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Edgewell Personal Care Co (NYSE:EPC)
Q3 2019 Earnings Call
Aug 6, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Edgewell Personal Care Third Quarter Fiscal 2019 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Chris Gough, Vice President of Investor Relations. Please go ahead.

Chris Gough -- Investor Relations

Thank you. Good morning, everyone, and thank you for joining us this morning as we discuss Edgewell's third quarter fiscal 2019 earnings conference call. 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 will hand over to Dan to discuss quarterly results and full year outlook, and we will then transition to Q&A. This call is being recorded and will be available for replay via our website www.edgewell.com. During the call, we may make statements about our expectations for future plans and performance.

This might include future sales, earnings, advertising and promotional spending, product launches, savings and costs related to restructurings, changes to our working capital metrics, currency fluctuations, commodity costs, category value, future plans for return of capital 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 will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures 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.

Rod R. Little -- President And Chief Executive Officer

Thanks, Chris, and good morning, everyone. I would like to start today's call by discussing the continued progress we are making to transform our business and build the foundation for future growth and value creation. I'll then provide an update on the strategic review process for the Feminine and Infant Care businesses, and I'll conclude with an update on the significant progress we are making on the integration planning with the Harry's team. The results in the quarter reflect the steps that we've been taking to fundamentally improve the commercial and operational performance of our business. Dan will take you through the detailed financial results in a moment. And as we communicated last quarter, we had an expectation for a much improved top line performance this quarter compared to recent trends as well as an expectation for solid adjusted earnings growth.

And we delivered on both of these objectives. Organic sales in the quarter were essentially flat, marking the best organic performance for the company in over 2 years and a meaningful improvement from recent trend. We continue to reshape how we operate this business through Project Fuel, which has generated over $100 million in gross savings to date, providing important offsets to significant inflationary headwinds and serving as our initial catalyst for reinvestment in our growth objectives. The flat top line performance in the quarter and ongoing benefits from Project Fuel, we delivered strong operating profit and adjusted earnings per share of $1.11.

Our GAAP earnings per share were negatively impacted by an after-tax noncash impairment charge of $9.10 in the quarter. This charge was triggered by declines in our stock price and the ensuing decrease in market capitalization and is not a reflection of business performance or a change in our forward-looking view of what we expect from the business. Overall, we are encouraged by the results this quarter and although much work remains, we believe we're taking the actions required to ensure ongoing improvement in the base business while providing the foundation for our integration with Harry's at close. Now turning to the strategic reviews of our fem and Infant Care businesses. Earlier this year, we announced a plan to evaluate strategic options for these businesses. In both instances, we ran processes that were thorough, involving both private equity and strategics. The review for the Infant Care business remains ongoing. As it relates to the fem care business, we have determined that the best path forward is to retain this business.

As you know, Feminine Care has a portfolio of well-recognized brands with a good innovation pipeline, improving business trends and a history of attractive EBITDA and cash generation. In reviewing these opportunities that came out of the process, we determined that there is more opportunity for value creation by retaining the business. The process confirmed our belief in the latent value proposition for this category while also revealing potential additional opportunities as part of our broader portfolio approach as a result of the Harry's acquisition and our ambition to build the CPG 2.0 platform. Having said that, to be successful moving forward, we will need to manage this business with a laser-like approach to brand building and trade execution, sensible, compelling innovation and leadership model that calls for increased autonomy and capabilities to harness the proper focus and diligence required to compete in this category. We are finalizing these plans and will share more in subsequent calls.

Turning briefly to Harry's. Our integration planning efforts have gained significant momentum with an active steering committee in place immediately following the transaction announcement and 14 work streams operationalized within the first few weeks. I'm extremely pleased not only with the progress made but more importantly, the way the teams from both organizations have worked collaboratively to lay the foundation for a new, stronger and more capable combined company following the close. We continue to believe in the compelling strategic rationale for the transaction and remain confident in the sustainable value creation opportunity by bringing together these complementary businesses and capabilities to create new avenues for growth. Lastly, I am excited by the progress we have made in defining the culture required for success going forward. As I have maintained from the start, unlocking the best of both cultures will be a critical imperative for success, and the integration planning efforts to date only reinforce this point. In terms of the approval process, we continue to work proactively with the regulatory agencies.

Not unexpectedly, we received a second request for additional information from the FTC. We are continuing to work cooperatively and constructively to provide the FTC the information it needs to complete its review. We have said that we anticipate closing the transaction no later than the first quarter of calendar 2020, and I remain optimistic that we will close the transaction within this timeline. Overall, we continue to make significant progress on the transformation of Edgewell. We delivered on our expectations in the quarter and are maintaining our full year outlook. We are laser-focused in meeting the needs of consumers and building stronger retail partnerships. We are also making progress toward delivering more consistent top line performance going forward. Project Fuel is serving as the catalyst of change, redefining how we operate this business and, importantly, providing the necessary financial flexibility to reinvest to build our brands.

We gained certainty around the Feminine Care business and believe that business can return to being a solid financial contributor for the company going forward, and we're gaining momentum as we work through the Harry's integration plan. As I mentioned last quarter, we have a clear path forward, and we're executing against our strategy with urgency and precision. This is an exciting time for us as we build a new company and a new culture, all positioned to win.

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

Daniel Sullivan -- Chief Financial Officer

Thank you, Rod, and good morning, everyone. As Rod mentioned, the quarter played out largely as we expected as we executed well against our core fundamentals. Underlying performance in key categories improved, fuel continued to transform our operations and provide meaningful gross savings. And we generated strong free cash flow allowing us to continue to structurally delever. Most importantly, we saw stabilization in our top line results driven by improved underlying performance in Wet Shave and fem care with tailwinds from a favorable comparison to the prior year primarily in Japan Wet Shave and the shift in the Easter holiday into 3Q.

We now have the timing and transitory-related issues that have impacted our quarterly sales growth rates this fiscal year largely behind us. Our focus on cost and expense continues with Project Fuel execution remaining strong across the business and delivering gross savings at expected levels. Our strategy to reallocate some A&P spending to trade promotion investment, combined with our success in fuel addressing nonworking dollars, has resulted in favorable A&P spending year-over-year and helped to improve top line performance but has served as a near-term headwind to gross margin. In aggregate, a more stable top line result and our focus on cost and expense control has enabled us to deliver over 18% growth in adjusted operating profit and 22% growth in adjusted earnings per share this quarter.

GAAP earnings per share in the quarter were a loss of $8.16, reflecting a onetime noncash accounting charge to adjust goodwill and intangibles carrying values. The after-tax charge is a noncore EPS adjustment of $9.10 in the quarter and resulted from the acceleration of our nondiscretionary annual impairment evaluation test due entirely to the triggering event resulting from the decline in the stock price in the third quarter and the fact that our market capitalization was below stockholders equity. The analysis was completed in a manner consistent with our annual impairment test using both the market and income approaches and weighting them based on our application to the reporting units.

The results of our testing indicated that the carrying amount of goodwill for the Wet Shave and Infant Care reporting units was greater than its fair value, resulting in an impairment in those business units, and that the indefinite-lived trade names of Wet Ones and Diaper Genie had carrying values that exceeded their fair values, resulting in these trade names being impaired as well. As Rod pointed out in his remarks, the charge is not a reflection of a fundamental change in our forward-looking view for these businesses. Now let's turn to our operational performance in the quarter. Net sales in the quarter decreased 1.8% or minus 30 basis points on an organic basis and was largely in line with our expectations.

Organic net sales exclude the negative translational impact from currency. International organic net sales grew 4.2% with growth in both Wet Shave and Sun and Skin Care, while net sales declined in North America by 2.7% driven by declines in Wet Shave and fem care, partly offset by growth in Sun and Skin, which benefited from the shift into the third quarter of the Easter holiday. Wet Shave organic net sales decreased 1.7%. Total volumes increase primarily in Asia Pacific and largely attributable to Japan and the cycling of last year's inventory reductions. This was partly offset by declines in North America and in the U.K. driven by ongoing competitive intensity and the cycling of the prior launch of Intuition f.a.b. and Hydro Sense. Even after adjusting for the tailwinds associated with the timing shifts in Japan, the volume performance in Wet Shave improved sequentially by over 200 basis points versus recent trends. Price/mix was unfavorable in the quarter largely reflecting mix in North America and the impact of lower pricing and higher trade spend on our Men's and Women's Systems products. Sun and Skin Care organic net sales increased 4.3% driven by growth in all geographic regions with the exception of Asia Pacific and in part a reflection of the benefit of the shift in the Easter holiday.

In North America, category performance continued to reflect lower consumptions largely a result of the negative impacts of the wettest early summer periods in almost 30 years. Volumes declined and we experienced tightened share losses in the quarter as Banana Boat consumption was disproportionately impacted by the weather given its focus on the occasion-based outdoor segments. These volume declines were partly offset by growth in Hawaiian Tropic, Bulldog and Jack Black. Price/mix was favorable due to lower returns primarily in the U.S. Fem care organic net sales decreased 3.4% as compared to the prior year period, representing an improved underlying performance with half 1 organic net sales down over 8%. Increased distribution and more impactful commercial programs in mass and drug drove the results. Volumes declined across all lines with the exception of O.B. tampons and Carefree liners. Price/mix was unfavorable due to the increased trade spend investment.

All Other organic sales decreased 60 basis points as compared to the prior year period. Increased sales in Diaper Genie and cups and mealtime products related to the Paw Patrol launch were more than offset by declines in Pet Care. Briskly looking at the category dynamics in the quarter, in Wet Shave, as measured by Nielsen, the U.S. razors and blades category was down nearly 1.9% in the latest 12-week data, with Men's Systems down 1.4%, women's increasing 40 basis points and Disposables down 3.4%. Including both e-commerce and off-line unmeasured, we estimate that U.S. razors and blades increased between 1% and 2%. From a market share perspective, as measured by Nielsen in our latest 12-week data, we are at 25.5% share in razors and blades in the U.S., down 150 basis points versus a year ago. This share decline was again primarily driven by a decline in mass retailers. On a global basis, we estimate our share was down 110 basis points.

Within the U.S. Sun Care category, 12-week consumption declined 4.4% with Home Scan data indicating that our losses are largely driven by loss category buyers and not brand switching, further reflecting the headwinds caused by weather. Our share declined by approximately 200 basis points primarily in Banana Boat Sport, Kids and Baby, which are more weather dependent. Hawaiian Tropic gained 20 basis points of share. Gross margin decreased 60 basis points year-over-year to 48%. Excluding costs associated with Sun Care reformulation and foreign exchange as well as the tailwinds associated with lower Sun Care returns, gross margin decreased about 150 basis points year-over-year, which was in line with our expectations.

The decline was driven primarily by 3 factors: unfavorable price/mix due to price reduction in Wet Shave and higher trade promotion spend in Wet Shave and fem care; unfavorable cost/mix in Wet Shave due to commodity pressures; increased energy and maintenance spend; and lower absorption rates due to lower volumes across Sun and Skin and fem care. A&P expense this quarter was 15.1% of net sales as compared to 17% of net sales in the prior year period. The decrease in A&P was primarily driven by lower spending in Wet Shave and fem care as compared to prior year and as a result of a few factors, including an intentional reallocation of A&P in trade spend; fuel savings, which have reduced nonproductive A&P cost; fewer in-product launches as compared to the prior year; and increased private label penetration. Our total commercial spend, defined as A&P and trade investments, has remained fairly consistent as a percentage of net sales year-over-year as market conditions have required that we shift to a more trade focused execution in the near term, which has pressured our gross margins. SG&A, including amortization expense, was $94.8 million or 15.6% of net sales as compared to 16.3% of net sales in the prior year period.

The operational improvement in SG&A despite inflationary headwinds was largely driven by strong execution of Project Fuel and lower equity compensation expense. The adjusted effective tax rate for the first 9 months of fiscal 2019 was 24.4%, which was comparable to the prior year period. GAAP diluted net earnings per share were a loss of $8.16 per share compared to earnings of $0.22 per share in the third quarter of fiscal 2018, reflecting the impact of impairment charges this quarter. Adjusted earnings per share were $1.11 per share compared to $0.91 per share in the prior year period. Net cash from operating activities was $98.2 million for the first 9 months of fiscal 2019 compared to $181.5 million in the prior year period. The decline in operating cash flow compared to the same period in the prior year was primarily driven by higher inventory levels in support of improved operational performance across key markets as well as the impact of both the Sun Care reformulation project and the building of inventories in Europe in preparation for Brexit.

Our free cash flow outlook for the year is unchanged and our capital allocation strategy remains committed to structurally paying down debt, as evidenced by our net debt leverage ratio at 2.8x, the lowest level since separation. Now I'd like to turn to Project Fuel. We continue to execute extremely well across the business, and we remain on track to deliver $115 million in gross savings for the full fiscal year. Third quarter Project Fuel-related gross savings were approximately $33 million, our strongest quarter to date. In the quarter, these set savings helped to offset year-over-year inflationary headwinds while providing the initial catalysts for reinvestment in our key brands and growth initiatives. In totality, we continue to expect Project Fuel will generate between $225 million to $240 million in total gross savings by the end of fiscal year 2021, and we estimate onetime pre-tax charges to be approximately $130 million to $140 million with an additional capital investment of $60 million to $70 million through the end of 2021 fiscal year. Now turning to our full year outlook.

We're maintaining our previous full year outlook for organic net sales and adjusted earnings per share though tightening the range on EPS. Our outlook for the year contemplates 2 meaningful pressures on our business in the fourth quarter. First, we anticipate continued top line headwinds related to the Sun Care category as lower consumption trends are expected to continue, and to a lesser degree, headwinds in Wet Shave mostly as a result of increased competitive pressures in U.K. Additionally, our gross margins will remain pressured in the quarter as a result of the continued shift in A&P spend into trade investments, further pricing and promotional pressures in Wet Shave to increase -- to combat increased competition and lower absorption rates as a result of lower volumes. As such, we continue to expect net sales to be down low single digits compared with the prior year with the acknowledgment that the risks above point to the higher end of the range of expected declines.

Our reported sales expectations include an approximate 130 basis points unfavorable impact from currency translation and an 80 basis point combined benefit from the Jack Black acquisition and Playtex gloves business divestiture. The outlook for GAAP EPS is now a loss in the range of $6.87 to $6.77 and includes the impairment charge, Project Fuel restructuring charges, Sun Care reformulation costs, Jack Black integration costs, expenses associated with an investor settlement, advisory expenses incurred in connection with the evaluation of the fem care and Infant Care businesses and Harry's acquisition and integration planning costs. Our adjusted EPS outlook is now in the range of $3.40 to $3.50. Project Fuel is expected to generate approximately $115 million in incremental gross savings. And Project Fuel-related restructuring charges and capital expenditures are expected to be approximately $65 million to $70 million and $40 million to $50 million, respectively. The adjusted effective tax rate for the fiscal year is estimated to be in the range of 23.5% to 25.5%. And as mentioned, our outlook for fiscal 2019 free cash flow is unchanged.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Steve Strycula of UBS.

Steve Strycula -- UBS -- Analyst

Good morning. So a quick strategic question. If we think about looking forward how the competitive landscape might pan out from large competitors maybe investing a little bit higher in trade and Wet Shave, how would you strategically respond in this adversary just given the higher debt loads moving forward? Is there -- would you lean in harder into the net savings from Project Fuel? Or are there other elements that you could maybe use to kind of offset distribute, expect the overall environment to just be more rational, as we've seen in some other categories across HBC in the last few months?

Rod R. Little -- President And Chief Executive Officer

Yes. So thanks for the question, Steve. If you step all the way back from a category intensity category environment, I think our view is that the category will continue to head down a path of being more rational. If you look at overall category rates, growth dynamics, we have the category, particularly in the U.S. market, up 1 to 2 points in total. That's a market improvement from where we were 1 and 2 years ago. Shaving incidents have flattened. Pricing in general has normalized. And I think what you're seeing is there is a bigger innovation focus coming back into the category, not like from our competitors but also from ourselves. And so that's a good thing from an overall category perspective. We do expect promotional trade spending to remain high in the near term.

We've seen that over the last couple of years. We expect that will continue particularly as we move forward and execute our plans. And so this Project Fuel that obviously is an enabler to allow us to incrementally invest to be competitive both with consumer price and the trade around margin as well as building a forward-looking plan both on the Edgewell side but also looking at a joint business plan of what an Edgewell Harry's business looks like combined that properly supports what we think are the right trade investments to be competitive and win.

Steve Strycula -- UBS -- Analyst

Okay. I have a quick follow-up. What has been the feedback to date since you've announced the transaction from the retail trade? What's been their initial reception? And how has this kind of shaped the way you're thinking about pro forma business in terms of like maybe the revenue synergies?

Rod R. Little -- President And Chief Executive Officer

Yes. Thank you. I won't be specific on any trade discussions. But our view is that the trade is broadly supportive of the combination, and I think the view is the combination will be well positioned to bring interesting innovation and growth to the category. And so with that as the primary thesis, that's -- I think we're encouraged by that, but we've got to do it. But the initial reaction has been very positive.

Thank you Steve. Operator next question please.

Operator

The next question is from Bill Chappell of SunTrust.

Rod R. Little -- President And Chief Executive Officer

Good morning Bill.

Bill Chappell -- SunTrust. -- Analyst

Morning,Going back just to Wet Shave in the U.S. As we look to this scanner data, it seemed to get a little bit worse kind of as we moved into June and some of July. And so just to know if you saw the competitive intensity increase, I mean if you have the large competitor trying to take advantage of your M&A stage. Or if it's just kind of a normal 4-week in, 4-week out. Just trying to understand if anything has changed at all over the past couple of months on the competitive landscape.

Rod R. Little -- President And Chief Executive Officer

Yes, Bill. It's -- our view is it's more of the latter. We don't see a fundamental change in the competitive landscape here in the U.S. And the thing though, is be a little bit careful of with scanner data as there's things happening outside that measured channel, both us and competitors. It's not always captured. And so again, we look at the totality of what's in the scanner data and beyond. We see it as a normalized environment. Obviously, if you look at the mass channel that's called the most disruptive or competitive channel here in the U.S. based on kind of what's been happening, but again, that -- it's kind of as expected and normal course for us now as we look at it.

Bill Chappell -- SunTrust. -- Analyst

Got it. And then just a follow-up on fem care. How should we look at that business going forward? I mean it's had sales declines for as long as I can remember in one shape or fashion. So should it be a flat growth business? Should it be a growth business? And is there a lot of room for margin improvement from here? Or I mean are we at a good level on margins?

Rod R. Little -- President And Chief Executive Officer

At a high-level, Bill, I think we expect improved performance going forward. We're seeing trends that are encouraging in the business. And I think we're confident we can do better than we've done in the past. As far as being precise around growth or flat, we'll come back and talk about that more next quarter once we've done the strategic work and laid the plan out for next year. And we have a view of what that looks like. I do believe there is opportunity for a little more margin there as we look at the business as well. The thing -- if you look at fem and you go back and say, what has driven the declines historically, the single factor that primarily drives it and correlates directly to our sales performance has been distribution declines around space on shelf and number of SKUs that we have in the planogram set. We had historically a very legacy SKU range that frankly had a lot of unproductive SKUs in it.

And as those have been called out by retailers and as kind of we work with what the planograms look like both today that are at shelf today via the February reset, which was more favorable to us and going forward, we think we've got a nice, tight range that can win and be successful and drive velocity at shelf. So that, combined with a very focused commercial strategy, better innovation that's still efficient and sensible, we think there are some interesting avenues for growth going forward. So again, that's all part of our calculus. But beyond that, as we look at the business, we like the value we can create with that business versus what we could have transacted at. By the way, we could have transacted albeit having a discussion around that point. But it wouldn't have been the right thing for the shareholder.

Thanks Bill. Operator next question please.

Operator

Our next question is from Ali Dibadj of Bernstein. Please go ahead.

Ali Dibadj -- Bernstein -- Analyst

Hey guys. So. the organic sales growth clearly was a little bit worse than where consensus had expected, and you're behind on your "low single-digit" decline for the year or, at the very least, you're kind of worse end of that. However, you continue to pull back on the A&P in favor of trade spend, noting that yes, there's competition. I get that. But this is also a time to develop the brand as well and not leave that behind. So I'm trying to get a sense of why beat on earnings at least versus our expectations, consensus expectations, while seeing your top line continue to frankly not do as well as I think you and we think and by cutting A&P. So I'm just trying to get a sense of that calculus. It doesn't make sense to us, right, as the bias.

Rod R. Little -- President And Chief Executive Officer

Thank you, Ali. If you go back to where we started the year, go back to about a year ago at the fall of last year, we put guidance out there for '19, which was down low single digits on top line and an implied midpoint, I guess, at $3.45 EPS. It was important for us -- it is important for us to deliver on those commitments. So we see the business largely where we saw it in the fall last year when we put the guidance out. I think personally that's a big step forward versus where we've been. And if you go back to that point in time, Ali, we have had significant foreign exchange headwinds, specifically the pound, euro, Canadian and aussie, that have moved against us that we have offset. And Harry's had just launched into Walmart initially.

Flamingo and Joy did not exist. They have launched since then. And so our plan contemplated some competitive activity and launches and I think we sit here feeling like we've got the year right, we're going to deliver on our commitment, we're concluding on the fem and infant divestiture analysis, we've acquired Harry's, we're well down the path on integration. And so overall, I think we are where we thought we'd be. Are there are little more headwinds on top line than maybe where we thought a little bit? I think we missed consensus by $1 million this quarter. There are. It's -- I would put it in the range of slightly softer. But again, it's the combination of how messy this environment has been. So I'm going to throw it to Dan for the A&P spend because it's important we spend a few minutes on this because we are not pulling back good A&P spend and sacrificing the future of our brands.

Daniel Sullivan -- Chief Financial Officer

Yes. Thanks, Rod. So I think if you unpack the year-over-year reductions in A&P, I think the first thing you have to sort of pull out are the natural declines that we would see with lower volumes, with higher private label penetrations and then with the fuel savings, which have gone to work on our nonproductive A&P spend. So all of those are either normal course of business reality and/or good things coming out of fuel. We have reallocated a portion of our year-over-year A&P spend back into trade. We thought that was the right thing to do in the near term given the competitive pressures we've talked about on this call and previously. We don't see that necessarily as the go-forward strategy. We will aim to be a bit more balanced.

But we thought it was the right thing to do in the market this year. And then obviously, we're cycling some NPD activity over a year ago which had A&P behind it. The other thing I would say is fuel is generating gross savings at the level we had anticipated. Obviously, there's inflationary pressures that are offsetting that. But fuel is allowing us to reinvest in A&P in certain growth brands and in certain growth markets. And we saw a step-up year-to-date in e-comm, in Jack Black and Bulldog in China, just to name a few. So we're trying to be balanced about it. We're obviously in a highly competitive situation which requires us to think about trade spend a bit differently in the near term. But as I've said, I think over time we'll look to rebalance that.

Ali Dibadj -- Bernstein -- Analyst

So just to be clear here with laser-focused on A&P for a second. I mean you used to talk about a 14% to 15%, if I recall, correct me if I'm wrong, but the kind of range that you want to get into from an A&P spend perspective. Clearly, that was less than that last year. You're not on track at all for that this year. And I get the environmental pressures and I certainly get the fact that North America Wet Shave was also done almost 9% organically.

Perhaps it would seem losing some shelf space, too, there obviously. So I guess in the go forward, how should we think about the A&P spend? Because you all know, and Rod, you were involved with consumer packaged goods situations where we're getting more efficient on A&P and we're putting more on trade spend was the narrative, and that didn't end well. So I'd encourage you to help us think through why this is short term and why -- and what it should look like going forward.

Daniel Sullivan -- Chief Financial Officer

Yes. I'll take it in the short term and I'll do it through the lens of Q4, and then I'll allow Rod to take the broader question. If you look at how we thought about Q4, you'll see a bit of a difference versus our year-to-date trend. Number one, we will spend in A&P dollars essentially the same level as last year Q4, which is obviously a departure from what we've been year-to-date. And in rate of sales, we'll be just under 12% in the quarter against -- which is about 40 or 50 basis points higher than a year ago. So I think you're already starting to see a little bit of that rebalancing that I mentioned roughly in Q4 itself.

Rod R. Little -- President And Chief Executive Officer

Yes. And then Ali from there going forward, I think your point is taken, right. The story doesn't end well if you shift from pure A&P to trade spend as your strategy. But I think we are at a period of time here over the last 12 to 18 months where when we look at the A&P spend we had in the campaigns, the programs we were putting out there, the ROI that went with them, I think we had an opportunity to really address that. And we've done that. And frankly, I think we're through that cycle now. So as we go forward, I won't commit to a number on this call, but I would expect you will see us maintaining brand investment. And over time, we will spend more, not less, on A&P to build the brands just because it's required as we go forward. And we've thought about it that way.

Daniel Sullivan -- Chief Financial Officer

Thank you Ali. Operator next question please.

Operator

The next question is from Bonnie Herzog of Wells Fargo. Please go ahead.

Bonnie Herzog -- Wells Fargo -- Analyst

Good morning. I actually had a couple of quick questions on Harry's. I was wondering if you guys could provide any update on the business' recent performance. Is the business on track to hit its profitability goals? And is the sales trajectory still tracking in the 30%-plus range? And then I was wondering if there's been any discussion between the 2 of you to sign a commercial agreement maybe between now and closing so you could possibly accelerate the distribution expansion of Harry's products. And then finally on Harry's, I'm just curious if, in fact, you're feeling better about the fem care business. Since your decision with Harry's, then there might be an opportunity for that team to do something more with the business.

Rod R. Little -- President And Chief Executive Officer

Yes, thank you, Bonnie. We can't comment on specifics around the Harry's business evolution during this period. I think you can appreciate that. But I would suggest kind of as expected on plan. We're not seeing anything unique there. In terms of where our focus is, it is doing everything we can to close this as soon as we possibly and practically can. We talked about being in a second request phase here. Our energy is being responsive as possible to that to get to a determination as quickly as possible. I'm personally optimistic that we can work through that and have a good outcome on the time line. In terms of any agreements or interim things that might be put in place to do something different that's in their base plan, I don't think we are in a position to do that.

I think it would potentially be distracting. And so again, our focus is on shortening the time line and being as aggressive as we can with that. And then from a fem care perspective, I don't anticipate that we'll have the Harry's team distracted in the U.S. leadership broadly with the fem care business in the near term. We are going to run that separately. We've got some really interesting thoughts on how to structure that and do that in parallel. But over time, when you look at capabilities that Harry's brings to our business not only around how they think about design category evolution and where growth is in the fem care category but also digital DTC platform, there are some interesting opportunities for us to consider as we move forward. So again, I think there will be a phased approach to that, but it's certainly part of the calculus.

Bonnie Herzog -- Wells Fargo -- Analyst

And if I -- maybe just a quick question on Disposable, which I believe has been pressured given what we're seeing in the U.S. track channel. So I know that Procter has been focusing more on Disposables. So I was hoping you could talk a little bit further about the competitive environment on the low end and whether or not you're losing shelf space there. And maybe in more broadly, have you seen any change in consumers' willingness to trade out from Disposables to Systems?

Rod R. Little -- President And Chief Executive Officer

Yes. On the Disposables piece, Bonnie, I -- so your point's taken. I mean we see that happening, although we grew on Disposables in the quarter and both in the U.S. and outside of the U.S. I don't think we're seeing any material change in shelf space around Disposables. But when you do have systems at lower price points, specifically Flamingo and Joy, there is some sourcing from Disposables into that just more around price points. But we actually are seeing our Disposables business relatively healthy.

Daniel Sullivan -- Chief Financial Officer

Thank you bye. Operator next question please.

Operator

Next question is from Faiza Alwy of Deutsche Bank.

Faiza Alwy -- Deutsche Bank -- Analyst

Thanks. Good morning. So I wanted to drill down a little bit more on the implied 4Q guidance. So it seems that the implication is that you'll see positive organic sales growth in 4Q. So I wanted to get more color on what you're expecting from the North America Wet Shave market and specifically your shares in those markets. I know we talked about you were lapping the Harry's expansion at Walmart. But to the extent that you are assuming a growth, I wanted to understand more sort of what you are expecting from Harry's in 4Q and beyond.

Daniel Sullivan -- Chief Financial Officer

Yes. So I think our outlook for the quarter total organic sales is actually not positive, it's slightly negative. But the guide would imply somewhere around the minus 1%. As Rod mentioned earlier, we certainly are seeing stabilization in the categories and health returning to the categories, which we're certainly excited about and certainly well positioned to participate in that in 4Q, which is fully captured within our thinking and our guide around Wet Shave and opportunities. We also think there will be further improvement in fem. We talked about it briefly on the call, but we've seen the types of improvements that we had expected from a minus 6% half 1.

Q3 was about a minus 3%. We think Q4 will continue to show that kind of improvement up to about a minus 1% for the reasons we mentioned earlier. So fem will be an important part of our Q4 improvement. Similar with Infant, we've seen underlying improvement there in Diaper Genie, which we think will continue as well as the successful Paw Patrol launch. So there will probably continue to be headwinds in Sun, although the performance will improve from Q3. We think the weather headwind will still be somewhat of a caution, which is what we've said. But if we sort of pull all of that together, that informs our thinking for the quarter of about a minus 1% organic top line.

Rod R. Little -- President And Chief Executive Officer

And Faiza, on the Harry's piece, again, we can't comment going forward. But the business is nicely growing at the moment, and our implied kind of future guidance, if you will, that we've put out there around the acquisition is that we expect that to continue in the foreseeable future.

Faiza Alwy -- Deutsche Bank -- Analyst

Okay thanks. And then just a quick follow-up, I know mentioned the second request from the U.S. FTC. Can you offer any color from -- if you've talked to the European authorities yet and how you're thinking about that?

Rod R. Little -- President And Chief Executive Officer

Yes, we have, Faiza. So the other body that matters here is actually Germany. There's not any review here, but there's a German review. And we're in contact with Germany as -- at the moment, and I don't expect that to be the gating item here versus the FTC, it's progressing, I think, according to plan.

Daniel Sullivan -- Chief Financial Officer

Thank you faiza. Operator next question please.

Operator

Thank you. Next question is from Olivia Tong of Bank of America.

Olivia Tong -- Bank of America. -- Analyst

Great. Thanks. Good morning. I just want to talk a little bit about the rationale behind the decision to keep Feminine Care but also -- but still explore alternatives to Infant Care. Did you look at one first and then or moving to the next one? So just sort of thinking about the sequencing there. And then specifically on the Feminine Care, how does the pipeline look now? Because you said improving trends potential but it's had a really negative last quarter. In this quarter, you continue to see some volume declines across all the different lines and increased your trade spend. But the 2-year stack did get a lot better -- did get a little bit better. So just wondering if you could give a little bit more color on that.

Rod R. Little -- President And Chief Executive Officer

Good morning Olivia. Yes. So the process was kicked off for both at the same time running in parallel, separate processes but in parallel. And as you know, processes don't all move at the same speed. And so that's the simple answer as to why we haven't concluded yet on Infant. I think we're very close, by the way, to concluding on that. We run the businesses separately. I think there's not a lot of synergy potential between them and so they're quite different in how we run them. And so that's what's behind the different time line here as we come to the end. In terms of the fem care business and innovation and trends just in general, we were down roughly 8%, I believe, in the first half of the year.

We cut that in half to about I think 3.8% on the quarter. We expect that to continue to improve sequentially here as we move forward. Some of that is around better planogram sets and distribution outcomes. And some are frankly is behind some innovation that's working. And where we've brought innovation to the category, we've seen the response. And we've got O.B. organics out there with new innovation in the line and as we go forward across all the segments, we have innovation planned that we think is more on trend. And that, combined with better distribution outcomes, ought to provide a better path forward than where we've been. So we're pretty confident based on the SKU range that's in a planogram set today and the innovation we have that we can improve quite substantially in the trends we've put up over the last couple of years. And you're just starting to see the beginning of that in the stack that you talked about.

Olivia Tong -- Bank of America. -- Analyst

Yes. Just a follow-up. Do you expect an improvement in the 2-year stack come Q4? And then we haven't talked a lot about in U.S. Wet Shave in the private label business, so I was just wondering if you can give us a little bit of an update on how you think that fits into the various lines of your business, whether it's men, women and private label?

Rod R. Little -- President And Chief Executive Officer

So yes is the short answer, and we expect continued improvement in Q4 on that 2-year stack. On private label, the business is doing well actually overall. Again, it's been pressured in the U.S. around price point than competitive offerings, but the business is performing well. I think we are -- without being specific, I think we are optimistic about the business going forward, and it's a key strategic lever for us as we move forward in the business not only within the U.S. but outside the U.S. And as we've talked in the past, the overall contribution margin from that business is essentially portfolio average, and so it's a profitable piece to the business that is going to remain as important as it has historically has been even with the Harry's combination.

Daniel Sullivan -- Chief Financial Officer

Thank you. Operator next question please.

Operator

Thank you. The next question is from Kevin Grundy of Jefferies. Please go ahead.

Kevin Grundy -- Jefferies -- Analyst

Hey good morning everyone. I wanted to come back, Rod, to the question on A&M, not to beat the dead horse but I guess to ask you a little bit differently, do you think the company is doing enough with Project Fuel to maybe fund some increases in A&M? So we've seen advertising and marketing levels come down over 300 basis points at the expense of gross margin. So obviously, I guess not a desirable trend, but I guess it's not really a zero-sum game either. So I mean as you think about the opportunity to take out even greater cost to potentially fund some of this, do you see that as an opportunity? And as you look at your overhead -- and Dan maybe this is a question for you. As you look at your company's overheads, are you comfortable with where they are relative to the peer set of companies of similar scale? And then I have a follow-up.

Daniel Sullivan -- Chief Financial Officer

Yes. I think you have to look at Project Fuel separating sort of the steps that have been taken in SG&A, which is a large piece of the flow-through to date. We've taken out the heads. We've delayered the organization. You've seen the impact on SG&A year-to-date. If I normalize for the one-offs, we're 100 basis points better in SG&A than we were a year ago, $30 million in dollars. So I think we are making the right steps. Benchmarks would indicate we have further opportunity certainly as we think about the Harry's acquisition. And putting these 2 companies together, I think we'll have further opportunities. So no, I think we've made a great first step in SG&A. We've taken significant costs and complexity out of the business. But that's -- Project Fuel is not something, I think, that stops, I think it's an ongoing piece of how we think about running this business with particular focus on SG&A.

Rod R. Little -- President And Chief Executive Officer

Yes. And Kevin, I would add this is not an A&P cutting exercise. A&M was the term you used. Going forward, it's not. And I think the other thing that you have to take into account here when you look at benchmarks and where relevant competition spend, when you adjust for our private label business and take that out and then do the math on the A&P support for the branded business, we still spend at very healthy rates of A&P vis-a-vis competition. we're not disadvantaged or underinvesting, if you will, even where we sit today with the current snapshot.

Kevin Grundy -- Jefferies -- Analyst

Got it. All right. That's helpful. And the quick follow-up is just -- and I apologize if I missed this, the data points that your team put out last quarter post the announcement of the Harry's deal, any changes to those whatsoever, mid-single-digit top line growth, high 40s gross margin, $2.7 billion in sales, $475 million EBITDA, etc, comfortable with all those metrics as we sit here today?

Daniel Sullivan -- Chief Financial Officer

Yes. We have not updated our thinking there. We remain extremely comfortable with that algorithm. And remember, the Edgewell component of that algorithm, which is a flat to slightly down top line, is, in fact, what we're seeing portrayed over the second half of the year. So we're extremely comfortable with that going forward, and that remains our best view 2021 and beyond.

Kevin Grundy -- Jefferies -- Analyst

Got it. All right. That's helpful.

Daniel Sullivan -- Chief Financial Officer

Thank you. Operator next question please.

Operator

Sir, we have no further questions in the queue. So I would love to hand the conference back to Rod Little for any closing remarks.

Rod R. Little -- President And Chief Executive Officer

All right. Thanks, everyone. Appreciate the time today. Yes, I think we're optimistic we're moving things in the right direction, so we look forward to talking to you again in a couple of months.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Chris Gough -- Investor Relations

Rod R. Little -- President And Chief Executive Officer

Daniel Sullivan -- Chief Financial Officer

Steve Strycula -- UBS -- Analyst

Bill Chappell -- SunTrust. -- Analyst

Ali Dibadj -- Bernstein -- Analyst

Bonnie Herzog -- Wells Fargo -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Olivia Tong -- Bank of America. -- Analyst

Kevin Grundy -- Jefferies -- Analyst

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