Helen of Troy [HELE] Conference call transcript for 2021 q2
2021-07-08 12:24:06
Fiscal: 2022 q1
Operator: Greetings, and welcome to the Helen of Troy First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jack Jancin, Senior Vice President, Corporate Business Development. Thank you. You may begin.
Jack Jancin: Thank you, Operator. Good morning everyone, and welcome to Helen of Troy's first quarter fiscal '22 earnings conference call. The agenda for the call this morning is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, will comment on financial performance of the quarter and specific progress on our strategic initiatives. Then Mr. Brian Grass, the company's CFO, and Matt Osberg, the company's Senior Vice President of Corporate Finance will review the financials in more detail and comment on the company's outlook for fiscal '22. Following this, Mr. Mininberg, Mr. Grass, and Mr. Osberg will take questions you have for us today.
Julien Mininberg: Thank you, Jack. Good morning everyone, and thank you for joining us. We have a lot of areas to cover this morning. Before talking about the excellent quarter, the many strengths across the business and the outlook for the full fiscal year that we introduce today, I would like to update you on the EPA matter in our press release. I will finish my remarks with some important updates about our organization. The EPA raised concerns that packaging claims on certain products in our U.S. water and air filtration lines and a limited subset of our humidifier products are not in compliance with the EPA's strict interpretation of specific regulations. We have already addressed their concerns on the water filtration products by making modest changes to our packaging, and have resumed shipping our PUR products. We strongly believe we can likewise address the EPA's concern on air and humidification packaging, after which we will work as quickly as operationally possible to restart shipments on those as well. It is important to emphasize that the EPA has not raised any concerns on product quality, safety or performance. These are outstanding products that have served consumers well over several decades, with plenty of first-rate innovation along the way.
Brian Grass: Thank you, Julien. Good morning everyone, and thank you for joining us. I'd like to make some high-level comments before handing it over to Matt Osberg, who will review the first quarter's results and our outlook for the full fiscal year '22 in more detail. It was an excellent quarter with consolidated sales growth of almost 29%, on a basic we are almost 12% in the same period last year. Our first quarter growth benefited from robust consumer demand for our products, brick and mortar strength, international expansion, healthy levels of supply the shift and timing of Amazon prime Day and shipments that spilled into the first quarter due to Winter Storm Uri at the end of the fourth quarter. First quarter sales growth also benefited from incremental investments made in the fourth quarter of fiscal '21. By accelerating investments into the prior year, we were also able to drive greater profitability in the first quarter of this year. We expanded adjusted operating margin by 60 basis points and increased adjusted diluted EPS by over 37% on a base that grew almost 23% in the same period last year and included significant temporary cost reductions due to COVID-19. The first quarter was not without its challenges, especially the unprecedented global supply chain disruption and inflationary cost pressures. Although the EPA matter presents another challenge to overcome, we've made considerable progress towards this being a transitory event and resuming our Phase II growth trajectory. We are pleased to initiate our fiscal '22 full-year outlook after conferring last quarter to allow supply chain and cost inflation trends to more fully develop. Prior to the EPA stop shipment action, we initiated on May 27th, we were in a position to provide a fiscal '22 outlook with core net sales and adjusted diluted EPS growth off of the highly elevated base of fiscal '21, despite approximately $55 million to $60 million of estimated inflationary cost increases. Quite an accomplishment in light of the circumstances with only the estimated impact of the EPA matter holding us back from Core net sales and adjusted EPS growth. We believe this is an indication of the underlying strength of our business and the power of our diversified portfolio. Finally, Julien's announcement today regarding Matt succession into the CFO role upon my retirement on November 1st, I'd like to take a moment to congratulate Matt and express my gratitude for all that he has done to support me and the company over the last five years. His promotion into the CFO position as well deserved, and the company couldn't be in better hands. Matt, I'm really proud of you and I'm thrilled for you and your family. And with that, I'm going to hand it over to you to take us through the first quarter and fiscal '22 outlook in more detail.
Matt Osberg: Thank you, Brian. I appreciate the kind words and the tremendous support that you and many others in the organization have given you along the way. You're leaving very big shoes to fill in November, and I'm looking forward to the opportunity to continue to build on your success. I also want to thank Julien and the Board of Directors for entrusting me with this leadership role and the financial stewardship of the company and excited to be part of the global leadership team that will help the company continue its successful progress to Phase II and beyond. Before reviewing our results and outlook, I'd like to give a little more color on the EPA matter that impacted our GAAP gross profit operating income included EPS during the quarter. The stop shipment actions did not have a material impact on our first quarter sale. However, we recorded a $13.1 million charge to write-off the obsolete packaging for the impacted products and inventory on hand and in transit as of the end of the first quarter of fiscal '22. The charge was recognized and cost of goods sold and it's referred to in the earnings release as EPA compliance cost. We are implementing a number of cost control measures in Health & Home segment to offset a portion of the impact from the anticipated revenue decline. Later in my remarks regarding our fiscal '22 outlook, I will expand on how we estimate this matter will impact the rest of the fiscal year. Now, turning to our first quarter results, consolidated organic sales growth of 2.3% was driven by our Beauty and Housewares segment. Our sales benefited from higher consolidated brick and mortar sales due to the favorable comparative impact of store closures and reduced store traffic in the prior year period, an increase in international sales, higher sales in a club and closeout channels growth in online sales and the favorable impact of approximately $15 million from orders that were not able to be shipped at the end of the fourth quarter of fiscal '21 during Winter Storm Uri. The impact of these orders was roughly spread evenly across each of the segments. Those profit margins declined 1.8 percentage points in the first quarter, primarily due to higher inbound freight expense and EPA compliance costs. These items were partially offset by a more favorable product mix within the Beauty segment. Our SG&A ratio decreased 0.2 percentage points to 28.8%, because we benefited from operating leverage on higher sales, reduce royalty expense, lower amortization, and a decrease in bad debt expense. These items were partially offset by the unfavorable impact, more normalized levels of personnel and advertising expenses compared to the first quarter of fiscal '21, and levels of spending in these areas were restricted due to temporary COVID related costs reduction initiatives. GAAP operating income was $64.8 million or 12% of net sales. On an adjusted basis, operating margin improved 60 basis points to 17.5%. This increase primarily reflects more favorable product mix in the Beauty segment, operating leverage, reduce royalties spend and a decrease in bad debt expense. These factors were partially offset by higher inbound trade expense and less favorable channel mix in the Housewares segment and hire personnel and advertising expenses. Income tax expense as a percentage, because income before tax with 8%, compared to an income tax benefit of 13% for the same period last year, primarily due to the benefit of the CARES Act in fiscal '21. Net income was $57 million or $2.31 per diluted share. Non-GAAP adjusted diluted EPS increased 37.5% to $3.48. This includes the positive impact from Winter Storm Uri of approximately $0.20 per share. Now moving on to our financial position and liquidity, net cash used by operating activities was $63.4 million, compared to cash provided by operations of $92.8 million in the prior year. The change in cash flow was primarily due to continued investment in inventory to help mitigate supply chain disruption, and the timing of working capital changes. We received proceeds related to the sale of our Personal Care business of $44.7 million at the beginning of the second quarter in the intent to use the net cash proceeds to pay down debt from capital expenditures. Total short and long-term debt was $511 million, compared to $324.9 million. This is a sequential increase from the $343.6 million at the end of the fourth quarter. Our leverage ratio as defined in our debt agreement was 1.4 times, compared to 1.1 times at the same time last year, and 1.0 times at the end of the fourth quarter. Our net leverage ratio, which nets our cash and cash equivalents with our outstanding debt was 1.3 times at the end of the first quarter, compared to 0.9 times at the end of the fourth quarter. Now turning to our full-year outlook for fiscal '22, due to the sale of the majority of the Personal Care business during the second quarter of fiscal '22, and the expected continued classification of the remaining Latin America and Caribbean Personal Care business has non-core for fiscal '22. The outlook we are providing is on both a consolidated and core business basis. We believe the core outlook provides the best comparability between historical and future periods and I will therefore focus on core in my following remarks. Looking through the current estimated impact the duration of the EPA related stock shipment action previously discussed which is based on the estimated timing of approval and implementation of our compliance plan. Our outlook includes an estimated unfavorable sales revenue impact of $110 million to $135 million and an unfavorable adjusted diluted EPS impact of $0.70 to $1 related to the expected loss sales volume and earnings due to the EPA matter. The adjusted diluted EPS impact is net of the favorable impact of cost reduction actions being taken in the Health & Home segment, which includes reductions in personnel, marketing, and selecting product development costs with a goal of preserving key long-term growth initiatives. It is important to note that the vast majority of our cost reduction actions will be within the health and home segment, so that we can continue to support the expected growth in both the Beauty and Houseware segments. We incurred $13.1 million of EPA compliance costs in the first quarter of fiscal '22 in conjunction with the implementation of our compliance plans. These costs are included in our GAAP operating results are excluded from our non-GAAP adjusted operating results. We expect to incur additional EPA compliance costs, which may include costs to re-package existing inventory as well as incremental freight and storage costs, among other things. We expect to continue to exclude these costs from our non-GAAP adjusted operating results, and they have been excluded from the annual outlook for non-GAAP adjusted diluted EPS. We expect consolidated net sales revenue in the range of $1.93 billion to $1.98 billion, which implies a decline of 8% to 5.5%. We expect core net sales revenue in the range of $1.9 billion to $1.95 billion, which implies a decline of 6% to 3.5% and improved 6.7% to 5.4% of unfavorable impacts related to the EPA matter. Our net sales outlook reflects the following expectations by segment. Housewares net sales growth of 7% to 9%. Health & Home net sales decline 27% to 24% including 15.2% to 12.4% of decline related to the EPA matter. Beauty consolidated net sales growth of 4.2% to 6.3% and beauty core net sales growth of 17% to 19%. We expect consolidated GAAP diluted EPS of $6.80 to $7.49 and core diluted EPS of $6.60 to $7.28. We expect consolidated non-GAAP adjusted diluted EPS in the range of $10.46 to $10.97 and core adjusted diluted EPS in the range of $10.25 to $10.75, which excludes any EPA compliance costs, asset impairment charges, restructuring charges, capture form, share-based compensation expense, and intangible asset amortization expense. Our core adjusted diluted EPS outlook implies a decline of 7% to 2.5%, which includes 9.1% to 6.3% of impact due to the EPA matter. Not including EPA matter our outlook implies year-over-year adjusted EPS growth of 2.1% to 3.8%. Our outlook also includes year-over-year inflationary cost pressures of approximately $55 million to $60 million, or approximately $2.25 to $2.45 of adjusted diluted EPS much of which we believe we have mitigated through a combination of improved product mix, price increases, forward buying of inventory to delay cost impacts, utilizing previously negotiated shipping contracts at rates below current market prices, and implementing other cost reduction initiatives. Our consolidated and core net sales and EPS outlook reflect the following. The assumption that the severity of the cough/cold/flu season will be in line with pre-COVID historical averages, the assumption that during 2021 foreign currency exchange rates will remain constant for the remainder of the fiscal year and an estimated weighted average diluted shares outstanding of $24.4 million. We expect in reported core GAAP effective tax rate range of 12.8% to 13.8% and core adjusted effective tax rate range of 9.9% to 10.9%. This range incorporates the previously disclosed adverse impact of 1.5 to 2 percentage points due to changes in tax law impacting our Macau sourcing operation. Even though we expect the tax out plan outlined by the Biden administration to continue to evolve, I will make some comments based on the current interpretation. Although there is a proposed increase to the U.S. corporate tax rate, we are less impacted by these changes due to our lower amount of income subject to tax in U.S., which is generally 20% to 25% of our worldwide income before tax. We do not expect any of the proposed changes related to the global intangible low tax income, often referred to as guilty to have a meaningful impact on our consolidated tax expense. As many of our foreign subsidiaries are not directly or indirectly owned by a U.S. parent, and are not subject to guilty or U.S. taxation, the G7 recently announced a commitment to pursue a 15% global minimum tax. Last week the OECD gave further support for these changes and their proposals will be brought into G20 this week. If the OECD successfully gains consensus on a global minimum tax, they have discussed potential implementation of changes as early as 2023. In the event, any changes become laws that are meaningful to us that cannot be mitigated; we would expect any impacts beginning in our fiscal '24. At this stage, it is still unclear what tax liability passed and in what form as well as when they would take effect. Nevertheless, we are not expecting a meaningful impact from tax legislation changes in fiscal '22. We will continue to assess the impacts as proposed legislation is considered and provide updates in the future. We expect capital asset expenditures from $100 million to $125 million for fiscal '22, which include expected initial expenditures related to a new 2 million square foot distribution facility with state-of-the-art automation for the Houseware segment. Preliminary estimates of the total cost of the new distribution center and equipment are in the range of $200 million to $225 million spread over fiscal years '22 and '23 assuming construction and equipment costs remain at current levels. Due to the strong growth comparison and COVID related events in fiscal '21 and the timing of the estimated impacts of the shipping restrictions related to the EPA matter, we expect consolidated core net sales growth for fiscal '22 to be concentrated entirely in the first quarter of the fiscal year. We also expect core adjusted EPS growth for fiscal '22 to be concentrated in the first and fourth quarters of the fiscal year, with the second quarter being the most impacted by the shipping restrictions, as well as having the most challenging close comparison to the prior fiscal year. Although, our outlook calls for an overall net sales decline, we are proud of the results we are able to deliver in the first quarter in all three segments and are excited about the expected growth with Beauty and Houseware segments in fiscal '22. For perspective, excluding the forecasted unfavorable impact of the EPA stock shipping action, our outlook would imply 0.7% to 1.9% of core sales growth in line with our initial goal of growing from our elevated fiscal '21 base. From a core adjusted diluted EPS perspective. Although we are forecasting a decline in fiscal '22, our outlook includes unfavorable impacts of $2.95 to $3.45 related to inflationary cost pressures, and EPA matter. We expect our mitigation plans to offset much of the cost inflation. However, we do not expect to fully mitigate the estimated sales volume impact of the EPA matter through cost reductions in Health & Home, or other segments, as doing so will significantly impact the attractive longer-term growth prospects of the company. Excluding the estimated impact of the EPA matter, our outlook implies core adjusted dilutive EPS growth of 2.1% to 3.8%. As Brian mentioned, we believe that this outlook is quite an accomplishment in light of the circumstances, with only the estimated impact of the EPA matter holding us back from core net sales and adjusted EPS growth. We believe we can return to our average annual long-term growth rate targets of 2.5% to 3.5% organic sales growth and adjusted EPS growth of at least 8% in fiscal '23 and fiscal '24. If we're able to deliver our fiscal '22 outlook and return to our long-term growth rates for fiscal '23 and '24, that would equate to Phase II compound annual growth rates for sales of approximately 6% and adjusted EPS of approximately 10%, which are well ahead of the Phase II targets we first presented during our Investor Day in May 2019. In closing, despite the challenges we've seen, we believe we have a set of strategies, capabilities and competitive advantages that have allowed Helen of Troy to perform in tough times and get done. I believe we're well positioned to return to our stated long-term targets, and deliver continued value for our consumers, associates, customers, communities and shareholders during the remainder of Phase II. The foundation of our business is strong, and with our diversified portfolio, scalable operating platform and strong balance sheet, we believe we can continue to be successful, even in the most challenging external environment. And with that, I'd like to turn it back to the operator for questions.
Operator: Thank you. We'll now be conducting a question-and-answer session. Our first question is coming from the line of Bob Labick with CJS Securities. Please proceed with your questions.
Bob Labick: Good morning. And first I'd just like to start with my congratulations to Matt on the announcement of his new role starting in November, and to Brian, again on his announced retirement.
Matt Osberg: Thanks, Bob.
Brian Grass: Thanks, Bob. I appreciate it.
Bob Labick: Absolutely. So, maybe hopefully you can expand a little bit, can you tell us what claims are in question? And are these claims and the labeling issues specific to Helen of Troy or other companies having similar issues with similar products?
Julien Mininberg: Yes. Hi, Bob. Good morning. It's Julien. Yes, on your question there, it's our understanding that the EPA in recent years has had a broad inquiry on some areas of claims in their rules, and then only recently, I think in the COVID era, they have been investigating even further. We have anecdotal evidence from various sources that there are multiple companies affected, but we don't have specifics, and certainly wouldn't name them. In our case, on the claims, it depends by product. They're actually quite minor. And the reason I say this is because our products are well-labeled in water as an example. And the EPA nonetheless asked us to clarify that the Pur products don't build your microbes. With clarity, we never claimed that they did. And that has already been corrected. Nonetheless, we're going to be stickering those boxes, and those are the ones that have already resumed shipping. In the case of air purifiers, there's a combination of claims, which are accurate, but nonetheless the combination of them is by the EPA's strict interpretation of their rules, not in compliance. And we expect feedback from them shortly on that, and we'll begin the rework as well as resume shipping plans. And in the case of humidifiers, there's really just one specific group of humidifiers that's affected, and it's again, a strict interpretation of a rule that they've asked us to clarify. We have a submission into them, and we hope they'll approve it shortly.
Bob Labick: Okay, great. That's helpful. Thanks. And then, do you view this as an isolated fiscal '22 event? Do you expect this to have an impact on '23 and beyond, or how should we think about this event over medium or longer-term?
Julien Mininberg: Yes, it's a great question. And I know one or two of the other analysts have it as well. We're focused on fiscal '22. As I mentioned, we've already resumed shipping on the water purifiers, and we believe that will be isolated. It's a little too soon to how quickly all the recovery will be on air, just as we don't have the final clearance yet. In the humidifier one, I emphasize this is small. And in the case of the Air one, we hope to be able to contain it within fiscal '22 as well, and therefore be able to grow from the product recovered basis, as opposed to from the reduced base. See how that turns out on air, but it is our hope, and it's also our plan. And just for absolute clarity, I know it was mentioned more than once in our press release and on our call, but I couldn't imagine anyone walking away from this call, or hearing the recording think that there's anything at all wrong with the product, the EPA has given no indication of concern in that regard. These are outstanding products. They've been serving the consumers for years. We've been innovating all along the way. So, there's no safety, there's no reliability. This is a labeling thing.
Bob Labick: Okay, great. And then, kind of shifting gears a little bit, you've been very clear before last quarter, in the last quarter et cetera that you've been strategically using your balance sheet to increase your inventory. Obviously, you did again this quarter and mentioned it. Can you just give us a sense of how this is going to play out going forward, how much inventory would you expect at your end, where do you see working capital going forward?
Julien Mininberg: Yes, couple of things here, and Matt, may have some color on this as well. We're glad to be in a position to use our balance sheet to take advantage of the environment that we're in. So, we have increased our inventory. We did it last quarter. We did it again this quarter. It was a strategic move. And what it gets us is a couple of really big things. One is it gives us the ability to have product on hand, the demand is high. It's not the case for all our competitors. And as a result, we're in a good position. It also gives us a chance to buy ahead of some of the inflationary peaks that we're seeing put down on the record books now. I don't think anyone knows what the word "Transitory" is really going to turn out to mean. So, owning the stuff at lower costs and what's available to buy from today is helpful to us, and it's good for our customers. In terms of cash flow, it's a short-term bad, but remember, all that inventory turns into cash when it fails, and we own it already. So, it's a net positive going forward. In terms of ending inventory, it gives us an opportunity to have a lower position than where we're today, which puts us back to healthy levels. Some people on the call may have the question, "Oh boy, more inventory means bad for ROIC, and it also means risk of excess or obsolete." These are not fashion products. These are not shoes or bathing suits. These are things that don't go out of style. They don't have expiration dates. And so, temporary, and the use of balance sheet for this. The inventory should come down by the end of the year is certainly our expectation. That said, I don't think anyone call in a position to predict how long some of the supply chain disruptions will last.
Matt Osberg: Yes. And I might just add to that, Julien, I agree with everything you said, I think we'd see inventory potentially increasing in Q2, but getting down to the end of the year, like Julien talked about and maybe even getting close to where we ended in FY '21, but there's still a lot of moving parts with what's happening from global supply chain. So, definitely we view it as an asset and we expect to be able to decrease our conditions from where we are now to the end of the year.
Bob Labick: Okay, great. And then last one for me, and I'll jump back in queue. On the Houseware side, you've obviously shown tremendous growth, you've been reinvesting -- investing behind the strength, investing for growth. There's a lot of moving parts in addition with the pandemic, but using round numbers and math, over the last six quarters, due to this reinvestment for growth, margins have been in the 15% range versus the prior six quarters before that in the 21% range. And so, my question is like what's the right margin over the medium to long-term, and why, and how are you contemplating, reinvesting for incremental growth in the balance of fiscal '22 and the margin profile expected for the balance of the year?
Julien Mininberg: Matt, it would be great for you to handle that, especially on the run rate and on the investment part?
Matt Osberg: Sure, sure. Yes, good question, Bob. So, you'll remember if you're kind of looking over the past six quarters or so is the time where we kind of, we had less mix of Hydro Flask, more mix of OXO and as we look forward one of the things that we look at from an operating margin perspective and we think even with the impacts that we're seeing, we can pull the operating margins flat year-over-year in fiscal '22 kind of flattish as a company and we expect we can grow in Houseware segment and a lot of that's being driven by mix improvements and getting back more mix of Hydro Flask as well as being able to offset a lot of the costs, inflationary pressures we're seeing. So, to your point, we've also been making a lot of strategic investments there. And I think that we'll be able to get closer to where we used to run closer to the 20 than the 15. But there are some things that we want to continue to invest in that segment, a lot of DTC opportunities there, a lot more continued growth and a lot of competitive environment, especially with Hydro Flask that we want to make sure we can protect and grow what we have and I think that there'll be continued investment but opportunities to improve margins from the six quarter run rate that you're quoting.
Bob Labick: Got it. Super. All right, thank you so much.
Operator: Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions.
Rupesh Parikh: Good morning. Thanks for taking my question, and also congrats on the promotion.
Julien Mininberg: Thanks, Rupesh.
Rupesh Parikh: So, I guess first question I want to start out with is the longer-term guidance. So, the commentary for 3% organic sales growth and 8% EPS growth on average in FY '23 and FY '24. What is the earnings base, we should be thinking about the growth off of, is it off the 10.25 to 10.75 core EPS numbers, so maybe just some more clarity there in terms of how to think about the base?
Julien Mininberg: Do you like to start that one?
Matt Osberg: Yes, I'll take it Julien, and then you feel free to jump in. Yes, Rupesh good question. Right now like Julien spoke, we want to make this EPA impact transitory as possible and spoke to the maybe more short-term nature of humidification and water. But air is a little bit more uncertain at this point in terms of how we're going to resolve it and recover it. So we've done our calculation, you've heard me the prepared remarks quotes and long-term CAGR of 6% on the top line, and 10% on the bottom that was based off of the 10.25 to 10.75. But we really want to focus on FY '22 and we want to make the impacts that we're assuming now in a very dynamic situation, we're working really hard to try and make our outcome better than that. But we've got another group we're working with, and we're going to try and do the best we can to decrease the impact on that. And then once we get '22 to a place where we feel like we've got our arms around it, we definitely look for a '23 to figure out how we can build that back and make it transitory right now, the calculations we've done are on the 10.25 to 10.75. But we're trying to make that better, and be able to build on it.
Julien Mininberg: Yes, there's some indications already in the positive direction on this, because of the water purification like we said couple of times, we've started to ship already. And we're looking to accelerate the rework plan and recover there quickly as possible. The trade inventories are quite good in both of these categories actually think more or less two months worth. So consumers won't be harmed. That's our intention. And it gives us a chance to preserve distribution. In the case of water, we're less concerned, in the case of air, once we get the clarity from the EPA we will work just as fast, may take just a little bit longer on the air products, depending on what feedback we receive on those boxes are bigger and more material, more information. So we'll see how that goes. But it's our intent to do right by customers, not to harm consumers and that should help solve for what Matt's talking about which is to be able to keep this transitory and then move forward from base, it's better than the ones in the guidance. We'll see how it turns out. This is our guidance for now. And if we can do better, we'll let you know.
Rupesh Parikh: Okay, great. That's helpful color. And then just I guess a little more clarity on the guidance, so what does the guidance in terms of the timeline for shipping, the impact of air filtration and humidifiers? Does any more clarity there just in terms of how we should think about?
Julien Mininberg: Matt, please go ahead.
Matt Osberg: Yes, good question, Rupesh. So, what we've assumed as we've given high-end, low-end of the guidance, I think on the high-end of the guidance is, there is no expected shipping during the second quarter for the effective products in air, water, and humidification, and then, no expected shipping in the third quarter for the air products that are affected. The only difference than on the low-end is that all those same situations except air shipments extend into the fourth quarter. So, we've got that's really how we've kind of drawn up the high and the low-end. And like we said, we're working in a dynamic situation. We're working with EPA to try and make it better than all of those assumptions, but there's a lot of things that play here.
Rupesh Parikh: Okay, great. Thank you. I'll pass it along.
Operator: Thank you. Our next question is from the line of Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.
Anthony Lebiedzinski: Yes, good morning and thank you for taking the question. Congratulations, as well, on your promotion here. So just wanted to ask about inventory, so obviously, you touched on this a little bit, but just wanted to get a little bit more clarity. So it is up versus the year-end and versus last year? Do you think you have adequate amount of inventory for Housewares and Beauty? And also just wanted to just get maybe a little bit more specifics as to your inventory situation for the Health & Home segment? And how much of that would need to be labeled or repackaged?
Julien Mininberg: Yes. Let's just go through the segments. And there's a broader point here about growth. I'm sure you saw it in the outlook. So let me try to get my arms around this with you. Just start with the Beauty. You might remember a year ago, we were hamstrung by lack of inventory. We were pleasantly surprised by the extreme demand for the volumizer franchise, and so much so that we were going as fast as we could, even in the original days of the China reaction to Coronavirus. So think of back in the Wuhan days. And in those days, there was a lot of shutdown of supply coming out of China. In those days, we majorly ramped up as quickly as we could. Production we satisfied that last year and we had a brilliant year in Beauty despite COVID not because of it. This year with less COVID, we have much better supply because of that work. And now we've added the inventory, you've seen the result of it in the first quarter Beauty grew 79% in the first quarter, that's not so shabby. It's not only because of the inventory, but now having the product available gives us a completely unconstrained ability to meet the market demand. It also allows us to have in inventory what we need for some other products like waivers, as an example, and some of our new innovations on Drybar that are doing beautifully. So it's great to our advantage, as I mentioned, but now put a little more specificity. In the case of Housewares, we've also increased the inventory, because we created a belief and the belief that was that we could grow from the elevated base there to not just in Beauty. And you see that we're leaning into that in our forecast, projecting how Housewares grows in the high-teens for the full fiscal year. A lot of that growth has already occurred in the first quarter, actually, for both Beauty and Housewares. And we believe we have the right amount of inventory to satisfy the elevated base for last year as we go through the back nine months of our fiscal year. And that should end us with a lower total inventory than we started as Matt mentioned earlier. In the case of Health & Home, we also ramped up our production because of coronavirus, and because of the inability to meet demand. We now have that inventory. I mentioned that in the first quarter, our thermometer sales were actually flat versus year ago, which is amazing given that everybody thought that market was saturated. It was really Europe that was the biggest part of it. And at some point there is some saturation. But nevertheless, the demand is there. In air purifiers, the demand is there in a big way. And that said we're constrained at the moment, because of the EPA matter you've heard before, we're working to resolve that as quickly as possible. As it does, we'll shift into that demand. And we'll also do the same with water purifiers, which we're doing right now. So I guess we're digital sense category-by-category, and international, which is growing even faster. We don't face any of those constraints. We have the inventory, and we will meet demand.
Anthony Lebiedzinski: Got it. So, thank you very much for that, Julien. So, on your last conference call in April, you talked about having three attractive acquisition targets that you were looking at. Just wanted to see if you have an update on that, and whether this EPA issue that does that perhaps slow down your M&A activity or is that an issue?
Julien Mininberg: Yes, zero correlation between EPA and M&A. It's two completely different areas have nothing to do with each other and we are eager on the M&A front to do the right deal for the business. In the case of the three specific ones, two of them actually have slowdowns in their own processes. They've now restarted and we are they in the case of the other one that we're pursuing, we're still in talks and yet another one is surfaced. Jack, you might want to put a little more color on the M&A front.
Jack Jancin: Yes, I think I would say just overall what we're seeing is a reactive market out there. And you've been as Julien mentioned in touch with several businesses, there was that slowdown, but for us, you've seen our criteria it's got high marks and what we're looking to achieve and you know, absolutely intriguing actions that are out there right now. So we're encouraged from that standpoint. So these processes that Julien has mentioned that have restarted the diligence is predominant. And we'll continue probably through the summer and sometimes these things take through the fall, it just depends. But if they look as good from a push then we're going to be very active, if they're not, we'll continue to look to the rest of the market, but just note that we're very active out there right now.
Julien Mininberg: In one build answer, you just come full circle on it. So with regard to the EPA matter, you might think from a balance sheet standpoint, if we have more inventory, then we won't be able to afford something like this. Matt mentioned our debt levels and we've been trying to emphasize on this call that the inventory that we have is not only right, but more than saleable. So, it gets turned into cash takes down on our debt, and it gives us the opportunity to take on debt for something else that we think is a great use of shareholders capital. It's also true that our leverage level in the absolute is still low, even now. So if you're worried about firepower, I'd probably suggest that we're not worried about that.
Anthony Lebiedzinski: Okay, yes. Thank you for that and just a couple of quick questions here. So in terms of the overall supply chain issues that are out there for you and anybody else seems like have you seen any improvements since the quarter ended or is it just more of the same, just dealing with the container issues and everything else out there?
Julien Mininberg: Yes, but largely more of the same. And it's one of these things where I know the market hates uncertainty, but just for anyone who's trading, this is not our uncertainty, it's general uncertainty, which is that the market, sorry that the supply chain disruptions are still fairly consistent. So, think of what's really happening. There are container shortages. There are some COVID outbreaks at certain ports, for example, there's a well documented one in Southeast China, something uniquely to do with us. So obviously, companies like ours are rerouting some of those shipments to go to some of the Northern ports. So, think of more of a Ningbo than MPM as an example. And then when we bring them into the United States, bringing them into the ports that have the least congestion, and using those contracted rates to the spot market, which is multiples of both our contracted rates and our historical rates. So, the more that we can do the better, and so far, we've been doing fairly well as a batting average. So we're muddling through just like everyone else. I think we're doing better than most for a couple of reasons. One we got ahead of it. The other is that we have the inventory, and we get the lower prices versus today and then the last one is that, we have the price increases in the market now and so far, so good on that front. And so, I think the mitigation plans are winners. We've come a very long way since April, when we couldn't give guidance just because the situation was so every day evolving. Now we think we have not only clarity, but arms around it. And that said, I can't tell you that it's peaked or that it's over in three months or something like that, because I don't think anyone leaving us.
Anthony Lebiedzinski: Got it, okay. And your last question is, Brian you mentioned that there was, I guess some benefit from the shift of Amazon Prime Day, was there anything meaningful to call out or just trying to get more clarity about that? Thanks.
Brian Grass: Great question, Anthony. It's so good. I'm going to hand it over to Matt to answer it.
Matt Osberg: Yes, Anthony, we called it out. I would say it was one of the drivers. It wasn't one of the main drivers, but it definitely contributed. I mean like we said, the growth we had was broad based. And that was one of the drivers but I wouldn't put it in front of the list.
Julien Mininberg: I'll just add, Anthony, it was isolated mostly in Beauty. So it was really a Beauty driver, not a whole company.
Matt Osberg: It's couple of million bucks, even if you took that off the 79% you'd still be in the 70s.
Anthony Lebiedzinski: Got it, all right. Thank you, and best of luck.
Matt Osberg: Thanks.
Operator: Thank you. Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.
Linda Bolton-Weiser: Yes, hi. Thank you.
Julien Mininberg: Hi, Linda.
Linda Bolton-Weiser: So with regard to these stopping of shipments of these products, I'm just wondering, what are retailer's reactions to this because they have to fulfill their demand from their orders from some supplier so the business is shifting to somebody else? So I'm just wondering how you intend to handle getting back in with the retailers once you are able to reship and then how do you kind of combine that with the need to take price increases? Is that going to inhibit you in those categories from taking price and then my second question on the pricing too is with the tariffs, you had some pushback from retailers in some categories, and the price increases. Can you remind us what categories those were and are you anticipating similar issues as we tried pricing now or do you think the pricing is going to go a little bit smoother than it did with the tariffs? Thanks.
Julien Mininberg: Yes, good. All the questions on that, let me take them since there's three in there, I'm going to chunk them up into the three. First is this concept of getting back in with retailers, we're not out with retailers, I think I mentioned earlier, retailers have on average about two months of inventory. On Amazon today, take in Honeywell Air Purifier, and you can buy one, Walmart, the same thing with the water purifiers, especially at the brick and mortar where a lot of that sell. So this makes a huge differences, this idea of in versus out here suggesting that we've been taken out we're not, what we're trying to avoid is getting taken out. And that's where the eight weeks of inventory becomes so important. You might also think of consumer out of stocks, it's important that the consumer can buy the product, regardless of what the retailer has, we've taken a good hard look at that. Just for clarity, our data indicates that the top five customers making up more than 70% of the volume have about two months of inventory on hand now, that shelf level out of stock on average in the mid single-digits kind of varies by item and also by customer. But there's not a crisis yet in that regard because we're now shipping water again, we don't expect that crisis to materialize. In the case of air purifiers, it really depends how quickly the EPA feeds back and how quickly we can rework and start shipping again. So, as far as the back-end, I hope that helps. In terms of the reaction, it's the one that you described, retailers are concerned, and some of them are strongly concerned. And that said, as we've demonstrated our ability to move quickly with the EPA so far, those concerns has reduced. So they get what they want, and they should, they're our customers. I'd also say that the customers are sympathetic. Frankly, nobody enjoys this kind of situation. They've seen the movie too. And they're sympathetic and working with us. We have very long trusting relationships with these retailers. These are generally market leading products. We've been at this for decades, as I mentioned before, and they know us, they trust us and they know that we will do right by them. We respect their patience in that regard and are working as hard for them as fast as we possibly can. It's actually the price increases, so far, so good is my response. Our customers realize that we're in an inflationary environment, consumers have the cash and this is correct to the price for the underlying costs. And only after we ourselves do all our mitigation efforts, which we have done and we've been very clear with our customers that we have taken out our cup for sticking my hand out for price increase. So they are generally sticking, we have not seen the kind of pushback that you're mentioning. In the case of the tariff situation, it's true that in air and in water, and in just a couple of customers, there was some resistance, we worked through it in the tariff times and those price increases were accepted. There's a lot of noise in the stock market on that topic, would not have been clear at the time, and what's there now those prices were accepted, in the case of now, so far so good. That said, we are slowing down a little bit on the Health & Home increases just to work through the EPA part to make sure we've got it clear before we go back to the customers and take those prices up just to make sure that we don't pour gas on the fire.
Linda Bolton-Weiser: Okay, thanks, Julien. And then, can I just ask to just because we got some questions from investors about your, the valuation of the sale of the personal care business? It did seem rather low. I think it was 0.6 times the revenue, something like that, even for declining business that seems sort of low. What's your view on valuation there and why not just hang on to the business and allow it to generate cash for you to fund some of these other initiatives that you have going?
Julien Mininberg: Yes, let me say a little here and then I'd appreciate if Matt might add on to this and Jack may have some views just to make sure everybody's super clear. First of all, we conducted a broad market process, we actually did about a year and a half or two years ago as well and we're confident that we sold for the price that the market would pay. In terms of whether it was right to sell at this price, given the multiple comments that you make, we believe that we did this right. This is about three times EBITDA and we already harvested the fat part of the cash flow, just for perspective last five, six years, we've taken more than a quarter of a billion dollars of EBITDA, out of that business in terms of cash flow. So, this idea of harvesting out, we concur, and we've done so it's declining. And as it declines, you might look at that and say, but there's still cash left in here and the answer is yes. And the buyer recognizes that and they paid for it. So, we've received those next couple of years worth in that 3x multiple, as you fast forward three years at that rate of decline, it becomes less and less valuable to us. Also, I'd like to point out that some of the earnings that were in the base year in which we sold were at harvest levels. So, when we did normalize, we would put money back into there. And if that money went back in there versus the other alternatives we had, it would be a worse ROI and therefore not right for shareholders. My very last point is focus. I know the folks on the call are generally not the operators, but I can tell you as a 30-year operator the more you have your ability to focus on the thing that you're going to grow, the more it grows. And you've seen that in our leadership, brand focus, as those have grown beautifully. But the distraction of feeding the last bits of cash flow out of personal care is not the right use in focus standpoint.
Brian Grass: Yes, I did add maybe a little bit of color onto to what Julien said, the declines we were seeing especially in the top line, they were accelerating. And when you're looking at those kinds of products in this kind of a market, you're seeing in plated COGS, you're less able to take pricing. So even more challenges ahead and as we look at our portfolio, when you've got brands like that, that are declining, and we're trying to expand our operating margins on an annual basis, then you've got kind of that creates a hole. So, you've got a gap to fill against that margin expansion, and you're actually having to solve a couple million dollars from that could go to another segment to fuel growth there. So, getting back to what Julien said, this helps us from an overall ROI perspective, and it takes out some drag from top line and bottom line. So something that we think is going to help us reinvest back in the business, better ROI.
Julien Mininberg: Yes, and on that drag that we've published all the numbers, so you can easily do the math, there's a half-a-point or so of just pick up from the fact that you don't have to overcome the decline.
Linda Bolton-Weiser: Great, thanks. And then finally, can I just ask you, I know that you guys don't really look too much at the IRI POS data, because it's not really representative of your whole business. But nevertheless, when we look at that, it actually shows in recent weeks, quite a big decline year-over-year in most of your categories versus very strong growth in the prior-year during the COVID surge. So, how does that, I'm just trying to kind of align that with the strong sales growth that you reported in the quarter. Why is there such a difference? Is it just the Hydro Flask is making the difference and that's not in the IRI? Or is it well, replenishment of inventory at retail that really drove your sales or can you just kind of explain that a little bit?
Brian Grass: Sure, let me take a stab at this. The number that comes in my mind is 70:30 meaning about 70% of what we sell is not captured in IRI, only the 30%. So as I mentioned in the prior call, that's why we don't buy the IRI data just it doesn't crack well enough. As we rely on sources, like Nielsen for brick and mortar, NPD for broad view of a broader set of brick and mortar including sports and outdoor, which captures a bunch of the retail for Hydro Flask and we use a partner of Nielsen called Profitero for Amazon as a good tracking tool. So, it gets us much further. The other big variable in there, Linda, is international, which is in none of those databases, not IRI or any of the ones I just mentioned. And remember, international is something like 20% of our sales and growing faster than the rest of the company, even though we just put pretty big growth up on the board on a consolidated basis. So that's why there's such a mismatch in the tracking. So, when we look at the IRI data that you've published, we frankly take it and square it against the data that I just talked about and look for the differences. That's how we use that information when you publish it and our conclusions is what I just told you. In terms of the big results in Q1, you heard where it came from in the prepared remarks and brick and mortar, which is where IRI is strongest surge for us during the quarter, it did not decline. And you've heard us talk about market shares, which made a big difference. In the case of Housewares, the numbers is even lower, it's probably for IRI is probably closer to about 15%, and as a result, it misses out on most, I think of the Internet as a big one. All of international and all other things like Bed Bath & Beyond, which are a big deal. When it comes to Beauty, things like Ulta, huge customers for us are not in there. And then we sell things like Drybar in stores like Sephora, and Ulta. And the Drybar salons in fact, they make up 80% or something like that in Drybar sales. And none of that is in any of the databases that we're talking about. So that's why it's so different. So, hope that helps.
Linda Bolton-Weiser: Yes, thank you very much.
Brian Grass: Sure, yes, thanks. Appreciate it. And just please don't get the idea that somehow it's all just replenishment or something. We shift the demand and retailers generally, we purchase through demand, sometimes their inventory strategies move things around a little bit, but over the course of like a year, the retail orders in the demand generally square up pretty well.
Operator: Thank you. Our next question comes from the line of Steve Marotta with CL King. Please proceed with your question.
Steve Marotta: Good morning, Julien and Brian, Matt and Jack. Julien, two quick questions, I know we're running a little late. The first is, regarding the EPA products, can domestic packaging be repurposed for international considering that this is a domestic issue? Is that a potential solution to minimize inventory obsolescence?
Julien Mininberg: It's possible, but it's not preferred. And the reason is, because the voltage and the plugs and some of the UL type regulations or ETL overseas are different. So it's better to stop it at the manufacturer level and repurpose the internal components or the sub components towards international products at that level and that's what we've done. So, for example, air purifiers are doing beautifully in Europe, and we've diverted some of the production there to help on this matter meanwhile. On the packaging front, just for absolute clarity, no one on the call walks away with anything different, none of the products will be scrapped, there will be some old packaging that will be removed probably in the case of air purifiers or stickered over. And in the case of water purifiers, the changes are so minor that there will be zero scrap of packaging just the addition of stickers. And in the case of the inventory, it'll come down once we're able to ship again, that's already happening on Pur and we hope soon enough on the air purifier. So that'll help a ton on the inventory. We did mention in our press release, we've also been able to move some inventory with the EPA's agreement from one of our warehouses to another which will help with the congestion and help with the space to do the rework. And also make us grow faster on the rework stuff, and of course ensure safety in our warehouses meanwhile.
Steve Marotta: Excellent, thank you. And my final question, has there been a comprehensive review of other packaging across categories in an effort to minimize the risk of this occurring in the future for your current product line?
Julien Mininberg: Yes, strong yes. We've taken a hard look, I don't know how to emphasize that these are strict interpretations by the EPA of their regulations. So far, the changes have been very modest. We'll see how it turns out in the air area. But we've taken that review across all of the areas that this type of agency oversees just to make sure everything stays just where it should be.
Operator: Thank you. There are no further questions. At this time, I would like to turn the call back over to management for any closing remarks.
Julien Mininberg: Yes. Thank you, Operator, and thank you everyone for joining us today and for your continued interest in Helen of Troy. We had nothing short of a spectacular first quarter. I know nobody asked about that, but we did, and we really look forward to speaking with you, many of you in the coming days, some over the course of a couple of next couple of weeks, and we will share further progress. And if something big comes out in between, we'll tell you, but otherwise when we report our second quarter results in October. So, thank you very much, and have a great day.
Operator: Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.
