Edgewell Personal Care Co (EPC)

[Enterprising Investor]

Edgewell Personal Care Announces Fourth Quarter and Fiscal 2016 Results and Provides Fiscal Year 2017 Financial Outlook (11/10/16)

ST. LOUIS, Nov. 10, 2016 /PRNewswire/ -- Edgewell Personal Care Company (NYSE: EPC) today announced results for its full year and fourth fiscal quarter, which ended September 30, 2016.

Executive Summary

•Net sales increased 9.0% in the quarter and decreased 2.4% for the full year. Organic net sales increased 9.2% in the quarter and 1.4% for the full year. Excluding the estimated impact of international go-to-market changes, full year underlying net sales would have increased by 2.8%.

•Net earnings were $52.2 million for the quarter and $178.7 million for the full year. Adjusted EBITDA was $119.4 million for the quarter and $440.1 million for the full year.

•GAAP Diluted Earnings Per Share ("EPS") was $0.88 for the quarter and $2.99 for the full year. Adjusted EPS was $1.06 for the quarter and $3.57 for the full year.

•The Company provided its financial outlook for fiscal 2017 that is in line with its long term financial objectives.

The Company reports and forecasts results on a GAAP and "Non-GAAP" basis, and has reconciled Non-GAAP results and outlook to the most directly comparable GAAP measures later in this release. See "Non-GAAP Financial Measures" for a more detailed explanation, including definitions of various Non-GAAP terms used in this release.

All comparisons used in this release are with the same period in the prior fiscal year unless otherwise stated.

"We ended fiscal year 2016 with solid fourth quarter results, growing organic net sales in the quarter and the year, driven by growth in Wet Shave and Sun and Skin Care. We are pleased to have exceeded the sales, adjusted EPS, and operational objectives that we set for ourselves at the beginning of the year," said David Hatfield, Edgewell's President, Chief Executive Officer, and Chairman of the Board. "I want to thank all of our Edgewell colleagues around the world for that accomplishment and for their dedication and hard work during a very complex transition year." Mr. Hatfield continued, "We now move into the next phase for Edgewell, one where the strategy and the building blocks are in place to drive sustained performance on both the top and bottom line. We're excited about the organization we have in place, the products we have in the marketplace and the innovation in our pipeline. Although we recognize the tough competitive environment, we are confident that we can deliver results that are in line with the objectives of our long term financial algorithm in 2017."

Fiscal 4Q 2016 Operating Results (Unaudited)

Net sales were $610.6 million in the quarter, an increase of 9.0%. Organic net sales increased 9.2%, driven by growth in all four segments. North America net sales were up 8.4%, with growth across all segments. International (everything outside North America) net sales were up 14.2%, or 11.0% on an organic basis, driven by Wet Shave, with good performance in Asia, and Sun and Skin Care in Asia and Latin America.

Gross margin was $310.1 million, or 50.8% of net sales, representing a 270 basis point improvement over the prior year quarter. The gross margin increase was primarily due to high levels of promotional spending in the prior year quarter and lower material costs in the current year quarter, which was partly offset by higher start-up costs related to the Feminine Care production consolidation into the U.S. plant.

Advertising and sales promotion expense ("A&P") was $82.6 million, or 13.5% of net sales, down from prior year A&P of $95.7 million, or 17.1% of net sales. The majority of the decline was in the Wet Shave segment, as the prior year reflected higher expense related to Hydro Silk® in North America. A&P for the Sun and Skin Care segment was also down versus the year ago quarter.

Selling, general and administrative expense ("SG&A") was $107.8 million, or 17.7% of net sales, including $3.6 million of intangibles amortization, compared to $123.5 million, or 22.0% of net sales, in the prior year quarter. Excluding $30.1 million in prior year charges related to the spin-off of the Company's Household Products business in July 2015, SG&A as a percent of net sales increased 100 basis points over the prior year quarter. This increase was driven by higher spending in strategic growth projects, IT projects and other corporate costs, as well as increased compensation expense, including incentive compensation.

We incurred a $6.5 million non-cash asset intangibles impairment charge during the quarter in connection with our annual impairment testing.

The Company recorded pre-tax restructuring expense of $9.4 million ($1.7 million in Cost of goods sold and $7.7 million in Restructuring charges) compared to $6.3 million in the prior year quarter.

Other expense (income), net was an expense of $2.0 million during the quarter compared to income of $3.5 million in the prior year quarter. The change reflects the impact of foreign currency hedging contract losses, particularly related to the Japanese Yen, and revaluation losses on nonfunctional currency balance sheet exposures.

The effective tax rate for the year ended September 30, 2016 was 18.7% as compared to 35.4% in the prior year. The adjusted 2016 full year effective tax rate was 23.1% as compared to the prior year rate of 23.2%. The 2015 full year adjusted tax rate was favorably impacted by a large allocation of U.S. interest expense and corporate overheads associated with supporting the Company's former Household Products business that are not reported in discontinued operations. The 2016 full year adjusted tax rate includes a favorable mix of earnings in lower tax rate jurisdictions and positive adjustments to prior year tax accruals.

Net earnings in the quarter were $52.2 million, compared to a net loss of $219.5 million in the fourth quarter of fiscal 2015. The increase in net earnings was primarily related to the impact of an intangibles impairment charge and higher costs related to the spin-off in the prior year quarter, and to higher segment profit in the current year quarter. Fourth quarter Adjusted EBITDA was $119.4 million, an increase of $36.4 million versus fourth quarter 2015 Adjusted EBITDA of $83.0 million.

GAAP Diluted EPS was $0.88 in the quarter as compared to a loss of $3.57 in the prior year quarter. Adjusted EPS for the quarter was $1.06, compared to $0.64 in the prior year quarter.

Fiscal 4Q 2016 Operating Segment Results (Unaudited)

Wet Shave (Men's Systems, Women's Systems, Disposables, Shave Preps)

Wet Shave net sales increased $33.1 million, or 9.2%. Excluding the impact of currency movements, organic net sales increased $26.4 million, or 7.4%. North America drove the majority of the increase, due in large part to the high level of promotional spend in the prior year quarter related to coupons and trade spending. International growth was driven by Hydro® sales in Asia and Women's systems performance in EMEA. Wet Shave segment profit increased $38.2 million. On an organic basis, Wet Shave segment profit increased $30.9 million. The increase in profit was driven primarily by lower promotional spending, favorable costs, and lower A&P spend.

Sun and Skin Care (Sun Care, Wipes, Gloves)

Sun and Skin Care net sales increased $11.8 million, or 17.9%. Excluding the impact of currency movements, organic net sales increased $12.0 million, or 18.2%, driven by growth of Banana Boat® and Hawaiian Tropic® in both North America and International. Growth was driven by higher volumes due to category growth versus a year ago. Sun and Skin Care segment profit increased $9.6 million. Excluding the impact of currency movements, organic segment profit improved $9.7 million, driven by higher volumes, favorable price mix, lower product costs and reduced A&P spend.

Feminine Care (Tampons, Pads, Liners)

Feminine Care net sales increased $11.0 million, or 11.4%. Growth was largely driven by lower promotional spending, which more than offset lower volumes this quarter. Feminine Care segment profit decreased $1.1 million. The decrease was primarily due to start-up costs related to the production consolidation into the U.S. plant and slightly lower volumes, which offset the benefit from the lower promotional spend.

All Other (Infant Care, all other brands)

All Other net sales decreased $5.4 million, or 13.8%. Excluding the impact of currency movements and the sale of the Industrial blade business a year ago, organic net sales increased $2.1 million, or 5.3%, with growth in Diaper Genie®, slightly offset by lower volumes in infant cups and bottles. All Other segment profit increased $1.6 million.

Fiscal 2016 Operating Results (Unaudited)

Net sales were $2,362.0 million in fiscal 2016, a decrease of 2.4%. Organic net sales increased 1.4%, including an approximate $34.0 million, or 140 basis point, negative impact from international go-to-market changes. From a geographic perspective, North America organic net sales increased 1.7%, and International organic net sales increased 1.1%, or 5.0% on an underlying basis. From a segment perspective, organic net sales increased 1.8% for Wet Shave, and 4.6% for Sun and Skin Care. Organic net sales decreased 1.8% for Feminine Care and 1.2% for All Other.

Gross margin was $1,159.9 million, or 49.1% of net sales, representing a 20 basis point increase over the prior year, including a 10 basis point benefit from currency.

Net earnings in fiscal 2016 were $178.7 million, compared to a net loss of $275.3 million in fiscal 2015. The increase in earnings was primarily related to the prior year impact of an intangibles impairment charge, the Venezuela deconsolidation, and spin-related charges. Fiscal 2016 Adjusted EBITDA was $440.1 million versus fiscal 2015 Normalized EBITDA of $462.2 million. Year-over-year segment profit growth was more than offset by $7.0 million of unfavorable foreign currency, $11.6 million from the impact of Venezuela and Industrial, and $15 million in Other expense (income), net. The change in Other expense (income), net was driven by foreign currency hedging activity, which was in an income position in fiscal 2015 but changed to a loss position in fiscal 2016, in large part due to the strengthening of the Japanese Yen.

GAAP Diluted EPS was $2.99 in fiscal 2016 as compared to a loss of $4.44 in fiscal 2015. Adjusted EPS for the year was $3.57, compared to $2.80 in the prior year.

Net cash from operating activities was $176.4 million for fiscal 2016. During fiscal 2016, the Company made a discretionary contribution of $100.5 million to one of its international pension plans, and repurchased 2.5 million shares for $196.6 million.

Adjusted working capital as a percent of net sales was 16.1% at September 30, 2016, versus 17.5% as of September 30, 2015. The 140 basis point improvement was driven by improved days payable outstanding and days in inventory. Adjusted working capital continues to reflect a higher level of inventory in Feminine Care, which is expected to return to normal levels as the Company completes the consolidation of Feminine Care manufacturing in the U.S.

On October 20, 2016, the Company terminated its commitments under its Netherlands revolving credit facility and repaid all outstanding loans and other obligations in full, in the amount of approximately $277 million.

On November 1, 2016, the Company announced that it had acquired the outstanding shares of Bulldog Skincare Holdings Limited, a U.K. based men's grooming and skincare products company. The acquisition was financed through available foreign cash.

Full Fiscal Year 2017 Financial Outlook

For fiscal 2017, the Company estimates that net sales will increase by low single digits, with no impact from currency, based on current exchange rates (as of November 2, 2016), and an approximately 40 basis point benefit from the Bulldog acquisition.

The GAAP EPS outlook is estimated to be in the range of $3.60 - $3.80. Adjusted EPS is estimated to be in the range of $3.80 - $4.00. Adjusted operating income margin is anticipated to expand by at least 50 basis points. The impact from the acquisition of Bulldog is expected to be neutral to EPS in 2017. The effective tax rate for the fiscal year is estimated to be in the range of 27% to 28%.

The full-year estimate for restructuring related costs is $15 to $20 million for fiscal 2017. Incremental restructuring savings are expected to be approximately $20 to $25 million in fiscal 2017 and an additional $25 million in fiscal 2018.

The Company anticipates that fiscal 2017 Free Cash Flow will exceed 100% of net earnings.

As part of the Company's strategy to drive systematic cost reduction, the Zero Based Spend (ZBS) initiative was announced last quarter. Based on initial projections, ZBS is anticipated to drive $10 to $15 million in savings (net of implementation expense) in fiscal 2017, primarily in the second half of the year, and an additional $25 to $30 million in savings in fiscal 2018.

In fiscal 2017, we anticipate that sales and earnings growth will not be uniform by quarter, largely due to the timing of product launches and A&P phasing. In particular, fiscal first quarter net sales are anticipated to be flat and segment profit is anticipated to be lower than in the prior year quarter.

Webcast Information

In conjunction with this announcement, the Company will hold an investor conference call beginning at 10:00 a.m. Eastern Time today. The call will focus on fiscal 2016 fourth quarter earnings and the outlook for fiscal 2017. All interested parties may access a live webcast of this conference call at www.edgewell.com, under "Investors," and "News and Events" tabs or by using the following link:

http://ir.edgewell.com/news-and-events/events

For those unable to participate during the live webcast, a replay will be available on www.edgewell.com, under "Investors," "Financial Reports," and "Quarterly Earnings" tabs.

About Edgewell

Edgewell is a leading pure-play consumer products company with an attractive, diversified portfolio of established brand names such as Schick® and Wilkinson Sword® men's and women's shaving systems and disposable razors; Edge® and Skintimate® shave preparations; Playtex®, Stayfree®, Carefree® and o.b.® feminine care products; Banana Boat® and Hawaiian Tropic® sun care products; Playtex® infant feeding, Diaper Genie® and gloves; and Wet Ones® moist wipes. The Company has a broad global footprint and operates in more than 50 markets, including the U.S., Canada, Mexico, Germany, Japan and Australia, with approximately 6,000 employees worldwide.

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