Helen of Troy Ltd (HELE) 2005 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the Helen of Troy's second-quarter earnings conference call for fiscal 2006.

At this time, I would like to inform you that all participants are in a listen-only mode.

At the request of the Company, we will open the conference up for questions and answers after the presentation.

Our speakers for this morning's conference call are Gerald Rubin, Chairman, Chief Executive Officer and President;

Christopher Carameros, Executive Vice President;

Thomas Benson, Senior Vice President and Chief Financial Officer; and Robert Spear, Senior Vice President and Chief Information Officer.

I will now turn the conference over to Robert Spear.

Please go ahead, sir.

Good morning, everyone, and welcome to Helen of Troy's second-quarter earnings conference call for fiscal year 2006.

The agenda for this morning's conference call is as follows.

We will have a brief forward-looking statement review followed by Mr. Rubin, who will discuss our second-quarter earnings release and related results of operations for Helen of Troy; followed by a financial review of our income statement and balance sheet for the quarter by Tom Benson, our Chief Financial Officer.

And finally, we will open up the floor to questions and answers -- question-and-answer session for those of you with any further questions.

Safe Harbor.

This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance.

A number of risks or uncertainties could cause actual results to differ materially from historical or anticipated results.

Generally, the words anticipates, believes, expects and other similar words identify forward-looking statements.

The Company cautions listeners to not place undue reliance on forward-looking statements.

Forward-looking statements are subject to risks that could cause such statements to differ materially from actual results.

Factors that could cause actual results to differ from those anticipated are described in the Company's Form 10-Q, filed with the Securities and Exchange Commission for the second quarter 2006 ended August 31, 2005.

Before I turn the conference call over to our Chairman, Mr. Rubin, I would like to inform all interested parties that a copy of today's earnings release has been posted to our website at www.hotus.com.

The release can be accessed by selecting the Investor Relations tab on our homepage and then the News tab.

I will now turn the conference over to Mr. Gerald Rubin, Chairman, CEO and President of Helen of Troy.

Thank you, Bob, and good morning to everybody.

Helen of Troy Limited today reported sales and earnings for the second quarter ended August 31, 2005.

Second-quarter sales declined 7.7% to $130 million versus sales of 141 million in the same period of the prior year.

Second-quarter net earnings were 9.452 million or $0.30 per diluted share compared with 18.848 million or $0.57 per diluted share for the same period a year ago, a decline of 49.9%.

Sales for the 6-month period ended August 31, 2005 increased 3.8% to $258 million versus 248 million for the previous year.

Net earnings for the first half of this year were $20 million or $0.63 per diluted share versus 33 million or $1.02 per diluted share in the same period of last year, a decline of 40%.

Decreases in sales in the Company's personal care segment and increases in selling, general and administrative expenses during the quarter were the primary reasons for the net earnings decline.

Second-quarter sales and earnings were less than we had expected.

Challenging and difficult economic conditions in our marketplace have prevailed over the past few quarters.

We believe this environment may continue into the second half of our current fiscal year.

These conditions over the past quarter have been negatively impacted by declining consumer confidence along with continued high oil and energy costs.

We believe these factors have negatively impacted consumer spending, so we are therefore revising our guidance for the current fiscal year.

Full year sales for fiscal 2006 ending February 28, 2006 are currently expected to be in the range of 575 to $590 million versus last year's sales of 582 million and previous guidance of 615 to 640 million.

Fully diluted earnings per share for fiscal 2006 are currently expected to be in the range of $1.80 to $1.90 per diluted share versus last year's fully diluted earnings per share of $2.35 and our previous guidance of $2.50 to $2.60 per diluted share.

EBITDA this year is expected to be $92 million versus $108 million last year.

Sales for the second half of fiscal 2006 are currently expected to be in a range of 317 to $332 million versus prior year's second-half sales of 333 million.

Net earnings per diluted share for the second half are currently expected in the range of $1.17 to $1.27 per diluted share versus the prior year's second-half earnings per diluted share of $1.33.

On a more positive note, we are pleased to report that our OXO houseware segment continues to be an industry leader in sales growth.

And Idelle Labs' grooming, skin and hair care product sales continue to exceed prior year's results.

As we previously discussed, this year has been a year of rebuilding our corporate support infrastructure in preparing to integrate OXO fulfillment operations into our processing systems.

We are therefore pleased to report that our 1.2 million square foot warehouse facility that we are building in Mississippi and related OXO conversion projects continue to progress on schedule.

We currently expect selling, general and administrative expenses to be reduced in the range of 8 to $10 million once we have fully integrated both our new distribution and warehouse facilities in OXO fulfillment integration programs.

We are also looking into other cost savings in SG&A.

Helen of Troy's balance sheet as of August 31, 2005 continues to be strong with cash of $8 million and stockholder equity at 445 million, an increase of 68 million in stockholders' equity from the comparable period last year.

We purposely increased our inventory this past summer for several reasons.

One was to lock in prices before any increases or changes in the Chinese Yuen.

We also wanted to make sure that we had delivery of inventory for our customers.

We also wanted to have inventory early to avoid the congestion of containers at the Long Beach Port.

Also, we wanted to make sure that we had inventory of new item introductions that are coming.

Inventory levels will be back to normal on February 28th, which is our fiscal year end.

We also expect to pay off our short-term loan that we have by the end of our fiscal year.

We expect stockholder equity to be approximately $480 million at the end of this fiscal year, which is approximately the same as our market cap.

And I don't recall this ever happening in our corporate history.

I would like to turn this conference over now to Tom Benson, our CFO.

Thank you, Jerry, and good morning, everyone.

We are disappointed with our operating performance for the second quarter.

Second-quarter net sales decreased 7.7% year over year.

In the second quarter of fiscal 2006, net sales were 130.4 million compared to 141.2 million in the second quarter of fiscal 2005.

This represents a decrease of $10.8 million or 7.7%.

I will discuss the reasons for the sales decrease under our segment net sales information.

Our second-quarter operating income decreased 44.1% year over year.

Operating income in the second quarter of fiscal 2006 was 14.1 million, a 10.8% rate, compared to 25.3 million or 17.9% for the second quarter of fiscal 2005.

This represents a decrease of $11.1 million or 44.1%.

Second-quarter net income decreased 49.9% in dollar terms year over year.

Net income for the second quarter of fiscal 2006 was 9.5 million, which is 7.2% of net sales, compared to 18.8 million or 13.3% of net sales in the second quarter of fiscal 2005.

This is a decrease of $9.3 million.

The major reasons for the net income reduction of 9.3 million were -- there was a sales decrease of $10.8 million, which has an impact of $5.1 million; we had an increase in cost of goods sold of 1.2%, which had a negative impact of $1.6 million; we had an increase in SG&A of $4.4 million; and we had an increase in interest rates and other income that had a negative impact of 0.7 million.

Due to lower earnings, we had a decrease in taxes, and we also had a decrease in tax rates, which provided a benefit of 2.5 million.

Some of those items is the $9.3 million decrease in net income.

Second-quarter diluted earnings per share was $0.30 for the second quarter of fiscal 2006 compared to $0.57 in the second quarter of the prior year.

This is a decrease of $0.27 per diluted share.

Now, I'll provide a more detailed review of the various components of our financial performance.

On June 1, 2004, we acquired certain assets and liabilities of OXO International for 273 million.

OXO is a leader in providing innovative consumer product tools in a variety of areas, including kitchen, cleaning, barbecue, barware, garden, automotive, storage and organization.

Brands that we sell include OXO Good Grips, OXO Steel, and OXO SoftWorks.

This business will be referred to as our housewares segment.

Our other segment is our personal care segment, includes the following product lines -- appliances, products in this group include curling irons, thermal brushes, hair straighteners, hairdryers, massagers, spa products, foot baths and electric clippers and trimmers.

Key brands in the appliance include Revlon, Sunbeam, Health o meter, Vidal Sassoon, Hot Tools, Wigo, and Dr. Scholl's.

Grooming, skincare and hair products are included in the personal care segment and consist of the following brands -- Brut, Sea Breeze, Skin Milk, Vitalis, Ammens, Condition 3-in-1, Final Net and Vitapointe.

Brushes, combs and accessories are also included in the personal care segment.

Key brands in the product category include Revlon, Vidal Sassoon and Karina.

The personal care segment net sales were 100.9 million for the second quarter of fiscal 2006 compared to 118.4 million for the second quarter of fiscal 2005.

This represents a decrease of 17.5 million or 14.8%.

Net sales decreases are a result of pressures to lower prices, additional competition on selected items, and additional costs associated with trade promotions.

The houseware segment net sales were 29.5 million in the second quarter of fiscal 2006 compared to 22.8 million in the second quarter of the prior year.

This represents an increase of 6.7 million or 29.4%.

Sales increases have been primarily driven by continued new product introductions, such as trash bins, teakettles and new cleaning items.

Gross profit for the second quarter was 60.2 million at a 46.2% rate compared to 66.9 million at a 47.4% rate in the second quarter the prior year.

This is a decrease of 6.7 million or a percentage decrease of 1.2 percentage points.

The decrease in gross profit percent of 1.2 percentage points is primarily due to a combination of higher costs of customer promotion programs and a reduction in selling prices on certain items.

We have also experienced some product price increases.

Selling, general and administrative expenses.

For the second quarter, SG&A expenses increased as a percent of sales.

They were 46 million, which is 35.3% of sales, compared to 41.6 million or 29.5% of sales in the prior year's second quarter.

This represents an increase of $4.4 million and a percentage increase of 5.8 percentage points.

The increase in SG&A percentage is primarily due to the following -- we've had increase in outbound freight costs of approximately $600,000; product and packaging development costs have gone up approximately 500,000; warehouse, storage and handling costs have gone up 1.5 million; professional fees have increased 400,000; our audit expanse has increased 250,000; depreciation has gone up 600,000; and customer-related costs have gone up 550,000.

That totals 4.4 million, which is the dollar increase year over year.

Outbound freight costs have increased due to fuel cost increases.

Products and package development costs are up due to new products and packaging changes that are in the market and will be introduced over the next year.

Warehouse, storage and handling costs are up due to more utilization of off-site warehouses and higher inventory levels.

Professional fees are up due to consulting fees for our worldwide information system.

Audit expenses up due to increased audits and Sarbanes-Oxley fees.

Depreciation is up due to placing into service September 1, 2004 our new worldwide information system.

The depreciation going forward will still be there, but it will not be a cost increase over the prior year starting September 2005.

Interest expense is up 1.1 million for the quarter due to higher interest rates and our floating rate debt.

Our tax expense for the second quarter of fiscal 2006 was 1.3 million, which is 12% of income before taxes.

This compares to a tax charge of 3.8 million or 16.6% of income before taxes in the second quarter of fiscal 2005.

The effective tax rate is down 4.6 percentage points compared to the prior year due to the mix of income and tax in jurisdictions with different tax rates and the movement of Hong Kong activities to Macau.

I will now discuss our financial position.

Our cash balance was 8.1 million at August 31, 2005.

We have a 75 million revolving line of credit in place, of which we borrowed 41 million, leaving us with approximately 34 million of available borrowing under this credit facility at August 31, 2005.

Accounts receivable increased 5 million year over year.

Accounts receivable days outstanding increased to 77.1 days at August 31, 2005 compared to 66.4 days at August 31, 2004.

Inventories at August 31, 2005 increased 60.4 million from August in the prior year.

Inventories are up due to our normal seasonal build, new product introductions and additional purchases on certain items that may be subject to future price increases.

Shareholders' equity increased 67.8 million to 445 million at August 31, 2005 compared to the prior year.

I will now update you on our financing activities.

To take advantage of local tax incentives and to finance the acquisition and installation of equipment in our Southaven, Mississippi distribution facility currently under construction, in August 2005, we entered into a loan agreement with the Mississippi Business Finance Corporation for up to 15 million of bonds.

We anticipate drawing on these funds over the next 9 months.

I will now turn it over to Jerry for some additional comments and questions.

Thank you, Tom.

I'd like to now open the floor for any questions.

(OPERATOR INSTRUCTIONS).

Kathleen Reed, Stanford Financial.

Can you talk a little bit about how you came up with your $1.82 to $1.98 new guidance for the full year -- just what are you assuming for the second half?

I know you put in your press release that you expect the economy to remain weak and declining consumer spending.

But can you also just talk about your expectations for Christmas, the commodity costs, interest rates and actually what is your new rate on your floating rate debt?

And if you've also factored in any revaluation -- any further revaluation I guess of the Chinese Yuen in your outlook?

This is Jerry.

The way that we built up our estimate is based on of course the first 6 months' earnings plus what we estimate will be our sales as we told you will be in the range of 317 to 332 million, a little weaker than we think in the last year's 333 million.

If we do have a strong Christmas, we can certainly do better than that.

But that's kind of our best guesstimate right now for the next 6 months.

And based on our overhead and our profit structure and what we see coming, we estimate the earnings to be $1.17 to $1.27 for the second half of the year versus $1.33.

Of course, all that can change based on sales.

As sales go up, our profit goes up because the majority of our expenses are basically fixed.

As I mentioned before, we do have substantial inventory.

We do not have to worry right now about any price increases or Yuen dilution there.

I don't have any comments because I do not know what the Chinese government is going to do.

I know there is probably going to be some devaluation of the Yuen.

But we don't anticipate anything in our earnings because of the inventories that we do currently have.

Christmas hopefully is going to be good.

There is certainly a lot of economic factors out there that without -- outside of our control -- the hurricanes, the prices of oil and other things like that.

But overall, we are optimistic.

We do have a good forecast from our retailers, and we have transformed that into what we think is our sales estimates.

Of course, this is just the beginning of the 6-month period.

So September was very good for us, very strong.

And hopefully, we will have five more good months, and then at the end of the year, we will be able to give you good results.

And can you just comment on your floating rate debt?

What rate is it priced at now?

This is Tom Benson.

We have the term loans of $225 million, and they have rates that started at the end of September for the next 3 months of approximately 4.9 percentage points.

Those rates will need to be renewed at the end of December.

And I anticipate that the rates will be up at the end of December from these rates today.

And also just on your comments about some pricing pressures you're seeing on some of your personal care products, can you elaborate on that a little bit?

I think you talked about it on your first-quarter call as well just on pricing.

And then, I think you said however you were getting positive pricing on some other products.

So can you just talk a little bit more about the pricing environment, if it's mainly personal care and not OXO, in just a little more detail?

Basically, you are right.

The pricing pressure is on the personal care division.

One of the areas that we are experiencing lower sales but hopefully we can turn it around is in our professional product line.

And as I mentioned in the last conference call that we had, we have 23 new products that we're coming out with.

They have not been introduced yet, but they will be hopefully by the end of the year, and this will drive the business for next year.

Which of the products you're getting a positive price on?

On the OXO and the Idelle Labs products.

Gary Giblen, Brean Murray.

You didn't blame anything on Hurricane Katrina, but is it possible to roughly quantify the impact of that?

Well, one is psychological; the other is we do sell major retailers who have been impacted.

So we have been hit a little bit with whatever loss of sales they had during that time period.

And some of the retailers have had -- of our major retailers have had stores closed permanently so that has affected us to a slight degree.

Hopefully, the people that left New Orleans are in another city and are buying merchandise in those other cities so that is the positive.

But I think overall, as you follow the major retailers, some of them do say that their sales are impacted based on gas prices.

If that filters down to us, then certainly we would sell less products if they're selling less products.

Is this unusual in your history to have basic consumer behavior weaken relative to your products, which are not expensive products and are nice small ticket purchases for people to make even in a bad economy?

So is this an unusual, particularly unusual development?

Well, I think it's just a slowdown in the personal care area.

As you heard, the results -- our housewares division, OXO, for the quarter was up 29%.

So they are strong positives there that consumers are still buying houseware products.

Then, last question would be -- are you more inclined to put your cash balances and cash flow to work on stock repurchases at levels like we're seeing this morning on the stock?

We talk about this all the time, the use of cash flow from Helen of Troy and of course the stock repurchase buyback, which certainly at these prices is very appetizing.

We also are looking at several acquisitions that hopefully something will come of that.

So there is a balance between using the money for buybacks and acquisitions.

But we are very cognizant of the price of the stock and acquisitions, and we're looking at both.

So something will happen on one of those ends.

Doug Lane, Avondale Partners.

Question -- did you give out the segment profits for housewares and personal care, Tom?

Doug, I did not.

That information will be in the Q, and that is going to be filed late today.

So it will be available tomorrow morning.

Just backing into some numbers, assuming housewares' margins are in line with where they have been in the past, it looks like personal care margins were in the single digits once again, which would be the third straight quarter.

And I wonder in your 180 to 190 for the second half of the year, are you looking for personal care margins to return to double digits?

And if so, what is going to drive do you think?

Well, I can answer and then Tom can answer.

It's basically the same percentage as the first half of the year.

We are comfortable with our new lines of 23 products in professional that they are at higher price points and higher profit that that will start kicking in.

But that will be towards the end of the fiscal year.

Doug, this is Tom Benson.

As we have explained in our prior Qs, our overhead is -- the majority of the overhead is going to the personal care area.

We are not allocating it to the houseware segment, and so we transition them in from the third party that is charging a fee.

So I think that the personal care segment is carrying a greater proportional portion of the overhead currently.

So I'm not sure that once we start reallocating that you won't see an increase in the operating income on personal care.

When do you expect that reallocation to occur?

That reallocation will start next year.

Are you still on pace for first calendar quarter of '06, migration of OXO into the Helen of Troy infrastructure?

Our timing is February of '06, yes (multiple speakers).

And what is that going to entail in more detail because you talk a lot about the beefed-up corporate infrastructure.

Can you give us just a little bit more color on that?

How much of that is the IT spend?

How much of that is just physical space, equipment, things like that?

This is Chris Carameros speaking.

We told you last time, probably going to save 5 to $8 million in the press release.

This time, it is 8 to 10.

A lot of it is when you say how much is that going to be, if you take a look at what we have been charging and I have told you before, World Kitchen has a transition fee of 8% of gross sales.

We're now forecasting the gross sales to be in the 120 -- I mean the net sales to be 120, 125; gross sales to be 135 to 140.

The mere statements of what we think in looking at the new warehouse and what we put into that warehouse and how we will be able to do it is, we think we have a savings of at least -- in that one particular piece, in just the warehouse piece is between the transition charge in that 6 to $7 million range.

The other initiatives we have, we are actually going to move and consolidate some of the warehouses we've told you before.

We are going to move all the Idelle SKUs to Mississippi, which we think we're going to save at least about 0.5 million to $1 million worth of freight in that same move.

And as I have said to you before is, we have other components and people that we're hiring at this point in time, which we are going to incur in the second half.

We have a movement of a warehouse, which we have in our forecast in the second half.

And that particular stuff will be absorbed in we think it will be a 3.5 or 4% cost to have been able to run that piece.

We are incurring all those costs today; that's why you see that SG&A at a very high rate.

Likewise, we are going to see that savings tomorrow, that tomorrow being March 1 when we unplug from World Kitchen.

All those are different components that we are incurring today -- whether it be customer service, whether it be people in the warehouse, whether it be across the spectrum -- to be able to absorb those particular -- actually to be able to absorb the OXO business.

So it's not just one piece that I have given you an overall dollar savings that we think we can incur to be able to do that along with the movement of the Idelle SKUs and the freight and freight in and freight out savings, which quite honestly, the freight has been a higher and higher piece.

As you know, Doug, the freight is in our SG&A; it's not in our COGS.

Our freight out, there always has been.

So as the freight amount becomes higher because of cost of fuel and the fuel surcharges that are being incurred, that tends to aggravate our SG&A, which will come down when we actually move a big piece of our business over to that particular portion.

All right?

No, that is very helpful.

Thank you;

I appreciate that.

Let me switch gears a little bit on the professional division.

Can you give us a little bit more color on what's going on there?

And with the weaker pricing/higher promotional spend impacting gross margins, is that mostly professional or just throughout the whole business?

And then can you talk about professional in particular, if there's any one or two customers that are impacting you more than others?

As far as the personal care, I would say it was personal care, not only domestically but also in Europe and our professional position.

It just happens to be the cycle.

In the professional division, it just seems that instead of going lower prices, the market is actually going higher prices.

And that's why we are going with our new line of the 23 products that we keep talking about.

It's a little different than what is going on in the other industries where the customers want higher priced merchandise.

And we've always been middle of the road there.

And so we will be coming out with our higher priced line, which hopefully will increase our sales and our profits.

There's a lot of very good positive signs in the professional business.

And the business in professional just as in retail is driven by several large customers that have impacted us.

But hopefully, --

Have you lost any business with customers?

Well, when you say -- we have not lost any customers.

We have had some decreases in revenues from some of the major customers.

So you haven't lost any major customers specifically.

Of the decreases in revenues from major customers, is that because they are discontinuing product lines?

Or is it just because the market moved away from your particular style and price points?

I think it is just a slower -- of our top 10 customers, the impact actually comes from just a couple of the customers, not from all of them.

We do have increases on the majority of the customers.

But our largest customer has shown a decrease with us because of their overall sales, which we hope to turn around in this next plan-o-gram year, which is coming up.

But you have been seeing same sort of pricing pressures at your traditional retail business at mass market?

As compared to?

Well, I mean it's --

The answer, Doug, is yes.

Yes, we have been having pricing pressures at mass.

That other set of quantities Jerry has mentioned to you is, we have an opportunity to raise prices and get better margin on some higher end pieces.

So it is kind of both ways in the clients' piece.

Professionally, the answer is no.

Actually, we can do a higher end line, and at mass, we are going to have pricing increases -- that simply put.

Rommel Dionisio, Wedbush Morgan.

I wonder if you could talk about the promotional programs you have planned going in the back half of the fiscal year.

I know you've obviously have built up inventories, and I think Jerry, you mentioned that you plan to work this down by year and.

So to what extent do you plan on lowering pricing, using commercial programs to work that inventory down?

Well, most of the promotions were planned earlier in the year, and we brought in the merchandise of a lot of our wellness products, such as our Dr. Scholl's and our Health o meter products are seasonal.

And as everybody knows, we do a lot more business in the third quarter than we do in any other quarter.

We brought in the inventory for those promotions, which are already set in retailers throughout the country.

We've already had the commitments.

It is not like we're going out looking for the business.

We have the commitments, and we will be shipping them in October and November.

Okay and also, could you just give us a quick update on the Brut line?

I know you print out a number of SKUs earlier in the year.

Yes, this is Chris Carameros.

As we told you before, we've had really three initiatives -- one is Brut, Sea Breeze and Skin Milk.

But in particular, Brut is our biggest piece that we have within Idelle Labs, which we call grooming.

We have seen a nice increase, which you will see in the Q within grooming for the quarter.

It is up about 18.8%, relatively speaking, about $3.5 million.

Within the U.S., we have the Brut Racecar sponsorship.

We've done a lot with NHRA and the association.

We have a 23-race schedule throughout the country that we tied into retailers and promotions all during that week.

So it is not just the races that we're dealing with.

But the most important thing is, we're going to the stores and retailers, renting promotions at those particular stores that they are very sleek.

There are a couple of district (ph) display cars that go along with the racecar.

But we're touching and really sampling the customers at the store level all through the week at major cities throughout the United States along with the race.

We've seen a nice lift in Brut APOs and DOs in the double digit.

We've seen the lift in also in the consumption of the fragrances in the double digit.

So we think we've had a lot of success with Brut in the U.S. and Canada.

Likewise, we are especially excited about, as I mentioned last time, about Brut within Mexico.

We've had a -- as I have said to you before, Brut actually had three different scents in Mexico before.

It was not in the U.S. in the APDO (ph) area.

It actually -- we have sent it to four.

We've had placement with all major retailers in Mexico.

And the sales have been very, very positive in Mexico.

We think we're going to have a 30 to 35% increase just in Brut in Mexico, and we are going to roll that out to Brazil sometime in springtime next year and along with other different places within the Latin America.

So Brut has been a strong brand increase for us this year.

But likewise, we spent a lot of money in that particular piece.

We did a whole print media campaign the first and second quarter.

We're not going to be just spending money in that print campaign continuing going forward.

We are going to just remain with the card and sampling going forward.

The next brand being Sea Breeze, we've launched in that first and second quarter of our fiscal year.

Again, Sea Breeze in the double digits, and Skin Milk is doing nicely too.

So within Brut, we've actually had in the U.S. our four shave SKUs that have been out there.

We thought we would get a little bit more placement in the first and second quarter of which we will get placement I believe in the fourth quarter with our major retailers; we've been told.

So the four shave SKUs that we have out there that we are advertising expanding along with actually redoing our line of Brut with the same logo across our line and removing the Unilever signature at that point in time; it's part of the agreement.

We're excited about having our four shave SKUs expand.

We've had a lot of success with our shaving SKUs in the retailers we have had it in.

We are going to carry that out to four other major retailers in the next 6 months, okay?

Great.

Thanks very much.

Mimi Sokolowski, Sidoti & Co.

Jerry, can you tell me how big the professional business is?

No, we try not to disclose that.

It is one of our major divisions.

Can you give me an idea, is the overall business sensitive to its performance based on the top line?

Is it sensitive based on margin or both?

I wasn't under the impression it was a huge contributor, and it surprises me to see a 15% decline nearly year over year based on that segment.

The gross profits in the professional division are larger than any of our others, and it has been a contributor, a very large contributor.

And so, as sales do decrease, we get impacted more there than probably some of the other divisions as sales hopefully will go back up and the profits will return.

Okay.

Also, can you tell me -- maybe this is a question for Tom -- the contribution from Skin Milk and TimeBlock?

I don't think those anniversaried until late last month.

Mimi, this is Chris.

I've told you that Skin Milk has been doing well, but we don't disclose individual brand sales in that particular piece.

You'll see in the Q, where the grooming piece is doing well, and it's increasing.

So I think that will pretty much tell you what we are doing.

And then Chris, I do have one that I think is for you.

With regard to the new products in personal care that Jerry is talking about, I assume there's some appliance stuff in there unless it is isolated to Idelle Labs stuff.

But can you give me an idea of the reception that you have gotten?

Within the personal care, we've had a great reception in the appliances and likewise within the Idelle piece.

We have a new Sea Breeze Naturals, which is going to be released the first quarter next year.

We've gotten very good reception on that.

So we are optimistic that Sea Breeze is in the double digits this year and increased; that we will take that momentum and carry it on into the Naturals and do some more piece on that.

And we've told you how we're positioning the full Sea Breeze as a younger piece and the Naturals as an older consumer.

But likewise with the professionals, we've said several times our opportunity is to do a higher end line, and we have a great brand name with Hot Tools.

And we've had a great heritage and a great piece with that; we are going to take that success and carry it on with our new line.

So we just need to have the right product, the right piece.

We probably should've had it 6 months earlier.

But hindsight is 20/20, and we are addressing the issue.

Just so I understand, these product introductions are going to occur -- what's the timing?

Is it next year, early next year?

They will be in our fiscal fourth quarter.

Rob Longmecker (ph), Barrington Capital.

Can you guys give a little more color around the $60 million pop in inventory and maybe just kind of what you guys broke out in a couple of different buckets.

And just kind of how much in dollar amount is attributable to each bucket?

We don't break down by which bucket.

I can just tell you we did increase our inventory for the reasons that I gave you.

And I think hopefully, we will be smart as we have the inventory to ship to retailers.

Last year, we scrambled a lot trying to ship the inventory because of either production problems or because of the congestion that you have at Long Beach.

And I'm sure those of you that are in business and port merchandise know that the Long Beach Port has a hard time keeping up with all the containers coming from China.

So we thought it would be good to increase our inventory, to have the inventory available when we need it and not have to scramble at the end of the year.

And I think it will work out positively for us.

And I think the retailers will be happier with us that we are shipping orders 100% on time.

And I think that will come to pay the fruits of our efforts that long-term, we have better relationships with the retailer.

As I mentioned, our inventory on February 28th will be back to our normalized monthly turn.

This is Chris.

Again, across the board in every business that we have, we have higher inventory.

So it's not just in one piece.

But we do expect all the inventories to be done, as Jerry said to you.

The only exception to that would probably be the houseware segment as we are moving that piece, and one of the biggest months we have is in January.

And that is going to be -- we are going to have higher inventories within that piece to be able to ship January effectively so we can move the first part of February.

Given the kind of shortfall in revenues and you guys cut your guidance on, I would think some of this inventory build has got to be on plan.

Well, anything you say -- if you missed your sales forecast, you are going to have more inventory.

Because inventory is not just produced in 30 or 60 days.

It has multiple lead times.

So I would say, yes, part of it is unplanned, but I would say that the majority of it is planned.

And then can you just give a little more color on how that grew into the increased warehouse expenses?

Well as far as we have some off storage piece and some pieces in there, we have some -- I think Tom got through telling you -- we have some increase in warehouse that again, one of the reasons why we are building a 1.2 million square foot warehouse is, we are going to be more efficient to be able to take that in in-house and be able to carry the inventories we need to carry -- maybe not at these levels at this point in time but to be allowed to expand our business.

But every year, we do have excess warehouse space that we go into that we should not be able to need at this point going forward with our new warehouse and will actually enable for us to be able to grow without additional more overhead.

Just one last question, you will have to excuse me;

I'm kind of new to the name.

A lot of your business is licensed.

Do you guys have any major license expirations in the next couple years?

We do not.

And remember that two primary, three primary licenses, it is Revlon, VS and Dr. Scholl's along with Sunbeam.

But we own everything else besides that.

Because the majority is the -- i.e., OXO, we own, all of the different Bruts, Sea Breeze pieces we own.

But none of those three major ones you mention expire?

No.

Ivan Sacks, Institutional Equities.

And what I'd like please, Jerry, if you would not mind since you've been in the business for so long, I was wanting to go through the numbers like we have gone through.

But if you could just give us a historical perspective, just like obviously you have see the cycles of this business.

And secondly, if you could just speak (indiscernible) about what's really bad and what's really good.

And how you -- just what other segments of the economy you're seeing being affected similarly to yourself.

I'd really appreciate that please.

You know, it is kind of interesting going back.

If you go back even 20 years, if you looked at the cycle of Helen of Troy, we have 4 or 5 good years, and then we have a soft year, and then we have increases for the next 4 or 5 years and a soft year.

We certainly had -- the last 5 years have been very, very good to us; we have more than quadrupled the earnings and EBITDA.

And we're just having a soft year this year.

But our market share is very strong.

The retailers appreciate everything we are doing for them in these times.

And I think some of them will even give us awards for what we do with them with delivery and promotions and sales.

We're looking into all the different aspects.

And on the positive end, we're looking that next year will be hopefully a new record year for us in sales and earnings.

But right now, we have to concentrate on the next 5 months, which it would make me feel great if I could beat the expectations that we put out there.

So that is what we are working towards.

Jerry, as far as the discretionary income, would you say that this is more for luxury items?

How do people view the items that you produce?

Are they necessary items or luxury items?

No, they are basically items that they use everyday -- personal care, retail are mainly under $20.

I know OXO items are certainly other than maybe some of the higher priced trash cans are in the 8 to 10, $12 range.

The Idelle Labs products are basically under $5.

So I would say they're more -- certainly not in the luxury category.

They are commodities that people use every single day.

Don Harlow (ph), Barrel Handly (ph).

I'd like to know if you still plan on doing a sale leaseback of the Mississippi warehouse.

This is Chris Carameros.

We have several alternatives to look at.

One of them that we are looking at very seriously, and we expect to come to that conclusion.

Our warehouse should be finished by the middle of November.

We actually have as we have disclosed, a put to our existing person who is building the building.

We can sell it to them and put it to them.

We actually have two different, three different people who want to pay a higher price for that.

So we are actually going from the 6.19 to 1.2.

But the sale leaseback, if we have several proposals -- and I have brought them to Jerry and the Board, and we're looking at them and going to review them over the next 30 days and see if that is the way we want to go.

Is that how you plan -- I think you said you will have your revolver paid down at the end of the year.

Is that where it's coming from?

Or is that out of--?

No.

We are assuming that will have it paid down, not doing the sale leaseback.

We'd actually have an additional $33 million in that forecast if we did a sale leaseback.

One other question about the professional area, it seems to be the place that we had more visibility, we might understand that quarter better.

Was the 23 products that were talked about this conference call and last, is that late to market?

Or is it on schedule?

As far as the introduction?

No, it will be somewhere around February that will be introducing those products.

I'm sorry.

I do not think that makes any sense.

I know last quarter, you talked about an introduction of 23 new products in defending your guidance and your expectations for this year.

And you just mentioned it again that that was going to come and be part of the second half.

Now, I think I just heard you say something about February.

Is that going to be in this half, or is that in next year's?

No.

That is a no.

It is in this half.

February 28th is the end of our fiscal year, so this is all in our second half.

We are on a fiscal February 28th, not on the calendar --

I understand that.

Are you--?

(multiple speakers) You have large shipments usually on the very first introduction pieces.

That's why we are saying it is in there in this fiscal year.

Are these products, were they late to market?

Or are they coming as they were scheduled say 3 months ago?

The answer to your question is, if they are late to market, we could have probably foreseen the situation maybe 6 or 9 months before, introduced them earlier.

But I do not think they are late to market.

No.

Graham Tanaka, Tanaka Capital Management.

I am relatively new too to your Company, and I was wondering if you -- there's a lot going on.

There are a lot moving parts.

If you could just summarize what the insulation aspect is on the margins going forward?

What kind of price increase or decrease you expect on average the next 12 months or the second half versus your cost inflation increases?

As we all know, every year, there has been inflation.

Inflation is something not new to 2005.

We compensate for any price increases in new products.

And that's why we do introduce a lot of new products each year, and that's where we get our price increases.

I do not think this year is any different than past years or what next year is going to bring.

We build in our margins, and they've been -- are actually pretty steady over the last 2, 3 years.

And they should continue even if there is pricing pressures or price increases, we have always tried to compensate for that in the sale price and mainly in new items.

Okay, so this first half, was that maybe you were squeezed on your cost/price spread because the new products didn't come out or are not coming out until the second half?

Is that what happened then?

Well, there's only a difference of 1%.

It's hard in a quarter because of all the range of products that we sell.

To me, the 1% difference is pretty much flat.

It's not a concern there on the gross profit side.

Okay, that is understandable.

And on the warehouse and the savings, I believe you were talking about a 6 to 7 million, is that an annual savings beginning March 1?

Yes, it is, but we mentioned 8 to 10 million.

The warehouse piece is 6 to 7 in that piece, and we have other initiatives to get on top of that.

But it is an annual savings.

And so do we view this year as being 8 to 10 million of extra costs, or are you just going to a different level?

In other words, was there a--?

Well, again, I have been trying to tell you this.

When we go through and are building the new warehouse, as you may not understand, we have a transitions fee for the World Kitchen piece of OXO.

We are building a new warehouse, so a lot of those things are going to be consolidated and put into one place.

As you build to take those expenses over, you just don't turn the switch off one day and have one come on.

You have to got to build up and higher people and do certain things up until the date you bring it in, the 8% is going to go away.

But we are having to incur 1 or 2 or 3% before you ever get the 8% to go away.

Yes, I get it.

But my point being is, yes, the question is, we are going to incur some expenses this year that will go away next year.

And that estimate is 8 to $10 million.

And the 8 to 10 million is the savings next year versus this year.

I'm just wondering to what extent this year you had an unusual spike because you had fair -- and investment spent and that kind of thing.

Say, was it half of that that was just unusual?

If you didn't do this program, your costs would have been lower by half of that?

Or is it by the--?

It's a small portion.

A small portion.

Okay, so it's really a lot of net savings.

This is Tom Benson.

One of them is a contractual arrangement that goes away.

So you're saying -- we couldn't have avoided that this year because it is a contractual arrangement.

We have also put on extra costs in anticipation of this move.

So next year, we are going to be doing it ourselves at a cheaper cost and also the cost we had this year that were more preparatory costs will be costs that we are absorbing in the operations instead of preparing and getting ready.

So there's outside costs that are going away.

And there's internal costs this year that will be really absorbed in the business instead of preparing to bring the business on.

Well, that is great.

The other thing is, you had talked a lot about some of these individual items in personal care being up strongly double digits.

What areas specifically were weak?

And what could turn that around in the next 6 to 12 months to have a specific--?

Again, what we said, we were up in the -- you will see it in the Q; you will see that we are up in the housewares piece nicely.

You will see up in the grooming piece nicely.

We've been down in the appliance piece.

As we have said numerous times in this conversation and as we've talked is, we're going to have new products and introductions of those products to be able to recover some of that piece that we have lost.

This is personal care?

Yes, it is.

Jack Salzman, Kings Point Partners.

I wonder if you can tell us about advertising promotion expenses, were they up or down in the first 6 months?

And do you expect them to be up or down the balance of the year?

And also, could you also address the cash flow issue?

Do you expect to be positive cash flow, ex-financing for the balance of the year?

Or do you think you will be borrowing additional cash?

And then, I have one other quick question.

This is Tom Benson.

Our advertising for the quarter was up slightly over the prior year.

It has been up for the first half of the year as we indicated.

For the second half of the year, some of the advertising costs will be going down compared to the first half of the year.

But we will continue to have advertising to support our brands.

On the cash flow side, I will call it cash flow from operations before any capital expenditures.

We are in a highly seasonal business where if you look at the pattern of our business year over year that we are consuming cash flow during the second quarter to build up for our peak season.

And over the third and fourth quarter, it --

It turns into receivables before it turns into cash.

Right.

It turns into receivables, and it turns into cash in the fourth quarter.

And for the full year, we will be very positive on a cash flow basis.

And that is consistent year over year.

So we should see an improvement in Accounts Receivable during the second half as you guys rebuild cash?

And cash, you're somewhere in this 10 to $15 million zone?

I don't want to promise an improvement in Accounts Receivable terms.

The Accounts Receivable will come down because of the seasonality of our business.

As we have mentioned before, the third quarter is always a very strong quarter.

In the fourth quarter, the sales are not as strong, so your receivable balances come down.

And also, as we have indicated, by the end of February, we expect our inventory levels to be decreased meaningful from where they are today.

And that is a normal seasonal pattern.

I think when people look at Helen of Troy, they need to look at kind of the four quarter cash flow and the full year.

Because people start getting concerned when they see negative cash flow in the first and second quarter.

It is very normal, seasonal pattern for this Company.

One other last quick question, I wonder if you could bring us up-to-date sort of on the tax issues.

You guys are running I guess at around a 12% corporate rate right now.

Is that an estimate we should be using for the new fiscal year?

Or is there a prospect that the corporate tax rate can start moving higher next year?

This is Chris Carameros.

We did settle the IRS exam this last year within the U.S.

We have the Hong Kong issue at hand.

We are confident in the next 6 to eight months that we can resolve that.

And our tax rate is, as we have said in the past, is going to range from 10 to 14% in our forecasting piece.

If we are successful doing all the things we want to do, we think it will be in the lower end of the spectrum, not the higher end.

But we are taking advantage of the different tax situations throughout the world.

And we think we can execute that against that in the next 6 or 8 months by resolving the issue in Hong Kong.

One other quick question (technical difficulty), keeping of what you think you may initiate in terms of price increases for the next 6 months?

We have some increases I guess within the housewares piece and somewhere in the grooming piece.

But again, as Jerry mentioned to you, our opportunity in the appliance piece is introducing the SKUs that have meaningful innovation and within those SKUs, such as we introduce variable ion and/or higher end-type pieces that will have better margins and more gross margin dollars.

And that's a process we go through all the time.

John Masnack (ph), Wasatch (ph) Advisor.

Could you provide some guidance on CapEx for second half of the year?

And maybe some color on what it could be for next fiscal year?

This is Tom Benson.

As we have indicated before, we have our new building that we are building in Southaven, Mississippi.

And the building itself could be 33 or $34 million that we plan on closing in November or December.

At the same time, we have an old building that we have the opportunity to put that to somebody in the range of $16 million.

And it is our intention to do something like that.

We are also going to be equipping our new warehouse, and that could be up to $15 million of capital expenditures.

And that would also happen in -- the majority of that would happen in the second half of the year.

I mentioned we have a Mississippi business finance bond in place for $15 million to cover those capital expenditures.

At the end of the day, if we do the sale leaseback (technical difficulty) additional $33 million.

As far as your comment for the next year, our CapEx is traditionally in the 5 or $10 million range, and that is where it should really land for the next year.

And so of the new building, has anything been spent yet?

Or is it all--?

We are in the process of building it and constructing it.

We've made payments accordingly in some of those different pieces in there.

It is about three-quarters -- I think the roof is coming up in the next month or so.

I do not know if we've ever mentioned this, but one of the incentives that we get in Southaven, Mississippi for building this building is, we do not have to pay property taxes for the next 10 years, which is also substantial savings, nor pay property taxes on the equipment that we're putting in.

So these are some of the advantages of being in Southaven, which is only a couple of miles away from the Memphis airport.

You'll be able to look in the Q today, and you will see it all in there.

And you will be able to fully understand that.

The building, the contractor and the developer are really funding it.

We made a small deposit on it, and we're going to pay the purchase price at closing.

The equipment, we've had some ongoing deposits and expenditures, and the majority of that will be again paid in the second half.

But the building, we have so far we have put very little money into it.

And then somebody early on the call asked about use of cash flow.

And you alluded to I guess two things, one either buying back stock or doing an acquisition.

Could you talk a little bit more about the third option which would be paying down debt?

Maybe where you want to see your debt to EBITDA before you would do another acquisition or buy back stock?

That is a very good point, the third thing about paying down debt.

We feel comparable somewhere around 3.5 times debt to EBITA based on what it's going to be at the end of the year and what our EBITDA we assume to be.

It should be somewhere around 2.5 times.

So we do have some leeway there yes of any of the three items of that -- two plus your idea of either buying stock back, acquisitions or pay down debt.

Our focus has been on acquisitions and stock buyback at this time.

I think our -- this is Tom Benson -- our revolver facility is set up so that we can pay it down and borrow again.

Our current plan is at the end of the fiscal year to have our revolver paid off and have some cash.

Dan Antenellus (ph), StoneRiver Capital.

I was just wondering if you could shed a little bit more light on the internal debate between buying back stock and doing another acquisition.

It seems like one of the big knocks on the stock in the market is, it is down over 50% year to date is that you guys should be buying back more stock when you can buy earnings at roughly 8.5, 9 times versus going out in the market and doing a much more expensive acquisition.

Actually, it just comes down to the numbers.

You have x amount of money; you buy back shares versus the acquisition and how much money can you make from the acquisition.

We're not looking for expensive acquisitions.

All acquisitions have to be accretive.

And when we put the numbers down, the acquisition would have to do better than buying back stock.

Otherwise, we would not do that.

And certainly, we are not paying higher prices.

So it's what helps the Company long term as far as earnings per share.

And if the numbers come out that buying the stock comes out better, then any of the acquisitions that we have on the table, then of course we will buy back stock.

If the numbers look better to have another division that we can make more than buying back the stock and has growth potentials for the future, I think it's better for the shareholders.

So we are mindful of all that that we need to increase not only our sales but our earnings per share, and that's what we constantly work it.

As we all realize, it was a poor quarter.

It is not indicative of certainly the last 5 years or hopefully the next 5 years that are coming up.

And the acquisitions will certainly be a part of our growth.

We want to grow this business to be a larger company and have higher earnings and certainly a higher price for the shareholders.

And we certainly appreciate that the acquisition strategy needs to be there.

But at the same time, that's been one of I guess kind of the core strategy there.

And it hasn't translated into any kind of multiple expansion.

I was just wondering, how are you going to address that going forward?

Well, as far as multiple expansions -- this is Chris Carameros -- I think if we continue to succeed with OXO that the people will appreciate what that acquisition can be and how we are executing against that acquisition.

If you are in a neighborhood of appliances versus cosmetics, you're going to have a lower multiple anyway.

But again, if we can execute and do well and get our earnings forecasts, I think the multiples, we can deserve a higher multiple.

But quite honestly today, we have not executed that well, and maybe we are not deserving of a higher multiple.

In the future, we may be deserving of that and time will tell.

Steve Friedman, Wachovia Securities.

Just a quick question on the percentage of OXO, your houseware division.

You are up I think from 22 to 29 million approximately -- 22.8 to 29 million, is that correct?

Steve, this is Tom Benson.

Yes, we had 29.5 million of sales in this quarter compared to 22.8 a year ago, and it was up 29.4%.

Obviously, we're still comparing if I am correct privately-held numbers or the private numbers of OXO--?

No, the OXO acquisition was June 1 of 2004.

So this is the first quarter it anniversaried.

So this is comparing actual public figures?

Yes, under our ownership the prior year.

I don't know if you can talk about this;

I know you don't like to break segments down.

But obviously, OXO is performing as an outstanding acquisition.

Do you have any goals or targets for a percentage of the total sales over the next several years as what percentage OXO may be of the whole mix?

Well, as you know, OXO is growing and hopefully there may be some acquisitions in the future where they can be put into OXO just as we think there could be acquisitions to put into the Idelle Labs.

One of our goals here at Helen of Troy is to get to $1 billion worth of sales.

And I think it's going to take acquisitions within the divisions that we currently run in order to get to the $1 billion worth of sales.

Well, notwithstanding any additional acquisitions, do you have some type of -- as to what percentage of your sales without acquisitions OXO would, let's say at the end of this fiscal year ending February 28th might--?

Well, again, we have experienced nice growth of OXO.

But as I said to you last time, if we do the small kitchen appliances, that could be very large and really have a very quick growth for that.

We are analyzing that right now.

But as I have said to several people, OXO has the potential to be bigger or bigger than the whole Company itself.

It is a brand that goes across the house.

It's got a great recognition within the retailers and the consumers.

It has just got a lot of upside to it.

And I think it's being demonstrated, that upside, by the increases we are seeing today.

So that is the reason why we are --

Currently, Steve, as you know, 20% of our sales is with OXO.

Steve, this is Tom Benson.

When we purchased OXO, we had indicated 100 million of sales over the first 12 months.

And we have talked about a number of 125 million for this year of OXO.

OXO is growing faster and exceeding our expectations.

Would it be reasonable to say that I guess you indicate your professional division may carry the highest margins with higher prices.

Would it be reasonable to say your OXO division may be you're second-highest gross margin item after that?

In gross margins?

(multiple speakers) I think that OXO does have very good gross margins, but our BCA (ph) business has good gross margins also and different pieces -- it depends on around the world -- depends on those items.

But OXO has great gross margins, and we said professional does.

But professional has lots of expenses you have to do to execute that business also that it is below the line.

So yes, OXO has great gross margins.

One final question, you had a challenge to Tactica's or an objection to Tactica's bankruptcy plan.

Can you comment anything that has developed or proceeded there?

Now, we've just been talking to Creditor's Committee, and we hope to get that resolved in the next quarter.

So we will see how that evolves.

Operator, we would like to take one more call.

I think normally our calls are around 45 minutes; this has been going 1.5 hour.

So we would be more than happy to take one more call please.

Gary Giblen, Brean Murray.

Is it fair to say that your procurement costs especially on the traditional appliances is about the lowest in the industry?

And therefore, you have the ability to stay price competitive while still making decent margins?

Gary, I don't know if it is the lowest in the industry.

I know that we are certainly very competitive with our competitors.

If something was to change in China where the Yuen gets revalued, then it wouldn't go across the board.

And we would revalue our prices based on that.

I don't (multiple speakers) --

to our competition is --

I do not think we have a competitive advantage either way.

The only good thing is, as I mentioned, is that we do have substantial inventory for the next 6 months.

So that could, depending on what happens on the monetary scene in the world, we might be sitting very, very pretty, having all of this inventory.

And long term, we will see what happens.

But we are in no different positions than our competitors.

If our prices increase, their prices increase.

Nobody is going to have a competitive advantage.

As everybody knows, we outsource our products to China.

We are very competitive.

We do get good prices based on the volume that we purchase.

Have you been overseas and in China longer than major competitors?

Probably about the same time.

I think we may have started a little earlier in the late 1980s.

And finally, nobody has asked about '06.

But of course, it is hard to talk about it.

But in other words, can you hazard a wide range of what your sales and earnings increase could be for full year '06 versus '05 when '05 finishes?

We purposely have not given out any numbers because we'd like to see how I think this quarter comes out.

And then -- which we will report early January.

At that time, we probably will be in the position certainly to give out next year's projections.

But right now --

Would your broad question hence be that '06 would be a more normal year for you?

Or could the consumer weakness and the macro factors (multiple speakers) --

Well, as I mentioned, I'm looking forward to '06, which is really fiscal '07.

February '07, you are right.

Optimistically looking, it will be our biggest year in our history.

Okay, so it could be a pretty normal or strong year?

Yes, we are looking forward to that.

I want to thank everybody for listening in and the questions that you asked for our second quarter.

And we look forward to talking to all of you at the end of our third-quarter results.

Thank you again.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 888-203-1112 with a replay pass code 2402061.

This concludes our conference call for today.

Thank you all for participating, and have a nice day.

All parties may disconnect now.