Good day and welcome to the Helen of Troy Limited Third Quarter 2017 Earnings Call. Today's conference is being recorded. At this time I’d like to turn the conference over to Jack Jancin, Investor Relations. You may begin, sir.

Thank you, operator. Good afternoon everyone, and welcome to Helen of Troy's Third Quarter Fiscal Year 2017 Earnings Conference Call. The agenda for the call this afternoon is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, will comment on the financial performance of the quarter and then update you on areas of focus for fiscal year 2017. Then Mr. Brian Grass, the company's CFO, will review the financials in more detail and comment on the company's outlook for fiscal year 2017. Following this, Mr. Mininberg and Mr. Grass will take your 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 word anticipates, believes, expects, and other words similar – 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 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 companies. 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. Mininberg, I'd like to inform all interested parties that a copy of today's earnings release has been posted to the company's website at www.hotus.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 home page, and then the news tab. I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack. Good afternoon, everyone and welcome to our call. Our transformation strategy combined with the ongoing benefits of our diversified business model led to a strong quarter of profitability highlighted by a 270 basis point increase in gross profit margin and a 14.5% increase in adjusted diluted earnings per share. We were pleased to achieve this improvement in profitability despite lower consolidated net revenue. Key drivers for the quarter were the continued strength of our Hydro Flask acquisition, our efforts to sweeten our core business mix, and further operational efficiency gains from our shared services platform. Hydro Flask contributed $34.3 million of net sales to our Houseware segment and was accretive to the segment’s operating margin. Housewares also grew sales and expanded its operating margin in the core business. Health & Home continued its trend of margin expansion even as a below average start to the cough cold and flu season weighed on sales. Beauty segment sales declined in line with our guidance but reflected a sequential improvement from the second quarter. Beauty sales performance continues to be impacted by our efforts to rationalize low margin and non-strategic businesses, Venezuela remeasurement and even further deterioration in foreign currency which have overshadowed the success of new innovations. And in Nutritional Supplements, sales declined in line with guidance as we continued the strategic transition from offline channels to online while investing in system upgrades and a significant range of new marketing initiatives to attract and convert a broader base of consumers to our outstanding products. Before moving to an update on the progress we made in each of our strategic choices over the last quarter, I would like to mention a few other highlights since our October investment call. We delivered a 149% increase in cash flow from operations driven…

Thank you, Julien. Good afternoon, everyone. While softness in certain segments of our business and a weak start to the cold, cough, flu season negatively impacted our consolidated core business revenue, we are pleased to have delivered expansion in gross profit and operating margins, which contributed to double-digit growth and adjusted diluted EPS in the quarter. Earnings growth was driven primarily by accretion from the Hydro Flask acquisition, mix improvements, our cost savings initiatives and lower tax expense. This growth includes the negative year-over-year impact of the previously disclosed change in the rate used to remeasure our Venezuelan financial statements, which reduced adjusted income by $2.9 million for the quarter. We are also pleased with our strong cash flow from operations which we believe demonstrates that we are making progress with respect to our supply chain and working capital initiatives. Consolidated sales revenue was $444.4 million for the quarter, a 0.2% decrease over the prior year period, which includes the decline in our core business of $35.4 million or 8% in growth from Hydro Flask of $34.3 million or 7.8%. The decrease in core business sales revenue includes the negative impacts of approximately 2.4% from business rationalization, 1.6% from the Venezuela remeasurement change and 0.8% from foreign currency fluctuations and a below average start to the cold, cough, flu season referred to earlier. Turning to a review of our segments, Housewares grew by 42% or $36.9 million driven by $34.3 million of sales from Hydro Flask and core business growth of $2.6 million or 2.9%. In the core business, growth was fueled by new products and distribution expansion in the club channel, partially offset by a small decline in EMEA sales due to the negative impact of the weakened British Pound. Our Health & Home segment declined 3.5% in the…

Thank you, sir. [Operator Instructions] And our first question will come from Bob Labick with CJS Securities.

Good afternoon.

Hey, Bob.

Hi. Couple things, obviously thanks for all that commentary. Just one of the last things you talked about was increasing the size of your revolver for flexibility. Can you talk about, little bit further the rationale behind that and in that context the M&A environment? Are there opportunities out there right now that you are looking that prompted you to do this or what were the other reasons behind changing the revolver now?

Yes, we decided it made sense to do that preemptively. I think when you do that, you are not in a rush and kind of not under the gun to accept the terms you may not accept otherwise. So we thought we get more favorable terms from doing it now and you are right in that we were looking at a potential acquisition that we ended up passing on, but the size of that acquisition and the timing of it made us take a look at what we had available to us in our revolver and its capacity and caused us the modeling of that acquisition kind of caused us to say why not increase the revolver now. Under favorable terms, it doesn’t really cost us anything other than the unused capacity and have it available for acquisition. So we are very interested in pursuing acquisitions and we felt like we didn’t want to be held back by not having the capacity to do so and then having to do an amendment to the credit agreement while in the middle of an acquisition deal.

Got it. Thank you. Yes, and speaking of acquisitions obviously, the last you did the Hydro Flask has been very successful. Congratulations on that. Looking ahead, since it has such high margin, can you just talk a little bit about, I guess two things, one, a year or two from now, will the housewares margins continue to rise? Or how do you decide how much of that to reinvest in the brand or other brands? And where should we see that going over time, because – since- as that’s growing faster it’s continuing to sweeten your mix in your words?

I think it’s a good question. There will be a tailwind from Hydro Flask. There is no doubt. I think offsetting that to some degree, we are – we never really for the Houseware’s division invested in the brand, it was kind of this grass roots development of the brand and we are now thinking about what possible if we do invest more behind the OXO brand and what can we gain from it and increase its overall recognition in the market. And so, I think we will continue to explore and have those discussions and you saw in our comments or heard in our comments that we are making additional investments in OXO actually in the fourth quarter to do some of these things. A lot of those, this quarter are around digital content investments and things like that, but on an ongoing basis, we could explore the idea of increasing their brand awareness through means that we have been explored in the past. So I would say, maybe those two things wash and we can keep the margin flat would be probably a decent target for us.

Great, thanks. And that segues to my last question and I’ll get back in queue. But you discussed investing in online and what not. Can you talk a little bit about your online strategy, the go market strategy and how it’s been evolving and where you see it going, either through retailers websites or Amazon or direct by yourself or how are you thinking about your online sales going forward?

Yes, hi, Bob, it’s Julien here and nice to talk to you. The online development has been very aggressive at Helen of Troy. As one indicator of it Amazon is now our number three customer and nipping at the heels of our number two customer by the way. So it’s not like a distant third and just a few years ago, wouldn’t even have been in the top ten. And so the aggressiveness, consumers behavior is driving not just us but the entire industry towards much more investment in online. There is a lot of new people in the company that have been brought in, in the last year or two, maybe three with the intention of taking us up to the whole next level on the subject of marketing online and taking advantage of all of the tools from a digital marketing standpoint and ecommerce. We are fairly agnostic from an ecommerce standpoint whether we go through a traditional brick and mortar retailer website or through an e-tailer and we're extremely eager to support the e-tail conversion at some of our own brick and mortar retailers even as we support them in their traditional brick and mortar stores, because that’s what consumers want and the retailers know that and they want their partners to invest in that and so do we. And on the subject of the opportunities that are available online, it’s amazing what is possible. My Hydro is a great example of it and that’s one we happen to direct to consumer, a significant portion of the direct to consumer sales from Hydro Flask are now done online and a significant portion of those are in My Hydro. So consumers really want that kind of flexibility, they couldn’t get otherwise. And then in terms of things like…

Super. Thanks so much.

You bet.

Our next question will come from Jason Gere with KeyBanc Capital Markets.

Okay. Good afternoon. Hey guys, I just have a couple housekeeping and then just one kind of bigger picture question housekeeping. I know you gave updates on the Home & Health as well as the core, I mean, the OXO business. But should we assume that the guidance that you gave last quarter for Hydro being $85 million to $90 million, Beauty declining 17% to 20% for the year and I think Healthy Directions down 14 to 16, is that still the same or is there any update there? That’s the housekeeping.

No change in those.

Okay. So I guess, the next question I have then, really I guess it’s just thinking about the guidance the six, I guess, the $6.20 to the $6.50 you are giving for the year, if you look at the third quarter, and if you put aside the tax benefit which I think was maybe about $0.22 or so better than what we had just based on that lower tax rate, you beat the street by $0.25, so as we think about the fourth quarter, I mean, it’s – the guidance really implies a meaningful decline year-over-year, put aside again the tax rate I know last year it was 7% and I think it’s got to be like 14% to be kind of at the low end of your 10% to 12%. But can you just talk a little bit about the investment maybe I need conceptually to understand how much investing are we going to see in this fourth quarter? And maybe it’s the wages that’s coming and playing a role too, but can you just kind of give a little bit more context, because it just seems very extreme that the guidance for the fourth quarter seems a little bit light given how the core business performed in the third quarter, again excluding tax just you had some nice upside. So I was just wondering if you could talk a little bit about the SG&A side and where we should see that really coming out, because I just don’t get it I guess?

Okay. Hey, Jason, it’s Brian. I’ll start and then Julien may add on to whatever I have. There are really two major things going on and we did make an attempt to call them out in our prepared remarks. We are making fairly significant investments, incremental investments that were kind of outside of our original plan in PUR, OXO and Hydro Flask and it goes in line with our strategy feeding our strongest brands. Those are three of our strongest brands and they are doing well and we want them to continue to do well. So we are choosing to take some over-performance, I’d call it from Hydro Flask and other parts of the business and reinvest that into the business. So that’s the first thing that will offset, I think what you are looking for is more EPS by the end of the year. So that they would definitely have an offset to that and I would say the second offset to that is a fairly significantly weaker cold, cough, and flu season than we originally expected and was an average season still embedded in our guidance through the second quarter. And so, the impact of below average cold, cough, and flu season has a significant effect on our financials and that’s the other weighing against our EPS results for the fourth quarter.

There's a bit of currency in there is my only build – and I think Brian mentioned in his prepared remarks, currencies did moved away from us in terms of guidance that we gave at the end of Q2 and even though we just raised our guidance, we did experienced a hurt from currency in Q3. Since we don’t know what the currencies will do in Q4, we have made the same assumption that we always do, which is with they’ll stay where they are now and yet that’s also lower than or worse than where they were when we finished Q2. So, there is a little bit of calculation there as well and you already mentioned the tax comment. And in terms of the amounts of investments, don’t be concerned, we are not spending wildly. There is just some really good opportunities out there right now, Hydro Flask is doing well. You heard us talking about getting behind it and we are building its future. In the case of PUR, there is an exciting launch of our faucet mount next generation product. There is new advertising, there is other new products in our pipeline and there is also moment in consumers’ minds where people are open to education and we have a new ad campaign that sees directly to it. So we are putting some money into it. In the case of OXO, back to Bob Labick’s question about online in general for the company, now more specifically the opportunity to invest in some of the online communication that will make OXO more successful online where it’s already doing well. It’s just the opportunity for us right now and we are grabbing it in Q4.

Okay. So then when you think about that incremental investment, I mean, how much, and then maybe it’s for the fourth quarter and then I guess, how we are thinking about into fiscal 2018, how much is strategic versus, how much is structural. So I am just trying to think about the build, obviously I understand the opportunity to invest in strategic opportunities and maybe, because there could be a good return on that more immediately, but the structural, how much is structural in the fourth quarter, the e-commerce, some of those things, how much carries over into 2018 as well?

Yes, I wouldn’t look – it’s a good question, but I wouldn’t look at it that way and the reason I say it is because if you look at Q1 through 3 that we have now reported and you look at our advertising spending, it’s been a little lighter than we ourselves originally planned. So some of it just ended up in Q4 just by the timing when various things were right or we are ready with the opportunity was there from lots of variables. And in the case of weighting some more of it just happened to fall in Q4. And you put the incremental that I just talked about and you get some of the compression that you mentioned when you calculate the overdeliveries of Q1 through 3 and then the raise that we are doing, say, hey well, how come I don’t see more in terms of the raise. So in terms of structure, I wouldn’t look at it that way, I would just look at it as the cadence of the quarters and where the money fell. In terms of fiscal 2018, we have not given guidance for fiscal 2018, we are just now entering our budget process and the dice has not been cast yet and that said, it is our intention to continue to invest in our core. There are certain brands. We listed them all in the call. Few are Hydro Flask, OXO as three, the Braun brand is also one that we are very interested in investing in and then Hot Tools on the professional side and Beauty is a very strong brand and we invest in it. And the point is these are structural but they are not huge differences than what we have done in the past. If we decide to make big differences, we have announced them in April and we do in our fiscal 2018 budget if we are going to do a doubling down in some big way on one of the brands.

Okay. I am just going to squeeze in one more because I guess it’s the thing to do. If you look at the Beauty segment and you talked that you called out a bunch of these one-time items whether it’s foot care or personal care, some of the rationalization if you look at the gap, I guess, that makes up the difference between your organic sales and maybe what those kind of – what some of those one-time items are? You are still probably looking at a mid single-digit kind of decline, I guess, partially it’s the category retail and appliances things like that. How has that progressed over the last quarter, because I know you did say Beauty did kind of bridged the gap a little bit there, is it kind of progressing the way you think and if you think about the timing of some of these one-off items, do you think you are on the right path to starting to see getting closer towards stabilization in some point in fiscal 2018?

Yes, in general the answer is yes, but there is a lot of moving parts here. It’s a big decline, we are not proud of it and the decline over the stuff that we announced at the beginning of the year, I am talking about the Venezuela, the foot care and the rationalization, that’s not news and that’s been in our guidance from the very beginning and the massive is exactly things that were before. What is different is two things that are unique to Q3, one of them is that foreign exchange did not help in Beauty during Q3 and I think Brian mentioned in his prepared remarks it was a 0.05 of the 19.5 points just was attributable to Q3. We stayed within our guidance despite that nonetheless absorb it. So, we are pleased in that regard but no point it’s proud of seeing the business decline. We are simply pleased that we could absorb the hit, but we didn’t plan it. The other one that was big and we mentioned this in our remarks is that there was some tighter retail inventory during the course of the year. When you - I know we just released the press release, when you get a chance to really go through it, you’ll see in the comments that I made in the press release, a reference to holiday related reductions in orders from some big customers and that happened during Q3. We were not expecting it. There has been one or two customers have been fairly public on their side about taking inventory down to their own systems and they were able to do that. On the good news – the bad news for sales obviously and that hurt us and that said, I am kind of pleased that we stayed within our guidance nevertheless, and the good news on it is that the sell-through of our products even as they ordered less, that’s pretty good frankly in Q3 and as a result they lot out-of-stocks and I haven’t seen the shares yet. When we have them we can say more, but I can say that we are looking better on that front, because we have more pegs with our innovation. We have better packaging. Consumers like our products. We just hear that in all our comments about the innovation and they are selling well. As a result the live through to perform within the range that we gave despite those inventory reductions, that’s a big deal and then to put sort of a finer points on it, we are talking about 5% of the 19% attributable to that remark and that’s not a small number to be able to sell-through of that.

Okay, great. Thank you for answering all my questions. I’ll pass on to the next caller.

Thank you. Thank you.

Thank you. And next we will take a question from Trevor Young with Jefferies.

Hi, thanks for taking my questions. Just touching on Hydro Flask for a moment. It seems like it’s trending well out of expectations contributing north of $75 million $76 million year-to-date. Are you still targeting that $85 million to $90 million full year contribution?

We do not change our guidance with respect to Hydro Flask. They do have somewhat of a seasonal business that peaks in the third quarter and then declines some in the fourth quarter. So that’s the reason you can’t kind of do a straight line trend and get to the $90 million you’ve guided to. So sales will tail off a little bit in the last quarter of our fiscal year, but yes, we are still guiding to our previous range, hopefully they end up exceeding that.

Okay, great. That’s really helpful. And then shifting gears to nutrition. The recent kind of store refresh and brand refresh and GNC, it seems like they are more focused on lower prices and loyalty reward programs. Could you maybe discuss how that impacts your business with them? Or perhaps more broadly your outlook on the nutrition category in general?

Yes, let me try this one. So, in GNC, it’s a small part of the business, but nonetheless one we were growing and with certain products in particular the Dr. Pergolizzi's or the OxyRub product is just doing well at GNC. Well then we have direct response television communication online with consumers as part of that whole online thing as opposed to offline which is where we were historically in direct mail. We see a big pop in sales of that product and GNC is an important part of that. From a price standpoint, we are not seeing price pressure there, because it’s a unique product. There is not a natural competitor to it, there is not a natural private label. So we are not having that problem. And then from the GNC in general, it’s just not a big part of the portfolio and yet it’s an area where we can grow and we’ve proven that when we make investments we do grow. When we had our biggest spend on air with the direct response TV on the ocular product we were the number one topical rub and pain relief in GNC, just to put a perspective on it. In the case of nutrition supplements in general, so we don’t like at all being in the position where we are declining as we make change and yet as we’ve talked in a couple of quarters now, the consumer is speaking and they are changing more and more from offline to online, maybe a parallel in some ways to the brick and mortar question that Bob Labick was asking earlier and that speed is, speed of light and just fast, faster than we have generally predicted. Our systems were built for offline and frankly the group in Bethesda is very…

That’s great color. Thank you. And then last one from me. Just expanding on some of the earlier questions about the tax, could you kind of help us parse out why it was so extraordinarily low this quarter? I know you mentioned kind of one-time things versus the change in the accounting standard. How much kind of recurring accounting standard and then going forward to the extent you can comment, should we expect that 10% to 12% range to persist beyond this year or will it likely trend up?

Yes, this is Brian. The one-time items for this particular quarter were approximately $1.2 million of tax benefits related to our normal process of finalizing our tax returns in the third quarter, most of them being in the US and so, often between the returns and the accrual there is a true up and that’s what the $1.2 million represents. There is $300,000 of one-time benefits related to the change in the accounting standard and it’s tough on that one to give you numbers that you can model, because it will bounce around quite a bit depending on activity within our share-based compensation and the share price of Helen Troy stock. So, in some quarters that could be a benefit, actually in other quarters it could be an additional expense. So, it will be difficult to model that one, but for the quarter it was a $300,000 benefit and then the remainder is really due to shifts in the mix of our taxable income. If you just look at the change between Healthy Directions which was not really integrated into our tax structure and had an effective tax rate of 40%, well, that went from having income – pre-tax income in previous periods to not having any real taxable income in this quarter. So, you get the benefit from no income and not having to pay tax of 40% and then that really shifted to Hydro Flask and even more so within the Hydro Flask and our effective tax rate on Hydro Flask is very low. The intellectual property is offshore and we source offshore for Hydro Flask. Therefore, we have a very low effective tax rate there and that shift alone is worth many points of effective tax rates and that was the other big driver. On a long-term basis, I do expect a lower effective tax rate than what we’ve guided to in the past and it’s really kind of related to the shift in the mix of income. So we are not prepared to give you guidance for next year, but I would expect lower in the future.

Great. That’s really helpful. Thank you both.

You bet.

Thanks, Trevor.

[Operator Instructions] Next we will take a question from Steph Wissink from Piper Jaffray.

Thanks, good afternoon everyone. Just really have quick ones.

Hi, Steph.

Hi. I jotted down Hydro Flask food and I want to make sure I heard you correctly that you are indeed getting into the foods business. Maybe talk a little bit about that decision. And then second question related to gross margins, you had nice steady improvements here for a number of quarters, should we think about improvement going forward being consistently steady or are there quarters where you expect to see a little more versus a little less based on product mix or other drivers? And then lastly, I think, Julien, when we were together, I know your product showcase event you had talked about hoping to have some visibility at this point into some of the retailer reads or booking trends on some of the new innovations, I am wondering if you can talk a little bit about some of [Indiscernible] some of your 2017 first half and second half initiatives? Thank you.

Yes, thanks. I just want to make sure I understand the second question about the quarterly consistency, are you talking about any specific area?

Just in the gross margins, specifically as you call that out as a reason for some of the improvement in operating margins.

Gotcha. Thank you. Okay, now I understand. So let me just try to pick through these. First on Hydro Flask Food, it’s true that the Hydro Flask has some food cap products and we are excited about them and we even have some more in our pipeline. It’s also true that in the call, we were mostly focusing on the OXO Tot baby food storage products. So those are the ones that we called out specifically in the call and just as an – we only did it not because we didn’t want to talk about Hydro Flask Food, it’s because OXO Tot continues to innovate and I think the market doesn’t necessarily see all the breadth of the adjacencies that OXO is expanding into. So if you take a look at closer and thanks to the core OXO brand like metal and glass bakeware that’s well known and those are out there, I think people get that. If you look at the OXO Tot brand, it’s quietly carved out a very good spot in high chairs, for example, big, hard, good well beyond things like the bibs and plates and sippy cups and stuff that’s normally associated with OXO Tot. So we want to make sure that the marketplace understands that we have broad OXO Tot further like we did in high chairs, now into the Cubby Strollers, you saw those in New York in our new products showcase and also these food containers that we mentioned. And on the Hydro Flask Food, you are right, Hydro Flask does has food containers. It’s amazing how well they work when you put hot soup or ice cream, those are two very different things in there and you come back hours later and you open it, you will have hot soup…

Very helpful. Thanks for the color.

You bet.

And that does conclude our question-and-answer session for today. I will turn it back over to Julien Mininberg for any closing remarks.

Great. Yes, thank you very much and thanks for joining us today. We look forward to speaking with those of you who are attending the ICR Conference in Orlando next week and our fourth quarter and our fiscal year end call will be in late April, our traditional cycle and also as fitting with that time of the year, we will also be providing detailed guidance for our fiscal year 2018. So, hope you will get a lot more outlook on where we are headed next. Really appreciate it. Thank you for all the support. We are very proud of many aspects of the quarter that we just had and on the profit side. We’d like to be in a position to beat and raise that’s good on the one hand, on the other hand we are keenly aware that we need to get our core growing and we are working on it very hard. Thank you.

And that does conclude our conference for today. Thank you for your participation.