Good day, and welcome to the Helen of Troy Ltd. Fourth Quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jack Jancin, Senior Vice President, Corporate Business Development. You may now begin.

Good afternoon, everyone, and welcome to Helen of Troy's Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. The agenda for the call this afternoon is as follows: I'll begin with a few brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, will comment on the financial performance and key accomplishments of the quarter and then update you on areas of focus as we begin the new fiscal year. Then Mr. Brian Grass, the company CFO, will review the financials in more details and comment on the company's fiscal year '17 outlook. Following this, Mr. Mininberg and Mr. Grass will take 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 similar words identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other companies. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Mininberg, I'd like to inform all interested parties that a copy of today's earnings release has been posted to the company's website at www.hotus.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the Investor Relations tab on the company's homepage and then the News tab. I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack, and good afternoon, everybody. Well, it's hard to believe it's already been 2 years since we began our transformation of Helen of Troy, a good moment to step back and look at the performance. Since beginning our strategic plan 2 years ago, revenue has grown 17.3%, and adjusted diluted EPS is up 38.9%. Since March of 2014, we have deployed more than $800 million in capital, including 3 acquisitions and several share repurchases with a sharp eye on long-term value creation. We ended fiscal year 2016 strongly, delivering fourth quarter results ahead of expectations and reflecting the continued successful execution of our 7 key strategic priorities. During the quarter, net sales grew 2.1% despite foreign currency headwinds of approximately 1.2%. For the full year, we achieved consolidated sales growth of 7% and core sales growth of 2.8% despite a foreign currency drag of approximately 2.1%. Growth for the year was led by the Housewares and Health & Home segments, which grew 4.9% and 4.8%, respectively, year-over-year. Their growth was particularly noteworthy in the fourth quarter compared to last year's strong fourth quarter performance, with Housewares growing over an 11.9% increase and Health & Home growing over a 15.6% increase. In fiscal year 2016, Housewares revenue crossed the $300 million milestone. All the more noteworthy is it marks the 11th consecutive year of Housewares growth under our ownership. In fiscal year 2016, we increased adjusted diluted EPS by 6.8% to $6.25 while simultaneously investing in the long-term growth of our business and organizational capabilities. These investments included consumer-centric product innovation, go-to-market plans and marketing activities that strengthened our business and our brands. The transformation of our organization continued in fiscal 2016 as we implemented new initiatives, brought in new talent and continued to augment our global shared services…

Thank you, Julien. Good afternoon, everyone. Overall, our fourth quarter results were ahead of our expectations, resulting in full year adjusted diluted earnings per share of $6.25 compared to our outlook range of $5.50 to $5.85. On a full year basis, we grew consolidated sales revenue by 7%, including organic growth of 2.8% despite a foreign exchange headwind of 2.1%. We also maintained strong adjusted operating margins of 14% despite the currency drag. We used our strong cash flow and balance sheet to acquire VapoSteam, pay down our debt and repurchase a total of $100 million of stock during the fiscal year. Looking specifically at our fourth quarter, the strong results reflect the positive impact of our successful new product introductions, solid point-of-sale activity at retail as well as our tight expense control and operating efficiency. We also benefited from an improvement in foreign currency trends toward the end of the quarter compared to our expectations. During the fourth quarter, exchange rate fluctuations reduced our reported net sales revenue by approximately $4.7 million or 1.2% year-over-year. This was somewhat better than we had expected, given the strengthening of several key currencies compared to the first 3 quarters of the fiscal year. As a reminder, rule of thumb to use when thinking about the impact of foreign currency on our results is that for every dollar of fluctuation in net sales, as much as $0.50 to $0.70 can fall to operating income, depending on the mix of currencies and their relative volatility against the U.S. dollar. Before reviewing our results in more detail, I'd like to discuss recent developments in Venezuela, the impact on our financial statements in fiscal year 2016 and the expected impact in fiscal year 2017. As a result of recent changes in the Venezuela exchange system, further…

[Operator Instructions] And we'll take our next question from Bob Labick with CJS Securities.

A lot to digest in the call so far.

Yes, a lot going on.

Wanted to start with the Health & Home. Obviously, a fantastic quarter and year, particularly on the EBIT basis. Can you help us think about how we're supposed to model this going forward? I mean, in the last 2 quarters, you did better than your last -- most of your years in the past. And it's 40%-plus growth in EBIT and Health & Home this year, so close to $59 million. Do you expect to grow off of that? And what's driving this big margin expansion? I think the 14.5% margin is the best we have in our model, and that's on a weak flu season. So it's a -- that's a pleasant surprise but it's certainly difficult to model going forward. So if you could talk to the drivers there, the sustainability of these high margins and how we should think about that going forward, please.

Bob, this is Brian. I think you know, this has been a focus for us. We -- from the -- I'd say even from the beginning of the acquiring Health & Home. We felt like we can improve their operating margin, and it's being done through -- a lot through the mix, focusing on consumables, a higher margin mix. As you note -- as you'll probably note, in the guidance, we moved away from some lower-profit business in that segment, and that's an indication of the types of things that we're trying to do. And they're achieving cost savings in cost of goods sold and operating leverage. So I would say it's a combination of a lot of things that drove the improvement. And is it sustainable? I'd say the answer is yes. I think be careful with assuming too much margin expansion, but it's clearly sustainable at these levels.

Okay, that's great. And then obviously, just at the very end there, gave us the guidance for revenues by segment. And it looks like on a consolidated basis, organic growth is expected, call it, 0% to 3%, which is below the 2% to 3% that you target, and it sounds like Beauty is the culprit there. Can you talk about what you expect to change after next year or what the biggest drag is to Beauty, I guess, even excluding Venezuela it's still down 2% to 7%. And then what do you have to do to change that to get it flat and then up?

Yes, let me just make sure that we're aligned here. The -- for Beauty works, well, on a total basis, we're expecting core to decline 2.3% to growing 0.6% on a core basis [ph].

I'm giving -- I'm just ex-ing out the Venezuela stuff. I'm giving you a little credit for some of the FX that's different than we might have otherwise set, so just rounding to 0% to 3% for that.

Got you. Yes, makes sense.

Okay. Okay, and then, sorry, the second part of your question?

Sure. So assuming 0 to 3% as your organic, and typically, you said your goal is 2% to 3%, right, and then the 7% bottom line. And it looks like difference there would be Beauty is certainly a drag next year on the organic basis. Once you take out the Venezuela 5%, it's still down 2% to 7%. So the question is what's the half to getting that down 2% to 7% to -- first to flat, and then up?

Yes. Good -- thanks, Bob, and good question on the Beauty. A lot to be proud of in Beauty. As you heard on the call, quite a lot of progress made, and for the first time, in a long time, you did not hear us talk about declines in the appliance business on the Beauty side nor did we call out appliances as an area of concern for fiscal '17. So already progress. And you saw the growth, small though it was, during fiscal '16. Now looking ahead, when you take out the Venezuela effect, I think you've already done in your numbers, you'll hear us talk about 3 areas: International, Foot and Personal Care. And those are 3 areas that are creating some drag on Beauty for fiscal '17, once you take out the FX and the Venezuela change. So in the area of International, we had a new normal around the new lower exchange rates. Things have gotten a little bit better but not much compared to where we were when we first started working on the stabilization. And on the international businesses, we have some work to do to get where we need to be on stabilization. On the subject of Foot Care and Personal Care, as we've called out a couple of times in Personal Care, we are still seeing declines in that area, and we do expect them to continue in fiscal '17, even though in fiscal '16, they were offset by good news in the appliance side. As far as what to do about it, there's quite a lot going on in that area. New packaging, a bunch of new products in Personal Care, some new advertising and then a restage of one of the major Personal Care brands that's scheduled for the end of the fiscal year. And that appears to be adding some good traction with our retail partners as far as appeal for the plans that we have. So hopefully, a path forward in that regard. And on Foot Care, a tricky one. We had a very good launch through a distributor of our pedi callus buffer products, but they have not gotten enough pickup in the marketplace, and we expect a reduction there in fiscal '17. We will earn through some of that, replace some of that revenue through excess performance on the appliance side but not enough to make up the whole, whole. So that's why you see the difference there. And as far as profitability on Beauty, as we mentioned in the prepared remarks, a lot of progress on Beauty profitability, not just top line, and more of that expected in fiscal '17.

Great. One more. I'll jump back in queue after this. But just on Hydro Flask, could you talk a little bit about the seasonality of that business as we model it going forward next year? Also what tax rate we should expect that to come in at? And then finally, on that as well, I know it's obviously very early, you owning it, but talk a little bit about what you've learned so far and what you think some of the other kind of cross-selling opportunities you might have discovered you might have?

Yes, let me start, and then Brian might have some comments as well on the tax rate. So there is seasonality to Hydro Flask, and it tends to be weighted towards Q3 and Q4. A little bit of that is around the holiday season. And it's consistent with the general seasonality of our company, which also has a weighting towards the back half. On the subject of opportunities, it is very new as you call out, measured in a month or 2 now. And that said, I've been out to Bend, Oregon twice. I've met the team there. They're tremendously strong. The team has stayed with the business after the acquisition. And our Housewares team is now no longer just focused on OXO, but now on the full portfolio of indoor and outdoor between Hydro Flask and the various OXO categories. With that, we see some new categories for Hydro Flask to start looking at, so we're taking a look at those on an upstream basis. There's some cool technology there. Some international expansion opportunities. And then frankly, an absolute ton of white space in the United States, not just in terms of distribution, but from a regional basis, there's areas where Hydro Flask today is tremendously strong, but yet, not as present as it could be. So we see opportunities on distribution, and then form factor, some colors, different caps and a lot of other short-term things that are just going into the market now. So call it a good combination of distribution opportunity, short-term line extensions and then some longer-term dabbling in what it would take to be in new categories, as well as the international. I'd also like to remind that we're very pleased to see that Hydro Flask already, just with the stuff it's doing today, according to some outside market measurement data has become the #1 player in the insulated water bottles just recently, and that's new news we announced on the call for calendar year 2015. That data just came out. On the tax, I'll turn it to Brian.

Yes, so on the tax, I'm hesitant to give you an effective tax rate at this stage but I would say that we do expect tax efficiencies after a transition period of about 6 to 12 months. So we can -- you can assume a lower effective tax rate maybe towards the end of the year.

Got it. I really -- I was just trying, basically, to back into the $0.28 to $0.32. But that's fine. I can work on that offline.

I'll now take our next question from Steph Wissink with Piper Jaffray.

Just a few more housekeeping-type questions for us. If you could just start on the gross margin. If we back out the Venezuela remeasurement, it looks like you had some nice benefits there. Can you talk, Brian, a little bit about was it mix or like-for-like pricing or margin -- broadly margin improving across the product category?

I'd say mainly mix. I mean, we're working on cost savings initiatives but mix would be the biggest driver. And I failed to mention earlier that we saw a nice traction with PUR in the quarter, which drives margin significantly. So that was an additional benefit in the quarter. So I would say it's mainly mix. And we are working on pricing. We -- there's a lot of new product introductions in there. And any time we introduced some new products, we're hopefully going to improve margins over existing products that have been in the category for a while. And so better mix, new products and a little bit of cost savings.

Great. And then on the $0.45 of incremental marketing spending for 2016, can you just help us appreciate where some of that's going to be directed, whether it's by product segment or by brand, just help show strength a little bit of where that incremental capital at point?

Yes, great question. So this is part of our strategy on investing in the core. There's a broad slate of good opportunities in the company for fiscal '17 that we would like to support. Give you an example or 2, we have some new air purifiers coming out, as I mentioned on the call, and we're looking to put some support there. We're very strong in humidifiers. We're spending a bit there that we have not spent before in that category. We dabbling in testing some upside spending in a few categories that we have not supported before. And then frankly, we're also restoring funding to some marketing initiatives that we pared back as we saw things like the cold/flu erode during fiscal '16. So obviously, we put less support where there's just less demand and less incidence of sickness in the marketplace and also in places where foreign exchange get hard enough during fiscal '16 that we simply spent less as kind of, call it, good responsible management during fiscal '16. So it's a little bit of restoration. Some of it is some additional investment in new categories, like the ones I mentioned. And then there's a few categories where we're just seeing good results, and we'd like to feed the straw.

All right. Just last question for us, just on the Personal Care business. If you could talk a little bit about the contribution to your operating margin in that segment from that specific product line or product area. Curious your thoughts on the drag in that business and if it's the recoverable or was it something that you would look to potentially exit out of if it continues to be a drag?

Yes. I would say we're not -- I mean, we don't typically breakout the individual impacts of the components in that business, but as we've kind of discussed in the past, it is a high-profit margin part of the Beauty business. So sales declines do have a meaningful impact.

Yes, I'd also say in terms of prospects there, while it is still in decline, as I mentioned before, there's some new stuff that's going into the marketplace. There's good reaction from retailers on that. So the idea of pruning it out, while there may be parts over time that would go that route, it's not our intention in the short term. And in terms of the ability to make up any of that cash flow, you heard me mention in my comments to Bob that there is opportunity to grow profitability in Beauty. Personal Care is part of Beauty, so obviously, we're producing enough in other in places to balance it out. There's good guys coming out of the SKU rationalization that you heard and a few other places that are helpful to us. So overall, making progress on the profitability of Beauty despite some short-term drags coming from declines in Personal Care.

I'll now take our next question from Frank Camma with Sidoti.

Just a couple quick questions. On Housewares, the new products, where did you find more success? I know initially you had some problems with educating consumers on the small appliances, but it seems like the bakeware was doing well. Could you just comment on that? Like was it more from the bakeware? Or did you see sort of an uptick in the small appliance side?

Yes, a couple of different places. First, small appliances are improving. So that's the good news. And we've seen some improvements, especially online, by the way. So in the e-tail space, there's been some nice left there. We are doing a lot of in-store associate education, as I mentioned before. Bakeware has performed well. Glassware was just launched. So this was at very end of our fiscal year. So it's too soon to say on that one. And then some good old-fashioned kitchen gadgets and other spaces, more traditional in OXO's line have performed well. We mentioned the Hand-Held Spiralizer on the call. That was in the blow-out item for us. And then earlier in the year, we got nice lift-off the GreenSaver products. So this is where a lot of it's coming in terms of growth from new products in Housewares.

Okay. On the retailer inventory levels in Health, now there was an uptick, right, in the incidence levels at the end of the -- of your quarter a little bit, right? Does that help? Or it sounds like it doesn't because there's a drag. I don't know if you want to comment on that at all.

Yes, it does help. So we sold in, and retailers bought in to an expectation of a normal season. The season has played out slowly. We started flagging that early as soon as we saw it in our external communication. And while retailers own that inventory, and we certainly don't take it back, there was a nice uptick in incidence in the last month or so, and some of that inventory that the retailers held has since sold through. So that overhang that Brian mentioned, I think we sized it about right. It's possible it's gotten a little smaller. I guess we don't know because the retailer inventory change has been so recent, just in the early weeks of April. And then in terms of what it means, it means our ability to sell into the next season would improve slightly based on any reduction that they got from that extra lift at the end of the season.

Great. Last question I had is you mentioned how the Flint situation helped you with the water purifiers. Obviously makes sense. But there's also the fact that more and more people are catching on to sort of indoor pollution concerns. Is that going to help you on the air purifier side? Is there anything that kind of stakes out there that you can play towards?

Yes, I wouldn't make a direct correlation between water pollution and air pollution, but it is true that consumers are increasingly sensitive to some paradigms that are out there. So the first paradigm historically has been that, hey, my water's fine. And now, that paradigm has been meaningfully challenged. Badly in Flint, it went horribly wrong. But since then, there's been a lot of follow-on articles, I'm sure you've seen some of them, in places where people all believe this wouldn't happen here and my water is safe. But then independent testing demonstrated that, that was not the case. And sadly, in a lot of school-related areas and related specifically to lead, which is a big issue, as everyone, I'm sure, knows around about child brain development. And frankly, it's not -- it's a toxin for adults as well. In terms of the awareness that's high, and we are getting a benefit off of that, and we've even grow share a bit on a recent basis because we've picked up on our faucet mount business, which do remove lead. In terms of the spillover to air purification, I can't say that there's a direct relationship. I can simply say that the concept of the old paradigm of, hey, everything is fine, is not as true as it was before, as exemplified by water, but we are not seeing a direct correlation between, hey, well, it's not just the air -- sorry, the water, it's also the air. And that said, our results that you heard me talk about, air purification, yes, not only did we notch on a tenth year of share growth, we're pretty proud of that, but we are seeing the business itself grow. I just can't correlate it directly to Flint.

We'll now take our next question from Trevor Young with Jefferies.

Can you expand upon the rationalization of low-profit business embedded in the fiscal '17 guidance? Is that a certain product or brand?

Yes. Trevor, nice to meet you. I know we haven't talked directly, and thanks for the strong interest in Helen of Troy. We're thrilled and looking forward to working with you. And then on your question, you're asking about the rationalization of the low-margin business, right?

Correct.

Yes. So as part of our broader strategy to increase the efficiency of our portfolio, we're taking out a couple of businesses over time that historically have just not made much money and are not the best use of our resources or where we don't see a way forward through either major innovation or reduction in cost of goods to increase the margin to where we'd like it to be. So you heard Bob Labick asked earlier, speak earlier about the improvements in Health & Home divisions, margin profile and this area that we're talking about where we walked away from some business with a major customer and a minor category is an example of us making a tough call to take out a piece of business that didn't pass the margin or the improvement test for us and give us a nice lift in the division where, historically, we've struggled to get the margins up where we want them to be. Now seeing that margin increase and having, frankly, a little courage to walk away from something that we didn't think was right for us does have that impact, and that's why we flagged the $16 million in our revenue guidance. You also see that we did not flag it as a bullet point in our EPS guidance. It'll be a little unfair to say, hey, we walked away and it hurt us. That concept is actually the opposite, which is we walked away because it helped us.

Great. That's definitely helpful. And then longer term, is this going to be kind of an ongoing process to rationalize certain products that may be aren't large dollars and not very profitable?

Yes. I wouldn't say, hey, there's going to be like a quarterly news report of some big thing that we stopped doing. But if you back up about a year, what you'll see is in other areas where there was a bit more of that than there should be, like the Beauty appliance business, we had no problems over the last 1.5 year walking away from some pretty big chunks of business that just didn't make a dime. So you heard me say 30% SKU count reduction in the Beauty appliance business and counting. That's also spilled into some other parts of Beauty now, including parts of Personal Care. And frankly, you just heard us say that we grew in fiscal '16 in that area, albeit it had some help from Venezuela and some hurts in other places, like other foreign exchange. And my point is, by focusing on more like better and best and the SKUs that performed better, walking away from some low-margin business that we don't think we can fix and then pocketing the systemic efficiency that comes with just having fewer SKUs that do better, we're willing to do it. We've now done it in a couple of areas, and as I said, both businesses grew and became more profitable as a result of it.

And let me just make the point. We do our best to replace the SKU that we're rationalizing with a better or best version where we can. In the case of the business that we pointed out in our guidance, we weren't able to do that. But in a lot of the examples that Julien is mentioning in Beauty, we do achieve that, where we move up to a better or best model.

Yes. Just a small build on that, Trevor, just so you know, because I know you haven't been with us for so long yet, in Beauty, we had a lot of hairdryers that did not pass the "good margin, good SKU" test. We killed those off. But rather than give up the peg or just leave the retailer without great options under Revlon, we launched a pretty cool new products, like the One-Step Styler that I mentioned, and that comes at a much higher price point, the $49.99, and it also brings a much higher margin, both for us and the retailer, and then innovation under a strong brand like Revlon that consumers like. That's why it got that #1 new item sellers status. And we took out some stuff that would not pass any of those tests in order to get that space.

We'll now take our final question from Jason Gere with KeyBanc.

Just a couple of quick questions. Just kind of, I guess, jumping off of previous questions. When you think about the investments in fiscal '17, the $0.45, how does that compare in terms of what you did last year and how you think going forward, if this year can certainly be an elevated year just for taking then some opportunities? And how do you think about that level of investment in the core going forward? So that's the first question.

Yes, Jason, we -- if you remember, we guided towards about $15 million of incremental investment last year. We did not spend all of that this year. But I would say, the $0.45, which equates to about $13 million of investment, is obviously very similar to what we guided towards last year. And I would say it's probably consistent with the level of investment we would like to make on a go-forward basis as well.

Yes. Just as a reminder, Jason, some of that is restoring spending that we didn't spend, as Brian just mentioned. I talked earlier about some of the choices that we made, the most obviously example being if there's less sick people out there promoting or advertising behind products that -- for people who don't have a sickness that we help to relieve, just make less sense, so we just did less of it. And there were few others of those kinds of reductions. Some of it is restoration. And then as we're trying to get across here, there's a bunch of cool opportunities that we would like to feed. And there's, frankly, some strength in certain categories where we have momentum, as well as new products that we think are worth investing behind. And that's where the incremental portion is going.

Okay, great. And then the last question. I guess thinking about OXO On and obviously, OXO itself had a very good quarter. I was just wondering, this was kind of your -- it felt like the first real step-up in that price point. And I was just wondering if you could talk about how that met your internal expectations after the first year? And in terms of pricing, and you mentioned that would be part of a margin opportunity, but how did that resonate with your consumers and how you're thinking about pricing or taking out price and trying to going into adjacent categories going forward? What did you learn from this process?

Yes, sure. Great question. So first of all, just to unpack it a little because there's a few things in there. On the subject of OXO On, we did meet our internal expectations for its first year. And that said, when we announced its launch, we also told investors that our expectations were not very high in the beginning because we were learning our way into the category and going up against some very big players. In terms of the slowness that we saw at the sellout stage, over the holidays, we've made a lot of adjustments. I think we talked about that a lot on our last call. And as I've just mentioned to one of the prior calls or analysts, we had some uptick, actually, especially online, and we are liking what we're seeing to the point where we're investing not only in the second year, but in some in-store training and some other support to help drive OXO On. On the margin subject, I know you're asking about price points, too. Let me come to that as well. On the margin subject, please remember that OXO On actually delivers a little bit of margin compression. So while the price points are much higher than anything else that OXO sells, you're talking about $99 items, $199 items and even one of the coffee pots is at the $299 price point, there's much more margin dollars but fewer margin points because of the nature of electrics and the fact that the base business of OXO has a very high gross margin already. And then in terms of price points, those higher price points I mentioned are getting sustained by consumers, and we are seeing the products move at those. So if the test is, can OXO sell products above certain price points, the answer is turning out to be yes. And as we launched new products, I'm talking about now the glass, the borosilicate glass, which is highly differentiated versus standard glass bakeware, and now also metal bakeware, we're testing some higher price points than OXO traditionally uses and seeing consumers accept as also retailers accept them. We'll know in a while whether there's a lot of promotion or other discounting required in that category. It's very, very new. But I guess at the underlying question, can OXO support higher price point in a traditional gadget, et cetera, the answer is yes. And just as a reminder, it's ready fairly premium priced in its base categories where it's already proven it can sustain higher price points.

And we do have a follow-up question from Trevor Young with Jefferies.

I'm actually all set on questions. Sorry about that.

All right. That does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any further closing remarks.

Great. Well, thanks very much for joining us here today. I know a lot to digest in a short time, and we're looking forward to following up with you as helpful as you digest the information and as we can be helpful to you and answer your questions. As always, we appreciate the very strong interest and support for Helen of Troy. We're, frankly, very pleased with what we achieved this past fiscal year, and we look forward to reporting further progress on our business results and on the strategic initiatives that are driving them in our first quarter call, which would be in July. So thank you very much. Have a wonderful evening.

That does conclude today's conference. Thank you for your participation.