Good day and welcome to the Edgewell Personal Care Q3 2023 Earnings Conference Call. All participants will be in listen-only mode. [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.

Good morning, everyone, and thank you for joining us this morning for Edgewell's third quarter fiscal year 2023 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 it over to Dan to discuss our results and update to the full year 2023 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 restructurings, acquisitions and integrations, 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 the 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, 2022, 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. The 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. 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. However, management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business. With that, I'd like to turn the call over to Rod.

Thank you, Chris. Good morning, everyone. And thanks for joining us on our third quarter earnings call. This was another strong quarter in which we continued to make progress against our strategic priorities. Organic net sales increased 4.5%, largely in line with our expectations and making nine consecutive quarters of growth. Adjusted earnings per share and adjusted EBITDA increased 14% and 12%, respectively, and we expand the gross margin by 80 basis points or 185 basis points at constant currency. This strong bottom line performance was delivered despite facing a $0.17 headwind from unfavorable currency and taxes, and over 300 basis points of gross inflationary headwinds in cost of goods. Our strong performance this quarter illustrates both the advantages of operating a broad and global brand portfolio as well as the impact of strong commercial execution. Organic net sales growth in the quarter was led by international markets, which contributed nearly 9% organic net sales growth. This growth was broad based across segments and driven by both higher volumes and price. In North America, organic net sales increased just over 2%, driven by price as category growth slowed sequentially, most notably in Sun and Skin Care. Since the initiation of our new growth strategy two-and-a-half years ago, our business has delivered consistent structural top line growth fueled by a stronger portfolio of brands and underpinned by the strides we have made across brand building, product innovation and retail execution. While the growth this quarter once again exceeded our long term algorithm, the composition of our growth was very consistent with our long term view as our right-to-win brands, which include Sun, Skin and Grooming grew organic net sales double-digits, driven by both volume and price, and our right-to-play brands were essentially flat the quarter as higher pricing offset lower volumes.…

Thank you, Rod. Good morning, everyone. As you just heard, we delivered another strong quarter with mid-single digit organic net sales growth and notable gains internationally from strong performance in both Wet Shave and Sun Care. Market share performance was solid, highlighted by gains in our women's shave business here in the US and in key international markets. On the bottom line, we delivered double digit adjusted EPS growth that was underpinned by meaningful gross margin expansion and good cost control, giving us increased confidence in our ability to deliver full year profitability at or above the high end with a previously provided range for both EPS and EBITDA. This quarter was the ninth consecutive quarter of organic net sales growth. Growth was delivered both in international and North American markets, reflecting continued strong demand for our products and was led by further price realization, good performance on shelf and improved product availability. As anticipated, we have significant gross margin expansion during the quarter as we have successfully delivered the margin inflection originally forecasted. Rod mentioned that the operating environment remains challenging. So, let me give you some insight into the external dynamics in the quarter. Overall, the supply chain continues to stabilize and our service levels and fill rates further strengthened. Inflation has eased and certain items in the commodity basket have turned deflationary, though labor remains extremely tight. Gross inflation still presented meaningful headwinds in the quarter of approximately 330 basis points, though this did represent sequential easing, and we continue to expect further flattening in the fourth quarter. While the consumer remains largely healthy across the start of the summer, we saw some softening in certain category consumption in the US. Aggregate category growth in the quarter was just over 3%, down about 6 points from a…

[Operator Instructions]. Our first question comes from the line of Nik Modi with RBC.

Just two questions. On the sun care business, now that we're going through the fall reset process and there's been a lot of volatility on the shelf, given product recalls and products coming back on shelf, just maybe, guys, if you could just give us kind of the state of the union on what you see net-net in terms of how you think you'll end up as we kind of come to the close of the year. The broader, bigger picture question is, there's been a lot of changes in your international business as relates to operating model and management and just wanting to see if we can get an update on what's going on in that market in Japan and Europe and some – China, I think there were some changes there. If you could just give us an update there as well.

Sun care, let's start there, state of the union. We feel good about our business in sun care, in that we got the distribution we expected to get. We had a good innovation program this year that's been well received by the consumer. And I think when we look at what we can control and how we've executed in sun care, I think the team has done a fantastic job. What we cannot control unfortunately is the weather. And as Dan had referenced, starting about Memorial Day, all the way through the July 4 holiday on both the West and East Coast, particularly in the northeast, we had poor weather, lots of rain, cooler than normal. And that impacted consumption. If you recall, Q2, we had a good shipment. In Q3, here in the US, we grew double digits again. And so, with that weather not being good, we're now seeing a catch up on consumption. So good news is consumption turned positive in July, second week of July. So it's going to be a bit of a different phasing. But as we called out in the script, we do expect our sun care business to be down versus what we had talked about last quarter. Still growing nicely for the year. And again, you saw not only a good result here in the US, but also internationally where we were up a little over 20% organic based on strength internationally as well. So, again, what we can control, we feel good about. We're not going to get into a situation where there's going to be a messy cleanup at the end with too much inventory out there. We'll be careful with what we ship in here in Q4. And that's contemplated in our revised guide. As it relates to…

The next question comes from the line of Bill Chappell with Truist Securities.

[Technical Difficulty] understand the kind of slight slowdown. I'm just trying to – it seemed in the spring quarter, you got some more shelf space and we're getting some momentum there. And didn't know if it's more just good you had shipments last quarter and the volume didn't show up, the consumers didn't show up [Technical Difficulty].

Bill, we're struggling to – I think I've got the basis of the question. But you're breaking up. Just the category you're interested in here is what?

Can you hear me now?

Yes.

Just to comment on your Fem Care performance from last quarter to this quarter. It seemed to be a pretty big slowdown and didn't know if that's just shelf space gains versus consumer takeaway being a little bit lower than expected or if there's something else going on?

Yeah, it's more of a base period issue, Bill. And I'll let Dan give you a little more perspective on what we're seeing. We're confident in our Fem Care business like where we are, share performance, volume, all that good, pricing has been received. The biggest issue you're seeing this quarter is what happened in the base period a year ago where there was some media coverage about a tampon shortage that drove a big consumption increase by consumers, effectively pantry loading, worried that they wouldn't be able to get tampons. It was not an accurate portrayal, I don't believe, of what was actually happening, not only with us, but our competitors. And so, that was in the bass is – is that bubble that we effectively cycled the quarter we just finished.

Yeah, that's right. Bill, so remember, Q2 of last year, we were down double digits organics in Fem Care for the exact reason Rod highlighted. We cycled that last quarter Q2, hence the growth. But I think if you ladder up to the category, you're seeing a much more sort of expected category in terms of growth and performance in the quarter. We're 52 weeks now with flat value share performance. So we feel like we've certainly hit that point of stability. I think, importantly, in the third quarter, even as the fem care category slowed versus recent trend, we grew volume share about 30 basis points in the quarter. So we liked the performance. We recognize that the organics are a bit choppy, given what's in the base.

Just kind of a housekeeping on currency, I'm not sure if you said where things stand in terms of top and bottom line, now a tailwind for the fourth quarter and kind of how that would play out as we move into next year. I know you're not giving guidance, but I would think we've now moved to a full tailwind from a currency standpoint.

I'll take it in two parts, Bill. I think for the back half of the year, we've seen that tailwind. Now, it's important to understand where those came from. In operating margin, it's a headwind. Transactional FX is still a headwind. And that's largely the effect of the yen. What we saw in the quarter, and we expect to see also in the fourth quarter, is gains from below the line hedge and balance sheet remeasurement. So, net-net, slightly better currency environment than we thought a quarter ago. Quite candidly, that flowed through. That's why you see the uptick in the guide in terms of EPS. As far as next year, obviously, you're right. We're not going to comment on that yet. But the thing I would hesitate though or put caution around is not only do we need to see how the currency environment shakes out, but we have to then understand the transactional impact again and how inventory will play out over the course of next year, similar to how we think about inflationary pressures and when that relief will come. So we certainly are encouraged, but I wouldn't assume that's a day one tailwind for our business.

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

I have a couple questions about gross margin. Maybe just simply, the gross margin, what was the key driver of why gross margin is coming down a bit versus prior expectations?

Very simply, Chris, it's increased headwinds from mix. That's largely a reflection of the international growth Rod talked about. And then within the shave category, international markets tend to be more disposable and PBG based. So, the mix was a bit more negative than we had anticipated on the margin profile. And then you have a bit higher FX headwinds on transactional FX that I mentioned on previous call. I think really important to call out the structural elements of margin, right? So we go back to price realization, productivity, execution, and easing inflation. We're literally on the pin where we thought we would be a year ago. Nothing has changed there. But obviously, some of these other items, a bit harder to predict, have proven to be a bit of a headwind here as we exit the year. But those are those are not structural. We think those are unique to this moment.

Just a second related question. Just on your view around perhaps medium term gross margins, I guess I'm struck by Street estimates for basically 100 basis points of gross margin expansion next year. Would seem significant relative to what you typically do. Clearly, that's driving an earnings growth number that you don't typically do either. Perhaps you're thinking about continuing to invest, which I would imagine is top of mind. And so, I guess I'm just – relative to gross margins coming in a touch, just how do you think about the medium term trajectory to get back to a gross margin kind of in the pre-pandemic range and perhaps the kind of timeline that you could see that coming together and whether near to medium term estimates seem reasonable or not? I just don't know if you have any comments on all that and how that balances together?

Look, I think what we've said and we still fundamentally believe is with, one, we're absolutely committed to getting this business back to its pre-COVID margin profile. Right? We've said that and we're committed to that. I think the second piece, and certainly 2023 is a good proof point, we're confident in our ability to pull the levers necessary to do that, right? And you've seen that not just in the pricing work we've done but in the SR, GM [ph] work the teams have done, our ability to drive cost savings consistently, 200 basis points, 225 basis points a year. So. So the levers at our disposal, we feel really good about. But there are certain factors, namely the inflationary pressures, FX, that impact the pace at which we can recover the margin. And so, we're obviously not yet ready to guide on that for next year. We'll give full transparency as we do in November. We like the fact that inflation is easing. We do see structural deflation in certain elements of the commodity basket. Labor is still the long pole in the tent, though, and is still challenging. So there are puts and takes. And then I think you hit the right point, which is there's a reinvestment cadence here. So, I think what I would say is just the commitment is there, the levers are clear and available to us. We've demonstrated that. I think the pace at which we recover the margin near term has some factors to it that we have to work our way through in the plans and, certainly, we'll talk about it in November.

Chris, this is Rod. I would just add one thing on to what Dan said, which I think is very comprehensive and hopefully gives you how we're thinking about it. But don't underestimate the impact of foreign exchange. We talked about it at the beginning of the year. We've got $0.38 of headwind year-over-year in here in foreign exchange. And as we go forward – and again, out of our control, and we won't predict when it happens – but as you get to more normal as defined by the last 20, 30 years, FX ranges among the matrix G7 currencies, we will pick that up over time as well. Right? There's a pretty negative view – maximally negative, I think, here in fiscal 23 that we feel like will recover. And that's well north of 10% EPS right there. So, beyond the work we'll do in running the business better and driving revenue management, I think we are confident, over time, we'll get some of that FX back as well.

The next question comes from the line of Susan Anderson with Canaccord Genuity.

I was wondering if you said how much Billie contributed in the quarter and did you see growth in Billie? And then also, how it's performing in the new retailers you've gotten into? Are you seeing that add to growth or bringing in new customers to the brand?

It's Dan. Billie did grow in the quarter. We don't disclose sort of the ins and outs with Billie. But I think your second question, I'll start there, spot on. Like, we really are excited about the performance we're seeing in retail. You'd recall, last year was a super important year for the brand at Walmart. And the performance there was a clear catalyst for 2023 retail expansion. We're seeing that. The brand is up to about a nine share in the category. We're super pleased with the results. Retailers are very pleased with the results. And even as the shelf has gotten more crowded in that space, particularly at Target, the brand certainly sticks out as a winner amongst the women's category. That is then proving to be a very important catalyst for next year, right? And 2024 is the year that Billie makes its move outside in a much more meaningful way of the shave category and gets into adjacent categories. So, we're executing sort of the integration playbook and the growth playbook for the brands, exactly as we kind of wrote it year-and-a-half, two years ago, and so far really, really excited about the performance on shelf.

The next question comes from the line of Olivia Tong with Raymond James.

I wanted to ask you about the mix of promotional spend versus advertising. You're obviously seeing promo spend across the industry come up as conditions normalize. And relative to ours, and I think the market expectations, advertising margin came in a little bit less than we expected. And the gross margin inflection, perhaps while inflecting, wasn't as substantial as we expected. So I would love to hear your commentary in terms of promotional levels this quarter and your expectations going forward and compare and contrast that with advertising.

It's Dan. Let me take the A&P question first because I think that's important. We spent in the quarter at over 12% rate of sale. So it was by no means a light quarter. We felt good about the quantity of spend. It was probably about $3 million below what we had anticipated when we last spoke to everyone a quarter ago. And I think there were two reasons for that, both around sun care. In the international markets, you heard we talked in our prepared remarks, we saw tremendous growth, over 30% category growth in the key markets in which we play with sun. And so, we had the product on the floor, the execution was terrific. There was simply no need to overspend. And we drove a 21% organic growth in the quarter and we gained share in some pretty important markets, like Australia, and Mexico. And so for us, the international piece was all about efficiency. There was no need to overspend. Conversely, in the US, and we talked about what we've seen there in the category and the weather impacts, by late May, retailers – the shelves had been stacked. Supply was saturated. The unfavorable weather was certainly weighing in on consumer consumption. And so, it didn't make any sense for us to spend more in that space. The consumer wasn't there. So in the US, it was about effectiveness of spend. And so, we made the decision to pull back. Some of that will come back in the quarter. In the quarter we're in, we're expecting over a 9% rate of spend in the fourth quarter, which is meaningfully more than a year ago. But again, we're focused on spending the right amounts in the right way. And we felt really good about how we executed that in the quarter for A&P. To the broader point, we said a quarter ago, we expected that things might get a bit more promotional in the back half of the year. That was already contemplated on our outlook. We haven't seen widespread increased promotions or, let's say, any irrational behavior. A bit in women's shave. But we don't think that's a reflection of consumer sentiment. We think that's a direct reflection of Billie's success. But that sort of incremental promotional activity on our end was already contemplated in our guide from what we said a quarter ago. So, new news there.

Perhaps, can I just follow up on your read on consumer sentiment, particularly in shaving? You're one of the few companies that have both the private brand group as well as branded. So, curious if you could talk about share changes across brand in private label. Specifically, if you're seeing any acceleration at sort of the low end of the category, given the macro situation, and any incrementality in terms of price sensitivity?

We're not seeing any meaningful change in consumer sentiment. We talked about a little deceleration in a couple of categories, sun being the biggest one, which is more about whether, not the consumer being there. But beyond that, particularly in shave, if we look at the last three month category growth rate versus prior 52 weeks, very much in line here domestically in the US. So we're not seeing a slowdown. Internationally, it's actually picked up and we're seeing some increases. So depending on the market you're looking at, the consumer is healthy. Within that, we're not seeing any meaningful trade down to private label, for example, and the opening price point. And we're also not seeing any meaningful trade down to disposable, going after a lower absolute price point, which consumers sometimes do when they get pinched. Within shave, we're seeing a stable, growing category and no meaningful trade down.

[Operator Instructions]. There are no more questions at this time. This concludes our question-and-answer session. I would now like to turn the conference back over to Rod Little for any closing remarks.

I'd just like to thank everybody for your time, your continued interest in Edgewell and we'll talk to you in three months.

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