Helen of Troy Limited

Greetings and welcome to the Helen of Troy Limited fourth quarter 2020 earnings call. At this time, all participants will be in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note that this conference is being recorded. At this time, I'll turn the conference over to Jack Jason, Senior Vice President of Corporate Business Development. Sir, you may begin.

Thank you, Operator. Good afternoon, everyone, and welcome to Helen of Troy's fourth quarter and fiscal 2020 earnings conference call. Today, each member of our earnings team is in their homes and in different locations across the United States. Since this is the first time we are conducting our earnings call remotely, we hope you will pardon any technical glitches. Before discussing today's agenda, I would like to call your attention to a change in how we define our sales. As detailed in this afternoon's earnings release, we now define core as strategic business that we expect to be an ongoing part of our operations, and non-core as business that we expect to divest within a year of its designation as non-core. Previously referred to as core business, organic business now refers to net sales revenue associated with product lines or brands Thank you for joining us. Mr. Brian Grass, the company's CFO, will review the financials in more detail and reflect on considerations from the COVID-19 pandemic uncertainty as we enter fiscal year 21. Following this, we will open up the call to take your questions. 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 the 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 cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Minnenberg, I would like to note that a copy of today's earnings release has been posted to the investor relations section of our 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.

Thanks, Jack. Good afternoon, everyone, and thanks for joining us. On behalf of Helen of Troy, I would like to share my heartfelt hope that you, your families, and loved ones are staying safe and healthy during this extraordinary time. As we all know, COVID-19 has brought unprecedented disruptions to the global community, which in turn is experiencing an unparalleled impact on economic activity across most sectors in all geographies. The situation is so dynamic that each day brings new developments. In response, we are rapidly and continually adapting our business and leaning into categories where our leadership brands play a vital role right now, such as Vicks, Braun, Pure, and parts of Honeywell and Oxo. We have also taken major steps to protect our people, increase our liquidity, temporarily reduce our costs, and safely continue our operations. We have done all of this guided by our values, with a focus on preserving the outstanding capabilities and systems we have built during our transformation. We came into the crisis with momentum and believe our actions have positioned us to serve all of our four major stakeholder groups, our associates, consumers, customers, and shareholders. We will give detail in each of these areas during today's call. Even the highly unpredictable nature of the COVID-19 situation, we will not be providing guidance for fiscal 21 at this time. While we are taking actions every day to work through the current crisis, we remain focused on our phase two plans and financial targets. With such a broad range of topics to discuss, my comments will first give perspective on our excellent fourth quarter and full year results. They mark an outstanding conclusion to the first year of our phase two transformation. Next, I will discuss our response to COVID-19 and how we are positioning Helen of Troy to navigate the current crisis. Finally, I will share recent trends we are now observing related to our business as the crisis evolves. Brian will then share a deeper view into our financials, including more insight on the business and environment as we move forward. Now I would like to turn to our performance in the fourth quarter of fiscal 20. We finished the quarter well ahead of our expectations. Net sales grew 14.9% with organic business growth of 13.4%. Sales growth was double digit in each of our three business units. Leadership brands led the way, growing 15.7% during the quarter. The online channel continued to be a major growth driver, up approximately 39% year over year, contributing 24% of total fourth quarter sales. Customer replenishment continued to be healthy following the strong sell-through of our products during the holiday season. Separately, late in the fourth quarter, thermometer demand further increased as COVID-19 began spreading across the globe. Turning to the full year, across nearly every key measure, fiscal 20 was the strongest result in Helen of Troy's history. We grew both total organic net sales and organic net sales 9.2%. We are delighted to deliver that acceleration on top of the 5.8% total net sales growth in each of our last two fiscal years, particularly in light of tariff-related disruptions unfavorable for our currency exchange and the operational challenges from three consecutive years of significant organic growth. Leadership brands grew 9.4% in fiscal 20 and accounted for approximately 80% of overall sales. Six of the eight leadership brands grew for the year. Our digital initiatives continue to generate results with online sales up over 34% during the fiscal year to represent 24% of total sales. Adjusted operating margin expanded 50 basis points in a year when we raised our growth investments to the next level. Adjusted diluted EPS grew 15.4%, a meaningful acceleration on top of the 11.3% growth in fiscal 19 and 11.6% growth in fiscal 18. Operating cash flow grew over 35% year over year, demonstrating the strength of our flywheel and helping us maintain strong liquidity and low leverage even after the dry bar acquisition. On a strategic level, our multi-year growth investments in leadership brands, digital marketing, e-commerce, consumer-centric innovation, and global shared services have added flywheel momentum. We are proud to share that last month, our two housewares leadership brands, were recognized by the NPD Group during their 7th Annual Home Industry Performance Awards for calendar year 2019. Hydroplast was recognized for delivering the largest dollar share increase in the portable beverage category. OXO won the award for the largest dollar share increase in food storage, and OXO also earned NPD's new award as the brand delivering the largest overall market share increase in the total U.S. housewares industry. This is the third consecutive year in which OXO's market share gains have been honored by NPD. I would like to turn now to our business segments during the fourth quarter and the full fiscal year. I'll begin with beauty, which delivered an outstanding quarter and its best year of sales growth in at least a decade. Total beauty sales increased 23.1% in the fourth quarter, well above our expectations. This included approximately five weeks of dry bar sales. Beauty organic revenue growth was 16.1%, also ahead of our expectations, and representing its fifth consecutive growth quarter. For the full fiscal 20, total beauty sales increased 10.4%, including dry bar. Very strong. For beauty appliances, fiscal 20 marks the third consecutive year of growth momentum, resulting in substantial market share gains. Over the past three years, the improvement to our beauty segment has accelerated under new leadership. Significantly more focus on developing the online channel, digital marketing, new products based on deep consumer insights for the retail and also the professional markets, and further improvements to the caliber of our organization have all paid off. Similar efforts were also made internationally in beauty over the past two years Thank you for joining us. Indicated data shows that during the latest 52-week period, Helen of Troy further grew its number one share position in the online channel for U.S. hair care appliances and now holds a significant lead. Indicated data in brick and mortar shows that during the latest 52-week period, we grew our number two domestic share position in U.S. retail appliances. First mover innovations, such as the creation of the volumizer category of appliances, Thank you for joining us. and incorporate further consumer-centric insights across our beauty appliance portfolio, including dry bar. In housewares, the segment capped an outstanding year by delivering an impressive fourth quarter with net sales up 15%, also topping our expectations. Housewares grew a remarkable 22.4% for the full fiscal year against a very tough year ago compare. Both OXO and HydroGlass finished strong and both posted healthy growth for the full year. Our investments in innovation, new distribution, marketing, and e-commerce are paying off with customers and consumers online and in brick and mortar, providing solid ROIs and growing our market shares. OXO's unique and enduring excellence in universal design and clearly defined positioning influences all touch points across the consumer journey. OXO is all about better performance through better design and quality that makes every day better. The two new NPD awards for OXO mentioned earlier confirm what we are seeing in our customer POS data. OXO's overall excellence and meticulously planned stream of consumer-centric innovation resonate with consumers and win in the marketplace. HydroGlass has had simply a fantastic fiscal 20. Its distribution continued to expand as did its cell food, resulting in high double-digit growth for the quarter and the year. According to third-party syndicated data, the 52-week period ending in February, Hydroclass added incremental market share gains to further expand its position as the number one player in the U.S. metal beverage bottle market. During the quarter, we continued to grow the brand internationally. Domestically, we began to see high-volume customers strategically expand Hydroclass shelf space to meet growing consumer demand. In February, we began shipping our 2020 spring collection. The new product lineup includes a variety of innovations, such as the new Trail series, which is 25% lighter with no reduction in thermal performance, new colors, and a new finished texture. Spring collection also further expands Hydro Flask beyond the bottle with new lunch boxes and packs. The Just One More strategy for Hydro Flask continues to produce results in the quarter, with loyal customers and consumers adding new sizes, colors, caps, and accessories to their collection. Looking ahead, we expect Hydroflask to continue benefiting from multiple long-term growth drivers. These include further expanding distribution and shelf space, just one more, okay, maybe just two more, among households that have already discovered Hydroflask, new innovation in existing categories, New entries beyond the bottle, further growth and expansion internationally, more direct-to-consumer, collegiate, and much more customization. Net, we think Hydro Flask has a wide array of white space opportunities. Turning to health and home, our largest and most global business, we are focusing on delighting consumers with trusted solutions for healthy living and peace of mind. especially when they need us most. Health at Home's excellent fourth quarter results were ahead of our expectations with net sales up 10.5%. Sales in several of our Health at Home categories are highly correlated to the severity of winter weather and cough, cold and flu incidents that is generally more concentrated in our fourth quarter. For the recent 2019-2020 season, fall and winter weather was milder than historical averages and the incidence of cough, cold and flu symptoms was only slightly greater than last year's below average season. Pediatric fever was the one symptom area where we did see higher incidence. Additionally and separately, the spread of COVID-19 during the month of February through Asia, Europe, and into the US added to health and home sales in thermometry, humidifiers, inhalants, and air purifiers. Now turning to our response to COVID-19. We came into the crisis very healthy. We have strong business results, a trusted and diversified portfolio of leadership brands with significant market positions, exceptional people united by a powerful culture, highly capable global systems under our shared services, and a proven ability to stay nimble. As the crisis unfolds, we acted quickly and decisively to protect our people and reduce our costs, doing so in a way that focuses on protecting the capabilities built during our transformation. On the product side, a key response area for us has been to provide essential health products that consumers need now. Thermometers under our Vicks and Braun brands, humidifiers and inhalants under the Vicks brand, and air and water purifiers under our Honeywell and Pure brands. All of these are critical at this time, are highly trusted, and are in high demand. We are working 24-7 to maximize supply and support customers and consumers. Outside of the health arena, with families nesting at home, spending more time in the kitchen and more focus on cleaning and on storage as they pass reload, our largest leadership brand, OXO, is also seeing elevated demand online and in those brick-and-mortar stores that remain open. We have adapted our shipments and marketing focus to meet the major shifts towards online shopping as key retailers temporarily close major portions of their brick-and-mortar footprints. Our response in the area of protecting our people has been comprehensive and proactive from the start. It's led by a task force of senior leaders coordinating across all of our global sites. Measures include a work from home policy, social distancing in our distribution centers, frequent and elevated cleaning protocols across all sites, and a lockdown on nearly all business travel. Such a dynamic situation, we will continue to adapt quickly to changes. Our cost interventions fall into two major categories, personnel cost reductions and significant delays in our fiscal 21 discretionary spending. Most became effective earlier this month. We are treating the reductions like light switches that we are dimming or turning off now, and by preserving our underlying infrastructure of people and systems, we can turn them back on just as quickly and with minimal disruption when business conditions warrant. We chose this approach versus widespread layoffs. in order to retain talent, protect what we have built, and preserve as many jobs as possible. A hiring freeze, suspension of merit increases and promotions, and other personnel measures have also been implemented. This approach of shared sacrifice reaching all levels of the organization is highly consistent with our culture. Our people supported this approach and continue to do exemplary work driving the business and keeping the company fully operational. I am proud but not at all surprised that they are doing so with the passion, the dedication, and the ownership mindset that is the signature of all Helen of Troy people all around the world. In our distribution centers, we are reducing our external temporary labor and furloughing some full-time employees to match demand. For furloughed associates covered under the company's health insurance plans, Helen of Troy is paying both the employee portion and the company portion of the premiums. so they can maintain their coverage during the health crisis. Our second category of temporary measures focuses on reductions and delays to discretionary spending such as brand and product spend, travel, and certain capital expenditures. Our fiscal 21 budget earmarked several substantial and incremental investments in our leadership brands and key phase two strategic initiatives. We believe we are making the right short-term business choices to delay some of these investments until later this year and some will likely now fall into fiscal 22. The largest bucket for discretionary spending is marketing expense for our leadership brands, so we have also taken action on this front. We are adapting our spend to match consumer demand and our supply. For some initiatives, spending has been reduced, while for others, a meaningful portion will be delayed until we have better visibility on demand and recovery. For those brands that are extremely relevant right now, we will continue to spend. In all cases, however, to keep the pump primed for the recovery period, we will make appropriate but reduced investments needed to help our brand stay top of mind. We continue to choicefully invest in new product development. Consumer-centric innovation is the lifeblood of our leadership brands. Innovation keeps them differentiated and is a core strategy in our transformation. The launches we are working on now will be key building blocks in the recovery period, in fiscal 22, and beyond. I'd now like to turn to the third and final area of my prepared remarks by reflecting on some current trends related to the COVID-19 pandemic that we are seeing during our first quarter and thoughts on the future as we navigate the crisis and plan for growth on the other side. One key trend area already mentioned is the greatly increased need for health-related products and awareness of their importance in people's lives. With the current intensive media focus on health, all generations are getting a rapid-fire education on the importance of owning the types of products we sell under the Braun, Vicks, and Honeywell brands. As an example, households are reminded that they should have a high-quality thermometer. On ear thermometers, compliance and demand for probe covers is way up as users look to ensure accuracy and hygiene and reduce the risk of contagion. Businesses are increasingly focusing on monitoring the temperature of their employees to help keep them safe and their sites operational. Inhalants such as Vicks VapoPads and cough suppressing inhalants like Vicks VapoSteam are in increasing demand as consumers take care of their families. Also in high demand and getting additional media attention are our highly rated and market leading humidifiers such as from our Vicks and Honeywell models. Demand is also up for our air purifiers, including our highly rated and market-leading Honeywell models, which help improve indoor air quality. With strong sales in the fourth quarter and supply constraints from the COVID-related factory shutdowns in China, we are working very hard to maximize production and delivery from our factory partners in China, Mexico, and the United States. Another key trend is wellness. People are looking to protect themselves and their families through hygiene and cleanliness as they spend more time at home and more time with families together. Water purifiers like Pure's pitcher and faucet mounts play an increasing role, as do their replacement filters that are certified to reduce a wide range of contaminants. Demand is up for both, especially as water in single-use plastic bottles remains increasingly undesirable and unavailable. With cleaning top of mind to help protect the wellness of families, cleaning products from OXO are seeing elevated demand online and in stores that remain open. A third trend is the necessity of keeping more food and home essentials on hand and cooking more at home. Families are discovering and rediscovering the joy that comes from cooking and baking together, especially with kids old and young in the house 24-7. Several core categories of OXO products are seeing elevated demand online and and in stores that are open, particularly in food prep, baking, home organization and storage containers. And the fourth trend we are seeing is the continued consumer interest in our highly popular beauty volumizer appliance franchises. Demand online in the stores that are open is higher than our supply. The steps we are taking to ramp up to full capacity at our key suppliers and add new ones are helping, which will in turn allow us to meet much more of the demand and position us to be more fully in stock now and also post-crisis. As we look to the future, we are fortunate to have a seasoned leadership team and a capable infrastructure. While this is not the first crisis many of our leaders running Helen of Troy have worked through, it is our first pandemic of this magnitude. We believe the set of carefully considered actions we have taken to bring the company through the crisis will make a substantial difference in protecting our cash, our business and our high-performing organization. We will continue to adapt quickly as the situation evolves. Once the economy returns to some level of normalcy, we expect to lean back into all parts of our flywheel, including the key initiatives for the second year of Phase 2 of our transformation. Examples on the shared service side include further geographic diversification of our supply chain and upgrading our IT capabilities to match our growth. Meanwhile, we remain focused on other key aspects of our strategic plan, such as continuing to invest in our leadership brands. The example is on the OXO brand. OXO recently entered into a partnership with 1% for the Planet, an organization that champions environmental awareness and action, enabling brands to give back to a global network of nonprofits that champion environmentally responsible initiatives. OXO has spent 30 years making high-quality products that last. engineered for functionality and durability. It's why we guarantee our tools for life. Approximately 90% of the impact a product will have on the environment is decided in the design process. Oxo's core competency in design and engineering makes us uniquely qualified to develop tomorrow's tools, which will continue to be thoughtfully designed through the lens of environmental responsibility. Oxo's partnership with 1% is a perfect fit for the brand, and parallels the rapidly growing interest that all of our stakeholders have in environmental and social responsibility. Another key example is the Drybar integration, which remains on track and is a very positive reflection on the high level of collaboration across all departments and the Drybar team. That team is now rapidly becoming a fully integrated part of Helen of Troy. We are proud that nearly all of the Drybar people we asked to join us in January accepted our offer and are hard at work on the brand. In conclusion, while things are difficult right now, we believe tomorrow can be improved by successfully managing the challenges we are all facing today. I remain optimistic that we are making the right choices for our associates, consumers, customers and shareholders. While much uncertainty remains, the current crisis will eventually pass and a new normal will emerge. We entered the crisis with strength and momentum We see plenty of reason to believe that Helena of Troy will brave the crisis, and we are confident that we will come out strong on the other side. Before turning the call over to Brian, I would like to share that Bill Sesetka, a director serving on our board since 2009, announced his intention to retire at the end of his term in August. Over the past decade, Bill provided the company with a wealth of global consumer products industry knowledge and a leadership experience from his very successful 30 years in marketing, and senior management for Clarol, Avon and later at the LPGA. The rest of the board and I are thankful and grateful to Bill for his service to Helen of Troy. His grace, exemplary character, consumer mindset and counsel have been an instrumental part of our success. We wish him the very best. With that, I will now turn the call over to Brian.