EDGEWELL PERSONAL CARE Co: Form 10-Q for the period ended Dec 31, 2023

(Amounts in millions, except per share data, unaudited)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited Condensed Consolidated Financial Statements and the accompanying notes included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on November 28, 2023 (the “2023 Annual Report”). The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs and involve risks, uncertainties, and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed within “Forward-Looking Statements” below and in Item 1A. Risk Factors and “Forward-Looking Statements” included within our 2023 Annual Report.

Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Edgewell Personal Care Company or any of our businesses (the “Company”). Forward-looking statements generally can be identified by the use of words or phrases such as “believe,” “expect,” “expectation,” “anticipate,” “may,” “could,” “intend,” “estimate,” “plan,” “target,” “predict,” “likely,” “will,” “should,” “forecast,” “outlook,” “strategy,” or other similar words or phrases. These statements are not based on historical facts, but instead reflect our expectations, estimates or projections concerning future results or events, including, without limitation, the future earnings and performance of the Company or any of our businesses. Many factors outside our control could affect the realization of these estimates. These statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or projections will be achieved. The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. You should not place undue reliance on these statements.

In addition, other risks and uncertainties not presently known to us or that we presently consider immaterial could significantly affect the forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Risks and uncertainties include those detailed from time to time in our publicly filed documents, including in Item 1A. Risk Factors of Part I of our 2023 Annual Report.

Non-GAAP Financial Measures

While we report financial results in accordance with GAAP, this discussion also includes non-GAAP measures. These non-GAAP measures are referred to as “adjusted” or “organic” and exclude items which are considered by the Company as unusual or non-recurring, and which may have a disproportionate positive or negative impact on the Company’s financial results in any particular period. Reconciliations of non-GAAP measures are included within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We use this non-GAAP information internally to make operating decisions and believe it is helpful to investors because it allows more meaningful period-to-period comparisons of ongoing operating results. Given certain significant events, we view the use of non-GAAP measures that take into account the impact of these unique events as particularly valuable in understanding our underlying operational results and providing insights into future performance. The information can also be used to perform trend analysis and to better identify operating trends that may otherwise be masked or distorted by the types of items that are excluded. This non-GAAP information is also a component in determining management’s incentive compensation. Finally, we believe this information provides more transparency.

The following provides additional detail on our non-GAAP measures for the periods presented:

• We analyze net sales and segment profit on an organic basis to better measure the comparability of results between periods. Organic net sales and organic segment profit exclude the impact of changes in foreign currency translation.
• Segment profit will be impacted by fluctuations in translation and transactional foreign currency. The impact of currency was applied to segments using management’s best estimate.
• Additionally, we utilize “adjusted” non-GAAP measures including adjusted gross profit, adjusted selling general and administrative (“SG&A”), adjusted operating income, adjusted income taxes, adjusted net earnings, and adjusted diluted earnings per share internally to make operating decisions.

All comparisons are with the same period in the prior year, unless otherwise noted.

Industry and Market Data

Unless we indicate otherwise, we base the information contained or incorporated by reference herein, concerning our industry on our general knowledge and expectations. Our market position, market share, and industry market size are estimates based on internal and external data from various industry analyses, our internal research and adjustments, and assumptions that we believe to be reasonable. We have not independently verified data from industry analyses and cannot guarantee its accuracy or completeness. In addition, we believe that industry, market size, market position and market share data within our industry provides general guidance but is inherently imprecise and has not been verified by any independent source. Further, our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in Item 1A. Risk Factors in Part I of our 2023 Annual Report. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions. You are cautioned not to place undue reliance on this data.

Retail sales for purposes of market size, market position and market share information are based on retail sales in U.S. dollars.

Trademarks and Trade Names

We own or have rights to use trademarks and trade names that we use in conjunction with the operation of our business, which appear throughout this Quarterly Report on Form 10-Q. We may also refer to brand names, trademarks, service marks and trade names of other companies and organizations, which are the property of their respective owners.

Executive Summary

The following is a summary of key results for the first quarter of fiscal 2024, as compared to the corresponding periods in fiscal 2023. In addition to net sales, net earnings and earnings per share (“EPS”) for the periods presented were also impacted by certain costs or income, as described in the table below. The impact of these items on reported net earnings and EPS are provided as a reconciliation of net earnings and EPS to adjusted net earnings and adjusted diluted EPS, both of which are non-GAAP measures.

First Quarter of Fiscal 2024

• Net sales in the first quarter of fiscal 2024 increased $19.8, or 4.2%, to $488.9, as compared to the prior year quarter. Organic net sales increased $14.3, or 3.1%, compared to the prior year quarter, as international markets increased $28.7 or 16.2%, primarily driven by strong performance across all segments, and reflecting growth from higher volumes and pricing across wet shave and grooming, partially offset by lower net sales in North America of $14.4 or 4.9%. In aggregate, organic net sales growth was driven by increased pricing, with volumes essentially flat.
• Net earnings in the first quarter of fiscal 2024 were $4.8 compared to $12.4 in the prior year quarter. On an adjusted basis, net earnings for the first quarter of fiscal 2024 were $12.0 compared to $16.5 in the prior year quarter. Adjusted net earnings decreased primarily due to increased SG&A and advertising and promotion expense (“A&P”) in the current quarter.
• Net earnings per diluted share during the first quarter of fiscal 2024 were $0.09 compared to $0.24 in the prior year quarter. On an adjusted basis, net earnings per diluted share during the first quarter of fiscal 2024 were $0.24 compared to $0.32 in the prior year quarter.

(1) EBIT is defined as Earnings before Income taxes.

Operating Results

The following table presents changes in net sales for the first quarter of fiscal 2024, as compared to the corresponding periods in fiscal 2023, and provides a reconciliation of organic net sales to reported amounts.

Net Sales

For the first quarter of fiscal 2024, net sales were $488.9, an increase of $19.8, or 4.2%, including a $5.5, or 1.1%, favorable impact from currency movements. Organic net sales increased $14.3, or 3.1%, as international markets across all segments increased 16.2%, reflecting growth from higher volumes and pricing across Wet Shave and Grooming, partially offset by lower net sales in North America which decreased by 4.9%. In aggregate, organic net sales growth was driven by increased pricing, with volumes essentially flat.

For further discussion regarding net sales, including a summary of reported versus organic changes, see “Segment Results.”

Gross Profit

Gross profit was $197.7 during the first quarter of fiscal 2024, compared to $189.6 in the prior year quarter, an increase of $8.1 or 4.3%. Gross margin as a percent of net sales for the first quarter of fiscal 2023 was 40.4%, or flat compared to the prior year quarter. Adjusted gross margin as a percent of net sales was 40.7% compared to 40.4% in the prior year quarter. The increase of 30-basis points was due to productivity savings of approximately 380-basis points, the benefit of higher pricing of approximately 210-basis points, and approximately 70-basis points of favorable currency, more than offset core gross inflationary pressures of approximately 70-basis points, transitory cost headwinds related to unfavorable absorption and heightened unit cost inflation trapped in inventory of 520-basis points and 40-basis points of negative mix and other.

Selling, General and Administrative Expense

SG&A was $103.3, or 21.1%, of net sales in the first quarter of fiscal 2024 compared to $95.7, or 20.4%, of net sales in the prior year quarter. Adjusted SG&A as a percent of net sales was 21.0%, an increase of 110-basis points, primarily driven by higher people and incentive compensation expenses, and the impact of unfavorable currency movements.

Advertising and Sales Promotion Expense

For the first quarter of fiscal 2024, A&P was $48.2, an increase of $2.3, or 5.0%, compared to $45.9 in the prior year quarter. A&P as a percent of net sales was 9.9%, compared to 9.8% in the prior year quarter, primarily due to timing of brand investments and marketing campaigns.

Research and Development Expense

Research and development expense (“R&D”) for the first quarter of fiscal 2024 was $13.3, a decrease of $0.1, or 0.7%, compared to $13.4 in the prior year quarter. As a percent of net sales, R&D was 2.7% in the first quarter of fiscal 2024 compared to 2.9% in the prior year quarter.

Interest Expense Associated with Debt

Interest expense associated with debt for the first quarter of fiscal 2024 was $19.8, a decrease of $0.1, or 0.5%, compared to $19.9 in the prior year quarter. The decrease in interest expense was the result of a lower overall debt balance on the Revolving Credit Facility, partially offset by higher interest rates.

Other expense (income), net

Other expense (income), net was $0.3 of expense in the first quarter of fiscal 2024, a decrease in income of $5.3, or 106.0%, compared to $5.0 of income in the prior year quarter. The change compared to the prior year quarter was primarily driven by lower foreign currency hedge gains.

Income Tax Provision

The effective tax rate for the first quarter of 2024 was 20.1% compared to 27.0% in the prior year period. The fiscal 2024 effective tax rate reflects a more favorable mix of earnings in lower tax rate jurisdictions and the impact of a change in our prior estimates. On an adjusted basis, the effective tax rate was 22.8% and 26.4% for the first quarter of 2024 and 2023, respectively.

Operating Model Redesign

In fiscal 2024, the Company is continuing to strengthen its operating model, simplify the organization and improve manufacturing and supply chain efficiency. As a result of these actions, we expect to incur charges of approximately $19 in fiscal 2024. We incurred $6.8 during the first quarter of fiscal 2024, primarily related to employee severance and related costs.

Segment Results

The following tables present changes in segment net sales and segment profit for the first quarter of fiscal 2024, compared to the corresponding periods in fiscal 2023, and provide a reconciliation of organic segment net sales and organic segment profit to reported amounts. For a reconciliation of segment profit to Earnings before income taxes, refer to Note 13 of Notes to Condensed Consolidated Financial Statements.

Our operating model includes some shared business functions across segments, including product warehousing and distribution, transaction processing functions and, in most cases, a combined sales force and management teams. We apply a fully allocated cost basis in which shared business functions are allocated between segments.

Wet Shave

Wet Shave net sales for the first quarter of fiscal 2024 increased $26.4, or 9.6%, including a $4.0 or 1.5% favorable impact from currency. Organic net sales increased $22.4, or 8.1%, reflecting an increase in Men’s and Women’s Systems, Disposables and Shave Preps. International organic sales increased 18.3%, driven by strong volume and price growth in most international markets, with notable growth in key Asian markets, partially offset by a 2.0% decrease in North American sales.

Wet Shave segment profit for the first quarter of fiscal 2024 was $53.7, an increase of $18.0, or 50.4%. Organic segment profit increased $14.4, or 40.3%, reflecting higher net sales and higher gross margins.

Sun and Skin Care

Sun and Skin Care net sales for the first quarter of fiscal 2024 increased $2.5, or 2.2%. Organic net sales increased $1.0, or 0.9%, driven by mid-single-digit Sun Care growth across both North America and International markets, partially offset by lower sales in Men’s grooming and Wet One’s. Organic net sales in International markets increased 8.0%, led by strong Sun Care demand in Latin America and Europe, while North America organic net sales decreased 2.3%, primarily driven by lower volumes.

Segment loss for the first quarter of fiscal 2024 was $1.3, a decrease of $14.6, or 109.8%. Organic segment profit decreased $15.1, or 113.6%, primarily driven by lower gross profit resulting from significantly higher inflation related costs.

Feminine Care

Feminine Care net sales for the first quarter of fiscal 2024 was $71.8, a decrease of $9.1, or 11.2%, primarily due to a decline in Tampons, reflective of the comparison to last years competitive product out-of-stocks and further retailer inventory reductions this fiscal quarter.

Feminine Care segment profit for the first quarter of fiscal 2024 was $7.3, a decrease of $4.6, or 38.7%. Organic segment profit decreased $4.5, or 37.9%, primarily driven by lower sales and the resulting impact on gross profit.

General Corporate and Other Expenses

For the first quarter of fiscal 2024, corporate expenses were $16.2, or 3.3%, of net sales, compared to $15.9, or 3.4%, of net sales in the prior year quarter. For the first quarter of fiscal 2024, the increase in corporate expenses was primarily due to higher people and incentive compensation costs.

Wet Ones manufacturing plant fire

On December 1, 2023, a fire occurred at our Wet Ones manufacturing plant in Sidney, Ohio. There were no injuries reported and damage was limited to a single manufacturing process. As a consequence of the fire damage, there was a partial shutdown of the operations that manufacture Wet Ones raw materials. Through the three months ended December 31, 2023, the Company has incurred $1.5 in costs related to incremental material charges, labor and absorption as a result of the fire.

Liquidity and Capital Resources

As of December 31, 2023, a significant portion of our cash balances was located outside the U.S. Given our extensive international operations, a significant portion of our cash is denominated in foreign currencies. Refer to Note 12 of Notes to Condensed Consolidated Financial Statements for a discussion of the primary currencies to which the Company is exposed. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. We generally repatriate a portion of current year earnings from select non-U.S. subsidiaries only if the economic cost of the repatriation is not considered material.

Our cash is deposited with multiple counterparties which consist of major financial institutions. We consistently monitor positions with, and credit ratings of, counterparties both internally and by using outside ratings agencies.

Our total borrowings as of December 31, 2023 and September 30, 2023 were as follows:

Our Revolver utilization is summarized below.

Historically, we have generated, and expect to continue to generate, favorable cash flows from operations. Our cash flows are affected by the seasonality of our Sun Care businesses, typically resulting in higher net sales and increased cash generated in the second and third quarters of each fiscal year. We believe our cash on hand, cash flows from operations and borrowing capacity under the Revolving Credit Facility will be sufficient to satisfy our future working capital requirements, interest payments, R&D activities, capital expenditures, and other financing requirements for at least the next 12 months. We will continue to monitor our cash flows, spending and liquidity needs.

Short-term financing needs primarily consist of working capital requirements and interest payments on our long-term debt. Long-term financing needs will depend largely on potential growth opportunities, including acquisition activity and repayment or refinancing of our long-term debt obligations. Our long-term liquidity may be influenced by our ability to borrow additional funds, renegotiate existing debt, and raise equity under terms that are favorable to us. We may, from time-to-time, seek to repurchase shares of our common stock. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

As of December 31, 2023, we were in compliance with the provisions and covenants associated with our debt agreements.

Cash Flows

A summary of our cash flow activities is provided in the following table:

Operating Activities

Cash flow used by operating activities was $72.9 during the first quarter of fiscal 2024, compared to a use of $86.3 during the prior year period. The decrease in cash used versus the same period in the prior year was driven by a lower net working capital build.

Investing Activities

Net cash used by investing activities was $6.0 during the first quarter of fiscal 2024, compared to $11.2 during the prior year period. Capital expenditures were $6.5 during the first quarter of fiscal 2024, compared to $11.3 in the prior year period.

Financing Activities

Net cash from financing activities was $69.8 during the first quarter of fiscal 2024, compared to $82.9 in the prior year period. During the first quarter of fiscal 2024, we had net borrowings of $91.0 under the Revolving Credit Facility, compared to $100.0 in the prior year period. Dividend payments totaled $7.6 in the first quarter of fiscal 2024, compared to $8.3 in the prior year period. We had financing outflows for employee equity awards held for taxes totaling $7.0 in the first quarter of fiscal 2024, compared to $8.1 in the prior year period.

Share Repurchases

During the first three months of fiscal 2024, we repurchased 0.4 shares of our common stock for $15.0. We have 4.2 shares remaining under the Repurchase Plan as of December 31, 2023. Future share repurchases, if any, would be made in the open market, privately negotiated transactions or otherwise, in such amounts and at such times as we deem appropriate based upon prevailing market conditions, business needs and other factors.

Dividends

Dividend activity for the three months ended December 31, 2023 are as follows:

On February 1, 2024, the Board declared a quarterly cash dividend of $0.15 per common share for the second fiscal quarter of 2024. The dividend will be payable on April 4, 2024 to shareholders of record as the close of business on March 7, 2024.

Dividends declared during the three months ended December 31, 2023 totaled $7.6. Payments made for dividends during the three months ended December 31, 2023 totaled $7.6.

Commitments and Contingencies

Contractual Obligations

As of December 31, 2023, we had outstanding borrowings of $213.0 under the Revolving Credit Facility. As of December 31, 2023, future minimum repayments of debt were: $213.0 in fiscal 2025, $750.0 in fiscal 2028 and $500.0 in fiscal 2029.

There have been no other material changes in our contractual obligations since the presentation in our 2023 Annual Report.

Recent Accounting Pronouncements

Information regarding new accounting pronouncements is included in Note 1 of the Notes to Condensed Consolidated Financial Statements

Critical Accounting Policies

Our critical accounting policies and estimates are fully described in our 2023 Annual Report. The preparation of these financial statements requires us to make estimates and assumptions. These estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates. There have been no significant changes to our critical accounting policies and estimates since September 30, 2023.

(Amounts in millions)

The market risk inherent in our financial instruments and positions represents the potential loss arising from adverse changes in currency rates, commodity prices, and interest rates. At times, we enter into contractual arrangements (derivatives) to reduce these exposures. For further information on our foreign currency derivative instruments, refer to Note 12 of Notes to our Condensed Consolidated Financial Statements. As of December 31, 2023, there were no open derivative or hedging instruments for future purchases of raw materials or commodities. Our exposure to interest rate risk relates primarily to our variable-rate debt instruments, which currently bear interest based on Secured Overnight Financing Rate (SOFR) plus margin. As of December 31, 2023, our outstanding variable-rate debt included $237.2 related to the Revolving Credit Facility and international, variable-rate notes payable. Assuming a one-percent increase in the applicable interest rates, annual interest expense on these variable-rate debt instruments would increase approximately $2.4.

There have been no material changes in our assessment of market risk sensitivity since our presentation of Quantitative and Qualitative Disclosures About Market Risk in our 2023 Annual Report.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2023. Based on that evaluation, our CEO and CFO concluded that, as of that date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are likely to materially affect, our internal control over financial reporting.