Helen of Troy Limited

Greetings and welcome to the Helen of Troy LTD fourth 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 conference over to your host, Jack Jansen, Senior Vice President of Corporate Business Development. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Helena Troy's fourth quarter fiscal 2022 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 Minenberg, the company's CEO, will comment on the business performance and key accomplishments and then provide some perspective as we begin the new fiscal year. Mr. Matt Osberg, the company's CFO, will review the financials in more detail and comment about current trends and expectations for the upcoming fiscal year. Following this, we will take 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 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 cautions 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 press releases tab. I will now turn the conference call over to Mr. Minnenberg. Thank you, Jack.

Good morning, everyone, and thank you for joining us today. We're excited to discuss our recent acquisition of CurlSmith. and our fourth quarter and full year fiscal 22 results. On today's call, we will also introduce our outlook for fiscal 23 and provide an overview of the investments we're making to continue to drive our transformation in the back half of phase two and beyond. As we have now completed our third year of phase two, we will also update you on the outstanding progress we have made on the goals we laid out during our May 2019 Investor Day. Spoiler alert, we are ahead nearly across the board. Let me start by providing a bit more color on the Curl Smith acquisition. We see it as an exciting and excellent strategic fit for our prestige beauty portfolio that also delivers immediate value creation and strong growth potential. Our M&A strategy calls for adding leadership brands and up-and-comers where we can add value and leverage our scalable operating platform. In this case, we are adding a fast-growing, innovative up-and-comer that complements our portfolio of leadership brands. With approximately 60% of U.S. consumers having hair with varying degrees of waves and curls, prestige textured hair products are growing 10 times faster than products for non-textured hair and twice as fast as mass market textured hair products. Curlsmith business more than doubled in size over the last two years, and we expect it to continue growing at a double-digit rate. Pearl Smith products are designed to make caring for textured hair easier for consumers, earning it leading net promoter scores, impressive repeat purchase loyalty, and strong reviews. Pearl Smith further builds our presence and prestige with a brand that complements our successful dry bar acquisition. We expect it to immediately become our most profitable brand and further sweeten our mix in beauty. Consistent with our better together thinking on acquisitions, We expect to add significant further value to CurlSmith by capitalizing on our much larger beauty sales force in brick and mortar and online, additional DTC capability, marketing, appliance know-how, our international go-to-market footprint, and our robust shared services platform that includes global sourcing, distribution, IT, and back office capability well beyond what CurlSmith has today. Our acquisition and divestiture activity so far in phase two has significantly improved our beauty portfolio. With the acquisition of CurlSmith and Drybar, the Revlon licensed buyout, and divestiture of our mass market personal care liquids, four of our last five major deals have been in beauty. These were strategic moves, which when combined with beauty's organic growth and efficiency projects, have made it our highest margin segment. Portfolio now includes a good, better, best set of winning appliance brands under Revlon, Bedhead, Hot Tools, and Drybar, and a growing consumables presence in Prestige Liquids with Drybar and Curlsmith. Turning to the fourth quarter, today we are pleased to report outstanding results, including double-digit growth in consolidated revenue and EPS. All three business segments performed well ahead of our expectations on both the top and bottom lines. Since COVID has had such a big impact on the comparisons over the past two years, we think it is also helpful to look at the two-year stack comparisons, which are included in today's press release. On that basis, for the quarter, we grew core net sales by 37% and core adjusted diluted EPS by 45%. As you have likely noticed in today's earnings release, we've renamed two of our business segments to reflect the substantial changes to our portfolio in recent years. With OXO now joined by two iconic brands in the outdoor industry, Hydro Flask and Osprey, we are renaming our houseware segment to home and outdoor. We are also renaming our health and home segment to health and wellness. The health side of the new name reflects the functional benefits of helping consumers monitor their physical condition and provide relief when family members may be sick. The wellness side allows us to put even more focus on the emotional benefits of providing peace of mind and well-being. Looking specifically at segment performance, home and outdoor sales grew significantly in the fourth quarter, aided by the contribution of Osprey. This comes on top of double-digit growth in the comparison period. The growth this quarter was led by Hydroflask, which continued to grow market share. Turning to beauty, demand was especially strong in volumizers and waivers. We continued to grow share in this segment as well. Beauty also continued to perform internationally, posting double-digit growth with particular strength in EMEA and Latin America. This reinforces our strategic focus on appliances and premium beauty products in Latin America. Fiscal 22 marks two years of dry bar under our ownership, delivering performance ahead of our acquisition economics, despite the challenges of the pandemic. Turning to health and wellness, the segment significantly exceeded our expectations. Key drivers in the fourth quarter included higher than expected sales of thermometers and humidifiers related to a late season Omicron surge that tended to produce cough and flu-like symptoms. With the cold and flu season itself indeed below historical averages as we forecasted on our third quarter call in January, it turned out that Omicron stimulated demand for health-related products. The quarter also benefited from higher sales of seasonal products such as fans. Turning now to the full fiscal year result, we are proud to continue delivering growth over the elevated base laid down last year and despite the many challenges from supply chain disruption, inflation, and the EPA matter. Fiscal 22 marks another record year for revenues and adjusted earnings per share and delivered further adjusted operating margin expansion. Growth rates on top of the elevated base were ahead of our phase two targets. Our business model is working. reflecting the power of a diversified portfolio of nine leadership brands, investment in our value creation flywheel, and excellence in execution of our transformation strategy by a high performance organization who operates under a winning culture. Fiscal 22 also demonstrated that the playbook we executed was effective in helping mitigate supply chain disruption and inflation. Stepping back now to look at our progress so far in phase two, We are proud that our results have contributed to total shareholder returns well ahead of our proxy peer group since the start of phase two and all through phase one. Even though we are just three years into phase two, we have grown significantly with core net sales growth of 50% and core adjusted diluted EPS growth of 68%. Both represent an acceleration of compound annual growth rates versus phase one. Looking at other phase two targets, we are also ahead of plan. Four adjusted operating margins so far in Phase 2 has expanded well beyond our target. This was achieved primarily through flywheel investments, cost reduction projects, and new products that have sweetened our mix. When we started Phase 2, we set a goal of feeding our leadership brands with an average annual increase of at least 10% in growth investments, such as consumer-centric product innovation and marketing support. The ROI from these investments has helped expand our margins, as have the benefits of our flywheel investments made in international and in shared services. Doubling down on international is another phase two strategic choice that has paid off with results ahead of plan. During our 2019 investor day, we set a goal of adding over $100 million of organic revenue growth outside of the United States by the end of fiscal 24. I am pleased to report that we have achieved this goal two years ahead of schedule. That provides us an opportunity to raise the bar. Today, we are announcing that we are targeting an additional 130 million of growth outside of the United States over the two remaining years of phase two. This includes further organic growth in the two geographic regions we originally chose, EMEA and Asia Pacific, while now also adding two new important international growth drivers, both of which are expected to grow double digits in the back half of phase two. The first of those is Latin America, which has been growing rapidly over phase two on a core basis. And second is Osprey, which is 50% international. Another impressive outcome from the choice to double down on international is the margin improvements during phase two. International margins have increased significantly over the past three years, with EMEA and Latin America joining Asia Pacific as investment grade, making them a further focus for the back half of phase two. ROIC is another key metric of our phase two plan. Careful stewardship and allocation of capital has been a hallmark of our transformation from the beginning. In priority order, our stated capital allocation strategy has been to invest in our business, make strategic and accretive acquisitions, and buy back shares. We have committed approximately $1.3 billion of capital in the first three years of phase two, which includes investments to date in the new distribution center, the Drybar, Osprey, and Curlsmith acquisitions, the Revlon 100-year license buyout, and share repurchases. This is approximately the same amount that we committed over the five years of phase one. Like all capital allocations that have multi-year payouts, these latest investments require time to deliver their return, not just in ROIC, but also in the form of an even more robust enterprise that we expect will serve as the foundation for further growth well beyond phase two. Now looking ahead to fiscal 23, the outlook we are introducing today projects another year of solid growth in revenue and profitability. Our two new acquisitions, Osprey and CurlSmith, are expected to drive revenue and margin growth. We expect their incremental revenues to add operating leverage and make further use of our shared services, which in turn provides further lift from adding critical mass to the flywheel. not only in fiscal 23, but also in future years, very similar to what we did with Hydroflask and Drybar in the past and continue to do today. We recognize the broad-based concerns about continued supply chain interruption, rising interest rates, and rising inflation that puts pressure on input costs and also on consumer buying power. In fact, we are seeing weakness in consumption in some categories in March and April. It is important to note our outlook includes our current assessment of the impact of each of these headwinds. To address them, we are reapplying our proven playbook, which we expect to mitigate more than $3 a share of inflation and supply chain interruption. We have now contracted all of our expected shipping needs for the year, which locks in sea freight for the full fiscal year at significant discounts to current spot market rates and provides considerable visibility on these costs. We have also now introduced many of our price increases. To help offset margin compression from higher costs, we also expect growth from dry bar and hydroflask to sweeten our organic mix. With regard to the EPA matter, the recent EPA concerns are related to the packaging and labels of certain additional humidifiers and air products that have been in the market for years. We continue to engage in dialogue with the EPA to resolve the matter as quickly as possible. The current estimate of the impact of this matter is included in our outlook. On the spending side for fiscal 23, we continue to believe strongly that executing our transformation strategy is the best way to continue delivering long-term value for shareholders. Our fiscal 23 outlook therefore includes carefully considered investments in the most important opportunities for our brands and the key shared service initiatives intended to open new efficiency, capability, and scalability for the back half of fiscal 23 and beyond. We also continue to invest in consumer-centric innovation, which has been the lifeblood of our leadership brands throughout the transformation. We are investing in the most attractive brand marketing opportunities, customization, personalization, and international. As mentioned earlier, we see further upside in EMEA and Asia Pacific and are increasing our focus on Latin America, especially in beauty appliances. In shared services, the major fiscal 23 investments are primarily related to improvements in operations, IT, and in executing the $10 million plus multi-year cost of goods savings programs underway in each business unit. In operations, we are further diversifying the geographic footprint of our global sourcing across China, Southeast Asia, and Mexico, and creating more dual sourcing to improve cost and certainty of supply. This in turn opens the door to creating new efficiencies and lower risks, such as shortening lead times, decreasing inventory, lowering freight, and reducing exposure to global geopolitical friction and to tariffs. On the distribution side of operations, the new Tennessee distribution center will significantly increase our capacity and allow us to more efficiently handle the growth of our business over the past five years and the new growth we are planning. Construction is proceeding on time and on budget, and we expect to open by the end of fiscal 23. On the IT side, our outlook includes choiceful investments and system upgrades such as best-of-breed applications for demand planning and warehouse management and new direct-to-consumer capability and capacity to adapt even further to the growing demand for online purchases and increasing service expectations. We believe we are making the right spending decisions and have been careful, especially in this cost environment, to focus on the ones we expect will matter most. We have a track record of delivering on the annual guidance we provide. This has been the case throughout the transformation and was proven again today in our fiscal 22 results. This track record is driven by our relentless focus on execution of our strategic plan, our agility in the face of adversity, and our culture that brings out the very best in our outstanding people. As we look further out, we reiterate our commitment to our long-term average annual top and bottom line growth targets for fiscal 24. Overall, we expect phase two will deliver a five-year run of top and bottom line organic growth well ahead of the average annual targets we set. Even though we have two years left in phase two and are focused on executing with excellence in all of the areas just mentioned, we are now beginning to work on phase three Over the balance of this fiscal year, I will be working with our global leadership team and our board on the strategic planning for phase three. As you can see from the previously discussed investments we are making now in infrastructure, we are looking to further build out our platform so we can scale it in the next generation of profitable organic and inorganic growth. We look forward to sharing our phase three strategic choices and plans with you in fiscal 24. Moving now to an update on executive leadership, I am pleased to report that we have completed our previously announced search for a chief operating officer. Adding this role will help us focus on continuing our growth and executing the major strategic initiatives for the back half of phase two and beyond with excellence. Noelle Jafois will join Helen of Troy as the chief operating officer on May 9th of 2022 and will oversee the day-to-day business, the execution of major projects, and help plan for phase three. Ms. Geoffroy brings over 25 years of experience as a proven leader in president and general manager roles at world-class companies, including Sanofi and Consumer Healthcare, Kellogg, H.J. Heinz, and Procter & Gamble. She is a consumer-centric leader, a passionate brand builder, a product innovator, and has a strong reputation as an inspirational, organizational, and cultural leader. She will report directly to me and will sit on our global leadership team. Additionally, I am very pleased to announce that we have new leadership in health and wellness. Christophe Coudray, president of our health and wellness business segment, retired from Helen of Troy at the end of February. It is an honor to see long service leaders like Christophe finish a distinguished career of over 35 years in the consumer products industry. Mauricio Troncoso has joined Helen of Troy as our new president of health and wellness. He brings 30 years of domestic and international experience. His career spans progressive roles at Kimberly Clark, OnTex, Mead Johnson Nutrition, and Procter & Gamble. He has led a wide range of consumer goods businesses, reorganizations, transformation programs, and operational efficiency initiatives, as well as acquisition integrations. Before concluding my remarks, I would like to briefly touch on further progress we have made on ESG and diversity, equity, inclusion, and belonging. Starting with ESG, at the corporate level, we recently increased our efforts to minimize our impact on the environment by confirming our plastic packaging targets as part of our participation in the new plastics economy. Through the global commitment, business and governments commit to change on how we produce, use and reuse plastic to work towards a circular economy for plastics. We look forward to providing more details on our corporate and brand-specific ESG initiatives in our second annual ESG report, which we expect to issue in June. Turning to diversity, equity, inclusion, and belonging, throughout the transformation, our focus has been to attract, retain, unify, include, and train the very best talent. Like ESG, diversity, equity, inclusion, and belonging is a priority for Helen of Troy, and we continue to make significant progress. This includes adding more diversity of thought, experience, gender, and ethnic background. With Noelle joining next month, half of our named executive officers will be women and half of our global leadership team will be women or ethnically diverse. Beyond senior management, diversity in hiring across levels also continues to increase with more and more diverse candidates in our hiring pools. Our plans for the back half of phase two include further focus on DEI and B initiatives. With that, I'd like to hand the call over to our CFO, Matt Osberg.