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Edited Transcript of EPC earnings conference call or presentation 12-Nov-19 1:00pm GMT

Q4 2019 Edgewell Personal Care Co Earnings Call

ST. LOUIS Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Edgewell Personal Care Co earnings conference call or presentation Tuesday, November 12, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Gough

Edgewell Personal Care Company - VP of IR

* Daniel J. Sullivan

Edgewell Personal Care Company - CFO

* Rod R. Little

Edgewell Personal Care Company - President, CEO & Director

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Conference Call Participants

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* Ali Dibadj

Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst

* Faiza Alwy

Deutsche Bank AG, Research Division - Research Analyst

* Jason M. English

Goldman Sachs Group Inc., Research Division - VP

* Katie Sarah Grafstein

Barclays Bank PLC, Research Division - Assistant VP

* Kevin Michael Grundy

Jefferies LLC, Research Division - Senior VP & Equity Analyst

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Steven A. Strycula

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Edgewell Personal Care Fourth Quarter and Full Fiscal Year 2019 Earnings Call. (Operator Instructions) Please note this event is being recorded.

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

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Chris Gough, Edgewell Personal Care Company - VP of IR [2]

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Thanks, Ben, and good morning, everyone. And thank you for joining us this morning as we discuss Edgewell's fourth quarter and full fiscal year 2019 earnings. With me this morning is Rod Little, our President and Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call, then we'll hand over to Dan to discuss quarterly and full year results and our 2020 outlook. And we'll then transition to Q&A. This call is being recorded, and will be available for replay via our website, www.edgewell.com.

During the call, we may make statements about our expectations for future plans and performance. This might include future sales, earnings, advertising and promotional spending, product launches, savings and costs related to restructuring, changes to our working capital metrics, currency fluctuations, commodity costs, category value, future plans for return of capital to shareholders and more. Any such statements are forward-looking statements which reflect our current views with respect to future events. These statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption Risk Factors in our annual report on Form 10-K for the year ended September 30, 2018, as may be amended in our quarterly reports on Form 10-Q. These risks may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances, except as required by law.

During this call, we'll 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 to the most directly comparable GAAP measures are shown in our press release issued earlier today, which is available at the Investor Relations section of our website. Management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business.

With that, I would like to turn the call over to Rod.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [3]

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Thanks, Chris, and good morning, everyone.

One year ago, our leadership team committed to delivering on a set of business and financial objectives for 2019 that we believed were achievable and reflective of the increasingly difficult competitive climate and evolving marketplace, particularly in North America Wet Shave. We knew that 2019 would play an important foundational role in the further stabilization of our business, and that meeting these objectives would require a strong execution of Project Fuel, our transformational initiative to strengthen our company, reduce our cost structure and simplify the way we work. It would require investment in our brands, in our most compelling growth opportunities and across key retail channels, and it would require a transformation of our portfolio, with an eye toward refining our brands and offerings and enhancing our commercial capabilities across the entire company.

Today, I am pleased to say that we have made meaningful progress on all of these objectives. Financially, we delivered net sales and adjusted earnings per share that were in line with our expectations, while again delivering healthy cash flow generation to structurally deleverage our balance sheet. Importantly, and as expected, we made significant headway over the second half of the year, with nearly every geography and segment demonstrating improved top line trends in the second half of the year as compared to the first half. I am pleased with the underlying improving top line trends, and I believe the stabilization of our business that we have seen over the last 2 quarters provides the necessary foundation for 2020.

Dan will discuss this in more detail shortly.

Product fuel delivered above target at $122 million in gross savings, serving as the catalyst of change, redefining how we operate the business, and importantly, providing the necessary financial flexibility to reinvest and build on our brands and capabilities. With Project Fuel, we have fundamentally improved the commercial and operational performance of our business. Although a large portion of the project fuel savings were used to offset inflation, increased input costs and the impact of lower volumes, we were still able to invest in our highest potential initiatives.

The impact of our investment in price and trade is beginning to show with improving volume trends. While much work remains, trade investment in fem care helped bring stabilization at the shelf and led to improved top line trends in the second half of the year despite a slight step back in Q4.

A&P investment in Bulldog and Jack Black helped deliver accelerated growth and served as a reminder of the opportunities that these brands offer for our broader portfolio. More specifically, Bulldog sales have tripled since the acquisition in 2016 and Jack Black has experienced double-digit sales growth, driven by enhanced retail presence and fantastic performance in e-commerce, which has increased nearly 60% in the 18 months since the acquisition.

Jack Black is not our only area of success in e-commerce. We continued to invest in building capabilities and infrastructure in e-commerce. And for the year, we grew overall sales to this channel by approximately 30%, with strong performance from our businesses on Amazon in the U.S. and Tmall in China. In the U.S., consumption at Amazon increased over 25%, outpacing category growth in both Shave and Sun and Skin. In China, e-commerce sales increased significantly, driven by Intuition and Hydro, both outpacing the category average.

As part of the portfolio transformation, we ran a thorough strategic review process for the Feminine Care and Infant Care businesses. Ultimately, we determined that retaining the Feminine Care business was in the best interest of the company and our shareholders, whereas for the Infant and Pet Care business, we recently announced our intent to sell the business to our long-term partner, Angelcare, for $122.5 million. We believe this is the best path forward for both businesses and presents the best opportunity for value creation for Edgewell shareholders. We will provide additional detail about the Infant transaction upon its closing.

Of course, the cornerstone of our portfolio transformation this year is the pending combination with Harry's. Both companies remain proactive and timely in providing the respective U.S. and German authorities with desired information, and dialogue with the authorities remains frequent and constructive. We continue to maintain a high degree of confidence in a successful outcome and expect the transaction to close no later than the first quarter of calendar 2020. Because we don't yet have clearance to close, I cannot go into the specifics of the Harry's business on this call as we are still 2 independent and competing companies. However, I can share the significant progress we're making on integration planning and cultural transformation. Over the past several months, I have spent a significant amount of time working through integration planning with Andy and Jeff and along with both of our leadership teams, and I'm extremely confident in what these 2 companies can do together. The strategic rationale for the Harry's transaction continues to be as compelling now as when we announced the combination in May. This transaction is the lynchpin and accelerator of our transformation, bringing together highly complementary assets and capabilities that position us to win with consumers. The combination brings together a disruptive omnichannel, consumer-focused go-to-market approach, with a portfolio of market leading, well-established brands. It merges best-in-class direct-to-consumer capabilities with a strong portfolio of technology and IP, global scale and commercial infrastructure. And ultimately, it creates a highly capable, dynamic and experienced leadership team to drive the transformation and create significant value. We've made great progress in the integration planning for the 2 companies. Collectively, our teams have spent thousands of hours working to create a thoughtful and exciting plan for the combined business.

In addition to addressing day 1 readiness and ensuring seamless activation and business governance post close, we focused our efforts on the preparation of brand-led commercial plans and integrated portfolio thinking across key channels and geographies. Once the transaction closes, we will be ready to hit the ground running as a new agile and focused personal care company on day 1, with a focus on strong execution.

As I've said previously, establishing a culture that unlocks the very best of both organizations is perhaps the greatest enabler of success for this transaction. A major focus of the integration with Harry's has been developing a combined forward-thinking culture that leverages the best from each organization, a new third way. Leaders from both companies are spearheading this effort to develop a new purpose statement, vision, values and behaviors to create an environment of high engagement where everyone brings the best talent and creativity every day to fulfill our ambition of building a modern CPG 2.0 company that is built to win. These efforts will deliver a highly desirable daily work environment, robust talent acquisition and retention as well as ensuring an empowered decision-making model that provides agility and speed to market. I'm excited about the way both teams have come together in support of this work and look forward to sharing more details in the future.

Before handing over to Dan, let me comment on the 2020 outlook for the base Edgewell business.

Our team continues to demonstrate an unrelenting dedication to transformation in a challenging industry and competitive environment. We have worked hard to simplify and streamline the business, providing the resources to invest in innovation and growth. We have an exciting growth opportunity as we near the close of our combination with Harry's. And with our recent infant and pet care divestiture, we have taken decisive actions to reshape our company and focus on our core Personal Care brands. All of which positions us well as we move into the next phase of the company's evolution, a phase where we will be focused on growth and reinvestment in the business to ensure sustainable value creation. This reinvestment is reflected in our outlook for 2020, with meaningful increases in A&P and capability building as we better moderate the balance between trade and brand investment. Our outlook also reflects stable top line and gross margin performance, further savings from Project Fuel and healthy free cash flow generation. This, of course, is only part of the story, as we are not in a position to provide guidance for the combined business today given we are not yet closed. However, it's important to note that the base Edgewell outlook for fiscal 2020, that Dan will discuss in a moment, is in line with the valuation model and assumptions developed back in the spring in support of the combination with Harry's.

We have made significant progress over the past year in setting our business up for growth and value creation. We have a clear plan for the future and also the right leadership in place to deliver on the plan. This is an exciting time for us as we build a new company and a new culture, one that is well positioned to win.

And now I'd like to ask Dan to take you through our fiscal fourth quarter and full year business and financial results and the outlook for fiscal 2020.

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Daniel J. Sullivan, Edgewell Personal Care Company - CFO [4]

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Thanks, Rod. Good morning, everyone.

Overall, the fourth quarter played out largely as we expected, reflecting our continued focus on executing against our core commercial and operational fundamentals. As a result, we saw further stabilization in our top line performance and accelerated growth savings from Project Fuel, which were reinvested behind growth in key brands and markets. We also generated $74 million of free cash flow, up almost 23% versus the same quarter of last year, which allowed us to continue to delever.

So let me start with the discussion of our operational performance in the quarter and then move to highlights for the full year and our outlook for fiscal 2020.

Net sales in the quarter decreased 1.7% or minus 90 basis points on an organic basis, in line with our expectations, as higher volumes in Grooming and Sun and Skin Care were more than offset by unfavorable price/mix in Wet Shave. International organic net sales grew 4.8% in the quarter, driven by Wet Shave and Sun and Skin Care and aided in part by the favorable timing impact of higher trade inventories ahead of the planned VAT increase in Japan in October. Importantly, all 3 of our international geographic areas saw organic net sales growth. Organic sales in North America decreased 5.1%, as growth in Sun and Skin Care and Infant and Other was more than offset by declines in the Wet Shave and fem care segments.

Looking at organic sales by segment.

Wet Shave continued to stabilize, decreasing 1.7%, consistent with our results a quarter ago and in line with our expectations, and includes the favorability resulting from the higher sales in Japan ahead of the VAT increase. Organic sales in North America, which were down 9%, continued to weigh on overall performance, driven by unfavorable price/mix, partly offset by favorable volume and product mix. The growth in volume came from several of our key initiatives, including our new Skintimate disposables launch, Bulldog razor sales and e-commerce business. Organic sales in international markets increased 4.2%, and growth came from all regions.

Sun and Skin Care organic sales increased 7%, driven by volume growth in men's grooming and international Sun Care. North American organic sales increased 4.5%, driven by continued strong Bulldog and Jack Black performance. Sun Care sales in North America declined despite over 4% consumption growth, primarily as a result of lower Banana Boat sales and higher coupons compared to the prior year period. International organic sales increased 10.6%, driven by growth in both men's grooming and Sun Care.

Fem care organic sales decreased 5.6% as compared to the prior year period despite stabilizing consumption trends as we experienced some level of destocking and cycled aggressive promotions in grocery a year ago. Pads and Liners continued to show improving trends and grew in the quarter. However, tampon sales declined compared to the prior year period, driven by Gentle Glide and Sport. o.b. tampons continued to grow, driven by innovation launched this year.

All other organic sales increased 2%, driven by cups and mealtime products related to the PAW Patrol launch.

Briefly looking at the category dynamics in the quarter.

In Wet Shave, as measured by Nielsen, the U.S. razors and blades category decreased about 3% in the latest 12-week data, with Men's Systems declining 1.6%, Women's declining 2.7% and Disposables declining 4.6%. Including both e-commerce and offline unmeasured, we estimate that U.S. razors and blades increased nearly 1%, consistent with the 52-week estimate. From a market share perspective, as measured by Nielsen in our latest 12-week data, we are at a 25.3% share in razors and blades in the U.S., down 40 basis points versus a year ago and a sequential improvement over previous quarters. On a global basis, we estimate our share was down 30 basis points. Within the U.S. Sun Care category, 12-week consumption increased 8.5%. Our share declined by approximately 110 basis points, primarily reflecting losses in Banana Boat Sport. Hawaiian Tropic share was flat.

Gross margin increased 70 basis points year-over-year to 43.6%. Excluding costs associated with Sun Care reformulation and Project Fuel, gross margin decreased about 380 basis points year-over-year, despite meaningful gross fuel savings that were reinvested in the business. The decline was driven primarily by continued unfavorable price and cost mix.

A&P expense this quarter was 11.3% of net sales as compared to 11.8% in the prior year period. The decrease in A&P was primarily driven by lower spending in Wet Shave due to a reduction in Hydro and Intuition f.a.b. spend. Spending in Sun and Skin Care and men's grooming increased in the quarter.

SG&A, including amortization expense, was $91.8 million or 17.4% of net sales as compared to 17% of net sales in the prior year. Excluding the impact of restructuring-related charges, Harry's integration costs and other charges, SG&A as a percent of net sales improved 90 basis points from 16.8% last year to 15.9% this quarter despite lower sales. The operational improvement in SG&A was primarily driven by a strong execution of Project Fuel, partly offset by inflation. There was no material impact on SG&A year-over-year associated with incentive costs.

GAAP diluted net earnings per share were $0.75 compared to $0.36 per share in the fourth quarter of fiscal 2018. And adjusted earnings per share were $0.86 compared to $1.11 in the prior year period.

Now for a few highlights on the full fiscal year.

Net sales decreased 4.2% or minus 3.4% on an organic basis. North America organic sales decreased 5.9%, primarily driven by declines in Wet Shave and fem care. Total international organic sales increased 40 basis points, with growth in Wet Shave and Sun and Skin Care.

Looking at our full year performance, it's important to note the improving organic sales trends in the second half of the fiscal year, as we had anticipated.

First half organic net sales declined 6.5% while second half sales declined only 60 basis points. This reflected underlying improvement in each segment as well as in each of our geographic regions. Overall, we are seeing healthier Wet Shave and Sun Care category trends and are better executing our commercial plans, both with consumers and at the shelf in an increasingly competitive marketplace.

International organic sales increased over 4% in each of the past 2 quarters, posting growth for the full fiscal year in aggregate as well as in Wet Shave and Sun and Skin. Our global men's grooming business continued to see strong results, led by Bulldog and Jack Black.

And finally, global e-commerce sales increased 30%, with growth and share gains on Amazon.

These results reinforce our belief that we are investing in the right fundamental drivers of growth for the business, and we will accelerate these investments in 2020.

Gross margin, excluding the Sun Care reformulation and Project Fuel charges, was 45.3%, a decline of 210 basis points compared to the prior year, as the meaningful savings realized in Project Fuel were largely reinvested in growth objectives for both key brands and markets. This, combined with inflationary headwinds, higher commodity costs and negative mix, drove the year-over-year declines.

A&P expense was 11.7% of net sales, down versus the prior year spending of 13.1%.

We as I discussed last quarter, there were a combination of factors leading to the lower level of spend this fiscal year, including a concentrated effort to drive out nonproductive spend through Project Fuel, lower display costs driven by lower volumes, an intentional short-term shift in spend to trade promotions as well as favorable comparisons to a year ago with the launch of Hydro Sense and Intuition f.a.b. We believe we've been responsible in both reducing and reallocating spend to ensure that near-term investments are best deployed against brand-building consumer efforts and retail trade competitive requirements.

We increased investments in select strategic objectives like Jack Black, Bulldog and our e-commerce business, all of which saw strong growth.

SG&A expense was $372 million or 17.5% of net sales, including $17.7 million of intangibles amortization. On a normalized basis, SG&A was 16.5% of net sales compared to 17.6% in the prior year period. This 110 basis point improvement despite lower net sales was driven by Project Fuel savings, partially offset by inflation.

Adjusted operating income was 14.6% of sales, an improvement of 50 basis points versus the prior year period.

Adjusted net earnings were $188.8 million, a decrease of 1.5% compared to the prior year.

The adjusted effective tax rate for fiscal 2019 was 23.8%, an increase of 80 basis points compared to the prior year.

GAAP diluted earnings per share were a loss of $6.52 in 2019, including the impact of a $549 million noncash impairment charge taken in the third quarter. This compares to earnings of $1.90 in the prior year. Adjusted earnings per share were $3.48 for fiscal 2019, including $0.15 per share of headwinds associated with unfavorable currency translation and a higher tax rate as well as $0.12 per share of tailwinds related to lower interest expense and other favorable items. This compared to $3.52 per share in the prior year period.

Net cash from operating activities was $190.6 million for fiscal 2019 as compared to $259.4 million during the prior year. The decline in operating cash flow was primarily driven by working capital changes, most notably, increased inventory days needed to improve service levels and to support the Sun Care reformulation effort.

The company's current net debt leverage ratio is at 2.8x.

Now I'd like to turn to Project Fuel.

Our teams continued to execute the core drivers of this program extremely well across the business, delivering $122 million in incremental gross savings for the full fiscal year. These savings helped to offset meaningful year-over-year inflationary headwinds across our operations and the impact of lower volumes. More importantly, they also provided the catalyst for reinvestment in our key brands and growth initiatives. And we saw some of the benefits of these investments in the accelerated growth of men's grooming and our e-commerce business. In totality, we continue to expect Project Fuel will generate $225 million to $240 million in total annual gross savings by the end of fiscal 2021. And we estimate onetime pretax charges to be approximately $130 million to $140 million through the end of 2021 fiscal year.

Now I'd like to turn to our outlook for fiscal 2020.

What we are sharing with you today is an outlook for the Edgewell business only. This outlook includes the infant care business and it does not include any elements of the Harry's combination. Adjustments to this outlook will be provided at a future date post close of these transactions.

Turning to the stand-alone Edgewell outlook.

As Rod mentioned earlier, the outlook for the business is largely in line with the assumptions, business plans and ultimately the valuation models developed for the combination business case earlier this year as part of our diligence efforts. At a high level, our outlook can be defined by 3 pillars.

First, top line trend improvement. Following the improved second half of 2019, we anticipate flat to slightly down organic sales results, with continued improving trends across all segments and most markets. The second element is gross margin stabilization, supported in part by further fuel savings, selective price actions and moderated trade spends. And finally, choiceful brand reinvestment, as this outlook contemplates meaningful reinvestment in key growth initiatives and overall increased A&P spend. We also continue to see gross Project Fuel savings, though at a lower -- at lower absolute levels than fiscal 2019.

As a result of the increased investment in the business, we anticipate lower adjusted EPS and adjusted EBITDA compared to fiscal 2019.

Now to the specific guidance for 2020.

We estimate organic net sales growth to be in the range of flat to down 1%. We estimate currency to negatively impact total reported sales by 100 basis points. The outlook for GAAP EPS is in the range of $2.45 to $2.65, and includes Project Fuel restructuring, IT enablement charges and other onetime charges. Our adjusted EPS outlook is in the range of $3.10 to $3.30. Adjusted EBITDA is estimated to be in the range of $370 million to $380 million.

Project Fuel is expected to generate about $70 million in incremental gross savings. Despite anticipated easing in many commodity categories, we still expect that approximately 70% of the fuel gross savings will be used to offset continued wage inflation, meaningful tariff headwinds and other rising input costs, with the remainder largely invested back in the business. Project Fuel-related restructuring charges are expected to be approximately $36 million.

The adjusted effective tax rate for the fiscal year is estimated to be in the range of 22.5% to 24.5%. And our outlook for fiscal 2020 free cash flow is expected to be in excess of 125% of GAAP earnings, with CapEx estimated to be between 3% and 3.5% of net sales.

And with that, I'll turn it back over to the operator and open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ali Dibadj with Bernstein.

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Ali Dibadj, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [2]

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I guess I have a few questions. One is, from a category perspective in North America men's grooming or men's Wet Shave, have you seen any stability from a category volume perspective or a competitive perspective in men's and then separately in women's at this point?

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [3]

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Yes. Ali, thanks for the question. The category, I think if you look at it today versus where we were a year ago has stabilized across men's and women's. At this point a year ago, there were still Harry's rolling out into Walmart, you had Flamingo and Joy just coming into the equation at this point; not yet in brick and mortar, but knowing it was coming in February, right, earlier this year. So that level of disruption that was playing out a year ago has now played out. And I think as we look at the categories in the U.S. in general, I would say, we view them as having stabilized. The market we have is roughly flat to up 1%. And so pricing has stabilized and shave incidents have stabilized. I would say still slightly negative, but in better shape than where we were a year ago.

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Ali Dibadj, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [4]

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So if that's the case, can you just talk through in a little bit more detail, maybe quantifications would be helpful too, in terms of the big ramp-up in investments next year. I understand that, that's going to be a lot of advertising from your commentary earlier. But does that have the risk of destabilizing things again? It's a very delicate balance, as you know, with your competitors, even the fact that you're buying one of them.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [5]

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Yes. Ali, I think from a competitive landscape, the category continues to be extremely competitive, right, with Gillette as the clear market leader, with lots of financial flexibility in their model. BIC coming with the hybrid and having some level of success in some accounts; and then not a brick and mortar retail, but Dollar Shave, Unilever out there from a competitive standpoint. So the landscape is very competitive, right, from a starting point.

I think as we look towards our own business and the combination with Harry's, we're going to be focused on brand building and equity building. We're not interested in looking at price and trade and trying to escalate that or lead a new round of what has been value destruction over the last couple of years. And so our -- we're not going to be price disadvantaged. We're not going to have barriers around trade margin to the trade wanting to partner and work with us. So we'll address those as they come up, but the bulk of our reinvestment is going to be into brand equity-building activity that will not only start to show benefit in 2020, but really in '21 and beyond.

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Ali Dibadj, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [6]

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Okay. And just last question on fem care. You said, I think last quarter that you do expect improvement. We're not really seeing it. Are you still sticking by your guns that we should see improvement in the next quarter or 2?

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [7]

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Yes, we are, Ali. What's unfortunate is just as the way Q4 sets up, there's some inventory stocking and promotion balance versus the prior period that makes it look like a step-back. However, if you look at share trends and consumption trends, they continue to improve behind what has been a stabilized distribution like-for-like outcome versus the prior period. So we remain confident that we'll improve the trends in that business.

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Operator [8]

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Our next question comes from Kevin Grundy with Jefferies.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [9]

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Just to stick with the line of questioning. So it looks like the spending is largely going to be A&P related, which had been sort of coming down. Understanding the business mix played a part in that, but you don't have to go back too far, it was up north of 14% of sales. So the question is, is this sort of a permanent step-up here as you're looking at it, or is this something you think is going to have to continue to move higher over time?

And then do you feel like you have good visibility on the return that you're going to get? Trends improved a bit in the back half of the year, albeit maybe some of this was sort of comp driven. How good do you think your visibility is on some of these improving trends? And then I have a quick follow-up.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [10]

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Yes. On the increase in A&P year-over-year, we've talked about in the past that we were going to look to a period where we would spend more, not less in equity building up against the brands in the business. As we work through Project Fuel, as we assess the return we were getting on our plans in 2018 and 2019, frankly, we didn't see the return as being there, which is why you saw the A&P cuts.

As we have better talent, better plans and programs, better exposure to categories and channels that have growth in them, you're seeing that investment come back in. And I would tell you, as we look at it, 2020 is just the first step.

Moving forward, any meaningful move up from where we are in '20 would be dependent on the return that we see and get as we would look towards '21 and beyond. I will remind though, you -- and Kevin, you know this, but others, looking at the business, the percentage up against the branded business is actually 1 point or so higher when you factor out that we don't spend A&P against our private label, private brands business.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [11]

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Yes. Understood. And that was the point I was alluding to. Just a quick follow-up, and then I'll pass it on. The long-term targets last quarter you guys basically supported. This was the $2.7 billion in sales and the $475 million in EBITDA all-in, including Harry's. So understanding that did not include the Infant and Pet divestiture. So if we adjust that EBITDA number by, call it, like circa $15 million, are you still supporting that number today? And then I'll pass it on.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [12]

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Yes. We're not changing our outlook, Kevin, and we're not updating on that today. We stand by the outlook, but there will be an adjustment that needs to be made once we close Infant and Pet for that P&L to come out. Whether it's $15 million or not, we've got to do that work. But yes.

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Daniel J. Sullivan, Edgewell Personal Care Company - CFO [13]

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Yes. And maybe just to remind everyone of the building blocks that were behind that outlook because there are 3 foundational pillars to call out. One obviously is the Edgewell stand-alone business which, as we've said, profiles with stable top line performance, solid EBITDA and cash flow generation. And as you've heard us say today, for 2020, this outlook that we've provided lines up very well with the models developed during the diligence.

Second element, of course, is the Harry's business. And while we're not going to comment on that business today, what we have said is, while it's historically not been profitable, we do anticipate continued strong top line performance here, and therefore, a significant leverage over costs, providing the catalyst for meaningful EBITDA growth. And then, of course, the third part is on synergies. And although the deal was never defined through the lens of cost synergies, we continue to expect strong synergy capture beginning in the first full year post close 2021.

So yes, there'll be an adjustment for Infant coming out, but we remain really excited about the opportunity behind those 3 pillars that really support the $475 million in 2021.

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Operator [14]

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Our next question comes from Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Rod, just I think we're all trying to understand how the A&P works going into kind of calendar 2020 with Harry's pending. And when I say that, I mean it seems tough to have an advertising, marketing budget assuming the deal doesn't close near term. So I'm just trying to figure out, are the businesses, since it's not going to close now maybe for the next few months, assume that through the spring resets and early summer they really run separately from a customer-facing side? Or can you -- if the deal closes sooner, can some of this advertising and marketing budget switch? And how does this affect resets? Do you have any say in kind of how the spring resets look with both brands? Or just kind of help us understand as we go these next 4 or 5 months with the transition still in place.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [16]

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Yes. A good question, Bill. Thanks. It starts by -- we're separate independent companies today than our competitors, right? So we've set this business plan up and what you see today as a stand-alone legacy Edgewell company. And as part of that, because we will be coming together, and that will happen relatively quickly here, what you're seeing today laid out is only part of the story. We felt it was important to give transparency and visibility to where the legacy business is so that people understand that. But it's certainly not reflective of what the plan would look like if we were going to be stand-alone with no eye towards the Harry's combination. And that said, we feel good about the plan that's been built this year. And the incremental A&P support is not all specifically up against Wet Shave, right? When we get closed, we'll look at putting that together with what Harry's has planned, and we'll have a combined plan that maximizes the return across the combined business.

But if you look at our plan and what we're doing in this plan, we have some really good growth profiles in our business that we want to keep going. Jack Black, Bulldog, China, e-com, all double-digit growers. The U.S. and Japan actually have some interesting return profiles where we want to put incremental investment into North America and Asia more generally. Our Sun Care business, we're excited about as we come through what has been a tough year with the reformulation and the allocation to start a late and wet sun season. We like the innovation we have planned for next year. And we're putting investment back in behind them. That's our highest ROI return actually; historically, is when we put increased investment against Sun, we see a nice return. And then we have international doing well, and we project international will continue to do well next year.

So across all of those elements when you think about where the A&P investment is going, the real overlap, if you will, with where our business and Harry's is, it's quite small. But we'll look at that in a combined way once we can do that when we're closed. But if -- but we're happy that we're putting the investment back in. We think it's necessary and right for the business.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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Got it. And just as a quick follow-up. The international Wet Shave growth up 4%., is that a number -- I guess, can you tell us how much of that was the pull forward from Japan? And then kind of -- are you expecting that kind of low to mid-single-digit growth in 2020 for Wet Shave International?

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Daniel J. Sullivan, Edgewell Personal Care Company - CFO [18]

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Yes. So the impact of Japan on the quarter totals about 50 basis points. Obviously, if you're talking about international penetration, it's going to be higher than that. I think, look, we've seen -- we've always projected growth out of the international business. We're excited that we saw growth 2 straight quarters and across all of our areas. So we'll continue to look for that business to grow. And as Roger said, we're going to continue to reinvest behind it in 2020 and beyond to ensure that growth.

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Operator [19]

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Our next question comes from Olivia Tong with Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [20]

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Wanted to start on gross margin and if you could give a little bit more detail on what sort of drove the decline this quarter. And once you get to the turnaround, what's your expectation for fiscal '20? And obviously, we've talked a lot about your EBITDA expectations. But as you think about the contribution from gross margin, we'd love to hear a little bit more on that.

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Daniel J. Sullivan, Edgewell Personal Care Company - CFO [21]

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Sure. So in the quarter, look, we thought we had a pretty good line of sight to margin back in our 3Q call, I think we identified 300 to 325 bps of year-over-year pressure. Played out slightly higher than that, largely due to a bit more promotional intensity and a bit of negative mix. But overall, we certainly weren't surprised by the performance in the quarter. We had called for that.

I think looking at the year overall, the main driver -- you've got meaningful fuel savings that unfortunately were largely absorbed by really rampant inflationary pressures across all areas of the business. And then we made the choice to invest heavily in trade and promotion and price, including reallocating funds out of A&P into additional trade. So that -- if I had to summarize, that was worth about 100 basis points of the 200 basis point year-over-year decline. And then you had some other items as well, slightly higher obsolescence costs and negative mix.

Why we're comfortable with an outlook in 2020 that calls for stabilization is really a couple of things. So one, we expect some level of accretion from fuel on margin rates. Even though we still expect significant inflationary costs and some tariff pressures, we do expect that fuel will provide some level of rate accretion. We're also taking selective price actions across certain markets and categories which we think will be helpful to our margin profile. And then lastly, as we've said, we're going to moderate the level of trade spend versus what we saw in 2019. So when you pull all of those together, that's why we're comfortable calling for a more stabilized margin picture in 2020.

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Operator [22]

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Our next question comes from Jason English with Goldman Sachs.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [23]

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Two questions for me. First, on cost inflation. Can you give us a little more context around where this is coming from? Because it certainly stands in sort of stark contrast to what we're seeing industry-wide. And when you look at steel prices in the U.S., they've come in substantially -- or they've come in kind of the right direction. Packaging costs seem to be coming in. So it's a little hard for us to foot kind of where this pressure is going to be so substantial for you.

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Daniel J. Sullivan, Edgewell Personal Care Company - CFO [24]

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Yes, absolutely. So I think it's important to back up and just think about our total book of business. On the commodity side of the equation, which are actually the things you're calling out, it's about 20% of our total cost structure. And in many of these categories, you're absolutely right, we are seeing not only easing of inflation. We're actually seeing deflationary trends around resin, around textiles, around packaging, around board. So completely agree with the assessment there.

Having said that, we continue to anticipate meaningful cost headwinds in a few other areas. Sun Care chemical costs continue to increase. Tariff headwinds are meaningful for us in 2020, if you think about not just the Sun Care chemicals that we purchase out of China, but the steel costs associated with our shave prep business.

And then on sort of the core business, we still anticipate headwinds mostly around wage pressure and a bit on transportation. So I guess, long story short, certainly some easing in commodities, but unfortunately, other headwinds, namely in Sun Care chemicals and tariffs, keep us in a highly pressurized cost position.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [25]

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That's helpful. And I want to come back to Mr. Grundy's question and the bridge to $475 million. Obviously, some adjustments before we contemplate adjustments for fem care. But it implies like $100 million of EBITDA growth next year off of the guidance you have here. And I think the base you're setting for this year is a little bit lower despite a pull forward of savings. So now we've got less savings to look forward to in fiscal '21 with a lower base.

It feels like the path to that $475 million is becoming a bit more stretched and a little harder to achieve. Can you help us contextualize the building blocks? How do we get there? Why should we believe that, that's still a feasible number?

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [26]

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Jason, we're not going to get into updating the details. We're not prepared to do that in total of how we get to the $475 million. We'll do that once we're closed, and we can actually see the Harry's numbers and get into the detail and update the work we did back in the spring when we put the guidance out.

But if you look at the components, and we said this in our commentary, the input to 2020 of the Edgewell business into that combined business plan is largely where we thought it would be. Right? So we know that piece of the input and we know what we assume for '21 on the Edgewell business. And I think from our perspective, we don't see a change there, right?

So that actually is a piece to us that's certain. That then leaves synergies, and it leads to Harry's business performance and the leverage we can bring on those sales as they grow and roll out their business. And so it's those 3 pieces that come together that when we look at, keep us confident in the $475 million. And what may look like a change to you doesn't necessarily appear the same way internally.

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Operator [27]

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Our next question comes from Faiza Alwy with Deutsche Bank.

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Faiza Alwy, Deutsche Bank AG, Research Division - Research Analyst [28]

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I wanted to talk about Sun and Skin Care. I guess the first question is, how sustainable do you think those results are? And when -- or what is the profitability outlook for that business? Because despite the strong sales growth, there doesn't seem to be much of a profit contribution there. So I would just love more color on that.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [29]

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Yes. Thanks, Faiza. I think for Sun and Skin, we see a lot of good to come in those categories. So what we've done specifically on Skin up to this point, primarily with Jack Black and Bulldog, is something that as we look forward at the growth trajectories and profile, we see a lot of continued upside there.

Double-digit growth rates is what we've historically done. We have that planned out in the foreseeable future and have line of sight to that.

One of the important points behind your question in that it makes us a little more bullish on that part of the portfolio is it's a rapidly growing segment, particularly the men's skin care area. And so as we define our business around grooming, Wet Shave, Skin combined, there is really nice growth in that part of the business. And we think we have brands with the right portfolios, innovation pipelines to take advantage of that.

So on Skin, we feel good about that. And then there's obviously a leg of that story that continues once we get closed with Harry's and you think about their exposure to that as well.

On the Sun side, I think we continue to feel good about the category overall. It's growing. And the issues we had this year, one was in our control with the Sun Care reformulation that we did at the beginning of the season to get that behind us as opposed to it being a mid-season cutover, is really around supply assurance. But what that did to us is it put us on allocation of supply early in the season, which impacted our results this past year. And then that, combined with -- through June, July, you had the wettest 52-month period on record in the United States, which got us off to a slow start. And then with our brands being more around beach orientation, outside orientation, with fewer beach incidents, that obviously disproportionately impacted our shares.

Moving forward, we can't control the weather, but that will normalize itself over time.

We've made incremental investments in R&D around formulation capability. Where we feel really good about our front-end formulation capability, significantly improved capability versus where we were 2 years ago. And we like the innovation path we're on. And I think we're also looking more holistically at the category and thinking about what our portfolio looks like, not only around beach access, but every day sun. And if you look at brands that are winning, such as Neutrogena, who's been growing share nicely, it's that every day positioning that's quite important. So as we look going forward, the combination of all that, I think we feel really good about the category and our ability to participate in it.

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Operator [30]

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Our next question comes from Steve Strycula with UBS.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [31]

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So a question on the domestic Wet Shave business. Wanted to go through that and just kind of understand how we ended the fourth quarter down 9%. And then ultimately, what -- within your organic sales framework for 2020, how should that business shake out based off what you think of internal innovation, shelf reset? And then more importantly, how should we think about the trade spend environment moderating and pricing going higher when the opposite proved true in the last quarter?

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [32]

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Yes. Thanks, Steve. I want to go back to the second part of Faiza's question around margin profile of Sun and Skin. We make nice margins on those businesses. They are below our Wet Shave blade razor margins, and so there is a negative mix, if you will, there. And that's part of what we've been working through from a margin perspective. But they are very profitable, and within their segments, I would say, at or above category average profitability.

So Steve, back to your question around the domestic Wet Shave business. I think we're coming off of a period that has been volatile and dynamic around what's happening in the base being quite different than what's happening in the current periods just around like-for-like distribution, particularly with the Harry's rollout across the full Walmart display and then you look at Joy and Flamingo coming in line as well, right?

We've had the impacts from that. We've adjusted price to be competitive with the end consumer. And we've put incremental trade margin in to remove barriers of our trade partners wanting to work with us and partnering with us.

So that's all in and largely done. There's some incremental investment we're making next year, but it's very minor and very tactical, certainly compared to where we've been. And so as we look going forward in the business, I see a much more stable environment. We'll have some moves from quarter to quarter, but I think we're more like-for-like with distribution at this point. We're more stable with pricing. We were also lapping the Intuition f.a.b. launch on the women's side. It was launched in '18, that we were lapping in '19, with no equivalent launch essentially. So as we bring our innovation pipeline forward in the future, we're looking at how we sequence that throughout the year to have more stability, more predictability, and obviously, better innovation plans in general that come forward that help us with our volume gains.

And so I wouldn't spend too much time looking backwards in the category to try to predict the future. But I think in total, we have wet shave improving year-over-year versus what we did in '19. '20 will be better, and that also holds true for the domestic U.S. business.

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Operator [33]

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Our next question comes from Kate Grafstein with Barclays.

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Katie Sarah Grafstein, Barclays Bank PLC, Research Division - Assistant VP [34]

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Dan, I think you had mentioned taking select pricing across some markets next year. And I was wondering if you can maybe give more details there in terms of which segments or geographies. And then just separately, I was also wondering if you could share your expectations for market share performance overall on the 3 segments for next year.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [35]

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I'm sorry, Kate, can -- we didn't catch the first part of your question, the line cut out. Are you talking to pricing?

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Katie Sarah Grafstein, Barclays Bank PLC, Research Division - Assistant VP [36]

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Sorry. Yes. I was just asking about which segments or geographies you're planning to take some select pricing next year.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [37]

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Yes. So we're planning some pricing behind Sun. And I think as Dan has laid out, the chemical and input cost increases in those business have been substantial and significant, actually, over the last couple of years now. And particularly as the bar goes up on the ingredients that go into the Sun Care products in the FDA monograph, it's becoming more expensive to compete in that category and to formulate products. And so we see some pricing behind Sun that we have planned in, and that's largely it. It's status quo everywhere else from a category and geographic standpoint. And so that's the price increase.

The second part of the equation, around market shares. We've seen generally improving trends in market share over the second half of the year in '19, and we essentially expect that to continue as we go into '20. So I would call it generally a stable set of assumptions of year-over-year market share change.

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Operator [38]

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That concludes our question-and-answer session. I would like to turn the conference back over to Chief Executive Officer, Rod Little, for any closing remarks.

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Rod R. Little, Edgewell Personal Care Company - President, CEO & Director [39]

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Thank you, everybody, for joining today. We appreciate your time and interest in Edgewell.

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Operator [40]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.