Edgewell Personal Care Co

NYSE:EPC

Earnings Call Transcript 2018-Q3

[Operator]

Good morning and welcome to the Edgewell Personal Care Third Quarter Fiscal 2018 Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Chris Gough, VP of Investor Relations. Please go ahead.

[Chris Gough, Edgewell Personal Care Co.]

Thanks, Chad. Good morning, everyone, and thank you for joining us for Edgewell's third quarter fiscal 2018 earnings conference call. With me this morning are David Hatfield, our President, Chief Executive Officer and Chairman of the Board; and Rod Little, our Chief Financial Officer.

David will kick-off the call then hand it over to Rod to discuss quarterly results and the outlook discussion, followed by 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 that 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, 2017, as amended and supplemented in our quarterly reports for Form 10-Q for the quarters ended December 31, 2017, March 31, 2018 and June 30, 2018. 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.

During this call, we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures in a most directly comparable GAAP measures are shown in our press release issued earlier today, which is available in the Investor Relations section of our website. Management believes these non-GAAP measures provide investors valuable information on the underlying trends of our business.

With that, I'd like to turn the call over to David.

[David P. Hatfield, Edgewell Personal Care Co.]

Thank you, Chris, and good morning, everyone. In a moment, I'll have Rod take you through our detailed financial results, outlook and the Project Fuel. But first, I'd like to make a few comments on each of these topics.

To summarize the quarter, we continue to make strategic investments against our key growth initiatives and we've made important progress on Project Fuel, our enterprise-wide initiative to transform the company's business and the cost structure.

With the challenging environment as a backdrop, the fiscal third quarter played out largely as expected. Our financial results were impacted by the trade inventory reductions in Japan as we discussed last quarter, which are almost behind us. As well as the expected non-repeat of promotional sales to U.S. club customer. They were also affected by the ongoing competitive intensity in the U.S. Wet Shave.

Going forward, the razors and the blades category continues to go through an unprecedented change. And with a recent competitive launch in the Men's Systems in the brick-and-mortar, that competitive environment is intensifying.

Based on our results this quarter and the initiatives we have underway, we're maintaining our previously announced full-year outlook for adjusted earnings per share and the free cash flow. However, we've adjusted our net sales outlook to reflect the additional competitive pressures we see in the U.S. Wet Shave. Although, these pressures present some near-term headwinds, we believe that in a category with more consumer segmentation and more product in a pricing tiers, we're well positioned over the longer term.

We have a full portfolio of products ranging from premium to value, a strong geographic mix, superior manufacturing capabilities, and an ability to deliver compelling innovation across all the product segments.

We are confident in our ability to continue developing and commercializing great products across all the pricing tiers. And we're confident Project Fuel will help provide the resources and flexibility needed to compete and to win going forward.

Turning to Project Fuel, we've made significant progress on this initiative during the third quarter. As a reminder, Project Fuel is an extension and acceleration of our third strategic pillar driving fuel for growth through cost savings, productivity initiatives and continuous improvement. It's designed to streamline our organization in a simplified ways of working to improve our competitiveness and agility and ensure we have the skills, capabilities, and the financial investments needed to win.

Rod will take you through the details of fuel, but I'm excited to see plans develop that will drive these savings needed to provide us the resources to accelerate both sales growth and net profit. A core element of that acceleration hinges on the success of our strategic growth initiatives and we've made some terrific progress against them this quarter. For example, in e-commerce, we increased sales to 26% this quarter.

In June, we launched our new and improved direct-to-consumer shave site in the U.S. under Schick.com. The new site includes products across both men's and women's, including unique online-only products and provides for subscription as well as pay-as-you-go models.

We launched our Bulldog DTC site in the UK and expect to launch in the U.S. in the next few months. We've seen a significant acceleration in our e-commerce sales in China, and we recently began supplying private label shaving products through a major e-commerce company in the U.S.

In the Sun and Skin, our international sales were up nearly 13% in the quarter, with a room for continued growth through new and existing distribution. Bulldog and Jack Black continued to exceed our expectations. And we recently launched our first Bulldog men's razors in the U.S. and the UK. We're pleased with our progress on these fronts and are confident that with increased investments from Project Fuel, these strategic areas will become a more meaningful source of growth moving forward. We'll be presenting at the Barclays Conference in early September, where we'll be able to share more details on both Project Fuel and the progress that we're making on these growth initiatives.

Thanks. And with that, I'll let Rod take you through the results.

[Rod R. Little, Edgewell Personal Care Co.]

Thank you, David, and good morning, everyone. Let me turn to some of the key third quarter business performance metrics. Reported net sales in the quarter were $621 million, a decrease of 2.7% or 4.9% on an organic basis. Organic net sales exclude the benefit from the Jack Black acquisition, the impact from the Playtex gloves divestiture, and the translational benefit from currency.

Organic net sales in North America declined 4%, while international markets decreased 7%, primarily driven by the impact of trade inventory reductions in Japan, which was in line with expectations. I'll discuss the segments and the drivers of sales performance in more detail in a moment.

Gross margin was 48.8%, 170 basis points lower than the prior year. Excluding Jack Black integration cost, gross margin was down 150 basis points. 90 basis points of the decline was driven by higher cost reflecting increased input cost and lower volumes. 80 basis points to the decline was due to favorable volume mix, primarily in Wet Shave as the Japan inventory reduction and club store declines disproportionately impacted Hydro, which has higher than average margins. Pricing was neutral as the impact of Sun Care returns, and higher promotional spend in Sun Care was offset by improved pricing in Other segments.

A&P expense as a percent of net sales was 17%, down 90 basis points compared to the prior year. The decline was driven by $4.7 million of saving in non-working spend generated by our Zero-Based Spending initiative, a shift in timing of support for Hydro as we gear up for a re-launch of that brand, planned to lower support for Fem Care and a focus on eliminating low ROI spending.

Our intent beginning in fiscal 2019 is to increase A&P, as a percent of net sales in an absolute terms, but we are also working diligently to ensure we are spending where we see the highest returns and cutting in areas where we are not seeing the return.

SG&A including amortization expense was 16.2% of net sales, excluding $2.7 million of acquisition and integration costs associated with the acquisition of Jack Black and unfavorable currency translation. SG&A, as a percent of net sales, improved 60 basis points over the prior year, as we continue to drive G&A cost down through our Zero-Based Spend initiatives.

We recorded a pre-tax non-cash goodwill impairment charge of $24.4 million in the quarter to adjust the carrying value of goodwill for Infant Care. The impairment was the result of higher discount rates in conjunction with lower forecasted revenue growth rates and earnings margins, which resulted in lower projected long-term future cash flows.

We also incurred $15.4 million in pre-tax restructuring expenses in the quarter in support of Project Fuel. Other expense net was $3.5 million in the quarter, down about $5 million compared to the prior year net income of $1.6 million.

The adjusted effective tax rate for the first nine months of fiscal 2018 was 24.4% compared to 23.9% in the prior year period. The current period rate was favorably impacted by lower U.S. tax rate from the December 2017 enactment of the Tax Act, offset by an unfavorable mix of earnings in higher tax rate jurisdictions.

GAAP diluted earnings per share was $0.22 per share, including a $0.43 after-tax impact from the Infant Care goodwill impairment charge. Adjusted earnings per share was $0.91 per share, as compared to $1.11 in the prior period.

Net cash from operating activities was $193 million for the first nine months of fiscal 2018, favorable to the prior year by $58 million and largely driven by improvements in working capital, particularly accounts receivable driven by an increase in our factoring arrangement.

Over the first nine months of the year, we completed share repurchases of approximately 2.1 million shares, completed the acquisition of Jack Black for $94 million and paid down our revolver, lowering our debt-to-EBITDA leverage ratio to 2.9 times, down from 3.6 times in the first quarter and representing the lowest debt leverage ratio since the separation in 2015.

Now, let me turn to our segment results. Starting with Wet Shave, organic net sales were down $25 million or 7% in the quarter. The decline was largely driven by inventory reductions in Japan as well as lost promotional sales in a club customer in the U.S. Combined, these reductions accounted for $21 million of the decline in the quarter. Both of these impacts are now largely behind us.

Additionally, our private label Men's business was impacted by new competitive distribution in the U.S. although much of that was offset by new distribution in international and in unmeasured channels in the U.S. As the Japan and club channel impacts were heavily weighted towards Men's Systems, total Men's declined 19% in the quarter on an organic basis.

Women's Systems organic net sales increased over 2%, driven by Intuition f.a.b. growth in North America and Latin America. Disposables declined 3% in the quarter, primarily driven by declines in North America. Wet Shave segment profit decreased $3.8 million, or 6%, driven primarily by lower volumes in high margin products in North America and Japan and slightly higher cost of goods driven by increased input costs, partly offset by lower A&P spending in North America Men's Systems.

In the Wet Shave category, there are signs of improving category growth, particularly in the U.S. As measured by Nielsen, the U.S. razors and blades category was down 3.2% in the latest 12-week data, with Men's Systems down nearly 3%, Women's approximately flat at minus 0.3% and Disposables down 5%.

When factoring in non-measured channels, we believe the U.S. Men's category was up 2% with the overall razors and blades category down less than a point. From a market share perspective, as measured by Nielsen in our latest 12-week data, our share in razors and blades was down 70 basis points versus a year ago with 50 basis points from private label in the U.S. and down 40 basis points on a global basis.

Moving to Sun and Skin. Sun and Skin Care net sales increased 1.1% on a reported basis and decreased 2.6% on an organic basis. Organic sales adjust out the impact of the Jack Black acquisition and the Playtex gloves divestiture. International organic net sales increased 13%, driven by volume growth in both the Banana Boat and the Hawaiian Tropic Sun Care brands, and as well as the Bulldog Skincare brand. North America organic net sales decreased $8 million or 6%, $6 million of the decline was related to the increased Sun Care returns and the impact of exiting the private label Sun Care business.

Within the U.S. category, consumption was relatively flat and we held share. Segment profit decreased $8.3 million, driven primarily by lower gross margin due to the combined impact of higher returns and trade spend, and slightly higher input costs. A&P was also higher in the quarter in support of new products.

Turning to Feminine Care. Organic net sales decreased $2.5 million or 2.9%. The decline was driven by volume declines in tampons, primarily in our Gentle Glide and o.b. brands and a 4% decline in pads.

Total liners increased 5.2% behind our new Stayfree Ultra-Thin all-in one innovation, which we launched in the quarter. Feminine Care segment profit increased $3.5 million due to overhead reduction initiatives, lower promotional spending, A&P and SG&A spend this quarter, partly offset by higher input costs and lower volume absorption.

Overall, the Feminine Care category was relatively flat with growth in pads and liners, offset by a decline in tampons. Our market share declined approximately 1 point. And finally, in our All Other segment, which is primarily Infant Care, organic net sales increased 2.5% as growth in Pet Care and favorable price mix in Infant, offset the impact from the Toys "R" Us liquidation. All Other segment profit decreased $1.2 million, or 17.9%, driven equally by the impact of higher input costs and the higher A&P spend.

Before getting to our outlook, let me take a moment to make a few comments on the progress we're making on Project Fuel. As we mentioned previously, Project Fuel is an enterprise-wide effort, touching every line of the P&L and is designed to generate the flexibility needed to fuel investments in our brands.

During the third quarter, we have had teams building out detailed solution designs and where possible, have already begun to implement changes designed to simplify the organization structure and key processes. These teams have validated the costs and savings objectives, previously stated. Additionally, we've implemented 15 different IT enablement projects, designed to support our new structure and help us deliver the cost savings.

Finally, we have completed readiness plans across the company and will begin full implementation of Project Fuel in late August, including footprint changes and head count reductions. With Project Fuel, we are building a highly capable organization that is simpler, more agile, more accountable, and positioned to win.

We anticipate the Project Fuel will achieve $225 million in annual gross savings by the end of the 2021 fiscal year. For the restructuring element of Project Fuel, we continue to expect total one-time pre-tax charges to be approximately $120 million to $130 million, with an additional capital investment of $60 million to $70 million through the end of the 2021 fiscal year. The majority of the one-time charges are expected to be incurred by the end of fiscal 2019.

As we completed the initial assessment phase of the project, we have refined some of our estimates for fiscal 2018. We now estimate that by the end of fiscal 2018, we will incur approximately $50 million in pre-tax charges and $3 million in capital expenditures. These changes are primarily timing related. In short, we are moving with a sense of urgency. We have already made important progress and we are poised to begin capturing the opportunities we have identified.

The savings generated will be used to fuel investments in strategic growth initiatives and capabilities as well as our brands, including increased A&P and trade investment. We expect the fuel savings will also help offset operational headwinds from inflation and other input costs, and importantly, improve the overall profitability of the company.

Now, turning to our full-year outlook. We estimate that reported net sales will now be down 2% versus our previous outlook of down 0.5%, driven by a less favorable currency outlook and further risks associated with North America Wet Shave. Organic net sales are now expected to be down approximately 3.5%.

Our GAAP EPS outlook is now in the range of $2.15 to $2.25, including the provisional net charge to the U.S. Tax Act, the gain related to the sale of Playtex gloves business, Jack Black integration costs, costs associated with Project Fuel, and the Infant Care impairment charge.

Our outlook for adjusted EPS is $3.45 to $3.55, in line with our previous outlook at the midpoint of the range. The impact of less favorable currency translations and a 1% higher adjusted tax rate versus our previous outlook are expected to be offset by lower spending in the fourth quarter.

As David mentioned earlier, we will share more information on Project Fuel and our growth initiatives at the Barclays Conference in early September. And we will share our outlook for fiscal 2019 on our next earnings call.

Fiscal 2018 has been an unprecedented year in terms of sales headwinds. The combined net sales impact of the Japan trade inventory reduction, loss club channel sales in North America, the Sun Care private label exit, unexpectedly higher Sun Care returns in the prior season, and the Toys "R" Us liquidation was over $45 million through the first three quarters of the fiscal year.

It has also been a difficult year in most of the categories in which we compete. Despite these challenges, we are entering the fourth quarter with the sales impact from these items largely behind us and an acute focus on implementing Project Fuel.

We are confident that we're taking the actions needed to better position us to tackle the competitive pressures we face, win in the marketplace, and improve sales and profit going forward, ultimately, increasing shareholder value.

With that, we will open it up for questions. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. The first question will come from Jason English with Goldman Sachs. Please go ahead.

[Cody Ross, Goldman Sachs & Co. LLC]

Good morning, everyone. This is actually Cody Ross on for Jason this morning. Thank you for taking my question. Just wanted to talk about your A&P spending. Can you discuss your strategy with A&P spending in the context of a competitive environment that we're in? Do you feel like you're investing enough behind the brands? And how did your overall level of A&P spending fair in Q3 compared to your expectations heading into the quarter? Thanks.

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah. Thank you. We're brand builders at heart and going forward, in fiscal 2019, we're committed to raising the overall level of A&P spend to drive brands in our business. But we're equally committed to spending in a disciplined fashion where we see the best ROI.

For Q3, sequentially, A&P increased over 30% to about 17% of net sales, but it was below year ago, that decline, 40% or so, it was due to ZBS cuts in non-working A&P. Some of the decline was due to variable costs related to the lower spend.

And then part of it was timing, where we push back Hydro U.S. spend. This push back reflects the fact that we have a new agency, a new digital first creative campaign and a marketing re-launch behind the brand coming in a couple of months. The spend that we had planned in the quarter wasn't consistent with the new directions, so we made the – it's painful, but prudent decision to push it off. So, net-net, we're committed to increase in A&P in the fiscal 2019 fueled by Project Fuel.

[Cody Ross, Goldman Sachs & Co. LLC]

Great.

[Chris Gough, Edgewell Personal Care Co.]

Thank you. Operator, next question, please?

[Operator]

Certainly. That comes from Ali Dibadj with Bernstein. Please go ahead.

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Hi, guys. So, just to follow-up on that and a couple of other ones. One is, so do you still think this kind of 14% to 15% of sales run rate on A&P is right number or is that coming down?

And then the two other ones, a little bit more longer term. One is that, look, you guys described that the categories have been tough. They clearly have been. It's not just you. It's for the whole sector. But I'm struggling to see why that will change, particularly in the context of your longer-term targets still being the kind of 2% to 3% growth range that's clearly not happening right now. What is it that you see that makes you think you can get back there or even kind of improve from where we are now?

And then other one, Rod, is for you, specifically. You've been there now since I think it was March or April maybe, so for a few months. And often, with a new CEO – sorry, new CFO, not to put the cart before the horse, but new CFO, there's a new openness to bigger kind of structural changes at accompany portfolio rationalization, M&A, outsourcing, other things. Can you talk a little bit about your views, your fresh views looking at this company? And why do you think there is real big structural potential for change here? So, thanks for those three.

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah. Do you want to tackle the last first, Rod?

[Rod R. Little, Edgewell Personal Care Co.]

Yeah. So, Ali, good morning. Thanks for the question. We'll take in reverse order. When I come in and look at the company fresh, as you know, I have a background that's in the space from a competitive standpoint, and so I have, I guess, a couple of decades to look back on and compare and contrast both big and small companies in my experience base. And when I come in and see is a really solid brand portfolio with great products and great technologies pretty much across the board.

We're in tough categories at the moment, right? And I get tough times, make you focus more. And I think before I came in, in March, the team had done a good job of looking forward and being real around where the categories were, where they were heading, what the pricing environment looked like, and overlaying consumer demand trends with just the changes around consumption, if you will, around facial hair, the more relaxed culture leading to less shaving occasions.

And at that point, put in place what has become now Project Fuel, which is effectively taking down the absolute cost structure in the company, by a significant amount to almost 10% on a gross basis, if you take our $225 million target, not only to put some additional investment back into the business, which could come into the form of over time price, trade, A&P, G&A capabilities around building out, the e-comm capabilities we've talked. All of those elements are largely in place. What was missing was the ability to go do that and fund that, which is what Project Fuel is.

So, structurally within Project Fuel, we're going to get smaller in terms of an overall footprint that's going to be a structural change. We're going to look at a mix of what we do inside the company and outside the company with outsourcing models in a couple of areas, not prepared to disclose that at this point. And then we're looking at leaning out the spans and layers and getting smaller and getting faster in our decision-making and also up in the accountability with more clarity around who owns what.

And so all of those individually within their own would be structural changes and put together, that's Project Fuel. And, again, we're confident that based on the headwinds that we've been facing this year that are somewhat one-time in nature and not necessarily part of the category or competitive environment going forward are largely behind us.

Now, it's putting the plans in place to win and be competitive vis-à-vis competition, while we wait for the category to come back in the cyclical nature of facial hair and whatnot. We can't predict when that's going to happen, but I think we feel like we're at a pretty low point on that cycle. So, that was the second one – or the third one. The second was long-term category growth and why we see it back. David, do you want take that?

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah. So, building on Rod's comments, what we see now particularly in the Wet Shave category is a category that's been disruptive and it's going from what was a pretty unique category within CPG to a more normal one where there's consumer segmentation and the pricing tiers.

And we think that as the ripples of that disruption received, what we're going to find is a more normal category, one where the microeconomics don't really reward pricing. You don't make more money getting bigger. And I think that will lead to a more normal category.

And then finally to your first question about A&P, we're in the middle of looking at our plans bottom up now, so I don't have an exact answer, but I'd say that the 14% to 15% generally is in the right ballpark.

[Ali Dibadj, Sanford C. Bernstein & Co. LLC]

Okay. Thanks a lot.

[Chris Gough, Edgewell Personal Care Co.]

Thank you, Ali. Operator, next question, please?

[Operator]

Yes. The next question we have from Nik Modi with RBC. Please go ahead.

[Russell Miller, RBC Capital Markets LLC]

Hey. Good morning. This is Russ Miller on for Nik. Two questions from us. First, just want to understand if today's guidance update includes the potential launch of Harry's into additional retailers, particularly in the drug channel. And second, if you could share any additional perspective on Intuition f.a.b. launch. How is the launch trending versus your internal expectations? What has the consumer feedback been? And any details you could share on trial and repeat metrics would be helpful. Thank you.

[David P. Hatfield, Edgewell Personal Care Co.]

The guidance that we've provided so far is mainly Q4. And so any rollout really wouldn't impact the quarter or not significantly in any way. And in terms of f.a.b., we're pleased and so are our customers with its performance. It's the number one Women's System launch in the units and in users in 2018. We feel conversion has been at category norms, which is good, but a bit below our expectations and our bases modeling, may be reflecting a consumer learning curve. However, trial and consumption continue to build throughout the quarter and through July week-after-week. So we're optimistic. We continue to support it aggressively and have robust plans and the trade support through Q4.

[Rod R. Little, Edgewell Personal Care Co.]

And Russ, just to confirm on the Harry's rollout, our guidance does reflect any impact from how we see their plans unfolding in Q4, that's covered.

[Russell Miller, RBC Capital Markets LLC]

Thank you.

[Chris Gough, Edgewell Personal Care Co.]

Thank you, Russ. Operator, next question, please?

[Operator]

Yes. And that will be from Bill Chappell with SunTrust. Please go ahead.

[William B. Chappell, SunTrust Robinson Humphrey, Inc.]

Thanks. Good morning. Could you help me a little bit more on just the whole ASR private label efforts in the U.S. I mean I think I understand what's going on, on kind of the online and the impact there, but maybe what we've seen in stores that some of the mass customers seem to be scaling back from what you've done in past years in terms of brand equivalent or interchangeable blades and it seems, I don't think we've heard you talk much about the whole flex launch that was a year ago either. So, anything you could kind of help us to understand and kind of what's going on in private label? Is that just a shift to focus more online or am I just missing something?

[David P. Hatfield, Edgewell Personal Care Co.]

Thank you, Bill. PBG continues to grow both in the U.S. in the quarter and around the world year-to-date. What we've seen with the Harry's launch is a little bit of a scale back in the share of shelf for PBG after a really good run over the last couple of years. I think that will remain over the near-term, but I expect over the medium term, with innovation and the Smart category management for that to come back.

In the meantime, we've actually gained more distribution and the emphasis with the customers in the non-measured segments such that we've actually made that up and we're actually growing for the quarter and the year.

[Rod R. Little, Edgewell Personal Care Co.]

Yeah. And Bill, this is Rod. David has made an important point here on the measured versus non-measured. The measured looks negative, right? And you're seeing that as the impact at Harry's, that David was talking about. We also have the disconnect in Europe as well, where we are getting new distribution, for example, in dollar store, dollar channel, all the legal in the non-German markets where they're not included. And so what that looks on a reported basis, negative when you put the measured in to David's point, not only are we up in absolute, but the share decline you're seeing goes away. So, we're comfortable with that business.

[Chris Gough, Edgewell Personal Care Co.]

Okay. Thank you, Bill. Operator, next question, please?

[Operator]

The next question will be from Faiza Alwy with Deutsche Bank. Please go ahead.

[Faiza Alwy, Deutsche Bank Securities, Inc.]

Thank you. Good morning. So, I was hoping to get more detail around Project Fuel. Perhaps, if you could give us some specifics around what actions are contemplated now that you've done more work on this. So, maybe expand on your comment around footprint changes. Is there a plan to optimize or close sort of manufacturing, distribution facilities or corporate offices? And maybe, if you could bucket the various components of where the savings are coming from?

And then, secondly, what is the expected phasing of when you'll begin to achieve these savings? And then just lastly, it sounds like the vast majority of those savings will need to be reinvested to keep pace with the competition. And does the category change? Is that correct or do you foresee Project Fuel changes flowing through directly to margins? Thanks.

[Rod R. Little, Edgewell Personal Care Co.]

Yeah. Good morning, Faiza. Thank you for the question. You're not going to love my answer, but we're not prepared to give additional specifics, much beyond what we had talked about last time. That doesn't mean we're not moving forward and pressing it forward. We expect to give a little more perspective on timing and details on where it's coming from bottom up at the Barclays Conference here at the beginning of September. And then fiscal 2019 impact will have fully laid out when we give guidance in the next quarterly call. That said, we're still comfortable with the $225 million number. Where it's coming from? Two-thirds of it roughly is coming out of costs of goods with the balance across G&A, A&P.

We have a good line of sight to what that is. We do expect some footprint changes in our global operating network. We're not prepared to disclose or announce that at this point, but yes to that, generically. And we're being very aggressive on that number as you might imagine. And nothing's changed in our mind around where that savings goes. There's a portion of it to offset normal inflation input costs. Everybody is talking about the impact commodities are having on the business and the escalation there. We have that in our line of sight when we've built the plan. So definitely, we want to insure ourselves and not rely on pricing in a difficult pricing environment.

We've also thought about making sure we have the right level of trade support in A&P behind our brands. And as David said earlier, we're going to increase our A&P support and spend behind the brands to drive growth, which we think we can do. And then there is going to be a balanced approach to also dropping a portion to the bottom line. And so some of that today is unknown, right? As you go over time, but we'll bring that into focus next quarter around fiscal 2019 and what those drivers will be.

[Faiza Alwy, Deutsche Bank Securities, Inc.]

Okay. If I may just ask a follow-up, Rod, if you could elaborate a bit on your comment regarding just investing in A&P and sort of where you're seeing the highest to return, like you mentioned that a few times that you're focusing on areas where you have the best ROI. So, maybe what are going to be some of your investment priorities as it relates to 2019, and maybe longer term as you think about the reinvestment from Project Fuel?

[Rod R. Little, Edgewell Personal Care Co.]

David talked about a long list of things that are going well for us and where we see growth. International Suns (45:18) continues to be up double digits year-on-year. We think there's a lot of runway there to accelerate and fuel that. The whole e-commerce effort, were up 33% year-to-date, e-comm, we think there's a lot of runway there. Bulldog, Jack Black expansion, China is a priority market we've talked about. All of those are heading in the right direction and we think warrant more investment to accelerate progress.

And importantly, as David mentioned in Wet Shave, we are re-launching our Hydro business in October as we start the new fiscal year. (45:58) a new agency in to help us create the story and fill up the future. The look and feel of the advertising will be very different. We have great products in the lineup with Hydro Sense. It's worth talking about it. And so, as we look at that business, we're going to be looking to put incremental A&P support against that business as well.

[Faiza Alwy, Deutsche Bank Securities, Inc.]

Great. Thank you.

[Chris Gough, Edgewell Personal Care Co.]

Thank you, Faiza. Operator, next question, please?

[Operator]

And that will be from Steve Strycula with UBS. Please go ahead.

[Steven Strycula, UBS Securities LLC]

Hi and good morning. Two-part question. Wanted to dig a little bit deeper into the Wet Shave category. And Rod, what you specifically with the fresh set of eyes are observing as the state of the category? If we take a step back for a moment, it appears that volumes are negative. More brands are entering the category and private labels rising. So, how are retailers view of managing that category evolving in your opinion? And how do you think about managing profitability around that moving target as the category assortment evolves? Thanks.

[Rod R. Little, Edgewell Personal Care Co.]

Yeah. So, good morning, Steve. Thank you for picking up coverage, and a good question.

First for context, for us, on Wet Shave, specifically in the U.S. market, because it consumes almost all we talk about. But yet, it's a relatively small part of our overall business. For example, Men's Systems in North America inclusive of Canada, at this point is less than 5% of our total net sales.

When you put in systems and disposables branded, it's less than 10%. And then when you put in private label, which we've talked about, it's 15% of our total sales corporately. And within that, if you break it down, so first of all, our overall company exposure is not as great to U.S. Men's and the competitiveness that we're seeing there right now. Frankly that is, the U.S. Men's segment is the most competitive.

I think the natural reaction as you have demographic shifts and changes where people shave less often or less frequently and new entrants, it becomes a massively negative situation. And we've held our pricing to this point. We've tried to be very competitive on our promotional spend and very sharp on that front. Others have not, and so that's been a negative on the category. And as the new entrants come in, they're doing a great job on the marketing front and in presenting themselves as a real option. So, we stay very focused on value, very focused on bringing value to our customers with the joint business planning efforts, specifically and ultimately on to the end consumer.

So, I think what you've seen happened is the investments required to compete in the category has gone up. We've made those investments at this point, we'll continue to do so. And we'll stay very sharp in all the fundamentals and make sure we don't have a disconnect that puts us at a disadvantage. Again, fuel allows us to do that, and then over time, I think we remain very confident that our technology, our products, our brands are superior to some of the entrants coming into the category, and over time, we think that plays out and when we put the right marketing message against our own products.

[David P. Hatfield, Edgewell Personal Care Co.]

And I'd only add, this is David, that with our full portfolio, we're actually positioned well to help manage the categories with our customers all the way from private label to the middle-tier disposables all the way to premium systems.

[Steven Strycula, UBS Securities LLC]

Okay. Great. I have a quick follow-up.

[Chris Gough, Edgewell Personal Care Co.]

Thanks, Steve. Okay. Go ahead, Steve.

[Steven Strycula, UBS Securities LLC]

A quick question on Japan. You mentioned that one of the key – there's two key wholesalers in that marketplace the way the market is structured. One of them already reduced their days outstanding of inventory. I'm wondering is the other company, a wholesaler in the marketplace at a comparable day levels of inventory already? Is that an overhang, or did the second one just play catch up to the one who has already leanest? Thanks.

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah. Within Japan, we're almost done with the process. In another customer, there might be four days or five days left, but that'll be worked down over time, and this isn't really a significant factor. So, we're pleased with the team in Japan. And I think they've managed it well. So, we think that we're pretty much through the overall inventory take-out process.

[Rod R. Little, Edgewell Personal Care Co.]

And end market performance in Japan continues to be strong.

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah.

[Chris Gough, Edgewell Personal Care Co.]

Okay. Thank you, Steve. Operator, next question, please?

[Operator]

That will be from Olivia Tong with Bank of America Merrill Lynch. Please go ahead.

[Olivia Tong, Bank of America Merrill Lynch]

Great. Thanks. Wanted to talk a little bit – would love a little bit more color on why you consider a lot of the issues impacting you right now is transitory. You mentioned that a couple of times you referenced lost shelf space in club, Sun Care returns because of bad weather, and things like that.

And while I obviously assume you don't go into a year, trying to predict the weather in the summer, but you just seem like things that are just part of running the business. You gain some shelf space, you lose some. If you sell sunblock, you're exposed to the ups and downs of weather. So, how does your planning around marketing, merchandising, and innovation get impacted, because my concern is that you consider these things transitory, and if you do that, are you prepared enough going into the season to impact change? Thank you.

[David P. Hatfield, Edgewell Personal Care Co.]

Thank you. I'll comment and may hand it over to Rod for any other. But the top three impacts that we really do think are one-offs or else will not be repeated next year. First of all, Japan, that we've mentioned it is about $15 million. Secondly, the non-repeat of the year-ago promotional waves in the club customer, well, we know that that's not going to impact us next year. And then third, the exit in our Sun Care private label business, well, that's gone zero, so we know that that won't impact us. And those are pretty out of the ordinary size-wise. And that's the bulk of the impact that we're talking about.

[Rod R. Little, Edgewell Personal Care Co.]

Olivia, I would just add, but I think the – maybe what's behind the question is the – I guess, the ongoing thing, what could be going forward, is there's always going to be some level of customer disruption and that distribution change, and we don't do that as one time, right. That's going to continue over time. And we're certain that we're going to have some disruption next year that we can't see now, but if you think about the club change in full distribution basically in and out for a full-year and that comes out, the club distribution, I think is at a low point and the rest I think just becomes normal course. And so, that's the piece we are planning for as we look at it going forward.

[Chris Gough, Edgewell Personal Care Co.]

Okay. Thank you, Olivia. Operator, next question, please?

[Operator]

The next question is from Bonnie Herzog with Wells Fargo.

[Joe B. Lachky, Wells Fargo Securities LLC]

Hi. It's actually Joe Lachky on for Bonnie. I was hoping you guys could talk a little bit about the Hydro re-launch, how you're positioning the brand, does it result in a change in price points. And maybe, if you could explain a level of innovation coming to support the launch. And then, also describe your price points and positioning for the new Bulldog razors that you mentioned.

And then secondarily, and kind of along the same lines, it sounds like you're stepping up your focus on direct-to-consumer, and is that really a focus for you guys to drive revenue growth at this point or is it still mainly a learning function at this point? Thanks.

[David P. Hatfield, Edgewell Personal Care Co.]

Okay. Great. Thanks. Thanks, Joe. On the Hydro launch, I'm not really prepared to go into too much depth today in the earnings call. That wouldn't do justice. We're going to talk a little bit more about it at the Barclays Conference coming up, and we'll share more details there. In terms Bulldog, it's a middle-tier price point within the context of a drug. It's a neat razor and it fits the need there very well.

Finally, DTC, we actually do view it primarily as a learning tool. And we don't do it particularly as a revenue driver. But, we do think of it as a key catalyst within our overall digital marketing plan, and I think that we're going to learn a great deal about our consumers, how to personalize, and that learning, and the insights that we get from that. We can plow back into all of our digital marketing work.

[Rod R. Little, Edgewell Personal Care Co.]

And we are being responsive, Joe, to – if we see things working online and being flexible with our A&P support...

[David P. Hatfield, Edgewell Personal Care Co.]

Right.

[Rod R. Little, Edgewell Personal Care Co.]

...and jumping in where we see good things working. And as we talked about last time, we're building an underlying infrastructure that will support multiple brand DTC sites off of the same infrastructure.

And so that's – the only thing you'll see us bring more online in more geographies with the ability to do that. And over time with the right A&P support. We'd hope it would become a sales driver. We're just not going to commit to that in a short run given the size.

[David P. Hatfield, Edgewell Personal Care Co.]

Right. Hey, and just one more thing, Joe. On your Hydro question, you asked about innovation. And I thought I'd make the point that Hydro Sense, which we just launched just a few months ago, is a terrific product. It gets great feedback, and that will really be the main platform – product platform underneath the marketing re-launch. So I wanted to call that out.

[Chris Gough, Edgewell Personal Care Co.]

Okay. Thank you, Joe. Operator, next question, please?

[Operator]

Yep. The question will be from Kevin Grundy with Jefferies. Please proceed.

[Kevin Grundy, Jefferies LLC]

Hi. Thanks. Good morning, everyone. First, a housekeeping question as it pertains to Barclays. Should we expect the new long-term algorithm? Rod, I think you spoke to guiding for fiscal 2019. Are you guys going to also put a new top line algorithm and earnings algorithm? Once upon a time, it was 2% to 3%. 50 basis points of margin improvement, high-single-digit EPS growth. Just want to know, if we should expect a new outlook there as you're sort of pulling together the last pieces around Project Fuel?

Also, is there a possible discussion around some portfolio decisions? We've talked about down the call, you seem to leave the door open last call around Fem Care and Infant Care. So, just any sort of guidance there in terms of what we should expect should be helpful?

And then last one, just to return to Wet Shave, can you talk a little about some of the factors that you see driving some of the less dire trends, I think you talked about down 3.2% in razors and blades, sort of less bad, I guess, than we've seen, talk about some of the factors there?

And then just broadly, and sorry for all the questions, I know you don't want to speak to Hydro re-launch specifically, but maybe you can just talk about some of the key areas that you're thinking sort of need to reestablish the proverbial right-to-win, and how you want to differentiate against, Procter, which has clearly shown its resolve over many years to win in this category? Harry's has obviously had a lot of success now in mass channels. So, just talk about maybe the key areas that you feel you sort of need to differentiate to reestablish some momentum with Schick. So, thanks for all that.

[David P. Hatfield, Edgewell Personal Care Co.]

Okay. Great. First of all on these Barclays questions, we're in planning now and I see us in a position to talk about the medium-term algorithm in our earnings call after Q4. So, at Barclays, I think we're going to focus mainly on our growth initiatives and on Hydro and on Project Fuel. And in terms of the portfolio, that's an – we always look at that, and I don't have any speculation about, any news on that front.

In terms of your Wet Shave question, the trends tend to be getting just a little better, because primarily there's the same volume component. But price mix is less bad, as we anniversary the list price cuts that Gillette did over a year ago. Promotional levels remain very, very high, and in fact, might be getting a little worse. But nonetheless, price mix is tending to get just a little better.

Finally, the Hydro marketing re-launch, we're going to be looking at the positioning and tone. And I'll leave it there. But we're also looking at packaging and our overall price value equation. So, we're looking at almost all the levers within the marketing mix.

[Kevin Grundy, Jefferies LLC]

Thank you, guys.

[Chris Gough, Edgewell Personal Care Co.]

Thank you, Kevin.

[Kevin Grundy, Jefferies LLC]

Good luck.

[Chris Gough, Edgewell Personal Care Co.]

Thanks, Kevin. Operator, next question, please?

[Operator]

The next question is from Lauren Lieberman with Barclays. Please go ahead.

[Lauren R. Lieberman, Barclays Capital, Inc.]

Thanks. Good morning. At the risk of front-running our conference, I'll ask a question. I was just curious about Fem Care, it was actually a bit better in the quarter than I might have expected. It was not a huge business, but given last quarter, you did mention that there were further shelf space launches. I just was curious if you picked up any shelf space as some of your products – some product areas may be performed better than expectations; because again, I would have expected to be a bit weaker, given the incremental share losses. Thanks.

[David P. Hatfield, Edgewell Personal Care Co.]

Yes. Yeah, thank you. The quarter did come in a little better than expectations, and it was really driven – wasn't really driven by share of shelf, but it did reflect really good performance on our liners business. And that reflects the innovation we drove for the quarter behind the Stayfree Ultra-Thin all-in-one liners. It was a product upgrade across the whole line, and it was supported by 100% digital with hyper-targeting and 360 marketing. We were pleased by the launch. Liners were up by 7% for the quarter with double-digit POS growth in several key customers across mass, drug and food.

[Lauren R. Lieberman, Barclays Capital, Inc.]

Great. Thank you.

[David P. Hatfield, Edgewell Personal Care Co.]

Yeah. I would add that we're not out of the woods yet on a sales front. So, one quarter doesn't make a trend, but my hats off to the Fem team. It's a new dedicated business unit, and I think that we are seeing some of the fruits of that focus.

[Chris Gough, Edgewell Personal Care Co.]

Thank you, Lauren. Operator, next question, please?

[Operator]

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

[Jonathan Feeney, Consumer Edge Research LLC]

Good morning, and thank you so much. I just have one question for Rod. It's a little bit of a follow-up to a couple of questions have been asked, but just kind of a state. I would like to know where you are versus where you'd like to be as far as total consumer execution capabilities. We've heard a lot of CPG companies talk about needed investments around capabilities. And the problem with these things, there's really no near-term return.

I know you've talked about, you've given us some your dollar figures, but that's what you're going to invest. But just as far as taking your seat, do you see all the data you need to see at the consumer side to understand what's going on? You haven't been in the seat for a while, you're talking with your retailer partners. Where are we in that journey to being at the point where you have all the capabilities you need to make all the best possible decisions or – that are practical for Edgewell going forward? Thank you.

[Rod R. Little, Edgewell Personal Care Co.]

Good morning, Jon. And thank you for the question. We have very good and robust data and access to everything you would expect that we have. I think there's no holes in terms of what we see and what we know what's happening with the consumer. We have account teams out in the markets dedicated with the customers just like you would expect, where I think we have an opportunity and what we are focused on with Project Fuel is around the organization structure and having information in the right hands with the decision makers very quickly.

So, for example, there's something happening at a specific customer, there could be an early trend or a red flag somewhere else or something that's working well. We need to have the forum for that to flow very quickly back up to the marketing teams and share and reapply across all the right teams. And we're creating those pipes now with Project Fuel, frankly by eliminating layers and making those connections a little more direct. Is that helpful?

[Jonathan Feeney, Consumer Edge Research LLC]

Oh, it is helpful. So, where would you say you stand with that? Would you be done with that process by the end of next year or I mean is it – or is that – it's just – are you just talking about continuous ongoing stuff you'd be doing at any business?

[Rod R. Little, Edgewell Personal Care Co.]

There's always a continuum to improvement whereas you go forward that's part of what we do. The big change, I think you'll see specific within North America will be in place as we start into the new fiscal year. So, we're talking – we talk about the Project Fuel execution really kicking off this month, that's happening this month. We're making organization structural changes between now and the end of September to have that in place. Again, once that's in place, we'll have to learn the new ways of working. But we have a highly motivated group of leaders who want that change and are actually helping drive it.

[Jonathan Feeney, Consumer Edge Research LLC]

Thank you very much.

[Chris Gough, Edgewell Personal Care Co.]

Thanks so much, Jonathan. Operator, next question, please?

[Operator]

As there are no other callers in the question queue, this concludes our question-and-answer session. I would like to turn the conference back over to David Hatfield for any closing remarks.

[David P. Hatfield, Edgewell Personal Care Co.]

Thank you. In closing, our management team and organization are executing with urgency in a purpose against Project Fuel, driving transformation to improve our agility, deliver cost savings targets and generate funds for reinvestment against our growth initiatives. I'm confident that, by doing so, we'll deliver an enhanced value to all Edgewell shareholders. Thank you all for your time and your interest into Edgewell. Have a good day.

[Operator]

And thank you, sir. The conference has now concluded. Thanks for attending today's presentation. You may now disconnect.