Greetings. Welcome to the Helen of Troy Limited Third Quarter Fiscal '23 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 third quarter fiscal 2023 earnings conference call. The agenda for the call this morning is as follows. I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, and Noel Geoffroy, the company's COO, will comment on business performance of the quarter, Project Pegasus, and current trends. Then, Mr. Matt Osberg, the company CFO, will review the financials in more detail and provide an update on our financial outlook for fiscal 2023. Following this, we 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 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 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 then the Press Releases tab. I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack. Good morning, and thanks to everyone for joining us. Today, I would like to provide you with an update on Project Pegasus, discuss our third quarter results, and the consumer and retail trends we saw during the quarter. As discussed in our October call, Pegasus is a comprehensive restructuring program launched this past summer with the goals of significantly strengthening and accelerating our platform for operating margin expansion, reducing inventory, improving ROIC, and improving cash flow. Pegasus is a multiyear initiative with a three-year arc designed not only to improve profitability but also provide additional investment fuel to more efficiently leverage our proven value creation flywheel as we return to growth. Pegasus goes well beyond the typical belt-tightening exercise. With the macro environment not indicative of a rapid reacceleration due to higher inflation, higher interest rates, uncertainty about the future financial health of consumers, and foreign exchange headwinds, we used this summer to take a hard look at ourselves. We zeroed in on ways to accelerate efficiency projects already underway and identified a comprehensive set of new savings opportunities. The key initiatives in Pegasus include optimizing our brand portfolio, accelerating and amplifying cost of goods savings projects, enhancing the efficiency of our supply chain and distribution network, optimizing our indirect spending, streamlining and simplifying the organization, and reducing inventory. Pegasus also includes initiatives to return to operating margin expansion and improve our organic growth rates. Over the past few months, we have made significant progress; all workstreams are underway, leaders and teams are in place, and they're focused on speed and on executional excellence. I have asked our Chief Operating Officer, Noel Geoffroy, to walk through that progress. Beyond Pegasus, Noel is also working closely with the business segments and operations, so she will also join Matt and me in the question-and-answer on both Pegasus and the business segments.

Thanks, Julien. Today, we are sharing details on the progress across several Pegasus initiatives, including streamlining and simplifying the organization, optimizing our brand portfolio, and further sharpening our investment choices. Specifically, on the organization, we are announcing three major structural changes. The first is to consolidate from three business segments to two. The second is to create a North American Regional Market Organization that will be responsible for sales and go-to-market for the United States and Canada. And the third is to further centralize our global shared services for operations and finance. Let's go through each of the three areas. Starting with the consolidation from three business segments to two, we are combining our current Health & Wellness and Beauty segments into one and renaming it Beauty & Wellness. Our other business segment will continue to be Home & Outdoor. Both segments will be even more focused on delighting consumers with outstanding brands and products that people trust and adore. They will retain and use their deep understanding of the brands, consumers, and competitors in each category, focusing on developing even more outstanding consumer-centric innovation and marketing programs that will further differentiate our world-class brands. The second major organizational change is to create a North American Regional Market Organization. Very similar to the RMOs we already operate in EMEA, Latin America, and Asia Pacific, the new North American RMO will capture the benefits of increased focus on sales and go-to-market with further attention to shoppers in the United States and Canada. The North American RMO will also create new savings and new capabilities both externally and internally. Like our other RMOs, the North American RMO will be responsible for go-to-market activation on all brands and channels, will capitalize on the scale of Helen of Troy's diversified brand portfolio, and leverage the strong strategic customer relationships we have worked so hard to build over many years. New savings will come from increased speed, eliminating duplication, streamlining interfaces with shared service functions, and standardizing processes. The North American RMO is being staffed with an emphasis on continuity of key sales leaders and maintaining the needed category and channel specialization in areas such as outdoors and prestige beauty where there is less overlap. There will be no change to the international RMOs and it will continue to be led by our President of International. The third change is to further centralize operations and finance. This is a continuation of the theme of shared service centralization we started in Phase I for IT, Legal, and HR. As always, our shared services are designed to support our business segments and RMOs with their expertise, gain speed and efficiency from applying best practices, eliminate duplication, standardize processes, streamline interfaces, and better leverage scale. We are further centralizing operations under our Chief of Global Operations, who will now own all sourcing and supplier relationships and will create a center of excellence on supply and demand planning to help improve forecast accuracy and inventory management. In finance, we are reconfiguring our finance leadership support to match our new organization structure, centralizing our global accounting function and aligning reporting for the full global finance organization under our CFO, all at a reduced headcount versus today. The new structure will reduce the size of our global workforce with impact across all business segments, departments, and shared services. Our overall global workforce will shrink by approximately 10%. The majority of the role reductions will be completed by March 1, and the savings will largely be realized in fiscal '24. We did not take this decision lightly. Our global leadership team has worked very carefully on the new organizational structure and on the specific staffing for each role. We all have immense respect and gratitude for the highly talented associates who will be leaving us. We've been careful to ensure continuity of leadership and expertise in the new organizational design. The two business segments, International, and the new North American RMO, will each be led by proven current presidents, who will continue to report to me. Nearly all shared service functions, including Operations, Finance, IT, Legal, and Corporate Business Development, will operate under the current proven leaders who serve with me on Julien's global leadership team.

Thanks, Noel. Our third quarter financial performance was better than the outlook we provided in October. The result was primarily due to higher sales from what has so far been an above-average cold and flu season and some pull-forward of sales from the fourth quarter into the third quarter of this fiscal year. On a fiscal year-to-date basis, core's net sales are up 33% on a three-year stack versus the pre-COVID base of fiscal year '20. Over those same nine months, core adjusted and diluted earnings per share is up 6.6% on a three-year stack despite the negative impact this fiscal year from inflation, higher interest rates, and lower operating leverage. During the third quarter, consumers continued to tighten their purchasing patterns in some categories in response to high inflation and higher interest rates. As consumption slowed, some retailers continued their conservative repurchase patterns to further reduce their inventory. Our promotions across online and in-store channels were slightly elevated on certain parts of our business, such as Beauty and Health & Wellness, helping to support the consumer trends we are seeing and helping our retail partners better reach their inventory reduction goals. The holiday season started off slower than expected, with discretionary categories generally under pressure from these trends. In some categories, performance improved in late December, ending largely in line with our expectations. Looking at our business segments, I'll start with Health & Wellness. As highlighted in the media, there has been a market increase in the various viruses that cause the symptoms our products help relieve, such as fever, cough, runny noses, congestion, and sore throat. While it was still early in the season during our third quarter, we are seeing elevated incidents of these conditions from cold, flu, and the latest Omicron COVID sub-variants. Symptoms this year have further been raised by a surge of other respiratory infections in both children and adults. The result has been strong sell-through of our thermometers, humidifiers, and inhalants under the Vicks and Braun brands. Since U.S. retailers generally had sufficient inventory on hand from last season, elevated incidents did not translate into year-over-year shipping growth during our third quarter, but it did quickly reduce inventory for our major retailer customers and even led to out of stocks for some, especially in humidifiers. Internationally, we saw shipment growth, especially in thermometers. As we start the fourth quarter, replenishment orders from retailers have been much stronger, especially on humidifiers, and we are forecasting strong shipments of our cold and cough related products this quarter. The exact amount will depend on how long symptoms persist, how aggressively retailers replenish, and our ability to serve the increased demand.

Turning to Home & Outdoor. Total sales, including Osprey, declined 7% versus a very tough comparison to the prior year when the segment grew 10.7%. OXO continued to see POS below peak prior year levels at brick and mortar as the overall home category continued to slow. Importantly, total POS for OXO remains solidly ahead of pre-pandemic levels as we focused on our marketing to introduce the brand to new consumers. OXO performed very well at our largest online retailer during the Black Friday and Cyber Monday period. Hydro Flask continues to hold its Number One position at our largest online retailer where sales almost doubled during the Black Friday and Cyber Monday period compared to the same period last year. This helped to offset the broader POS decline at brick and mortar in the quarter.

Turning to Beauty. Core segment sales declined 12.2% in the third quarter. The primary driver was the overall beauty appliance category decline from the high base of fiscal '22 in both online and the U.S. mass merchandisers. It was partially offset by some pull-forward of orders in the third quarter ahead of this year's holiday period. Even though consumers continue to trade down to lower priced appliances, our market share at the largest online retailer and at the brick-and-mortar retailers that make up the majority of our sales are now showing growth over the past 52 weeks. The Revlon One-Step Volumizer continues to be, by far, the Number One selling item in the category, selling at twice the rate of the Number Two seller across nearly all retail customers. With prestige liquids, which are among our most profitable businesses, both Drybar and Curlsmith achieved solid performance. Turning to International. Results were ahead of expectations with net sales up 15.3% and particular strength in EMEA and Asia. Contributions from the acquisitions of Osprey and Curlsmith were the main drivers. All three Home & Outdoor brands performed above expectations internationally, with Osprey doing very well in Europe. Braun outperformed as we were able to partially overcome supply shortages to help meet the increased thermometer demand in EMEA and in Asia. Regarding Pegasus, I would like to say that the workforce reduction we announced today is one of the hardest things I have done in my entire career. We have an exceptional team and a team that has delivered outstanding results over many years. My respect for the people who will be leaving us and the work that they have done is immense as is my gratitude. Changes we are announcing today are the right ones. They are a natural evolution of the major themes we have been focused on from the start of our transformation. While change is never easy, I want to reiterate how encouraged I am about the progress on all of the Pegasus workstreams. Helen of Troy has an outstanding track record of adapting to change and transforming itself with significant positive results. We have done it three times in the recent past: as proven in Phase I of our transformation; as demonstrated further in the first three years of Phase II, both before and during the pandemic; and in our Beauty segment under the Refuel initiatives. Rather than grind through the present challenges, we greatly prefer to proactively shape our future through Pegasus and then build on it with Phase III. With regard to timing, we see fiscal '24 as a transition year. From a macro standpoint, we see a very challenging near-term economic backdrop. We are focused on Pegasus, on launching our pipeline of consumer-centric innovation, and on executing our commercial plans for fiscal '24. The faster we secure our Pegasus efficiencies, the more that we can invest in accelerating revenue growth and building market share for our most promising brands. With the largest portion of Pegasus' savings slated for realization in fiscal '25, we expect to generate fuel to invest in the value creation flywheel further. As we execute the full suite of Pegasus' initiatives over the three-year arc, I am confident we can return to growth on the top line, lower our input costs, expand operating margins, improve cash flow, and further reduce inventory. I look forward to sharing further progress on Pegasus as well as our fiscal '24 outlook when we report our fourth quarter results on our normal timing in late April. And with that, I'd like to hand the call over to Matt.

Thank you, Julien, and good morning, everyone. I would like to begin with an overview of our third quarter results, then review our updated fiscal '23 outlook, provide an update on Project Pegasus, and conclude with some high-level thoughts on fiscal '24. Looking at the third quarter, results were ahead of our expectations as we benefited from a more severe start to the cough, cold, and flu season, driving higher-than-expected sales in certain health-related categories, such as thermometry and humidification, as well as the benefit of the shift of approximately $10 million of sales that occurred in the third quarter that were forecasted to occur in the fourth quarter, and lower interest expense. These factors were partially offset by the holiday selling season that did not start off as strong as expected, as macroeconomic pressures continued to impact consumer purchasing behavior, a more unfavorable gross profit margin, particularly in Beauty and Health & Wellness, and a higher effective tax rate. Our consolidated net sales decreased 10.6% in the quarter, as organic sales were impacted by lower consumer demand, unfavorable shifts in consumer spending patterns, and reduced orders from retail customers due to higher trade inventory levels. The net sales comparison was also unfavorably impacted by the pull-forward of approximately $15 million into the third quarter of last year as retailers accelerated orders to try to avoid supply chain disruptions during the holiday season. The contributions of Osprey and Curlsmith partially offset the decline in organic sales. GAAP consolidated operating margin for the quarter was 13.8% of net sales. On an adjusted basis, operating margins declined by 0.4 percentage points to 16.6%, primarily driven by unfavorable operating leverage, the unfavorable impact of less Beauty segment sales within our consolidated net sales revenue, and a less favorable product mix within the Home & Outdoor segment due to the acquisition of Osprey. These items were partially offset by a higher gross margin due to a more favorable customer mix within the Home & Outdoor segment and a more favorable product mix within the Beauty segment primarily due to the acquisition of Curlsmith, as well as lower annual incentive compensation expense. Net income was $51.8 million or $2.15 per diluted share. Non-GAAP adjusted diluted EPS decreased 26.1% to $2.75, primarily due to lower adjusted operating income, higher interest expense, and an increase in the effective income tax rate, partially offset by lower weighted average diluted shares outstanding. We generated $125 million of operating cash flow in the third quarter, primarily driven by a sequential decline in our inventory levels from the end of the second quarter of $106 million. We are now at lower inventory levels than the end of fiscal '22, and we continue to expect a further decline in inventory in the fourth quarter. Our new expectation is to reach approximately $500 million of inventory by the end of fiscal '23. Even with this accelerated improvement in inventory levels versus our previous expectations, we continue to expect slightly negative free cash flow for the full fiscal year. We ended the quarter with total debt of $1.08 billion, a decrease of $89.3 million from the second quarter as we used our positive cash flow to pay down our debt. This brought our net leverage ratio down to 3.1 times compared to 3.16 times at the end of the second quarter. We continue to expect our leverage ratio to decline in the fourth quarter and to end fiscal '23 with the leverage ratio in the range of 2.75 times to 3.0 times. Now turning to our revised outlook for the current fiscal year. As outlined in our earnings release, we have raised the lower end of our full year outlook for fiscal '23 for both sales and adjusted diluted EPS while maintaining the top end of the ranges. Given the volatility and uncertainty we have experienced this year, coupled with the current trends in the market, we remain cautious in our outlook for the fourth quarter. The consumer continues to feel the impact of inflation, and, as we have seen during the holiday period, was seeking to buy discounted or promotional items. We are seeing positive signs that inventory at some key customers is beginning to rebalance, and we will continue to monitor closely as retailers finish their holiday season. Our revised outlook reflects several factors, including the timing shift of sales into the third quarter versus our previous expectation of those sales occurring in the fourth quarter, higher sales in our Beauty segment due to an improved outlook for Curlsmith and a less than expected category decline in hair appliances, and higher sales in our Health & Wellness segment due to a more severe start to the flu season. These factors are offset by lower-than-expected consumption trends in our Home & Outdoor segment and our assumption of lower customer replenishment orders impacting the fourth quarter following the slower start to the holiday season. Although we are seeing a more severe start to the flu season, it is unclear how the remainder of the season will progress. Additionally, due to our strategic initiative to decrease inventory levels and our previous expectation of a flu season in line with pre-COVID historical averages, we will be somewhat limited in our ability to supply at elevated demand levels in certain categories in the fourth quarter. Our adjusted diluted EPS outlook is being impacted by our expectations for sales, a more unfavorable gross margin, particularly in Beauty and Health & Wellness, higher marketing expense, lower interest expense, and a higher effective tax rate. For fiscal '23, we now expect consolidated net sales revenue in the range of $2.025 billion to $2.05 billion, which implies a consolidated decline of 8.9% to 7.8% and a core decline of 7.5% to 6.4%. By segment, we now have the following net sales expectations: Home & Outdoor growth of 2.5% to 3.5%, including net sales from Osprey of $180 million to $185 million; a Health & Wellness decline of 11% to 10%; and the Beauty core business decline of 18.5% to 17.5%, including net sales from Curlsmith of $35 million to $40 million for the 10-month period of ownership in fiscal '23. As a reminder, the fourth quarter of last year included accelerated sales from certain retailers securing additional supply ahead of expected price increases, the favorable sales impact of health-related products from the initial Omicron wave, and approximately two months of sales from the Osprey acquisition. Despite the macroeconomic challenges we have faced this year, we are particularly pleased to see Osprey continue to hold the sales outlook we provided at the beginning of the year and to be able to increase our sales outlook for Curlsmith. We now expect consolidated GAAP diluted EPS of $4.82 to $5.11 and consolidated non-GAAP adjusted diluted EPS in the range of $9.20 to $9.40, which implies a consolidated decline of 25.6% to 23.9% and a core decline of 24.5% to 22.8%. This includes an adjusted diluted EPS contribution from Osprey of approximately $0.35 to $0.40 and a pro-rata fiscal '23 contribution from Curlsmith of approximately $0.20 to $0.25. We continue to expect to slightly expand gross margin in fiscal '23 and consolidated adjusted operating margin is now expected to decline approximately 100 basis points to 120 basis points, with roughly the same year-over-year decline in each of our segments. The consolidated adjusted operating margin decline is expected to be driven primarily by unfavorable operating leverage, the net dilutive effect of inflationary price increases, the dilutive impact of the Osprey acquisition in the Home & Outdoor segment, and an unfavorable product mix in the Health & Wellness segment. Our outlook for the estimated after-tax impact of incremental inflationary cost declined slightly to approximately $50 million to $55 million or approximately $2.10 to $2.25 of adjusted diluted EPS. Our outlook for interest expense declined to approximately $42 million to $43 million. While we still expect the Fed to increase interest rates by 450 basis points in calendar year '22, we benefited from previous assumptions on the pace of rate increases, our ability to pay down debt, and the forecasted amount of capitalized interest related to the construction of our new distribution center. During the quarter, we made good progress on our Project Pegasus initiative, as we reduced inventory levels, improved cash flow, and advanced many other workstreams that we believe will create future operating efficiencies, expand our margins, and provide a platform to fund future growth investments. We believe we are on track to achieve the total savings and timing objectives that we introduced in our second quarter call and that we reiterated in today's earnings release. As Noel discussed in her remarks, changes to the structure of the organization in connection with Project Pegasus will include the Beauty and Health & Wellness operating segments being combined into a single reportable segment, which will be referred to as Beauty & Wellness. Therefore, beginning with our fiscal '23 Form 10-K, our future disclosures will reflect the two reportable segments, Home & Outdoor and Beauty & Wellness, with historical periods' segment information recast to be on the same basis. Additionally, when we issue our fourth quarter earnings release, we will provide two years of historical quarterly segment data on a comparable basis. Looking ahead to fiscal '24, there remains considerable uncertainty in the near-term macroeconomic and consumer outlook. We expect that many of the same macroeconomic factors that made calendar '22 so challenging may persist into calendar '23, as well as the compounding effect of the uncertainty of a potential recession and whether or not the Fed can execute a soft landing. These factors continue to make the ability to forecast consumer behavior patterns difficult. We believe that fiscal '24 sales growth will be challenged and highly dependent on the health of the consumer, and that the variability of these factors could drive a wide range of potential outcomes, which will be impacted by the depth and length of any potential recession. As previously discussed, we also expect to face a number of cost headwinds in fiscal '24, which include: higher interest expense as we annualize the increase in interest rates in fiscal '23; incremental depreciation related to our new $225 million distribution center, which we expect to put in service at the beginning of fiscal '24; and higher annual incentive compensation expense, as we reinstate expense associated with our estimates to achieve fiscal '24 compensation targets. We do expect fiscal '24 tailwinds from healthier retailer inventories and more aligned sell-in and sell-through sales patterns, savings from Project Pegasus initiatives, and lower ocean freight and product costs. However, the benefit from freight and product costs are generally expected to be realized in the second half of our fiscal year, as we move through the cycle of purchasing new inventory and turning it through cost of goods sold. While our fiscal '24 may be a transition year as we see macroeconomic rebalancing and navigate some cost headwinds, I am confident that the strength of our brands, efforts of our associates, strategic growth investments, and the initiatives we are executing under Project Pegasus will help position us to return to sustained long-term growth as we look to fiscal '25 and beyond.

Thank you. Our first question is from Rupesh Parikh with Oppenheimer. Please proceed.

Good morning. Thanks for taking my question. So, I guess, I'll just start with the Hydro Flask brand. Just curious what's driving the disconnect between what you guys are seeing online versus some of the weakness you're seeing at brick-and-mortar? And then, as you look at Hydro Flask, is that gaining or losing share at this point from your perspective?

Yes. Hi, Rupesh. Nice to talk to you, and glad for everyone that we're out of our quiet period and able to speak openly. Noel, could you fill in on this topic?

Sure. Hi, Rupesh. Thanks for joining us today. When we look at Hydro Flask, we do see channel shift, and you touched on that in your question. We see a lot more sales transitioning to online where we are performing very strongly, as Julien outlined in the script, leading share brand in the leading online retailer. I think that's a function of shoppers shifting more and more to online, especially for items like Hydro Flask. As we look at Hydro Flask over a two-year stack, we do see the brand growing strongly. And so, we still are very excited about Hydro Flask and its performance.

My only point is that over the past three or four years, the performance of Hydro Flask has been relatively flat compared to four years ago. There have been some fluctuations in that time. Regarding the shift in channels, we have actively worked in this area. We previously disclosed that we transitioned from using a third-party manager for our online sales at the largest online retailer to managing it ourselves, which has significantly benefited us. Direct-to-consumer is also a major investment focus for us, and we have been clear about our significant initiatives in this space. We are actually pleased with the progress we’ve made. While this did not affect the online retailer's results during the quarter, it is positively impacting our direct-to-consumer sales. We noted that direct-to-consumer performed exceptionally well during the Turkey 5 and Cyber Monday, and we will have more updates on direct-to-consumer for Hydro Flask and other brands very soon.

Great, thank you.

Good morning, and Happy New Year.

Yes. Hey, Bob. Happy New Year to you, too.

Thank you. Just want to follow up on some of your comments as it relates to the outlook. Obviously, you guys said and we've heard from many companies that visibility into calendar '23 is lower than normal due to the inventory corrections at retail and also the potential recession next year. So, the question is what changes operationally in a low visibility environment for you? What do you do differently in it, if anything? And how can this impact the year overall? What are the kind of issues that it could impact the year as a result?

Yes, I want to make a few comments before turning it over to Matt and Noel, who can provide additional insights. First, I want to note that we are in an interesting time of year where everyone is keenly focused on calendar '23 and our fiscal '24, which begins on March 1. However, our usual process involves completing our budget and providing final disclosures in April. Therefore, we cannot give a lot of specific information right now. While some have asked for details as far back as October, we find that amusing, as it seems like a request for information about 18 months ahead. I understand that you’re looking for broader insights on how we operate in a low visibility environment. My main point here is to emphasize the importance of focusing on what we can control. We’ve highlighted specific areas in our prepared remarks. First is Pegasus, which provides not only fuel but also additional efficiencies. It is crucial for our core operations. The second area we can control is our impressive pipeline of innovative products. Our products are receiving numerous awards, and while we may have experienced some market share losses, overall, consumers prefer and purchase our products. This drives our commitment to innovation, which remains a priority for us. We genuinely enjoy serving our customers and performing well in the market. The third area of control relates to our commercial plans, which Noel can elaborate on. Our strategy involves honing in on what we can manage. When it comes to inventory, we can dictate our purchasing, but we cannot control retail purchasing decisions. However, we work closely with retailers to help manage their inventory levels. As mentioned in our prepared remarks, we are committed to ensuring that retailer inventory is well-managed in this current environment. We are also being prudent with our pricing strategies and significantly reducing our own inventory, which is another aspect we can control. Finally, we are taking a proactive approach to manage costs and our operational footprint. We remain optimistic about the economy, consumer trends, and the long-term prospects of enhancing people’s lives. We recognize that we are entering a turbulent period with limited visibility, which presents a wide range of potential outcomes. So, Matt or Noel, if you would like to add anything specific, please do. The main takeaway here is our focus on controllable factors.

Yes, good morning, everybody, and Happy New Year. This is Matt. Bob, the only thing I would add to what Julien said is, he talked about focusing our controllables and what we do differently. I think Pegasus is part of that too, right? I mean, so we've already put Pegasus in place, and I think that will help generate some things that will give us some headwinds for next year. The other is, I think you can just take a general planning approach as you go in, which we've done before in similar years where there's more uncertainty where you take a little bit more of a conservative spending approach, cash management approach, and then, what I call, spend into success, right? So, as you see the sales develop maybe more positively than you would have gone in, you are ready with plans to start spending into the success. And I think as we look at our budgeting approach for fiscal '24, that's kind of the mentality we're taking is planned for maybe a more conservative approach, but then be ready with alternative plans as we see success to be more aggressive and capitalize on it.

Yes. The only additional point I want to emphasize, building on what Matt said, is the importance of prioritizing our spending. As we approach the budget season, we will focus on the brands with the greatest growth potential, profitability, and market momentum. We will support these brands while ensuring that other brands remain strong and stable, allowing us to maximize the value of our best portfolio assets. As Julien mentioned, we continue to innovate and have received numerous awards for both design and several of our products from leading women's magazines. This indicates that our consumer-focused innovations are resonating well. Additionally, we are engaging in close joint business planning with our major customers to ensure that our distribution and product assortment align with the current economic uncertainty faced by consumers. This versatility is one of the strengths of Helen of Troy's diversified portfolio, as we offer a wide range of price points to adapt to different market conditions.

By the way, on that awards thing, people might think, we might be talking more about all those volumized awards or the traditional industrial design awards that OXO would win. There was a pretty healthy slate in Health & Wellness quite recently and some pretty major international ones. And even in Beauty, by the way, and not in the volumizer area, the dual plate straightener, the one that has the floor plates, looks like a tuning fork, you've seen it from us before on Hot Tools where we extended it from the original Revlon, just recently won a Cosmopolitan Holy Grail Award for 2022, like a week or two ago.

Got it. Okay. Thank you.

Great, thanks. Good morning, everybody. My first question is, first a clarification on the consolidation of Beauty and Health & Wellness divisions into one, because it sounds like it's both the cost savings maneuver to reduce headcount, but also you're expecting it to help with brand development innovation and focus on marketing, at least that's what it says in the press release. So, I'm trying to understand the savings component fairly straightforward. But can you talk about how you expect that consolidation to help you drive innovation and presumably faster sales growth over time to start? Thanks.

Yes. Hey, Olivia, good to talk with you again. We do see significant additional synergies by combining Beauty and Health & Wellness. The two business units have the largest overlap of core customers. Of course, we've got Drybar and Curlsmith that are more prestige beauty, but when you think about mass merchandisers, food, drug, mass, et cetera, there's a lot of overlap there. So, good synergy there as we get our North American RMO up and running. And then, many different synergies in the cost areas, some third-party manufacturers, a lot of common plastics and resins. So, when you think about some of the cost of goods, workstreams that we have on that side of things, we see a lot of synergies there. Plastic and resins, as well as common motors and blowers, those sorts of things. So, there's really a lot of areas. It may not be obvious on the surface, but when you really dig down into it, there's a lot. And then, the other place is just when you have fewer business units, not only do you need less overhead or fewer people, as you talked about, but just the streamlined interfaces. As we get our shared services even more centralized, interfacing with two business units versus three is more efficient. Our processes can be more standard and be more efficient. So, those would be some of the areas that we see as beneficial as we kind of come together as a new Beauty & Wellness business unit.

Got it. That's helpful. And then, my second question is on inventory and consumer demand. And can you talk about where you stand on retailer inventory within key categories, particularly those that have benefited from outsized demand obviously in the last two to three years? And kind of your view on when sell-in and sell-through more or less converge? And then, the other side is then, on your own inventory, getting to $500 million, great progress over this year, of course. But what's the end goal? Because even if we adjust upward for acquisitions and place, et cetera, inventory is still a fair bit higher than pre-pandemic levels. So, what's the end goal? Maybe a little bit of color on that after that $500 million? Thank you so much.

Good morning, Olivia. Thank you for your questions. We are very pleased with the progress we've made this quarter in reducing our inventory levels to $500 million this year. Regarding your point, some adjustments are necessary due to our recent acquisitions. Moving forward, we will focus on inventory turns as a key measure. Inventory levels serve as a leading indicator, while turns are a lagging indicator due to the way they are calculated. Previously, we maintained around three turns, but we've fallen to the low twos currently. Our aim is to return to the three-turn level. I can't guarantee that we'll achieve this next year given the lag effects and the macroeconomic environment, but we definitely want to reach three turns and eventually exceed that in the long term. This will improve our efficiency significantly. Our new distribution center and the consolidation of our distribution footprint will enhance our efficiency in managing inventory. We also aim to bring our inventory levels down significantly below $500 million, and we will assess what that means by the end of next year. Overall, we will focus on turns and acknowledge that it will take some more time to achieve three turns and beyond. However, we have several positive factors that will assist us in reaching that goal over time.

Yes. One example of this is our ongoing discussions about balancing sourcing from China with sourcing from the rest of the world, particularly in the Americas and specifically Mexico, which supports nearshoring for both the US and Canadian markets, as well as the Latin American markets. This nearshoring offers clear advantages, such as shorter lead times, which inherently means reduced inventory levels and less dependence on the sea freight market. There are numerous reasons why these initiatives, which extend beyond just speed, will positively influence our turnover rates. Regarding retailer inventories, I also want to mention our efforts in SKU rationalization in Pegasus, which Noel may expand upon, as this will assist us not only in managing inventory levels but also in improving turnover speed. Noel, if you could address retailer inventory and any additional insights on how our inventory levels will continue to decline.

Yes, starting with our inventory, the SKU rationalization through Pegasus will benefit us. As we simplify our product lineup and focus on the most productive items for both consumers and retailers, while reducing the long-tail complexity, this will improve our inventory management and forecasting. Regarding retailer inventory, it does vary by category and retailer, as we have a diverse portfolio across many retailers. However, we are in a better position now compared to last quarter and the one before. We still see some retailers ordering less than consumption in certain categories, indicating pockets of higher inventory that we would prefer to reduce. We are working closely with our retailers on the right commercial strategies to address this issue, and we are encouraged to see the sales in and sales out becoming more aligned as the year progresses. That is our current status.

One quick thought before we move from this one, Olivia, is things change quickly. And what I mean by that is, we just saw it in the cold and flu numbers and yet, I think people are used to, whether it's because of the consumer buying pattern shifts from the pandemic or the retailers having swollen inventories in the last six to nine months, people are used to this narrative that the inventory needs to turn slowly and the consumer is down for the count. Things turn quickly. So, just now, when people have a need, like in the cold and flu, we're in a situation where we literally just can't ship enough humidifiers right this minute. In the case of thermometers, everyone knows what it was like during the pandemic. Air purifiers, a little bit later in the pandemic. And so, things change quickly. Our products are diversified. So, when needs come, we do have what people want, whether it's in health-related category or home-related category and outdoor-related category, and when the need is there and consumers go for it, not only do they prefer our products, but things change quickly for us.

Got it. Thanks for all the details, and see you next week.

You bet. Yes, looking forward to that.

Hi, thank you.

Hi, Linda.

Hi, Happy New Year.

Yes, you too.

I have a question about the long-term outlook. Your operating margin for this year is around 15%, which isn't significantly lower than your peak margins. You've achieved strong margins through your efforts. As a durable goods company with about a 15% operating margin, people often ask me about the long-term potential. Some might say that's already high. I'm curious if the Pegasus restructuring is aimed at preventing further decline or if it's intended to push that margin to new highs. I want to understand your perspective on this.

Yes. First the former, then the latter. And Noel, please put some color on the margin trajectory for Pegasus.

Yes, we have discussed various workstreams in Pegasus, many of which aim to improve our margins. SKU rationalization is a prime example. This process involves analyzing each SKU to identify opportunities to eliminate less productive and less profitable items, which can enhance our margins. We are exploring multiple cost-saving initiatives related to goods, and each aspect of Pegasus contributes to this effort. Additionally, we intend to reinvest in Pegasus. Our goal is not solely to enhance our operating margin over time; we also aim to use the savings generated to reinvest in the business and foster future growth. The quicker we can implement these projects and address cost and inventory issues, as Matt highlighted, the sooner we can reinvest in the business. Matt, would you like to add anything?

Yes, Linda, I just want to add that I think you've captured the margin outcome for this year. We provided guidance today indicating a decline of 100 to 120 basis points. However, to your point, achieving approximately 15% involves a lot of deleveraging. Given the significant sales decline we experienced, that number reflects substantial deleveraging. If we could remove the impact of deleveraging and see some growth next year, along with a little favorable leverage, that would serve as a foundation for improvement. Additionally, as Noel mentioned regarding Pegasus, there is potential to enhance margins through cost savings or lower product costs. Creating space for reinvestment will support brand growth, leading to a better product mix. For instance, Curlsmith, while not our largest brand, has had a significant positive impact on our mix this year. Investing in brands we've acquired recently will further contribute to a higher mix. Overall, I believe there are numerous tailwinds to consider in our operating margin trajectory. Of course, we will face cost challenges like everyone else, with some significant ones on the horizon next year. However, looking at the longer term, I still see many opportunities for margin expansion.

Yes, I couldn't agree more. And, Linda, I'm so glad you asked this question. And for your question and for all, frankly, on this call, there is a message from us. And the message from us is that the best is yet to come over time on margin from Helen of Troy. In the short term, there is pressure. You just heard us describe the minus 100 points. I think everyone on the call knows that Helen of Troy is up several hundred points on margin over the course of the transformation years. To lose a 100 basis points or even 120 basis points during this fiscal year is extremely painful, and we've certainly taken our beating on that topic. So, for the short term, folks, they're right that, that's painful. For the long-term picture and not just Pegasus, but also the Phase III plan, which will follow it, the intention is to not only return to the margin peak that we saw last year, which was in, I think, the 16% range for adjusted operating margin, but to surpass it. So, we're not making particular Phase III promises, we're not putting a specific long-term goal out today, but there is a message. And the message is, we've made several hundred bps of progress, we've lost about 100 basis points of them. We not only intend with Pegasus to quickly try to earn it back, but to surpass it in Phase III using the fuel from Pegasus to reinvest in the flywheel.

Okay, thank you. That's very helpful. And then, can I just ask about, in the Health & Wellness, we all know the whole story in the past about the EPA relabeling issue, et cetera, et cetera, and you had lost some sales from that. It actually looks in the data like you're actually gaining back a lot of share. Is that the case? And are you kind of catching up and now that you're able to reship? Are you actually gaining a lot of share, as well as the cough, cold, flu season helping? I mean, is that kind of what I'm seeing going on there?

Yes, Linda, as we touched on in the prepared remarks and you see it all over the news that this is a particularly high illness season, and the products that we have, in many cases, really help with those symptoms. So, our humidifiers, for example, are selling very well. Our share is very robust there. We look very positive in that regard. And frankly, we don't have necessarily enough to meet all of the elevated demand from a supply standpoint. Thermometers is another place. Now, there's a lot of ups and downs in thermometers since we've kind of come out of COVID and we've had very different participants come in, but that's another place where we see strength. So, we do see strength in a few of our share positions in Health & Wellness in this most recent time period.

And we were also down pretty hard in air purifiers because of the EPA matter. So, yes, it's true that we've bounced back in part. It's quite competitive these days. There is a lot of inventory out there. So, there's more promotion than I think anybody would like. But in that battle to see our share improve and hold our own, that's good news. But the idea that we're back to pre-EPA positions, that would not be the case in market share for air purifiers.

Hi, good morning. Thanks for taking my question. Nice to see the improved inventory position. I'm curious just on the M&A environment, just kind of what you're seeing out there, potential acquisitions starting to become more attractive from a valuation perspective? And then also if you could give us an update just on your thoughts on leverage? It sounds like you still expect to be 2.75 times to 3 times at the end of the year. I'm curious how you're thinking about. If there's any early thoughts of next year? If you're happy with that level? And then also any other thoughts on just the floating rate debt and maybe moving that more of a fixed rate? Thanks.

Yes. Hi, first of all, Susan, and welcome. We're very pleased that you initiated coverage and I believe this is the first call since you did. So, we're out of our quiet period. So, very nice to meet you. We're looking forward to meeting you in person next week. So, it's great news.

Same here.

Yes, pleasure. Yes, thanks. Let me say just a little, and then from Jack on the subject of M&A and Matt on the topic of debt levels. Our general goal is, as we've been talking quite a lot in the last few months, to improve our cash flow, reduce our inventory, bring down our debt, and invest in the most important initiatives. That's where our money has been going. It's been our strategy for a while now. In the case of the progress, you've heard it reported today, and thanks for your comment. We did make progress on inventory. We've made progress on debt a little bit actually, not that much. And on the subject of cash flow, also progress despite the investments in the big new distribution center. With regard to M&A and debt levels, maybe for Jack first and then for Matt.

Sure. Hi, Susan. So, on the M&A side, we are actively looking at a number of different projects. What I can tell you is that we're not really seeing the types of assets that we would like that will fit our criteria. We are rather picky with selecting and bringing new assets in. They need to sweeten our mix. And we also look for ones that we can make better but also can help make us better. So, at this point in time, we're continuing to look, but we're not seeing anything that is getting us to lean in at least at this point in time. But hopefully, there will be something in the near future and we do will have something to share about it.

By the way, valuations to your comment, they are coming down, right? Money is not cheap. And there is a different marketplace that many people are selling into. So, we're keenly aware of that. You were not following us at the time, but you probably saw our comments when we bought Curlsmith. We bought an extremely strong prestige name with a significant position in its unique space of textured hair for roughly 10 times, and that's unheard of in the prestige space. So, we took advantage of that opportunity. It's been good for us, as you've heard us say. And as we see others that have the right mix of better together, as Jack always says, and the sweet spot on valuation, and then put that together with the cash flow and debt story, not only why not, but that's our entire track record as a company. We've doubled this company in the last 10 years in terms of sales and a portion of that came from acquisition and many of those were outstandingly good financial deals.

Hey, Susan. This is Matt. I'll just add onto the leverage component of it. Obviously, if you look back at our history, the amount of cash flow we'll generate this year, free cash flow is much lower than we've done in the past. And as you look into next year, I think we've got tailwinds for being able to continue to reduce our inventory levels, as well as we're not going to spend $150 million of CapEx on our new distribution center we're going to spend this year. So, just take those two things and put them together, and that's a big tailwind for us from a cash flow perspective. So, we expect to be able to continue to bring down our leverage. One thing for us is we typically generate more of our cash flow in the third and fourth quarter than the first and second quarter. So, as we kind of look at our general cash flow cadence, I'd expect more of the reduction in our leverage to occur in the second half of the year than the first half of the year.

Yes, good morning. Thank you for taking the questions, and Happy New Year to all.

Yes, hi.

Given the trade down comments you mentioned and the current state of the economy, are you reconsidering your product strategy? Or do you believe that low-end products are simply too commoditized? I would like to hear your thoughts on this.

There is an optimal point where products can set brands apart and validate their quality, pricing, and appeal to consumers. Below this point, we start to see commoditization, similar to private label products, where everything is indistinguishable, and brands can't differentiate themselves. It's a market primarily for those looking to spend less. I believe this phase will eventually pass, but it's important to note that it represents a temporary shift that occurs during economic cycles. To address this, we've ensured, particularly in beauty appliances, that we include some lower-priced products in our offerings. While this may not be ideal for profit margins, it is helpful in this context. We also discussed our improved thermometers, such as the Vicks stick-type, which gained market share last quarter and performed well during the trade-down trend. You can see us adapting in this area—diversifying not just by category but across varying quality levels, without fully descending to the lowest price points. With that said, Noel, if you could share your insights on the hair appliance category, especially regarding large mass retailers where there's a chance to refine our product mix in line with Anthony's comments.

Yes. As mentioned, that was the place to really make sure that our assortment was as robust as possible to cover the good, better, best range that Julien just referred to. So, we've done that in mass, in particular, the channel where that consumer and that shopper tends to shop. We have rounded out our assortment in that regard and that helped us in this quarter and that's part of what helped our share in the beauty appliance category. And we look to continue to do that as appropriate during this time when we need to meet that full broad range of consumer and shopper needs.

Yes. So, we'll see some improvements in that area in upcoming distribution planograms as our expectation as well, and it just helps balance it all. But if you have the question of, are we strategically going to shift, go down market and become commoditized and then duke it out on price where people sell their mother for a nickel, the answer is no.

This will conclude our question-and-answer session. I would like to turn the conference back over to management for closing comments.

Thank you all for being here today. As we enter a new year, we appreciate your continued interest in our journey. We're at an exciting point in our growth, and as you heard from our discussion today, we have a clear vision moving forward. We look forward to meeting many of you in person next week and connecting virtually at the upcoming conferences. We have several meetings lined up, which is something we eagerly anticipate. It's a thrilling time for us, and we appreciate the opportunity to share our progress. Thank you again for joining us today.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.