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Edgewell Personal Care Co (NYSE:EPC)
Q1 2020 Earnings Call
Feb 10, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Edgewell Personal Care Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions].

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

Chris Gough -- Vice President, Investor Relations

Thank you. Good morning everyone and thank you for joining us this morning, as we discuss Edgewell's First Quarter 2020 Earnings. With me this morning are Rod Little, our President and Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call and then will hand over to Dan to discuss quarter one results and our full year 2020 outlook, 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 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, 2019. As may be amended in our quarterly results 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'd like to turn the call over to Rod.

Rod R. Little -- President and Chief Executive Officer

Thanks Chris and good morning everyone. In our call this morning, I'm going to focus my comments on two core topics. First, I will address the Harry's transaction, including our release this morning announcing that we have terminated the merger agreement. Then I will talk more broadly about Edgewell business, the journey that we're on, the positive results we continue to see, and our go-forward strategic priorities. Dan will then take you through our operational financial performance for the quarter, as well as update the full-year outlook.

As I stated a week ago, we're obviously disappointed by the FTC's decision to seek to block the proposed transaction with Harry's, and we continue to disagree with the merits of their position. We believe that the consummation of the merger would have brought together complementary capabilities for the benefit of all of our stakeholders, including consumers. That said, given the ongoing uncertainty about the potential outcome and the required investment of resources, time, and resulting distraction to our business, what the continuing legal battle with the FTC would entail. And after detailed deliberation with our Board of Directors on these factors, we have terminated the merger agreement.

As we stated in the press release, Harry's has informed us of their intent to pursue litigation. We believe that such litigation has no merit, and I won't be commenting on this matter any further. As such, we are moving forward with the improving underlying performance of our business, underpinning our confidence and our path ahead. We will build on our core strengths in technology, IP and innovation strategically adding to our capabilities, in support of brands that resonate and increase engagement with consumers and retailers, enhancing our ability to drive growth and value creation. We are committed to building a next generation consumer products company. And while the path there will not include the Harry's business and brands, our strategic objectives remain unchanged.

So let me now provide perspective on our business, our ongoing transformation and share some insight on where we are headed. Starting with where we are today, we have a strong foundation, augmented by the progress we have made over the past three fiscal quarters, and built on our global infrastructure, our best-in-class blade-making and formulation capabilities and our compelling brands that maintain meaningful share positions across diverse global categories, as well as a company with a global scale, operating in more than 20 countries with extensive retail reach across 50 markets. As such, we have a diversified revenue profile, with North America representing about 60% of our global revenue and our International business contributing 40%. This diversity is also seen across segments, and while we are well known for our Wet Shave business, the Sun and Skin Care and Feminine Care segments contribute more than 40% of our revenue.

It's important to remember, that while we spend considerable time discussing the U.S. men's branded Wet Shave category, it represents only 3% of our global revenue. Underpinning our business is our technology stack and intellectual property, which provide us clear competitive advantages and an ability to repeatedly bring innovation to the categories in which we compete. Consistently producing high quality durable blades is a requirement for sustainable growth in the Wet Shave category, and we know that we have the ability to do that. Additionally, we have three different R&D facilities and a leading Sun Care formulation capability the actions we have taken to reshape and refocus our portfolio, have enhanced our position in our core categories, Grooming, Sun and Skin Care and Feminine Care. With the successful divestiture of our Infant Care business now completed, we are narrowing our focus and further investing in growth in support of our stable of brands, including Schick, Wilkinson Sword, Banana Boat, Hawaiian Tropic and Playtex. And some very exciting new brands, including Bulldog and Jack Black.

As you know, the Wet Shave category has encountered significant headwinds over recent years, most notably in North America. But I am encouraged by where we stand today. We think consumers care about quality and consistency of shave and believe that our high-quality products, position us well in that respect. We believe there are growth opportunities in the broader men's grooming category, when you consider shave preps and soft products. Bolt-on acquisitions have played an important role for us in expanding our presence in men's grooming, and Bulldog and Jack Black are performing exceptionally well, both delivering double-digit growth in maintaining leading positions in their respective markets.

Outside of the grooming category, we have compelling growth opportunities in both Sun and Fem care. Sun Care is a healthy category and our brands maintained strong equity with consumers across the globe, and meaningful market positions, especially here in the U.S. Innovation will continue to play an increasingly important role, in expanding our participation in this exciting category, leveraging our strong existing portfolio of brands, while we also contemplate organic and acquired additions to the portfolio.

And in our Fem Care business, we are in the early stages of our efforts, to redefine our commercial and operating model for the future. We've made significant steps in filling key leadership roles across sales, marketing and finance. They will be an important catalyst for helping define the optimal strategic path forward for this business. We've seen some initial stemming of the top line declines, which I am encouraged by. Although, we know, significant work remains, and repositioning this business for more stable top-line performance and profit delivery will take time.

Project Fuel remains an important catalyst for our continued evolution, both in mindset and in economics. This organization is reshaping itself, rooting out ways and driving greater productivity in all that we do, and we have executed well, delivering over $150 million in gross savings to date. These savings have provided us with resources to invest in innovation and growth and build our brands and capabilities, specifically we focused our investments on our most compelling growth opportunities across key retail channels, and we've also worked to reshape our portfolio, with an eye toward simplifying, refining our brands and offerings, and beginning to enhance our commercial capabilities across the entire company.

Work remains here, and we are progressing with urgency and focus. We've also revamped our senior leadership team over the last 18 months, and added new members to our Board of Directors. My management team brings a significant track record of success and experience, operating in this industry in our categories.

Over the last three quarters, including this fiscal Q1, I am pleased with the results we are seeing in our business. Organic top line growth trends continue to stabilize, with the last three quarters down approximately 40 basis points compared to the prior year period, and these results were underpinned by improved results across all segments, in all geographies. Gross margin rates are stabilizing, as we execute Project Fuel and moderate trade and promotional spend. After a year of muted brand investments in 2020, we are leaning in on investment, including both advertising promotion and R&D, increasing our collective spend by $20 million, and supporting our commitment to maintaining healthy leading brands.

Project Fuel is maturing, and we have a clear track record for execution, having realized over $150 million of gross savings to-date, inclusive of $15 million in Q1. Free cash flow generation remains a core strength of our business model, fueling consistent and systemic deleveraging. Over the last year, we have reduced our leverage by one full turn of debt, providing the necessary drypowder to support accretive M&A activity.

Our outlook for the year reflects our expectation of continued progress, with organic net sales flat to slightly negative. Gross margin rate stable, further execution of Project Fuel, and free cash flow, over 100% of GAAP net earnings. Dan will discuss this in more detail shortly. But, we should not confuse progress with achievement. Foundational studying of our business is a required first step, and three fiscal quarters results indicate we are on the right path. We are working with urgency, to further strengthen our business and ensure sustainable value creation for our shareholders. This is a time, when we must be bold in our thinking and disciplined in our actions.

Our priorities are as follows; first we must increase our ability to innovate and build brands consumers love. Our recent efforts in this area have not provided the level of impact needed. A consumer-centric occasion based thinking needs to be at the center of our approach. We have recently added resources in our R&D organization, and we'll continue to seek to augment our existing team with the necessary infusion of talent where needed, to meaningfully strengthen our capabilities in this area. Enhancing our innovation roadmap and developing a robust pipeline of opportunities for the business going forward is a clear strategic priority.

Second, we will build on our strategic partnerships with our most important retailers to win at the shelf. This was the first task that I initiated upon becoming CEO, and it has become increasingly important that we maintain strong mutually beneficial relationships, whether it's through stronger brands on shelf, robust innovation, or exploring unique exclusivities in certain categories, we are committed to further solidifying our strategic relationships with our key retail partners.

Third, we will continue to drive efforts to strengthen our competitiveness through Project Fuel and other initiatives to further simplify our ways of working and drive efficiency in our operations. Maintaining our focus on the strategy that brought us to this point and enabling continued investment in growth opportunities.

Fourth, we will continue to maintain a strong balance sheet, utilizing our healthy free cash flow profile in a balanced and disciplined manner. Investing in our business, while also returning value to our shareholders, ensuring an efficient capital structure that enables a balanced capital allocation strategy is critical, and Dan will elaborate on this in a moment.

And finally, talent profile and work environment for our employees matters, and in fact, are key drivers of sustainable success. We will invest in top talent in critical commercial roles, with North America commercial leadership, our biggest priority. As you know, Colin Hutchison has been dual heading as both the COO and Head of North America for quite some time, and we knew this was not sustainable. And so we will act quickly to identify a new leader for our North American business. With focus on a seasoned dynamic leader, who has the right complement of sales and marketing expertise required to lead our business forward in this important geography. Additionally, we are committed to creating a culture that attracts and retains world-class talent and drives engagement among our teammates. We are focused on strengthening our culture, which is built on values of inclusivity and sustainability, so that we can be a company where people love to work.

Before I turn the call over to Dan, I want to emphasize the most important takeaway from this call. Our business is healthier today than it has been in quite some time. We are executing with urgency and focus and our mission to become a world-class CPG company remains unchanged. We understand where our strengths lie. We know the areas of our business that we need to continue to address, and we are pleased with the progress we are making. In short, we believe we are well positioned to succeed and we look forward to redirecting our focus toward the opportunities that lie ahead.

And now I'd like to ask Dan to take you through our first quarter results and updated outlook for fiscal 2020.

Daniel Sullivan -- Chief Financial Officer

Thank you. Rod, and good morning everyone. As Rod mentioned, we're very pleased with how we started the year and the solid Q1 results reflect the continued focus on our fundamentals. Good execution on shelf, the efficient balance of brand and trade spend, and further progress on becoming a more productive and effective organization, with Project Fuel now entering mature execution and core to how we run this business.

Our top line results continue to improve, with flat organic net sales and importantly, underpinned by our return to growth in North America. We estimate that on an underlying basis, run rate sales for the business in Q1 were also flat, adjusting for the impact of the Japan VAT loading in Q4 of last year, and cycling the Sun Care reformulation headwinds of a year ago. Gross margins were also strong, benefiting from improved market and product mix and the continued execution of Project Fuel. Q1 was therefore, a good demonstration of our full year objectives, to deliver stable organic net sales and gross margin results year-over-year.

We also successfully closed on the Infant and Pet Care divestiture, utilizing the proceeds to further strengthen our balance sheet. This was an important step in the transformation of our portfolio, enabling us to focus on our core brands and new growth opportunities. This business was simply not a strategic fit for us, where we lacked a clear right to win, as evidenced by the significant profit erosion we experienced over the past several years. Although the foregone segment profit and associated stranded costs from the divestiture negatively impacts earnings per share, this streamlining of our portfolio better positions us to be a stronger company in the long run, while freeing up capital that can be potentially deployed elsewhere at higher returns.

We've updated our full year outlook to reflect the divestiture and a lower full year tax rate. Outside of those changes, the full year outlook for the business is unchanged and I'll discuss this in more detail shortly.

So let me start with a discussion of our operational performance in the quarter and then move to our outlook for the full year. As mentioned, net sales in the quarter were flat on an organic basis and slightly ahead of our expectations. The further sequential top line improvement was supported by organic net sales growth in North America of 60 basis points, representing the first year-over-year quarterly growth since Q4 of fiscal 2016. Growth was also seen in the Sun and Skin Care and Fem care segments, and although Wet Shave organic net sales declined 3% in the quarter, this represented an improvement, as compared to recent trends.

International organic net sales declined 90 basis points in the quarter, cycling mid-single digit growth last year and reflecting the negative impact of the Q4 2019 load-in, ahead of the VAT increase. E-commerce growth accelerated in the quarter, as we further expanded our capabilities and presence, driven by strong holiday execution, and growth in our gifting business.

Looking at organic sales by segment; Wet Shave organic sales declined just over 3% in the quarter, with declines in Men's Systems and Disposables, partly offset by growth in Women's Systems and shave preps. We continue to see solid performance in two of our most recent product offerings, Bulldog Razors and Skintimate Disposables. Women's private label also posted strong growth in the quarter.

From a geographic perspective, North America continued to face competitive pressure, with share losses over the last 12 weeks, largely in line with 52 week trends. Despite our progress, we anticipate that our Wet Shave business in North America will remain somewhat challenged over the course of 2020, with the spring planogram resets providing mixed results in key retailers. We are therefore focused on improving our innovation capabilities and continuing to invest incrementally in our brands, which Rod discussed earlier.

Sun and Skin Care organic sales increased over 12%, aided in part by the cycling of last year's reformulation headwinds. Adjusting for this, we estimate underlying run rate sales for the segment to be up about 6%, with strong performance in grooming and wipes.

Our Wet Ones business grew over 20% in the quarter, driven by distribution gains, improved placement, additional secondary displays and added seasonal demand. Bulldog continue to realize mid single-digit growth in our grooming business, with improved velocity in the U.S., and achieved a leading market share position in the mass channel in Canada, for both the beard and face care categories.

In our Sun Care business, although largely off-season here in the U.S., our retail price increases were successfully executed across mass and drug, and we're cautiously optimistic heading into the summer season, where we will deploy increased A&P spend across both digital and traditional media venues. Internationally, Sun and Skin grew 8.5% on a run rate basis.

Fem care organic sales increased 70 basis points, with stable distribution, largely a result of our increased trade spend and stronger Amazon shipments and consumption. Volumes were positive across OB, Sport Tampons and Carefree Liners. We continue to see declines in Stayfree Pads. As Rod mentioned, while we are pleased with the initial progress seen in our efforts to reposition this business for sustainable success, we also know the path forward will be challenging, as evidenced by some distribution losses at Walmart, that will be felt in half two of this year, from the recent planogram resets. Changes to our Fem Care business will take time, but we remain confident that once implemented, they will improve the performance of this business over the medium and longer term.

Briefly looking at the category dynamics in the quarter, in Wet Shave as measured by Nielsen, the U.S. razors and blades category decreased 130 basis points in the last 12-week data with Men's Systems decline of 3.2%, women's increase of 4.6% and Disposables declines of 2%, including both e-commerce and offline unmeasured, we estimate that U.S. razors and blades increased about 1.5%, driven by continued growth online and offline unmeasured. From a market share perspective, as measured by Nielsen in our latest 12-week data, we are at a 23.4% share in razors and blades in the U.S. down 150 basis points versus a year ago and in line with 52-week results. On a global basis, we estimate our share was down about 50 basis points.

Gross margin increased 20 basis points year-over-year to 42.5%. Excluding costs associated with Sun Care reformulation, gross margin was flat, exceeding our expectations due to a combination of timing tailwinds and improved structural performance. Gross margin rates benefited from favorable market and product mix, sourcing gains, lower warehouse costs and more efficient trade spend, which helped mitigate the impact of the final stages of the North American Wet Shave price investment and other investments in trade spend, mostly in our Fem Care business.

A&P expense this quarter was 9.1% of net sales as compared to 11.3% of net sales in the prior year period. The decrease in A&P was largely expected, as we cycled the MPD activation of Hydro Sense and Intuition f.a.b. a year ago. Our planned step up investment in A&P spending this year will be highly seasonal and largely seen in the second and third quarters, where we anticipate investing about $25 million incremental year-over-year, in conjunction with our Sun Care season in the U.S., as well as in support of our new women's Wet Shave campaigns, and behind our Bulldog brands.

SG&A, including amortization expense was $95 million or 20.9% of net sales, as compared to 19.1% of net sales in the prior year period. Excluding the impact of restructuring-related charges, Harry's related costs and other charges, SG&A as a percent of net sales increased 50 basis points, two-thirds of which relates to a one-time item in Q1 last year, related to a favorable vacation accrual adjustment. Q1 results on a like-for-like basis increased roughly 20 bps, driven by higher equity compensation, partly offset by savings from Project Fuel. R&D expense increased 30 basis points as a percent of net sales over the prior year quarter, as we added resources as part of our planned efforts to increase capabilities and reach in support of a more robust innovation pipeline.

GAAP diluted net earnings per share were $0.41 per share, compared to a loss of $0.01 per share in the first quarter of last year and adjusted earnings per share were $0.55 per share compared to $0.37 in the prior year period, with the increase equally driven by improved operating profit and favorable tax and interest costs.

Net cash used by operating activities was $46.9 million for the quarter, as compared to a use of cash of $46.4 million during the prior year. As a reminder, due to the seasonality of the company's business, primarily in Sun Care, the first fiscal quarter is typically the lowest operating cash flow quarter of the year. The company's current net debt leverage ratio is about 2.5 times, representing a full turn reduction over the last 12 months, and further evidence of this business' strong free cash flow profile.

Now I'd like to turn to Project Fuel; our teams continue to execute the core drivers of this program, delivering $15 million in incremental gross savings in the quarter, which was in line with our expectations. These savings help to partially offset year-over-year inflationary headwinds across operations, and increased investments in R&D and provide the catalyst for reinvestments behind key growth brands and markets.

Turning to our updated outlook for fiscal 2020; we have adjusted our outlook to only reflect the impact of the Infant and Pet Care divestiture on profitability and free cash flow, and a new assumption for our full-year effective tax rate. 2020 EPS is now expected to be $0.15 less than prior guidance, driven by the sale of Infant and Pet, with a partial offset from a lower effective corporate tax rate. The sale of the Infant and Pet is expected to result in a $0.25 gross headwind to EPS, with approximately half the impact coming from the reported segment results and half from stranded costs. We are already developing plans to address the stranded costs and at this time, it's too early to comment on what we will be able to structurally offset.

For the remainder of the business, our outlook is unchanged, as are the three pillars I discussed last quarter. For the first pillar, top line stabilization; we anticipate flat to slightly down, organic sales results. The second element is gross margin stabilization, supported in part by further fuel savings, selective price actions, and moderated trade spend. And finally, choiceful brand reinvestment; this outlook continues to contemplate meaningful reinvestment in key growth initiatives, and overall increased A&P spend, particularly in quarters, two and three, as I mentioned earlier.

Now to the specific elements of our outlook for 2020; we estimate net sales declines to be in the range of down 4% to 5%. This reflects a 440 basis point impact from the Infant and Pet Care divestiture. Currency at spot rates does not impact full year growth. The outlook for GAAP EPS is in the range of $2.40 to $2.60, and includes Project Fuel restructuring and IT enablement charges, the gain on the Infant and Pet Care sale, and other one-time charges. Our adjusted EPS outlook is in the range of $2.95 to $3.15. Adjusted EBITDA is estimated to be in the range of $350 million to $360 million, reflecting an approximate $20 million reduction, due to the Infant and Pet Care divestiture.

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 invested back into the business. Project Fuel related restructuring charges are expected to be approximately $35 million. The adjusted effective tax rate for the fiscal year is now estimated to be in the range of 20% to 22%, and our outlook for fiscal 2020 free cash flow is now expected to be in excess of 100% of GAAP earnings, with capex estimated to be 3% to 3.5% of net sales. While the total cash benefit from the Infant and Pet Care divestiture will be approximately $60 million for the year. The transaction will result in a reduction in expected free cash flow, as transaction taxes and other balance sheet adjustments, will be reflected in cash from operating activities, as well as lower net income, while the proceeds from the transaction will be reflected in cash from investing activities.

And finally, I'd like to address our capital structure and comment on our capital allocation strategy going forward. We have already proactively begun the process of addressing our financing; leveraging our strong credit history, attractive cash flow profile, and recent success in obtaining the financing for the Harry's transaction, and we are highly confident in our ability to put in place the required capital structure necessary to support the business going forward, while addressing near term maturities.

In terms of our capital allocation strategy, our strong free cash flow generation coupled with the fact that we anticipate being below 2.5 times levered by the end of this fiscal year, provide us with considerable optionality. Since spin, we have taken over a turn of debt off the balance sheet, while also returning over $650 million to shareholders in the form of stock buybacks and investing over $100 million in the successful acquisitions of Jack Black and Bulldog. Our primary objective will continue to be investing appropriately in the long-term sustainable growth of this business, both organic and acquired. With a longer-term desired net debt leverage ratio of between 3 and 3.5 times, we also will consider the potential to opportunistically return capital to our shareholders.

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

Questions and Answers:

Operator

[Operator Instructions]. And the first question comes from Jason English with Goldman Sachs.

Jason English -- Goldman Sachs -- Analyst

Hey, good morning folks. Sorry for the tardiness there. A couple of questions from me; first, the organization, I imagine, has been in a state of paralysis, a degree of turmoil. I suspect in the wake and anticipation of the of the merger with Harry's, with the decision to not move forward with that, obviously in light of the FTC's pressure on this, can you give us a state of the Union on and current status of the organization, how much turnover you've had, whether we've seen an excess of good talent and and whether or not we should expect to see you have to incur some costs to go out there and rebuild?

Rod R. Little -- President and Chief Executive Officer

Hey, good morning, Jason. Thank you for the question. The organization has been very resilient. We have kept the focus of the organization on building the business, executing our plan, and I think you see that in the continued improvement of our results from a trend perspective. The team we had working on the transaction, we had pulled some people off full-time, to work on integration planning. To do that work, we've had no meaningful change in turnover, no loss of any key talent. In fact, the organization was energized and moving forward with or without a transaction, we're making a lot of changes here in how we work, how we operate, what we value, what we expect people to do when they come in the office around accountability and focus, and with that, I think the organization has been resilient, and the results show that.

Jason English -- Goldman Sachs -- Analyst

That's encouraging to hear. And maybe related to that and the energy in the organization, in the press release, you mentioned that you're committed to building a next generation CPG company. Maybe I missed it, but I don't remember that language being used by you in the past. What does that mean to you and what are the implications, as we think about the strategic direction of Edgewell going forward?

Rod R. Little -- President and Chief Executive Officer

Yeah. The next generation language is forward-looking. Just simply said, an organization that's built to win based on the current landscape of where the consumer is, what he or she wants from a product and experience, how the consumer shops, do they want to buy online, late in the evening. To have a delivered to their home, do they want to buy in a brick and mortar retail store, and being able to offer our products in an efficient way, wherever that consumer wants to shop. And as part of that, how you reach consumers with marketing messages that are on point and target, that are relevant, that are interesting, that drive the consumer to want to try the product and have a great experience when they do it, architecting all of that, where the eyeballs are in a world where increasingly its online, its digital, it takes a modern forward-looking skill-set to go architect all of that, and ultimately drive resonance and take the consumer all the way through to purchase. And that's very different than the legacy consumer products model, certainly that I grew up in over the last 20, 25 years.

And so that's what we mean by that, and again, we were on that path before the Harry's acquisition opportunity came along, and we'll will remain on that path, as we go forward, albeit being transparent and honest it's going to take us longer to get there in some cases, than what we would have had with plug in play DTC for example, with the Harry's expertise there.

Jason English -- Goldman Sachs -- Analyst

Got it. Thanks a lot guys.

Rod R. Little -- President and Chief Executive Officer

Thank you.

Chris Gough -- Vice President, Investor Relations

Thank you, Jason. Operator, next question please.

Operator

Yes and that comes from Ali Dibadj with Bernstein.

Ali Dibadj -- Bernstein -- Analyst

Hey guys. So I had a few questions, one is, just as you step back from this Harry's deal, many CPG investors look at CPG companies along kind of a spectrum or continuum, I mean, on the one hand, it's real high growth something like a luxury or cosmetics company. On the other end of the spectrum, it's something like a good free cash flow driver, a good margin driver, a good return to shareholders story like, I think tobacco almost in that sense. It only sounds like you guys decided to take a shot -- quite a risky shot given what happened to your leverage, but a shot at moving from one end of the spectrum to a faster growth part of that spectrum, and thought you might be rewarded with Harry's. With this change and not doing Harry's, how should investors think about you guys? I've heard kind of two almost conflicting pieces of language in your prepared remarks here about where you want to sit. So just want to get a sense of where are you on that spectrum? I think the easy answer is always we're in the middle, but where do you tend to lean one way or the other, more growthy or a more return of cash to shareholders' free cash flow?

Rod R. Little -- President and Chief Executive Officer

Yeah, good morning, Ali. Thanks for the question. I think where we sit today we do have characteristics of the strong free cash flow generator, consistent reliable delivery of cash flow, and so we're very much, I would say just in that place in terms of the profile. Although we do aspire to be more of a growth-oriented company and we think in our core categories where we play, certainly beyond Wet Shave. Wet Shave is stabilized now to flat to up 1.5 in absolute growth. So it's healthier than where we were one, two years ago. But beyond that, the growth is really going to come from Skin Care and Men's and Women's grooming, when you look at growth rates high-single digits, even double digits in some areas, Sun Care is growing.

So we're in categories that are actually growing and getting healthier and so as we look at our ability to innovate and partner with retailers and bring better ideas and innovations that the consumer wants, then we absolutely can grow on top of generating strong free cash flow and stability. And so I think, we still aspire to be, let's call it very much in that middle consistent, reliable, predictable player. I do think the opportunity with Harry's was to even be a little more than that, and to be at the top of the pack on consumer products certainly, versus that peer set and what we could have done together, just uniquely with the combination of assets and capabilities, that frankly there's not another combination out there that I see, that would match that and so it will just be a different plan going forward, and probably less aggressive on top line.

Ali Dibadj -- Bernstein -- Analyst

That's very helpful in terms of kind of setting guardrails up. In that context, how should we think about the role of M&A now going forward versus returning cash to shareholders part one. Part two is how should we think about the sustainable level of advertising that you want to put back into the marketplace, given that it sounds like, Rod, attempt to move a little bit more growthy, although not a leapfrog that you would have imagined with Harry's?

Rod R. Little -- President and Chief Executive Officer

Yeah, I'll cover the M&A one Ali, and I I'll throw it to Dan on how we're thinking about the advertising support for the business. Yeah it starts M&A wise with us having a successful track record with bolt-on acquisitions. Frankly, this company was put together over time from the beginning, via a series of acquisitions, most recently with Bulldog and Jack Black, which are both performing very-very well. Founder led businesses, the founders remain with us, flourished, thrived, and we were able to bring incremental capability to those businesses, to not only keep the growth going, but accelerated in some cases. And so there is absolutely a case for continued bolt-on M&A acquisitions. I think we're we're out in the market for big transformational things. This was a unique opportunity for us here. But bolt-on M&A is absolutely part of the plan going forward. As Dan mentioned, we have a very clean balance sheet and leverage to go do that. And I also think we have a unique capability of integrating companies into into our organization. The final thing I'll say, actually two more points is, we'll do this in a very disciplined way as we move forward, being financially disciplined with M&A as we move forward is important.

The second piece of this is, it's not all about the US and its not all about Wet Shave. We've got opportunities globally when we look at the map, and we've got opportunities beyond Wet Shave, particularly in Sun Care is an interesting category for us.

Daniel Sullivan -- Chief Financial Officer

Yeah. And then on the, on the A&P model going forward, we've said 2020 is a lean-in year for us. We expect to spend about 100 basis points more our rate of sales than we did a year ago. We expected to largely be seasonal in Qs two and three and I think what we're seeing is, our willingness to invest heavily behind campaigns that we believe in, and we're seeing that now in Sun Care, where we will invest behind both Banana Boat and Hawaiian Tropics. We will have new Women's Shave campaigns coming to the market, to be activated in two and three and we're going to put incremental money behind Bulldog, because we are seeing great results on the shelf.

So I think our thinking on A&P is now -- as we see campaigns we really like, that we've got the plans in place to invest behind, we'll do that and you'll see that step up largely in two and three.

Ali Dibadj -- Bernstein -- Analyst

Okay, thanks very much guys.

Rod R. Little -- President and Chief Executive Officer

Thank you, Ali.

Chris Gough -- Vice President, Investor Relations

Operator, next question please?

Operator

Yes, thank you. And that comes from Nik Modi with RBC

Nik Modi -- RBC -- Analyst

Yeah, good morning everyone. I had two questions. First Rod, You touched on some of the brand streamlining work that you've been doing. Can you just give us an update on where you guys are in that process? I mean have you completed a transferable demand analysis to kind of understand which SKU should be coming off the shelf? So that was the first question. And then the second question is just bigger picture, as you've been speaking to retailers and kind of reengaging them, I'm just curious what they're saying to you, what are they asking Edgewell to do, what do they want from you? What do you think you need to do in order to gain back some of the lost shelf space over the last few years?

Rod R. Little -- President and Chief Executive Officer

Yeah. Thank you, Nik and good morning. On the brand streamlining point, I think we're started down the path, we're not complete yet, where we've made meaningful progress is in Disposables. And as you know, we had multiple disposable brands in lines across both men's and women's, and we've consolidated our entire Disposables business on the men's side, under the Xtreme brand and on the Women's side, we've consolidated all of our Disposables under the Skintimate brand. It's a big simplification around SKU reduction, it's a big focus around just two brands now versus what was six or seven brands in terms of putting support and building those brands out. And so we feel good about that progress. There is more work to be done on Men's and Women's Systems, again we're on the path to do that and I think you'll see us continue to make progress toward fewer, but yet bigger brands that we can put support behind as we go forward. So I would say, we're starting to far from complete there.

In terms of retailers and what they want, I think it's actually quite simple. They want partners that can help them grow the category and deliver products and innovations the consumers want, and are willing to buy in higher demand than what we have today. And I think, if you look at the landscape and and what ultimately made Harry's successful and get to where they got was, they were able to take propositions to the retailer that grew the category. And if you look at what Gillette is doing in the space now, with the focus on innovation, value to consumer, consumer insights, leading us to where growth can be had in the category, that's what retailers want. And I think as we look at our innovation pipeline and roadmap and what we have coming, we're very encouraged with what we have. As we look at our strategy to move forward in a more consumer-centric way with data, analytics, insights, leading our thinking on what we take to the shelf, we feel good about where that's heading, and certainly as an overall corporate priority and commitment, including my time with retailers, we are serious about partnering with retailers and delivering across all three of those. And so, I think it's pretty simple what they want, we need to help them grow and bring value back into the category.

Nik Modi -- RBC -- Analyst

Great, thank you very much.

Chris Gough -- Vice President, Investor Relations

Thank you. Thanks, Nik. Operator, next question please.

Operator

Thank you. And that comes from Bill Chappell with SunTrust.

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Thanks, good morning.

Rod R. Little -- President and Chief Executive Officer

Good morning Bill.

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Two questions, first, can you talk a little bit more about just international Wet Shave kind of the outlook, and I mean that seems to be fairly stable, and maybe I didn't know if there is any -- if it's more products, new product introductions, marketing or if there's just some -- it's just much more stable than the U.S.?

Daniel Sullivan -- Chief Financial Officer

Yeah, good morning, it is more stable in the U.S., particularly in the last 12 weeks in Europe, where you might recall, coming out of Q4, we saw a challenging Wet Shave category in Europe. We saw heightened competitive pressures. We see a slightly more stable outlook today there and the results in Europe reinforce that. We also, as you know, have a very strong presence in Japan, and saw good results in the quarter when we normalized for the VAT impact of Q4. So we feel like we've got the right brands. We're executing better. We are spending incrementally year one -- Q1 rather year-over-year and yes we saw more stable Wet Shave category.

Rod R. Little -- President and Chief Executive Officer

And Bill, if I could add -- build on this, not only is the category more stable, but this is something we've gotten better at, around our innovation capability and how we architect and build our brands, to resonate with local consumers. Historically, we were in a very global average innovation model and under the new leadership we have in place globally, we've gone to a much more regional, local, tailored model with our innovation, where there is a global menu of innovation, that frankly, resonates more with local consumers.

I'll give you a couple of examples. In Germany, we've started the work on a regional rebrand and relaunch of the Wilkinson Sword brand. That was not led by the global team. The global team helped do that, but the regional team in Europe led that execution and activation, in a way that's much more interesting to the local consumer. Another example is, we're launching Schick 5 in China. It's a razor system architected for the Chinese consumer, with local Chinese design firms and insights being put into the market. In the past that would have been a -- something built for the U.S. market, having to then travel to those markets. And so our regional tailoring and our focus on local insights is starting to show up in the market as a result.

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Got it. And then just a follow-up on Sun Care, Skin Care, can you just remind us the pricing that went into effect? I assume everyone followed that pricing within the industry and then, is there anything I need to -- we need to keep in mind? Last year was kind of -- with the reformulation funky on the quarter, so just what the next few quarters -- kind of the flow looks like?

Daniel Sullivan -- Chief Financial Officer

I'll take the first question. So we won't get into too much of the specifics around the pricing. We took a bold steps in both mass, to put us on par from a front-line pricing standpoint and in drug. To our knowledge, no one has follow yet. But we have extremely strong execution in selling with the retailers, and as I said in my remarks, we're quite comfortable now and cautiously optimistic, as we think about the Sun Care season. We think we've got the pricing right, based not only on our brand equity, but also based on the significant costs that the entire category has seen over time. So we feel good about that. Sorry, what was the -- can you repeat the second question?

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Just over the next few quarters, how sales flow?

Daniel Sullivan -- Chief Financial Officer

Yeah, on the timing of the sales flow of the last year, we started the year. The first couple of quarters, essentially on allocation, as we went through the reformulation. We don't have that headwind this year. That's the simplest way to think about is, we are more on a like-for-like matching, [Indecipherable] consumption as we go this year, and we just went there last year, due to being on allocation.

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Got it. Thank you.

Chris Gough -- Vice President, Investor Relations

Thank you, Bill. Operator, next question please.

Operator

Thank you. And that comes from Steve Strycula with UBS.

Steven Strycula -- UBS -- Analyst

Hi, good morning. So Rod, my question is, I heard earlier in the call you downplaying the U.S. men's Shave business. So I'm curious as you think out like the next few years, what should investors think about, in terms of your top category country combinations, where the company is the most focused on. A lot of larger multinationals will talk about, whether they are focused on U.S. lingerie or German Wet Shave etc. So what are the three big platforms you would kind of point investors to, that matter most as you look out, whether it's U.S. private label, Japan Shave, U.S. Skin Care or Sun Care, anything would would be helpful. And then clean up question would be, can you comment on the cash break-up fee?

Rod R. Little -- President and Chief Executive Officer

Sure. I will take them in reverse order. There was no cash break up fee. And on the first question; the the priority is going to be around grooming in Sun Care, from a category perspective, geographically, U.S. and Canada and then broadly international, with a particular emphasis on Asia.

Steven Strycula -- UBS -- Analyst

And outside of Japan, do you have the scale and house to really deliver on a lot of these platforms, as you look out over these regions? Or is there any kind of change into how you think about scale, specifically, outside of the U.S.? Thank you.

Rod R. Little -- President and Chief Executive Officer

Our infrastructure outside of the U.S. is reasonably good, particularly in Europe, we've got good infrastructure there. I think as you get to Asia and as you point out, outside of Japan, which is a real area of strength for us. In terms of our scale, the team there, the talent we have on the ground, we don't just have that level of scale, in terms of market share in other markets around Asia. We're in the process of building some of that out. Already we have some good distribution partners we work with. However, it's one of the areas, if you think about M&A and where we would put some focus, there is the opportunity to accelerate our progress in building some scale via the M&A lever, as we move forward over time. And so I think it'll be a mix of potentially organic and M&A as we think about Asia

Chris Gough -- Vice President, Investor Relations

Thank you, Steve. Operator, next question please.

Operator

Yes. And that comes on Faiza Alwy with Deutsche Bank.

Faiza Alwy -- Deutsche Bank -- Analyst

Yes, hi, good morning. So two questions. One is just, I was wondering if you could give us a few more comments around the Harry's litigation that you referenced, sort of what's the premise of that? Like, are they saying that you operated out of bad faith, or just sort of like what is that litigation about? And then my second question is just around gross margin, maybe if you could give us some color around the impact of mix, input costs volume deleveraging, tariffs, etce in the quarter and how we should be thinking about those metrics on a go-forward basis?

Rod R. Little -- President and Chief Executive Officer

Good morning Faiza. I'll take the first one on litigation and then throw out to Dan for gross margin. On the litigation point first, to clarify, to our knowledge, we do not we do not know that Harry's has filed a lawsuit, as of me coming into this call, we don't have knowledge that they filed a lawsuit. But their counsel send us a letter, saying that they do intend to pursue litigation. And again, our view, as we stated in the press release is, we believe that any litigation that would be brought from Harry's toward us, has absolutely no merit. I'll leave it at that.

Daniel Sullivan -- Chief Financial Officer

In terms of the the gross margin question. As I mentioned in my prepared remarks, the margin performance in the quarter was slightly stronger than we had anticipated. There were some -- a combination of what I would call tailwinds. We mix that quite well both in product and market, which certainly helped the margin profile promotional intensity in the quarter eased a bit from what we anticipated, and then we also performed really well in terms of the Fuel program, and executing to help mitigate inflationary pressures. So good quarter. There are some timing and unique tailwinds there. But it keeps us feeling comfortable with our full-year outlook, which is a much more stable gross margin profile than we've seen.

Chris Gough -- Vice President, Investor Relations

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

Operator

Yes, and it comes from Olivia Tong with Bank of America.

Olivia Tong -- Bank of America -- Analyst

Great, thanks. Now that the deal isn't happening, I was just hoping you could focus on two different areas. First, in terms of sales mix, which you expect that to look like going forward, is it further diversification? Obviously Skin has been growing disproportionately, so just your view in terms of how you're going to support sales mix. And then, what kind of investment do you think you have to make to build out some of the areas that you expected Harry's to help you on, specifically digital capabilities and some go to market investments. Thanks.

Rod R. Little -- President and Chief Executive Officer

Good morning, Olivia. Thanks for the questions. On the sales mix, I think as we look forward, we would continue to expect in broad terms, moving forward, that Sun and Skin Care, so that grooming and and Skin Care area will continue to lead to growth for us. We know we've got some headwinds as Dan mentioned on Fem care, around distribution and the planogram set changes for this year, but over time, we would expect to have that continue to improve trend-wise, but certainly grooming Skin and Sun Care would lead the way. From a Wet Shave business, I think we still feel really good about our international business, and we expect those trends to continue to improve in the U.S. as an area, where we just know, particularly with what you see in Nielsen, the the distribution changes, as we look at that, we're going to continue to have some headwinds, that's all factored in to what we thought about, and we would be optimistic over time that we can improve those trends in the U.S. in shave, and we would expect to do that.

The other thing I'll tell you about trends and you don't see it in all the measured Nielsen data, but e-commerce in the quarter just finished for us, was up 47%. And so there is an increasingly large base of sales that are not captured in Nielsen. So when you put that together, our trends obviously look better. But those would be the areas.

And then in terms of investment required to build out around direct-to-consumer, digital marketing and the infrastructure and capability to make that happen, we were on a journey to do that and had made significant investments, leading up to the Harry's transaction. We'll continue to put investment in that area and that looks like technology choices and what the technology stack that we will use to run any DTC channels that we have, it will be incremental resources in direct-to-consumer managing, the e-commerce channel. We'll add people in there, and I think we also thought about some incremental resources in the marketing area around digital marketing and specifically in some areas where we know we want to take control of some of the value chain around social media management, how we do some design work, today it is third party managed for us. We'll look at bringing some of that in-house. So that's all contemplated in our go-forward investment plan. I wouldn't put a number on it, but it's contemplated within the Project Fuel work and how we look at reallocating where we put investment in the company.

Olivia Tong -- Bank of America -- Analyst

Thanks.

Chris Gough -- Vice President, Investor Relations

Thank you, Olivia.

Operator

Thank you. And the next question comes from Kevin Grundy with Jefferies.

Kevin Grundy -- Jefferies -- Analyst

Thanks. Good morning, everyone. Two quick ones from me. First one maybe for Dan on capital deployment and the balance sheet now with the Harry's news and debt leverage at about 2.5 times or even less than that. So, why is 3 to 3.5 times the right level for this business? And then, second, in light of the Harry's news, was there any thought to pivoting more aggressively toward share repurchases with the stock down here? And then, of course, in the process, you're moving more toward your target leverage ratio. And then, I have a follow-up on Harry's. Thanks.

Daniel Sullivan -- Chief Financial Officer

Yeah, good question. So, I guess, I'd put my remarks in context. We're quite comfortable that this business can easily handle a leverage ratio of 3 to 3.5 times. We think that gives us a very healthy balance of ammunition to invest in this business and just think about a healthy balance sheet that allows us to be aggressive where we want to be aggressive in terms of acquisition, reinvest in growth and opportunistically return capital to shareholders.

As you've seen through the Harry's potential deal, we were also comfortable leveraging up even higher than that if something was attractive to us. We don't see that right now. I think Rod's comments are clear. We're looking at acquisitions more through the lens of sort of bolt-on complementary acquisitions. So, we have to think about all of those elements as we think about what's the right profile for this business going forward. And again, because of the healthy balance sheet, 3, 3.5 times for us is a place of comfort.

Kevin Grundy -- Jefferies -- Analyst

Okay. Thank you. The quick follow-up is just for Rod. What are the key leadership positions now in North America that need to be filled that were going to be assumed by the Harry's management team? I know there's a lot of enthusiasm around what the founders and what their team was going to bring. What are the big roles, if any, at this point that that need to be filled? And I'll pass it on. Thank you.

Rod R. Little -- President and Chief Executive Officer

Yeah. Thank you, Kevin. I'm going to talk about one role. It's the North America leadership role. We mentioned, Colin has been double-headed now for over a year in running the global operations and also running the North America business. And as we said, that was unsustainable. Colin has done a great job and you can see from the North American results, the results have been proved, we've stabilized. We've got a better team in place in North America now across sales and marketing. And the big thing we need to do is get a dynamic leader in there that's experienced and can come in and really pick up the work that Andy and Jeff were going to lead. And so, as you look at the profile of what we're going to go get, it's a leader that's dynamic and experienced. And that is the position that we need to fill. And then, from that point forward, if there are other changes that need to be made, we'll work hand in hand with that leader accordingly to make further changes, but that's how I would portray it. Starts with the leader.

Kevin Grundy -- Jefferies -- Analyst

Thank you.

Chris Gough -- Vice President, Investor Relations

Thank you, Kevin. Operator, next question please.

Operator

And last question comes from Jonathan Feeney with Consumer Edge.

Jonathan Feeney -- Consumer Edge -- Analyst

Good morning. Thanks very much. Two questions for me. First, on Wet Shave, you commented on a number of factors on margin within the Wet Shave, but I'm trying to understand mix. When you think about men's systems disposables to women's system shave crafts, it's been my understanding that men's systems are by far the most profitable, and that's been a major issue. But any way you can comment or dimensionalize what mix looks like between those brands and specifically how critical it is to get men's systems flat to growing again in the overall margin plan? That would be great.

And second question is, it strikes to me that you have now over 60% of your business in Wet Shave and your manufacturing capabilities are quite unique and there's not really anybody else out there who have those kinds of capability well. There is one other and they're not -- they're a lot bigger, a lot more diversified. Are there other ways of taking advantage of that strategic position you're in, whether it's partnership deals to manufacturer or other ways you could think of that could get you that quantum improvement in execution that you're looking forward with Harry's, maybe without all that cost? Thank you.

Rod R. Little -- President and Chief Executive Officer

Yeah. Thank you, Jonathan. Good morning. And thanks for the questions. On Wet Shave, from an overall margin structure, men's and women's systems are the most profitable segments within Wet Shave. Disposables and private label are below that. So, your point is right, is when you are declining in the systems business, economically, it has an outsized impact. And so, that's correct. As we look forward, the uniqueness of the assets that we do have around not only IP technology, patent space, but manufacturing know-how and technology around manufacturing process, it is quite unique. Two of us have it. And so, as we look forward, don't take anything away from our conversation that grooming and sun, we think, have nice growth rates in areas that we can grow and win in. We still fundamentally believe we can be successful in Wet Shave, partly because of the structural dynamics in the assets we do have. And so, as we move forward and allocate investment and look at where we can grow and develop, filling up our manufacturing plants with more volume is a big idea. And so, that's something we're looking at organically as we make investments where a marginal dollar in return can be had. And I think that goes across private label disposable men to women's systems all the way through other partnerships or other ways to create value with those assets, we would look at all of those things as we move forward.

Chris Gough -- Vice President, Investor Relations

Thanks, Jon. Operator, next question please.

Operator

Actually there is nothing else at the present time. And that concludes our question-and-answer session. So, I'd like to return the floor to Rod Little for any closing comments.

Rod R. Little -- President and Chief Executive Officer

Thank you all for your time today. We appreciate the continued interest and investment.

Operator

[Operator Closing Remarks].

Duration: 67 minutes

Call participants:

Chris Gough -- Vice President, Investor Relations

Rod R. Little -- President and Chief Executive Officer

Daniel Sullivan -- Chief Financial Officer

Jason English -- Goldman Sachs -- Analyst

Ali Dibadj -- Bernstein -- Analyst

Nik Modi -- RBC -- Analyst

William Chappell -- SunTrust Robinson Humphrey, Inc -- Analyst

Steven Strycula -- UBS -- Analyst

Faiza Alwy -- Deutsche Bank -- Analyst

Olivia Tong -- Bank of America -- Analyst

Kevin Grundy -- Jefferies -- Analyst

Jonathan Feeney -- Consumer Edge -- Analyst

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