Helen of Troy Limited (HELE) Q4 2012 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Helen of Troy Fourth Quarter and Year End Conference Call for Fiscal 2012. [Operator Instructions] Our speakers for this morning's conference call are Gerald Rubin, Chairman, Chief Executive Officer and President; Thomas Benson, Senior Vice President and Chief Financial Officer; and John Boomer, Senior Vice President. I will now turn the conference over to Mr. John Boomer. Please go ahead, sir.

Good morning, everyone, and welcome to Helen of Troy's Fourth Quarter and Year End Conference Call for Fiscal 2012. The agenda for this morning's conference call is as follows: We'll have a brief forward-looking statement review followed by Mr. Rubin, who will discuss our fourth quarter and year end earnings release and related results of operations for Helen of Troy; followed by a financial review of our income statement and balance sheet for the fourth quarter and year end by Tom Benson, our Chief Financial Officer. And finally, an open question-and-answer session for those of you with any further questions. Safe Harbor. This conference call may contain certain forward-looking statements that are based on management's current expectation with respect to future events or financial performance. Generally, the words anticipates, believes, expects and other similar words identify 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 conference call over to our Chairman, Mr. Rubin, I would like to inform all interested parties that a copy of today's earnings release has been posted to our website at www.hotus.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be accessed by selecting the Investor Relations tab on our homepage and then the News tab. I will now turn the conference over to Mr. Gerald Rubin, Chairman, CEO and President of Helen of Troy.

Thank you, John, and good morning, everybody, and welcome to our fourth quarter and year end conference call. For those of you that didn't know, Bob Spear, our CIO Officer passed away this past January 25. For more than 20 years, Bob was a key member of the Helen of Troy management team, helping transform the company into the global diversified business it is today. During that time, Bob served as our Corporate Controller and eventually, as our Senior Vice President and Chief Information Officer. Over the years, those of you who worked with Bob were impressed by his many skills, his dedication and loyalty to Helen of Troy and his vast knowledge of our business. Bob always was eager to serve as a sounding board for ideas and was an effective advocate for the concerns of other employees, and we will surely miss him. We are very pleased with our record fiscal fourth quarter and record fiscal year results as reported. Fiscal year 2012 results were an important milestone for Helen of Troy, as our annual net sales revenue surpassed $1 billion for the first time to $1,181,676,000. And our net income passed $100 million for the first time to $110 million. Gross sales and net income were the best in our company's history. We continue to make progress in achieving our long-term strategic business objectives, despite the numerous challenges of a very difficult retail environment for several of our businesses. At December 30, 2011, we purchased the PUR business from the Procter & Gamble Company for $160 million in cash. The PUR business has been accretive to earnings since the acquisition, and we are very excited about the potential for long-term growth with the PUR brand. Our corporate core sales increased 2.4% for the full year after being down the prior 2 years. Our debt to EBITDA is just 2x, giving us room to do more acquisitions. We also will be introducing new products this year in all of our divisions. We expect the strength of our products, along with our powerful brands and targeted growth initiatives, will position Helen of Troy for another year of growth. For fiscal year 2013 ending February 28, 2013, we expect net sales revenue to be in the range of $1.3 billion to $1.325 billion, with earnings per share in the range of $3.80 to $3.90 per fully diluted share. At February 29, the company's balance sheet remains strong with stockholder equity up $797 million. The domestic retail environment has recently shown a small measure of improvement, and we are confident that we will continue to be an innovative market leader in serving our retail partners and consumers in the years to come. And I would like to turn this conference call over to Tom Benson, our CFO, for the financial review.

Thank you, Gerry, and good morning, everyone. In the fourth quarter, we experienced a year-over-year net sales revenue increase of $56.94 million or 24%. Gross profit margin in the fourth quarter declined by 1.9 percentage points year-over-year. Fourth quarter selling, general and administrative expense, as a percentage of net sales revenue, decreased by 1.1 percentage points compared to the same period last year. Operating income increased 22.6% year-over-year. Fourth quarter net income was $29.3 million compared to $24.4 million for the same period last year. Diluted earnings per share for the fourth quarter was $0.92 compared to $0.77 for the same period last year, an increase of 19.5%. On December 30, 2011, we completed the acquisition of the PUR Water Purification business from the Procter & Gamble Company and certain of its affiliates for a net cash purchase price of $160 million. Fourth quarter net sales revenue increased 24% year-over-year. Net sales revenue for the fourth quarter of fiscal 2012 was $294 million compared to $237.1 million in the fourth quarter of fiscal 2011. This is an increase of $56.9 million or 24%. The increase in net sales revenue reflects the impact of the PUR acquisition on December 30, 2011. One month of incremental sales from the Kaz acquisition and organic growth in the Housewares segment of 8.8%. Foreign currency fluctuations decreased sales by $876,000 for the quarter. Operating income for the fourth quarter fiscal 2012 was $36.6 million, which is 12.4% of net sales compared to $29.8 million or 12.6% of net sales in the fourth quarter of fiscal 2011. This is an increase of $6.7 million or 22.6%. The increase in operating income reflects the impact of the PUR acquisition on December 30, 2011, 1 month of incremental sales from the Kaz acquisition on December 31, 2010, and organic sales growth in the Housewares segment. Year-over-year operating income was unfavorably impacted by a sales decline in the Personal Care segment and the decline in gross profit margins due to profit cost increases. Fourth quarter net income was $29.3 million, which is 10% of net sales, compared to $24.4 million, which is 10.3% of net sales in the fourth quarter of fiscal 2011. This is a dollar increase of $4.9 million and a percentage increase of 20.2%. Diluted earnings per share for the fourth quarter of fiscal 2011 was $0.92 compared to $0.77 in the prior year fourth quarter, an increase of $0.15 or 19.5%. Fourth quarter net income and diluted earnings per share growth primarily reflects incremental operating income from the Kaz and PUR acquisitions and organic growth in the Housewares segment, partially offset by gross margin declines and higher tax expense. Now I'll provide a more detailed review of various components of our financial performance. Our Personal Care's -- I'm sorry, products in our Personal Care segment include hairdryers, straightening irons, curling irons, hairbrushes and accessories, liquid hair care and styling products, men's fragrances, antiperspirants and deodorants, foot powder, body powder and skin care products among others. Key brands in this segment include Revlon, [indiscernible], Hot Tools, Dr. Scholl's, Pro beauty tools, Toni&Guy, Brut, Ammens, Infusium 23, Pert Plus and Sure. Personal Care net sales revenue for the fourth quarter of fiscal 2011 was $109.6 million compared to $113.4 million in the prior year fourth quarter. This is a $1 decrease of $3.8 million or 3.3%. The decrease in Personal Care net sales revenue primarily reflects the continuing impact of the economy on retail sales, especially in our international markets, a disappointing new product introduction and inventory management practiced by some significant retail customers. Our Housewares segment consists of the OXO business. OXO is a leader in providing innovative consumer product tools in a variety of areas including kitchen, cleaning, storage and organization. Brands that we sell include OXO Good Grips, OXO Steel, OXO SoftWorks, OXO Touchables and OXO Tot. OXO's net sales revenue for the fourth quarter of fiscal 2012 was $59.4 million compared to $54.6 million in the prior year fourth quarter, which is an increase of $4.8 million or 8.8%. Fourth quarter sales growth was driven primarily by expansion within existing accounts and new product line introductions. For fiscal year 2012, Housewares net sales increased 9.6% year-over-year compared to sales growth of 9.2% in fiscal 2011. Our Healthcare/Home Environment segment consists of the Kaz business acquired on December 31, 2010, and the PUR business acquired on December 30, 2011. Kaz is a world leader in providing a broad range of consumer products in 2 primary product care categories consisting of Healthcare and Home Environment. Kaz markets, a number of well-recognized brands including Vicks, Braun, Febreze, Honeywell, Kaz, SmartTemp, Softheat, Duracraft, Protec, Stinger and Nosquito. PUR is 1 of 2 leading brands in the U.S. market. PUR products include faucet-mount water filtration systems and filters, pitcher system and filters and refrigerator filters. Healthcare/Home Environment net sales revenue for the fourth quarter was $125 million compared to $69.1 million in the same quarter last year, an increase of $55.9 million or 80.8%. Of this increase, $21.4 million relates to the PUR acquisition and $35.1 million relates to an incremental month of sales from the Kaz acquisition. Kaz net sales revenue for the fourth quarter fiscal 2012 was $103.6 million compared to $100.5 million in the same quarter last year, 1 month of which was prior to our acquisition of Kaz. This represents a growth of 3% on a pro forma basis as if the Kaz acquisition had occurred at the beginning of fiscal 2011. Gross profit for the fourth quarter fiscal 2012 was $23.1 million, which is 41.9% of net sales, compared to $103.8 million, which is 43.8% of net sales in the prior year fourth quarter. This is a $1 increase of $19.3 million and a percentage increase of 18.6%. Gross margin as a percent of sales decreased 1.9 percentage points year-over-year. The decline in gross profit as a percent of sales, primarily due to product cost increases in the fourth quarter dilutive impact of Kaz acquisition, which has historically operated with the lower gross profit margin than our other businesses. The overall decline was partially offset by the impact of the PUR acquisition, which is historically operated with a higher gross profit margin than our other businesses. Selling, general, administrative expense for the fourth quarter fiscal 2012 was $86.6 million, which is 29.4% of net sales, compared to $72.3 million, which is 30.5% of net sales. This is a $1 increase of $14.2 million and a percentage increase in dollars of 19.7%. As a percentage of net sales, SG&A expense declined 1.1 percentage points in fiscal 2012 compared to the fourth quarter of fiscal 2011. The year-over-year decrease in SG&A as a percentage of sales is primarily due to the full quarter impact of Kaz, which operated on lower SG&A expense as a percentage of sales for the fourth quarter of fiscal 2012 than the company's consolidated SG&A as a percentage of sales for the same period last year, and expense leverage and synergies achieved through the integration of acquired businesses into our operating structure. The overall decrease was partially offset by higher advertising and amortization expense as a percentage of sales related to the PUR acquisition. Interest expense for the fourth quarter was $3.3 million or 1.1% of net sales revenue compared to $3.3 million or 1.4% of net sales revenue in the same quarter last year. Income tax expense for the fourth quarter fiscal 2012 was $3.9 million compared to $2.2 million in the fourth quarter of fiscal 2011. Fourth quarter income tax expense was 11.9% of pretax earnings compared to 8.3% effective tax rate in the same quarter last year. The fluctuations in our effective tax rate is primarily due to the impact of Kaz and PUR on the mix of income tax and high-rate jurisdictions. I will now discuss our financial position. Our cash and cash equivalents balance was $21.8 million at February 29, 2012, compared to $27.2 million at February 28, 2011. Receivables were $195.3 million at February 29, 2012, compared to $188.4 million at February 28, 2011. Receivables turnover improved to 62.5 days at February 29, 2012 from 64.7 days at February 28, 2011. On December 15, 2011, we amended our line of credit agreement to increase the amount of borrowings available under the revolving commitment from $150 million to $250 million. Inventory at February 29, 2012, was $246.1 million compared to $217.2 million at February 28, 2011. Inventory turnover improved to 2.9x at February 29, 2012, compared to 2.7x at February 28, 2011. Stockholders equity increased $111.2 million to $796.7 million at February 29, 2012, compared to $685.5 million at February 28, 2011. I'll now turn it over to Gerry for questions.

Thank you, Tom. Operator, we're open for questions now.

[Operator Instructions] And our first question comes from Lee Giordano with Imperial Capital.

Can you talk a little bit more about the gross margin and how big of an impact the product cost increases were versus the Kaz dilution? And then how should we think about product cost increases through the remainder of the year? Are you going to be anniversary-ing higher cost from last year or should that stabilize?

Lee, this is Tom Benson. As you know, all year long, our gross profit has been impacted by the addition of Kaz. Kaz, historically, is operated on lower gross profit margins than the rest of the business. So for the full year, our gross profit margin this year is 40.5% compared to 44.9%. The majority of that change is due to the integration of Kaz. We have had price increases through our business in all the segments, that is a smaller component of it. We continue to come out with new products that give us an opportunity to set the price of those products on the cost basis. It is still a challenging sourcing environment. It has been throughout the last year. It's still continuing, but we're working very hard to come out with innovative products and work with our customers, where possible, to raise prices to reflect the increases. The PUR business does operate on a higher gross profit margin than our other businesses. That was a very small component of our sales for the fourth quarter. It was only 2 months. Going forward, that will have a positive impact on our gross profit margin. But as I mentioned, I think in one of our calls before, the PUR business does have a higher SG&A because it's a heavily-advertised business. So we're looking to improve our gross profit margins next year a little bit.

Great. And then if you could talk a little more about the Personal Care segment. What exactly was the disappointing product you highlighted? And then also, what regions, in particular when you said international, was weak? What region in particular are you seeing the most challenging environment there?

The disappointing geography was actually Europe. It's been difficult in Europe. And the new product introduction was a line of Personal Care hair dryers and curling irons in the British market. So that's what held us back from showing an increase in that division. It was not the United States.

Our next question comes from Steve Friedman with Wells Fargo Advisories.

Quick question relating to -- well, part of it was answered in the prior caller's question. You did say that most of your margin change is due to the Kaz acquisition as opposed to cost increases, would that be an accurate statement?

Yes, that's an accurate statement. The biggest portion is due to the Kaz.

Okay. Gerry, one other question. With your earnings today of $3.48 for the trailing 12 and your earnings guidance approximating $3.80 to $3.90, a little under $4 a share, can you maybe give me a little idea as to why the multiple on Helen of Troy remains around 10x, where competitors of yours are trading at 16x to 17x, such as Jordan Corporation and so forth?

Well, Steve, as you know, that I've always voiced my opinion that the Helen of Troy stock price was lower than it should be. Based on our earnings per share for this past year and for next year and our EBITDA currently and going forward, our stock should be much higher. And I'm sure that as we get more and more support for the business and we grow our businesses, and now that we've past $1 billion, I think we're going to be on more radar screens. So I think that, that's going to help it. But certainly, we are selling the multiple today.

[Operator Instructions] And we'll go next to Jason Gere with RBC Capital Markets.

It's actually Brian on for Jason. Just wanted to get some color as you look out to FY'13, if you could give some ideas to what you're looking at for growth rates for Housewares segment? And then also Personal Care, what do you think it's going to look like next year?

Well, over all this past year, we had organic growth of 2.4%. We're looking at something similar next year, but we are looking for a positive increase in our Personal Care business. OXO is doing very nicely and should follow the trend that you've seen over the next few years. And Kaz will, in the Healthcare and Home Environment segment, should show increases. So we're very positive that all 3 divisions, this coming year, will show increases.

Great. And as you mentioned with PUR coming on, on board, what are your plans for future growth in that business and what does it look like? I know it's a much larger marketing investment than some of your other businesses, what are your plans there?

Well, we've just taken over the business for the last couple of months from Procter & Gamble. And everybody's very excited about the business. And we plan to continue doing much of what P&G did in the distribution and in advertising, and we're looking to grow the business. It's a very good solid business. And as we talked the last time, P&G decided to exit the business and stay with, what I call, down-the-drain products. And this was one of their brands that they decided to divest themselves of. And I think it's going to be a very good brand. I can't give you on the phone all the things that we're going to be doing, but it is going to be a good division for us as part of the Home/Healthcare area. Water is -- purifying water is a very, very big growth area. And although we're #2, we're certainly going to strive and see if we can make it to #1 in the United States.

Brian, this is Tom Benson. We do have some new products in the pipeline that we're working on for the PUR business. It has a little bit longer lead time than some of our other business units bring products out. But we're working on some exciting products and we are going to advertise the PUR business and continue to communicate with the consumers the benefits of using water filtration. So we're very excited about the future and there'll be new things coming out, may not be in this fiscal year, but we will have exciting things coming out.

All right, great. And I was just curious, too, with the warmer winter weather that we've seemed to have this past year. Did that have any effect on the Kaz business? Kind of some other companies have mentioned the lack of flu and cold season this year, so just curious if that impacted your business at all?

That did impact our Healthcare/Home Environment. The cold -- the flu season was very light, I think, it was the lightest in 10 years, or even longer than that. There's statistics that they follow very closely. And also the warm weather, the warm weather was not only in the U.S., it was also in Europe initially for the winter season. So that did have a negative impact on our heater sales and humidifiers and things like that. So we would say it was not a good season for the Kaz business.

And just going further on that, is there anyway that you can potentially quantify that or think about what the -- if there would be a potential impact later on in fiscal '13?

Well, I don't -- I mean, basically, the sales that were missed because of the season, they're not going to be made up. Well, it'll be next season, if next season is more normal, we expect sales to improve even with the tough weather season for the products and the cough -- the cold, we still had 3% growth in the Healthcare/Home Environment. So it was positive growth, but we think that the weather did hurt us. So next year, we hope to do better.

Great. And then just one last one. Any thoughts on potential for FX impact for the coming year?

I'm sorry, I didn't...

What are your thoughts on -- right, on currency?

Next year, we have had some exposure on the pound already, and we have some Canadian dollar hedged in place. And those details are in our 10-K, there's some tables that show that. But, I mean, we are concerned, the Mexican peso, we've looked at hedging that a few times. It's a very expensive process to hedge. And so we've concluded not to do it, but that's the trading -- it's taking over 13 pesos. So that's a little bit negative. Some of the other ones, the euro's been a little bit more positive for us. So we've had some of the exposure and we're happy at where we hedged in another exposure. We continue to look at and look for opportunities to hedge it.

Our next question comes from Jeffrey Matthews with RAM Partners.

I'm wondering what you're doing on the sourcing side to deal with the rising costs?

Well, this is Gerry. We're probably doing everything that we possibly can. As you know in the past, when we come out with new products, we build on the price increases there. Any price increases that we do get, we try to increase our prices with the retailers. And so we've done everything. But our competitors are in the same boat as we are. So if our prices go up because of commodity prices or, if you will, our labor in China, it reflects with our competitors also. So we're not in the competitive disadvantage. So it...

Sure. But, I guess, I'm curious. Are you moving maybe closer to North America at all in any of your products or out of China, as an example?

We currently make Vicks products. In Vicks and Braun products in Mexico, and the PUR -- big part of the PUR retails are made in Mexico. So we're not making everything in the United States. Almost all our Idelle Lab products, the PUR, the Pert, the Sure, the Infusion 23, the Brut, those are not made offshore, either. So only the Personal Care items, basically, are made in China, for the most part.

Okay. And then in terms of where you saw some signs of improvement at the retail side, what are you seeing? I mean, I know you gained share at Wal-Mart. But outside of that, what caused you to note that? What are you seeing?

Yes. I'm very optimistic that this coming year -- we have the planograms in place that will be starting in about 2 months to several other major retailers, and it's all positive. We picked up business, more shelf space with our new products and space that our competitors had. So I'm very optimistic that at least the top customers that we have, we're going to see improvement. So again, I'm very optimistic that we're going to show sales increases and profit for the Personal Care segment coming up, starting in the second half of the year.

Okay. And then finally, could I just ask on Kaz. Looking back, what have been any major interesting surprises about that business to the plus side or the downside?

I think that the thing that we've learned that we didn't have in our other businesses is what Tom told you about. Whether it does affect the business, if it's hot, they won't buy fans. If it's cold, they won't buy heaters. The cold season is very, very important to us, not that we want people to get sick. But when the cold season does come, they do buy humidifiers and vaporizers and thermometers, which are a big part of our business. So it's not a surprise, but they had more of a seasonal business than we do and they have to worry about the weather and the cold-cough time of the year. That's what we've learned.

And if there are no further questions, I will turn the conference back to Gerald Rubin to conclude.

Thank you very much, everybody, who listened and participated in our conference call today. And we look forward to reporting to you on our results for the first quarter in a few months. Thank you again.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1 (888) 203-1112 with replay passcode 4202961. This concludes our conference call for today. Thank you all for participating, and have a nice day. All parties may now disconnect.