Edgewell Personal Care Company (EPC) Q1 2021 Earnings Report, Transcript and Summary

Good morning. And welcome to the Edgewell Personal Care Company First Quarter Fiscal Year 2021 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today's event is being recorded. I would now like to turn the conference over to Chris Gough, Vice President, Investor Relations. Please go ahead.

Good morning, everyone. And thank you for joining us this morning as we discuss Edgewell's First Quarter Fiscal Year 2021 Earnings. 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 he will hand it over to Dan to discuss our results, and we will then 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, 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, 2020, as we - as may be amended in our quarterly reports on Form 10-Q. 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 financial 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 the 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.

Thanks, Chris. Good morning, everyone. And thank you for joining us on our fiscal first quarter earnings call. Before we review our results and outlook, I want to acknowledge the difficult times we're living through. At Edgewell, we are a people-first organization that infuses joy into all we do. And at times like these, it is important that we stay true to our purpose and values to guide all of our decisions, while ensuring that we maintain our commitment to the safety and well-being of all of our team around the world. In November, we held our Investor Day and outlined our five strategic priorities designed to transform Edgewell into a growing, sustainable and consumer-centric company, focused on delivering stable topline growth and predictable profit and cash generation. We have defined a clear go-forward strategy, and the results we saw this quarter, as well as our outlook for the full year, are consistent with this strategy. We delivered flat organic net sales, expanded gross margins, realized $16 million in gross Project Fuel savings and continued to invest in our key growth initiatives, all versus a pre-COVID-19 base period and showing significant sequential improvement versus the beginning of the pandemic when our net sales declined by nearly 15% in the April to June 2020 quarter. We delivered $0.43 in adjusted earnings per share and $72 million in adjusted EBITDA. We also returned cash to shareholders, initiating a $0.15 per share quarterly dividend and repurchased shares. COVID-19 continues to present challenges across our businesses. Global consumption in our key categories of Wet Shave, Sun Care and Feminine Care all decreased on a year-over-year basis across all of our core markets, with personal hygiene being the exception. Looking ahead, with expanded lockdowns in many parts of the world, we see increased near term headwinds, particularly in the second fiscal quarter. And importantly, we continue to expect a stronger second half as vaccine distribution grows and we lapped the COVID headwinds of a year ago, particularly in the Sun Care category. Despite these mounting challenges, we maintained continuity of operations, yet again reinforcing the strategic importance of our global operations and supply chain. All of our global manufacturing plants and distribution centers remained open and fully operational, although heightened COVID-19 infection levels have created some minor intermittent strain on operations. We do see increasing challenges across the supply chain in the near term, particularly across our distribution network, which could pressure cost and product availability. Our teams are tackling these issues, and they remain nimble and flexible to meeting the challenges of this COVID-19 environment. Now let's turn to a few segment highlights. As we shared at our Investor Day, we are taking a more strategic approach to managing our portfolio by working to accelerate growth and share gains in the categories where we have a clear right to win with consumers. This includes Men's Grooming, Sun Care and personal hygiene. Additionally, we are focused on stabilizing our profit pool in Wet Shave and Fem Care, where latent brand equity and strong technology provide us a clear right to play. In the Sun and Skin Care segment, which includes our right to win offerings, organic net sales increased by 14% in the quarter. More specifically in personal hygiene, Wet Ones' organic net sales increased over 100%, driven by ongoing demand for this trusted brand, with increased capacity supporting channel as well as geographic expansion. Consistent with our efforts to more broadly leverage this brand to meet consumer’s needs, we also expanded our portfolio range, launching a new Wet Ones Hand Sanitizer and Wet Ones Plus Alcohol Wipes near the end of the quarter. Men's Grooming net sales increased by nearly $20 million, driven by the addition of the newly acquired Cremo business, plus 12% organic growth in the combined Bulldog and Jack Black businesses. All three of these businesses posted strong e-commerce growth in the Amazon e-retailer channel, as well as direct-to-consumer. In Sun Care, organic net sales declined over 20%. However, seasonally, this is our smallest quarter. It is highly dependent on tourism and broad travel destinations, which continue to be significantly impacted by COVID-19. Now let's turn to our right to play businesses. Wet Shave organic net sales decreased 1.5% in the quarter, marking another quarter of sequential improvement and further demonstrating signs of stabilization. Wet Shave market share performance in the US was solid and encouraging. The Schick brand gained share overall, reflecting share gains in Women's Systems and Disposables. Men's Systems share trends improved versus a quarter ago, and we again gained meaningful Wet Shave share on Amazon. In Feminine Care, our business has not yet stabilized and our work continues. Our results reflect category declines and intense competitive environment and previously discussed distribution losses, largely at Walmart related to last year's planogram resets. Across our businesses, we're seeing the results of good execution against our strategic initiatives, which I will now review. First, we're expanding our presence in growing categories, including personal hygiene and Men's Grooming. We added to our internal manufacturing capabilities and secured additional third-party sourcing for Wet Ones. We successfully launched new products across wipes and hand sanitizers, broadened our e-commerce presence and expanded geographically in both Grooming and Wet Ones. Importantly, the integration efforts behind the recent Cremo acquisition remain on track, providing us not only with an important grooming brand for our portfolio, but also helping to infuse the organization with a disruptor mindset and unique brand-building skills. Second, our digital and e-commerce capabilities continue to strengthen. E-commerce net sales, which now represent approximately 8% of total company net sales, increased 40% in the quarter, reflective of increased digital advertising spending and strong execution. Next, we are strengthening our brands in both Men's and Women's Wet Shave, underpinned by stronger branding and positioning, more effective execution and consumer-centric innovations like the recently launched Stubble Eraser for our Hydro franchise. Our focus on strengthening key retail relationships and partnerships continues. And we see the initial results of these efforts in the improved planogram outcomes in both Wet Shave and Sun Care. And finally, we're investing behind our strategies, including e-commerce and digital, brand marketing and R&D. In the second fiscal quarter, you'll see a meaningful increase in brand marketing behind new campaigns in Wet Shave and the rollout of exciting new products in both Wet Shave and personal hygiene. As I mentioned a quarter ago and as you saw in our Investor Day presentation, our teams continue to demonstrate an unrelenting commitment to transformation and improvement. That commitment is reflected in our full year outlook. For the fiscal year, we are maintaining our previous full year outlook, including organic sales growth in the low single digit range, a strengthening gross margin profile, an investment stance in priority brands, markets and capabilities, adjusted operating profit growth, and another year of healthy free cash flow generation. As I mentioned previously, we are seeing some additional near-term COVID-19-related headwind, especially across our International markets, the impact and duration of which remain difficult to predict. Despite these ongoing challenges, we continue to manage the business with urgency, strong discipline and agility and remain ready to pivot as conditions necessitate and as the year progresses. Dan will take you through all the specifics related to our outlook shortly. Before turning the call over to Dan and as I have done for nearly a year now, I want to recognize our teams and the extraordinary efforts they are making across the company and once again extend my gratitude to each and every team member. It is their resiliency and effort which underpin our results to date, with continuity across our operations, enhanced digital and brand-building capabilities and better execution at the shelf. While the macro environment remains challenging, our business is on far more stable footing, and we're positioned well to deliver the sustainable top line and profit growth discussed at our Investor Day. And now I'd like to ask Dan to take you through our fiscal first quarter results and provide more detail on our full fiscal year outlook.

Thank you, Rod. And good morning, everyone. As Rod discussed, this was a good start to the year with flat organic sales and strong gross margin performance serving to largely offset our focused investment in building critical internal capabilities reflected in our planned increase in SG&A spend. Our teams are focused on executing against the go-forward strategy and supporting the initiatives that we outlined at our Investor Day in November. We still have a lot of work to do, but we're very encouraged by the progress we're making, which is reflected in our results in the quarter and in our outlook for the year. As a reminder, we've developed a clear framework for sustainable value creation, reflective of four core priorities, we will generate consistent organic top line growth, we will continue to make efficiency and continuous improvement core to how we run our business and a catalyst for investing in our growth objectives, we will strengthen our gross margin profile, with focus on both cost and revenue management, and we will direct our attractive free cash flow in a disciplined way to improve shareholder return. This quarter, we executed well on our strategic priorities, growing important areas of the business: Wet Ones and Men's Grooming and our e-commerce channel, while delivering meaningful sequential improvement in our Wet Shave business. We expanded adjusted gross margin, driven by Project Fuel savings, enabling us to continue investing in our key strategic initiatives. And with our strong balance sheet, we initiated our first dividend and repurchased shares in the quarter. So as we continue through fiscal 2021 and despite the uncertainty related to COVID-19, we do so from a position of operational and financial strength. Now before getting into the specifics in the quarter, let me give you a bit more color on what we're seeing in the COVID-19 environment and resulting operational challenges. Overall, our core categories continue to be impacted by the effects of the latest wave of COVID-19, so our teams have executed with urgency and agility to meet rapidly changing dynamics across our markets. In Europe, we exit the quarter with broader, more stringent lockdowns and there are increasing restrictions across many of our Asian markets. In the US, the COVID environment remains heightened, and we've encountered industry-wide distribution challenges as asset and driver supply constraints and continued port disruptions weighed on overall product flow. These shipping challenges modestly impacted our supply chain in the quarter, and we expect this environment to persist in the near term. Despite these challenges, we continue to manage the business with discipline and, importantly, remain focused on near-term efficiency, while investing in support of sustainable growth, including a meaningful increase in A&P in the current quarter that we foreshadowed previously and which I'll elaborate on shortly. Now I'll turn to the detailed results for the quarter. Organic net sales in the quarter were flat compared to the prior year, reflecting another quarter of sequential improvement and further evidence of continued top line stability for the business. Organic net sales in North America increased nearly 2%, marking the second straight quarter of positive organic sales growth and was driven by strong growth in Wet Ones and in Men's Grooming, partly offset by declines in Fem Care, Wet Shave and Sun Care. International organic net sales declined about 3%, driven by declines in Sun Care. Wet Ones and Men's Grooming delivered strong growth while Wet Shave was essentially flat. This was a marked improvement in International Wet Shave performance over the past several quarters, driven by growth in both Men's and Women's branded Systems. In terms of market share performance, we saw accelerated share gains in Japan, with strong performance across Men's, Women's and Disposables with slight share declines across most of our European markets. And as Rod mentioned, our e-commerce business grew organically by 40% in the quarter with strong growth in all regions and all segments. In our largest e-commerce channel, Amazon, consumption increased by 65%, and we gained 150 basis points of market share in the Wet Shave category. During the quarter, our team successfully migrated our Schick, Bulldog and Skintimate sites to a new best-in-class Shopify digital platform. This, combined with the steps we've already taken to enhance content and overall site performance, has meaningfully improved the customer shopping experience. Looking at performance by segment. Wet Shave organic net sales decreased 1.5% in the quarter, largely driven by COVID-19-related global category declines. Pricing and mix were unfavorable, however, growth in Women's Systems and Private Label drove overall volume increases. In the U.S., the razors and blades category was down about 8%, slightly off the 52-week trend. The decline in the quarter was across Men's and Women's Systems and Disposables, reflecting continued transitory declines in shaving incidents in the work-from-home environment and a continued shift to e-commerce. For the 12-week period, our US market share in razors and blades declined 90 basis points, which was an 80 basis point improvement versus our 52-week performance. This improvement was primarily driven by our branded business where our Women's Systems gained share and our men's business saw solid trend improvement. Total share for the Schick franchise increased 20 basis points in the quarter despite the previously mentioned lost distribution at Sam's and Walmart. Within that, Disposables grew share by 100 basis points, driven by increased distribution for our Skintimate and Xtreme three brands. Women's Systems share increased by 20 basis points, reflecting strong holiday and gift set sales, highly effective media execution and strong sampling campaigns for Hydro Silk and Intuition. Our Men's-branded Systems share declined 80 basis points versus a 52-week decline of 120 basis points. And when excluding the distribution losses at Walmart and Sam's, share was flat for the third consecutive quarter. Importantly, men's Hydro gained 80 basis points of share at Walmart despite increasing competition and ahead of our Hydro Skin Comfort launch. Lastly, Shave Preps realized 170 basis points of share gains, driven by both Edge and Skintimate, reflecting increased baseline velocities and distribution gains. The Wet Shave category remains volatile as COVID-19 continues to negatively impact the category and competitive intensity remains heightened, particularly in the US. That being said, we are encouraged by the clear progress we're making. On top of the improved share performance in the US, we're also pleased with the planogram outcomes in the category. Across our Men's and Women's Systems, we have a largely neutral outcome in terms of items and phasings, which is a marked improvement from past years. More specifically for Walmart, our men's business held phasings despite increased competition, and we gained an incremental stride for the Skintimate brand. And we're bringing well-funded innovation and new news to the category globally in the second quarter, including the relaunch of Schick Hydro in the US, new packaging for Wilkinson Sword in Europe; the aforementioned Hydro Stubble Eraser and expanded retail distribution for the new Skintimate Women's System and shave gels. Sun and Skin Care organic net sales increased 14%, driven by continued demand for Wet Ones and strong Men's Grooming growth. Sun Care organic sales declined 23%, significantly affected by COVID-19 and the resulting impact on travel to global tourist destinations. In the US, with the fiscal first quarter typically only accounts for about 6% of annual consumption, the Sun Care category declined 17%, as COVID-19 impacted store traffic, travel and outdoor activities. Banana Boat and Hawaiian Tropic collectively lost 90 basis points of share in the quarter. And as we've seen in the past, everyday brands typically perform better in this off-season quarter for the category. Men's Grooming organic net sales increased 12% in the quarter, with solid growth in both Bulldog and Jack Black. Bulldog grew double digits in the US, and its performance was further fueled by distribution gains in Germany and a highly successful launch in Japan with over 18,000 listings gained. Both brands delivered strong e-commerce growth with traffic gains and healthy conversions. Wet Ones' organic net sales more than doubled versus last year with continued strong demand for trusted brands that meet consumers' heightened hygiene and sanitation needs. As we mentioned a quarter ago, we've essentially doubled our internal capacity versus pre-COVID levels through a combination of capital investment and extended operating hours, while also securing additional third-party manufacturing. We also began initial distribution of the new Wet Ones Hand Sanitizer and Wet Ones Alcohol Wipes in the quarter. Despite these efforts, there is still unmet demand, and many of our retail customers remain on supply allocation. We expect to continue to scale up existing internal capacity and have plans in place to bring additional capacity online later this fiscal year. In the quarter, the category increased by over 300%, driven by new entrants in grocery and drug channels where retailers remain on allocation for Wet Ones. Sun Care organic net sales decreased 8% as compared to the prior year period, driven by distribution losses, most notably related to Gentle Glide at Walmart. The remainder of the decline resulted from overall category softness due to COVID-19 and ongoing heightened competitive pressure. In terms of consumption, Fem Care category sales declined 2.3% and our market share declined 140 basis points, consistent with 52-week trends. Our online sales in Amazon channel increased 87% and our share increased 130 basis points. Moving down to P&L. Gross margin rate on an adjusted basis increased 70 basis points year-over-year, as further fuel savings, lower commodity costs and reduced promotional intensity more than offset segment geographic mix headwinds from COVID-19. A&P expense this quarter was 9.1% of net sales, which was comparable to the rate a year ago in largely a pre-COVID environment. Increased spending in Men's Grooming, Wet Ones and Wet Shave was offset by lower spending in Sun Care, as we pulled back investments in regions that continue to be heavily impacted by COVID-19. Digital penetration of total advertising spend and total working dollars increased significantly versus a year ago. We continue to expect a meaningful step-up in total spending and rate of sale in the current quarter in support of the new advertising campaigns across Hydro, Skintimate and Bulldog, the new Stubble Eraser innovation and the Wet Ones range expansion. SG&A, including amortization expense, was $93.1 million or 20.6% of net sales. Adjusted SG&A increased 100 basis points versus last year, primarily driven by the inclusion of the operating costs associated with Cremo. Investments in key capabilities, inflationary pressures and unfavorable currency translation were offset by Project Fuel savings and reductions in discretionary spending. Adjusted operating income was $49 million and 11% of net sales compared to $51.6 million and 11.4% in the prior year, reflecting the higher SG&A costs. GAAP diluted net earnings per share were $0.32 compared to $0.41 on in the first quarter of fiscal 2020. And adjusted earnings per share were $0.43 compared to $0.55 in the prior year period, primarily reflecting the impact of the Infant divestiture and higher interest and tax expenses. Adjusted EBITDA was $72.2 million compared to $76.1 million in the prior year. Net cash used by operating activities for the quarter was $82.5 million. As a reminder, due to the seasonality of the company's business primarily in Sun Care, the first quarter is typically the lowest operating cash flow quarter of the year. Our liquidity remains strong, and we ended the quarter with $280 million in cash on hand and have access to a $425 million credit facility. Our current net debt leverage ratio is about 2.9 times. In terms of capital allocation, we were pleased to initiate our first ever dividend in November, followed by today's dividend announcement. We also repurchased shares at a cost of $9.2 million in the quarter to offset expected dilution in the fiscal year. That brings us to our outlook for fiscal 2021. We remain comfortable with our previously provided full year outlook and are mindful that we continue to operate in an environment that has greater uncertainty than normal, making flexibility and agility a key focus. Let me discuss some of the key elements of our full year outlook and phasing. For the full fiscal year 2021, we anticipate low single digit organic net sales growth with declining organic net sales in the first half of the year, as we cycle an estimated 240 basis points of COVID tailwinds in the second quarter, along with slightly intensifying COVID headwinds, as I discussed a few minutes ago. We expect mid single digit organic net sales growth in the second half of the year as we anniversary the impact of COVID and expect some modest recovery. Adjusted operating profit margin is expected to be largely in line with 2020 levels. Adjusted EBITDA is expected to grow largely in line with organic sales growth. Adjusted EPS is expected to be in the range of $2.62 to $2.82 and is inclusive of approximately $0.22 of headwinds equally attributable to last year's Infant Care divestiture and higher interest expense associated with the 2028 notes. In terms of phasing, we expect our first half performance to largely be in line with the outlook we provided on our year-end call in November. We continue to expect that approximately two thirds of our adjusted EPS will be delivered in the second half of the fiscal year, as first half operating margins will be pressured primarily by the deleverage effect from lower sales and the planned step-up in advertising spend. More specifically in Q2, A&P spend is expected to be approximately 14% of net sales, reflecting a planned step-up in brand investment behind our new brand campaigns, timing of our new product launches and cycling abnormally low levels of A&P spend in Q2 last year. We will closely monitor the changing COVID environment, and we'll be prepared to pivot our investment stance accordingly while also optimizing more discretionary areas. For more information related to our fiscal 2021 outlook, I would refer you to the press release that we issued earlier this morning. And with that, I'll turn the call back over to the operator to start the Q&A session.

[Operator Instructions] The first question comes from Nik Modi of RBC Capital Markets. Please go ahead.

Yes. Thanks. Good morning, everyone. So just two quick questions. Dan, maybe you could just give us a state of the union on input costs and how you're thinking about some of the key inputs and any potential offsets as you kind of move through the fiscal year? And then, Rod, maybe just talking about Wet Shave, I mean, very good progress there. Velocities look like they're starting to stabilize or kind of coming off their troughs. And so I just wanted to get your thoughts on how you think the discussions with retailers will go in terms of actually perhaps getting more space at some point later this year, maybe during the September resets? Or is that too early to kind of start requesting extra space? Thanks.

Sure. I'll go ahead and handle the margin question, then I'll hand it to Rod. Yes, I think without a doubt, the inflationary pressures are growing. We sort of saw that through the course of Q1, although it wasn't meaningful. In commodities, we think that the biggest pressure will continue to be in resin, and that's likely to last with us through the year. We're seeing some movement in warehouse and distribution costs, over-the-road costs, some port congestion, which is adding to the headwinds. Other commodities though, neutral to actually better year-over-year. Alcohol appears to have leveled off, which is good for us. And other areas, pulp and others, actually still in a favorable position. So when I pull all that together, I think the cost outlook is still going to be challenging. Likely - unlike the first quarter where we saw some year-over-year tailwinds, we'll encounter more pressure as we go through the year, largely due to resin. But we have offsets. We continue to execute well against fuel. We are driving good revenue and promotion efficiency, which we talked about in our Investor Day. And we will stare into the back half year of favorable mix cycling last year's COVID impact. So net-net, we remain confident in our overall gross margin accretion outlook.

Yes. Good morning, Nik. And on the Wet Shave question around progress in space, there is a couple of things that remain in play here. First, the category is greatly impacted by COVID-19, right? As you go back to starting in March of last year, with the lockdowns, we've seen a reduction in shave incidents as primarily guys go - or not in the office and going to the office. Women's has been a little more stable. But the category is still net challenged until we get out of the lockdown period here. And the competitive environment remains highly competitive. So with those two overviews, I think we look at our progress that we're making and we feel like we are making good progress. Internationally, we're very stable. I would say, overall net growing our distribution space internationally and holding share in all of our key markets. And so the international view we think is pretty solid in this environment. In the US market, which I know you and others care a lot about, we remain focused on building our brands, being more consumer-centric, better consumer targeting, bringing better-picked campaigns and messaging along with our brands. Meaningful innovation. We're just launching Stubble Eraser and the new Hydro Skin Comfort lines as we speak. And we've improved our retailer relationships. And the net result of that is we've held our space across the planograms and Wet Shave despite new competitive entrants. And the space is fixed. And so you can read into that, that some others have donated some space to make room for the new entrants. But we've held our space behind the innovation and messaging and the relationships. And as Dan mentioned, in the quarter just finished, Schick grew share by 20 basis points. We've not been able to say that for a while. So it's a holistic effort. It takes time. I think we're optimistic for the future. And our ability to get space incrementally and get more space will be dependent, I think, on how we perform this year and the sales velocities that come out of the planogram resets that are happening with US retailers right now. So still a lot to do, but making progress.

Super helpful. I'll pass it on

Thanks.

Thank you, Nik. Operator, next question, please.

The next question comes from Jason English of Goldman Sachs. Please go ahead.

Hey, good morning, folk. And congrats on a good start to the year. A couple of quick questions for me. First on Private Label. You've cited some gains on Private Label as a source of strength in a couple of quarters now I think. When we look at the data, it looks like Private Label is actually seeing ramp. So where are you getting the gains? And is there any sort of end in sight for those gains? In other words, are they coming from a contract win that we should be expecting to anniversary any time soon?

Good morning, Jason. Yes, on Private Label, I think we remain confident in our capabilities in that part of the business. We did grow both men's and women's in the first quarter. Importantly, our gross margin in that segment is up as well. What you see in some of the tracked and measured data is only part of the story. For example, we had 80-plus-percent growth in e-com in that part of the business, and that's not measured and doesn't get picked up. In addition, we've had some incremental new distribution wins, primarily in our International markets. That gives us some tailwinds there as well. And so when you put that all together, it's an important segment for us. It's 25% of our total Wet Shave business. We've got a high share in that segment. And it's a capability that we think we uniquely have and we'll continue to leverage as we move forward.

Okay. So no sort of timing needs be considered - to consider there? It sounds like you're confident this is durable growth. Did I hear that right?

Yes.

Okay. And then on cash flow real quick. I know that this is seasonally a low quarter for you, but this was exceptionally low this quarter. You're holding on to your full year free cash flow outlook. What were the timing impacts this quarter? What sort of weighed on it? And what comes back at the tail end of this year?

Dan, go ahead on that one.

Yes. I think it's largely structurally around how we thought about the year, half one, half two, the role of the Sun business. You said it right at the start, Jason. This is a very, very low cash flow quarter for us relative to our full year. We actually performed at or even better than we thought we would particularly structurally in working capital. So the quarter fell in really where we thought it would be and doesn't change our full year outlook in terms of full year cash flow.

Yes. Jason, the biggest thing that drives the seasonality here is the timing of the build of Sun Care in the inventory. We've been building that all quarter to ship out here now in the coming months. And so that cycles back here in the next quarter and in the third quarter as well.

Okay. So the answer is inventory, it was a bigger drag than usual, and you expect it to come back in later this year. Is that right?

Well, particularly in Sun Care, there's seasonality around Sun Care. Well, that's true. And Dan, you can comment on the rest.

No, I think that's absolutely right. But again, the quarter performed as we thought it would. There wasn't a drag to our expectation. And so if you think about how did the quarter relate to our overall full year view of cash flow, in line, if not slightly better.

Okay. Yes, I'll follow-up offline then. Thank you. I'll pass it on.

Thank you, Jason. Operator, next question please?

Yes. The next question comes from Bill Chappell of Truist Securities. Please go ahead.

Thanks, good morning. Two questions. First, just maybe give a little more color on Sun Care and kind of your expectations. I'm just trying to understand what your - what the crystal ball is for travel, international travel this summer and how you're building for that? I think last year, the big hit was that lack of international travel. I didn't know if you're expecting it to come back as we get to June. And hopefully, there's -- everyone's fully inoculated or if you're not planning for that. And same kind of with the US, I'm just trying to understand, what are the building blocks as you're working on production right now?

Yes. Good morning, Bill. And thanks for the question. This is nuanced, and there's three things going on. There's an international tourism market that's highly dependent on international travel across borders. That market has effectively been shut down or severely impacted since the beginning of the pandemic and continues to be that way today. And I think that part of the sun market isn't going to return to normal until we're through the bulk of the lockdowns and vaccines are up at rate. And so we can all predict when that might be, but that's going to continue to be challenged for us. And that's primarily our international business. In the second piece of this is the US market and then primarily the European domestic markets as well, where people can travel and get to the coast, to be at the beach or feel comfortable and safe to be out of their pools. That is less impacted because people can still go do that safely. In fact, being outside is encouraged to be safe, and you need to protect your skin when you're outside. So that's the second piece which is less impacted. The third piece of this though is the timing of when and how all this happens. In addition to the first two impacts last year, the other element we had is we lost the early part of the sun season. With spring breaks being impacted, Easter being impacted, Memorial Day was impacted, things didn't really open up domestically in the US and the European markets. For example, swimming pools being open until the middle towards the end of June. And so as we cycle this period, we continue to expect the international headwinds as I said. And the timing piece of these more domestic-driven Sun Care use occasions, I think we're a little more optimistic that we're going to be back into, let's call it, normal consumption, maybe a little sooner than we were last year. And I think we still feel good about the season overall in terms of the consumer going to be there. There's going to be a lot of demand for people to be outside and out of the homes as we come out of the spring period here. And retailers see that as well. And so there's been good sell-in and priority amongst retailers. And I think the view from retailers is they're optimistic as well. And we executed well last year. We expect to execute well again this year relative with the competitive set and having good islander and end-aisle displays and then our brands and the messaging will do the rest.

Got it. Well - and I'll just follow-up on that. I mean so are you producing where we could actually have out of stocks? Or are you okay with having a glut at the end of the season? Because I know that there's not - it's going to run on consignment, but it's somewhat - you take back returns, excessive returns in this industry. So I'm just trying to understand how that's planning. What do you see at the end of the tunnel or what you're comfortable with?

Yes. Our production around Sun Care is very flexible. We do it domestically here in the US, and we've got a very responsive model. You saw us last year, despite the category and the season being down overall, having no material write-offs, in fact, less. We, in fact, shorted some inventory at the end of last year as we were looking to be very careful and to not be in that position. This year, we can meet all the demand that's there. We've been building across the fall. And so we're ready to go, and we can source volume up or down regardless of where it goes. But we don't foresee an out of stock issue even in a better-than-expected sun season.

Great. Thanks so much.

Thanks, Bill.

Thank you, Bill. Operator, next question please?

The next question comes from Chris Carey of Wells Fargo Securities. Please go ahead.

Hi, good morning.

Good morning.

Just - so being more efficient on promotions, it has been a strategy for the company, clearly promotional levels for the company. But really, virtually every staples category was significantly lower in 2020 and, from what we can tell, remain low in January. That's not an as well comment as much as just the broader sector. And it sounds like you'd like to maintain, I think you said, promotional efficiency going forward, which makes sense. But I wonder if you can just talk to this concept of maintaining a level of efficient promotions, but that balanced with the fact that promotions could well normalize back to pre-COVID levels. So underlying the question is just your expectations for how promotional levels across your categories trend for the next year. And if you think that you can keep them lower than what they were pre-COVID? And then I have a follow-up.

Yes, sure. I think there's certainly a reasonable line of thought that says, on the other side of COVID, promotional levels will likely increase from where they are today. I don't know if they will return across all categories to where they were. But the way we think about promotional efficiency is a couple of things. One, we've put a lot of energy into measuring the effectiveness of promotions and sort of where those tail end promotions go and what do they actually drive in the business. So we have a more fact-based view of the effectiveness, and that helps us deploy promotional dollars in a far more intentional way with desired outcomes. So that would be the first thing. I think the second thing is you're seeing the benefits of a more stable business. You're seeing the benefits of a top line that is, as you saw, flat organics. And so your effort is just different when you're promoting behind concept as opposed to a business that had been down mid-single digits. And so the intelligence internally is better at tracking, and return equation is more clear for us. And therefore, we're intentional. So as we think about our margin profile, we've always had fuel as a significant tailwind to our efforts. On the cost side, we continue to get better on the revenue and the promotional efficiency side. And that's what we will continue to do. And that certainly doesn't change when we get on the other side of COVID. We'll just have more information, more ammunition behind our efforts.

Okay. Okay. Thank you. And then just two quick, more or less, modeling questions. I think you mentioned in the press release that there might have been some stock up in the international business. Can you quantify that? Do you expect the reversal? Is it - was that material at all? And then secondly, wipes, obviously, the category is on fire. Can you just talk to what you see as sustainability there, potentially differentiation versus an increasingly crowded field? And obviously, you've been increasing capacity, so you do think that the category has likes going forward. But any commentary around how you see that business trending potentially over the medium-term horizon as a potential growth driver? Thank you.

Yes. Just the...

Go ahead, Rod.

Yes. Sorry, Dan. I'll take the wipes kind of category question and then, Dan, throw it over to you to add on anything on wipes and address the stocking question. Wipes category, as Dan said, grew faster than we did. Part of that is just the demand and our ability to scale up production to meet that demand. You're seeing that in many other categories as well, where there's just - there's no way to meet the demand. What we feel really good about, as Dan mentioned in his remarks, is we've added capacity, nearly doubled it. There's more to come. We've got some very smart third-party arrangements as well to help us surge and have more flexible capacity as well. And at the end of this, consumers are going for trusted brands. And we have the number one brand in the body/hand hygiene segment that is trusted for decades. And with some new extensions of the brand into hand sanitizer with really good formulation and scent patterns, we've expanded the line into the Wet Ones, plus an alcohol-based range that's a new addition. And so as we work through towards more of the end of the pandemic, we believe the demand for Wet Ones is going to remain very durable. And in the field that's gotten crowded, to try to fill that demand in the short run will narrow back to the trusted brands and the players that consumers trust and so that goes back into balance. And we come online with more capacity, we're seeing and we'll continue, we think, to see some of that trade back out into Wet Ones. So we're bullish on Wet Ones for the future overall. Dan, anything to add on that and then the stock up question?

No. I think you're quite clear on the Wet Ones piece. On the stock up element, we put that in the commentary more to provide color around the state of the environment, particularly internationally as we exited Q1 where we are just seeing more stringent lockdowns. So that was meant to provide a little bit more color on the environment. In terms of the amount, it's not material. It's less than a point to the organic profile for the quarter. And so as you think about the organic sales in the quarter at flat, yes, there was a bit of a benefit from the international pull forward, but we're still operating in a net COVID headwind environment. Of course, it gets harder to measure as you move farther and farther away. We're basically a year at this now. But our best estimate would be low single digit organic underlying performance in the quarter with all of these puts and takes related to COVID.

Okay. Thank you.

Thank you, Chris. Operator next question, please?

The next question comes from Jonathan Feeney of Consumer Edge. Please go ahead.

Thanks very much. You outlined back in November your delineation of what are accelerated brands and particularly your digital investment plans around them. Could you talk a little bit about the kinds of returns you're getting on those spending investments? Are you - is that what we see in evidence in some of these - if you look at the non-Shave grooming brand this quarter, for sure. And I guess maybe a related question, how do you think about the ROIs on that kind of spending? And maybe the ROIs broadly when you're - I guess on - how that affects your capital allocation with your stock where it is. Clearly, you're having some success in integrating brands that makes sense for you getting some return on digital spend, yet you have your - some cash flow guidance out there that would suggest the cash-on-cash returns behind a much more aggressive path of share repurchase would be a great risk-adjusted return. So the two, I think, maybe broadly related questions. I just love to think about financially how you work through that.

Yes. I'm happy to start, and Rod can jump in. I'll sort of - I'll stick on the A&P digital point. I mean your point on share repurchase is fair. Obviously, we did repurchase some shares in the quarter, but a small amount just to offset dilution. And as we've said, going back to November and previous earnings calls, our capital allocation strategy is clear. It involves continuing to invest in growth, organic growth of this business, first and foremost, but with a healthy view towards returning cash to shareholders. And so we're not oblivious to the point, but our priority right now as you've seen over the last 12 months is to stabilize and grow this business. And that's where we remain most focused. Getting to your question then on how we think about digital spend, it's difficult to totally unpack returns at this point because with COVID environment, the consumer is just in a different place and the role of our e-commerce business is just different. I think we have to acknowledge it's getting natural tailwinds at this point. I think you have to look beyond that to look at the efforts that we've made in our digital business, investment being one of them, complete site re-platforming, better content and copy being others, changing the shopping experience for customers so that it is seamless and engaging. It's all part of the mix for us. I don't think you can boil it down to our digital spend as the one lever. Having said that, obviously, executing our own DTC sites, investing in Amazon, the whole pay-for-clicks performance of our - I mean, we're doing all of that. It's still a reasonably small piece of spend, but we do measure the value that it creates. But I think you have to look at it in the totality of our digital business. And when you look at the 40% growth that we saw in the quarter, and I think as importantly, meaningful share gains in Wet Shave, meaningful share gains in Fem, we think we're on the right path, but it's early on in this journey for us.

Yes, that makes a lot of sense. Thanks.

Thank you, Jon. Operator, next question please?

The next question comes from Kevin Grundy of Jefferies. Please go ahead.

Great. Thanks. Good morning, everyone. A question for Rod. Just with respect to balancing investment and top line objectives with delivering against your earnings guidance. And the context here is the COVID circumstance is more difficult. Commodity costs are higher, of course, and Dan spent some time on that. So the question is balancing priorities between returning the company to organic sales growth even if that means maintaining investment levels in the face of some of these pressures. Or do you potentially pull back on some of this brand support in order to deliver against your EPS outlook? You may say, well, that's perhaps a false choice or false dilemma. I was just curious to kind of get your thoughts on prioritization because both of those things have been really important, right? And Rod, particularly under your watch, it's getting this portfolio back to organic sales growth. It's stabilizing EBITDA and restoring credibility to The Street. So I'm just wondering if commodity costs move higher, COVID remains difficult, do you continue to invest to deliver against this organic sales growth even if that means potentially taking down your earnings outlook? And then I have a follow-up. Thanks.

Yes. Let me start here, Kevin, and then I'll throw it over to Dan for some additional perspective. And thanks for the question. Dan and I both have talked at length, and frankly, the time I joined the company and Dan's mindset as well, the whole leadership, to be honest, is delivering on our commitments. And so when we make a commitment, we want to deliver on that commitment, be consistent, reliable deliverers of what we say we will do. And so that's very important to us. And so when we put our guide out there for the year, we were very thoughtful about doing that and being in a position to pivot towards growth, which you see in our guide, with the right investments in place to go do that and then ultimately be able to have the capability to deliver on that in what is a highly dynamic and uncertain environment. And so as we put the guide in those expectations out there, we felt like we have that all in balance. We're projecting a return to growth, albeit the bulk of that comes in the second half as we get to a lapping of COVID headwinds, tailwinds. And it comes with an incremental investment in not only brand support that you see in our P&L, but also what you don't see is some incremental G&A investments in things like content creation in-house, social media management in-house, design work being done in-house, new teams up against e-commerce and winning in that channel. So we've made what we think are very balanced and appropriate investments back into the business across brand building and capabilities in totality that leave us in a position to deliver the top and bottom line we've put out there. And it's important that we do both. And I think we're confident we can do both in the environment we're in and what we have line of sight to. Dan, I'll throw it over to you for anything to add.

Yes. All super points. I think getting to the point of sort of how do we navigate the uncertainty, we put in some pretty stringent process last year, obviously, faced with similar situations. And so I think for us, we're going to continue to invest where we feel really good about our ability to activate and the programs we're investing in and that the consumer is there. If you look at Q1, we spent at about 9% A&P. That was below our expectation. We pulled back a bit because we weren't comfortable in our ability to execute. The 14% rate that we mentioned today for the quarter that we're in, that's actually above the initial plans that we wrote because we really like what we're activating this quarter around the new Hydro campaign, the new Bulldog campaign, Wet Ones, et cetera. So I think as we look at it, we did a really good job last year navigating. We've put the muscle memory in to navigate the uncertainty with the right guardrails, with the right hurdle rates to invest, and we managed this quarter-by-quarter with the team. That's the process we're in right now.

Okay. All fair. Quick follow-up, just with respect to the commodity and pricing outlook. So Rod, do you think incremental pricing is a likelihood here? And I know in a number of your categories, particularly grooming, you would follow and not lead. But I'm just curious to kind of get your thoughts because it's topical for obvious reasons. And then related to that, like how would you characterize retailers' receptivity to pricing at this point as you're kind of going through shelf space resets, et cetera? So just curious to get your thoughts there in the current environment. I'll pass it on.

Yes. It's a hot topic for obvious reasons. We pass through pricing on Wet Ones. In the environment we're in, retailers were open to that and understood that. Again, it is a responsible pricing. It's not pricing because, just because we can. We had input cost inflation. We spent a lot of money air freighting, running over time. The cost inputs have gone up significantly in some cases. And so we've been able to price for that. We led a price increase in Sun Care last year, the first one in over a decade. So we're going to lap that and have a full season of that. And so where it makes sense and where there's a story there to price for input cost inflation, retailers are receptive to it. And we've shown where it makes sense, that we can drive it, in some cases, lead it.

Very good. Thank you and good luck.

Thanks, Kevin.

Thanks, Kevin. Operator, next question please?

The next question comes from Olivia Tong of Bank of America. Please go ahead.

Great. Thanks, Good morning. I apologize I got on a little bit late, so I apologize if this has been asked. But you had mentioned modest second half growth. But given the divergence of the comps, I guess, my question is, why is it only modest? Was there any pull forward? Or are you anticipating any pull forward of sales into Q2? Or is there any shift in timing? Or has there been any change in your innovation plans to drive that divergence in growth to only modest in the second half? Thanks.

Yes, Dan, go ahead. You start, and I'll come in if I need to. Go ahead.

Okay. Yes. I guess just two things, Olivia. One, for the second half of the year, we've said mid-single digit organic growth. That was the description we gave, not modest. So I just want to clarify that. I think if you're looking at Q2, in particular, where we just need to acknowledge, we're cycling against tailwinds last year related to COVID, right? So you're operating in a COVID headwind environment today, and you're in a quarter that had, call it, 250 basis points of COVID tailwinds in it last year that you now have to cycle. So that's the half Q outlook and a little bit of color on Q2.

Yes. Olivia, the other thing I'll say, again, as Dan said, there's no change in our plan. Actually, we've gone through the first quarter and what we have line of sight to feeling like we've built a good plan and we're executing that plan exactly as we intended. And so we feel really good about the plan for the year. There's no change in that. The piece here that remains very uncertain and very dynamic though is consumer behavior around COVID-19 infection rates and vaccines. And if you go back to where we were late summer, early fall, I don't think anyone predicted that we would be in the environment we're in today. Or it was certainly not the lead prediction where we're back into heavy restrictions and lockdowns, primarily across Europe and mobility is heading in the wrong direction here in the States. And if you get to a point where the new variant strains become dominant and take us back up the curves, we potentially have even tighter restrictions and lockdowns into the spring here in the US and potentially the Canadian markets. And so as you put all that together, the thing that will really drive our second half and beyond is what happens to our categories. We're in declining category environments in Wet Shave, Sun and Fem Care right now, right? That's been true since the beginning of the pandemic. It's true in the quarter just finished. And the question is, when do those revert to normal? They will. We're very confident they will. When that happens, we don't know. Again, we've planned what we think is the right way to plan this. But that's the biggest thing that's driving that timing. And those are all still not headwinds for us even potentially into the second half of the year when we think we will still be in a position to grow.

Got it. That's helpful. My second question is around e-commerce and the growth there. Because obviously, most of us, our view is that, that doesn't go back to where it was prepandemic. I assume it's your view as well. So how does this influence not only your innovation, but also how you think about merchandising, go-to-market and bringing product to market nowadays in a market where e-commerce is significantly larger? Thank you.

Yes. It's certainly -- I think, for us, just brings us back to the importance of the investments that we've been making now for close to a year, viewing the opportunity that e-commerce presented us, and that opportunity is both in terms of functionality of the site and engagement with the customer, capabilities in our organization. We've spent quite a bit of time, effort and money in investing in capabilities to activate better across our e-commerce business to get to a place where we are much more highly engaged with customers and have relationships with customers that we can then activate DTC, Amazon, retail and others. So it actually serves us well for the journey that we've been on. As you saw in the quarter, the results, we're quite excited about. Recognizing you're right, we have to be careful about what normal looks like. But we know that the consumer is going to continue to expand and increase their participation in this channel. That's for sure. And so we're super excited about the results that we're seeing, small sample size, COVID tailwinds notwithstanding, for the journey that we've been on. And so for us, that bodes well as we look forward and again, the role that e-commerce will play in our business. It's not an accident that it grew 40%, and it's not an accident that it was about 8% of our business. So again, encouraged from where we are.

Thank you.

Thank you, Olivia. Operator next question please?

I see that there are no further questions, so this concludes our question-and-answer session. I would like to turn the conference back over to Rod Little, Chief Executive Officer, for any closing remarks.

Thank you, everyone. I appreciate your continued interest in Edgewell, and take care and be safe. See you next quarter.

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