulative gross savings to approximately $70 million for the project.

Fiscal 2Q 2019 Operating Segment Results (Unaudited)

The following is a summary of second quarter results by segment:

Wet Shave (Men's Systems, Women's Systems, Disposables, and Shave Preps)

Wet Shave net sales decreased $50.8 million, or 14.7%, as compared to the prior year period. Excluding the impact of currency movements, organic net sales decreased $41.0 million or 11.9%, as compared to the prior year, driven by declines in both North America and International.  The North America organic net sales decline reflects on-going competitive intensity, particularly in mass retail, cycling of the prior year period's launch of Intuition f.a.b. and Hydro Sense, and the impact of lower pricing on our Men's and Women's Systems products.  The decline in International markets was largely driven by an expected quarterly phasing shift in Wet Shave sales in Japan that resulted in a significant decline in the second quarter.  Wet Shave segment profit decreased $13.2 million, or 19.2%.  Excluding the impact of currency movements, organic segment profit decreased $11.0 million, or 16.0%, as gross margins decreased from lower sales volumes in North America and Japan, unfavorable price mix from a price decrease in North America and increased promotional expenses, and unfavorable cost mix. The decline in gross margins were offset by lower A&P and lower SG&A during the quarter.

Sun and Skin Care (Sun Care, Wipes, Bulldog, and Jack Black)

Sun and Skin Care net sales decreased $7.1 million, or 4.7%, as compared to the prior year period.  Excluding the Jack Black acquisition and the impact of currency movements, organic net sales decreased $10.1 million, or 6.6%, driven by a 10% organic decline in North America related to the Sun Care reformulation project and a shift in phasing to the fiscal third quarter, largely reflective of the shift in the Easter holiday this year. Organic net sales in International increased 7%, led by strong performance in Asia Pacific with the launch of Hawaiian Tropic in Australia. Sun and Skin Care segment profit decreased $8.1 million, or 16.7%.  Excluding the impact of the Jack Black acquisition and currency movements, organic segment profit decreased $9.1 million, or 18.7%, driven by decreased volumes and unfavorable price mix, and increased A&P and overheads expense related to the expansion of Bulldog.

Feminine Care (Tampons, Pads, and Liners)

Feminine Care net sales decreased $5.7 million, or 7.1%, as compared to the prior year period, driven by volume declines across all lines, except for o.b. tampons behind the launch of organic o.b. products and Sport Tampons. Unfavorable price mix was the result of increased trade spend investment.  Feminine Care segment profit increased $3.8 million, or 38.5% as compared to the prior year period, driven by lower A&P and overhead spending and favorable cost mix, partially offset by lower volumes and unfavorable price mix.

All Other (Infant Care, and all other brands)

All Other net sales increased $2.2 million, or 7.3%, as compared to the prior year period. Excluding the impact of currency movements, organic net sales increased $2.5 million, or 8.3%, as compared to the prior year period.  The increase in net sales was largely driven by increased Diaper Genie sales, particularly in eCommerce and volume growth in cups and mealtime related to the Paw Patrol launch.  All Other segment profit increased $1.7 million, as compared to the prior year period, or 39.5%, driven by higher volumes and favorable price mix.

Full Fiscal Year 2019 Financial Outlook
For fiscal 2019, reported net sales are expected to be down in the low single digits compared with the prior year, inclusive of an approximate 150 basis-point unfavorable impact from currency translation and an 80 basis-point combined benefit from the Jack Black acquisition and Playtex gloves divestiture.

The Company's outlook for GAAP EPS for fiscal 2019 is in the range of $2.16 to $2.46 (previously $2.09 to $2.39), and includes Project Fuel restructuring charges, Sun Care reformulation costs, Jack Black integration costs, expenses associated with an investor settlement, and advisory expenses incurred in connection with the evaluation of the Feminine Care and Infant Care businesses.  The outlook for Adjusted EPS remains in the range of $3.30 to $3.60.  Adjusted operating income margin as a percent of net sales is anticipated to be consistent with the prior year, adjusted for the adoption of ASU 2017-17, as more fully described below.

For fiscal 2019, Project Fuel is expected to generate approximately $115 million in incremental gross savings.  Project Fuel related restructuring charges and capital expenditures are expected to be approximately $65 to $70 million and $40 to $50 million, respectively.  Total Company capital expenditures, including Project Fuel are expected to be approximately 4% of net sales.

The effective tax rate for the fiscal year is estimated to be in the range of 23.5% to 25.5%.

The Company anticipates that fiscal 2019 free cash flow will be above 100% of GAAP net earnings.

Webcast Information
In conjunction with this announcement, the Company will hold an investor conference call beginning at 8:00 a.m. Eastern Time today.  The call will focus on fiscal 2019 second quarter earnings and the outlook for fiscal 2019.  All interested parties may access a live webcast of this conference call at www.edgewell.com, under the "Investors," and "News and Events" tabs or by using the following link:  http://ir.edgewell.com/news-and-events/events

For those unable to participate during the live webcast, a replay will be available on www.edgewell.com, under the "Investors," "Financial Reports," and "Quarterly Earnings" tabs.

About Edgewell
Edgewell is a leading pure-play consumer products company with an attractive, diversified portfolio of established brand names such as Schick® and Wilkinson Sword® men's and women's shaving systems and disposable razors; Edge® and Skintimate® shave preparations; Playtex®, Stayfree®, Carefree® and o.b.® feminine care products; Banana Boat®, Hawaiian Tropic®, Bulldog® and Jack Black® sun and skin care products; Playtex® infant feeding and Diaper Genie®; and Wet Ones® moist wipes.  The Company has a broad global footprint and operates in more than 50 markets, including the U.S., Canada, Mexico, Germany, Japan, the U.K. and Australia, with approximately 6,000 employees worldwide.

Forward-Looking Statements.  This document contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  You should not place undue reliance on these statements.  Forward-looking statements generally can be identified by the use of words or phrases such as "believe," "expect," "expectation," "anticipate," "may," "could," "intend," "belief," "estimate," "plan," "target," "predict," "likely," "will," "should," "forecast," "outlook," or other similar words or phrases.  These statements are not based on historical facts, but instead reflect the Company's expectations, estimates or projections concerning future results or events, including, without limitation, the future earnings and performance of Edgewell or any of its businesses.  These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause the Company's actual results to differ materially from those indicated by those statements.  The Company cannot assure you that any of its expectations, estimates or projections will be achieved.  The forward-looking statements included in this document are only made as of the date of this document and the Company disclaims any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law.

In addition, other risks and uncertainties not presently known to the Company or that it presently considers immaterial could significantly affect the accuracy of any such forward-looking statements.  Risks and uncertainties include those detailed from time to time in the Company's publicly filed documents, including in Item 1A. Risk Factors of Part I of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on Form 10-K on November 19, 2018.

Non-GAAP Financial Measures.  While the Company reports financial results in accordance with generally accepted accounting principles ("GAAP") in the U.S., this discussion also includes Non-GAAP measures.  These Non-GAAP measures are referred to as "adjusted" or "organic" and exclude items such as restructuring charges, Feminine and Infant Care evaluation costs, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, the sale of the Playtex gloves business, and the impact of the transition tax and re-measurement of deferred tax assets and liabilities related to the Tax Act.  Reconciliations of Non-GAAP measures, including reconciliations of measures related to the Company's fiscal 2019 financial outlook, are included within the Notes to Condensed Consolidated Financial Statements included with this release.

This Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP.  The Company uses this Non-GAAP information internally to make operating decisions and believes it is helpful to investors because it allows more meaningful period-to-period comparisons of ongoing operating results.  The information can also be used to perform analysis and to better identify operating trends that may otherwise be masked or distorted by the types of items that are excluded.  This Non-GAAP information is a component in determining management's incentive compensation.  Finally, the Company believes this information provides a higher degree of transparency.  The following provides additional detail on the Company's Non-GAAP measures.

• The Company analyzes its net revenue on an organic basis to better measure the comparability of results between periods. Organic net sales exclude the impact of changes in foreign currency, acquisitions, and dispositions. This information is provided because these fluctuations can distort the underlying change in net sales either positively or negatively. For the quarter and six months ended March 31, 2019, the impact of acquisitions includes net sales and segment profit activity for Jack Black through February 2019. Jack Black was acquired in March 2018. For the six months ended March 31, 2019, the impact of disposition includes October 2017 net sales and segment profit for the Playtex gloves business.
• Adjusted EBITDA is defined as earnings before income taxes, interest expense, net, depreciation and amortization and excludes items such as restructuring charges, Feminine and Infant Care evaluation costs, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, and the sale of the Playtex gloves business.
• Adjusted operating income is defined as earnings before income taxes, interest expense associated with debt, other income, net, and excludes items such as restructuring charges, Feminine and Infant Care evaluation costs, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, and the sale of the Playtex gloves business.
• Adjusted net earnings and adjusted earnings per share are defined as net earnings and diluted earnings per share excluding items such as restructuring charges, Feminine and Infant Care evaluation costs, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, the sale of the Playtex gloves business, the related tax effects of these items, and the impact of the transition tax and re-measurement of deferred tax assets and liabilities related to the Tax Act.
• Adjusted effective tax rate is defined as the effective tax rate excluding items such as restructuring charges, Feminine and Infant Care evaluation costs, Sun Care reformulation costs, Jack Black acquisition and integration costs, investor settlement expense, the sale of the Playtex gloves business, the related tax effects of these items, and the impact of the transition tax and re-measurement of deferred tax assets and liabilities related to the Tax Act from the income tax provision and earnings before income taxes.
• Adjusted working capital is defined as receivables, less trade allowances in accrued liabilities, plus inventories, less accounts payable, and is calculated using an average of the trailing four-quarter end balances.
• Free cash flow is defined as net cash from operating activities less net capital expenditures. Free cash flow conversion is defined as free cash flow as a percentage of net earnings adjusted for the net impact of non-cash impairments.

EDGEWELL PERSONAL CARE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in millions, except per share data)

Note 1 - Segments

The Company conducts its business in the following four segments: Wet Shave, Sun and Skin Care, Feminine Care and All Other (collectively, the "Segments" and, each individually, a "Segment").  Segment performance is evaluated based on segment profit, exclusive of general corporate expenses, share-based compensation costs, costs associated with restructuring initiatives, advisory expenses incurred in connection with the evaluation of the Feminine Care and Infant Care businesses, Sun Care reformulation costs, Jack Black, L.L.C. integration costs, investor settlement expenses, the sale of the Playtex gloves business, and the amortization of intangible assets.  Financial items, such as interest income and expense, are managed on a global basis at the corporate level. The exclusion of such charges from segment results reflects management's view on how it evaluates segment performance.

On March 1, 2018, the Company completed the acquisition of Jack Black, a leading U.S. based luxury men's skincare products company based in the United States, for approximately $90.2, net of cash acquired. The acquisition creates opportunities to expand Edgewell's personal care portfolio in growing categories in the U.S. and globally, while nurturing the brand equity of Jack Black.

Segment net sales and profitability are presented below:

Note 2 - GAAP to Non-GAAP Reconciliations

Basic earnings per share is based on the average number of common shares outstanding during the period.  Diluted earnings per share is based on the weighted-average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of share options and restricted stock equivalent awards.

The following tables provide a reconciliation of Net earnings and Net earnings per diluted share ("EPS") to Adjusted net earnings and Adjusted EPS, which are Non-GAAP measures.

The following tables provide a GAAP to Non-GAAP reconciliation of certain line items from the Condensed Consolidated Statement of Earnings:

The following table provides a reconciliation of Earnings before income taxes to adjusted operating income, which is a Non-GAAP measure, for the second quarter and first six months of fiscal 2019 and 2018:

The following table provides a reconciliation of the effective tax rate to the adjusted effective tax rate, which is a Non-GAAP measure:

Note 3 - Net Sales and Profit by Segment

Operations for the Company are reported via the four Segments.  The following tables present changes in net sales and segment profit for the second quarter and first six months of fiscal 2019, as compared to the corresponding period in fiscal 2018, and provide a reconciliation of organic net sales and organic segment profit to reported amounts.