Greetings, and welcome to the Helen of Troy Limited Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Jack Jancin, Senior Vice President of Corporate Senior Development. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and welcome to Helen of Troy's Third Quarter Fiscal 2020 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 in the quarter and specific progress on our strategic initiatives. Then Mr. Brian Grass, the company's CFO, will review the financials in more detail and comment on the company's outlook for fiscal 2020. 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 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 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 to not 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 can be 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 News tab. I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack, and good afternoon to everyone. Thank you for joining us today. I'd like to wish everyone a happy new year. I look forward to a successful and prosperous 2020 for all of us. During this afternoon's call, I will discuss our third quarter results and then take the opportunity to share progress we have made on our strategic plan and in the business segments. Following my remarks, Brian will provide a deeper look into our financials, and then we'll open the line for your questions. As you saw in our earnings release this afternoon, we concluded our third quarter with excellent business momentum. We delivered strong top line and bottom line results driven by our Phase II transformation plan, which continues to drive everything we do at Helen of Troy. The results this quarter were ahead of our expectations. Consolidated core business sales grew 10.7%. Leadership Brand sales increased 10.6%, and our online channel sales grew approximately 30% to now represent 24% of total sales. International sales also demonstrated high -- healthy growth in the quarter, especially in EMEA and Asia, the international regions we are most focused on in Phase II. We increased our gross margin by 2 percentage points, expanded adjusted operating margin in all 3 business segments, and grew adjusted EPS by 30% to $3.12. Due to the strong performance this quarter, we are increasing our full fiscal year outlook for sales and EPS. I am pleased to raise our outlook even as we execute our planned incremental investments in the business and absorb higher costs to support our distribution centers as we meet the growing demand for our products. Our balance sheet remains strong with significant progress on further reducing our already low debt and a reduction in inventory during the quarter. Cash…

Thank you, Julien. Good afternoon, everyone. We are pleased with our third quarter results and to be in a position to raise our full year consolidated outlook. We achieved strong results with adjusted diluted EPS growth above our expectations, largely due to stronger-than-expected net sales in the Housewares segment. Consolidated sales revenue was $474.7 million, a 10.1% increase over the prior year, driven by strong demand in Beauty appliances and across the Housewares segment, both in the online and brick-and-mortar channels. Growth was partially offset by a slight decline in core business sales in the Health & Home segment, a decline in Personal Care within Beauty and unfavorable foreign currency. Consolidated sales in the online channel grew approximately 30% year-over-year to comprise approximately 24% of our consolidated net sales in the third quarter, and sales from our Leadership Brands grew 10.6% in the quarter. This was another strong quarter for our Housewares segment, which posted a core business increase of 28.5% on top of 11.6% core business growth in the same period last year. The segment continues to see strong demand for both the OXO and Hydro Flask brands online and in-store. Health & Home core business net sales declined slightly due to lower domestic sales driven by net retail distribution changes year-over-year and the unfavorable comparative impact from more wildfire activity in the same period last year, partially offset by growth in international. Beauty core business net sales increased 6.2% primarily due to increased demand in new product introductions and appliances, growth in the online channel and an increase in international sales. These factors were partially offset by a decline in Personal Care. Before discussing gross profit, I'd like to touch upon the impact of tariffs based on the most recent information we have available to us. As discussed…

[Operator Instructions]. Our first question today is coming from Olivia Tong from Bank of America.

First, I just want to touch on Housewares and the impressive growth there. I appreciate the color on timing of Q3 versus Q4. That's certainly very helpful. So can we talk a little bit about the pipeline because it doesn't sound like you see major factors that suggest that the trend is slowing, yet you are looking for the 2-year stack to have in Housewares [Technical Difficulty]. So maybe can you compare and contrast the growth between either same-store sales versus new distribution, the domestic versus international, the core strength versus the extensions like coolers and how much you're driving the category versus [Technical Difficulty]. Thanks.

Let me start, and Brian might have some build here. And Hi Olivia, the growth is continuing. We do expect it to moderate a bit, as Brian outlined, and you'd expect that after the pace that we've been on. The pipeline is very strong in both Hydro Flask and OXO, and I would say that the pipeline in Hydro Flask keeps getting stronger and stronger. We have done an enormous amount of work as we divisionalize the entire Housewares operation, and so the engineering oversight, the design capability, the consumer know-how, the oversight on the manufacturing, and it is just ever stronger as the Housewares division -- 2 brands come together. That's a big change even versus 1.5 years ago. The pipeline itself, if you look at the products in Hydro Flask, is significant. And in OXO, it has had a very long history of 100-plus products a year that we bring to market. So, we're not at all worried about pipeline, and we like our prospects. There are some terrific new bottle designs, shapes, lightweighting of materials, all different types of approaches that we feel strong in the core. In beyond-the-bottle stuff, there's quite a lot -- a bit of good stuff coming forward like the hydro packs that you saw, there's more things of that general nature and some new areas that we believe can continue to go beyond the bottle. And on the international and domestic side, there's still yet retailer distribution available to us. So, we are not worried about the anniversary concern. It does slow the growth rate a little bit, but we see lots of reasons why the brand should keep growing when it comes to Hydro Flask. In the case of OXO, it's been growing the whole time. So, we like our prospects in that regard. Brian, you may have some for the build.

Yes. I mean just to try and answer the question about point-of-sale versus distribution, I characterize the growth has been more about point-of-sale than distribution. We tried to give you a data point in Julien's prepared remarks that DICK's Sporting Goods is really the biggest new incremental distribution that we have, and that really -- DICK's entire growth for the quarter represented only a quarter of Housewares' growth for the quarter. So, if that's by far our biggest distribution gain year-over-year and it represents only a quarter, I think the conclusion is that the point-of-sale is driving the majority of the growth.

Yes, that's showing up in the share. I think you heard in the prepared remarks, there's not only number one in the insulated beverage bottles but by a significant margin and added significant share in the quarter. So, it's not just new distribution and new doors it sells through, and sell through at an accelerated rate relative to the category, and with no arrogance of any kind largely driving the growth of the category itself.

And just to be clear, we only called out the distribution anniversary, so to -- it is a factor in why there will be a moderation of the growth rate in the fourth quarter, because the fill-in anniversaries compared to the same period last year, so we called it out only so that you are aware of one of the things impacting the growth rate in the fourth quarter.

I think you already did the calculation because you mentioned about 10% in the fourth quarter in your question. So, you've already figured it out and that’s a very healthy rate and that's even with those factors and even with a little bit of supply constraint. And as we get into the forecasting work for fiscal '21, we'll come back in April with specific numbers at the divisional level, but we like our prospects.

Got it. That's really helpful. Can we talk a little bit about the flu season because it looks like, at least from the data that I see, that's -- good or bad, the flu season is off to a pretty strong start compared to last year and two years ago. So, to the extent that flu does come in better and the demand for your product comes in better than anticipated, how flexible are you in terms of getting product to the store whether it's brick-and-mortar or online? Have there been enough changes to make sure that there are no supply constraints, all these kinds of things?

Yes, we -- yes, should it -- so it's a great question. And it's early in the season. So we all see those projections, we see those curves and we all see the many articles even from people with MD and Ph.D and other things like that after their titles saying that it's not clear how things will pan out, how -- which strains, how effective the flu shot, it’s temperature related. It's even humidity related. There are so many variables that's kind of beyond the scope of current science to just put a number on the whole thing. As Brian mentioned in his prepared remarks, he mentioned that we're prepared to meet the demand of a stronger season if one should occur. And that is definitely the case. Some customers take product direct import, and they are largely prepared for a normal season. And if they see the sell-out going faster than they expected because of these demand curves, they will order from us, and we will replenish from a warehouse, and there's enough product there to take on a pretty decent spike. It would have to be pandemic kind of situation for us to run out. And in the case of those that just order in the natural replenishment, so they didn't take a lot of direct import or DI, you hear us sometimes say early in the season, that's what our warehouse inventory is largely there for, to fill that demand in on pretty quick timing. Especially given the fact that different markets peak, and when they peak, the people there are sick, and in terms of incidents as they will be that year, and we want to make sure there's plenty of product. And we have no interest in people getting sick, but we certainly have an interest in helping them get better. And it's important to be there for them and not have empty store shelves. So we're very focused on that.

Your next question today is coming from Linda Bolton-Weiser from D.A. Davidson.

Congratulations. So can you talk about -- I get a lot of -- tons of questions from investors about, does the underlying fundamentals that drive the demand for Hydro Flask bottles, would you say that you're experiencing a lot of growth because of this phenomenon of people having multiple bottles, it being a fashion statement, et cetera? Or is it just truly that the household penetration is rising? And can you give any numbers around household penetration or any of that to help us understand what's really driving the underlying demand?

Sure. Let me take a stab here. The Hydro Flask category itself or the metal hydration bottle category, whether it's single wall or, like Hydro Flask and some of its competitors, double wall and insulated, so this is providing -- stays hot longer, stays cold longer type of benefit. That category in general is just taking hold. So 10 years ago, people might have carried around a SIGG bottle or a plastic Nalgene bottle, CamelBak bottle, something like this and be happy, and that trend has been going on for a long time. There is an acceleration of the benefits of the insulation, bringing the hot and the cold, and there is a further very welcome reaction from consumers against single-use plastic water bottles, which are difficult from an environmental standpoint, and they demonstrate disdain in some way, almost like smoking a cigarette was back in the day for the environment and for your fellow human being. And that kind of thing, it was increasingly taboo. So there's an underlying fundamental trend in that regard. In terms of the fashion aspect and the penetration of household. Hydro Flask, I think, has done a great job getting consumers to understand that the brand itself is very authentic. It's organic. It's very real, and we don't do anything but show consumers other ways that they can benefit. So we're not pounding our chest or making it artificial in any way. It's organic. It's natural. It's grass roots. We've put a lot of money online. And we've put a lot of money into our social media and other areas to help people see this. We've been supporting Parks for All for years and years and years as a charitable benefit and really being in touch with those consumers. As the household penetration and…

Can I also just ask about the Health & Home segment? I think you maybe said in one of your comments last quarter that you did expect it would be up in the third fiscal quarter. So it was just a little off. Could you like give us a little color on whether it was the thermometer piece or another part of the business that was the part that was maybe a little worse than you expected? And I think you said something about a distribution change. Is that some distribution that you actually lost? So can you give us a little more color?

Yes. So let me go through a couple of areas. It is true that Health & Home performed slightly behind our expectations during Q3 and slightly behind the year-ago period by about 0.5 point when you take into account foreign exchange. Foreign exchange worked against Health & Home. It's a bit more international than our other segments. And so about a further 0.5 or exactly 0.6 of a percentage point was related to foreign exchange.

Well, and just to put some perspective about being below expectations, I'd say that's only about $3 million or $4 million. So yes, we did expect it to have growth in the third quarter, but the difference between what we're expecting and what we realized is really small in dollar amounts.

Yes.

Julien, go ahead.

No, I appreciate that because it dimensionalizes and it's important people understand the degree. In terms of the distribution changes, we say the word changes rather than just losses or wins because it's a net situation. We gain and lose distribution based on each season as it comes and goes. So as the, for example, heater and fan shelf, which if you go into most retailers, you'll see that it's the same stores, the same part of the shelf. The fans come on, the heaters go off. And 6 months later, the heaters go up and the fans go on. So there's line reviews of what that shelf will look like every 6 months or so, and the question of whether you gain or lose this particular SKU or that particular SKU happens all the time. So there's net changes in distribution. Sometimes you win, sometimes you lose. It also depends on your new products. It depends on the mix of products. It depends what the competitors have to offer. Pricing, tariffs, there's so many variables there.

Well, and I would just add that it can also depend on what the store is doing with their format and shelf and those types of things. So sometimes we can lose and not lose to competition necessarily in our space but lose because the store has decided to emphasize a different product category or reconfigure the shelf for the store itself. And so those changes are included in this netting concept that Julien is describing.

And so -- and the word, it's not a euphemism to say net distribution changes of loss distribution. It's simply that there are wins and losses in every season. And in this particular one, there's more losses than wins when you net it all down. And in the case of foreign exchange, we talked already. In the case of Health & Home, we've seen that year-over-year, the wildfires made a difference in Q3 of this year and last year. And you might think, hey, just a minute, there was significant wildfire this year during Q3, which is true. But you might remember that in the year-ago period, especially in the southern part of California and even also in the northern part of California, there were not only big fires, but they were in populated areas. And so you might think, oh, how many acres burned and how -- therefore, how much smoke, so how much compromise and where people might need to buy air purifiers or fans. It turns out there was a lot more in populated areas last year. So the sort of net position of wildfire to the extent that it's a seasonal effect was more last year than it was this year, it turned out. And on the international side, Health & Home not only grew, it grew nicely. And Braun did particularly well. And you heard the remarks already, I think, on China, where we see not only significant growth opportunities for China, but we had a breakthrough during Q3, which is the ability to bring the Braun thermometers on the Chinese market, both online and also off-line beyond just the cross-border exchange market, where we're already the market leader, but we've been limited to that channel only for the last couple of years. And with the China equivalent of the FDA's approval now of the product for distribution across all channels, we started getting some gains there, and we anticipate that being a meaningful building block going forward, which is why we brought it up in the call.

Our next question today is coming from Steve Marotta from CL King & Associates.

I wanted to ask a little bit about the tariff deltas, Brian, that you delineated earlier on in the prepared remarks. Were there price increases in effect in the third quarter for products that were ultimately not tariffed? And if so, what would you attribute that capture to? And how do you suspect pricing will flow, if you will, over the next quarter to two quarters to three quarters based on the likelihood of 4B not being implemented?

Well, to answer, the first part of the question there, what I would call pockets of price increases that we took when the original tariffs came out, List 1, 2 and, 3, where we have the opportunity to raise price, kind of irrespective of the tariffs. And I would say that, that was largely in the Housewares part of the business. So we took advantage of those. And changes to tariffs that could occur later, those price increases would remain in effect. However, they are not talking about rolling back, at least that I've heard or seen available in the public domain, rolling back anything on List 1, 2 or 3. The discussion that I've seen is rolling back increases on List 4A in only halfway and then 4B entirely. The tariff increases in List 4 that affect us are almost entirely in List 4B. So because 4B has -- was never even implemented, it was only discussed in the middle of December, we took no pricing action related to 4B, and we didn't really have much on the list of 4A. So I hope that answers your question. We took no price increases on List 4. We do have price increases from List 1, 2 and 3 in place, and I would say they largely match the tariffs that are still in place today. But in the case of Housewares, if they were to roll those tariffs back, we would likely keep the price increases in place because we have the opportunity to do so. Does that answer the question?

Yes. Yes, it does. I guess my follow-up question has to do a little bit with Housewares. I believe you mentioned, trying to put a fine point on it, the Hydro Flask, there was demand pull-forward this year into the third quarter from the fourth quarter. Can you talk a little bit about OXO? And was there any shifts in demand through the wholesale channel on a quarterly basis in or out of the third quarter more specific to OXO?

For OXO, I would say nothing worth calling out. I mean we have this occur from time to time in smaller amounts, and there probably was some. But I would say it's not worth mentioning.

Yes, these are -- we're getting into small strokes there. A retailer says, well, you've done a bit more in Black Friday, so I'll take that stuff a little earlier than I might have done for Christmas time because I see the promotional activity move from one period to another, and it just happens to cross the quarterly line for us by 2 weeks. It gets into kind of almost weekly chatter in the warehouse.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, thanks for joining us today. We look forward to speaking to many of you in the coming weeks and to meeting those of you who will be attending next week's ICR conference in Orlando. Beyond that, we expect to host our fourth quarter and fiscal year to date -- I'm sorry, fiscal year-end call in late April, at which time, we will also provide our outlook for FY '21. Thanks very much, and have a great evening.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.