Edgewell Personal Care (NYSE:EPC)
Q3 2016 Earnings Conference Call
August 02, 2016, 10:00 ET
Chris Gough - VP, IR
David Hatfield - CEO & Chairman of the Board
Sandy Sheldon - CFO
Olivia Tong - Bank of America Merrill Lynch
Dara Mohsenian - Morgan Stanley
Jason English - Goldman Sachs
Bill Chappell - SunTrust Robinson Humphrey
Ali Dibadj - Sanford Bernstein
Nik Modi - RBC Capital Markets
Bill Schmitz - Deutsche Bank
Kevin Grundy - Jefferies
Stephens Power - UBS
Jonathan Feeney - Consumer Edge Research
Welcome to the Edgewell Personal Care Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Chris Gough, Vice President Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining us for Edgewell's third quarter FY '16 earnings conference call. As a reminder, for comparative purposes FY '15 third quarter results include both the Personal Care and the household products businesses with the results of the household products business presented as discontinued operations. Historical results on a continuing operations basis include certain costs associated with supporting the operations of the household business as these costs were not reported in discontinued operations.
As a result, EPS this quarter is not comparable to the prior year as the prior year's results include SG&A expense, interest expense, spin cost, restructuring cost and tax associated with supporting the household business. Additionally, EPS was not comparable in either the first or second quarter of FY '16. To partially address this, we have provided normalized third quarter FY '16 EBITDA reflecting pro forma adjustments to SG&A. You will find these normalizations in the non-GAAP reconciliations at the back of our press release issued earlier today and on our website.
With me this morning are David Hatfield, our President and Chief Executive Officer and Chairman of the Board and Sandy Sheldon, our Chief Financial Officer. David will kick off the call and then hand the call over to Sandy for earnings and outlook discussion followed by 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, the impact of go-to-market changes on sales, 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, 2015, as amended and supplemented in our quarterly reports on form 10-Q for the quarters ended December 31, 2015 and March 31, 2016. 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.
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 in the Investor Relations section of our website. Management believes these non-GAAP measures provide investors valuable information on the underlying trends of our business.
With that I would like to turn the call over to David.
Thank you, Chris and good morning, everyone. Before Sandy takes you through the results, I'll briefly comment on a few highlights of Edgewell's performance. We were pleased that through our fiscal year-to-date both our top line sales and operating profit are generally in line with the expectations that we set for ourselves at the beginning of the year. Also, we're reaffirming our full-year outlook for sales. This past quarter marked our one-year anniversary as a standalone Company and we're now at the point where we begin to put many of the transition actions and the impacts behind us. Most notably, we have now completed four full quarters of our go-to-market changes.
The total year-to-date impact has been 1.8 points of top line growth in line with our original estimates. I'm pleased at how the distributor model is working in the vast majority of markets where we made changes and we can now set our sights on really growing in those markets. Fiscal year-to-date, our total net sales are down 6%. They are down about a point on an organic basis but are up about a point in underlying basis after go-to-market impacts. This performance is tracking very close to our planning assumptions and over that period we've seen growth in many of our key businesses.
Total Wet Shave is flat on an organic basis but grew an estimated 2.5% on an underlying basis. With that, we're up in Men's Systems reflecting the global rollout of our next-generation Hydro product improvement. We also launched in this quarter our fifth Mach3 private label product in partnership with our U.S. customers. We've also grown Women Systems and Shave Preps in this fiscal year behind innovation and category management. The Sun and Skin segment is up both on an organic basis and an underlying basis reflecting category growth and strong share performance in the U.S. behind both Banana Boat and Hawaiian Tropic innovation.
We have introduced 4 of the top 10 new items this year with one of our Banana Boat Sun Comfort new items ranking number 1 in the category in the unit sales. From a geographic perspective, U.S. organic net sales are flat year-to-date and though international net sales are down nearly two points, they are up over 3% on an underlying basis. So all-in-all, we're making good progress against our number one value driver in our Company plan, namely accelerating top line growth. Importantly, in addition to net sales, our operating profit year-to-date is also tracking to plan. And given all the volatility this year, we're proud that we're meeting financial goals as well as key business initiative milestones. In addition to these core initiatives we've discussed with you over the past nine months, we're also embarking on a new initiative, Zero Based Spending, to augment our ongoing efforts against our second value driver, systematic cost reduction.
This project entails matrix accountability across targeted worldwide cost categories with a focus on reducing price and usage. This project fits well into our culture of systematic cost reduction and will increase our financial flexibility to further enable our growth objectives. Overall, we continue to be encouraged by the progress that we're making. We're executing against all five of our value drivers with more to come. Much of the organizational change related to the spin is behind us and we're excited as we move to this next phase for Edgewell.
Thanks and with that I'll hand it over to Sandy.
Thank you, David and good morning, everyone. I would like to turn to our performance in the third quarter and year-to-date. Our results for sales and operating profit in the quarter and through the first quarters of the fiscal year were generally in line with our expectations coming into the year and in line with our previous outlook. As David mentioned earlier, we're pleased with the progress we're making in -- particularly in light of the magnitude and scope of organizational change that we've undertaken this year. We continue to monitor the currency and macroeconomic environment closely as changing dynamics there can and have impacted our projected results. Now moving into details, our net sales were $645 million, a decrease of 4.1% or 2% on an organic basis which excludes the impact of ten basis points from currency and 180 basis points from the Venezuela deconsolidation and industrial sale which were included in prior-year comparatives.
In addition, we estimate that about $10 million of the net sales decline was due to the go-to-market changes including exits and transitions to distributors. North American net sales were down 2.2% or 1.8% on an organic basis as growth in Sun and Skin Care was offset primarily by declines in Feminine Care. International net sales were down 2.7% and down about 3% on an organic basis, though up 1.4% excluding the estimated $10 million negative impact of go-to-market changes. Reported net sales through the first three quarters were down 5.9% and down about one point on an organic basis, but up about one point excluding the impact of go-to-market changes. This was in line with our plan coming into the year and puts us on track for our previous full-year outlook a flat organic sales. Gross margin was 48.2%, up ten basis points over the prior year. The increase was primarily due to lower spinoff-related costs and lower material costs compared to the prior year.
These margin benefits were partially offset by lower net sales, unfavorable mix and unfavorable transactional foreign-exchange impacts on product cost. A&P expense was $123 million in the quarter or about 19% of net sales. Down from the previous year when it was about 21% of net sales. Much of the decrease this quarter was related to lower spending in North America compared to the prior-year's heavy promotional activity in Feminine Care and Wet Shave as well as lower spending in Sun and Skin Care segment. Year-to-date A&P, as a percentage of net sales of 14.5%, is roughly in line with the prior-year as higher spend in Wet Shave has been offset with lower spend in Fem Care and Sun and Skin Care.
SG&A as a percent of net sales was 16.2% compared to 24.6% in the prior year. Included within the current quarter results were pretax costs of $2.8 million related to the spinoff of the Company's Household Products business in July, 2015. Excluding these spin off costs and including amortization of intangible assets not allocated to the segments, SG&A as a percent of net sales was 15.8%. Historical SG&A results on a continuing operations basis include certain costs associated was supporting the Household Products business that were not reported in discontinued operations. Other expense net was $8.2 million of expense in the third quarter compared to net income of $6.6 million in the prior year. The charge this quarter reflects the net impact of foreign currency hedging contract losses primarily associated with the yen and revaluation losses on non-functional currency balance sheet exposures.
In addition, we recorded $3.2 million of interest expense related to settlements with tax authorities. Third quarter adjusted EBITDA was $88.6 million versus the third quarter 2015 normalized EBITDA of $100 million. The primary driver of the decrease was $12 million impact from other expense reflecting the impact of foreign currency hedging contract losses and the revaluation losses on non-functional currency balance sheet exposures. The year-to-date effective tax rate was 19% as compared to 25.9% in the prior year. The effective tax rate for FY '16 includes positive adjustments of a prior-year tax accruals as well as the favorable impact of separation and restructuring charges and higher tax rate jurisdictions. In the third quarter of FY '16, these favorable adjustments resulted in a tax benefit on earnings.
Excluding the impact of spinoff and restructuring, the 2016 year-to-date adjusted effective tax rate was 23.8%, a 220 basis point decrease over the prior year rate of 26%. Now turning to other items, average working capital as a percent of sales based on trailing four quarters was 16% in the third quarter versus 17.5% at the end of FY '16 and 16.5% at the end of the second quarter. The 150 basis point improvement through the first three quarters was primarily driven by improved days payable outstanding. Working capital continues to reflect a higher level of inventory in Feminine Care though this should return to normal levels as we complete the transition out of our Montreal plant. Net cash from operating activities was $4.1 million for the first three quarters of FY '16. During the second quarter we made a discretionary contribution of $100 million to one of our international pension plans which negatively impacted operating cash flow on a year-to-date basis.
We don't plan to make additional discretionary contributions to our pension plans for the remainder of FY '16 and for the full fiscal year we expect to have positive net cash from operating activities. Now let's move on to our segment results. Wet Shave organic net sales decreased 1.7% in the third quarter though underlying growth was up by 60 basis points, excluding an estimated $8 million impact from go-to-market changes. Our share was up globally and in the U.S., where we've grown share for five consecutive quarters. Key drivers of underlying net sales growth in the quarter were International Wet Shave was up 250 basis points, excluding the $8 million impact from go-to-market changes and was driven by growth in Hydro, Hydro Silk and disposables. In North America, lower volumes related to timing of shipments and promotional programs compared to prior-year promotional activity were partially offset by favorable price mix.
Organic Wet Shave segment profit declined $12.6 million driven primarily by lower gross margins as volume declines, unfavorable product mix and unfavorable cost mix due to transactional currency more than offset favorable price mix. As measured by Nielsen, the U.S. manual shave category was down 4% in the latest 12 week data, the declines in men's and women's systems and disposables. Men's manual shave was down nearly 3%, however when factoring in non-measured channels we believe the us men's category was up nearly 3% and the overall category was down only around 1% due to disposable softness ex-AOC.
From a share perspective, globally we're competing well, gaining share in several non-U.S. markets as well as gaining share in the U.S. Versus a year ago, our U.S. share was up 20 basis points in manual shave with gains in all three razors and blades segments, men's systems, women's systems and disposables. Note that our U.S. corporate branded share results continue to be impacted by a transition of our opening price point value branded product offering in a major retailer through a private label product line. Sun and Skin Care organic net sales decreased 50 basis points in the third quarter though underlying growth was up by 40 basis points, excluding the estimated $2 million impact from go-to-market changes due to increased sales in North America driven by both Banana Boat and Hawaiian Tropic.
Organic segment profit improved $9.1 million, driven by higher gross margin due to better cost mix and lower A&P spending versus a year ago when spending was elevated in response to a slow early sun care season. Within the U.S. category, consumption was up nearly 4% in the latest 12 week data due to favorable weather over the Memorial Day holiday and the month of June. We grew share this quarter in both Banana Boat and Hawaiian Tropic brands. Feminine Care organic net sales decreased $6.6 million or 6.3%. North American net sales declined driven primarily by unfavorable comparisons to the prior-year pipeline build for the new sport pads and liners offerings and lower net sales in Stayfree. Organic segment profit was down $0.3 million or 3.8%. The decrease in profit was driven by the lower net sales offset by lower spending compared to last year's launch activities.
The Feminine Care category grew approximately 2% versus a year ago while our share was down. I'd like to turn to our outlook for the full fiscal year. As David mentioned up front, through the first three quarters we're operationally on track with many of our key initiatives and our net sales and operating profit results were in line with expectations. We've reaffirmed our outlook for organic net sales and for both adjusted EPS and adjusted EBITDA we have narrowed the range and raise the range for adjusted EPS. For the full FY '16 organic net sales are expected to be generally flat for the full year. Go-to-market changes are estimated to impact top line growth by approximately 1.5% with no significant impact expected in the fourth quarter. Therefore, our underlying sales growth excluding these go-to- market changes is expected to increase by approximately the same level.
Unfavorable foreign currency impact on net sales is still expected be in the range of $25 million to $35 million for the full fiscal year. Reported net sales are expected to decrease by roughly 4%. As we look to the fourth quarter, we have good underlying momentum in many of our key international businesses and we anniversary the go-to-market changes and transition issues from a year ago. In addition, we'll benefit from the comparison to a year ago when we made significant investments, primarily in North America, on trade promotions and coupons. We believe we have much better insights into ROI going into the fourth quarter and have been able to cut low return, low impact events which we expect will provide a boost to both organic net sales and gross margin in the fourth quarter of this year.
The outlook on net earnings is in the range of $176 million to $185 million. Our adjusted EBITDA outlook is now -- is estimated to be in a range of $440 million to $450 million for FY '16, including $10 million to $15 million of negative currency impact for the full fiscal year. This updated outlook includes the impact that currency is projected to have on our other expense income line which is swung to an expense in the third quarter. Adjusted EPS is now projected to be in the range of $3.45 to $3.60, an increase over the previous range of $3.30 to $3.50 for FY '16, including $10 million to $15 million of negative currency impact for the full fiscal year. The adjusted EPS outlook includes updated assumptions for the full-year tax rate and updated other expense assumptions that reflect the hedge losses and the expense recorded in the third quarter due to a settlement with tax authorities.
Our adjusted tax rate is now expected to be in range of 24% to 26% for FY '16. This reflects a change from our previous outlook based on the lower rate year-to-date due to the favorable mix of foreign versus U.S. earnings and the favorable provision adjustments recorded this past quarter. Restructuring-related costs are now expected be $35 million to $40 million for FY '16 and $10 million to $15 million for FY '17. We expect incremental savings of approximately $15 million for FY '16 and an additional $40 million to $50 million in FY '17 and FY18 combined. Our restructuring projects are tracking as expected and encompass the closure of our Montreal plant as well as other footprint rationalization and asset optimization projects. The savings on these larger projects will lag costs and be achieved largely in 2017 and 2018.
Finally let me give you an update on current SG&A assumptions. We're currently estimating that adjusted SG&A, as a percent of net sales, will be at the high end of the 15% to 16% target that we previously discussed for FY '16. As reminder, that rate does not include the roughly $15 million of amortization intangibles. This is about in line with where we're on a year-to-date basis with adjusted SG&A of 16.7% of net sales and incorporates higher spending and strategic growth projects in the second half of the fiscal year and slightly higher than anticipated IT spending. Now that the major, heavy lifting of separation is behind us, we're focusing our attention back on those projects.
We previously discussed our new trade optimization tool which is included in this group of projects. Additionally, we started new projects this year in our ERP infrastructure focused on global supply chain and engineering processes. These strategic investments, in addition to new IT projects we'll be initiating next year, will enable us to be more agile, more standardized and more efficient across many of our processes and across a number of functions. Beyond IT, we have initiated a few other strategic projects, one of the more critical of which is Zero Based Spending. Last quarter I spent some time discussing our strategy to continually drive efficiency and productivity in our business. As you know, that strategy began prior to the spend and continues now and is an integral part of our business model and financial algorithm going forward. As part of the Company's strategy and to drive systematic cost reduction, in June 2016 the Company launched a Zero Based Spend initiative with the following key objectives. First identifying and capture savings in all targeted categories.
The savings will provide ongoing financial and operational flexibility for reinvestment to reinforce both the organic growth and margin improvement in our financial algorithm. Second, build a methodology for governance and organizational capability, continue ZBS as a sustainable way of doing business. And third, incorporate ZBS into our culture of systematic cost reduction. This initiative follows on three years of productivity initiatives starting with the 2013 structuring program as well as the initiatives launched with the overall separation program. The ZBS project is complementary to our overall trade promotion management project, focused on improving productivity in our trade promotion spending, as well is our overall IT enablement strategy. As we're in early stages, we will provide more visibility to details of this project, as well is our overall outlook for 2017 fiscal year, in our November earnings release and call.
And with that I'd like to turn it back over to David.
Thank you, Sandy. To close our upfront comments, we'd like to thank our colleagues worldwide for their accomplishments over the last 12 months, our first year. In addition to building Edgewell and managing through significant organizational changes, you have also competed very effectively in your markets. Thank you for your efforts and we look forward to closing out FY '16 at or above plan and working toward an even better second year. With that, we'll open it up for questions. Operator?
[Operator Instructions]. The first question comes from Olivia Tong of Bank of America Merrill Lynch. Please go ahead.
My first question is just about the spending behind the Wet Shave business. You talked about more efficient spend trade spend in Q4. Do you think of that as freeing up funds for reinvestment to restore some of the growth in the top line or is that slowing down to EPS? And then, it's interesting -- I wanted to ask you about your view on the change in ownership on Dollar Shave Club, do they become a bigger competitor to you because they're housed within a larger organization? How do you think about the competitive dynamics in that category? So that my first question and then I will follow up.
On the first question, I think it is a planned -- the spend that we're putting against Wet Shave's consistent with our annual plan and it correlates directly to planned top line and operating profit delivery. On the DSC question, Unilever had several reasons why they said that they bought DSC and I really can't speculate how they will operate DSC. What I can say is that we have competed well over the years in the shaving, before and after the entry of Dollar Shave Club and we will continue doing so going forward.
The next question comes from Dara Mohsenian of Morgan Stanley. Please go ahead.
I wanted to stick to the competitive environment both in Wet Shave but also more broadly across your portfolio. Your largest competitor has obviously significantly increased marketing and sampling spend in the last couple of quarters, sounds like it will continue going forward. Obviously, the Unilever dynamic with Dollar Shave Club. Do you think you will need to boost spending behind your business going forward? I mean, are you planning to on the Wet Shave side? I know you don't want to speculate on Unilever but I guess are you planning to preemptively spend? And as you think about the rest of the portfolio, if you could just review the pricing promotion level of ad spend environment you are seeing in terms of the industry? That would be helpful. Thanks.
We're seeing P&G ramping up their spend. And we knew they would behind the launch of their new products and after our successful launch of Next-Generation Hydro. We knew that they would try to win Q3. Still, we're surprised that their promotional level in men's systems in the U.S. hit 40%, the most ever since we have kept records.
So I really don't want to speculate about going forward, but I will just say that our philosophy is, we don't like to promote for a share. We prefer to build baseline share through innovation, equity and category management and that's the plan. But the flip side is also true that we won't lose share over the medium term due to being out-promoted or having value equations that are off. So we're going into a planning season now. And we will factor that in accordingly.
Okay, can you talk about the competitive environment on the rest of the portfolio also, beyond Wet Shave?
Yes. Sun, I think, is pretty similar to past years and I think that we're competing well with it in the U.S. Fem is also pretty -- at a pretty normalized levels for the most part, I'd say. And then Infant is a more fragmented marketplace but I don't think there's anything overly noteworthy there, also.
The next question comes from Jason English of Goldman Sachs. Please go ahead.
Gross margins, I know you came into the year expecting sort of flattish performance. Is it fair to say that, that's probably off the table given the progression through the first three quarters?
No, we would still say our gross margin is going to be roughly in line with the full-year prior year. We've had some volatility between quarters but we still have a pretty solid outlook of relatively flat for the year.
Okay. So pretty solid bounce back expectation in the fourth quarter. Is it fair to say that, that really is going to be driven by Wet Shave and the trade dynamics you talked about? And a related question to Wet Shave, I know you've talked a lot about how this private label mix factor is nothing to be concerned about with margins overall, but the margin degradation here is a little bit concerning. Should we be bracing for continued margin pressure in Wet Shave on the private label mix?
So we did see, this quarter in particular, we did see some unfavorable volume mix in Wet Shave and part of that really relates to the year-over-year dynamics. Last year we had pretty Wet Shave -- brand of Wet Shave growth and this quarter we were more flat there but we had higher private label sales due to the launched that David mentioned previously. So we're seeing some unfavorable volume mix this quarter. But we do expect to see margins bounce back next quarter in Wet Shave related to better price mix and then for the full-year we think we will be roughly around the same level. And the other thing that continues to impact us, particularly in Wet Shave on gross margin, is some of the FX transaction cost. That has a pretty big impact on Wet Shave and also Fem Care.
And one more question and I will pass it on. Back to the Shave Club commentary, Unilever is obviously making a bet on this and they are talking about the ability to expand it internationally. P&G has had success playing catch-up rapidly with their own shave club. How do you see shave clubs, assuming that there is some durability to them, how do you see them playing out for you in your future? Is there opportunity for you to participate and, if so, would it more likely be on a standalone basis or is there opportunity to partner with established online retailers?
We think eCommerce generally is a large opportunity for us in the coming years. Whether it be the omni channel customers, where we support them or the pure play like Amazon or Ali Baba, we see significant growth through those channels, also. And then finally, your question about direct-to-consumer. We actually sell to many shave clubs around the world, actually. And when you look at them generally, they are not profitable while we actually enjoy pretty good margins through them. We have concerns about the profitability of existing direct-to-consumer models but we're committed to serving consumers wherever they choose to shop.
So we're developing a direct-to-consumer proposition that is scalable, that is differentiated, that it builds brand equity and that complements our channel strategy. So, we're developing that. If and when we can meet those hurdles, we will consider entering DTC.
The next question comes from Bill Chapell of SunTrust. Please go ahead.
First question to make sure I understand, in terms of the EBITDA guidance change for this year to kind of the lower end, what is the main driver behind that? I'm pretty sure FX wasn't a change in terms of your guidance from last quarter so just want to make sure I understood what was the major driver?
Yes, the major drivers are the losses on our currency hedge contracts in our other expense income line. That's the major driver.
And other income is in EBITDA? The way it looks?
Yes, it is.
And then the second, just the thought process behind continued share repurchase, is there any changes you look going forward in terms of M&A versus possibly a dividend? It strikes me as you seem to continue to step up share repurchase and put more of your cash towards that. Is there a thought that maybe a dividend makes more sense for the long term or that there is not a whole lot in terms of M&A candidates out there?
Yes, I would say that our direction remains -- that uses of the cash remain, first of all to put in the business either to fuel growth or else to drive productivity. The second priority remains M&A and we're actively scanning the horizon for that. The third remains share buyback. We review dividend policy with the board regularly but right now the priorities remain the business and then M&A and then share repurchase.
The next question comes from Ali Dibadj of Bernstein. Please go ahead.
Can you expand a little bit on the on-track channel growth? That's explaining the discrepancy between Nielsen and your reported numbers in Wet Shave? Is it online or is it club? Is it private label or is it branded? And then you had mentioned private label mix shift on gross margins, but how much of the lower gross margins were impacted by this kind of untracked mix shift in Wet Shave, because both club and online tend to be lower margin.
We see Nielsen tracked -- markets are down 4% in the U.S. They count for about 80% of the total market. The other 20% grew rapidly enough that we estimate that the total market is down one1%, so that's the math behind that.
So you already gave that in your prepared remarks. I'm trying to figure out whether it is online or club or if it's branded or private label? And what the impact was of the untracked channels on the gross margins? And then I have a follow-up.
The growth was across club, dollar store and the shave clubs. They were all up. And I believe that's all branded or the vast majority would be branded.
Yes. And I would say the mix issues are not necessarily channel dependent. It's predominantly this quarter the mix of private label versus branded within our normal customers.
Okay. And then on the very creatively named ZBS that you guys are just implementing. Can you talk a little bit more about -- more specifically on the targeted areas of spend, quote-unquote, that you describe? And I'm trying to get a better sense of whether, I'm trying to find the language you use, reinforcing -- reinforce organic growth and market objectives. Means that's what you need to reach your current targets or is it to get beyond the current targets? So in some sense, is it incremental or is it because it seems like you are going to have to spend a little more back? Thank you.
So first of all, we're actually targeting a broad range of cost categories. We're actually ruling out headcount. Organizationally, we have made many changes over the last several years. And this is not directed at new organization moves and because we have a long-standing program against product cost, also -- it isn't generally focused there. So it is kind of everything else but that. And then we're entering planning season now and I think we'd finalize both the program and what we think we can net from it. And then also just look at the bottom up plans around the world. So I'm not sure that I can answer you yet but that is something we can talk about more come November.
The next question comes from Nik Modi of RBC Capital Markets. Please go ahead.
Sandy, maybe you can answer this one. When you think about the trade spending program, can you just help us understand the pathway in terms of the rollout? And maybe even help us understand how much trade spend you guys have so we can think about potential implications on that. And then any case studies on what you've learned to so far from implementing the system here in the U.S.
Okay, I will start and maybe David will jump in on some comments as well. So where we're with the rollout is, we have been using the new tool in our U.S. commercial teams to work on our 2017 plan. And obviously as we go into 2017, we will start to be able to track better a lot of the actual programs versus our expectations and start to really zone in on optimal programs and really understand even better than we do today, some of the ROIs of these programs.
I think what we're probably using it some extent when we think about fourth quarter and trying to zone in on far more efficient promotions in the fourth quarter versus prior-year and really that would run the gamut of all of our segments. I think we've been using it effectively in Wet Shave and in Sun Care and Fem Care. So I think it's pretty much against a broad range of segments and we're starting to see some good results.
I think that covered it pretty well.
The next question comes from Bill Schmitz of Deutsche Bank. Please go ahead.
Can you guys just talk about the platform lifecycle and if that changes in shaving because I think Hydro is six years old now and typically they have been like seven-year launch cycles? Is that still the way to think about things? Do you view Hydro as maybe a different platform where you can kind of live with it for a little bit longer and continue to innovate behind it?
We really wouldn't want to comment about future roadmaps. Sorry.
Okay. But industrywide, I think you said stuff previously, though, that maybe the industry has changed a little bit and you might support the existing platforms longer. Did I miss hear that?
Well, broadly, I think rising up broadly, I think that you have seen that the lift that MACH3 gave versus Sensor was higher than Fusion to Mach 3 and I think we have a similar tack and I think that, that lends itself maybe to longer cycles. But that's just a general comment.
Okay and then to Sandy. Are the bulk of the hedging losses done now? Or should we continue to model losses going forward? That's a difficult number for us to try to figure out.
In the fourth quarter we will have some losses as well, but they will be not as severe as what we saw this quarter.
Okay and then do they go away after that?
Obviously it depends on where rates fall, but based on the current spot rate I would say we would have some fall into 2017, as well.
The next question comes from Kevin Grundy of Jefferies. Please go ahead.
First, quick housekeeping question, Sandy. Just the sustainable long term tax rate as we look out to 2017 and 2018? And then, David, I wanted to come back to the M&A question but I hope ask it a bit differently given some of the evolving dynamics. So the top line remains pressured and we all appreciate the difficult competitive environment and the ramp spending there that we're seeing from your largest competitor. I wouldn't expect you to comment on this, but -- the Unilever's move with Dollar Shave Club, they seem to have chosen their path in the category there.
They were widely viewed as the most likely potential suitor of Edgewell and now that scenario is seemingly off the table. I'm just curious, as you sort of pull these pieces together, the top line remains under pressure. You have the dynamic with Unilever, again which I wouldn't expect you to comment on. Is there any change in philosophy at all with respect to M&A or maybe there is a case to be made that the Company should be looking at higher growth assets. Has that changed at all? If so, what potential categories or geographies are of greatest interest to you? Thank you.
First on the tax rate, I would say that we would have a core tax rate somewhere in the 27% to 29% rate going forward. But as you know, it is all dependent on mix of U.S. and foreign earnings. But right now that is what we're considering our core rate.
And then your M&A question, I think that it remains a very high priority for us. I think international would be very good. But generally, we're looking at close in adjacencies, whether it be Skin Care, Men's Grooming, Sun Care. Those kind of categories are our number one priorities and we continue to work on those.
The next question comes from Stephen Powers of UBS. Please go ahead.
So I know it's early days, but regarding the Zero Based Spending initiative, can you talk more about what led you to the program, how much -- I know you've framed this but how much work you've been doing on this program to this point? And whether you have any outside help, whether Accenture or anybody else?
Yes, so I would say we're in the middle of the first phase which is really focused predominantly on visibility. So that's what the team has been working the hardest on. And in addition, in parallel we're been setting up all the category teams. David mentioned matrix accountability, we thought that was critical in the early days to set that up and ensure that the people that will be managing and watching and making policy decisions were involved from the beginning, particularly in this visibility phase.
So once we get through this phase which is scheduled to be complete let's say sometime in September, we would move into the next phase which is really where you get into looking at benchmarks and targets and looking at decisions and policies on where we will land within those benchmarks. And yes, we have been using Accenture.
And then just on to a little bit of a modeling question. I may have my numbers wrong, but I think just back into some of the Q4 dynamics. I guess you are pointing towards maybe even a steeper sequential decline in SG&A dollars than I had anticipated and/or maybe some downward movement in A&P. I just wanted to see if you could update us on that? And if there is a sharp sequential decline, in SG&A dollars, Q4 versus Q3, can you just talk about what drives that? And is that an ongoing pattern in your business we should take into account going forward? Thanks.
Yes. So on SG&A, again our current view on SG&A is that we will be at the high-end of the 15% and 16% before amortization. So if you build amortization in, we'll be in the 16.5% level. And yes, we will have -- most of that incorporates what we talked about in terms of our higher IT spend and some incremental strategic projects. And then on A&P, we're guiding to the midpoint of 14% to 15% which is very consistent with our year-to-date trends, as well.
The next question comes from Jonathan Feeney of Consumer Edge Research. Please go ahead.
A few of your competitors have talked about eCommerce and I know a little bit less developed in your portfolio, a little bit more narrow and geographically not so important, but if we think about -- could you talk a little bit about that channel for you? Your market share in it? And as you think about your portfolio does that advantage or disadvantage you if that continues to develop in the U.S. maybe where it has in other markets? Thank you.
I think that it would be fair to say that we under-index somewhat in the eCommerce channel but we see it as a great opportunity for us, not only in the U.S., but internationally and in China. And when you think of our portfolio, I think that we, having both the high-end, the premium and with Hydro, but also middle-tier products and also private brands, it allows us a lot of flexibility to cater to it. So we actually see it as a large opportunity.
But I guess maybe why do you under-index now if you see it as an opportunity? And that just a historical evolution of the business or maybe some investment that is needed? And I guess what steps should we look for you to take to maybe grow that?
I think maybe we were a little late really focusing on it. But over the last couple of years, we have been really going after it and we have been growing rapidly there and that we think that we will continue and it will remain a key focal point for us.
There no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to David Hatfield for closing remarks.
Thank you all very much for your time and your interest and have a nice day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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