Earnings Call Transcript
HELEN OF TROY LTD (HELE)
Earnings Call Transcript - HELE Q2 2020
Operator, Operator
Greetings. Welcome to Helen of Troy Second Quarter 2020 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.
Jack Jancin, Senior VP of Corporate Business Development
Thank you, operator. Good morning everyone, and welcome to Helen of Troy's second quarter fiscal 2020 earnings conference call. The agenda for the call this morning is as follows: I'll begin with a brief discussion of forward-looking statements. Mr. Julien Mininberg, the company's CEO, will comment on the financial performance of the quarter and specific progress on our strategic initiatives. Then Mr. Brian Grass, the company's CFO, will review the financials in more detail and comment on the company's outlook for fiscal 2020. Following this, Mr. Mininberg and Mr. Grass will take your questions for us today. This conference call may contain certain forward-looking statements that are based on management's current expectations 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 companies. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Mr. Mininberg, I'd like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the company's website. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. The release can be obtained by selecting the Investor Relations tab on the company's homepage and then the News tab. I will now turn the conference call over to Mr. Mininberg.
Julien Mininberg, CEO
Thank you, Jack. And good morning everyone. Thank you for joining us today. Before discussing our business, I'd like to extend my gratitude for the concern that many of you offered after the mass shooting in El Paso in August. While the city is still mourning, we are very proud of its resilience and how citizens and leaders from El Paso and across the nation came together to support victims and their families in the face of senseless and hateful violence. I'm also proud that Helen of Troy as a company and so many of our associates around the world stepped up immediately, emotionally, financially, and with their time to help the victims and their families and to support the community we are proud to call home for over 50 years. Now turning to a discussion of our business performance in the second quarter of fiscal 2020, this morning we reported another healthy quarter, which featured a 5.7% increase in our core business sales against a very strong year-ago comparison and an increase in adjusted diluted EPS of 13.1%. Our quarterly results featured benefits from a diversified portfolio of brands, margin expansion beyond improving our mix, disciplined incremental investment spending, and operating efficiency within our business units and also in our shared service platforms. The results underscore the flywheel effect from continuing to execute the strategies underlying Phase II of our Transformation Plan. Our sales growth was led by an online increase of approximately 25%, product innovation, and growth in international sales. Online sales represented approximately 24% of our total sales in the quarter. The overall strong results for the company featured 3.8% growth in Leadership Brands, driven by substantial growth in Housewares, which more than offset the difficult comparison for the Health & Home Leadership Brands that grew 22.3% in the same period last year. Beyond our Leadership Brands, we are especially pleased with the performance of our Beauty appliance business, which we believe is now on pace to deliver a third consecutive year of growth behind meaningful consumer-centric innovations. For the first half of the fiscal year, total net sales grew by 5.6%. Sales to the online channel increased by 26% to represent approximately 23% of our total fiscal year-to-date sales. This accomplishment was fueled by our incremental digital growth investments. Leadership Brand sales are up 5.5% year-to-date, and adjusted diluted EPS increased by 11.7% for the first half of the fiscal year. These operating results give us fuel to further invest behind attractive opportunities for the balance of the year, while raising our revenue and EPS outlook for the full fiscal year. As outlined during our recent Investor Day, Phase II builds on the accomplishments of Phase I by focusing on eight core strategic priorities. With a focus on executing our strategic strategies of doubling down on international and accelerating shared service excellence, we are pleased to announce that Nicholas Lannis is joining Helen of Troy in the newly created role of International President. He will serve on our global leadership team and report directly to me. Nicholas will be located in Europe focusing primarily on our business and expansion plans in EMEA and Asia Pacific. He has a perfect combination of international and consumer product industry experience. In his more than 20 years in the consumer products industry, he has led major businesses in EMEA, Asia Pacific and Latin America, and spent significant time living and working in these regions. He has proven himself in progressively senior roles in strategy, execution, P&L responsibility, building and managing organizations, and working with corporate leadership teams. Additionally, as we implement the Phase II strategic choice of accelerating shared service excellence, I am pleased to announce that Harish Ramani joined Helen of Troy as Chief Information Officer this past August. Harish will be located in El Paso, and he has deep experience as a CIO at several large multinational public companies, where he played a crucial role in transformations, working across business units, brands, and regions, and building top-quality IT organizations. Both Nicholas and Harish are the right additions to our leadership team and come at just the right time for Helen of Troy’s Phase II Transformation. Shifting now to our businesses. Sales growth in the quarter was led by our Housewares segment, which increased net sales by over 22%. Housewares grew in brick-and-mortar, online, and internationally, as we gained distribution, launched new products, and benefited from very strong point-of-sale and store traffic at key retailers. Dinnerware and food storage were standout categories across the business segment during the quarter. Hydro Flask’s popularity continues to climb with outdoor enthusiasts and retailers alike. During the quarter, the brand added further to its leading market position and continues to be a significant contributor to the high-performance insulated beverage bottle category. We made even more strides in growing sales in the U.S., particularly in the East, and also internationally. We also grew sales in brick-and-mortar, online and with new products including products that take Hydro Flask beyond the bottle. We are seeing strong point-of-sale results, as well as inventory replenishment orders that are in line with robust sale-through rates for those customers where we have visibility. Additional drivers this quarter were Hydro Flask back-to-school purchases, back-to-campus sales across the collegiate channel, and growing popularity among younger consumers in both online and outdoor retailers. In Health & Home we experienced just over a 9% decline in core business net sales, which was slightly below our plan, as we faced a particularly strong comparison in which the segment grew 20.3% in the same period last year. If you recall, in the summer of 2018, the segment benefited from a confluence of business drivers, including the U.S. heat wave, some of the largest West Coast wildfires on record, new shelf placements in seasonal categories, and inventory replenishment following the strong prior cold and flu season. Looking at the segment’s longer-term track record, net sales in the second quarter of fiscal 2020 were 8.7% greater than two years ago in the second quarter of fiscal year 2018. Over the past four years ending fiscal 2019, the segment has grown at a healthy compound annual growth rate of 3.4%. We continue to be excited about Health & Home’s prospects behind product innovations like the ones showcased at our recent Investor Day, commercial innovation and its international expansion plans. We expect Health & Home to return to growth in the second half of this fiscal year. In Beauty, consumer-centric appliance innovation continues to lead the segment, driving Beauty core business sales growth of 9.3% during the quarter. Beauty grew both domestically and internationally. We are pleased to now project growth for Beauty in our revised fiscal '20 outlook introduced today. Leading that growth is Beauty appliances, which have been growing share in both brick-and-mortar and online, as the appeal of our Revlon Volumizer continues to build, earning over 10,500 online reviews with an average rating of 4.3 stars out of 5. Strong consumer and retail demand continued to be above expectations during the quarter. This high demand contributed to higher logistics costs and lower operating efficiency in Beauty. We expect short-term compression of Beauty segment margins as we increase our supply chain throughput and return to peak operating efficiency. As we look at our long-term trajectory in Beauty appliances, we are hard at work on its pipeline of new products, on international expansion and our marketing efforts. Turning to other parts of our Phase II strategy, we are diligently focused on maintaining a strong balance sheet. With our low leverage, we are in a strong position to deploy capital towards accretive acquisition that has more critical mass to our flywheel, more opportunistic share purchases and repurchases. We are also focused on optimizing our cash flow through a combination of improving inventory management, extending our payment terms, and growing our operating earnings. We are highly focused on managing the complexities of currency volatility, tariffs, rising commodity and logistics costs, intense competition in the marketplace, and continued evolution of the global retail channel landscape. As we have discussed in our prior calls, and Brian will address in his comments, we continue to deploy a variety of levers to mitigate the business impacts of tariffs. I remain confident about the power of our Phase II choices to position our company for continued long-term profitable growth. Additionally, we continue to invest in our associates who come to work with a passion for excellence as we deliver value to consumers and customers while dealing ethically with suppliers and supporting our communities. Focusing on delivering for all stakeholders has been a hallmark of Helen of Troy throughout its transformation, and we’re proud to continue that work. I will now turn the call over to Brian.
Brian Grass, CFO
Thank you, Julien. Good morning everyone. We’re pleased with our second quarter results and to be in a position to raise our full year consolidated outlook. Before discussing the quarter in more detail, I’d like to further discuss the impact of tariffs, since I know it is an important topic for many of you as it is for us. As you probably know, the U.S. announced List 4 tariffs of an additional 15% on a broad range of consumer goods. List 4A became effective on September 1st and List 4B is scheduled to become effective on December 15th absent any new developments. The majority of increases that will impact our product categories are List 4B tariffs. Based on the scheduled effective date, we expect minimal impact on our cost of goods sold in fiscal '20, with most of the impact in fiscal '21. Once implemented, we anticipate taking the same approach that we’ve taken in the past. The goal would be to offset the gross profit dollar impact with pricing, cost reduction, supplier consolidation, other sourcing changes, exclusions, and other mitigation efforts. We also expect to forward buy some inventory in selected categories during the third quarter in order to defer the impact on our cost of goods sold as long as possible. I’d also like to briefly explain the various impacts of foreign currency fluctuations that I will be discussing during the call. Average foreign exchange rates were generally unfavorable compared to the same period last year, which negatively impacts the year-over-year comparison of net sales and gross profit. You’ll also hear me refer to a favorable impact from foreign currency and SG&A, which primarily relates to the settlement of favorable currency hedges that are intended to offset the impact of unfavorable currency fluctuations on net sales and gross profit. Turning to review of the quarter, we achieved strong results with adjusted diluted EPS above our expectations, largely due to stronger than expected net sales in Housewares and Beauty, partially offset by Health & Home which was slightly below our expectations. EPS also benefited from tariff exclusion refunds received in Q2 related to certain duties paid in prior quarters. Exclusions were granted for several categories of our goods, primarily concentrated in our Health & Home segment. At this time, exclusions are being granted for a one-year period of time. Increased tariffs will become effective for these product categories at the end of that year if the exclusion is not granted again. We believe it’s prudent to consider the exclusion refunds as one-time in nature. Furthermore, we expect that much of the refund benefit will be reinvested for the benefit of our brands and our retail customers. We believe that reinvestment is the best way to mitigate any potential declines in consumer demand that may result from tariffs and related consumer price inflation. Consolidated sales revenue was $414 million, a 5.2% increase over the prior year, driven by core business increases of 5.7% reflecting strong demand in the Housewares segment, growth in consolidated online sales, and increase in appliance sales in the Beauty segment. Core business growth came on top of 14.2% growth in the same period last year. Sales in the online channel grew approximately 25% year-over-year to comprise approximately 24% of our consolidated net sales in the second quarter. These factors were partially offset by lower sales in the Health & Home segment, a decline in personal care sales within the Beauty segment, and the unfavorable impact from foreign currency of approximately $1.9 million or 0.5%. This was a very strong quarter for our Housewares segment which posted a core business increase of 22.4% on top of 19.4% growth in the same period last year. The segment continues to see strong demand for both OXO and Hydro Flask brands online and in store. Health & Home core business net sales declined 9.1%, which was slightly below our expectations. The decline reflects an especially difficult comparison to core business growth of 20.3% in the same period last year, the timing of seasonal shipments, less wildfire activity this quarter, and net distribution changes year-over-year. Beauty core business net sales increased 9.3% primarily due to growth in the appliance category, especially online and growth in international. These factors were partially offset by a decrease in brick-and-mortar and a decline in personal care. Consolidated gross profit margin was 43% compared to 39.4%. The 3.6 percentage point increase is primarily due to a higher mix of Housewares revenue at a higher overall gross profit margin, the benefit of tariff exclusion refunds I mentioned earlier, and a lower mix of shipments made on a direct import basis. These factors were partially offset by the net margin dilutive impact from tariffs and related pricing actions, unfavorable foreign currency, a lower mix of personal care sales, and higher inbound freight due to high demand in Beauty appliances. SG&A was 29.8% of net sales compared to 26.3%. The 3.5 percentage point increase was primarily due to higher incentive compensation expense related to short and long-term performance, the unfavorable impact of a lower mix of shipments made on a direct import basis, higher outbound trade expense, higher advertising and new product development expense, and higher amortization expense. These factors were partially offset by the impact from tariff-related pricing actions taken with retail customers, greater operating leverage, and the favorable impact from foreign currency hedges. GAAP operating income grew to $54.5 million or 13.2% of net sales. This compares to $50.7 million or 12.9% of net sales in the same period last year. Consolidated adjusted operating income increased 10.4% to $65.8 million, or 15.9% of net sales, compared to $59.6 million or 15.1% of net sales in the same period last year. Housewares’ adjusted operating margin was flat at 22.4%. The quarter benefited from a more favorable product and channel mix and greater operating leverage. These factors were offset by higher incentive compensation expense, higher new product development expense, and higher freight and distribution center expense to support integration activity and higher retail and direct to consumer demand. Health & Home’s adjusted operating margin was 11.2% compared to 10.5%. The 0.7 percentage point increase primarily reflects the tariff exclusion refunds and the impact of favorable currency hedges. These factors were partially offset by higher media advertising expense, unfavorable operating leverage, the margin impact of a less favorable channel mix, and the impact of unfavorable currency on net sales and operating margin. Beauty adjusted operating margin was 11.9% compared to 12.8%. The 0.9 percentage point decrease was primarily due to the impact of higher freight expense to meet strong demand in the appliance category, higher incentive compensation expense, the margin impact of a less favorable product and channel mix, and the impact of unfavorable currency on net sales and operating margin. These factors were partially offset by lower advertising. Our effective tax rate was 10.3%, compared to 8.3%. The year-over-year increase in the effective tax rate is primarily due to shifts in the mix of taxable income in our various tax jurisdictions, and increases in certain statutory tax rates. Income from continuing operations was $46.1 million or $1.83 per diluted share, compared to $44 million or $1.66 per diluted share. Non-GAAP adjusted income from continuing operations grew to $56.5 million or $2.24 per diluted share, compared to $52.5 million or $1.98 per diluted share. This represents a 13.1% increase in adjusted diluted EPS, the strong results on top of 20% growth in the same period last year, and 10.2% growth in the first quarter of fiscal '20. We believe our second quarter results demonstrate the benefits of our diversified portfolio and our reinvestment formula, which targets a healthy balance between growth investments and margin expansion. Now moving on to our financial position. Accounts receivable turnover increased to 68.4 days for the second quarter, compared to 65.4 days in the same period last year. Turnover is an average trailing 12 months calculation, and the increase primarily reflects the timing of revenue growth and cash collections period-over-period. Our accounts receivable balance at the end of the second quarter was $310.4 million, compared to $313.6 million at the same time last year. Trailing 12 months inventory turnover was 2.9 times, compared to 3.3 times in the prior year period. Inventory was $370.9 million, compared to $284.8 million at the same time last year. This includes approximately $12 million of additional inventory value related to higher tariff rates, as well as higher inventory levels due to lower direct import sales in the first half of fiscal '20. The remaining increase largely reflects additional inventory to support strong demand and distribution center volume, as well as for risk management as we progress with supplier consolidation, complete and optimize integration activities, and implement systems and processes to increase capacity and throughput for future growth. Even as we plan for tariff-related forward buying of inventory in the third quarter, we continue to expect to improve our inventory levels over the remainder of the year and believe we remain on track to meet our cash flow objectives for the full fiscal year. Net cash provided by operating activities from continuing operations for the six months of fiscal '20 increased $0.9 million compared to the same period last year. The increase was primarily driven by an increase in income from continuing operations, higher non-cash expense, the collection of a $10.8 million supplemental payment in the second quarter related to the divestiture of our former Nutritional Supplements segment, and the comparative impact of a $15 million dispute settlement payment made in the same period last year. These factors were offset by an increase in cash used for inventories. Total short and long-term debt was $301.2 million, compared to $301.1 million. Our leverage ratio was 1.2 times for both periods. Turning now to our outlook. Our strong business performance in the first half of the year gives us the opportunity to raise our full year sales and earnings outlook while further increasing our growth investments consistent with our stated objective of maintaining a healthy balance between margin expansion and growth investment. For fiscal '20, we now expect consolidated net sales revenue to be in the range of $1.61 billion to $1.64 billion, which implies consolidated sales growth of 2.9% to 4.8%. This compares to our prior expectation of 1.7% to 3.6%. Our net sales outlook reflects an increase in Housewares net sales growth to 13% to 15% compared to our prior expectation of 6% to 8%. We're lowering our outlook for Health & Home net sales to a decline in the low single-digits compared to our prior expectation of net sales growth of 2% to 3%. This reflects second quarter performance and the lower expected growth in the second half of the year due to net retail distribution changes and the unfavorable impact of foreign exchange rates year-over-year. We continue to model an average cough/cold/flu season but are positioned to meet the demand of a strong season if one should occur. We're increasing our outlook for Beauty and now expect sales to grow in the low single-digits compared to our prior expectation of a decline in the low single-digits. We now expect consolidated GAAP diluted EPS from continuing operations of $6.84 to $7.04 and non-GAAP adjusted diluted EPS from continuing operations in the range of $8.50 to $8.75. Our net sales and diluted EPS outlook continues to assume that the severity of the upcoming cough/cold/flu season will be in line with historical averages and that September 2019 foreign currency exchange rates will remain constant for the remainder of the fiscal year. The year-over-year comparison of adjusted diluted EPS from continuing operations is now expected to be impacted by an increase in growth investments of 13% to 18% in fiscal '20. Our diluted EPS outlook is based on an estimated diluted shares outstanding of 25.3 million. The increase in adjusted diluted EPS outlook for fiscal '20 reflects the company’s strong performance in the second quarter, partially offset by an expected increase in growth investments, higher expected incentive compensation expenses, and higher expected freight and distribution costs. The higher freight and distribution costs are expected in order to support strong demand in our Housewares segment and Beauty appliances business as well as integration activity and increases in capacity and throughput of our operations for future growth. We expect the reported GAAP effective tax rate range of 9.6% to 10.7% and an adjusted effective tax rate range of 9% to 10% for the full fiscal year 2020. The likelihood and potential impact of any fiscal '20 acquisitions and divestitures, future asset impairment charges, future foreign currency fluctuations, further tariff increases, or future share repurchases are unknown and cannot be reasonably estimated. Therefore, they are not included in our sales and earnings outlook. And now, I'd like to turn it back to the operator for questions.
Operator, Operator
Our first question is from Bob Labick at CJS Securities. Please proceed.
Bob Labick, Analyst
Yes. So I wanted to start with the tariff exclusion refund, just to get a little more information. I appreciate what you’ve told us so far. But can you just tell us if there’s more to follow? It sounds like maybe there’s another quarter. Can you quantify it? And was it in revenue in Health & Home, or how should we think about that hitting the P&L this quarter?
Brian Grass, CFO
Yes, Bob. Thank you for the question. We believe it’s not ideal to disclose the impact of an individual tariff in isolation. Doing so is misleading since there are numerous factors at play. The tariffs affect our profit and loss statement along with various pricing changes we've implemented. There could also be demand impacts related to pricing, adjustments in sourcing, cost savings, and recent tariff exclusion refunds, all of which interact differently over time. Focusing on just one factor would not give a full picture. As mentioned in our prepared remarks, we believe the optimal use of the refunds is to reinvest them for the benefit of our brands and retail partners. We anticipate that most of the refunds will be reinvested in fiscal 2020, rendering any remaining profits minimal. Furthermore, we've increased our sales and earnings outlook twice despite the challenging tariff environment. We're committed to that outlook, which encompasses our best estimates of the various tariff impacts. Therefore, we don't feel it's appropriate to disclose specific dollar amounts at this stage due to all the moving parts. The impact primarily affects the cost of goods sold and gross profit margin, rather than sales.
Bob Labick, Analyst
As it relates to another strong quarter, especially given a challenging comparison, we saw core sales growth of 5.7%. Can you provide some insight on how much of the growth can be attributed to pricing versus volume, considering the various factors like tariffs? It seems that pricing has shifted somewhat in this new environment.
Brian Grass, CFO
Yes, I mean there’s definitely some price impact there. I think you should recognize that the majority of where we take some price increases just because that’s where the majority of the tariffs have come into play so far is in Health & Home. There’s some in Housewares but less in Housewares, more in Health & Home. So there is a price impact there, but the part that’s very difficult to quantify and we haven’t really seen that we can get our arms around is the demand impact. So you could say there was a price impact but we know that there’s probably also a demand impact that’s just very hard to quantify.
Julien Mininberg, CEO
Yes, we grew internationally; no tariff impacts there. And then in categories that didn’t have much tariff impact resulted in significant growth. So it’s a combination of the two. There’s just no question. Mathematically, if the price goes up and you sell the same volume of products, there’s revenue benefit.
Bob Labick, Analyst
Okay, last one from me. It seems like it's nearly an all-encompassing situation. However, I wanted to focus a bit more on the Housewares segment. The growth is impressive. So, my question is what led to the increase in revenue expectations and what are the main changes driving that? Has it been your stronger performance internationally or successes in U.S. distribution? Please provide some insights because you are clearly performing exceptionally well. I’m just trying to understand it better.
Julien Mininberg, CEO
Thanks, Bob. We had a strong quarter in Housewares, exceeding our initial expectations for the year. There are several factors contributing to this success. The anniversary of the Hydro Flask planogram expansion at DICK’s was beneficial, and we’ve seen significant growth in Hydro Flask, particularly in the East, which we identified as a key focus area about a year and a half ago. Our direct-to-consumer sales in Housewares have also increased, especially for Hydro Flask. We've been ramping up our warehouse's throughput and capacity, which will require larger investments in the second half of the year than we initially anticipated. We're pleased to make these investments to meet consumer demand, and our warehouse is effectively supporting this growth. Brian, do you have additional insights on this?
Brian Grass, CFO
Yes. I’d like to add a bit more. Julien mentioned the DICK’s planogram expansion. I want to emphasize that the second quarter was the last period for comparisons against a time when this expansion had not yet started last year. Starting in the third quarter, we will be comparing against last year’s planogram expansion at DICK’s, which will make comparisons in the second half of the year much more challenging than in the first half. This includes the initial pipeline filling that occurred in the third quarter of last year, as well as the ongoing year-over-year distribution comparisons. I appreciate the comments and the question regarding the strong growth. Some may wonder why the growth might not remain as high in the second half of the year, and this is one of the main reasons.
Operator, Operator
Our next question is from Olivia Tong with Bank of America, Merrill Lynch.
Olivia Tong, Analyst
First is just a follow-up on the tariff refund. First, kind of what drove that refund, was it just an overpayment and the rates are now settled? So going forward, you won't see as much of an episodic change? Or is there going to be continued volatility in terms of the tariff refunds?
Brian Grass, CFO
We don't expect that much continued volatility and what happened is, all importers have the ability to apply for exclusions and refunds depending on their situation or the case that they were able to make to the USTR. We happen to file exclusions with the help of our third-party advisors. And we're successful in getting some exclusions in various categories. So it's really based on how active you are in filing your exclusions and stating the case for your exclusions. And then what the USTR is willing to grant for various reasons. Now, I just want to make sure it's clear. They grant these for a year, a period of time, from the date of the exclusion; there's no guarantee that they will be granted again. In fact, you got to believe that it's in their interest not to continue to grant the exclusions because I think the motivation is to get manufacturers to move their sourcing to the U.S. And so to continue to grant exclusions wouldn't incentivize the behavior that they're looking for. So we don't expect huge meaningful amounts of activity on a going-forward basis. There could be some and we're going to try to get some where we can. But it's not the main lever that we're pursuing in terms of how to mitigate all the duty impacts. Just to make clear, it's what the amount we received is a recapture of duties that we had paid over like the last three quarters. So starting in the second half of last year, and then the first quarter of this year we paid duties because the exclusion had not been granted. And then once the exclusion was granted, we got a refund of all those past duties paid.
Julien Mininberg, CEO
Yes. As Brian mentioned before, we're largely reinvesting. So the impact on the bottom-line is actually very small.
Brian Grass, CFO
Well, for the quarter, it's big, because obviously …
Julien Mininberg, CEO
The impact on the bottom line is actually very small.
Brian Grass, CFO
Oh! Yes. We don't have the ability to reinvest so quickly. But our plan is to reinvest the majority of it by the end of the fiscal year.
Julien Mininberg, CEO
You can see in our outlook that, mathematically, this was above Wall Street expectations, and it is expected to appear more in the outlook. Factors such as foreign exchange and others, as Brian mentioned, are areas where we are reinvesting back into the business with the strategy of operating our flywheel to drive growth, expand margins, and achieve better results. This approach allows us to maintain the momentum of our operations rather than simply capitalizing on short-term gains.
Olivia Tong, Analyst
Just a follow-up there. And relative to the 13% to 18% increase in growth investments that you're planning for the full year, what was that number for the first half?
Brian Grass, CFO
The growth in investments, I would say, it's in the range, it might be closer to the bottom of that range, whereas we expect to be at the higher end of the range in the back half of the year.
Julien Mininberg, CEO
Yes, we'll look it up for you, Olivia. It’s a couple of points lower, and we've actually done it twice now. We increased it at the beginning of the last call when we reported Q1, and we mentioned that we would be investing back into growth. We're doing it again here, so that number is increasing by about a point each time.
Brian Grass, CFO
We have discussed this previously. I wish I could provide a consistent pattern for our growth investment spending, but it's unreliable as it varies by each individual business, depending on their specific opportunities, categories, promotions, and seasons. I understand it may be challenging to track which spending aligns with which quarters and whether a regular pattern can be anticipated. Unfortunately, I cannot assure you that this is possible, as it is too complex.
Julien Mininberg, CEO
It might be helpful to consider a full-year perspective. As we mentioned during the Investor Day, our company has set written targets focused on supporting our business with a growth rate of about 10% each year. As long as we can identify good opportunities that provide strong returns on investment, we will maintain that target. If we encounter a lack of good returns, we would certainly adjust our strategy. Currently, we are finding promising opportunities. As Brian pointed out, many factors such as seasons, new product launches, competitive activities, and promotions are at play, and we remain flexible. We prefer to stay agile rather than commit to a strict 2.5% increase every quarter.
Brian Grass, CFO
And we double checked that number while we were talking and we are at the bottom of the range for the growth investment increase and we expect to be in the higher end of the range in the second half of the year.
Olivia Tong, Analyst
In terms of the different product segments, we've discussed Housewares and Beauty already. Regarding Health & Home, you mentioned some weak performance this quarter and a downward adjustment for the full year. You noted that the season was relatively quiet, along with a few factors contributing to this, including the challenging comparison to last year's wildfires. Could you elaborate on the distribution you referred to, the competitive landscape, and your reasons for believing that growth will resume in the second half? What insights give you confidence that growth will return in Q3?
Julien Mininberg, CEO
There are a couple of things there that are pretty important. You might remember, we had some nice wins on the distribution side in the year-ago base. And if you look at the seasons or the categories that Health & Home plays in whether it's humidifiers, thermometers, bug zappers, water filters, air filters, and so many different parts of the Health & Home world, there are constant category line reviews going on, and there's wins and even some losses each time. And sometimes you get a series of perfection. It happened last year. This year was more of a sort of normal win-loss total and it's just common.
Brian Grass, CFO
Well, Julien, I wouldn’t say that. I believe the segment has been performing well in terms of net distribution over the past three or four years, but that level of success isn't something that can be maintained indefinitely. You can't succeed every single year, and I would consider this to be a year where the net distribution exchange was slightly down.
Julien Mininberg, CEO
Yes, it’s important to realize that this occurs regularly. While we've been experiencing a winning streak and have generally succeeded over a multi-year period, the 3.4% four-year compound annual growth rate I mentioned is derived from 12 quarters of results, resulting in 16 quarters when accounting for all wins and losses. If you were to consider what to expect based on that history, the answer would be 3.4%. This year, we stated that we expect to return to growth in the third and fourth quarters, particularly in the latter half of the year. There are two factors contributing to this: one is a weaker comparison from the previous year, and the other is the strength in our business. We are seeing significant strength with new products and international expansion, particularly in Asia, which we are pleased about. You may recall that in the fourth quarter of last year, we addressed a short-term excess inventory issue in Asia, which has now resolved well. This illustrates how our results can fluctuate. All of these factors will contribute to bringing Health & Home back to growth in the latter half of the year. Unfortunately, we did lower our guidance for the year, which you noticed. However, keep in mind that compound annual growth rate to understand our performance over a multi-year horizon. As I noted in my prepared remarks, when comparing to the previous year, we had significant growth this second quarter in Health & Home compared to that period. It’s better to assess performance over multiple years to see the overall wins.
Operator, Operator
Our next question is from Frank Camma with Sidoti. Please proceed.
Frank Camma, Analyst
Could you provide a bit of clarification on the demand side? It seems that the tariffs are primarily affecting the Health & Home sector, and perhaps that's where the exclusions apply as well. From a consumer perspective, wouldn't that be an area with price elasticity, given that many of those purchases aren't discretionary? I'm considering this from a macro perspective.
Julien Mininberg, CEO
Yes, I concur, Frank. People do have options in those categories. I would not say that there are great substitutes. We’re the overwhelming market leader in things like pharmacy humidifiers, and ear thermometers, air purifiers to give three examples. So, if you have a family or a child suffering from things like allergy, asthma, fever, cough, congestion, cold, for most consumers given that market share, they’ve spoken and their answer they're looking for the best. They want the leader, they want the reliable product, they want the features. In our case, we’ve had a lot of innovations. So they also want the differentiation that we’ve put into the market to make our products exceptional and delight those consumers that they want that, and they’re willing to pay for it, and they should. These are excellent products.
Frank Camma, Analyst
And pricing is not going to be the driver as to why they buy it, right? I mean you don’t go out and say, 'Oh! I want to buy this thermometer because it’s $10, and it’s cheap today, it’s on sale?'
Julien Mininberg, CEO
So, I can’t say that. I mean people are price sensitive and there are alternatives. There’s even private label in the retailers who largely stay close to some of the best innovations in the category. So there are alternatives but those drivers that I listed would certainly drive people to our products, and we are seeing that. And you can see it in the shares as well. Our shares generally look good. And these things also go up and down a little bit over time; they tend to go up for all the reasons I just mentioned.
Frank Camma, Analyst
I would have thought you saw some demand impact. Are you not noticing any changes in demand for your more discretionary items, like a $30 tumbler, where people might be more price conscious? It seems like the answer is no, given the circumstances.
Julien Mininberg, CEO
Yes, I generally agree with you for clarity, especially in the non-discretionary areas where the products are well-regarded and possess premium features. We like what we see in terms of demand. There are fluctuations and alternatives, so we can't just charge any price. This isn't the case in a competitive environment, and we're being very cautious. We are focusing on managing our costs. Regarding the $30 tumbler, we didn't encounter tariffs in that category, so there wasn't any pricing adjustment, which means it wouldn't serve as an accurate test of demand elasticity. Nonetheless, we have observed significant demand increases at those prices in all previously mentioned areas, and we are pleased to meet that demand and expand our market share, business, and profits. Yes. I understand you might expect a quantitative response, but I’ll provide a qualitative one because I believe that approach is more appropriate. Each year, we innovate across our main platforms, and this can be observed in all categories, including the ones you mentioned. For instance, in Housewares, specifically on OXO, we introduced a substantial number of new products in Q2, with more on the way in Q3 and Q4. A significant example of this is the POP 2.0 containers, which were slightly delayed but are expected to positively impact the market. In terms of our innovation pipeline, it's extensive, and these products are proving beneficial. This extends beyond POP to many new products on the OXO side. On the Hydro Flask side, we’ve launched a variety of new items, including products beyond just bottles. In our last call, we highlighted Hydro Flask hydra packs, especially designed for women’s body shapes. This year, we also launched new types of lunch boxes, updated versions of our totes, and new colors for our soft packs, in addition to a wide array of bottles and caps in various shapes, colors, and sizes. The new product initiative is thriving. In the Beauty category, as noted in our prepared remarks, our consumer-centric innovations in appliances are attracting substantial demand, making it challenging to keep up, which has put pressure on our supply chain. Consequently, we've invested in logistics this year and continue to build our capabilities and throughput in the latter half of the year.
Frank Camma, Analyst
And just the last two are real just quick. Was the UK intangible tax in the quarter in the SG&A?
Brian Grass, CFO
Yes, it was. We mentioned it last quarter because it represented a significant change from our forecast. Now it's included in our forecast, so we haven't focused on it as much, but it's reflected in the SG&A.
Frank Camma, Analyst
Could you provide some insight on capital allocation? You paid down some debt over the last six months. Should we expect your excess cash flow to be directed there, unless there's an acquisition? Also, it seems you haven't repurchased much stock lately, likely due to the current valuation. Could you comment on that?
Brian Grass, CFO
Yes, I believe so. If we didn't feel confident in our share performance without an acquisition and didn't see an opportunity for share repurchases, we would focus on paying down debt. We anticipate having strong cash flow in the second half of this fiscal year. We're actively pursuing opportunities in mergers and acquisitions, and we'll see how that develops.
Operator, Operator
Our next question is from Lisa Bolton Weiser with DA Davidson. Please proceed.
Linda Bolton Weiser, Analyst
I understand that the IRI data doesn't fully capture your point of sale performance. It appeared that your growth was quite robust in certain areas, but there seemed to be a slight slowdown in September, particularly with hair appliances and possibly thermometers. Could you discuss if there was a general slowdown following the back-to-school season? Additionally, could you provide some insight into the overall cadence?
Julien Mininberg, CEO
Yes, sure. And I saw your note on the topic and great that you're seeing that data so it's great. We actually see a fair amount of Nielsen data. We're not seeing that. These things go up and down. And as you yourself called out in the note, that the coverage of our world is less than 50%, probably more like 30%, 40%, depends on what part you're talking about. And then in specific categories like hair appliances, as we mentioned in our prepared remarks, we're seeing growth in brick-and-mortar. So that will help. And brick-and-mortar generally in hair appliances is not a growth category. So whoever is growing in that category is taking share from others, and that has been the case especially behind the strength of volumizer. And in the case of online, we've seen sort of explosive growth in a very positive way and very large share gains that wouldn't be measured in Nielsen. And I don't think they are captured in IRI either. And in terms of September, specifically, in my view it's hard to talk in a Q2 call about a Q3 month but I'll give you the most generic comment I can which is we're not seeing a slowdown.
Linda Bolton Weiser, Analyst
Can you comment on whether the current tariff situation and the uncertainties surrounding it have slowed down decision-making in the M&A space? Does this make it more challenging for you to make decisions or cause you to be more cautious about certain M&A targets? Thank you.
Julien Mininberg, CEO
That's a great question. There are two points I'd like to make. First, the earlier discussion about tariff refunds highlights the temporary fluctuations caused by tariffs, which are primarily distractions rather than long-term strategic influences. We don't expect tariffs to continuously rise in a new direction. However, they are unpredictable and do create uncertainty. Regarding M&A, this uncertainty isn't hindering our pursuit of opportunities. Brian noted that we are actively working in that area. When it comes to specific M&A decisions, tariff considerations are factored into valuations since we know the product details and tariff rates from announcements, like those for List 4. Unless circumstances change, tariffs affect asset valuations. We understand profitability has been impacted, and as Frank indicated, we can make assumptions about demand elasticity, growth rates, and consequently determine the value and potential growth of an asset. We view it this way rather than allowing it to hinder our capital deployment. It's essential not to overlook these factors and maintain a realistic perspective instead of acting as if everything remains normal, as tariffs are significant in the short term.
Brian Grass, CFO
I would just change slightly what Julien mentioned about altering the profit perception of an acquisition target. That may not necessarily be true. In some cases, we would evaluate whether we could use the same strategy we've been using, which involves assessing the ability to raise prices to offset gross profit. During negotiations, we would address the lost profit. However, we would also consider the possibility of raising prices once we acquire the asset to mitigate the tariff impact. I would say we are exploring all scenarios and options as we assess potential acquisition targets, and it hasn't deterred us from considering these targets. We are open to taking on risk, either by believing we can offset it through pricing or possibly revising valuations downward if we feel we cannot counter the tariff impact.
Operator, Operator
Our next question is from Steve Marotta with CL King & Associates. Please proceed.
Steve Marotta, Analyst
Julien, can you please speak to international growth, specifically in the second quarter on a consolidated basis? Can you remind us what the current penetration is for international, where the largest opportunities are? I know in the Investor Day regarding Phase II, you talked a lot about international being a source of focus, and that the coming year, if anything, would be a little bit more planting seeds than selling, if you will, but it seems like you're getting some early indications of demand pull-through. If you could just speak in a little bit more specifics about international growth currently and where you are from an infrastructure standpoint, that'd be helpful?
Julien Mininberg, CEO
Yes, that's a great question. It's very strategic for us as we focus on international growth, and we saw some progress this quarter. Currently, the company has a 20% penetration in international markets, providing a solid foundation to build from. Europe and Asia are the key regions. This gives you an idea of our deployment. Within those areas, we have strong infrastructure in Europe and moderate infrastructure in Asia. Additionally, we have expanded go-to-market capabilities outside of these regional organizations, like in Housewares in Japan and some online activities. We noticed growth that slightly exceeded our average consolidated rate, indicating that international performance is stronger than expected, particularly in Asia, where profitability is notably higher. As we move forward with our strategic choices under Nicholas Lannis, we're excited to take action on our plans for international focused leadership. We previously mentioned at Investor Day that we were working on this, and now we are ready to implement these changes. Nicholas will initially focus on Europe and Asia. Regarding infrastructure adjustments, it’s a bit early to determine changes, but we will conduct a strategic review in December as part of our annual planning process, looking ahead three years for potential changes to boost growth. At Investor Day, we estimated about a $100 million organic growth opportunity in international markets, which, when calculated against the 20% base, would result in a higher growth rate than the overall company during Phase II. So, with our target of 2.5% to 3.5% organic growth for the total company in Phase II, aiming for $100 million growth from the 20% segment indicates we expect more from international markets. Specific investments are underway; for example, Health & Home in Asia and our Beauty business, notably the volumizers, are performing well internationally, contributing to the growth we observed this quarter. I can confidently state that international growth is a major focus for all four of our presidents, including the divisional leaders and Nicholas. During the December strategy reviews, we will better understand their decisions for fiscal years '21, '22, and '23 regarding infrastructure and investment.
Brian Grass, CFO
And Steve, just to clarify, it's slightly higher without considering the impact of currency. When you include currency, it's not the same, but we sometimes analyze it both ways.
Steve Marotta, Analyst
And my second question is, as I understand that the Australian flu season was particularly acute this year, do you find that that's often a leading indicator for North America? Is that what your internal research shows?
Julien Mininberg, CEO
It's quite mixed. So the short answer is no, not really. The reason for that is it's very early in the season, and everyone is trying to find clues to understand what kind of season it will be. There is a significant debate over whether Australia's season, due to its location compared to North America, aligns with their version of the season that the Western Hemisphere just experienced or what the Western Hemisphere is about to experience. It raises the question of which hemisphere influences the other first. It's a timeless question, and we might not have the answer. I can say that the strains of the virus are more significant than this debate, and that’s why it remains unresolved. The strains evolve over the year, whether they begin in the Southern Hemisphere and move to the North or vice versa; they do mutate. Therefore, regardless of hemispheric origin, you end up dealing with varying strains like H1N2, H2N3, and so forth. Then there's the effectiveness of flu shots, along with the rhinovirus, which causes colds, as opposed to the influenza virus, leading to a complicated situation. Considering which strains are included in the flu shot only adds to the confusion, and eventually, you have to acknowledge that a higher power will determine what the flu season will truly be like.
Steve Marotta, Analyst
Julien, that's very helpful. I don't anticipate that you would answer the chicken and egg on an open line, but I will certainly press you on to that.
Julien Mininberg, CEO
Yes. I'm not trying to be clever with my comment; I'm just stating that it's not really a leading indicator. It's also unclear if it functions as a trailing indicator. It's just another part of the world, and they experience flu as well, that's for sure. There was a CNN article yesterday that emphasizes taking it out of the realm of anyone's personal opinion. It might have been referenced by the CDC or WHO, but in either case, they are both authoritative sources on viruses, and they provided an explanation. At the end of their quote, they mentioned, 'So as you can see, it's clear as mud.' I'm not criticizing anyone; I'm simply recognizing that science hasn't completely figured this out yet. While we don't wish for people to be sick and don't take pleasure in illness, we are proud to create products that help people feel better. When they are unwell, we are happy that our products are their preferred options.
Operator, Operator
We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Mininberg for closing remarks.
Julien Mininberg, CEO
Yes. Well, thank you, and thank you again to everyone for joining us. We're very proud to see Phase II continuing to start off very strong. We look forward to speaking to many of you in the coming weeks and updating you on our progress, and we'll report our next results for the third quarter in early January.
Operator, Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.