Helen Of Troy Ltd Q2 FY2022 Earnings Call

Greetings. Welcome to Helen of Troy Ltd. Second Quarter 2022 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Jack Jancin, Senior Vice President of Corporate Business Development. Thank you. You may begin.

Thank you, operator. Good morning, everyone and welcome to Helen of Troy’s Second Quarter Fiscal 2022 Earnings Conference Call. The agenda for the call this morning is as follows. I will 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. This conference call may contain certain forward-looking statements that are based on management’s current expectation with respect to future events or financial performance. Generally, the words anticipates, believes, expects and other words similar are worth 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 the 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 parties. 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 would like to inform all interested parties that a copy of today’s earnings release has been posted to the Investor Relations section of the company’s website at www.helenoftroy.com. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the Investor Relations tab on the company’s homepage and in the press releases tab. I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack. Good morning, everyone and thank you for joining us. I am looking forward to reviewing our second quarter results, providing perspective on the higher revenue and EPS outlook that we announced earlier today, updating you on our ESG progress, and discussing several important organizational topics with you. Before doing so, I want to provide a brief update on the EPA matter discussed in our first quarter call in July and in August via our investor presentation and 8-K filing. As a reminder, in July, the EPA approved modest changes to the labeling claims on our existing water filtration packaging, which we implemented and subsequently began shipping limited quantities. I am pleased to report that the shipping volume for our PUR products has continued to increase. And in September, we returned to more normalized shipping levels. In August, we communicated that the EPA had approved changes to our air filtration packaging and we began shipping limited quantities of the impacted products at the end of that month. We expect to return to a more normalized level of shipping activity for our Honeywell air filtration products by the end of our third quarter of fiscal ‘22. Today, our main message on the largely resolved EPA matter is that we have the material and labor currently needed to rework the affected inventory and are accelerating that work rapidly. We are making good progress on the millions of affected packages, putting us in a better position to serve our retail customers. We thank them for their patience and appreciate how closely they have worked with us. On PUR, we are turning the tide in the marketplace. We have made significant progress on reducing out-of-stocks and earning back market share. Third-party syndicated data shows out-of-stocks have improved by more than 30 points and market share is up by more than 10 points since mid-August. More extensive and complex rework on the air-affected purifiers is well underway and a primary focus. I would also like to thank the hundreds of Helen of Troy associates who have worked tirelessly to resolve these matters and minimize the impact to consumers, to retailers and to our business. I could not be more impressed or prouder of the way they worked through the efforts without complaint. They work together seamlessly often around the clock. This is Helen of Troy at its finest and it’s our culture in action. Now turning to our second quarter results, overall, the quarter exceeded our expectations. Our diversified portfolio once again delivered a balanced result with Housewares and Beauty both growing over major double-digit sales increases in the second quarter of last fiscal year and Health & Home declining less than we expected during the favorable resolution to the EPA matter. Our leadership brands outside of Health & Home had excellent growth, led by Drybar, Hydro Flask and Hot Tools, all of which faced headwinds in the year-ago base from the pandemic. International had solid sales in the second quarter. Turning to online sales, our 18% decline in the quarter reflects two things: first, approximately two-thirds of this decline was due to the impact of our stop-ship action as we addressed the EPA matter. Second, even though COVID remains top of mind, many consumers are returning to in-person shopping compared to the previous year when COVID-related store closures accelerated the larger trend of brick-and-mortar sales shifting online. Even with more of our sales in brick-and-mortar this quarter, online represented 22% of total sales, similar to our pre-COVID online penetration in fiscal study. We are pleased to report adjusted EPS of $2.65, which was ahead of our expectations. It reflects an expansion in gross profit margin as some of our highest-margin brands improved our mix, partially offset by more normalized levels of operating expenses versus the depressed spending level during the peak of the pandemic in the year-ago base. The adjusted EPS results also reflect our hard work to address the headwinds from widespread inflation affecting nearly all input costs such as material, labor and transportation, as well as the work done to blunt as much as possible the impact from significant levels of supply chain disruption seen across nearly every sector of the global economy. Stepping back to look at the first half of our fiscal year, we are pleased to be growing our core sales and deliver flat core adjusted EPS compared to the especially difficult comparisons in the prior year period. We achieved this despite the EPA matter and despite the significant supply chain-related headwinds. Our diversified portfolio played a major role in this where core Beauty and Housewares both grew significantly over their higher basis in the first half of last year. Taking a look at those supply chain and cost challenges, our investments in inventory earlier this year have been an important component of our mitigation plans. Higher inventory also positioned us well to meet demand and better manage supply chain disruptions. We believe having more inventory on hand ahead of our busy season in Q3 and Q4 will help us meet consumer demand and meet customer expectations in the back half of this fiscal year. We have also made good use of our pre-negotiated sea freight contracts at rates considerably lower than the current elevated spot market. As part of our mitigation plans, we began to implement price increases on certain brands, most of which became effective at the end of the second quarter. Pricing on other brands will take place in the third quarter with the benefit being realized in the second half of the year and into fiscal ‘23. We have taken a measured approach on pricing, which is designed to protect our market shares by managing key consumer price points. I’m very proud of our global operations team and of our business units, all of whom have worked diligently to contain and reduce costs, freeing up the oxygen needed to continue to invest in our growth initiatives. They, along with our associates around the world, are highly engaged, enthusiastic and dedicated to furthering our growth objectives. They are currently putting in place additional mitigation plans, including exploration of further price increases to address the inflationary pressures and the supply chain disruption that show little sign of abating in the short term. We believe that the powerful combination of containment and investment is the exact right formula to drive our growth initiatives for the balance of our Phase 2 transformation and to create incremental shareholder value. I would now like to touch on the results in our business segments for the second quarter. Housewares led the way, posting net sales growth of 6.6% on top of 20.3% growth in the second quarter of last year. Both OXO and Hydro Flask experienced solid organic growth, reflecting both domestic and international strength. OXO continues to deliver growth at key brick-and-mortar retailers. As discussed in prior calls, we believe the new and younger households penetrated during the pandemic and the consumers that have become even more familiar with OXO’s exceptional products and promise of better are sticky. OXO continues to be the market leader in many of the U.S. kitchen categories it competes in. OXO’s Good Grips and Steel lines made healthy contributions to quarterly growth, along with new products that are gaining traction with consumers. We saw strength at specialty retailers due in part to a surge in demand that was postponed during COVID. OXO domestic brick-and-mortar growth is broad based across all channels, except the cloud. OXO also earned strong growth internationally, especially in EMEA as prior investments and plans long in the works paid off with improved growth and profitability in that region. Hydro Flask also saw broad-based strength in domestic brick-and-mortar driven by retailers increasing orders to replenish from a stronger back-to-school season and support expected future demand. On top of the current acceleration in pre-holiday ordering, we are seeing healthy retailer inventory replenishment in line with the strong sell-through for those customers where we have visibility. Internationally, Hydro Flask grew even faster, primarily concentrated in Canada and Asia-Pacific. New product introductions beyond the bottle contributed to growth in the quarter as consumers pursued more outdoor activities close to home in the current COVID environment. Within our bottle line, the new colors and sizes in the fall collection gave consumers another motivation to add just one more and freshen their collection. Consumer activity for the Hydro Flask brand continues to be a strong tailwind. As one high-profile example, we were very pleased to see some of our own athletes using our popular new Hydro Flask USA bottle at the Tokyo Olympics. Turning to Beauty, the segment delivered its 11th consecutive quarter of sales growth, continuing its remarkable transformation story that began in the middle of Phase 1. Total sales were up 0.8% in the quarter, following over 34.6% growth in the second quarter of last year. On a core basis, which excludes the impact of the Personal Care business that we divested in June of this year, Beauty sales grew 13.9% in the second quarter. Our leadership brands Drybar and Hot Tools led the growth in Beauty, with strong consumer demand, evidenced by improved traffic at brick-and-mortar stores. Our focus on consumer-centric innovation and strategy of good, better, best in beauty appliances is paying off and is delivering dividends across brands, regions and channels with strong contributions from Drybar, Hot Tools, Revlon and Bed Head. Drybar is having a terrific year and making a considerable contribution to sales growth and profitability. With strong product innovation, the improvement in the brick-and-mortar channel, expanded distribution and the reopening of salons, the brand is on a strong growth trajectory. Sales in fiscal ‘22 are expected to be ahead of our pre-COVID expectations and its higher margins are contributing to our mix. We are delighting consumers with outstanding innovation that deliver noticeable benefits. Examples include the single-shot appliance, the Drybar Reserve ultra-light dryer and our Liquid Glass product line. New distribution at popular destinations like Ulta shops inside Target and new Sephora shops inside Kohl’s provide the opportunity to introduce the brand to more consumers shopping in the mass channel, while maintaining Drybar’s prestige positioning and price point. Hot Tools is also having a great year and is on track to reach record sales levels in fiscal ‘22. Our good, better, best beauty strategy is also paying off with the expansion of Hot Tools from the professional channel to also include retail. We launched Hot Tools Signature Series in 2019 to bring professional quality features and functions to a broader demographic. Signature Series has grown each year since its introduction and is achieving market share gains as it grows its awareness, presence and product lineup. Demand for our one-step volumizers and wavers remains strong. Our investment in social media and digital content continues to elevate the profile of our volumizers with existing users and to attract new ones to the franchise. One-step online reviews are now over 350,000 at an average of 4.6 stars on Amazon alone with 80% of those being 5-star reviews. The volumizer household penetration is well below conventional appliances; we believe the franchise has significant room to grow through new product innovation and expansion into new geographies and new adjacencies. One recent example is our Revlon Plus, which is arriving on shelves now ahead of the upcoming holiday season. Revlon Plus features an additional heat setting, sleeker handle and design, upgraded bristles and improved internal technology that exemplify our consumer-centric approach. Our goal is to keep delivering innovation that maintains our significant market share lead in the volumizer segment that we created. Beyond volumizers, innovation in other parts of our Beauty portfolio, such as the wavers on our Bed Head brand demonstrate that we are continuing to drive demand and share with winning on-trend products across product categories. Beauty also did well internationally, continuing its strong growth in Latin America and EMEA. With international shares and margins expanding, we are investing in the bright prospects we see for further international growth. Turning to Health & Home, sales declined by 33.1% in the second quarter primarily as a result of the voluntary stop-ship related to the EPA matter and the particularly tough comparison to the second quarter last year in which this segment grew 33% behind health-related products due to COVID. For a bit more perspective, the first 6 months of fiscal ‘22 on a 2-year stack comparison shows the total sales for Health & Home were up 10% compared to the first half of fiscal ‘20, even including the EPA matter. As the rework and shipments continue to ramp up on the affected items, we are raising our sales outlook for this segment for the remainder of this fiscal year and remain confident in its long-term prospects. During the quarter, we saw strength in several areas of the Health & Home portfolio, such as nasal aspirators, blood pressure monitors and pulse oximeters and also Honeywell products. Some retailers moved orders into the second quarter to reduce the impact of port congestion and availability constraints such as containers and trucking. We are pleased to see our prior investments in developing new Health & Home products for categories such as blood pressure, sinus and pulse oximeters now producing growth in those categories and further diversifying Health & Home into adjacent health care areas with long-term potential. In thermometers, while the overall market was lower in the second quarter compared to the high COVID base of last year, our market share rebounded sharply. Our U.S. thermometer share is now in line with pre-pandemic share levels as we saw the availability of our market-leading products that consumers prefer. This was driven by our investments to improve our supply chain and by higher inventory levels, which address out-of-stocks with retailers. Inventory in the channel is healthy in the U.S., and we are shipping in line with consumption. Moving on to international, we saw solid growth in the quarter to round out an outstanding first half. Doubling down on international is an important strategic choice in our Phase 2 strategy. Now halfway through Phase 2, we remain ahead of the glide path we outlined in our 2019 Investor Day to create at least $100 million of incremental organic sales outside of the United States by the end of fiscal ‘24. Second quarter benefited from the step-up investments made in the second half of fiscal ‘21 to support new distribution in Continental Europe and fully support our U.K. businesses and increased awareness of our brand thermometers in Asia. Beauty and Housewares led the way. We saw strength in both brick-and-mortar and online. Demand for thermometers remained strong in EMEA. Revenue and profitability for Beauty in EMEA and Latin America continue to grow sharply, and EMEA market shares are growing fast. Progress we have achieved in international markets is fuel to continue making new investments with attractive ROI intended to further accelerate growth outside of the United States. If we step back to look at the full fiscal year ‘22, we are in a position to raise our outlook today. On a core adjusted basis, at the high end of our range, our outlook indicates growth on both the top and bottom line. We are very pleased to be able to do this, considering the elevated base laid down last fiscal year and considering the significant incremental inflationary costs when considering the impact of the EPA matter. The strength of the first half and our improved outlook for the balance of the year allows us to increase our store sales expectation in all three business segments. Beauty and Housewares are both expecting to deliver healthy growth in revenue and profitability on top of the elevated base they laid down last year. Based on the favorable resolution of the EPA matter, our Health & Home outlook has also improved. While inflation remains an issue, we are pleased that this updated outlook includes continued investment in our flywheel. Looking longer term, using our past experience overcoming various headwinds such as tariffs, COVID and inflation, our global team is focused on putting together the best playbook possible to address the external challenges facing virtually all companies. As mentioned in our last call, we are actively involved in several M&A processes and remain committed to putting our strong balance sheet to work to create additional shareholder value by adding attractive new brands and providing critical mass to our flywheel. As you may have seen in a recent press release, we added a $500 million share repurchase authorization at the end of the quarter, putting us in a position to continue to opportunistically repurchase our stock from time to time. Before I wrap up my remarks, I would like to touch on our continued progress on ESG and on a few important organizational matters. We see ESG as a strategic priority for our company’s sustained success and highly consistent with our corporate purpose, which is to elevate lives and store together. This is important work, and I am pleased with the progress we are making. In June, we captured many aspects of that progress in our first published ESG report. We are pleased to see more external recognition of our ESG efforts from key stakeholders, such as customers and shareholders. In August, as part of Walmart’s Project Gigaton, which is intended to help eliminate a gigaton of CO2 emissions, this key customer recognized our Health & Home division as a Walmart Gigaton partner for the second consecutive year. Shareholders have likely seen our improved ESG scores from well-known tracking agencies such as Institutional Shareholder Services. During the second quarter, ISS acknowledged our ESG efforts by now rating Helen of Troy’s social score in the top decile of firms they compare us to, an improvement from our top 20% rating as recently as July and a sharp improvement from the bottom 20% ranking just one year ago. Our ISS environmental score has also improved markedly over the past year, now in the top 30% of companies they compare us to up from the bottom decile a year ago. On governance, ISS has consistently remained in the top decile for the past several years. Internally, our associates enthusiastically support and applaud this. As mentioned in our report, our next step is to further refine our overall ESG strategy and embed key initiatives into the broader Phase 2 strategic transformation plan that drives all that we do with Helen of Troy. As discussed in our public remarks at our Annual Meeting of Shareholders on August 25, several months ago we began actively recruiting to add a new Director to our Board. This recruitment effort has three specific goals. First is to add additional outstanding executive experience in the global consumer products industry on top of the 100-plus years already represented on the Board. Second is to add racial and ethnic diversity. And third is to add even more gender diversity. Even these goals will deliver on our broader corporate diversity, equity and inclusion initiatives as well as the Board’s independent goals. Turning now to our organization, I would like to make a few comments. Those of you who have been following our multiyear transformation know that we have been building out our organizational capability and leadership team for many years. This talented team that we have in place now and the powerful culture we have built have helped drive revenue growth of more than 40% in the last four years and adjusted EPS growth of more than 50% over that same time period. As we look at the back half of Phase 2 and our long-term trajectory, we are ready to add a Chief Operating Officer to our global leadership team to help drive the significant plans we have for the coming years. We have begun recruiting for this new position, which will report to me. We would like to have the new COO in place for the beginning of our next fiscal year. Another organizational update I’d like to share is our return-to-office plan. Taking stock of recent developments to the Delta variant, we have decided to postpone the return to office for our nonessential workers until January. We intend to implement the same hybrid model we discussed several quarters ago, which we believe provides the best balance of the proven benefits of work from home two days a week and the irreplaceable power that in-person collaboration provides during the remaining three days each week. All along, we have prioritized the health and safety of our associates, putting our people first, sticking to our principles and walking the talk on our culture. These four elements have proven to be a powerful combination during normal times as well as during the extreme circumstances of COVID-19. Before turning the call over to Brian, I wanted to again acknowledge his significant contribution to the success of our company over the past 15 years. During the transformation, his leadership, strategic thinking and outstanding stewardship of our finances have made him a key asset with business insights and friendship. As previously announced, Matt Osberg officially stepped into the CFO chair on November 1. Building on all of the strength Matt has already demonstrated in the business and in the organization over his past five years at Helen of Troy, I look forward to the many valuable contributions he will make in the CFO role as we continue through Phase 2 of our transformation and beyond. With that, I will now turn the call over to Brian.

Thank you, Julien. Good morning, everyone and thank you for joining us. I’ll make some high-level comments before handing it over to Matt, who will review the second quarter results and our revised outlook for the full fiscal year ‘22 in more detail. We are really pleased with our second quarter. We saw a number of positive trends, including strong sales and consumer demand across the Housewares and Beauty portfolios and continued expansion of our international business. The investments we made in product innovation, operating efficiencies, shared services and elevating and unifying our people are paying off. We believe they are fueling our flywheel for the remainder of fiscal ‘22 and beyond. Our Health & Home segment sales declined primarily due to disruption from the EPA matter, but we believe we are achieving the best possible outcome under the circumstances. None of it would be possible without the strength and resilience of our operations team in Northern Mississippi and its incredible leaders that I’ve had the honor of working with during my time here. I’m going to miss working with you guys but I’ll come visit soon. Although we continue to face unprecedented global supply chain disruption and inflationary cost pressures, I’m proud of the work we are doing to continue to mitigate these challenges and maintain the momentum toward our long-term growth trajectory. I’m also very pleased that we are able to improve our full fiscal ‘22 outlook due to the strong results in the second quarter and a more favorable-than-expected resolution of the EPA matter. Finally, I’d just like to say a final farewell and express my gratitude to Julien, the Board and all the talented people I’ve had the good fortune of working with, especially my good friends and mentors, Tom Benson and Vince Carson. I spent the majority of my career at Helen of Troy, and helping shape this company’s transformation has been an incredible experience that I wouldn’t trade for anything. I’m very proud of what we have accomplished, and I believe that the best is yet to come. The company is in great hands. And with that, I’m going to hand it over to Matt to take us through the second quarter and fiscal ‘22 outlook in more detail.

Thank you, Brian. Since this is our final handoff, I want to say thank you for all your hard work, financial leadership and mentoring. You will be missed, and we wish you the best of luck in your new endeavors. As we look at our results, with the sale of substantially all of the Personal Care business impacting us significantly for the quarter on a comparative basis, we believe it is useful to look at our operations on a core basis, which excludes the results of the entire Personal Care business in all periods and provides the best comparability between historical and future periods. Accordingly, I will be referencing core metrics where appropriate in my remarks today. Now, turning to our second quarter, core business net sales declined 7.6% primarily due to a decrease in sales in the Health & Home segment as a result of the EPA matter. This was partially offset by strong consumer demand and point-of-sale growth at brick-and-mortar in the Beauty and Housewares segments as well as the favorable comparative impact of COVID-19-related store closures and reduced store traffic in the prior year period. Gross profit margin increased 0.9 percentage points to 44.3% primarily due to a more favorable product mix within the Beauty segment and a favorable mix of more Housewares and Beauty sales within consolidated net sales revenue. This was partially offset by higher inbound freight expense due to rising freight rates and container supply shortages and a less favorable channel mix within the Housewares segment. Our SG&A ratio increased 5.4 percentage points to 30.1% from 24.7%. In the prior year period, we benefited from both significant operating leverage as sales grew 28% as well as lower-than-normal levels of personnel and advertising expenses as spending in these areas was restricted due to temporary COVID-related cost reduction initiatives. In the current period, we were also unfavorably impacted by higher distribution and freight expenses, unfavorable operating leverage, higher share-based compensation expense and EPA compliance costs. GAAP operating income was $67.3 million or 14.2% of net sales revenue. On an adjusted basis, operating margin declined 3.3 percentage points to 17.1% primarily due to the higher SG&A ratio in the current period. Income tax expense as a percentage of income before tax was 19.8% compared to 9.6% for the same period last year. The higher-than-usual tax rate was primarily due to shifts in the mix of taxable income in the company’s various tax jurisdictions driven by updates in the second quarter to our full year income forecast. On a year-to-date basis, our effective tax rate is a more normalized 14%, roughly in line with our full year effective tax rate outlook. Net income was $51.3 million or $2.11 per diluted share. Non-GAAP adjusted diluted EPS decreased 29.7% to $2.65 primarily due to lower adjusted operating income in the Health & Home segment and an increase in the effective tax rate and higher interest expense, partially offset by higher operating income in the Beauty segment and lower weighted average diluted shares outstanding. Looking at the first half of our fiscal year, we are very pleased with our results. On a core basis, we have been able to grow our net sales 8.9%. This is on top of growth of 22% recorded in the first half of fiscal ‘21. We have also been able to maintain core adjusted EPS compared to fiscal ‘21, which grew 50% over fiscal ‘20. We believe this is a healthy outcome given the impact of rising freight and labor costs, the lost sales and margin due to the EPA matter and the lower spending base in the first half of last year. Now moving on to our financial position and liquidity. Net cash used by operating activities for the first six months of the fiscal year was $58.3 million compared to net cash provided by operating activities of $186.3 million in the prior year. A portion of the cash used by operating activities was to increase inventory to help mitigate rising supply chain costs and purchase high-demand products ahead of the holiday season. The global supply chain remains disrupted. We are expecting some retailers to pull forward orders into our fiscal third quarter in order to ensure in-stock positions before their busiest selling season. We expect to reduce our inventory levels throughout the third and fourth quarters to end fiscal ‘22 more in line with where we ended fiscal ‘21. Cash provided by investing activities for the first six months of the fiscal year was $24 million due to the proceeds received from the sale of the Personal Care business partially offset by capital investments in land and initial construction expenditures associated with our new 2 million square foot distribution center for the Housewares segment. Total short and long-term debt was $472.2 million, a sequential decrease from $511 million at the end of the first quarter. Our leverage ratio, as defined in our debt agreement, was 1.4x, in line with the ratio at the end of the first quarter and compared to 0.9x at the same time last year. Our net leverage ratio, which nets our cash and cash equivalents with our outstanding debt, was 1.4x at the end of the second quarter compared to 1.3x at the end of the first quarter. Now turning to our full year outlook for fiscal ‘22, we are pleased to be able to increase our outlook for both sales and EPS for the fiscal year. The increase to our sales outlook reflects a combination of stronger-than-expected second quarter sales and an improvement in our sales expectations in the back half of the year. The increase to our EPS outlook largely reflects the higher-than-expected earnings in the second quarter. We expect EPS for the back half of the year to be similar to our prior expectations and reflects the favorable profit impact of higher-than-previously-expected sales in the back half of the year offset by continued increases in freight and labor costs as well as incremental marketing investments we are making to reenergize categories that were impacted by the EPA matter. Our revised outlook includes an estimated unfavorable sales revenue impact of $75 million to $100 million and an unfavorable adjusted diluted EPS impact of $0.45 to $0.75 related to the expected lost sales volume and earnings due to the EPA matter. This reflects an improvement of $35 million of sales and $0.25 of adjusted diluted EPS versus our previous outlook. 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 select new product development costs with a goal of preserving key long-term growth initiatives. We now expect consolidated net sales revenue in the range of $2.02 billion to $2.07 billion, which implies a decline of 3.5% to 1.5%. We now expect core net sales revenue in the range of $1.99 billion to $2.03 billion, which implies a decline of 1.5% at the low end of our range and growth of 0.5% at the high end of our range and includes 4.9% to 3.7% of unfavorable impact related to the EPA matter. Not including the impact of the EPA matter, our core net sales outlook implies year-over-year growth of 3.4% to 4.3%. Our updated net sales outlook for the full year reflects improvement in all three segments with the following expectations: Housewares net sales growth of 9% to 11%; Health & Home net sales decline of 20% to 18%, including 11.2% to 8.4% of declines related to the EPA matter; Beauty net sales growth of 7.5% to 9.5% and Beauty core net sales growth of 20% to 22%. We expect consolidated GAAP diluted EPS of $7.88 to $8.31 and core diluted EPS of $7.68 to $8.11. We expect consolidated non-GAAP adjusted diluted EPS in the range of $11.26 to $11.56 and core adjusted diluted EPS in the range of $11.05 to $11.35, which excludes any EPA compliance costs, asset impairment charges, restructuring charges, tax reform, share-based compensation expense and intangible asset amortization expense. Our core adjusted diluted EPS outlook implied growth of 0.2% to 2.9%, which includes 6.8% to 4.1% of unfavorable impact due to the EPA matter. Not including the EPA matter, our core adjusted diluted EPS outlook implied year-over-year growth of 7%. This EPS outlook includes the estimated unfavorable impact of the year-over-year inflationary cost pressures of approximately $60 million to $65 million or approximately $2.45 to $2.65 of adjusted diluted EPS representing an increase of $5 million from our previous outlook due to the continued inflation of freight and labor costs. We believe we have mitigated much of these costs 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 initiatives. Due to the strong growth comparison and COVID-related events in fiscal ‘21 and the timing of the estimated impact of the shipping restrictions related to the EPA matter, we continue to 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 diluted 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 EPA matter as well as having the most challenging growth comparison to the prior fiscal year. We expect a reported core GAAP effective tax rate range of 12.7% to 13.8% and a core adjusted effective tax rate range of 10.4% to 11.4%. Consistent with prior expectations, we do not expect a meaningful impact from currently proposed tax legislation changes in fiscal ‘22. We continue to expect capital asset expenditures of $100 million to $125 million for fiscal ‘22, which includes expected initial expenditures related to a new 2 million square foot distribution facility with state-of-the-art automation for the Housewares segment. We continue to expect the total cost of the new distribution center and equipment to be 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. In summary, on a core basis, excluding the impact of the EPA matter, our revised full year outlook implies net sales growth of 3.4% to 4.3% slightly ahead of our long-term growth target. Additionally, our revised full year outlook for the Housewares segment implies net sales growth of 9% to 11% on top of 13.5% growth in the prior year. Our Beauty segment core sales outlook implied net sales growth of 20% to 22% on top of 30% growth in the prior year. And although the Health & Home segment is forecasted to have a net sales decline of 20% to 18%, including the impact of the EPA matter, it grew 29.9% in the prior year. On a core basis, excluding the impact of the EPA matter, our revised full year outlook for adjusted diluted EPS had a growth of 7% on top of growth of 26.5% in fiscal ‘21. This is only slightly below our long-term growth target of 8% and includes the adverse impact of inflationary costs of approximately 22 percentage points year-over-year. Even including the adverse impact of inflationary costs and the EPA matter, we still expect to be able to maintain or slightly expand consolidated adjusted operating margin for the fiscal year. We believe that this outlook is quite an accomplishment in light of the high base in fiscal ‘21 with significantly higher input costs and the impact of the EPA matter in fiscal ‘22. In closing, I am proud of how the entire organization has rallied in the face of significant challenges to overcome temporary obstacles, make further progress on our growth strategies and set Helen of Troy up for continued success in Phase 2. We have a strong foundation of market-leading brands with a global footprint and many opportunities for growth as well as a strong balance sheet that gives us the ability to deploy capital to drive shareholder return. I believe we are well positioned to deliver continued value for our consumers, associates, customers, communities and shareholders. And with that, I’d like to turn it back to the operator for questions.

Thank you. Our first question is from Bob Labick with CJS Securities. Please proceed.

Good morning. And once again, I just want to offer congratulations to both Brian and to Matt. We’re really excited for both of you and your future endeavors.

Thanks, Bob.

Thank you, Bob. Appreciate it.

Absolutely. Great. So obviously, you gave us tons of detail. It’s appreciated. Trying to get a sense of the Q2 impact from the EPA both revenue and EPS, I guess? And then, therefore, how much is left in your – you’ve guided to the year in the back half? And if you said that already, I apologize, but I don’t think I captured the Q2 impact. And then I guess just to finish that off, do you expect any lingering impacts in fiscal ‘23 from the EPA issues? Or do you make up the hit that you took this year so you could actually get a little better growth as a result?

Yes, I can take that.

Yes, Matt, why don’t you please handle the Q2, Q3 questions, and I can give a little more color on fiscal ‘23.

Sure, Bob. And you’re right, Bob, we didn’t disclose the exact numbers. We talked that Q2 would be the major impact of the EPA matter. If you think about what we had come out with in terms of how the product categories were being impacted by the stop-ship we had during Q2, basically all of the categories were in a stop-ship and we’ve been ramping up since then. So we didn’t give exact numbers. If I had to kind of give you an overall, I’d say roughly two-thirds of the impact occurred in Q2 and maybe about one-third of the impact still lingering into Q3 as we get our air category ramped up to full shipping.

Okay. Great. That’s helpful. Yes, go ahead, Julien.

Sorry, Bob. Hi, Bob. And on the fiscal ‘23 stuff, and I think for others on the call they may all have the same question as Bob, so does the EPA thing have ongoing impact. I think our main message — and I know our main message is that we’re working very hard to make sure that we retain the long-term business. On PUR, we’re much further along simply because the EPA resolution came sooner and the changes were simpler. And in the case of PUR, we’re looking quite good. I can’t imagine that we would have long-term impacts. We always have to keep earning our business. In the case of air, it’s a bit soon to tell, and yet we’re highly optimistic. The vast majority of customers are continuing to support a key market leader that they have been doing business with for decades. We know them. They trust us. Our products are exceptional and consumers need them. So highly optimistic. And that said, it just remains to be seen until we’re consistently shipping them, and that’s going to be the most important thing for them to have confidence to maintain the long-term distribution.

Got it. Okay. That makes sense. Thank you. And then, yes, as it relates to the ability to mitigate inflation, you’ve obviously done a very good job. And you mentioned, I think, that inflationary pressures are ramping up a little bit versus even last time you spoke with us. Can you give us a sense of how much has been mitigated or how much has flowed through to the P&L? And then just talk about maybe second half impacts. And then back to the same kind of question, without quantifying it, how are you set up for fiscal ‘23 as it relates to the inflationary pressures?

Yes. I’ll maybe start on that one, Bob, and then, Julien, feel free to jump in. As we look at this year, we ended the year with good levels of inventory, and we’ve talked about that as a way to defer some of the higher costs that we were seeing as freight rates, in particular, have been increasing during the year. So there has been an impact on the first half of the year, but it will impact us more in the second half of the year. We’ve talked about the fact that we’ve put in price increases, and those price increases are largely in place now and will help offset that as we move through the second half of the year. But at a high level, I’m expecting that gross profit will be unfavorably down compared to last year in the second half of the year because we won’t be able to offset everything that’s coming with price increases. So we will see a little bit of gross profit erosion due to it. That said, we’re doing a lot of other things to try and offset the total impact for the year, but it will impact our margins in the second half.

For fiscal ‘23, the second part of your question, Bob, it’s a tough world out there every day; the front page of pretty much any business newspaper speculates on the long-term nature of the inflation, how high things go and how long they stay. So is it going to look like the lumber curve where it had a boom but also comes down? Or is it going to look more permanent? We’re assuming that the inflation is not going to be transitory, and we’re positioning ourselves accordingly. So like Matt’s talking about, the price increases are important. We are working hard in our supply chain, implementing productivity initiatives, de-risking, forward buying, and working against tariff exclusions. I think everyone on the call knows that the U.S. trade representative announced that the administration is opening another potential round of tariff exclusions; rules for that have not been set yet, so we don’t know whether we will qualify. But we will work hard to get as many of our products as possible included, especially those essential to human life like thermometers as an example and others. And in the case of the playbook, we’ve been here before. We just put more than $2.50 of costs behind us and raised our guidance. So there is some credibility, I think, in that statement. It’s not just what we’ve done with inflation. We’ve worked through tariffs when they came. We, like everybody else, worked through COVID. We’re tough. We’re not going to be beaten down by this. And so that’s our plan, and we will see how it plays out for fiscal ‘23.

Just to be clear, the $2.50 is for the full fiscal year. It’s not totally behind us in the first half of the year. That’s what we’re digesting for the full fiscal year.

Yes. Thanks, Brian. And the only point of mentioning that is not chest-pounding, but simply to say that if people on this call thought that the company could raise its guidance with $2.50 of full-year cost inflation coming at us unexpectedly during the fiscal year, people probably would not have expected that, and yet that’s what’s in today’s press release.

Got it. Okay. Thank you. And then last one, I’ll get back in queue, I promise. Obviously, Housewares had another terrific quarter and off of super high comps. The guidance for the top line is relatively flat for the second half, and there is obviously lots of puts and takes with that and, as I said really high comps. Maybe you could just talk us through the forces and the underlying growth drivers and expectations, excluding the crazy comps for Housewares going forward and where you see that once we get to kind of a more normalized level.

Yes. Happy to do so. First of all, it’s not just Housewares. It’s also Beauty on a core basis, which means excluding Personal Care; both in the base and the current and the future, Beauty grew 14 points on a core basis, and both just lifted their guidance for the full year. So to your point about Housewares going forward, it is a high base. What’s happening is a couple of things. We mentioned them in the prepared remarks, too. The basic habits that we’ve seen in the COVID year—people at home, increased home cooking and baking, kids at home doing remote schooling—these things have abated, but the stickiness of the brand has not. So once there are OXO items in the household, they tend to multiply because people recognize the excellence of the products—the grip, the design, the materials, the durability. So this is sticky. There are also other tailwinds, which is a lot of weddings were delayed from 2020 into 2021, and that frankly continues. There is also a lot more international push on our side. We mentioned in our prepared remarks that Europe is doing especially well for Housewares, and that is true. We’re projecting that to continue, and we have some meaningful initiatives now that the profitability for Housewares in Europe is greatly improved to invest into that growth and turn the flywheel against the higher ROI that we’re now getting for those investments. New products are a big driver—Housewares is a famously productive machine. And it’s not just OXO, but Hydro Flask as well. Hydro Flask is anniversarying weaker comps and is doing beautifully. It’s up strongly. We don’t disclose brand-by-brand results, but I can say it’s winning. It’s also making significant progress in our mix from a margin standpoint. It’s our second-most profitable brand behind only Drybar, so it’s good for the mix for Housewares. In terms of international expansion for Hydro Flask, that’s a big deal, as are other things we do on Hydro Flask, whether it’s beyond the bottle and new collections. This favorable trend—back-to-school—was our friend year-over-year for Housewares, especially because last year, there wasn’t any back-to-school. And kids and families being out and about more despite coronavirus still being with us is positive for Hydro Flask. So we like our plans. We also like where we stand with the major customers. And as I know you didn’t ask about Beauty, but there is a similarly positive story for Beauty being able to anniversary a past period and grow from there, and that’s also reflected in our guidance. It’s not just a volumizer story. We’re doing well in the wavers. We’re doing beautifully in EMEA and also in Latin America. In Beauty, Canada is also going well. So it gives us a lot to invest into. There is a ton of new products coming out in Beauty like the Revlon Plus and the new Drybar products that I mentioned. All of these things are positive for Beauty too.

Super. Okay. Thank you very much.

Our next question is from Rupesh Parikh with Oppenheimer & Company. Please proceed.

Good morning. Thanks for taking my question. So I guess just going back to commentary that you guys said in the last call about delivering that 2.5% to 3.5% organic sales growth and adjusted EPS growth of at least 8% the next two fiscal years on average. Given now that you have a higher base since you raised guidance, do you still feel comfortable with those targets? And I know there is also more cost pressures out there. So I’m not sure if you can provide any updated thoughts there?

This is for the next two fiscal years, right, Rupesh? Yes, it’s certainly our goal. We did commit to it in our Phase 2 plans, and we are not moving off of those commitments. That said, the hill to climb to get through the cost inflation that we were just talking about has gotten higher. I am actually not only talking about this fiscal year. Remember, as higher costs flow through COGS, they flow into future periods, and that causes the inflation to persist even if prices come down in the short-term. So there are challenges out there. If prices persist in the short-term, it just makes the hill higher to climb. That said, higher prices, if we raise our prices further, are good for our top line. So it helps to do some of the offset, and yet we are consumer-centric. We are extremely sensitive to the needs of our consumers, to price points, and competition. We will find the right balance. On top of organic growth, our balance sheet gives us flexibility to pursue acquisitions. We are 1.4x leverage and there is room to execute M&A. We signaled that we are involved in several acquisition prospects, and we will see how those land. That’s above and beyond the base case, but it gives us a chance to find ways to grow regardless.

Okay, great. And then I guess now we are moving further past the stimulus or the significant stimulus that you have seen earlier this year. And I know one of the retailers out there called out some challenges. I was just curious, as you guys look at your business, as we move past the stimulus, have you seen any notable changes in consumer behavior?

Not yet. People are returning to the workforce in general, although slower than everybody expected. Even after extended unemployment benefits ended, people remain concerned about coronavirus and there is a lot of shifting going on. This creates some churn in the employment base. Our belief is the economy will continue to generate net jobs, which is positive. Wages are higher and wage inflation is higher than goods inflation in some cases, so some consumers have more money in their pockets. Taxes have not been raised yet, although Washington is discussing changes. We are concerned that future policy actions could reduce consumer spending. Meanwhile, we will continue to provide value to consumers with differentiated products, which has been our playbook for 50 years. In terms of attacking costs, we will continue the playbook of forward buying, productivity initiatives, pricing, and supply chain actions until the inflationary pressures moderate.

And Rupesh, maybe one thing I would add on that. You asked about consumer behavior. I think you’ve seen a macro trend where, with the supply chain disruption persisting, retailers are making larger bets and buying earlier to ensure in-stock positions heading into the holiday season. We talked about this in our prepared remarks. That behavior could impact the timing of revenue in our Q3 and Q4 as retailers pull forward orders, and the sell-through during the holiday season will determine final outcomes.

Okay, great. That’s really helpful color. And then maybe just one last one: as you look to next fiscal year, given the accelerating cost items and pricing actions, is it your view that you have enough levers to expand operating margins next year or is it too early at this point to say?

I think it’s too early. We are just laying out guidance for fiscal ‘22. We are not yet giving guidance other than the broad long-term strokes for fiscal ‘23 and ‘24. We acknowledge the headwinds are present, but we have no intention of being stopped by them. Our key priority in an environment like this is to keep the flywheel turning, which requires continuing to invest in initiatives that drive higher gross margin and top-line growth. Whether we can expand margins next year depends on how inflation and consumer demand evolve and we will continue to work the playbook.

Okay, great. Thank you.

Our next question is from Anthony Lebiedzinski with Sidoti & Company. Please proceed.

Good morning. Thank you for taking the questions. Hi Julien and it’s been nice working with you, Brian, and best of luck going forward and look forward to working with you, Matt. So yes, just have a few questions. You guys talked about price increases. Can you give us an expectation as to the level of price increases that you have taken and plan to do? Basically so we can have a better understanding as far as the guidance for the back half of the year for sales in terms of pricing versus volumes?

In terms of price increases we have already taken, I would feel comfortable speaking about those, but for competitive reasons I would not feel comfortable committing to the size of future increases. The increases we have already implemented vary by brand, product, channel and competitive situation, but are generally in the mid- to high-single digits, and in some cases into the low-double digits. It varies by product and retail price point. These increases have held. It’s a difficult conversation with trade customers, but often preferable to out-of-stocks for key market-leading brands. For future increases, we’ll see how consumer pressure and the competitive environment evolve. We will balance protecting margins with maintaining accessibility for consumers.

Okay. Thanks for that color. In terms of the EPA impacted products, what has been the recent sell-through at retail? I know you gave some comments about PUR. Is it safe to say PUR has seen better sell-through than some of the others? Any additional color would be helpful.

This is an important question. If the trade had less inventory because we had low shipments or no shipments during the stop-ship period, replacing product on shelves is not instantaneous. It requires store-by-store work. As I noted in my prepared remarks, we have materially reduced out-of-stocks for PUR in the last six weeks and the trade customers have been phenomenal working with us. They want their shelves full; we want our products available; consumers prefer our products. For PUR specifically, out-of-stocks improved significantly and market share has increased by about 10 points in the six weeks since our August announcement. Air is behind PUR in timing: the rework is more complex and is happening now. We are talking about more than four million pieces of rework between water and air. This is a large task, but our teams are making significant progress. The customers have been patient, and we are investing to ensure we are top-of-mind as products return to shelves.

Got it. Okay. And then in terms of the guidance, the EPA compliance costs that you have for the second half of the year, is that all in the third quarter, or will any of that spill over into the fourth quarter?

There will be costs in the back half of the year. As Julien mentioned, there are more than four million pieces to rework, and we expect those costs to be incurred in Q3 and into Q4 as we work through those units. So the expense will span both quarters.

Got it. Okay. And then lastly, as far as the tax rate, I know you gave us guidance for this fiscal year. Beyond fiscal ‘22, excluding any potential impact from legislative changes, how should we think about tax rates for fiscal ‘23 and beyond?

Excluding any legislative changes, you should assume a very consistent tax rate into next year similar to our current outlook. The big drivers would be changes in the law in Washington or international tax changes, which would be the primary causes for a different rate in future periods.

Got it. Alright. Well, thank you very much and best of luck going forward.

Thank you.

Thank you, Anthony.

Our next question is from Linda Bolton-Weiser with D.A. Davidson. Please proceed.

Yes. Hi, how are you?

Hi, Linda, nice to hear from you.

I guess what I am a little bit interested in is in the Health & Home segment. You didn’t quantify exactly the impact of the EPA issue, but it looks like if you excluded that, it still looks like organic sales were kind of down. You had a very hard comparison, but the comparison remains really hard in the next quarter, too. So I am just trying to get a sense for kind of whether you are growing or not against these hard comparisons. And on the thermometers, I think you said last quarter, thermometer sales were flat, but you said they were down this quarter. So I guess I am wondering what changed in thermometers and also on the thermometers, POS data actually shows — and I know it doesn’t tell the whole story — that POS is actually growing really well for you in thermometers. So I am just wondering what’s the disconnect between your sell-in and maybe POS being stronger, or can you explain what’s going on with thermometers? Thank you.

Sure. Let’s start with thermometers. The overall category has been down in recent months from the COVID peak. Our sales have held up reasonably well; they are down in the U.S. but not nearly as much as the category, so our market share has rebounded sharply. You will see that in IRI data and our prepared remarks. Regarding any apparent disconnect between POS and sell-in, short-term differences can happen due to timing—retailers managing inventories, pulled-forward orders, and differences in where inventory is sitting. We recommend looking at our full-year guidance and the disclosures in our release, including our 2-year stack comparisons, to see the full picture. On a two-year stack basis, Health & Home is up roughly 10% compared to pre-COVID levels so far this fiscal year. For the full year, our guidance outlines the expected net sales decline and the portion attributable to the EPA matter, so you can reconcile how Health & Home will perform year-over-year excluding the EPA impact.

Linda, to add to Julien’s comments, in our earnings release we included some new tables showing consolidated core and non-core business results excluding the impact of the EPA matter. We also added 2-year stack tables in the executive summary to help with perspective. We thought those would be helpful given the moving parts, including the divestiture of Personal Care. In terms of Health & Home, we expect that segment to be down 20% to 18% for the year, which includes 11.2% to 8.4% of declines related to the EPA matter. So excluding the EPA, Health & Home remains down double digits for the year, reflecting the very strong prior-year base.

Okay. Thank you. And then trying to follow up with a question on the Beauty business, it seems like competitors have brought similar products to market. You’re still growing well and maintaining or even growing market share. How are you doing that? Are you innovating more, expanding distribution, or what is the key driver?

Competitors have been following our volumizer franchise, and we expected that. Our approach is classic consumer-product playbook: be first, continuously innovate, expand geographically, introduce new versions at different price points with differentiated features, and invest in marketing and social content. The scale of our consumer reviews—over 350,000 for the volumizer franchise on Amazon with 4.6 average stars and 80% 5-star reviews—helps sustain our position. New products such as Revlon Plus and innovations from Drybar and Hot Tools are important. We are also expanding internationally—with strong growth in Latin America, EMEA and Canada— and adding new distribution inside major retailers that raises awareness while maintaining brand positioning. All these factors together explain continued share gains despite competitive entries.

Great. Thank you very much.

And our final question is from Steve Marotta with CL King & Associates. Please proceed.

Good morning, Julien, Brian and Matt and Jack. I know that we are bumping up against time, so I will limit it to one question. Julien, on the last call, you intimated maybe even tangentially that the EPA could be negatively impacting some competitors in the industry as well. Are there market share opportunities based on complications your competitors might be having with the EPA at this time? Thanks.

In theory, there could be opportunities, but we don’t look at it that way. We compete ethically and expect regulators to apply rules consistently. We want everyone to play by the rules. If enforcement actions create opportunity for our products because we are in compliance and consumers prefer our products, we will participate, but our focus is on serving consumers and maintaining principled competition. If any competitor faces issues, we expect regulators to be even-handed and consistent.

Very helpful. Thank you. I will take it down offline. Thanks.

There are no more questions. If you have any final comments.

Well, just a quick wrap up. I wanted to thank everyone for joining us today and for the continued interest in Helen of Troy. We very much look forward to speaking to many of you either later today or over the coming days and weeks as well. We will also be sharing further progress with you when we report our third quarter results, which will be in early January. I know we are running up against time, and I just want to say thank you. A lot is going on at Helen of Troy. We like our positive trends and we are very proud to have beaten expectations and to be able to raise our guidance and set our plans for what we hope will be another growth year despite the high base. We thank you very much for attending today.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and have a wonderful day.