Good day, and welcome to the Edgewell Q2 2021 earnings call. [Operator Instructions]. Please note this event is being recorded. I'll now like to turn the conference over to Chris Gough, VP of Investor Relations. Please go ahead.

Good morning, everyone. And thank you for joining us this morning for Edgewell's second quarter of 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 will make statements about our expectations for future plans of 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, 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 10K for the year ended September 30th, 2020, as may be amended in our quarterly reports on Form 10Q. 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 are 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.

Thanks, Chris. Good morning, everyone. And thank you for joining us on our fiscal second quarter earnings call. Overall, I'm pleased with what we've been able to accomplish through the first half of our fiscal year, despite COVID-19 continuing to negatively impact consumption in our key categories since the start of the pandemic more than one year ago. Encouragingly, we are now seeing our key categories, particularly Sun Care, turn more in our favor as we begin to see post-COVID-19 reopening in some of our key markets. The supply chain environment remains challenging and volatile. And as a purpose and values driven organization, our commitment to the safety and wellbeing of our teams around the world remains the top priority. While staying focused on this priority is paramount, our teams have excelled, progressing a new company strategy, enhancing our digital and brand building capabilities, executing better at the shelf. All of which has put our business on far more stable footing and positioned us well for stronger results, both in the second half of fiscal 2021 and beyond. Over the first half of the year, we have increased our investment in brand building, new product innovation, and digital activation. We've expanded gross margin rates, with Project Fuel helping to offset the impact of higher input costs and commodities. In our wet shave segment, returned to organic sales growth in the most recent quarter. We're beginning to see some signs of recovery in certain categories and geographies as vaccination rates increase and markets slowly begin to open up. We believe we are well-positioned to deliver on our financial and operational goals for the full year, including accelerated organic net sales growth in the second half of this year. Now let me take you through a few segment highlights and discuss the…

Thank you, Rod, and good morning, everyone. As Rod discussed, we've made good progress against our strategic initiatives through the first half of the fiscal year, increasing investment in a targeted way in supportive brand equity building, innovation and digital activation, continuing to strengthen our internal capabilities, and again, delivering against our fuel cost savings objectives. We executed well against our framework for sustainable value creation. This framework is to generate consistent organic top line growth, to make efficiency and continuous improvement core to how we run our business and a catalyst for investing in our growth objectives, to strengthen our gross margin profile with focus on both costs and revenue management, and to direct our attractive free cash flow in a disciplined way to improve shareholder return. With the first half of the year complete, the progress we are making against these objectives is clear. Despite the reality that we continue to operate in a heavily COVID-impacted environment, organic net sales for the first half were down 3%, inclusive of both the negative COVID impacts from cycling last year's pantry loading and the added impact of current year COVID headwinds. The men's grooming and Wet Ones components of our Right to Win portfolio delivered growth in half one. And importantly, we saw underlying improved performance in our wet shave category with consecutive quarters of share gains across the women's business in the US and in both men's and women's in Japan. And in the men's shave business in the US, we delivered organic sales growth in Q2, fueled in part by the new Stubble Eraser launch and the new Hydro Skin Comfort campaign. These trends combined with the improved planogram outcomes discussed last quarter position us well moving forward. In half one, we also delivered 40 basis points of…

[Operator Instructions]. Our first question today will come from Jason English with Goldman Sachs.

A couple of quick questions. I guess I was caught a little flat-footed by the organic sales strength in North America, a positive surprise obviously on Wet Shave. Was there any pipeline fill? I know you had some innovation out there, we recently got distribution. Anything that usual that we should contemplate as we look at that number?

Yes. So Jason, good morning. We did have some pipeline on the men's side in particular. In the quarter as we launched the Stubble Eraser and the new hydro skin comfort ranges with that. There was some pipe fill in the quarter on the men's side, less so on women's. It was a good quarter for us overall, as you call out in the U.S. Schick share was flat in the face of very heavy, competitive launch activity as you know. And so it was a little bit down on men's, but then we had the pipe fill on top and then women's grew nicely for the second quarter in a row. So overall a good to decent quarter for us on shave, particularly in the US.

And I think you guys mentioned a couple of times trends improving as the quarter progressed, and you spoke upbeat, at least around sun care, on what you're seeing in April. Can you put a finer point on that and tell us how were sales tracking through the quarter? How are sales tracking so far into this quarter?

Yes. So as you look at the categories, we saw a wet shave improve in the quarter versus the prior quarter, right? So we're seeing a little bit of sequential improvement in the shave category as things start to reopen a bit. The biggest piece of improvement we saw within the quarter was sun care. Whereas we got into March and particularly in the back half of the March month, we it was a negative year ago as the lockdown was starting. And we really started to see March pivot to a much more positive picture in the back half of March on sun care at the category level. And we have seen that continue through all of April as well.

Our next question comes from Kevin Grundy with Jefferies.

Question probably for Dan. Just to kind of tumble through your earnings guidance a bit, some of the moving parts. So clearly the commodity cost environment has worsened broadly as you mentioned in your prepared remarks. Maybe just kind of walk us through a little bit. What's gotten better, whether this is sort of lower trade promotion. Maybe you feel a little bit better about some of the categories. I think that would be helpful to folks. And then Dan, I guess within that, what is the updated commodity cost outlook within the guidance? Maybe just comments on updated thoughts on pricing as well.

Sure. Thanks, Kevin. Yes. So let's take them in pieces. The commodity call it supply chain picture certainly got more challenging in Q2, not less. Now I think we have to distinguish between structural challenges, right? We're seeing inflationary pressures in certain commodities, most notably resin, a bit of labor pressure. So wages moving in a bit of distribution cost pressure. Those are structural and we anticipate those pressures will continue for the remainder of the fiscal. Equally though, you do see certain categories in the commodity world easing a bit. Alcohol would be a good example of that, aluminum, other chemicals, et cetera. So it's slightly more inflationary environment here on out. Certainly we anticipate that. You also saw just transitory issues unique to the quarter, whether it was the weather events in Texas or the continued port congestion or even Suez canal related challenges. So I think what we're saying here is it's going to be more challenging rest of year. But what that really means to us is that the net flow through of fuel will likely be absorbed. That's maybe the best way to think about the back half of the year versus what we would have seen in the first half. Then you turn to price and promotion and our overall outlook. And you're right. We do see price opportunities back half of the year. We do see continued benefits from promotional effectiveness. We have taken a price increase on the Wet Ones franchise, which is going into market end of Q2 now, into Q3. Those are tailwinds. And then what really reinforces our margin profile in the back half of the year, in addition to those elements, is you're getting the benefit of leverage and you're getting the benefit of mix. Remember what we are cycling in mix, year over year, back half of the year, is a pretty tough mix environment last year based on how the segments swapped out. So put it all together. I think cost pressures will remain, fuel will continue to offset. And we anticipate strong margin accretion back half of the year for the reasons I mentioned.

Quick follow up with that, just to kind of play that back. So presumably you are within a lower point within the range, just given that some of the fuel savings that maybe you thought were going to flow through your earnings are now going to be absorbed by commodity costs. Maybe you just can confirm that, that you're understandably and likely within a lower part of your earnings outlook. And then Rod, maybe just your comments on expectations for pricing and men's grooming, and then I'll pass it on. Thank you.

Yes. No, I would actually, I'm glad you asked the question, Kevin, thank you. I would say quite the opposite. So let's unpack the second half of the year. Stronger top-line growth continued gross margin accretion at or better than first half of the year, continued reinvestment in AMP, better than the first half of the year. In other words, stronger, more reinvestment. So if I were thinking about the EPS range using the midpoint, I have a higher degree of confidence to the upside than to the downside. Rod, I'll turn it to you.

Yes. And on the pricing piece in men's grooming, if you look at blades and razors, I think it remains pretty competitive. While things have become less promotional versus the last year or so, I don't particularly see opportunity there. On the grooming side of our -- you start to look at brands like Jack Black, Cremo and Bulldog, potentially there is some pricing power there.

Our next question will come from Bill Chappell with Truist Securities.

Sorry. First question. Just trying to understand as we walked through the wet shave category and really, and several of the categories, it's not the old play of just Gillette and Gillette and Gillette. And it seems like there are a lot of smaller brands that are actually coming from Gillette, or others that are popping up, both in grooming in actual shave. Now how does that change your strategy, your marketing, and does it make it so much noise in the space where it's harder to differentiate? Just trying to understand how you grow from here with so many kind of new brands being introduced to the various categories?

Yes. So a good question, Bill. The landscape is quite different than it was a few years ago, no doubt. With new brand offerings coming in, not all brand offerings coming in, by the way, will make it through and get into full distribution. Some of them are at a retailer or specific to a channel. But you've got to perform right to move out of that channel space where you start. And so I think that's still to play out, in how that plays out. Our focus has been step all the way back. What we have is great shave technology in an IP portfolio to deliver a very comfortable shave that's underpinned by sharp, durable blades that last, that are very consistent from pack to pack. We can do that very well. As you take that as a given. And over time, I think that's a durable piece you have to have to compete and win in the category over time. We've been focused on a very different approach to brand building and architecting our brands. And it starts by working to eliminate sub-brands, simplify the portfolio and make our brand messaging better and make it significantly easier to shop at shelf. For example, you've seen us consolidate on the women's side, 4 or 5 different disposable ranges, all under Skintimate as a master brand. And we've launched Skintimate into systems as well, and are having success as we talked about in the call on Skintimate. And we are looking across the portfolio, again to simplify, consolidate into fewer brands, fewer skews, more power skew type set up to cut through the clutter and have the messaging resonate. I think we're in the early innings of doing that. You'll see us continue steps towards that as we move into next year in a much bigger way, for example, on the Schick men's side.

Got it. And then switching to sun care, just understanding that the numbers are pretty astronomical off of a pretty much zero base a year ago, but how do you plan or do you have the capacity, if we really open, reopen in full and travel, everybody's out and about, and the whole category just explodes. Because I understand it's not sold on consignment, but it's definitely, you're managing your inventory and sales in and out to the retailers pretty tight. I mean, how do you forecast and how do you plan? And do you have the capacity if we do in fact kind of fully reopen and everybody gets out of the house over the next 3 months?

Yes. Well, it's not an easy category, Bill, to manage. It's one that's a little atypical based on the seasonality and the historical returns profile at the end. Which we're actually working to change. We have some retailer setups where we don't take returns, as an example, right? We're working to change the category, but we love the category, remain very bullish on the longer term outlook for the category. I feel like we've got great capability around formulation, regulatory safety and like the portfolio we have with room to add to the portfolio over time. So with that as a backdrop, we are seeing very high levels of demand in domestic markets. So for example, where you don't have to travel to cross an international border within that market. So think the US, Australia, Mexico, continental Europe, within country, we are seeing very heavy demand. There's pent up desire to be outside coming out of the winter season. There's pent up demand to put vacation travel back into the routine for friends. And family groups and to go to warmer climates and basically be around water to do that. And when you do that, being outside around water drives consumption. And so what you are seeing play out in the scanner data right now is people coming back online and doing that. We have, internally within our mix, we see potential upside in sun care, and we have tried to position ourselves to be able to meet higher than expected demand within the year with pre buys, making sure we've got staffing in place where we've had long supply chains, working to shorten the supply chain, tighter power skews, skew ranges that we can produce longer into the season, for example. So we're set up and prepared to hit a higher demand outcome across the summer. And if, frankly, it goes later into the fall, which we do expect, there's obviously a limit to how high you can go based on that tail. And also then a balance that happens at the end of the year. We don't want to be shipping anything in that we're just going to turn around and take back or have to discount and flow through. We actually have pretty good analytics around that. And I think a pretty robust capability to manage and execute in this category. We've got a direct store delivery team out in store that provides real-time data feedback that beats anything you see in scanner data, right? So we have that type of data coming back in to help inform our decisions there as well. But it's going to be an interesting summer here.

Right. So you don't see capacity constraints in near term.

Well, there is, bill. There's a theoretical constraint out there anywhere. Again, do we hit that constraint? Yes or no? It just all depends on how? When category's growing 200% to 300% week on week, it can't do that all season. And us, none of our competitors would be able to meet that demand. But if you get to where we expect it to be, we think we can hit the demand, but there are limits to it.

Next question comes from Wendy Nicholson, Citi.

I just wanted to follow up on that line of questioning or whatnot. And Rod, your color that you offered was fantastic. But I guess I assume every sun care manufacturer is thinking the same thing and going out there with a lot of inventory. And I'm just wondering relative to past summers, this feels like it could be a great opportunity from a kind of land grab perspective. So can you just talk about your innovation sort of pipeline in sun care, and your marketing program, do you intend to spend more than usual? Just given how strong the category's going to be. And can you remind us in the sun care business specifically, how much of that business is online?

Sure. Dan, you want to start?

Yes. Wendy, I'll start and then I'll hand to Rod. So just building on his comments earlier, we feel really good about our position right now at the start of the season. We, as Rod said, pre-bought, pre-built. we were sitting on even a slightly higher inventory level ourselves at 2Q, which you saw in the results. We've taken all of the necessary steps to be ready for the season. It probably played out a couple of weeks later than maybe we had anticipated. And obviously we've seen a really nice start to the quarter on our end. So feel really good about that. In terms of advertising and promotion, one of the reasons we spent slightly below the rate that we had thought we would spend in the quarter, aside from managing COVID and markets and effectiveness was sun. We pushed a fairly decent amount of our spend into 3Q that we anticipated spending in 2Q. So we feel like we're in a really good place to start the season. We've got the inventory and the capacity. We are absolutely spending incrementally behind the brands, probably in a more disproportionate way in 3Q than originally planned. So from that standpoint, I feel really good about how we're prepared for the season and certainly liked what we saw in April where you're saying 100% growth week over week for 4 straight weeks. That's our overall outlook. Rod, I'll throw it over to you to add any comments.

Yes. And Wendy, the online piece of the business is still relatively small, but growing fast. We just launched Hawaiian Tropic DTC site, as an example, as a way to get the message out, connect with the consumer. The retailer.com, e-tailor piece, we've got a good capability to drive growth through that channel, and then at Amazon, it's a growing part of the business as well. So there's a good omni mix there, but it skews more traditional brick and mortar retail at this point. From an innovation standpoint, we're really excited about the pipeline. What we have in the pipeline to come is really exciting in terms of product forms, the package form itself, the product formulation around mineral sprays, not only the efficacy, but the skin fill, in ease of spread and how you get the product on your body. We've got innovation around that as well. And I think the marketing teams have done a great job with the brands around the messaging, the brand equity, the positioning to pull Hawaiian Tropic into more of a better for you range, where Banana Boat's all around protect the fun outside in the sun, more of a sport active, tight positioning. And so as we look at the pipeline, the clarity of the messaging, and what we can do going forward, I think we're in the best position we've been in the category, certainly since I've been here. And this is coming off of a base period last year where we grew share, and so we are healthy in the category at the moment. As the category improves, we'd expect to go with it.

Our next question will come from Chris Carey with Wells Fargo Securities.

So I guess, I'm trying to understand this outlook for the back half of the year, and then I have a follow-up. But I think you said that organic sales growth, and fiscal Q3, and fiscal Q4 should be about the same. And I guess, part of the problem with that or challenge there is just the comp differential. I'm taking also into account the fact that the sun care business seems to be off to a really good start in the quarter, and comps are incredibly easy. And so, I guess what I'm asking is are you implying that the wet shave business is going to reverse what happened this quarter, perhaps after the [indiscernible]? I'm not necessarily suggesting that's what you're saying, but certainly there are pretty significant comp differentials between Q3 and Q4, but the outlook is for both quarters about in line. And I guess what I'm just asking is I'm trying to reconcile those because it doesn't make a whole lot of sense to me on face value. So thanks for just any clarification there, then I have a follow-up.

That was a lot, Chris, I'll try to make it simple. You have the outlook right. We anticipate largely similar rates of organic growth in Q3 and Q4 6-7% range for both. You have to remember that the categories we play in are lapping very different years last year. And I wouldn't write the sun category off completely. You might recall, the sun season actually had a very strong end of the season for us and went much longer than a normal sun season would go. And Wet Ones is cycling unbelievable growth, so it's really difficult. I would encourage you to look category by category and go back and recall how Q3 and Q4 played out. Because I think if you paint it with a broad brush of must be cycling COVID, you'll come to the wrong answer. We do not anticipate that wet shave will decline, back half of the year. That's not our thinking. You've heard us talk. We're bullish on sun, so we would expect growth in sun. And then of course, it's still growing in Wet Ones, although at a slower rate for obvious reasons. So hopefully that answers the question and gets you a little more comfortable on the back half of the year.

Yes, I appreciate that. And it's not necessarily questioning the back half of the year, as much as the cadence from Q3 to Q4, just given the [indiscernible] so much easier one quarter to the next. But the organic sales growth is implied to be the same for both quarters. I just didn't know if there was a [indiscernible] reversal dynamic going on, or there was other underlying issues, or not issues but dynamics, in one of the businesses to be mindful of. But I suppose that's helpful. And just as a follow-up, can you maybe just drill down a little bit on what you're seeing in the wet shave business, the return to organic sales growth is phenomenal. From a volume versus price mix dynamic, what are your general observations on channel mix between online and in store, and then maybe just any developments that you're seeing on the private label business. The general idea there is, it's nice to see that business return to organic sales growth, then just maybe what you're seeing a little bit more under the hood. So thanks so much for all that.

Yes. Chris, I want to stay on Q3 Q4 because you, you don't sound satisfied and it's not that complicated, so I want to make sure we get it. Wet Ones is cycling massive tailwinds from a year ago. So while we still see growth, that is at a much slower rate for obvious reasons. Fem-care is sort of the opposite end of the spectrum, cycling a heavily impacted COVID category. I think that's what you're alluding to, sort of growth on a negative comp having. So you put those to the side, we anticipate continued growth across wet shave, not too dissimilar from what you saw in 2Q. And we expect sun to be slightly growing as well. And remember that cycling of very down Q3, but cycling a surprisingly strong Q4 the way the sun season played out. So that's what gets you, it's a very different composition, Q3 versus Q4 by category, but that's what gets you back to similar growth rates. So I'll leave it there. I'll hand it to Rod for shave.

Yes. Dan and team have done good math on the quarters and the outlook. We'll talk about it next quarter, but I think the guidance hopefully is pretty clear. And then, if we need more time, we can do it in a follow-up with Chris and Dan. In terms of wet shave, just in general, the category remains very competitive here in the US across both men's and women's. That in fact is true. Internationally, while it's less dynamic around just level of competition, broadly in international markets, there's a higher level of lockdown on balance right now internationally. And so you're seeing, back what we saw in the winter months here in the states, with that in the other markets, you're seeing the category recovery lag internationally. We still expect that to come, as we get into the next couple of quarters, but it's a very different profile between the US and some of the international markets. The online channel has grown over the last year, via the lockdown. While the category has declined over the past year, around fewer shaving incidents with the more remote work, more casual approach to the grooming habits, if you will, through that period, online has grown and brick and mortar has lagged. But as we now cycle a year into this, and get to what are frankly easier comps in brick and mortar, we're seeing that catch back up, and we're seeing a return to a more normal, not quite flat category yet in our read, but we think heading back there, which is where we were pre-pandemic.

[Operator Instructions]. The next question will come from Faiza Alwy with Deutsche Bank.

So Dan, your comments earlier in the call regarding where you expect to be, as it relates to EPS outlook for the year, was really helpful. And I'm wondering if you could talk about organic sales growth, and whether the composition of organic sales growth for the year has changed for you. I know we're still at low single digits, but it sounds like you seem to be suggesting that there's upside in sun care. And I'm curious if the launch on the men's shaving side has gone better than expected. So just some comments around, and then Wet Ones, I don't know, it feels like it's a little bit not as good as expected. So I'm curious if you're recalibrating how you get to that low single digit number for the year?

Yes, thanks for the question. And I think you're spot on. You might recall when we developed the guide, initially, we said low single digit organic growth, largely driven by Wet Ones, was kind of the easiest way to think about it. And now sitting here at the halfway point, I don't know that I would say Wet Ones' results are disappointing. I think we knew at some point that the tailwinds of, if you can make it, you can sell it, was going to run its course. We still see growth for Wet Ones back half of the year. So we still certainly see opportunities, particularly as we gain distribution in grocery and drug, which we weren't able to gain just due to product constraints. So there's growth in the profile, but maybe a bit less than what we thought. It's probably contributing a half to a third of our growth for the year organic growth. And that's being reinforced by absolutely encouraging results on shave. And you saw that this quarter, and Rod talked about it. Particularly the women's side, where we've now gained share 2 straight quarters, while still cycling through the distribution losses of a year ago and staring into positive distribution outcomes for the new sets. So feel good about shave, led by women's. And then, yes, maybe a bit more optimistic on sun. You just wouldn't know how to predict the season back in November when we gave the guide, and we're really encouraged by what we've seen and how we've seen retailers respond. So yes, the mix of organics is probably a bit more to the core. Wet shave, stronger. Sun, stronger, which certainly we like.

Great, that's fine. Yes?

Yes, you asked about the wet shave innovation on Schick, and it's on track. It's early, but we feel good about it. It's meaningfully differentiated and well-supported, in terms of how we're launching stubble razor and skin comfort. So on track but early.

Okay. And if I may ask, just on the innovation, how would you recommend us evaluating the strength of that innovation near term? I guess what I'm asking is are you seeing better outcomes? And, e-commerce, is scanner data the right way to look at that? How's the business mix on the innovation relative to the rest of your business?

Yes. Scanner data is tricky. The quarter we just came through is really messy, because we're in the middle of planigram resets. It's different timing retailer by retailer. As you know, the execution is not always perfect, so scanner data can be a little misleading. As we look at the online portion, our market share online is typically higher than it is in retail brick and mortar. And the other thing that's been true here more lately, is not only is our share bigger, but we're gaining share online vis-a-vis competition. And that's true in shave as well. And so, it's a growth area for us that doesn't show up in the scanner data. But over time, in brick and mortar retail scanner data, we need to be positive, right? I mean, we've challenged the teams to success is not just delivering an annual budget number. Success is delivering market share gains, and winning in market vis-a-vis competition. And so, as we cycle through this, what you should be looking at, I think, in the near term is, are we hitting our numbers that we've committed to you via the guidance Dan's put out. And over time, are we growing or losing share in an all outlet look, not just XAOC, brick and mortar? But that's still a big component. So it's a complicated answer to the question. It's kind of all of the above. But I don't want to be losing share in anything we track over time. And that's how we've been talking to the teams about this as we cycle into fiscal 22.

There appear to be no further questions. So this will conclude our question and answer session. I'd like to turn the conference back over to the Rod Little, CEO, for any closing remarks.

Right. Well, thank you everybody for your time and your continued interest. Be safe, be well, and we'll talk to you in 3 months. Thank you.

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