Helen of Troy Limited

Greetings and welcome to the Helen of Troy Limited third quarter 2020 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jack Jensen, Senior Vice President of Corporate Senior Development. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and welcome to Helen and Troy's third quarter fiscal 2020 earnings conference call. The agenda for the call this afternoon is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julian Mindenberg, the company's CEO, will comment on the financial performance of the quarter and specific progress on our strategic initiatives. Then, Mr. Brian Grass, the company's CFO, will review the financials in more detail and comment on the company's outlook for fiscal 2020. Following this, Mr. Minnenberg and Mr. Grass will take your questions you have for us today. This conference call may contain certain forward-looking statements that are based on management's current expectation with respect to future events or financial performance. Generally, the words anticipates, believes, expects and other words similar are words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other companies. The company costs its listeners to not place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Minnenberg, I'd like to inform all interested parties that a copy of today's earnings release can be posted to the investor relations section of the company's website at www.HelenofTroy.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the investor relations tab on the company's homepage and then the News tab. I will now turn the conference call over to Mr. Minnenberg.

Thank you, Jack, and good afternoon to everyone. Thank you for joining us today. I'd like to wish everyone a happy new year. I look forward to a successful and prosperous 2020 for all of us. During this afternoon's call, I will discuss our third quarter results and then take the opportunity to share progress we've made on our strategic plan and in the business segments. Following my remarks, Brian will provide a deeper look into our financials and then we'll open the line for your questions. As you saw in our earnings release this afternoon, we concluded our third quarter with excellent business momentum. We delivered strong top line and bottom line results driven by our phase two transformation plan which continues to drive everything we do at Helen of Troy. The results this quarter were ahead of our expectations. Consolidated core business sales grew 10.7%. Leadership brand sales increased 10.6% and our online channel sales grew approximately 30% to now represent 24% of total sales. International sales also demonstrated healthy growth in the quarter, especially in EMEA and Asia, the international regions we are most focused on in phase two. We increased our gross margin by two percentage points, expanded adjusted operating margin in all three business segments and grew adjusted EPS by 30% to $3.12. Due to the strong performance this quarter, we are increasing our full fiscal year outlook for sales and EPS. I am pleased to raise our outlook even as we execute our planned incremental investments in the business and absorb higher costs to support our distribution centers as we meet the growing demand for our products. Our balance sheet remains strong with significant progress on further reducing our already low debt and a reduction in inventory during the quarter. Cash flow from these and other working capital efficiency efforts helped us ensure dry powder to execute our strategic objective of adding accretive businesses we believe fit strategically within our portfolio. Our secondary capital deployment strategy remains opportunistic shareholder purchases as a vehicle to return capital to shareholders. Before I provide color on each business segment, I would like to take a few moments to focus on one of our major phase two strategic choices, Selective and Strategic M&A As discussed during our May 2019 Investor Day, M&A is expected to be a key component of our growth in Phase 2. Our primary M&A goal continues to be adding critical mass to our flywheel by acquiring leadership brands that are the right fit for our portfolio and wheelhouse and where we can add significant value. As many of you are likely already aware, in December we announced an agreement to acquire Drybar Products, LLC, Upon closing of the transaction, we expect Drybar will be immediately accretive to key measures, and we anticipate ending fiscal 2020 with a low leverage ratio. The Drybar products acquisition will add a multi-category leader in prestige hair care that will complement our Revlon and Hot Tools brands and extend our beauty portfolio across the good, better, and now best segments. Helen of Troy believes it can add significant value to the brand through our expertise in new product development, Sourcing, Sales, Marketing, Digital, Brick and Mortar Category Development, and International. Concurrently with the closing of the transaction, we will enter into a relationship with Drybar Holdings LLC, the owner and longtime operator of the highly successful and growing fleet of Drybar salons. They will license our newly acquired Drybar brand and their continued management of all Drybar salons. We believe this relationship will provide a better together combination that will strengthen a powerhouse brand. Our capabilities in existing infrastructure combined with the expertise and brand experience of the Drybar products team makes for what we believe will be a compelling combination with a business model unlike any other brand in the industry. We remain disciplined as we actively search for additional acquisition opportunities that we believe could provide the right strategic fit and the right financial fit for our dry powder and our company. Turning now to our business segments, Housewares delivered another outstanding quarter with core business net sales increasing 28.5%. Housewares grew in brick and mortar and online, gained new distribution, benefited from new products, and delivered strong POS at key retailers. We also saw international expansion for both OXO and Hydro Flask. Standout categories during the quarter were specialty hydration, food storage, cleaning, and baking. We continue to make incremental marketing investments to build out digital content and online support that engages consumers on the outstanding innovation, design, and performance of OXO and Hydroflask products. Our investments online and across the consumer journey continue to pay off. For example, based on third party data, Hydroflask continued to add significant incremental market share to its number one position in the insulated beverage bottle category over the past 12 months. It was also the number one most searched brand on Amazon for the entire month of October. and named REI's vendor partner of the year in the camp category. Focusing on OXO, its online presence continued to impress with social media engagement that far exceeds industry averages, millions of online searches each year and a long string of awards for its business performance and product innovation. At Target, OXO was recently named vendor of the year across the entire home category. Hydroflat's eco-friendly vacuum insulated bottles and Its accessories and its soft cooler packs continue to grow in popularity as an everyday essential with broad groups of consumers and outdoor enthusiasts, making the brand a staple for retailers. During the quarter, Hydroflask growth was broad-based, domestically and internationally, across all channels and key retailers, including online, active lifestyle, specialty outdoor, natural foods, and collegiate. Hydroflask sales growth at a major... and the sporting goods retailer where we gained new distribution last year represented only about a quarter of total houseware segment growth. Hydroflask grew at other retailers and channels where our POS exceeded the category average growth rate and we added new doors and shelf space particularly in the eastern United States. In addition, some retailers accelerated orders to support holiday demand as well as expected shelf replenishment needs based on POS trends. As we look forward to the fourth quarter, we expect year-over-year growth to naturally moderate as we anniversary the previously mentioned distribution gains at the major sporting goods retailer. Brian will provide a bit more detail shortly. Beyond the current fiscal year, Hydroflask has multiple key growth drivers, including new product introductions, expansion into new categories as the brand expands beyond the bottle, additional distribution gains not only in the U.S., but also internationally, where the brand is currently underpenetrated. and of course our Just One More strategy to further penetrate the households of our existing consumers. Based on its market leading position with rapidly growing consumer appeal, awareness and equity, we expect the brand to grow at a healthy rate on an annual basis and continue to be a key driver of top and bottom line growth for the houseware segment and for the total company. In health and home, core business net sales declined slightly due to net retail distribution changes year over year and more wildfire activity in the Year Ago base, more than offsetting strength internationally. Health and Homes international growth came from expanded distribution, including early wins from the Braun Thermometer expansion in China and e-commerce growth, especially during Singles Day, the largest shopping event in China occurring annually each November 11th. Focusing on the Braun Thermometer expansion, this past October I was proud to join leaders from our Health and Home division Our new president of international and our Asia Pacific regional market leaders to formally announce the expansion of Braun's flagship ear thermometers in China. This initiative broadens our footprint from the China cross-border exchange market, where it is already market leader for Braun, to the national markets online and in brick and mortar offline. Now families across all the key channels in China will have access to the world's most trusted, accurate, and reliable ear thermometer technology. Turning to the start of the current cough, cold, and flu season, reported incidence levels are slightly above historical averages. As discussed in the past, our sales of thermometers correlate most to pediatric fever, and Vicks humidifier sales correlate most closely to congestion and cough. Our sales depend not only on point of sale, but also on whether retailers bought ahead of the season via direct import, or are placing replenishment orders to our warehouse Now that the season is beginning to progress closer to its likely peak in the northern hemisphere. The exact timing and duration of the season for each symptom can vary, but most types of respiratory illness, including influenza, usually begin to increase in October, peak between December and March, and wind down by early spring. This year's illness rates are following this same pattern so far, with some increased fever, cough, and congestion incidents in recent weeks. Our outlook continues to assume a normal season for the balance of fiscal 2020 in line with historical averages. Now turning to beauty, I am pleased to share that our beauty segment delivered another strong quarter, with core business net sales increasing by 5.4%. We are raising our outlook for beauty, which we believe is now on track to deliver growth in the range of 3% to 5% this fiscal year. Based on that outlook, we expect fiscal 20 will mark the third consecutive year of beauty appliance growth. During the third quarter, Beauty sales were driven by consumer-centric appliance innovation that continues to sell ahead of expectations domestically and is now getting significant traction internationally. Our beauty appliances gained further share in the quarter in both brick and mortar and online as the momentum and appeal of our volumizer franchise continues to build. Our Revlon volumizer has now earned nearly 20,000 online reviews with an average rate of 4.3 stars. Our volumizers have gained considerable share online and have earned positive media attention online, on TV and through consumer word of mouth. Our beauty team strategically developed investments during Black Friday's week that performed very well. Based upon third-party syndicated data, Revlon Appliances' point of sale dollars grew strong double digits compared to last year's 2018 Black Friday week. Our beauty organization is focused on maintaining our market position and on building it further. As we look at our long-term trajectory, we are hard at work on adding new consumer-centric innovation to our pipeline of appliances, increasing international expansion, and investing more in the marketing efforts that we have found perform best. We are proud of our progress and are excited about the prospects in beauty, including the addition of Drybar in the prestige segment. Before turning the call over to Brian, I would like to call your attention to the excellence of our associates as they continue to bring to Helen of Troy every day Operating the business and living our culture. I am very pleased with their ability to deliver significant results in a highly dynamic environment. On top of their day jobs of meeting the needs of our customers, keeping our leadership brands healthy, introducing outstanding new products, developing and executing the key phase two initiatives, and working nimbly in a highly competitive category, they are also successfully navigating the volatility from changes in tariffs, I believe our Phase II choices position our company for continued long-term profitable growth, not only profitable but responsible and sustainable growth that delivers on the expectations and needs of our outstanding consumers, customers, suppliers, and associates. With that, I will now turn the call over to Brian.