Good day, and welcome to the Edgewell Personal Care Q2 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Chris Gough, Vice President of Edgewell Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us this morning for Edgewell's Second Quarter Fiscal Year 2022 Earnings Call. With me this morning are Rod Little, our President and Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call then hand over to Dan to discuss our results and full year '22 outlook before we transition to 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 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 for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events, plans or prospects. 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, 2021, as may be amended in our quarterly reports on Form 10-Q, which is on file with the SEC. 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, 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 is shown in our press release issued earlier today, which is available at the Investor Relations section of our website. Management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business. With that, I would like to turn the call over to Rod.

Thank you, Chris. Good morning, everyone, and thanks for joining us on our second quarter earnings call. We delivered our fourth consecutive quarter of organic net sales growth despite an increasingly challenging operating environment. In the quarter, many of our categories showed further signs of strengthening, and the demand for our products remained high, underpinned by the strong distribution outcomes on shelf that we spoke to previously. Consumption growth for our brands in the United States was over 10% and strengthened as the quarter progressed. As our pricing actions increasingly take effect and with our improved competitiveness on shelf, our market share gains in the U.S. and key international markets accelerated, particularly in Sun Care. We reported organic net sales growth of 2%, which was slightly below expectations and well below inherent demand as a result of supply chain disruption. Organic sales growth was driven by Sun Care, which increased 28% and gained 3 points of share in the United States as well as women shave and men's grooming, each of which grew about 6% organically in the quarter. Additionally, Billie contributed over 5 points of top line growth in the quarter, driven by the strong initial rollout at Walmart. We are very pleased with the early results for the brand at Walmart has reached a 20% market share in women's shave and only recently reached full chain distribution. We anticipate meaningful growth opportunities, which our teams continue to explore as they finalize planning for next year. At the same time, the external environment was increasingly challenging and volatile in the quarter. We faced higher-than-expected inflation, particularly across transportation-related costs as geopolitical events and overall supply and demand balances moved oil prices significantly higher. We also experienced significant pandemic-related supply chain disruption, most notably in fem care and women's Wet…

Thank you, Rod, and good morning, everyone. As Rod discussed, we saw a strong underlying demand for our brands in the quarter, realizing share gains in the U.S. and across many key international markets, including Japan, Germany, and Mexico. Consumption growth on our branded business in the U.S. was over 10% and led to branded portfolio share gains of 70 basis points, with widespread gains across Wet Shave, Sun, Skin, and fem care. We exited the quarter with momentum, delivering a full point of branded share gains reflective of 12% consumption growth in the 5 weeks ended March 27th. And our Sun portfolio continued to be the catalyst with over 20% consumption growth in the quarter and for the last 52 weeks, and I'll talk more about segment results shortly. However, the external environment grew increasingly challenging in the quarter, and our organic growth rate in the U.S. lagged our consumption gains as supply chain disruption increased and certain raw material availability became stretched, both of which negatively impacted organic sales and to a degree, product availability on shelf, most notably in fem care and women shave. As service levels declined sharply and inventory position softened, we were not able to meet inherent customer demand, creating an estimated 300 basis points headwind to Q2 organic growth. However, late in the quarter, we saw meaningful improvements in product flow, and this is carried over through April and into May. For both categories, on-time and full performance is now approaching expected levels and inventory continues to build. In Wet Shave, we are completely off supply allocations, and we expect to similarly the off allocation in fem care by the end of the current quarter. Additionally, organic sales in April were in line with our expectations, all of which we believe are clear…

[Operator Instructions] The first question comes from Dara Mohsenian with Morgan Stanley.

Clearly some profitability pressure here with the higher costs versus what you expected a few months ago, but we didn't really hear about incremental pricing to help offset those cost pressures. So, a, are you taking any incremental pricing; b, why not take a greater level of pricing to offset some of these incremental cost pressures? Just help us understand that decision.

So on the profit pressure, you're right, Dara. The data point we were looking at when we were talking this time last quarter, diesel rate was $3.50 a gallon. It's $5.30 today, right? So the Russian invasion has created a new move up in oil costs; certainly, which we're highly exposed to. Within that, when we aren't pricing more, we will continue to price more and you'll see the pricing offset become a bigger component as we move forward. I'll let Dan speak to that in a moment. The other thing, Dara, I want to get out there is we are very confident in our forward-looking plans and the share momentum we have in the business. And we made a conscious choice not to cut advertising and promotion support in the quarter. In fact, we increased it by 9% year-over-year in dollars. And so that's a different choice than we would have made in the past. And I think the momentum we see made us continue to lean in on the investment behind the brands because we're seeing that move in the right direction. I'll let Dan speak to the pricing.

Yes. I won't go back through all we've talked about previously in terms of our strategy and how it's played out by category. But just to take your point on incremental pricing that we've gone and executed literally since the last time we spoke, it has been largely U.S. and Canada-based. We've taken up pricing mid to high single digits across men's branded Shave, mid-single digits across women's branded shave, and mid to high single digits across almost all of our grooming portfolio. Those price actions a bit maybe in Q2, but really start to get realized in Q3. So as you then think about what that means to the margin profile, whereas pricing was about 100 basis point offset in our initial thinking for the year. In Q4, it will reach about 180 basis points. So you can see that sort of scaling up component here as we work that pricing through. And as Rod mentioned, we're certainly by no means done, that the team continues to evaluate further pricing opportunities across all categories.

Okay. That's helpful. And just relative to prior plan, obviously, there was a lot of pricing in place, right, which is partially realized in the quarter and to come. But can you be a little more specific in terms of percent of the portfolio maybe where there could be additional price increases and how you're thinking about that strategically? Because just looking at the implied guidance, it doesn't seem like there's a big incremental pricing offset to what you had planned previously relative to these cost pressures moving up?

Sure. Yes. So let me start with sort of where you ended there, sort of how is our in-year pricing benefit changed from initial guidance. And as I said, it was -- for the full year, we were originally anticipating about 100 basis points of price offsets, and it will be about 125 now for the year. So slightly better as an offset to inflation. But again, I think you have to look at Q4 run rate closer to 180, 190 basis points to see how that pricing ladders through the back half of the year. Areas around the portfolio where we will consider now further pricing, I think certainly, fem care in the U.S., where we've already taken high single-digit price increases essentially at the start of this fiscal year. Work continues there with the probability that we'll take further price. And then Sun Care, where I think we've been selective in how we priced here mostly around NPD and new product execution for obvious reasons, when you look at the success we've had on shelf and in category, but that's an area that we would look to as well as the season winds down, which will provide further tailwind as we look to next year.

Our next question comes from Bill Chappell with Truist Securities.

Just following up on the kind of the top line guidance. Is the assumption that kind of the supply chain hit stuff in fem care and other areas in women's shave, it's not coming back, I guess, in 3Q, 4Q. Do you expect some of that to bounce back? Just trying to understand if the raise is all because of the incremental pricing or if there was something else driving it that gives you increased confidence?

Bill, it's Dan. Certainly, as you think about exiting Q2 and looking at Q3, where we're modeling mid-single digit organic growth, we do expect that some of that supply disruption does come back. And I think in our prepared remarks, we also talked about April organics being largely in line with what we had expected. So you're already seeing the benefit of a little bit of a replenishment or restock, if you will, as service levels normalize. As you think about sort of growth in the back half of the year, the incremental pricing is mathematically what drove up our organic outlook, right? So it's purely a pricing play mathematically. But our confidence level for half 2 is really underpinned by the distribution outcomes that we've talked about earlier, which we're excited that the category health, the share gains that we have seen, and obviously, the incremental pricing I mentioned on the earlier question, all of that gives us a really good line of sight and a high confidence in our ability to execute what will be about a 5% organic growth in half 2.

Yes. Bill, I would just build on that with 2 points. One, the planogram outcomes are known now, and they're favorable. And we've been talking about better partnerships with our retail customers. That's happened, and that's showing up with better planogram outcomes as they reset. So we now have line of sight to that for the next 6 months, and that's positive. But the other piece that's playing in here and you're seeing it move our market shares up with now consecutive quarters of market share growth, which we haven't had in the previous 5 years in the United States, which is better innovation and better brand messaging. So we've relaunched the Schick Men's Masterbrand with a new tagline "Be You. No One Else Can." It's an amazing campaign. It's very well crafted. Playtex Sport, we've got a new campaign against Playtex Sport, with the reopening now benefiting this is the fastest-growing Tampon brand, up 2.7 share points in the last quarter with the new launch of Clean Comfort Tampon. We've launched the Cremo razor. We have mentioned that at the premium price tier. And then Sun is obviously working very well for us. We have really solid innovation across Sun, which drove us up 3 share points in the quarter. And so we also look at the exposure of our main categories of shave and sun relative to reopening. We're reopening play here, right? People are going back to the office and returning to prior habits around shave and grooming. That benefits us in the category. And some, there's still pent-up demand for people to get out and move, which drives sun care consumption.

The only thing I would add, Bill, just to build on the some point, our half 2 outlook contemplates low single-digit Sun Care growth. So while it's been a significant driver to date back half of the year, low single digits.

Got it. And just to follow up on that sun point. From the other seasonal Lawn and Garden and other companies so far kind of implied that March, April wasn't that great in terms of getting out weather, especially in the southern half of the country. Has that not impacted the sun care market? Or is it your market share gains more than offsetting that?

Correct, Bill. Category was up during that period. Our market share was up. There was a shift in Easter in the month of April, where there were a couple of weeks that were down. That was a little bit around weather, but very temporary in terms of you look at the year-over-year shelf sets and how Easter falls. The other thing for us though is looking outside the U.S. is international is lagging the U.S. primarily whether you look at European, Latin America, or Asian markets, where we have a sizable business, and that's to come. And I think we expect outside the U.S. to look more like the U.S. looked last year. So it's lagging for a year, and that will be a tailwind for us in the second half.

Our next question comes from Chris Carey with Wells Fargo Securities.

So the first question is actually just to maybe clarify the back half acceleration. And so pricing is building, but supply chain is also expected to improve; sun low single, which would imply the other divisions re-accelerating. And so that reacceleration is due to the supply chain improvement. I'm just trying to dimensionalize the pickup in pricing in the back half implied for supply chain improvement in the back half implied and what you're kind of embedding here? That's just a clarification. And I have a quick follow-up.

Yes. Chris, I think, in principle, you're right. Let's think about the build in half 2 to this 5-ish percent organic growth. Half of that will be year-over-year pricing gains, right? The only pricing we had a year ago was Wet Ones. We hadn't moved yet on the rest of the portfolio. So you've got a meaningful lift from year-over-year pricing. Yes, you've got to a degree the replenishment, mostly in fem care that we talked about earlier. You still got Sun Care growing, albeit at a lower rate, as we said, low single digits. And then I think probably the piece we haven't talked about yet this morning is accelerated growth coming out of shave internationally, driven by Japan, where we get the benefits of the women's Hydro relaunch, which we're excited about. And we have new TBG business. But you started to see a bit of a tailwind in the second quarter that now provides growth as we head into the back half of the year. So if you put all of those pieces together and then sort of anecdotally, Wet Ones is while still declining a bit declining far less and cycling for different half 2 segment performance than it did in half 1. And all of that sort of leads to our 5% organic outlook.

Okay. Got it. And then just on the inflation piece, I guess, there as well. I'm just trying to understand a bit of visibility, obviously, seeing some worsening, but how much confidence you have in that outlook that it doesn't move from here? More specifically, do you have hedges in place on certain commodities just because you've locked up commodities for a seasonal category like Sun, have you locked in transportation costs? Or is there a potential that things could move here? And I guess, getting back to the prior question is just if that were to happen, are you in a position to be more aggressive on pricing? Certainly, we've seen the peer set take multiple rounds of mid-single digit up to double-digit pricing. And I just wonder if that's entering your thinking should things get worse from here?

Yes. Look, on the cost piece, what's really sort of the driver of the new news for us is largely freight and distribution line. Rod gave a data point earlier on what we've seen in diesel. You've seen north of $100 a barrel of oil. So in every year that is 12%, 13% of COGS now has a roughly 20% year-over-year inflation expectation to it. We do not hedge here. We have contracts in place, but quite candidly, with demand being where it's at, those contracts don't necessarily protect you because lanes are constantly being rebid, and ocean contracts are constantly being rebid. So I don't think that offers necessarily any comfort. And then we're still seeing choppiness in commodities, mostly in resins and a bit in Sun Chemicals, where I think we talked about it on our last call, we essentially reached all of our buy options with vendors. We're purchasing on the open market now. It's the right thing to do. We've secured raw materials for the season, but we continue to see mid-single-digit increases in Sun Chemicals. So we think we've got a good outlook here, Chris. We think we've thought through all of the different puts and takes, and we do expect airfreight utilization to go down from here as it was spiked in the quarter as part of some of the supply chain challenges that we saw. So we think we've framed it the right way, but we're looking at about 12% inflation on COGS for the year now. And I think from a timing perspective, also, we feel pretty good about being locked in on the commodity front for the year, which helps, I think, put a bit of a baseline in our thinking as far as cost exposure. So that's the inflation side of your question. Maybe Rod let you take the pricing side.

On the pricing, Chris, I would just say, we see it overall as a favorable environment for pricing, certainly versus historical norms with a typical elasticity curves up to this point. We take a position of typically following pricing in the fem and shave care categories. We are not the leader. You've seen others make moves to price with more moves to come. We would look in our role to follow that pricing as we typically do. We've got our stated pricing strategies for our brands. And part of that is where you price relative to competition, right? And so that's something we look at. We lead in some skin and grooming more typically. And we have intentionally not priced in Sun Care other than some tactical moves this year because we're mid-season. We're growing share. We feel really good about where we are, but we also recognize there's an opportunity. I think Dan touched on this earlier, there's pricing opportunity in some of those categories I mentioned, where we take more of a leadership position. And we will certainly do that even if there's no more inflation from here. We're already looking at that. If there's more from here, well, then we would respond accordingly. And we've got an agile responsive approach to that.

Next question comes from Kevin Grundy with Jefferies.

I did want to pick up on the comment, Rod, you just made actually, but I think sort of extrapolate it more broadly. And this gets back to your approach to pricing and what we're seeing from a market share perspective. So I think what you and Dan have done has been very good in terms of turning the company around and improving the top line momentum and your market share. That certainly seems to be the lens with which you are approaching your pricing strategy. And I guess what I mean by that is, to your comment a moment ago where you haven't really moved a lot in sun tan products, but it doesn't seem to be reserved to that exclusively. I look at disposables, I look at systems, I look at blades, shaving cream, you guys have lagged the category. And then implicitly with your guidance here, where the incremental commodity cost pressure is entirely flowing through with very little offset then, I think it was 25 basis points, I think, is what you mentioned, but negligible because the incremental commodity cost pressure is entirely flowing through. So Rod, maybe just expand on that a bit. The balance here in the approach with respect to sustain this top line momentum what seems to be general sort of satisfaction with market share trends with the willingness to foresee gross margins sort of in the near term? Is that sort of a fair assessment?

Well, I think you laid out the conundrum well, let me start by saying we're highly dissatisfied with the margin outcome in the short run, right? We've got almost 600 basis points of inflation in the quarter just printed. And we have 100 basis points of pricing as an offset and 200 basis points of cost productivity work. So the way I think to think about it going forward is we will continue the cost productivity work, primarily in the area of cost of goods. And so that 200 basis points is a good proxy for going forward. The pricing element of the 100 basis points offset we saw in the quarter Dan spoke to, by quarter 4, it will be 180 basis points. And from there, as we move forward into next year, I would anticipate that getting bigger or holding, certainly not getting smaller. So if you think about our profile, we'll have somewhere between 350 and 400 basis points of pricing and cost productivity work flowing through as we begin to cycle less impactful inflation year-over-year versus prior periods. And at some point, I would guess we get to normalization on inflation, if not even deflation in some elements of the P&L, which would be helpful. In terms of pricing and the lag, you're right. We look category by category, business segment by business segment at relative health of the brand, relative response from the consumer, how we're priced relative to competition, how we think about what we have around distribution changes and conversations with retailers, what we have in terms of innovation that's new, that's going to come, that others don't have line of sight to. And when we put that all together, you may not see a perfect match between inflation moving up and us responding in that moment to offset it or a competitor moving in a direction and us not responding. We will build value in this company by pricing more aggressively in the future than we've done in the past. No doubt, we've talked to the teams about that. And it goes to health of the brands. Where you've seen us lag, it would typically be where there's less health in that part of the brand portfolio. As we fix the brand health, you'll see that catch up. And I think one of the things you're seeing is we're growing share in shaving now. We've grown share more recently in men's branded. You will see a response in pricing across the portfolio start to ladder in. That's part of what's laddering in now.

Our next question comes from Olivia Tong with Raymond James.

Just on the shaving business, you do sound a bit more bullish on both the men's and women's franchises, the re-launches, Billie, etcetera. So I'm curious you to talk about share changes across branded and private label. More specifically, if you're seeing any acceleration in private label, given the macro situation potentially, any signs of increasing price sensitivity amongst your consumers are in the market?

To this point, no real changes in consumer behavior around price points and price tiers. Again, I think we've seen a period of fairly atypical elasticity curves broadly and certainly in shaving, I think that holds. And you're right, we are more confident and more optimistic in our Shave portfolio and our ability to grow and create value in the future. Not only because the category continues to recover with the reopening and by the way, not just here in the U.S. but outside the U.S. But we're more confident with our internal plans around the moves we're making with the brand building, the innovation pipelines, and how we think about architecting this for the future. And I think as we look at our portfolio today across men's, women's, and what we call private brands group, which has 2 legs to it. One is opening price point and two is branded direct-to-consumer partners that we supply. We have all of those legs growing as we go into the back half of the year. So while we're not seeing any material shifts opening price point we grew in the most recent period. We've talked about the growth we've had with branded partners that we supply that are primarily direct to consumer. And I think with Billie now coming into the portfolio and some of the momentum we have on the men's side, you're now seeing the breadth of the portfolio come to bearing with the final leg of the stool here being Schick Men's business. Schick Branded, which we've talked about for a long time, ceding market share to others, that has stopped in the most recent periods. And part of the great work by the team to go rebrand that part of the business and get excitement back into the category and identify Schick to men as standing for something that's meaningful, it has been a missing piece. And so yes, I think we've got the portfolio we think, in a good place and all legs of the stool are additive at the moment.

Got it. And then just really quickly on share repurchase. Obviously, in the quarter, you bought back some. As you think about the go-forward and different ways of utilizing your cash. Just kind of curious how you're thinking about share repurchase going forward and just broadly on other uses of cash.

I'll hit the broad capital allocation thoughts and then flip it to Dan if he wants to put more color here. Funding the organic business properly is priority one. And I think, again, you saw us do that in the quarter just finished as we look at brand support. We've made big incremental investments, capital investments behind increased capacity across various elements of our supply chain footprint. And so we're leaning in and funding the core base business. The bar is higher than it's ever been on M&A for us as we focus on our core and build out what we think is a winning portfolio. It doesn't mean we won't do something at some point, but the bar is really high on that one. We initiated the dividend a year ago. We're happy we did that. We think that was the right move. And we announced the $300 million of share repurchase, which we're committed to, which I think you saw in the last quarter, which, I don't know, Dan, if you want to speak to that?

Yes. No. Look, I think the broader point is right. We're going to simply continue to allocate cash to where the returns are the greatest. And in the near term, given the economics and the payback and quite candidly, what we think is an underpriced stock, we had the opportunity to accelerate the buybacks, and we did. We put the $300 million program out there, never intending that it would be a ratable repurchase that we'll let the market dictate, and we saw opportunity in the quarter to accelerate the buy, and we'll continue to stay in that stance in Q3 if the market conditions remain.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Rod Little for any closing remarks.

Thank you, everyone, for your continued interest. Have a great day, and we'll see you in 3 months.

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