Helen of Troy Limited (HELE) Q1 2009 Earnings Report, Transcript and Summary

Good morning and welcome, ladies and gentlemen, to the Helen of Troy first quarter conference call for fiscal 2009. (Operator Instructions) Our speakers for this morning’s conference call is Gerald Rubin, Chairman, Chief Executive Officer, and President; Thomas Benson, Senior Vice President and Chief Financial Officer; and Robert Spears, Senior Vice President and Chief Information Officer. I’ll now turn the conference call over to Mr. Robert Spears. Please go ahead, sir.

Good morning, everyone. The agenda for this morning’s conference call is as follows: we’ll have a brief forward-looking statement review followed by Mr. Rubin, who will discuss our first quarter earnings release and related results of operation for Helen of Troy, followed by a financial review of our income statement and balance sheet for the quarter by Tom Benson, our Chief Financial Officer; and finally we’ll open it up for questions and answers for those of you with any further questions. Safe Harbor -- 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. A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results. Generally the words anticipate, believes, expects, and other similar words identify forward-looking statements. The company cautions listeners to not place undue reliance on forward-looking statements. Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results. Factors that could cause actual results to differ from those anticipated are described in the company’s Form 10-K filed with the Securities and Exchange Commission for the year ended February 29, 2008. Before I turn the conference call over to our Chairman, Mr. Rubin, I would like to inform all interested parties that a copy of today’s earnings release has been posted to our website at www.hotus.com. The release can be accessed by selecting the investor relations tab on our homepage and then the news tab. I will now turn the conference over to Mr. Gerald Rubin, Chairman, CEO, and President of Helen of Troy.

Thank you, Bob and good morning to everyone. Helen of Troy Limited today reported record first quarter sales and an earnings increase of 28.9%, excluding significant items for the quarter ended May 31, 2008. First quarter sales increased 3.4% to a record $145 million versus sales of $140,170,000 in the same period of the prior year. First quarter net earnings, which include significant -- several significant items were $5,558,000, or $0.18 per fully diluted share, compared with $10,117,000 or $0.32 per fully diluted share for the same period in the prior year. First quarter net earnings include the following significant items net of their related income tax benefits or expense: an impairment charge of $7.6 million, or $0.25 per fully diluted share, relating to the write-down of intangible assets, primarily trademarks, as a non-cash item as we discussed last quarter; a bad debt charge for uncollectible accounts receivable of $2.5 million, or $0.08 per fully diluted share, related to a significant customer bankruptcy filing as we also discussed last quarter; and the gains on casualty insurance settlements of $2.6 million, or $0.09 per fully diluted share, primarily related to a warehouse fire that we had in Latin America. Excluding these significant items, non-GAAP earnings were $13,044,000, or $0.42 per fully diluted share, versus $10,117,000, or $0.32 per fully diluted share for the same period in the prior year, an increase in non-GAAP earnings of 28.9%. Gross margins for the first quarter were 43.5% compared to 42.8% in the first quarter of the prior year, an improvement of 0.7 percentage points. First quarter sales in the houseware segment increased 15.3% to $38,472,000, compared to $33,358,000 for the same period last year, reflecting continued strength in our OXO brands worldwide. Sales in our personal care segment decreased slightly to $106,531,000, or 0.3%…

Thank you, Gerry and good morning, everyone. In the first quarter, we experienced year-over-year sales growth despite a difficult domestic retail environment where many of our retail partners faced slowing same-store sales trends. Our sales growth was driven by our housewares and international businesses, which grew 15.3% and 9.1% respectively compared to the same quarter last year. Gross profit margins improved by 0.7 percentage points year over year. First quarter selling, general, administrative expense as a percentage of sales decreased by 1.2 percentage points year over year. Selling, general, and administrative expense includes a pretax charge of $3.9 million for Linens and Things receivables that are estimated to be uncollectible, partly offset by pretax gains on casualty insurance settlements of $2.7 million. We recorded pretax impairment charges totaling $7.8 million, which I will discuss in further detail shortly. We reached an agreement to settle the consolidated securities class action lawsuits against the company and two officers. First quarter net sales increased 3.4% year over year. Net sales for the first quarter of fiscal 2009 was $145 million, compared to $140.2 million in the prior year first quarter. This is an increase of $4.8 million, or 3.4%. Our first quarter operating income before impairment charges increased by 21.9% in dollar terms year over year. Operating income before impairment charges in the first quarter of fiscal 2009 was $17.4 million, which is 12% of net sales, compared to $14.3 million, or 10.2% of net sales in the prior year quarter. This represents an increase of $3.1 million, or 21.9%. First quarter net earnings decreased 45.1% in dollar terms year over year. Net earnings for the first quarter of fiscal 2009 was $5.6 million, or 3.8% of net sales, compared to $10.1 million, or 7.2% of net sales in the prior year first…

Operator, we’re now open for questions.

(Operator Instructions) Our first question will come from Gary Giblen with Goldsmith & Harris. Gary Giblen - Goldsmith & Harris: Good morning. Could you give us a sense of how gross margins looked in the personal care segment, given that you had competitive and private label issues arising there?

Gary, as you know, we don’t disclose gross margins by segment but I just want -- you know, it looks like it’s holding steady right now because we are -- as Tom mentioned, we do have increased costs but we are increasing prices and introducing new products, so we are holding our own there. Gary Giblen - Goldsmith & Harris: Okay, that’s helpful, and then the -- are you appreciably closer to getting a meaningful acquisition accomplished now versus three months ago, or are sellers still looking for unrealistically high prices?

I don’t think we’re any closer than we were three months ago but we are continuing looking. We have a lot on our look list and I don’t think it has anything to do with price. It’s just finding the right acquisition, and hopefully in time we will find the right acquisition that we’ll announce. Gary Giblen - Goldsmith & Harris: You’re one of the most experienced people in the industry, so -- I mean, how does the consumer and retailer environment compare to let’s say the ‘70s and early ‘80s, which was a tough time too.

I don’t know if I can remember back in the ‘70s, that far back, but you know, everybody knows that the consumer is having a tough time because of gas prices and traffic in many stores is down but there are a lot of retailers that are doing better with promotional activity, so we sell everybody, so we’ve got a mix of customers that are doing better and we have customers that are doing worse. I think in our commodities, most of our products are certainly, what, under $30, $25, that it’s something that they do need. It’s not like they are buying a house or a car, so hopefully we’ll weather the storm and the economy will pick up. Gary Giblen - Goldsmith & Harris: Final question and then I’ll give up the floor is any thought to when you might re-introduce guidance?

No, we haven’t thought about it. We’re not doing it at the present time and it’s something that we talk about all the time but we decided that at the present time, we’re not giving any guidance.

We’ll now move on to Doug Lane with Jefferies. Doug Lane - Jefferies & Company: Good morning, everybody. Just to follow-up on the gross margin question, is it safe to say that probably the single primary driver to the improvement in gross margins is the mix shift from personal care to OXO, as OXO continues to grow much more rapidly?

Doug, that’s partial but it’s also we are discontinuing or dropping any low margin items because it’s just not worth our while anymore, so that as an effect also by dropping the low margin items. Doug Lane - Jefferies & Company: Okay, and while we’re on the topic, how would you characterize the Belson business now versus the rest of the personal care appliance business?

You know, I think it’s a good business. They have a good market share, they have good brand. One of the things that affected us this last quarter was supply, which we are correcting. One of the major factories that produced Belson products and also Helen of Troy products closed down and we have transitioned those, the tooling and the production to other factories which are just getting started now, so they could have done much better last quarter if they had more supply of product, which we are correcting. Doug Lane - Jefferies & Company: Will there be some pent-up demand carried into the second quarter here do you think?

No, I don’t think so. There’s always the pluses and the minuses, so -- yeah, I don’t think there is. Doug Lane - Jefferies & Company: Can you talk broadly about the personal care appliance, or really the haircare appliance category? How is the category performing? How do you think your market shares are holding up in the category with the competitive pressures? And just give us some brief overview there of the lay of the land, in that area.

Well, in personal care appliances, I think we are holding our own. I think the business is soft. We’re introducing a lot of new products and some of our major retailers, professional retailers come September, we have increased SKU count coming in September, so we’re looking -- if the business and the economy gets better, we think that we’re in a better position come September when we have more products on the shelf. Doug Lane - Jefferies & Company: Okay, now if I remember right, there was a -- in the brushes and combs and accessories area, there was a loss of a customer. Can you refresh my memory there? When does that anniversary?

I think it was a decrease of a major customer. I don’t think that there was a loss of a major customer. Doug Lane - Jefferies & Company: But there was an event there, right?

Gary, we lost a product line with a customer and we also lost a distributor, which was a much smaller customer, early last year. Doug Lane - Jefferies & Company: What time do you think about last year, about this time last year? So that should be pretty much behind us?

I don’t remember exactly but I know it was early in the year. Doug Lane - Jefferies & Company: Okay, fair enough. And then if we could talk about OXO for a little while. You know, it’s continued to deliver strong numbers, OXO's still largely in the United States and so the success you’ve had in the U.S. with OXO in such a difficult time, what do you think is really driving that? And could you talk a little bit more specifically about new product activity at OXO this year?

Okay, on new product activity, I’ll talk about that first -- you know, they always have somewhere around 100 different items in the pipeline, so they are introducing products all the time and as you know, their business is doing very well. There could be a lot of reasons for it. It is certainly the new products. It may be also that consumers are not going to restaurants and staying home and cooking but their business has done very, very nicely and also the international business has done very well in the U.K. and in Japan, where we took over the distributorships. They are both doing very, very well. If you’d like to see or anybody would like to see all their new products, you can go to OXO.com, their website. They post all their new products there and like I say, they are constantly adding new products all the time. Doug Lane - Jefferies & Company: Good, okay, and do you have any kind of market share information for OXO? Was there any kind of -- any way, the context of the category?

I don’t have it but you know, I could get it for you if it’s available. Doug Lane - Jefferies & Company: I was just curious as to how big the category is versus where OXO is and how much room there is to continue to take market share. Lastly, Tom, did you give us an FX benefit in the quarter?

I’m sorry, what was the question? Doug Lane - Jefferies & Company: Did you give us a benefit from currency exchange in the quarter?

No, I didn’t. That will be in the Q that’s going to probably be filed tomorrow. Doug Lane - Jefferies & Company: Okay. Thank you.

Mimi Noel from Sidoti & Company has our next question. Mimi Noel - Sidoti & Company: Gerry, you’ve talked about how you believe you are poised to take advantage of the current environment that we are in. Can you talk to me a little about what you are doing differently now versus a year ago or two years ago?

Well, in each category it’s a little different but in personal care, professional appliances, we have a -- we have developed a lot of new products that we think will be accepted favorably in the marketplace somewhere in more popular price points and the initial reaction from the consumer looks good, and -- or from the customers, but as I mentioned it’s going to be around September time when we release most of the product. Mimi Noel - Sidoti & Company: Okay, and then you’ve always been pretty good at keeping your product fresh though. That doesn’t sound like a different strategy from the tact you took a couple of years ago. Is there a nuance that I’m missing?

No, it’s just we’re just adapting to the marketplace with some more promotional merchandise that the market needs. We’ve always had promotional merchandise and good, better, best and we just expanded the range. Mimi Noel - Sidoti & Company: Okay. And with any given retailer, how many times a year do you, can you introduce new products or raise prices on those retailers?

Okay, it depends on the retailer. Major planogram changes occur once a year, less than major, minor ones occur also during the year so I would say in the retail field, it’s twice a year. In the professional business, it’s anytime we come out with products, it’s when we introduce them. Mimi Noel - Sidoti & Company: Okay, okay. And then Tom, some housekeeping questions for you, if you don’t mind; what is the status of the current share buy-back authorization?

We have a 157,000 shares that are still available to be repurchased. Mimi Noel - Sidoti & Company: Okay, and did you buy back any shares in the quarter?

Yes, we did. Mimi Noel - Sidoti & Company: Can you tell me how many or how much you spent?

I’m looking it up as we speak. We bought back 187,000 and we have 153,000 left that we can buy as of the end of May.

Under the current program.

Under the current program, and as we explained last quarter, when we run out of this buy-back the process is to go back to the board and ask for authorization. We feel that there will be another program authorized. Mimi Noel - Sidoti & Company: Okay, there’s a good history there is what you are saying.

Yes. Mimi Noel - Sidoti & Company: Okay, and then the last question, Tom, I had for you is can you characterize what’s in the long-term investments? As you and I discussed last time, you are moving away from the auction rate securities.

What is in there is remaining auction rate securities. During the quarter, we reduced our exposure to auction rate securities about $15 million, but we have $47 million of them remaining. Mimi Noel - Sidoti & Company: Okay. That’s all I --

And they are all student loan auction rate securities that are guaranteed by the government. Mimi Noel - Sidoti & Company: Okay. That’s all I have. Thank you.

From Wachovia, we have Steve Friedman.

Congratulations on an excellent quarter in such a difficult environment. Most of my questions have been somewhat answered but just a brief comment on the changes in the gross margin, which increased 70 basis points and the SG&A which decreased about 120 or about a 2% swing you had. You indicated you couldn’t comment exactly on where the gross margin increased, but could you comment is the SG&A due to the increased efficiency of the new warehouse and a good portion there?

The SG&A, some of the improvement is due to the warehouse. Some of it is due to lower advertising during the quarter, and there was a negative in there also, our outbound freight costs as a percent went up year over year. So we have some benefits but there’s also a negative.

But even with the outbound freight costs, you still were able to decrease about 120 basis points?

Yes, and as I explained also, there’s -- in SG&A there’s about another -- there’s a net of $1.2 million between the bad debt write-off and the gain on the insurance. That’s included in there also.

All right. Also with the write-offs on the -- non-cash write-offs on the impairment charges, you still incurred a tax expense close to double that. Is that due to more OXO business in a higher taxed jurisdiction in the United States?

What’s happening is we’re expanding our business outside the United States. We’re incurring -- we’re operating in higher tax rate jurisdictions and our tax rate is creeping up some. I think you can’t make a determination on one quarter because there’s some ebb and flow. I think you need to kind of look at a longer run and I would say our tax rate on a longer term period probably would be 12% to 15%.

All right. Thank you very much and again, a great quarter in a tremendously difficult environment.

We’ll now hear from John Curdy with Principal Global Investments.

Good morning. Could you please tell us what you expect for capital spending this year?

Our what I call maintenance capital spending is usually $5 million to $7 million a year. At this time, we have no major projects planned. If we do acquisitions, you know, which we hope to do, that could change but $5 million to $7 million is an ongoing run-rate.

And then what’s the outlook for your costs for raw materials and production coming out of the far east for the remainder of the year? We’ve been hearing a lot about price increases, sourcing out of China and the far east, as well as we’re seeing the price of energy go up, plastics, et cetera, and your ability to offset that with price increases.

You know, based John, on everything that’s going on in China, prices will be going up during the year. I don’t know for how many years it will go up, but I know for this year, based on the oil prices and copper prices and inflation and the exchange rate and the factories are paying the employees more and all those things, yes, the -- we know that prices go up because we get price increases almost daily and we try to offset that by what we can get in the marketplace at increases. And we’ve been holding our own, as we just discussed, with the gross profit increasing slightly, so that’s our challenges, is try to keep up with the price increases from overseas.

Are there any couple of either commodities or items that are particularly going to be particularly difficult to offset maybe the balance of the year that could cause some pressure on margins? Either plastic --

Well, as I mentioned, a lot of the low -- the items that we sold last year at low prices and because of price increases weren’t able to get price increases on some of the products, we have dropped some products if we just can’t make any money on them. But even with that, we did show a slight increase in sales. But we are not going to -- we are not in the business of selling products below cost and we need to hold our profit, so we increase on every item that we can.

Thank you.

Thank you. From Wedbush Morgan, we have Rommel Dionisio.

Good morning. During your prepared comments, you talked about increased private label penetration. Could you just delve a little more into that? I mean, is it because you are deliberately exiting some of these lower priced products? Or is it the price increases that you are taking that’s causing the retail to give them more incentive to go private label? I mean, could you just talk a little bit more about that, please?

I think Tom mentioned that in his remarks but what it is, and there are a couple of customers in the professional business that have decided that they want to -- or that have decided that they are going to source directly with their own brand, but that is quickly changing. I know one of them is changing and adding more SKUs to us because they are having problems getting delivery and because of increased cost. So private label, I know that you write about it in your report, is not a major factor. There isn’t any major customer that we have that’s thinking of going more private label. The reverse is actually happening, that some of the customers are coming back away from private label because the brand didn’t sell well or they are having a supply problem getting product, and the low cost that they thought they were going to derive by importing from the orient just didn’t happen. So that’s not really an issue at Helen of Troy private label.

And just a follow-up question; I think in response to a question, Tom talked about lower advertising. Can you just expand a little more on that? Was it just a timing shift or is there a deliberate thought to lower advertising expense going forward?

No, I think it’s a timing shift. Some of our advertising from the previous year had gone into the first quarter but we have major advertising programs coming up for back to school and Christmas, as we’ve had in the past. So no, we’re not getting away from advertising. All of our products will be advertised in print and on television for the back to school and for the fall season.

We’ve also changed some of the format of doing our advertising this year. We’ve done a lot more promotional driven and couponing, which comes out of sales, versus media advertising, which goes in SG&A. So some of the geography of the advertising has changed. My comments were in response to what has changed in SG&A and the amount of advertising in SG&A has gone down. We have moved some of it up into -- it comes out of gross sales to get to net sales.

Perfect. Thanks very much.

(Operator Instructions) We’ll now take a follow-up question from Gary Giblen. Gary Giblen - Goldsmith & Harris: Thanks. You guys mentioned de-stocking as one of the challenge factors relative to appliances within personal care, but what about the lotions and liquids and other parts of personal care? Is de-stocking a pressure there?

Gary, you know, I’m sorry, I forgot to talk about the Idell -- yes, they are increasing their prices because they use plastic bottles. There’s alcohol, the freight costs have gone up. They have the same situation as Helen of Troy appliances have but just different commodities. Gary Giblen - Goldsmith & Harris: In terms of retailers rationalizing SKUs, is that happening in the Idell part of personal care?

No, no. All the retailers, of course, are under pressure to do more business and we are working closely with all the retailers to try to increase their business and of course, increase ours. You know, they all want increased business and we want increased business, so we work together with them to make that happen. Gary Giblen - Goldsmith & Harris: Are your brands value -- is Idell value-priced?

No, no it is not. I mean, you can go to some of the major retailers, you’ll see most of their products are in the $5.99, $6.99 category. Value is what I’m reading is the dollar stores, a stuff under a dollar and the answer is no, you don’t find our products there. Gary Giblen - Goldsmith & Harris: But within the category, Idell is priced about in the middle of its --

Yeah, it’s always been -- you know, the prices haven’t gone down and I think they probably have gone up retail wise over the years. Gary Giblen - Goldsmith & Harris: Okay. Thank you for the clarification.

Thank you. We’ll now take a follow-up question from Mimi Noel. Mimi Noel - Sidoti & Company: Thank you. Gerry, I do have one more, in listening to you talk a bit about Belson and the sourcing that you are doing there for the business at large, particularly in the appliance segment. Do you ever explore shifting production to another geography, perhaps like Vietnam, where you might have greater cost savings or be able to offset the cost increases in China? Or is that too much a risk to fulfillment to explore that?

You know, we’re always looking at other countries to produce our product. We do make, mainly in Southeast Asia, Vietnam that you mentioned may be lower priced for some manufacturers but we’ve looked into it. Labor may be cheaper but the cost to get the materials there, there’s all -- there’s a lot of things going on -- Mimi Noel - Sidoti & Company: Okay.

-- and I don’t think Vietnam is certainly the answer. I think China is still a low cost manufacturer even though prices are higher. It’s still cheaper to make there than to make in any other country. Mimi Noel - Sidoti & Company: Okay. That’s helpful. Thank you.

(Operator Instructions) Gentlemen, it appears that we have no further questions. I’ll turn the conference back over to Gerald Rubin to conclude the conference.

Thank you, everyone, for participating and listening to our first quarter results and I look forward to talking to you on our second quarter results. Thank you again.

And that does conclude today’s conference call. Thank you for your participation. Have a great day.