Helen of Troy Ltd (HELE) 2019 Q3 法說會逐字稿

Good day, and welcome to the Helen of Troy Limited Third Quarter 2019 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Jack Jancin, Senior Vice President of Corporate Business Development.

You may begin.

Good morning, everyone, and welcome to Helen of Troy's Third Quarter Fiscal Year 2019 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 then update you on areas of focus for fiscal year 2019; then Mr. Brian Grass, the company's CFO, will review the financials in more detail and comment on the company's outlook for fiscal year 2019.

Following this, Mr. Mininberg and Mr. Grass will take questions you have for us today.

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

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

Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to defer materially from actual results.

This conference call may also include information that may be considered non-GAAP financial information.

These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently from 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 on the company's website at www.helenoftroy.com.

The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures.

The release can be obtained by selecting the Investor Relations tab on the company's homepage and then select the press release tab.

I will now turn the conference call over to Mr. Mininberg.

Thank you, Jack.

Good morning, and thanks to everyone for joining us today.

Before we start, I'd like to wish everybody a happy new year.

I look forward to success and a prosperous 2019 for all of us.

During this morning's call, I will discuss our result and then take the opportunity to share the progress we've made on our strategic plan as we prepare for the second phase of Helen of Troy's transformation plan beginning in March, that's the start of our fiscal 2020.

Brian will then take a deeper look into our financials and following that, we'll open up the line for your questions.

As you saw in our earnings release this morning, we concluded our third quarter with continued net sales momentum.

We grew 2.4% in the quarter, which included core business growth of 2.9%.

Adjusted diluted EPS from continuing operations in the third quarter declined 4% year-over-year, in line with our expectations and reflecting the factors we highlighted in our last earnings call.

These factors include the concentration of incremental marketing spend in the third quarter to support our Leadership Brands and match our seasonality, the impact initially of tariffs ahead of mitigation measures we have taken and some mix effects.

Leadership Brands and online sales led the way this quarter.

Leadership Brands grew net sales 4.9% in the quarter and online sales grew 6%, now accounting for 18% of the total sales of the company.

Our 7 Leadership Brands are now approximately 80% of our sales.

The strategic choices we are making around investment in digital marketing and online support for our Leadership Brands are critical and are paying off with sales growth, market share gains for some and improvements at all touch points of the consumer journey.

By investing in more and better content and using increasingly sophisticated marketing strategies, we are creating an ever-stronger presence online.

Many studies confirm consumer spend more and more time surfing, searching, socializing and shopping on digital devices.

As a consumer-centric company, we are focused on ensuring our brands and products stay prominent in the hearts, the minds and the checkout carts of consumers around the world.

And even as we grow faster online than we do in brick and mortar, in-store support remains a key investment for us in order to command the shelf, stay competitive on price and help customers maintain their growing e-commerce business.

At the end of the day, we're focused on remaining top of mind wherever consumers spend their time and their money.

Consumer demand for our products remains strong.

In the U.S., where the majority of our sales occur, more households have additional discretionary income with growing employment and labor participation rates, wage growth and generally speaking, lower taxes.

We see this reflected where we have access to point-of-sale and to market share data.

Outside the U.S., we have seen pressure on Chinese consumers, particularly online as the rapid growth of their economy slows and uncertainty from the trade war touches all shores.

Even as we begin rebalancing our supply chain, we remain confident in China as a long-term strategic source of goods and a growth vector for Helen of Troy.

We see it's growing middle class, increasing childbirth rate and new household formation as key growth drivers for our brands and inspiration for new products.

The whole Asia region remains a top priority for us as we continue to build out our branded presence in these markets.

As we balance the needs to manage the costs of the trade war, some foreign exchange headwinds and continued investment in the most promising opportunities for our Leadership Brands, we have been raising prices, focusing primarily on products impacted by higher tariffs.

Overall, our conversations with customers about pricing have been constructive, and we believe will successfully mitigate a significant portion of higher costs through pricing.

We also are pursuing productivity initiatives internally and with our suppliers, leveraging changes in commodity costs and foreign exchange and working towards a new sourcing balance between China, the Americas and Europe.

While retail price points have been relatively stable for years, retailers will likely pass on some of the increases, testing consumer's price sensitivity.

Turning to our strategic progress, I would like to report key steps since our last earnings call towards further improving our portfolio and asset efficiency.

We put our strong cash flow and capital allocation strategy to work in the third quarter.

We returned $100 million to shareholders through the repurchase of just over 800,000 shares of our stock.

We used our remaining free cash flow to reduce Helen of Troy's leverage ratio to 1.4x, keeping us in a strong financial position to make additional acquisition.

With the transformation plan continuing to strengthen our shared services platform, we have never been better prepared operationally to add new businesses to our portfolio.

We nevertheless remain highly selective as we look for the right assets to augment our Leadership Brands, build-out our regional footprint and leverage our scale.

Project Refuel is also progressing as expected and continues to target annualized savings of approximately $8 million to $10 million over the duration of the plan.

We are reinvesting some of this and dropping some to strengthen the bottom line in Beauty.

The reinvestment focus on critical areas, such as developing new products, new appliance products, attracting outside new talent and dialing up our marketing support, especially online.

Turning now to our business segments, Housewares delivered another excellent quarter with net sales increased by 11.4%.

Standout categories during the quarter were specialty hydration and coffee collections, cooking prep and kitchen organization.

As discussed previously, we continue to make incremental marketing investments to build out digital content that engages consumers on the outstanding innovation, design and performance at OXO and also Hydro Flask products, all with a sharp eye on ROI and the challenging competitive environment.

Hydro Flask continues to win.

Third-party data confirms the brand continues to hold the #1 market share position in the insulated metal water bottle segment and has grown share significantly over the past 12 months.

Hydro Flask continues to enjoy excellent point-of-sale performance across the diverse distribution channels we track, which include NPD, SSI, active lifestyle industry, natural foods, online and also in specific customers.

Stronger in-store presentations across bottles and accessories we started over the holidays are showing early encouraging results.

We are seeing healthy consumer takeaway with notable complementary sales from accessories.

Hydro Flask also continues to earn new distribution and expand its geographic footprint.

In Health & Home, our largest and our most global business, net sales decreased 0.7%, primarily due to a drag of 0.6% from unfavorable foreign currency exchange.

The core business was essentially flat year-over-year versus the strong third quarter performance last year, when we benefited from new product launches and international distribution gains.

Domestically, we further expanded distribution in Health & Home and saw growth in some seasonal categories.

Another devastating wildfire season on the West Coast struck in November late in the quarter, leading to a modest year-over-year sales increase for our market-leading Honeywell air purifiers.

As a reminder, in October of last year, the West Coast also felt the impact of a heavy fire season, which increased air purifier sales in the year-ago base.

Also, in the base is last year's historic Thomas Fire, which struck during our fourth quarter.

Reflecting on the current cough/cold and flu season, we've experienced a more normal start and there are currently no indications of a repeat of last year's particularly high incidence of flu.

The exact timing and duration of the season for each symptom can vary, but most types of respiratory illness, including flu, usually begin to peak between December and February, and they wind down by early spring.

This season's illness rates so far are following this pattern as well, with increased incidents in recent weeks of symptoms such as fever, cough and congestion.

These correlate very strongly with consumer purchases of our thermometers, humidifiers and inhalants under the Vicks and Braun names.

The specific impact on our shipment depends on customer inventory stocking patterns and replenishment rates as their upfront purchases via direct import, or from our warehouses sell-through.

Given the pattern so far this year, our outlook continues to assume a normal season for the balance of fiscal 2019.

Now turning to Beauty.

Net sales decreased 3% in the quarter.

We are seeing some improvements from our strategic efforts to stabilize appliances.

While down slightly in the quarter following the discontinuation of certain brands and products, appliances benefited from new products, international sales and growth in the online channel.

We are also growing appliance share online.

The Revlon Volumizer is a particularly hot seller, serving as a great example of consumer-centric innovation at work.

It delivers on the consumer need for speed, styling and drying in one convenient time-saving product.

It consistently earns 4- to 5-star reviews and has garnered considerable attention in the media and online as an it item.

Looking at what we've accomplished so far this fiscal year-to-date, we have quite a lot to be proud of.

The third quarter built on a very strong first half.

On a full year basis, we expect to show solid growth even in the phase of a tough compare to last year's especially strong cough/cold and flu season.

Nine months in, we've returned value to shareholders through the repurchase of over 1.2 million shares, while simultaneously lowering leverage.

We remain in a strong position to deploy capital towards further acquisition.

We now expect fiscal 2019 to deliver net sales growth of 3.8% to 4.8% versus fiscal 2018, which was also a strong sales growth year at 5.9%.

On the bottom line, we have raised our adjusted EPS for fiscal 2019 to $7.70 to $7.95 per share, reflecting the most recent share repurchase and that represents growth of 6.4% to 9.8% versus fiscal 2018.

As we look forward to fiscal 2020, which begins this March, we have made our strategic choices for a second phase of Helen of Troy's transformation.

This next phase is designed to build on the successes of the past 5 years.

We will focus on driving further improvements to our current businesses, expand our geographic footprint, our global shared services will advance and the overall strength of our organization as well.

We will also seek to add to our Leadership Brand portfolio through further acquisition.

We believe we have the balance sheet, the capabilities, the culture and the passionate owner-minded people to take our transformation to the next level.

We look forward to sharing more during our next Investor Day, which is currently planned for late spring.

With that, I will now turn the call over to Brian.

Thank you, Julien.

Good morning, everyone.

Before discussing the quarter in more detail, I'd like to start with a few broad points.

First, my comments today will be regarding our results from continuing operations for the third quarter of both fiscal 2019 and 2018 unless otherwise indicated.

Second, during the quarter -- during the first quarter of fiscal 2019, we adopted the new revenue recognition accounting standard.

As a result, we have reclassified certain expenses from SG&A to reduction of net sales revenue.

Corresponding amounts in the prior periods have been reclassified to conform with the current period presentation so that both periods are comparable.

Please see the related table and footnotes in the accompanying press release for further information.

Finally, tariff increases began to impact our cost of goods sold during the third quarter as expected.

While we have implemented pricing actions and other mitigation measures, the bulk of these actions did not become materially effective in the third quarter.

Our pricing actions will begin to provide a meaningful offset to the tariffs in the fourth quarter of fiscal 2019, and we expect them to be effectively completed in the first quarter of fiscal 2020.

This is due to the negotiation and notice periods involved in taking pricing actions.

The company is targeting to offset as much of the tariff gross dollar -- gross profit dollar impact as possible.

However, a 25% tariff impact on costs translates to an 11% to 13% increase on the price of product to retailers.

As such, even if we keep ourselves whole in gross dollars, gross profit margin is expected to decline.

Further, although the pricing actions are intended to keep us whole in terms of gross profit dollars, there is no guarantee that they won't reduce retail consumption or customer orders in the short term.

We have not resolved product pricing with one key retailer in 2 product categories.

And we are currently not shipping these particular items to this one customer.

While we expect some disruption from pricing actions in the short term, including the fourth quarter of fiscal 2019, we believe we are making the right choices for the long-term health of our business and that our products continue to offer attractive value propositions at the higher prices.

Now turning to a review of the quarter.

We posted adjusted diluted EPS at the midpoint of our stated range of flat to down 8% compared to the same period last year, which was in line with our expectations.

As we highlighted on our second quarter call, this is largely due to the planned increase in marketing spending in fiscal 2019, coupled with the concentration of spending in the third quarter, along with the tariff increases we began to realize in the third quarter.

Turning to a more detailed review.

Consolidated sales revenue was $431.1 million, a 2.4% increase over the prior year.

Core business revenue grew 2.9%.

Revenue growth was driven primarily by an increase in brick-and-mortar sales in our Housewares segment and growth in consolidated online sales.

Sales in the online channel grew approximately 6% year-over-year to comprise approximately 18% of our consolidated net sales in the third quarter.

The sequential decline in the online sales growth rate was primarily due to a deceleration of growth in our China e-commerce business and the corresponding buildup of inventory in the channel, primarily impacting Health & Home and the reduction in inventory levels by a key online retailer, primarily impacting Housewares.

Online sell-through and Housewares continues to be healthy and is growing double digits.

Leadership Brand sales grew approximately 4.9%.

Our Leadership Brand sales now represent approximately 80% of our consolidated net sales for the quarter compared to approximately 78% for the same period last year.

Housewares net sales increased 11.4%, reflecting point-of-sale strengths and incremental distribution with existing domestic customers and increase in online sales and new product introductions.

Health & Home net sales decreased 0.7%, with the decline primarily due to the unfavorable impact from net foreign currency fluctuations of $1.1 million or 0.6%.

The core business within Health & Home posted a slight decline of 0.2%, reflecting lower online sales and the unfavorable comparative impact from international distribution gains, new product introductions and a strong cough/cold/flu season in the prior year.

These factors were partially offset by strong seasonal category growth and gains in distribution and shelf space with existing domestic customers.

As Julien mentioned, the segment did see strong point-of-sale activity in the air category related to recent wildfires; however, it was largely comparable to the activity in the same period last year.

Beauty net sales decreased 3%, primarily due to a decline in the Personal Care category and the discontinuation of certain brands and products.

These factors more than offset continued growth in the online channel, new product introductions in the retail appliance category and an increase in international sales.

Segment net sales were unfavorably impacted by net foreign currency fluctuations of approximately $0.6 million or 0.6%.

Consolidated gross profit margin was 42.2% compared to 42.3% for the same period last year.

The 0.1 percentage point decrease is primarily due to less favorable product mix and the impact of tariff increases, partially offset by margin lift from growth in our Leadership Brands.

SG&A was 28% of net sales compared to 26.1% for the same period last year.

The 1.9 percentage point increase is primarily due to higher advertising expense, increased freight costs, increased share-based compensation expense and higher product claim expense.

These factors were partially offset by favorable foreign currency exchange and forward contract settlements, the favorable comparative impact of restructuring charges in the same period last year and lower amortization expense.

The primary driver of higher share-based compensation expense in the quarter was due to the issuance of transformation shares to every Helen of Troy associate, which we highlighted on our last earnings call.

These transformation shares vest over a 3-year period.

GAAP operating income was $61.3 million or 14.2% of net sales.

This compares to $67.3 million or 16% of net sales in the same period last year, which included restructuring charges of $1.1 million.

Adjusted operating income was $70.6 million or 16.4% of net sales compared to $77.6 million or 18.4% of net sales.

The 2 percentage point decrease in adjusted operating margin primarily reflects higher advertising expense, the impact of tariff increases and higher freight expense.

These factors were partially offset by favorable foreign currency exchange and forward contract settlements, lower amortization and the favorable margin impact from Leadership Brand growth.

Turning now to adjusted operating margin by segment.

Housewares adjusted operating margin was 22.8% compared to 24.7%.

The 1.9% -- percentage point decrease primarily reflects higher advertising expense, higher annual incentive compensation expense related to current year performance, higher freight expense and higher rents expense related to previously announced new office space.

These factors were partially offset by the margin impact of more favorable -- a more favorable product and channel mix and increased operating leverage from net sales growth.

Health & Home adjusted operating margin was 13% compared to 17%.

The 4 percentage point decrease primarily reflects higher advertising expense, increased promotional spending and trade support with retail customers, the impact of tariff increases, the margin impact of a less favorable product and channel mix and higher personnel expense.

These factors were partially offset by favorable foreign currency exchange and forward contract settlements.

Beauty adjusted operating margin was 13.5% compared to 13.3%.

The 0.2 percentage point increase primarily reflects lower amortization and personal -- personnel cost savings from Project Refuel.

These factors were partially offset by higher advertising and higher freight expense.

Our effective tax rate was 6.9% compared to 8.2% in the same period last year.

The decrease is due to shifts in the mix of taxable income across our tax jurisdictions.

Income from continuing operations was $54.3 million or $2.06 per diluted share.

This compares to $58.6 million or $2.15 per diluted share in the same period last year, which included after-tax restructuring charges of $0.04 a share.

Non-GAAP adjusted income from continuing operations was $63.2 million or $2.40 per diluted share compared to $68.1 million or $2.50 per diluted share.

The 4% decrease in adjusted diluted EPS primarily reflects higher advertising expense, the impact of tariff increases and higher freight expense, partially offset by better operating leverage, the margin lift from Leadership Brand growth, lower interest expense, lower tax expense and the impact of lower weighted average diluted shares outstanding.

Loss from discontinued operations was $4.9 million compared to a loss of $89.1 million in the same period last year.

The loss in the third quarter of fiscal 2019 reflects the impact of the settlement of the supplemental payment amount associated with the sale of Healthy Directions.

During the quarter, we reduced the estimated value of the supplemental payment to $10.8 million and recorded an after-tax charge of $4.4 million.

The amount was adjusted based on the settlement with respect to the calculation of the performance of Healthy Directions through February 28, 2018.

During the quarter, we also reported an after-tax charge of $0.5 million resulting from the resolution of certain contingencies.

The loss in the same quarter last year primarily reflects after-tax impairment charges recorded prior to the divestiture.

Now moving onto our financial position.

Accounts receivable turnover increased to 69.4 days compared to 65.4 days in the same period last year.

Inventory was $300.6 million compared to $278.1 million at the same time last year.

Inventory turnover improved to 3.4x compared to 2.8x in the prior year period.

Net cash provided by operating activities from continuing operations for the first 9 months of fiscal 2019 increased $6.6 million to $109.5 million.

The increase was primarily due to an increase in income from continuing operations, higher share-based compensation and an increase in cash provided from accounts payable.

These factors were partially offset by an increase in cash used for inventory and a dispute settlement payment of $15 million made in the first quarter of fiscal 2019.

Total short and long-term debt decreased $86.5 million to $339.7 million compared to $426.2 million at the end of the third quarter last year.

We ended the third quarter with a leverage ratio of 1.4x compared to 1.8x as previously reported at the end of the third quarter last year.

We were able to continue to delever well -- while also repurchasing almost 814,000 shares of our common stock for $100 million for an average price of less than $123 per share.

We are pleased with our results for the quarter and year-to-date, which we believe keep us on track to deliver another strong year of revenue and adjusted diluted EPS growth.

For fiscal 2019, we now expect consolidated net sales revenue in the range of $1.535 billion to $1.55 billion, which implies consolidated sales growth of 3.8% to 4.8%.

Our sales outlook now also includes the following items, which together account for the $10 million decline in the high end of our outlook and primarily impact the Health & Home segment.

An expected unfavorable impact from pricing actions that have not been resolved with a key customer in 2 of our product categories.

And a deceleration of growth in China, with the corresponding buildup of inventory in the channel and the impact that we believe trade tensions are having on both the U.S. and Chinese consumers.

We are still very optimistic about our prospects in China and the opportunity for growth in the region and continue to consider it to be a key strategic initiative for the company going forward.

Our net sales outlook continues to assume the severity of the cough/cold/flu season will be in line with historical averages, which unfavorably impacts the full year comparison to fiscal 2018 by 1.1%.

Our net sales outlook also assumes that December 2018 foreign currency exchange rates will remain constant for the remainder of the year.

We have updated our segment growth rate expectations for the full fiscal year and now expect an increase in Housewares net sales growth to 11% to 13%; Health & Home net sales growth of 2% to 4%, including an unfavorable impact of approximately 2.3% from the average cough/cold/flu assumption; and Beauty net sales decline in the low to mid-single digits, which remain the same.

Despite the decline in the high end of our net sales outlook range, we are increasing our EPS outlook to reflect the lower share count from open market repurchases made during the quarter.

We now expect consolidated GAAP diluted EPS from continuing operations of $6.35 to $6.51, and adjusted diluted EPS from continuing operations in the range of $7.70 to $7.95 based on an estimated weighted average diluted shares outstanding of $26 million for the fourth quarter of fiscal 2019.

Our EPS outlook continues to include an increase in growth investments for fiscal 2019 in the range of 18% to 22% year-over-year as we spend into the strengths of the current year, support new product launches and accelerate the development of digital assets and investment in digital marketing to drive future growth.

Our outlook also includes the impact of expected commodity and freight inflation on our cost of goods sold as well as the expected impact of tariff changes in their current form.

While we currently anticipate achieving our fiscal 2019 revised full year outlook, the current U.S. China trade environment is certainly a concern and could provide a meaningful headwind next fiscal year if we ultimately realize the full year impact of tariff changes in their current form.

Looking at our expectations for tax.

We now expect the reported GAAP effective tax rate range of 7.3% to 8.4% and an adjusted effective tax rate range of 6.9% to 7.7% for the full fiscal year 2019.

Please refer to the schedule entitled Effective Tax Rate and Adjusted Effective Tax Rate in the tables of the press release.

Our outlook for diluted EPS from continuing operations assumes that December 2018 foreign currency exchange rates will remain constant for the remainder of the fiscal year.

Other EPS assumptions are consistent with our previous guidance.

The likelihood and potential impact of any fiscal 2019 acquisitions or additional divestitures, future asset impairment charges, future foreign currency fluctuations or further share repurchases are unknown and cannot be reasonably estimated.

Therefore, they are not included in the company's sales and earnings outlook.

And now I'd like to turn it back to the operator for questions.

(Operator Instructions) We will now take our first question from Bob Labick of CJS Securities.

I wanted to start with 2 quick kind of clarifications and I'll ask one thematic one and I'll hop back in queue.

You mentioned a pricing dispute with one customer in 2 categories.

Can you tell us what percentage of sales were impacted there or really any kind of clarification?

Is this a normal occurrence or what's kind of going on there?

Yes, let me start here.

Brian may have more to say.

Pricing is a lumpy process.

It's easy to say in a conference room or a business meeting, we're going to take some pricing.

And that said, in these categories in our industry, there hasn't been pricing action in years.

So to go into the market and take pricing is a process.

Our customers understand it.

I think consumers understand about the trade war.

And we've been largely successful.

In fact, it's just one customer and it's only in 2 of the 10 or 11 categories we trade in, in Health & Home.

And even in that one customer, I think, 8 or 9 of the categories have already been accepted and we're shipping as normal.

While we didn't take price increases in all categories because not all categories were impacted by the tariffs.

But we're successful in getting price increases in all but 2 of the categories that were impacted by tariffs.

Correct.

And in Housewares, we've also raised prices on the tariff-affected categories and have not had significant concerns either.

In this one customer, we're holding our ground.

We're doing the right thing.

We're doing the right thing for the brand.

We're doing the right thing in the marketplace, and we've done right with other customers, and frankly, so have they.

So this is the right move.

In terms of dimensionalizing, you heard Brian say that the primary driver of our small chains to the upper end only of our guidance on sales, that $10 million is primarily due to this item, and so that gives you a sense of dimension.

Well, so it's due to a combination of this and the...

Chinese slowdown.

Slowdown in China e-commerce.

So if you want to think 50-50, you're probably not going to be that far off.

But we're not going to give specific guidance, but that could hopefully help you dimensionalize it.

Yes.

And so the price -- I just want to make sure on the public call, and while we're officially on record that there's absolutely no misunderstanding of any kind.

Our pricing actions so far have been successful.

We have been able to take pricing in categories that traditionally do not have price increases as part of their normal cycle and that's a statement measured in years.

And we have been able to take pricing with the vast majority of our customers in the vast majority of affected categories.

We are lowering the guidance to deal with those 2 items that Brian is talking about.

This is one of them, and we're transparent.

We want you to know.

And my last comment on it is, pricing is a lumpy process.

It is not the kind of thing that you just send out a note saying here's our new price, when shall we ship you with the new higher prices, what's your order, please.

Customers want to have a discussion, they want to push back, they want to see the math, they want to have a meeting, they want to see what competitors do, they want to see what their alternatives are.

This is a marketplace.

And in marketplaces, things have a way of working out, but it doesn't just go from one day to the next.

Well, and I would just add one thing with respect to doing the right thing part.

Imagine if you were talking to retail customer A, and they found out that retail customer B didn't have to take a price increase.

Retail customer A wouldn't be very happy about it.

It's really -- the only choice is to stick to our position and take -- hold to our ground and take the pricing even if it's a little bit lumpy and a little bit disruptive to sales in the short term.

We believe that this is the short-term item and that in the long run will end up in a good place on pricing and profitability.

And we already are in most of the customers in most of the categories.

Right.

Okay, super.

And then just maybe 2 seconds on the Chinese e-commerce issues going on here.

It sounds like just maybe some inventory in the channel.

Can you tell us really what you're selling in there, what categories if you can?

And then the bigger question I really want to ask is international has become a bigger theme for you over the last several quarters.

Can you talk a little bit about how big the opportunity is and maybe how you view that opportunity now versus a few years ago?

What's different and where the growth will come in that area?

Yes, 2 great questions.

First, to clarify on the Chinese, on the e-commerce.

E-commerce is an important part of the Chinese market.

China is an important part of Asia and Asia is a winning area for us.

We don't disclose Asia as a specific category or by specific breakout, but I will just tell everyone in the public call here that we're talking about thermometers, is the primary driver in China and it's primarily online.

We've been tremendously successful.

If you listen to us over the last couple of years really, not just quarters, we've frequently highlighted success in China and Asia and online and in thermometers.

What's happening here is there is some slowdown and as a result, there's an inventory buildup in the category that will have to play through.

Prices are also sorting themselves out.

And in China, in general, there's just a bit of slowdown of some pretty heady growth, that 6%, 8%, 9% kind of numbers that have been going on for years, in China, are believed to be coming down.

We're seeing a little bit of that.

But you have to see the underlying picture.

There's roughly 16 million births a year in China.

That's a growing number.

That's roughly 4x the number of births that's in the United States every single year.

And those babies go into households, many of them newly formed.

Those households in a rising middle class with more discretionary income and they want to do right for their families just like anybody else in the world, they want the best.

And when it comes to a thermometer, it's well known that the Braun products are exceptionally capable.

They're generally better than any other ear thermometers available on the market.

They're not made in China and Chinese consumers tend to favor that, especially for health care products.

And we have been the market leader.

So it is just great to see.

To see that slow down a little and a little inventory stack up, that's what we're talking about.

And if you take that $10 million that I mentioned -- that we mentioned in our guidance and that split that Brian alluded to, you can get a little sense of the size here.

And then as it pertains to Asia broadly and international -- sorry, Asia, in general, and international broadly, international is a highly underdeveloped part of Helen of Troy's business.

During Phase 1 of the transformation, which is the last 5 years, we've focused more on domestic than we have international and all of the key themes that you've heard me talk about at length over the last few years on Helen of Troy have been playing through with some pretty good success.

We're now at a point of development where we can export more of that success in terms of our business model.

We're much better integrated and operationally capable than we have ever been before.

The shared services platform is increasingly standardized and synchronized and the back offices around the world are on pretty standard processes.

The front of the house is getting better and better with the digital marketing, and our Leadership Brand strategy has been paying dividends.

So to do more of that in places where we're highly underdeveloped makes all the sense in the world to us and Asia and Europe are 2 clear and obvious focus areas.

We have good infrastructure, we have the right brands, the right consumer markets like the Chinese thing I just described.

Most of the European markets we're active in, but frankly could have a bigger footprint.

So this is an area where we would like to see action in the future and in the second phase of the transformation that I alluded to in my comments, we're very excited about our international prospects.

We will now take our next question from Chris Carey of Bank of America.

So I know we're early days right, and it sounds like we're going to get a broader strategy overview at the Investor Day.

But as we think -- as we certainly think about fiscal '20, would you envision being able to grow core sales next year given the tough comps, especially in the first half of the year?

Does that international component that you just mentioned in Phase 2 become necessary in order to get that lift?

And then just any update that you have on your ability to cover tariffs would also be helpful.

Yes, sure.

So our fiscal '20, we'll give guidance in April, which is our traditional window for that.

So we won't -- I know everyone is looking for it, and I'm sure everyone wants to know exactly what the fiscal '20 forecast is for the company when -- we're not going to be able to provide that at the end of the third quarter call.

I don't think so many companies do that, and we gave that guidance in April.

In terms of the very big picture on fiscal '20, we do believe that we can continue growing.

History is on our side.

We have a good track record on that subject, and we have the building blocks.

That said, we are working through our budget cycle right now.

This is exactly the time of year for this.

We're right in the thick of it, and we'll have a lot more to say in April.

In terms of the quarterly comparisons, I know a lot of people focus on it, right, like this quarter, last quarter, the last half.

We had a spectacular first half to the year, and we're going to bring in a year between 3.8% and 4.8% growth for the year and that's on top of the 5.9% last year and the growth from the year before that.

The story goes on and on.

I guess, my point is we think in years when we forecast, and we think in 5-year chunks when we strategize and Phase 2 was a 5-year thought and our guidance is always in 1-year chunks.

And we'll do that again.

In terms of the first half, therefore, we're not so worried about whether we'll be able to anniversary in one particular quarter or another.

In fact, in Q4, I'm sure you've all done the math already.

You'll see that with the guidance that we just gave, will give us a very strong year, in fact, stronger than we originally forecasted at the beginning of the year.

It turned out to be that a lot of that is coming in the first half.

We just added another 2.4% of net sales this quarter, and we'll get a 3.8% to 4.8% year.

So everybody realizes that that means that the tough compare in the fourth quarter because of the cold and flu season doesn't give you all the growth in all the quarters.

So we're not worried about that.

I know the market gets upset on such things, but our businesses are lumpy, seasons are lumpy and you can never predict all these things.

It's why we don't give quarterly guidance in the first place.

And then in the case of the multi-year plan, I don't want to make too many promises about the long-term future, but we have given long-term guidance, and it's our intention over a many year period to be in line with that guidance.

I think you had a second question on tariffs, Chris that I can start on and maybe Julien can add to if he wants.

Our pricing actions are intended to offset the full amount of gross profit dollar impact from tariff increases.

That doesn't mean we'll be 100% successful.

And as we called out in the prepared remarks, it could have some impact on consumption and customer orders, which we believe would happen in the short term.

But in the long term, we would expect stability and no remaining issues.

The -- so in a perfect world, if we were able to get all the price increases in place, they are designed to offset 100% of the gross profit impact -- dollar impact.

We are not stopping there though.

We are -- have put in place preliminary mitigation actions with respect to sourcing and are continuing a lot of those actions because some of those take a longer period of time to get into place.

So we've started that process.

And I think, as a result of the whole tariff thing, they'll be a rebalancing in our sourcing structure, and it will be more fairly balanced in some other regions other than China, which is probably a healthy result to begin with because we'll have more of our supply closer to the U.S. and have shorter lead times, and we'll have a diversified sourcing base and maybe in some cases, we'll be dual sourced.

We'll have the same product made partially in Mexico, for instance, and in China potentially.

So I think I've said it before, the sourcing action would hopefully be viewed as icing on the cake or gravy on top of the pricing action that we're taking.

So I just want to be clear, the intention is to offset 100%.

We may not get totally there, but I feel very good that we're to get a high percentage of the tariffs offset and then any sourcing actions would be kind of icing on the cake.

Yes, I think you've got it.

The only add I'd build is never waste a good crisis.

When there's an opportunity to take a look in the mirror, look at our footprint.

So when you think about Phase 2 of our plan and ask how we think the various categories and geographies will end and then we look at what our sourcing footprint is and the current tariff structure as well as opportunities to shorten lead times and the other things that Brian mentioned, it creates a chance to just put a bright light on plans we've already had, make some adjustments and reoptimize.

So that's exactly what's happening in Helen of Troy.

Got it.

Very helpful.

And then just one quick follow-up and then I'll get back in.

So it struck to me that the market has been so volatile and weak to some extent.

I wonder if that's improved your negotiating power when you think about your ability to do M&A and how you're thinking about the ability to maybe get better prices on some of the deals that you've found, that you think are attractive?

You're talking about M&A or you're talking about sourcing when you asked that?

Sorry.

This would be specifically your M&A strategy, your ability to get assets potentially at better pricing or not and then just broadly any updates on your deployment of capital toward that end.

Yes, okay.

Let's just start with the big picture on deployment of capital.

It hasn't come up yet in the call, but I'm sure everybody saw in our press release and heard in the comment.

We made a statement last quarter, and we were trying to be very clear with the market at $122.90, we saw our stock as a strong buy and we bought it.

We bought 800,000 shares, a little bit more actually, and in years, we have not made a bigger buyback than this with the exception of the tender offer a few years ago.

So there's a message in there.

And that buyback is good for the math as well.

That said, our primary capital strategy remains acquisition.

And you probably saw that even though we took on the $100 million worth of expense, we also reduced our debt by $85 million -- sorry, low $80s million during the quarter and our ratio is now 1.4.

So not only operationally are we in the best place we've ever been on the subject of acquisition, but financially we are poised.

In terms of looking for assets, we've been aggressive on the subject.

I think we've told various people in various discussions, various versions of the same, but it all comes down to the common theme, which is we're a bit picky to make sure that we have the right asset.

It's not so much about price, it's about fits and quality of asset as opposed to how accretive and how much would we pay and how we finance.

Our balance sheet is more than able to finance the stuff that we're looking at.

And in terms of the picky, I just want to say that there's a few really good ones actually that looked on the surface to the point where we engaged, engaged heavily.

But once you get under the hood, there is enough hair on them that I think you'd be disappointed if we buy them and frankly, we were not going to go further.

So we never got all the way to the point where it was -- you're going to get the best possible price in the market there.

I think we could have bought any of those assets, and we were willing to do so if it was right for us.

And on pricing, I don't know if Jeff or Brian, you might have something on that.

Well, I was just going to add but I think it's too early to see any reflection in the prices from the recent stock market volatility.

So we have not seen that yet.

But I would attribute that to just being too soon to have those reflected in pricing yet.

We will now take our next question from Linda Bolton-Weiser of D.A. Davidson.

So I believe that on the last call, when you were giving us a really good rundown of all the tariff impacts and everything, I think, you said the worst-case scenario impact on profit growth in FY '20 would be like 5 percentage points if I'm recollecting correctly.

So what you're saying now is that you're actually hoping to offset with pricing all of the impact.

So...

Yes.

Linda, it's Brian.

I think we gave dollar -- unmitigated dollar ranges, and we had to give 2 ranges, one for whether the last round stayed at 10% or went to 25%.

So we -- I never put it in percentage point terms and I couldn't tell you off the cuff what the percentages are.

We gave dollar ranges and that was -- we tried to be clear and say that was 100% unmitigated, just to give people some perspective on it and because we hadn't completed our negotiations on pricing or explored all our other mitigation options.

We're now much further along with respect to pricing.

And I'm saying that the intention is to offset a 100% of the tariff increases through pricing and have tried to say it's no guarantee that we will get completely there and there could be an impact on consumption and customer orders in the short term.

But, yes, in -- a way to think about it is, the goal is to offset 100% of the gross dollar impact through the pricing and then pick up additional wins if we can in sourcing.

And on the sourcing side, well, it's not as straightforward as okay, let's work on the price, we can work backwards into our supply chain.

We put this in our prepared remarks as well, with productivity initiatives we have internally always, externally always as well, but there are some specific ones that we are pursuing in China and in Mexico that create opportunity and some savings to help mitigate.

And then both commodities and foreign exchange move around but they move in our favor frankly.

When commodity costs come down, for example, you've seen the price of oil over the last few months.

You've seen the price of copper over the last 2 months and the forms of -- various forms of plastic which we use and lots of things with motors and metal windings that use copper.

These are opportunities to gain back some ground on disruptive pricing or hold off increases that might come from a supplier who's facing themselves some increase on commodities that are going in the wrong direction like cardboard for example, for cartons.

It's well known that carton is an escalating commodity.

And then in terms of foreign exchange, the RMB has been weaker than the U.S. dollar for some time now, triggered or exacerbated anyway by the trade war and some of that broader macroeconomic China slowdown.

And when we trade in dollars in China, our dollars buy more RMBs and that gives an opportunity to help mitigate price differences.

So these kinds of things, and that's before you get into factory moves, or moving a SKU between Chinese factories let alone, multiregional moves like under the new NAFTA Law.

So there's lots of stuff that's not just putting out a price sheet.

That's very helpful.

And then when you talk about just a possibility of consumption or order declines or softening because of the price increases, can you give a little more color on which categories because I think of your stuff as mostly smaller gadgety-type things that I wouldn't think the consumer is so price-sensitive over.

So what are you referring to and are you more referring to competition, still being able to not take the price increase?

Like what are you talking about in terms of consumption decline due to these price increases?

Yes.

Just to be clear, we're not anticipating consumption declines.

Our products provide an excellent value.

They're generally the leaders in the market.

They have some of the best attributes, the best quality, the best brand names, the best features.

Our products are winners.

Consumers know that, and you can see it in the online ratings, you can see it in our market shares and you can see it in our premium that we often command compared to competitors in the category.

So we are very confident in the value equation that we give.

We also are confident that the U.S. consumer has a lot of tailwind right now.

Those things I mentioned in the prepared remarks.

The taxes are generally lower depending exactly which course and situation.

There's more people with jobs.

You saw the labor reports last week and all 3 of the major indicators went positive.

I'm talking about the number of jobs that were created, the wage growth of the people who had jobs and the labor participation rate, which means they're just more people working.

So all those things puts money in people's pockets and now they go to the shelf.

But for the first time in years, they'll see products that have a bit of inflation in them and there has not been inflation in this country of any meaningful way in the last couple of years, and certainly not in our categories.

There's plenty of competition out there, but I don't think they all can say the same positive things I said about our products.

Some of them are excellent, some of them are less so.

And the customers have alternatives and consumers do too.

It's a competitive marketplace.

That is yet to be tested and that's the only comment we're really trying to make to see at the new price points that retailers may choose to put on their shelves, what consumer response will be.

So you pick something of a low dollar value to your point before about a gadgety type of item, pick a carrot peeler or a can opener or something, that's a $10, $12 item when it comes from us.

There's always been $3 to $5 alternatives in a discount store.

That has nothing to do with tariffs, nothing to do with pricing.

It's just always been true.

That said, if our item now, let's say, goes up $1 and the other one only goes up $0.25 that relative equation has not been retested, and it's also possible to cross a price point like, say, something crosses the $10 price point or the $25 price point or on our more expensive items like an air purifier, you might cross the $200 or $250 price point, something like this.

And so at some point, consumers have an opinion about what they're willing to buy and how much they're willing to spend, how much money they've got in their pocket, et cetera.

I saw Christmas as very encouraging on this subject and while all the numbers haven't been published yet from Christmas I think it's well known that the Christmas season was generally positive and consumers demonstrated with their wallets that they are willing to spend that money that's in their pocket to buy the things that they want.

And so when prices go up a little now it will be retested of whether there's any new normal in the new equations when prices move around.

That's all we're saying.

Okay.

And then just can I follow-up on the M&A topic.

We know that you've been generally successful with M&A and have done a great job, especially for things like Hydro Flask.

But I'm just wondering with what we're looking at possibly in terms of China slowdown seeping over into the U.S., are you considering in your mind maybe just keeping your balance sheet really clean, keeping your powder dry and just not doing something for now and not levering up because maybe investors might value at this point having a really clean unleveraged balance sheet and that might be the best thing to do.

In other words, I'm just wondering should you lever up right ahead of a potential recession, that's what I'm kind of wondering.

Yes, it's a great question.

We do debate it internally sometimes, that very safe route.

Look at our leverage ratio, it's low and it just got lower.

Look at our stock buyback behavior, there's been about 1.2 million shares repurchased by us just within this fiscal year alone, and we brought the leverage down.

So that strategy creates value.

And that said, operationally, when we find the right asset even with some of those larger macro concerns, we should be able to add value to the asset in any reasonable economic environment.

A tougher one like you're concerned about, if there's a recession or contagion or something like that, everything certainly gets harder on the one hand.

On the other hand, the winners tend to win in those recessions, and we've seen that before.

In the last recession, especially in Health & Home, for example, it was an area where we just got stronger.

And I guess my point is if we find the right thing, I think, we would move forward.

If there's massive macro data that says caution all around, it would make us a bit more cautious.

But our balance sheet and our operations already, and if we find the right asset, we would act on it and yet we're keenly aware of the environment you're talking about.

Meanwhile, as I've said many times in many meetings, the money has not been burning a hole in our pocket.

We have not made a significant purchase of any asset since 2016.

And this was that Hydro Flask acquisition, and since then we've been aggressive with the stock buybacks, especially when the market looked at us and didn't see much value, we thought they were crazy and we saw tons of value.

So we bought back the stock.

So we're not afraid to go both ways, as they say, and we'll do the right thing not only for the balance sheet but for our portfolio and our operations with a sharp eye on the macro horizon.

I would just add that we've always had a conservative approach to leverage, and we would never lever above, I don't know, pick a number 4 times leverage or something like that.

So I think we would -- if we were going to do something, we would choose to minimize our risk through not taking on a high amount of leverage, and we've always had the ability to generate a lot of cash to quickly delever.

So that -- for those reasons, we would consider an acquisition, even if we thought like there was some recessionary signs, but we wouldn't do it so aggressively that we ended up with a ultrahigh leverage ratio, and we've always had the ability to delever quickly, which would help, I think, even in a recessionary environment, we would still be able to delever quickly.

So for those reasons, I think, we would continue to consider acquisition, even if the trends are totally in our favor from a macro perspective.

Yes.

It could also take pricing to the question that Chris Carey asked before in that kind of environment, multiples and prices come down.

Interest rates are a little higher now than they were a few years ago.

So all these things, the market has a way of factoring them in very efficiently.

I think what we would not do in a very negative environment is bet the farm.

So you're not going to see us swing for the fences.

We've not done that really ever as a company, but to go in the face of heavy negative macroeconomic environment and bet the ranch, we're not that smart and not that stupid at the same time.

I don't think we would do that.

And can I just ask one little quick one?

What percentage of your total sales are in China?

And what percent of your e-commerce sales are in China?

Yes, we don't break it out.

It's been growing rapidly.

I can say that.

It's been very successful for us.

It's market leadership in those thermometers, that's been true for some time.

The rapid growth has been exceptional.

We've had an internal project to grow by multiples in the last couple of years.

We've exceeded it.

And I can give you lots of qualitative indicators that say that this is a winning area.

If you're worried about the slowdown, looking to dimensionalize, which, I think, is what you're really trying to do.

The number Brian gave before, which is of the $10 million of reduction, which is only to the high end of our guidance just to be repetitive, I'm sorry.

But we see the market doesn't like it when we lower guidance, but raise our earnings they may forget that this is going to be a 3.8% to 4.8% growth year.

And in China, we're actually going to have an up year yet again.

We're just going to have a less up year than we originally forecasted because of this.

Linda, what we can disclose is our percentage of sales in the Asia Pacific region, last fiscal year was 5.1% of our total, but growing rapidly.

So I would expect that number to be higher for fiscal year '19, but we give that breakout annually.

But just as a starting point, it's 5.1% of the total in the Asia Pacific region for last fiscal year, and it grew 25% last fiscal year and is continuing to grow this year.

Yes.

And on the online side, it's not the lion share of our online.

We do a lot more online in the United States.

It's just a large part of the Chinese business that is online.

So that's the reason we made that distinction.

So if that business that Brian just described with numbers has a dependency of online, that's been its biggest growth driver.

If that slows down a little bit, it's not surprising that our forecast takes a hit in that $5-ish million that we're talking about.

I'm frankly surprised we're having such a discussion about $5-ish million.

We will now take our next question from Steven Marotta of CL King.

I know we're running over, so I'll just offer 2 quick questions and take the rest off-line.

From a sourcing rebalancing standpoint, can you remind us where you are right now from a China exposure to COGS domestically?

And where you would expect to be 12 months from now?

Yes.

Brian, I believe, we break out the total number, and while -- he's going to dig it up for you, Steve, we'll give you that number because we do disclose it.

While he's doing it, I'll remind this group that it varies a lot by segments.

So in the case of Beauty and Housewares, we're primarily China-sourced.

In the case of Health & Home, we are roughly even in dollar terms between China and the Americas, with Mexico being the primary source for the Americas products.

So think of thermometers, humidifiers, air purifiers, vaporizers, a lot of this stuff is made in Mexico for them.

So -- right, currently 70 -- well, for last fiscal year, 74% of our product was sourced in the Far East.

And I would say at this stage, it's hard to give an estimate on how we could shift that percentage because we're early days and looking at new regions and options.

It's not like we didn't look at it in the past.

But in the past, the analysis always proved out that China was by far the most efficient.

And the numbers moved.

Numbers moved.

The lines have recrawled as a new equilibrium.

Right.

Right.

Now they shifted because of tariffs and because China is becoming more expensive, the lines are starting to cross.

So that, in conjunction with the massive impact from tariffs, has got us looking at this harder and the analysis shows that it's getting close to equal or maybe even the lines are crossing.

So it's early days.

Steve, I can't -- I don't think it would be prudent for us to give you what we think it could be in a year at this stage.

I think there'll be more to come on that in the next couple of quarters.

We're at 74% currently.

Yes, the way -- looking forward, the way I would look at it and the way we look at internally is Health & Home is roughly at 50-50, the company is the balance that you just heard in the last fiscal year and for Housewares and Beauty, it's almost completely China.

With the lines moving, think of things like labor rates, the Chinese labor rate has been going up almost like clockwork for the last 7 or 8 years now, 15%, 20% a year.

It's not that big a component of our cost of goods, but compound that over a 7-, 8-year period, labor gets to be more expensive.

Exchange rates, if you look at the RMB versus the dollar over the last 7 or 8 years and the Mexican peso versus the dollar over the last 7 years, you're going to see 2 entirely different scenarios.

And then if you look at lead times, inventory levels and then cube meaning like, let's say, you're making a thing like a vaporizer or a salad spinner, so that's a big item, they're roughly the same size.

They're very light, so you're going to cube out a container across the Pacific, long before you gross it out with weight and the lead time is longer.

So why would you ship all that air and yet fill up that container that you could put more weight in, filling it up with something else like a thermometer or a hair dryer or something like that, you're going to be able to get a lot more units and a lot more dollar value in that container before you cube it out or gross it out.

So this stuff is all being factored into the equation because it's all moving around and because the rule of law has changed.

NAFTA 2 or USMCA is, I don't know if it's a done deal, but appears closely to ratification.

And in the case of the China thing, I believe the delegations are meeting this week as we speak on the subject of whether or not there's going to be a new normal coming out of China.

And meanwhile, there's also new Congress in the United States that wants to fight about everything.

So I can't tell you how all that's going to go.

I can simply tell you that that's the way we look at it.

My response is very simple.

Never waste a good crisis, I said it before and when the numbers move around, it creates opportunity.

We're capitalists, and we're going to put our assets where we think they're most efficient and get the best value we can for our shareholders and make the best margins we can in our business.

It appears there are no further questions at this time.

Mr. Mininberg, I'd like to turn the conference back to you for any additional or closing remarks.

Yes, well, thanks for joining today.

Robust discussion, very much appreciated.

Look forward to the follow-up calls.

I know we'll be speaking to many of you as well in the coming weeks, and we'll be meeting those of you that are attending next week's ICR conference in Orlando.

Beyond that, we do expect to host our fourth quarter and fiscal year-end call in late April, when we will also provide our outlook for fiscal '20, and we'll give you an update on Investor Day for the second phase of our transformation when we're in a position where we have all the dates and details.

Well, thanks very much, everybody.

So long.

Thanks for calling -- for being on the call.

This concludes today's call.

Thank you for your participation.

You may now disconnect.