Helen of Troy Limited

Greetings and welcome to the Helen of Troy third 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. As a reminder, this conference is being recorded. I would now like to turn the call 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 Troy's third quarter fiscal 22 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. Matt Osberg, The company's CFO will review the financials in more detail and comment on the company's outlook for fiscal 22. Following this, we will take the 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 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. Minnenberg, 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.helmutroy.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 press releases tab. I will now turn the conference call over to Mr. Mendenberg.

Thank you, Jack. Good morning, everyone, and thank you for joining us. I'd like to wish everyone a happy, healthy, and prosperous 2022. During today's call, I will review our third quarter results, provide perspective on the higher revenue and EPS outlook we announced earlier this morning, and update you on how we plan to use our strengths, our strategy, and our operational playbook to continue creating value in the back half of phase two. On a core basis, for both the quarter and year to date, we are pleased to report that we grew our sales and adjusted diluted earnings per share compared to the prior year period, despite the especially difficult comparisons versus last year, and this year's major headwinds from broad scale inflation, supply chain disruptions, and the EPA matter. We see this result as a strong testament to the power of our transformation flywheel, the quality of our diversified portfolio of leadership brands, the effectiveness of our inflation mitigation tactics, and the strength of our organization, as well as the power of our culture. Looking specifically at our third quarter, all three business segments exceeded our expectation. We delivered consolidated core net sales growth on top of last year's 37.1% third quarter increase and delivered core adjusted earnings per share growth on top of last year's 21.1% third quarter lift. These results and the positive trends we see for our business in the fourth quarter allow us to now raise our top and bottom line outlook for the full fiscal year. Strong consumer and retailer demand have helped drive double-digit core sales growth in housewares and in beauty, and in the third quarter, this came on top of their double-digit sales increases in the same period last year. While health and home declined, it too performed above our expectations, due primarily to stronger-than-expected demand and faster-than-expected completion of rework for certain products impacted by the EPA matter. Online sales declined approximately 7% in the quarter, reflecting similar channel trends to those we saw in the second quarter. Key drivers were the impact of the EPA matter and rebalancing of brick and mortar and online shopping habits compared to a year ago. Even with more of our sales in the brick and mortar channel this quarter, online represented 23% of total sales in the third quarter. Looking at our online sales on a two-year stack, Our sales in the channel have grown approximately 24% since the third quarter of fiscal 20. Now looking at bottom line performance, core adjusted EPS grew 3% on top of last year's 21% increase, despite the headwinds I mentioned. I'm very pleased by the excellence of execution across our organization as we work to mitigate those headwinds and deliver growth over the particularly tough comparison period. A key component of that work has been making the tactics in our operational playbook successful. As discussed in prior calls, those include a strategic increase in inventory, leveraging of pre-negotiated sea freight container rates, several efficiency and cost control initiatives, and price increases. Our inventory position has proven to be important, providing a competitive advantage in addressing inflation, supply chain disruption, and increased demand from consumers and retailers. Looking at capital deployment, on December 29th of 2021, we acquired Osprey PACS, a highly respected pillar in the outdoor industry and a global leader in technical and everyday PACS. We continue to put our balance sheet to work on selective and strategic M&A, which is important as a part of our phase two transformation strategy. The Osprey deal marks yet another major capital transaction so far in phase two, following the dry bar acquisition at the beginning of 2020, the Revlon license transaction at the end of 2020, and various opportunistic share repurchases. With these and the previously announced new distribution center now under construction for housewares, we have committed to deploy over $1.2 billion of capital during the first three years of Phase 2. That's more than what was deployed in all five years of Phase 1 combined. Osprey will amplify our outdoor offerings, it will add an iconic ninth leadership brand that complements and diversifies our world-class portfolio, and it will add more critical mass to our flywheel. With more than half of its sales outside of the United States, the brand increases our international presence, especially in EMEA and Asia Pacific, the two international regions where we are most focused. We believe this acquisition is a classic story of two companies that are better together. Combining the talent, capabilities, authenticity, and credibility of this proven outdoor pioneer with our global footprint and scalable global shared services creates opportunities for new efficiencies and new growth. We also believe there are attractive sales and marketing opportunities between Osprey, Hydroflask, and the growing outdoors lineup for OXO, all of which serve like-minded consumers with premium products. On the financial side, we expect Osprey to be immediately accretive to nearly all of our key consolidated financial metrics. I would now like to touch on the results of our business segments for the third quarter. House Quarters had a very strong quarter, posting net sales growth of 10.7% on top of 21.4% growth in the third quarter of last year. Both OXO and Hydroflask delivered solid organic growth, reflecting both domestic and international strength. Bath, storage, electrics, and drinkware made healthy contributions to the quarterly growth. Hydroflasks' especially strong growth in the quarter sweetened the mix, improving the margins for housewares. Demand for OXO remains strong. As the coronavirus pandemic endures, consumers have settled into routines that continue to involve a lot more home cooking and a greater need to organize, clean, and supply their households. We believe these habits are likely to remain sticky even after the pandemic. OXO continues to be a brand of choice for new and younger households who discovered the joys of cooking and nesting during the pandemic, as well as for more established households that have become familiar with even more of OXO's exceptional products and the brand's overall promise of better. Retailers responded to the strong POS strength by replenishing inventory and pulling forward buys in anticipation of supply chain delays. That strategic inventory position I mentioned earlier allowed us to meet that demand and contributed to OXO's growth compared to some competitors who faced delivery constraints and out of stocks. This appreciation of and the demand for the brand further improved OXO's overall share performance as measured by third-party syndicated data in many of the U.S. kitchen gadget categories that it competes in. Internationally, OXO also grew with particular strength in EMEA, in Latin America, and in Asia Pacific with new distribution in South Korea and in the Philippines. Hydroplast saw share growth and broad-based strength across brick and mortar as retailers increased orders after a much stronger back-to-school season to replenish POS momentum and to remain in stock ahead of the holiday season. Robust online sales also contributed to Hydroplast's growth, particularly in the direct-to-consumer channel. We are pleased to report that the investments we have been making in BTC are paying off by allowing us to meet the much higher traffic and improve year-over-year conversions. our improved online platform held up well to the pressure test of record sales on Black Friday. Internationally, Hydroflask saw growth in all geographic regions, particularly in Canada. New product introductions beyond the bottle also contributed to growth, including Hydroflask mugs in new sizes and insulated food jars in child and adult sizes. The concept of bringing the safety of home to offices and travel locations drove new demand for food storage, and beverage bottles as some consumers went back to offices and schools, and some increased their travel. Turning to beauty, on a core basis, sales grew 17.4% in the third quarter, a remarkable achievement considering core beauty grew 77.7% in the third quarter of last year. Revlon, Drybar, and Hot Tools again led the growth in beauty, with demand increasing across all channels. driven by more activities such as social gatherings, back to office, and back to school. Our one-step volumizers and our waivers continue to see exceptional demand, driven by increases in household penetration, further new product innovation, and expanded distribution. As testament to the continued popularity of Revlon one-step volumizers, Amazon called them out along with Apple AirPods and Fire TV sticks as among the best-selling items driving their record sales, during the critical period of Black Friday through Cyber Monday. Recent new product launches continue to extend the Volumizer franchise and sweeten its mix, such as the recently launched Revlon Plus, which brings new features at a higher price point. Internationally, beauty sales growth was even stronger, outpacing the overall segment with strength across Latin America, Canada, and EMEA. As a result, international market shares for beauty continue to grow in the markets where we have visibility to that share data. Rybar continued its momentum, driven by expanding product innovation, improvement in the brick-and-mortar channel, expanded distribution, and the reopening of salons and retail stores compared to the year-ago period. New product launches continue to generate incremental sales, and new distribution of popular destinations like the new Ulta shops inside Target and the new Sephora shops inside Kohl's are expanding the brand's prestige position to a broader demographic. Third-party U.S. syndicated data confirms that Drybar continues to gain share in both brick and mortar and online. Hot Tools also continued its momentum, delighting consumers across the good, better, best spectrum and growing its market share with the expansion of Hot Tools from the professional channel to also include retail. Turning to health and home, I want to start by providing a brief update on the EPA matter. As previously discussed, we have largely resolved the EPA's concerns. Since returning to normalized shipping levels on Pure, we continue to reduce out of stocks and have seen major improvements in our U.S. market share, which is now approaching pre-EPA levels. I am pleased to report that as of the end of the third quarter, we returned to a more normalized level of shipping activity for key models and customers on our Honeywell air filtration products. The pace of rework has been faster than expected. We are on track to largely complete the rework on the remainder of the more than 4 million originally impacted items by the end of February. I would like to once again thank and acknowledge the hundreds of Helen of Troy associates who are working tirelessly to help our business recover as quickly as possible. Health and home sales declined by 18.5% in the third quarter, again, ahead of our expectations. We faced a particularly tough comparison to the third quarter last year, in which this segment grew approximately 35% behind COVID-driven demand for health-related products, such as thermometers and air filtration products. As anticipated, we saw the adverse impact to air filtration products stemming from the impact of the EPA matter. Given the ups and downs of these categories over the past two years, it is helpful to look at health and home sales on a two-year stack. first nine months of fiscal 22, which included the EPA impact, grew 10% compared to the first nine months of fiscal 20. During the quarter, several areas of health and home grew, including humidification, water purification, fans, blood pressure monitors, pulse oximeters, and sinus products. As the traditional cough, cold, and flu season started to ramp up, through the end of the third quarter, we saw incidents well ahead of last year's record low, and above historical averages. Too early to tell when or at what level of incidents this year's cough, cold, and flu season will peak. The current trends indicated is on track to be well above last year's highly depressed outcome, yet likely below historical pre-COVID averages. In thermometers, the overall market continues to normalize after the highly elevated COVID base of last year, but our U.S. thermometer market share has grown as consumers continue to prefer our products. Importantly, our much stronger inventory position improved our ability to meet that preference. Given the gyrations of the overall thermometer market, thermometers are another area where it's helpful to look at a two-year stack. That analysis shows our third-quarter thermometer sales are up double digits versus the same period two years ago. Important to keep in mind that our health and home products are winning with consumers and recognized for their excellence. This shows up in our market shares, in the appeal of our new products, and in other measures such as design awards. Two of our Braun products were recently recognized by the influential 2022 German Design Awards. One of our Braun no-touch plus forehead thermometers won an excellent product design gold award, and our Braun nasal aspirator earned an excellent product design award in that same category. I would like to move now to the international. Doubling down on international is an important strategic choice in our phase two strategy. We are on track for another strong year and remain ahead of the glide path we outlined in our 2019 investor day to create at least $100 million of incremental organic sales outside of the United States by the end of fiscal 24. Turning to our outlook, we are very pleased to be able to raise our top and bottom line expectations for the current fiscal year. We now expect to grow core net sales 2 to 3% over last year's 25.1% increase, grow core adjusted diluted EPS 4.7 to 6.5% over last year's 26.5% increase, and expand margins. I am proud of the hard work across our organization to put us in a position to deliver fiscal year 22 results in line with our phase two average annual targets. Tremendous accomplishment. I'm also pleased that our playbook for managing inflation and supply chain disruption has helped us to mitigate more than $2.25 per share of headwinds from these factors this fiscal year. Looking ahead, we see these same headwinds in fiscal 23, so we are continuing to deploy that mitigation playbook. Our plans include carrying elevated inventory levels, new pre-negotiated sea freight container contracts, executing further efficiency improvements that we have identified, and some additional price increases beyond those we implemented on certain products during the third quarter. The benefit from the price increases we already implemented are being realized in the second half of this fiscal year and into fiscal 23. We expect to release our fiscal 23 guidance in April as part of our fourth quarter increase. Having concluded my remarks on the business, I would like to close with important news on progress towards our ESG objectives. As part of our efforts to minimize our impact on the environment, we finalized and submitted our company-wide emissions reduction targets to SBT, the science-based targets organization. This formalizes our commitment to work with other companies towards a net zero economy. We have committed to reducing absolute scope one and two greenhouse gas emissions by 46.2%, and to reduce absolute Scope 3 greenhouse gas emissions by 42% by fiscal 2030. More than 90% of the greenhouse gas emissions occurs through our suppliers and through consumer usage of our products. As such, our environmental efforts continue to be focused on designing products that are intended to be energy and resource efficient, including aligning with standards like ENERGY STAR, where applicable, as well as continued collaboration with our suppliers to improve their energy and carbon efficiencies. These targets have been approved by SBT. We will now be reporting our progress against them on an annual basis in our ESG reporting. This is important work and aligns with our purpose to elevate lives and soar together for all our stakeholders. I am also happy to report that our ESG scores from external evaluators continue to reflect our progress. As one example, ISS currently rates Helen of Troy in the third decile for environmental and in the top decile for both social and governance. As we head into the final two months of fiscal 22 and the back half of phase two in fiscal 23 and in fiscal 24, we have a lot of positive momentum. Looking at our balance sheet, operational capability, and the caliber of our organization, we are excited to continue driving our transformation. For fiscal 23 and the remainder of the back half of phase two, we plan to combine that mitigation playbook with the rest of our proven strategy, which includes investing in our leadership brands, doubling down on international, creating efficiencies and new capabilities through our global shared services platform, deploying capital accretively, and harnessing the excellence of our organization and culture. As we have demonstrated this fiscal year and also in the past, Helen of Troy has a track record of delivering results in the face of obstacles. We have consistently performed in tough times like this fiscal year, like last year when COVID first impacted every household and institution, and like the two years before that when tariffs first emerged as a major cost challenge. Through all of these challenges and many more, we remain relentless in our focus on building our brands, on executing our flywheel with excellence, and further elevating our high-performing organization and culture to deliver multi-year results that could lead to superior shareholder outcomes. With that, I will now turn the call over to Matt.