Helen of Troy Limited

Greetings and welcome to the Helen of Troy second quarter fiscal 2021 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. If you do need operator assistance at any time during the event, please press star 0 on your telephone keypad. It is now my pleasure to introduce your host, Mr. Jack Jansen, Senior Vice President of Corporate Business Development. Thank you, sir. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Helena Troy's second quarter fiscal year 21 earnings conference call. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements. Mr. Julian Lindenberg, the company's CEO, will comment on some high-level results for the quarter, discuss current business trends. Then Mr. Brian Grass, the company's CFO, will review the financials in more detail and reflect on considerations from the ongoing COVID-19 pandemic uncertainty as fiscal year 21 progresses. Both Julian and Brian will speak to you about our announced leadership plans. Following this, we will open 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 costs its listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Mindenberg, I would like to inform all interested parties that a copy of today's earnings release has been 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, Jag. Good morning, everyone, and thank you for joining us today. I hope you and your families are staying safe and healthy. We recognize that people around the world continue to suffer as the virus and natural disasters take their toll. We extend our deepest sympathy to those who have lost loved ones to COVID-19, have been ill with the virus, have faced financial hardship, are dealing with the devastating impact of hurricanes or wildfires. Turning to our earnings, Helen of Troy posted outstanding results this morning as our diversified portfolio continues to perform very well. We have been able to successfully adapt to and navigate through countless COVID-related challenges. From the start of this pandemic, we took decisive action to lead our business and organization through uncharted waters. We had two goals in mind. Our first was to safeguard employee health while continuing to provide our consumers and customers with the high level of service they have become accustomed to. Our second goal has been to adapt to the new normals with the speed and agility needed to stay focused on delivering business results for the here and now, while also advancing our multi-year phase two strategic plan for sustained long-term results. We remain laser focused on those goals and on our Phase 2 transformation targets. We began leaning back into our key Phase 2 priorities in the second quarter. The continued strength of the business now puts us in a position to do so even further in the back half of our fiscal year. We believe these investments will continue to benefit all stakeholders as we drive our value creation flywheels. The results we are reporting today would not be possible without the tremendous commitment of our exceptional people. The dedication of the essential frontline workers in our distribution centers, in our test labs, and in our operational hubs around the world continue to make the difference every single day. All around the world, our associates are delivering elevated throughput to meet as much demand as possible in the challenging conditions from COVID and its ripple effects around the world. I am very proud to see how Helen of Troy's people in all parts of our business have embraced the shared sacrifice we asked of them during the early months of this crisis to preserve the organization and capabilities we all worked so hard to build in the transformation. Their trust and their hard work continue to pay off as the resilience of our business, organization, and culture gets tested and confirmed. As a result, in early July, we shared that we would restore all wages, salaries, and director compensation to pre-COVID levels effective August 1st. I am pleased to share that later in the second quarter, we also made our people whole on all back pay resulting from the temporary wage and salary reductions. We believe this is core to our values and highly consistent with our stated strategic goal to attract, retain, unify, and train the very best people. Thank you for joining us today. to make sure our approach to facilities and work environments stays timely, thoughtful, carefully measured, and complies with expert guidance and local regulations. Before I discuss our business results further, I would like to touch on the two executive leadership announcements highlighted in today's press release. Helen of Troy's Board of Directors has asked me to extend my service as Helen of Troy's CEO beyond the February 28th, 2023 end date I am honored by their continued faith in me and enthusiastic about serving an additional year. I believe there is considerable opportunity ahead for continued growth of our revenues, profitability, brand portfolio, our global footprint, and our capabilities. When the amended employment agreement is finalized, we will make a formal announcement. I feel very fortunate to have had the opportunity to lead the company not only through the remaining three and a half years of phase two of our transformation plan, but also to provide continuity of leadership through all 10 years of transformation. I am right where I enjoy being, at the heart of our strategic thinking with a special responsibility to further reinvent our business, deliver sustained performance, and continue building organizational and cultural excellence. I look forward to stewarding the company through the end of fiscal 24 and through smooth succession planning for the next generation of leaders for fiscal 25 and beyond. The second executive management announcement we made today is that our friend, colleague, and chief financial officer, Brian Grass, intends to retire a little over a year from now, effective November 1, 2021. Brian is a valued partner to me and to our global leadership team. I greatly appreciate his expertise, integrity, high standards, and countless contributions during what will be more than a 15-year career at Helen of Troy. He has been influential in helping advance our transformation into a company that is built to last. Brian is rightfully proud of what he and the company have achieved, as well as the considerable progress he and his team have accomplished raising the levels of excellence for our global corporate finance team and for many of our systems. He has also been highly focused on establishing a compelling bench of internal CFO succession talent that we intend to groom over the next year. We also intend to conduct a comprehensive external search to ensure we have the very best next CFO for Helen of Troy. We expect that person to provide the outstanding level of financial leadership we are accustomed to and to continue to deliver on our transformation. Brian will speak more about his plans to retire during his remarks. Over the next year, he will continue to remain fully in his role, providing highly effective executive management and financial governance, and will assist with a seamless transition when the time comes. Now on to our business results. Our diversified business model and portfolio served us well in the second quarter and drove an outstanding first half for fiscal 21. As highlighted in our press release, we continue to see strong customer demand for our products across each of our three business segments globally. Net sales growth was 28.2%. Adjusted diluted EPS grew a robust 68.3%. That growth was broad-based, as all business segments and international grew at least 20% in the quarter. Margins expanded behind mixed improvements, disciplined investment spending, and operating leverage within our business units and in our shared service platforms. Our leadership brands performed extremely well, going 30.3%, including a 3.2 contribution from Drybar. Online sales grew 32% and represented approximately 24% of our total sales in the quarter. The pandemic continued to accelerate the consumer trend from bricks to clicks. The first half of this fiscal year marked an excellent start to the second year of Phase 2. First half net sales grew by 20.4%, powered by leadership brand growth of 23.3%. International sales were notable, growing double-digit in the first half of the year. The major projects in EMEA and Asia under our Phase 2 strategy to double down on international are performing ahead of internal expectations. and creating attractive new investment opportunities to continue driving international growth. Sales to the online channel increased by 32% to represent approximately 26% of our total fiscal year-to-date sales. Adjusted diluted EPS increased by 46.5% in the first half and we generated $186 million of operating cash flow. Combination of winning first half results, and strong prospects for the business in the back half of this fiscal year allow us to restore even more of the major Phase II investments originally planned for this year than what we communicated in our July call. We believe this will help power the long-term sustainability of our value creation flywheel. The additional spending allows us to make key hires and drive ahead on direct-to-consumer, customization, product innovation and marketing. It also allows us to provide more marketing support for the distribution gains we have earned, further diversify our supply chain beyond China, and make investments to expand our supply capacity and our infrastructure. The infrastructure investments are especially important in these middle years of Phase 2 as we expand our distribution and IT capabilities to keep up with what has been more than 30% growth since our original transformation began and to prepare us to handle our future growth prospects. We are also leaning into additional select marketing opportunities across our business and regional portfolio, such as Hydroflask, no-touch thermometers, and in supporting our Volumizer franchise. Even with demand continuing to surge in health-related categories, we believe it is prudent to continue to manage our marketing spend in the back half given the biological uncertainty about the path of COVID and given the veracity of the current cold and flu season, as well as other unknowns around consumer demand. Our efforts to improve supply are working, yet are still unlikely to satisfy all of the current demand. Taken together, these uncertainties make us unable to give specific quantitative financial guidance at this time. Brian will provide some additional perspective on this in his remarks. Regarding current trends, we like what we see so far. September was another very strong month across nearly all parts of the business. Major trends in health-related products continue We are extremely pleased with our performance in beauty. Delivering 23% organic sales growth, the highest we have seen in more than a decade. The dry bar acquisition contributed a further 12.1 percentage points to the segment's total sales growth of 34.6% in the quarter. The organic growth comes on top of the 9.3% organic sales growth in the same period last year, despite the current challenges around retailers who are grappling with stay-at-home recommendations and measured reopening of their brick-and-mortar stores. testament to our innovation stream and the strength of the one-step volumizer franchise as it continues to generate rave customer reviews for an expanding distribution and grow its market share. Syndicated data shows that during the latest 52-week period, Helen of Troy further grew its number one market share position in the online channel for U.S. hair care appliances and continues to hold a significant lead. syndicated data in brick and mortar shows that during the latest 52-week period, we also grew our number two share position in the market for U.S. retail appliances. Our first mover volumizer appliance innovations continue to be a major driver and are a key expansion focus for us even as competitive copycat products enter the market. Our Revlon and Hot Tools one-step volumizers have now earned more than 90,000 online consumer reviews with ratings of 4.5 stars and up, depending on the site, and considerable media attention, both in traditional vehicles and on social media platforms. Sales of our newest leadership brand, Drybar, were all incremental in the quarter. The beauty industry has been among the hardest hit by COVID, shutting down hair salons and slowing reopenings and traffic at major retailers in the Prestige Channel and in other parts of retail brick and mortar. Despite this challenge, Drybar revenue improved sequentially each month of the second quarter as Drybar Salons expanded their careful market-by-market reopening plans that prioritized the safety of its clients. By mid-September, Drybar Salons had largely reopened for business, especially those outside of coastal cities, but remained impacted by COVID. Prestige Retail faced similar challenges during the quarter, responding by accelerating the use of e-commerce, buy online and pick up in-store or BOPIS, and curbside pickup as they gradually reopened more of their brick-and-mortar stores. For key customers like Ulta, Sephora, and Nordstrom, traffic remains a challenge, but we continue to see positive sequential purchase trends for stores that have reopened. With regard to our previously disclosed investiture plan for the personal care business, the process is advancing and we anticipate being able to share more progress when we report our earnings for the third quarter in January. Now turning to health and home, an outstanding performance. Momentum continued in the second quarter as the segment's simple mission was more relevant than ever. Be there when consumers need us most with trusted solutions for healthy living and peace of mind. Organic sales grew 33.1% as all four of our health and home leadership brands grew sharply in the quarter. Demand remains very strong for Vicks, Braun, Honeywell, and Pure products that address needs around temperature, humidity, water quality, and air quality. The trends in the second quarter were especially powerful. New COVID developments emerge almost every day. The Northern Hemisphere generally experienced a very hot and dry summer. and devastating wildfires continue to rage across large swaths of the Western United States. Beyond the immediate impact of these events on the business, we believe the heightened media attention on our categories and brands has had important positive, short and long-term implications for category development and household penetration, especially as this attention comes at a time when consumers are focused on current events, on learning more about protecting health. Braun remains our most global brand and is seeing significantly elevated demand. All Braun thermometer types are very relevant today, but none more so than our no-touch or non-contact thermometers, which measure and record a person's temperature with clinical accuracy yet require no physical contact. The use of thermometers is changing from what was primarily a diagnostic tool to understand the severity of an illness and help to distinguish between a cold and the flu, to now a pre-screening device recommended by experts for use in identifying the potential presence of a virus like COVID-19. Thermometers have become the first line of defense to help protect not only our loved ones in the home, but to now also monitor public health and safety in schools, restaurants, stores, work sites, institutions, and in transportation systems. Earlier this year, we shared that we began investing additional capital and human resources into expanding thermometer production capacity, including no touch and ear. On top of the increase in capacity we secured in the first quarter, further production increases helped us satisfy even more of the demand in the second quarter. We are also adding incremental supply that should be operational in the third quarter and get more coming online in the fourth quarter. With this ramp up, we expect to be more than double our total pre-COVID capacity by the end of the year. This will much better match thermometer output to the ongoing pandemic and better handle our fourth quarter during which the cough, cold and flu season traditionally peaks. Air purification has also been a very hot category. U.S. sales for our Honeywell air purifiers grew strongly during the quarter. The key drivers were increasing concerns around COVID, Thank you for joining us. for their scale and their intensity. Finding air quality from wildfires can also compound concerns around COVID-19 as more people are confined to enclosed spaces and polluted air can create risk of airway damage and respiratory infection. The surge in air purifier demand has been much stronger than we expected, straining our supply chain. We have responded quickly with a 50% increase in air purifier supply becoming operational by the end of next month. Man for Water Purification also continued in the quarter, underscored by two key trends. The first is from COVID-19, as many people who continue to shelter in place and work from home are seeking additional avenues to help protect themselves and their families. The second is that our pure products are benefiting from an increasing trend of single-use plastic bottle bans around the world as mindsets shift towards more sustainable purchase and usage habits. Propelled by these trends and increases in supply and in distribution, syndicated data shows that Pure's growth has outpaced the growth of the category, resulting in market share gains for Pure's U.S. devices and replacement filters in brick and mortar. Lastly, in health and home, we have seen continued strong demand for our Vicks humidifier devices and VapoSteam inhalants. These products are designed to ease breathing by helping relieve the common symptoms of cough and congestion that can accompany a wide range of respiratory infections. According to syndicated data, our Vicks inhalant and humidifier businesses grew market share in the U.S. brick and mortar market during the quarter. In housewares, second quarter sales increased by over 20%, even as we faced a particularly strong comparison in which the segment grew more than 22% in the same period last year. Both of our housewares leadership brands grew during the quarter. It is clear the pandemic is changing nearly everything in our daily lives, including the way consumers look at food. As people continue adapting to shelter in place guidelines, new habits are forming. Many who used to rely on eating outside the home are now getting reacquainted with their kitchens. Studies confirm that consumers, especially millennials, are experiencing the joy of cooking more while sheltering in place and experimenting with a wider variety of meal options. It is this time of experimentation and newfound fun that is also expanding their use of essential products and gadgets for cooking, baking, brewing, cleaning, storage, and organization. All of these are in the sweet spot for our outstanding OXO lineup that helps consumers transform their homes and kitchens and many more. We are excited about the prospects for the brand as Oxo benefits from these positive new habits and greater adoption by a new and younger demographic. This is positively compounded by follow-on sales Oxo usually earns once a household is penetrated. Oxo grew in brick and mortar online and internationally during the quarter as we gained distribution launched new products and benefited from very strong point-of-sale trends and store traffic at certain retailers. Bath, food storage, coffee, measuring, and baking had particularly explosive growth. International sales for OXO were also an excellent source of growth, especially in EMEA and online. OXO's domestic online sales benefited from significant increases in direct-to-consumer as the trends from bricks to clicks continued. .com such as Amazon, Oxo.com, and Target.com were also standouts. Market share gains were strong for Oxo in the United States. Syndicated data shows that even as the U.S. housewares category has grown fast, Oxo's dollar sales growth during the quarter has been roughly twice as fast. Oxo's partnership with 1% for the Planet further aligns the brand with its consumer as it joins a global community of brands that reinforce their positive equity Thank you for joining us. Thank you for joining us. Hydroflask's brick-and-mortar point of sale also began to improve as foot traffic started to re-emerge in regions where consumers felt more comfortable leaving their homes. While it is likely COVID will persist for a longer time than any of us would like, we continue to like our prospects on Hydroflask as it remains highly relevant and wildly popular, and with its on-trend positioning, products, distribution, and online presence. As I wrap up my comments, I would like to emphasize the focus we are placing on our Phase 2 initiatives. They are the key to continuing to drive our value creation flywheel. Heading into the back half of Fiscal 21, our portfolio is demonstrating excellent momentum, allowing us to use our cash flow to continue selectively investing in Phase 2. Our balance sheet and financial position are very strong and capable of supporting accelerated investment. With our strong cash flow and low leverage, we are in a strong position to fund higher inventory levels, deploy capital toward a creative acquisition that adds more critical mass to that flywheel, and consider opportunistic share repurchases. While many challenges from COVID grabbed the headlines, we believe we are creating a company that is built to last and has proven its ability to create value for our stakeholders in a wide range of market environments. Focusing on delivering results for all stakeholders has been a hallmark of Ellen of Troy throughout its transformation. We are proud to continue that work. I will now turn the call over to Brian.