Helen of Troy Limited

Greetings and welcome to the Helen of Troy Limited second quarter fiscal 2023 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, Corporate Business Development for Helen of Troy. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to Helen Troy's second quarter fiscal 2023 earnings conference call. On the call today with me are Julian Minnenberg, our CEO, Matt Osberg, our CFO, and our COO, Noelle Jafois. 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 current trends. Then Mr. Matt Osberg, the company's CFO, will review the financials in more detail and provide an update on our financial outlook for fiscal 2023. 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 costs its listeners not to place undue reliance on forward-looking statements or non-GAAP financial 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.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. Today, I would like to talk about our second quarter results, the changes we see in trends since our July call, the various factors leading to our revised outlook for this fiscal year, and provide an update on our progress on the initiatives we announced in July. As a reminder, those initiatives were to normalize our elevated inventory levels, launch a new corporate program to further improve our productivity and lower our costs, and move faster on several strategic changes and efficiency projects that we've identified in our health and wellness segment. Let me start with that update. Over the summer, we built these initiatives into an overall restructuring project we are calling Pegasus. The basic idea of Pegasus is to significantly accelerate and amplify our transformation to provide a stronger platform for operating margin expansion, reduce inventory, raise return on invested capital, and improve cash flow. Pegasus is a multiyear initiative with a three-year arc designed not only to improve profitability, but also help us more efficiently leverage our investment flywheel. As Pegasus generates savings, We plan to invest a portion of those savings back into the business under our new and leaner cost structure. The timing and extent of the reinvestment will depend on the future macro conditions and on the opportunities that provide the most attractive return on investment. We believe this will also help generate more profitable growth once consumers' patterns of consumption normalize and once retailer replenishment better aligns with sell-through. we came into the current environment with considerable momentum, an outstanding portfolio of leadership brands, outstanding people, and a powerful, positive culture. Like many other companies, we are addressing the difficult short-term macro deterioration, and in our case, we are simultaneously and purposefully focusing on Pegasus to significantly improve what is within our control. The Pegasus steering team is being led by our COO, Noelle Jafois, with the support of a premium global consulting firm, as well as a dedicated internal core team. Strategically, Pegasus is intended to return Helen of Troy to the top quartile of our peer group on measures such as revenue and earnings per share growth, cash flow generation, and total shareholder return. Key initiatives in Pegasus include optimizing our brand portfolio, accelerating and amplifying cost of goods savings projects, enhancing the efficiency of our supply chain network, optimizing our indirect spending, streamlining and simplifying the organization, and reducing our inventory. Pegasus will also include initiatives to improve margins, growth rates, and brand portfolio in health and wellness. I am very confident that the major projects that make up Pegasus are the right ones. Starting with our brand portfolio, we have demonstrated our willingness to exit underperforming businesses such as mass market personal care, when they are no longer right for our long-term portfolio, profitability, and growth targets. Pegasus includes a further look at our businesses through this lens. On the acquisition side, we have demonstrated our ability to deploy or redeploy capital on acquisitions that add fast-growing brands and on-trend categories. Recent examples include the ones made so far in phase two, Osprey, CurlSmith, and Drybar, that are delivering on our strategy to further diversify our portfolio in outdoor and in prestige beauty. The cost of goods savings projects in Pegasus are intended to amplify and accelerate work already underway and identify new opportunities to better leverage our scale in procurement, supplier consolidation, and platforming technologies more rapidly and at lower cost. Pegasus projects in other parts of our supply chain are intended to move faster on streamlining our distribution network and footprint. This will lower costs, free up capital, and accelerate our ability to capture the efficiencies of the state-of-the-art automation and IT systems in our new distribution center. Selling down our elevated inventory of certain existing products will also contribute to capturing these efficiencies. The net effect of these supply chain and inventory changes will make a big difference to how quickly we can improve working capital and increase cash flow. The Pegasus initiatives on optimizing indirect spend will help us standardize and simplify in additional spend areas, such as marketing, similar to what we have already done in IT and in other areas. The next round of optimization will also allow us to reapply best practices more quickly, better leverage purchasing power across business units, and further increase our focus on return on investment. By streamlining our organization, we believe we will be able to create further operating efficiencies through selective centralization that more easily allows us to leverage our scale, prioritize investment decisions across our business, and shift resources to the brands and projects we expect will have the greatest positive impact for our consumers and for our retail customers. Streamlining is also intended to help enhance our speed, collaboration, and reapplication of best practices as we get more leverage from further centralizing our shared services and free our business units to focus on even more consumer-centric innovation and brand building. Turning now to look at the quarter, despite the current challenges, we are pleased to report revenue growth and adjusted earnings per share in line with the quarterly outlook we provided in July. Stepping back to look at the first half of the fiscal year, we believe it is important to note that even with the various ups and downs from the pandemic over the past two and a half years and the EPA matter, sales of our portfolio of organic and acquired leadership brands grew 40% in the first half of this fiscal year compared to the fiscal 2020 pre-pandemic year. As discussed in our April and July earnings calls, we saw a notable change in consumer buying patterns beginning this March and April. This trend continued throughout the second quarter, accelerating in some categories, resulting in a larger overall slowdown in demand than we expected in our organic business. Consumers further tightened their purchasing patterns in some categories in response to higher than expected inflation on basics, such as rent, gasoline, and food, and the impact of higher than expected interest rates rippling through the global economy. As a result of these changes in consumer purchase habits, Most retailers slowed their repurchase orders and further adjusted their inventories and weeks on hand to match reduced sell-through. Within our diversified portfolio, we can see consumers generally trading down or delaying purchases in some discretionary categories, such as beauty appliances and home-related categories. With our portfolio intentionally built to focus on the better and best segments, changing consumer purchase habits that have an outsized negative impact on our revenues and market share in those categories. In some cases, our brands are a beneficiary of trade-down, such as in thermometers, where sales of Vicks thermometers were strong in the second quarter, and we grew market share significantly as consumers sought quality products from trusted brands whose lineups include lower-priced alternatives. Other discretionary categories, such as outdoors and prestige beauty liquids, are more on trend and performing much better. As examples, demand for Osprey's everyday travel packs was strong, as was demand for Drybar and Curl Smith liquids. As always, healthcare essentials, such as thermometers and humidifiers, trend with healthcare needs, and our health brands have the outstanding products, range of price points, and the trusted names consumers rely on to care for their families. Looking at our business segments, sales growth in the quarter was led by health and wellness, which increased 27.6%. We achieved significant sales growth in water purifiers, air purifiers, and humidifiers due to the EPA-related stock shipment actions in the prior year. We were benefited from an uptick in category growth during the summer and back-to-school periods, and we have largely restored Pure's shelf placement in brick and mortar and online. In humidification, VIX grew share in both devices and consumables as we were able to put more product on shelves and meet incremental demand as consumers experienced the summer surge of Omicron and its variants. While we continue to see the US thermometer category decline off the historic high base set in the peak of the pandemic, our VIX digital thermometers achieved strong revenue and share growth over the last 13-week period as mentioned. With our Braun and VIX thermometers both serving different consumer segments and both delivering healthy operating margins, the diversification of our product lineup between the two brands is a winning mix. Turning to home and outdoor, total sales increased 11.8%, which included the acquisition of Osprey. Sell-through for Hydroflask grew modestly in the quarter, with strength in Collegiate during the back-to-school period and strength in Grocery. While the brand lost market share overall in the United States, online sales were strong, and we grew share at our largest online retailer. Internationally, Hydroflask increased sales in Asia and Canada fueled by improved consumer demand. Looking ahead, we are focused on improving our DTC presence as we launch our new DTC platform this fiscal year. Osprey had a strong quarter, contributing 47.4 million in sales and remains on track to achieve our outlook range of 180 to 185 million for the full fiscal year. As expected, OXO continued to face sell-through declines similar to what we saw in the first quarter. The overall categories it competes in are generally declining from COVID-level peaks as consumers shifted some of their spending away from home-related goods and adjusted their budgets to address inflation. Nonetheless, total sell-through for OXO remains solidly ahead of pre-pandemic levels. While we rarely mention specific retailer situations, given the developments at Bed Bath & Beyond during the quarter, we want to update you. Over the past few years, we have decreased our concentration of business with Bed Bath & Beyond and are continuing to manage our credit exposure. That said, we are highly encouraged by their public statement emphasizing their refocus on leading power brands like OXO that have been so important to driving traffic and sales. We are highly supportive of their strategic return to what we believe contributed to the previous success of this iconic retailer. Regarding OXO, we are working closely with them at the highest levels. Turning to beauty, core segment sales declined by 11% in the second quarter, primarily driven by continued softening in the hair appliance category off the high base of fiscal 2022. The overall hair appliance category has experienced a decline. We have lost some share in U.S. mass merchandisers as consumers traded down in that channel, partially offset by growth in our largest online retail partner. On the prestige liquid side of beauty, Drybar continued to perform well, growing over the period in the prior year as we improved our supply to meet demand. Grossmith performed in line with our expectations for the quarter and remains on track to deliver its full year forecast. For Beauty, stepping back to look at phase two to date, our focus on consumer-centric innovation, accretive acquisition in the prestige segment, and building a much more capable organization that leverages our global shared service platform has resulted in improved sales, profitability, and market share during the transformation. While the current environment is highly challenging, we are working on new distribution and new products that we expect to serve as building blocks for the future. Looking at our international business, total net sales increased 27.4% over the second quarter of last year, with particular strength in EMEA, Canada, and Asia. Growth primarily reflects the incremental sales from the acquisitions of Osprey and Curlsmith. The macroeconomic challenges outside of the United States are comparable to what we all see domestically, exacerbated by the further impacts of the strong dollar and war-related energy insecurity in Europe. These serve to exacerbate and escalate inflation and recession fears, causing shifts in consumer shopping preferences and higher price elasticities. We are responding by focusing our efforts on those opportunities that provide the biggest potential. We expect consolidated international sales growth in the second half of the fiscal year, primarily driven by Osprey. We'd like to turn now to our revised full fiscal year 2023 outlook. The deterioration of macro trends, the trading down behavior impacting our portfolio, and share losses in some of our categories lead us to lower our organic revenue expectation and EPS outlook for the balance of the year. Our revised outlook includes our expectations for pressure on consumer spending and further retailer inventory corrections. With regard to the upcoming cough, cold, and flu season, our guidance assumes a return to historical pre-pandemic incidence levels as adults spend more time traveling and in offices, as students return to in-person schooling, and as COVID restrictions are largely dropped in most parts of the world. Lastly, our outlook includes the impact of certain supply chain interruptions, particularly in select thermometer models where securing sufficient chip supply has been a challenge. We are being thoughtful about how we balance our short-term profitability goals with our objective to preserve market share, putting ourselves in a better position to return to growth, especially once retailers' replenishment patterns normalize to reflect the point-of-sale sell-through. Our brands have a long history of earning trust and winning with consumers. We remain focused on value reframing and on product innovation to ensure consumers continue to recognize the quality, the features, and the benefits our brands provide. Stepping back, I remain highly energized and enthusiastic about our business and the choices we are making to position our company for continued long-term leadership and profitable growth. We see Pegasus as a major catalyst to returning to top quartile financial performance. By streamlining our portfolio, costs, processes, and organization, we believe we can create significant value and are focused on doing so. We also expect to produce continued attractive returns from our strategic focus on consumer-centric product and commercial innovation, our disciplined investments in our leadership brands, international expansion, and new growth opportunities such as direct-to-consumer. With that, I would like to hand the call over to our CFO, Matt Osberg.