Helen of Troy Limited

To Helena Troy, LTD, second quarter 2022 earnings call. At this time, all participants are in a 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. Please note this conference is being recorded. I will now turn the conference over to Jack Jansen, Senior Vice President of Corporate Business Development. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Helena Choi's second quarter fiscal 2022 earnings conference call. The agenda for the call this morning is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julian Minnenberg, 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, and Matt Osberg, the company's Senior Vice President of Corporate Finance, will review the financials in more detail and comment on the company's outlook for fiscal 22. Following this, Mr. Mindenberg, Mr. Grass, and Mr. Osberg will take questions you have for us today. This conference call may contain certain forward-looking statements that are based on management's current expectations 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 parties. 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. Minenberg, 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.HelenTroy.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 press releases tab. I will now turn the conference call over to Mr. Minberg. Thank you, Jack. Good morning, everyone, and thank you for joining us. I am looking forward to reviewing our second quarter results, to providing perspective on the higher revenue and EPS outlook that we announced earlier today, to updating you on our ESG progress, and to discussing several important organizational topics with you. Before doing so, I want to provide a brief update on the EPA matter discussed in our first quarter call in July and in August via our investor presentation and 8K filing. As a reminder, in July, the EPA approved modest changes to the labeling claims on our existing water filtration packaging, which we implemented and subsequently began shipping limited quantities. and pleased to report that the shipping volume for our pure products has continued to increase, and in September we returned to more normalized shipping levels. In August, we communicated that the EPA had approved changes to our air filtration packaging, and we began shipping limited quantities of the impacted products at the end of that month. We expect to return to a more normalized level of shipping activity for our Honeywell air filtration products by the end of our third quarter of fiscal 22. Today, our main message on the largely resolved EPA matter is that we have the materials and labor currently needed to rework the affected inventory and are accelerating that work rapidly. We are making good progress on the millions of affected packages, putting us in a better position to serve our retail customers. We thank them for their patience and appreciate how closely they have worked with us. On Pure, we are turning the tide in the marketplace. We have made significant progress on reducing out-of-stocks and earning back market share. Third-party syndicated data shows pure out-of-stocks have improved by more than 30 points, and market share is up by more than 10 points since mid-August. More extensive and complex rework on the air-affected purifiers is well underway and a primary focus. I would also like to thank the hundreds of Helen of Troy associates who have worked tirelessly to resolve these matters and minimize the impact to consumers, to retailers, and to our business. I could not be more impressed or prouder of the way they flowed to the work without complaint. They worked together seamlessly, often around the clock. This is Helen of Troy at its finest, and it's our culture in action. Now turning to our second quarter results. Overall, the quarter exceeded our expectations. Our diversified portfolio once again delivered a balanced result, with housewares and beauty both growing over major double-digit sales increases in the second quarter of last fiscal year, and health and home declining less than we expected during the favorable resolution to the EPA matter. Our leadership brands outside of health and home had excellent growth, led by Drybar, Hydroflask, and Hot Tools, all of which faced headwinds in the year-ago base from the pandemic. International had a solid growth in sales in the second quarter. According to online sales, our 18% decline in the quarter reflects two things. First, approximately two-thirds of this decline was due to the impact of our stop-ship action as we addressed the EPA matter. Second, even though COVID remains top of mind, many consumers are returning to in-person shopping compared to the previous year when COVID-related store closures accelerated the larger trend of brick-and-mortar sales that were shifting online. Even with more of our sales in brick-and-mortar this quarter, online represented 22% of total sales, similar to our pre-COVID online penetration in fiscal 2020. We are pleased to report adjusted EPS of $2.65, which was ahead of our expectations. It reflects an expansion in gross profit margin as some of our highest margin brands sweetened our mix, partially offset by more normalized levels of operating expenses versus the depressed spending levels The adjusted EPS results also reflect our hard work to address the headwinds from the widespread inflation affecting nearly all inflow costs, such as materials, labor, and transportation, as well as the work done to blunt, as much as possible, the impact on significant levels of supply chain disruption seen across nearly every sector of the global economy. Stepping back to look at the first half of our fiscal year, we are pleased to be growing our core sales and deliver flat core adjusted EPS compared to the especially difficult comparisons in the prior year period. We achieved this despite the EPA matter and despite the significant supply chain related headwinds. Our diversified portfolio played a major role in this as core beauty and housewares rose significantly over their higher bases in the first half of last year. Taking a look at those supply chain and cost challenges, our investments in inventory earlier this year have been an important component of our mitigation plans. Higher inventory also positioned us well to meet demand and better manage supply chain disruptions. We believe having more inventory on hand ahead of our busy season in Q3 and Q4 will help us meet consumer demand and meet customer expectations in the back half of this fiscal year. We have also made good use of our pre-negotiated sleep rate contracts at rates considerably lower than the current elevated spot market. As part of our mitigation plans, we began to implement price increases on certain brands, most of which became effective at the end of the second quarter. Pricing on other brands will take place in the third quarter, with the benefit being realized in the second half of the year and into fiscal 23. We have taken a measured approach on pricing, which is designed to protect our market shares by managing key consumer price points. I am very proud of our global operations team and of our business unit, all of whom have worked diligently to contain and reduce costs, freeing up the oxygen needed to continue to invest in our flywheel. They, along with our associates around the world, are highly engaged, enthusiastic, and dedicated to furthering our growth objectives. They are currently putting in place additional mitigation plans, including exploration of further price increases to address the inflationary pressures and the supply chain disruption that show little sign of abating in the short term. We believe that the powerful combination of containment and investment is the exact right formula to drive our growth initiatives for the balance of our Phase II transformation and to create incremental shareholder value. I would now like to touch on the results in our business segments for the second quarter. Housewares led the way, posting net sales growth of 6.6% on top of 20.3% growth in the second quarter of last year. Both Oxo and Hydroflask experienced solid organic growth, reflecting both domestic and international strength. Oxo continues to deliver growth at key brick and mortar retailers. As discussed in prior calls, we believe the new and younger households penetrated during the pandemic and the consumers that have become even more familiar with OXO's exceptional products and promise of better are sticky. OXO continues to be the market leader in many of the U.S. kitchen gadget categories it competes in. OXO's wood grips and steel lines made healthy contributions to quarterly growth, along with new products that are gaining traction with consumers. We saw strength at specialty retailers due in part to a surge in weddings that were postponed during COVID. OXO domestic brick-and-mortar growth is broad-based across all channels except the club. OXO also earned strong growth internationally, especially in EMEA, as prior investments and plans long in the works paid off with improved growth and profitability in that region. Hydroflac also saw broad-based strength orders to replenish from a stronger back-to-school season and support expected future demand. On top of the current acceleration in pre-holiday ordering, we are seeing healthy inventory retailer replenishment in line with a strong sell-through for those customers where we have visibility. Internationally, Hydroflask is even faster, primarily concentrated in Canada and Asia Pacific. New product introductions beyond the bottle, the home in the current COVID environment. Within our bottle line, the new colors and sizes in the fall collection gave eager consumers another motivation to add just one more and freshen their collection. Consumer affinity for the Hydro Slash brand continues to be a strong tailwind. As one high-profile example, we were very pleased to see Simone Biles using our popular new Hydro Slash USA bottle at the Tokyo Olympics.

Turning to beauty, the segment delivered its 11th consecutive quarter of sales growth, continuing its remarkable transformation story that began in the middle of Phase 1.