John Boomer - Senior Vice President Gerald J. Rubin - Co-Founder, Chairman, Chief Executive Officer and President Thomas J. Benson - Chief Financial Officer and Senior Vice President

Robert Labick - CJS Securities, Inc. Graham Yoshio Tanaka - Tanaka Capital Management, Inc. Christopher W. Robertson - Cardinal Capital Management, L.L.C. Steven Friedman

Good day, everyone, and welcome to the Helen of Troy Limited Second Quarter Fiscal 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Boomer, Senior Vice President. You may begin.

Good afternoon, everyone, and welcome to the Helen of Troy's second quarter of fiscal year 2014 earnings conference call. The agenda for the call this afternoon is as follows: I will begin with a brief discussion of forward-looking statements. Mr. Gerald Rubin, our Chairman of the Board, CEO and President, will then discuss the factors that drove our growth in the quarter, then Tom Benson, our Chief Financial Officer, will review our financials and outlook in more detail. Following this, we will take the 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 identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ 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 than the non-GAAP financial information disclosed by other companies. The company cautions listeners to not place undue reliance on forward-looking statements or non-GAAP information. Before I turn the conference call over to our Chairman, I'd 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 earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. 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 Gerald Rubin. Gerald J. Rubin: Thank you, John. Good afternoon, everybody, and welcome to our second quarter of fiscal year 2014 earnings conference call. During the second quarter, we continue the positive momentum we saw in the first quarter, achieving sales growth in all segments of our business for consolidated net sales revenue increase of 11.1% to a record $319.4 million. While product costs continue to increase across the board for the company and the industry as a whole, we diligently managed our expenses to achieve diluted EPS of $0.72 per share and adjusted EBITDA of $41.8 million for the quarter, ending August 31, 2013. Growth in the quarter was led by our Healthcare/Home Environment segment, which grew sales by 20.4%. Fan sales were up sharply due to a very warm summer in Europe. This segment also saw a strong performance in the humidifier, thermometer and hot/cold therapy categories. Our Housewares segment grew sales by 8.7%. Continued innovation drove overall growth in kitchen tools, gadgets and kitchen storage lines. Contributing to growth in the segment was the success of the revamped OXO cleaning utility line and continued market penetration of our OXO tot line of infant and toddler care products. On a year-over-year basis, we also expanded shelf space and assortments at several key retailers, continued to grow Internet sales and expanded our wholesale club business and new customer distribution. We also achieved growth in our Personal Care segment, which grew net sales revenue by 3.4% in the second quarter. We saw increased sales of professional appliances, as well as higher sales in Europe and Latin America. In Europe, we benefited from a new product distribution arrangement specific to the current fiscal year. As a reminder, we restructured and strengthened our European sales team last year and this is one of the tractions we are beginning to see there and strengthening our product offering. Our grooming, skin care and hair care solutions product category continues to meet the challenges of a very difficult competitive and economic environment, but has several exciting new initiatives, which include new products and new technology, which offer promises for the future. Retail acceptance of these new items have been encouraging, and the new products should start shipping in our fourth quarter of fiscal year 2014. We remain focused on controlling our costs and executing our growth objectives to sustain our growth and profitability. In line with these objectives, at quarter end, our Healthcare/Home Environment segment converted from their legacy Enterprise Resource Planning system onto our global ERP system. We expect this to contribute to our profitable growth by eliminating duplicate costs and improving uniformity of execution throughout our organization. In the first week of September 2013, we commenced initial operations at our new 1.3 million square-foot distribution facility in Olive Branch, Mississippi, which will house the distribution operations of both our Personal Care and Healthcare/Home Environment appliance businesses. I am pleased to report that the project is on schedule and on budget, and this is an important initiative for us and one that we -- that will support our growth for years to come. Looking ahead to the second half of the year, we continue to invest in new product introductions and extension of our brands into adjacent categories that will drive growth beyond the current fiscal year. We are planning a number of new product introductions in our home, health care environment segment, including an 11-cup PUR water filter -- filtering pitcher, a new stainless-steel, PUR faucet-mount water filter and a PUR baby product, all of which started shipping at the beginning of the -- will start shipping at the beginning of the third quarter of fiscal 2014. The Housewares business will continue to focus on expansion in all OXO categories, including the OXO tot program. The Personal Care segment will see the launch of a complete line of appliance products featuring infrared heat technology, as well as new packaging for existing products. I now would like to turn the conference call over to Tom Benson, our CFO, who will give you the financial highlights of the quarter and update you on our financial guidance for the fiscal year 2014. Thomas J. Benson: Thank you, Gerry. Good afternoon, everyone. I'd like to start my discussion by reviewing our second quarter of fiscal year 2014 financial results from this afternoon's press release. Net sales revenue for the second quarter of fiscal year 2014 increased 11.1% to a record $319.4 million. As Gerry mentioned, this reflects growth in the Healthcare/Home Environment segment of 20.4%, which consists of the Kaz and PUR business; and 8.7% in the Housewares segment, which consists of our OXO business. Our Personal Care segment also grew by 3.4% despite a still difficult retail environment. Foreign currency negatively impacted revenue by $900,000, which mostly affected the Personal Care segment. Consolidated gross profit was 38.6% of net sales compared to 40.7% in the second quarter of fiscal year 2013, reflecting the effect of foreign currency exchange rates, product cost increases across all segments and product mix. Selling, general and administrative expense in the second quarter of fiscal year 2014 was 29.1% of net sales, a slight improvement over 30% of net sales in the second quarter of fiscal year 2013, as we continue to keep a tight rein on our expenses. The decrease primarily reflects lower outbound freight and distribution costs, as well as reduced media advertising costs. These expense reductions were partially offset by higher incentive compensation costs and higher cooperative advertising costs. Operating income for the second quarter of fiscal year 2014 was $30.4 million or 9.5% of net sales compared to operating income of $30.8 million or 10.7% of net sales in the second quarter of fiscal year 2013. The income tax rate as a percentage of income before taxes for the second quarter was 17.4% compared to 17.2% in the second quarter fiscal year 2013. We currently expect our effective tax rate for the full fiscal year 2014 to range between 17% and 19%. Net income for the second quarter of fiscal year 2014 increased 1.5% to $23.3 million or 7.3% of net sales compared to $23 million or 8% of net sales in the prior year second quarter. Now moving on to our financial position at August 31, 2013, compared to August 31, 2012. Accounts receivable were $231.3 million compared to $208.3 million, reflecting the 11.1% quarterly sales revenue increase year-over-year. Receivable turnover was relatively flat at 61.9 days compared to 61.1 days at the same time last year. Inventory declined 3.7% to $306.9 million compared to $318.7 million. Total short- and long-term debt declined by $108.4 million to $227.6 million compared to $336 million at August 31, 2012. Stockholders’ equity increased year-over-year to $970.7 million compared to $852.4 million. Now I'll take -- now I'd like to turn to our outlook for fiscal year 2014. We continue to expect net sales revenue in the range of $1.29 billion to $1.32 billion and GAAP diluted EPS in the range of $3.13 to $3.23, which includes the after-tax impact of non-cash asset impairment charges of $0.37 per share recorded in the first quarter of fiscal year 2014. We expect adjusted diluted EPS to be in the range of $3.50 to $3.60, which is consistent with the company's previous guidance. This sort of guidance reflects the negative impact of the difficult retail environment, a normal cold/cough/flu season, product cost increases across all segments and an increase in compensation expense. We continue to expect capital expenditures for fiscal year 2014 to be in the range of $40 million to $45 million, with approximately $33 million related to the completion of our new 1.3 million square-foot distribution center in Olive Branch, Mississippi. In summary, the fundamentals of our business remains solid and remain keenly focused on controlling costs to maximize profitability, even as we continue to invest in our business in support of long-term growth. Operator, we'll now turn it over for questions. Thank you.

[Operator Instructions] And our first question will come from Bob Labick of CJS Securities. Robert Labick - CJS Securities, Inc.: I just wanted to start with the significant revenue performance. Very strong growth in the quarter, both HHE and Personal Care. You mentioned -- you gave some color on that. I was wondering if you could expand a little bit, particularly, on the HHE side and the sustainability of the growth there. And then maybe also just your second half guidance, just because you didn't change it, implies a lot softer growth. Is there anything there that you're implying? Or is it more that you just didn't want to change your guidance yet? Thomas J. Benson: Bob, on the Healthcare/Home Environment, as you pointed out, we had a very strong quarter, 20.4% sales growth, which is approximately $23 million. We had very good performance in thermometry. We had good performance in humidifiers. In Europe, we had very warm weather, and we actually sold out of all the fans we had, so we're very pleased with that. And also, our hot/cold therapy, we performed better. The 20% quarterly year-over-year growth rate is not something that we expect as a continuing growth rate. Some of it have to do with the weather. There's possibly some correlation, because we moved warehouses at the end of August, and we did give our customers notes we're moving. We can't say for sure, but maybe some of the customers ordered, a fear of some type of shipping disruption. But as we go into the second half of the year, we are very dependent upon the cough/cold/flu season. We're anticipating a normal cough/cold/flu season. Last year, the cough/cold/flu season started very strong in the November, December, January period. Then it kind of slowed down. So throughout the whole year, it was a normal seasonal. So we're expecting the same type of normal season. On the Personal Care, it was a very good performance, core growth, 3.4%. Looking at the history of the company, that's an area that we've been working on to improve and improve core growth. We do have another favorable event coming out at our European operations. We have an agreement to supply a product for like a 1-year period. During this fiscal year, we have an agreement to sell it. As far as we know, right now, that's not going to continue, so that did have some positive impact on us. We are working on various things to replace those sales for the next fiscal year. But at this time, we know some of them aren't going to continue. Robert Labick - CJS Securities, Inc.: Yes. Moving to your new distribution center. First, congratulations on the move and getting it on time and on budget. I was hoping -- can you tell us, was there any extra cost associated with that in the quarter? And then, also, can you remind us of the expected savings that you should garner from being in this new facility? And how long you should take to play out until you get to maximum efficiency? Thomas J. Benson: I mean, if you look at our SG&A cost for the first 6 months without regard to impairment, it's $180 million. We did incur some extra costs during the quarter. They are not significant or meaningful in regard to the SG&A for the quarter, which was $92 million. And the savings going forward are not really going to be that meaningful to the SG&A. What it does is we're releasing a 700,000 square-foot facility. We've moved into a 1.3 million square-foot facility. We are going to move some of the goods from our -- one of our other owned facilities. When everything's all done, we are going to have 2 warehouses that both have combined about 600,000 square-foot of growth capacity. So it's really -- we took the next step, which really has not added on incremental cost, and we've added 600,000 square feet of capacity we can utilize in the future. Gerald J. Rubin: This is Gerry. The reason that we do have a little extra space is because we actually do need flex[ph] space for the season. The Christmas season, we're always used to rent several hundred thousand feet from a third party. Also, we need those extra spaces for the extra square footage that we have for growth in the divisions that we have, and also, for any possible acquisitions that we may have coming up. Robert Labick - CJS Securities, Inc.: Okay, great. Well, sticking with that, I'm glad I brought on the questions, but could you talk a little bit about the acquisition environment and just capital allocations, since we'd like to ask that every quarter anyway? Thoughts on what the acquisition environment looks like and alternative uses of capital, including repurchasing shares. Gerald J. Rubin: Well, nothing has changed since the last conference call that we have. We are very particular on what type of acquisitions we have. There are acquisitions that we do look at on a weekly basis. Of course, we can't choose them all. And we're just looking for the one that -- or the ones that we think that we could handle in the 3 categories that we now sell in or in new categories. So there are opportunities out there, I don't have anything to report to you, but there are opportunities out there that -- for acquisitions. And, of course, the same thing that if in case nothing comes up, there's always the stock buybacks. We're kind of holding off on that a little. Although we do a little bit of the buying until we see how the market places as for acquisitions. So I think one or the other will occur, certainly, in the next 6 months.

[Operator Instructions] Our next question will come from Graham Tanaka of Tanaka Capital. Graham Yoshio Tanaka - Tanaka Capital Management, Inc.: Yes. I was just wondering what new products might contribute to sales in this year? And whether that percentage would rise or stay steady or maybe fall, perhaps, next year? How is that new product pipeline looking in terms of dollars? Thomas J. Benson: In our business, it's -- we work very hard to bring out new products every year. So we're due to have some new products that are coming out the second half. We have a pipeline to introduce new products again next year. So I would not call it an unusual activity, or, really, we're going to have a lot more this year than normal, or in the future, we're not anticipating to have less. So every year, we have a very robust product pipeline that we introduce across our 3 segments. Graham Yoshio Tanaka - Tanaka Capital Management, Inc.: I'm just wondering, in terms of annual growth rates, long term, what percent you'd like to see coming from new products? Does it add, say, 2% or 3% for sales per year or more than that? Thomas J. Benson: Well, sometimes when we introduce new products. We discontinue some because it might be an upgrade of products. Sometimes it might be a new category, so it's really a mixed bag. And our 3 segments, we have talked about growth potential over a longer period of time of really different percentages. I mean, our Housewares segment, we're consistently looking for mid-single-digits. The Healthcare/Home Environment, low single digits. And Personal Care, which we've been working on very hard, we hope to have low single digits, too. Graham Yoshio Tanaka - Tanaka Capital Management, Inc.: And second question related to just sort of what's happening in terms of costs -- purchase material costs and pricing? Are you able to get pricing? How much are you -- may get in pricing this year? And how much of that is going to be used to cover costs, or perhaps more than costs? Thomas J. Benson: As I've mentioned to you before, costs in Asia and other places that we do buy from, costs are going up. Labor is going up, material is going up. In China, you have the exchange rate changes there, money changes. So our cost of goods are going up. But we try to balance that with price increases to the retailers. We also try to balance that with the new products, where we know what the new costs are and try to build that in. But it's something that we live with, we've been living with it for many, many years. It's not going to go away tomorrow or next year. It's just part of the business of increased costs. And we do everything that we can with price increases, as I mentioned and new products to build on increases and try to keep the gross profit where it should be. And as you saw this past quarter, we did lower our -- we were tired, and we got the SG&A down about 1%. So we want to keep working on that and continue lowering our SG&A expenses, as well as to get the GPF also.

And our next question will come from Chris Robertson of Cardinal Capital. Christopher W. Robertson - Cardinal Capital Management, L.L.C.: Good afternoon. I wanted to see if I could get a little bit more color on some of the revenue growth rate numbers, as far as -- you'd mentioned some things that were more one-time in nature, such as the European item that you sold and the favorable weather opportunities for the fans in HHE. As I look ahead to try and figure out what normalized growth rates might look like, I know you just walked through the 3 segments. But as we look at the back half of the year relative to the sales guidance that you gave, I think Bob mentioned, it, clearly, was looking for some deterioration if you're going to stay within that range. Can you break apart, particularly, the Personal Care and the HHE, as to what you might described as what the non-one-time growth parts were? Thomas J. Benson: Well, what I'd say, if you're trying to look at the second half of the year to the Housewares, I mean, we did have 7.1% for the first 6 months. We're very pleased with that performance. We think an appropriate indicator would be like in the 5% range for the second half. And so you'll get a little bit more than 5% for the whole year. For the Healthcare/Home Environment, I mean, we're looking at again around 5%. I would caution that the Healthcare/Home Environment is -- I mean, weather plays a big impact upon it. We will be going into the cold/cough/flu season. We'll also be going into the heater season. So in both of those categories, we get the sell in of the products. You really determine how the season is by the reorders that you get out, so -- and then on Personal Care for the rest of the year, I mean, on a year-to-date basis, we have 0.7%. For the second quarter, we're at the 3.4%. So somewhere in between that range for the second half of the year, we're looking at. There's a lot of overwriting things. In our business, we really don't have any future purchase order. We have shelf placement. So a lot of it is based on the consumer offtake. There's a lot of things going on in the -- globally, and also domestically here in the United States. But we really don't know what the impact is. We don't know how long the government is going to be shut down. We don't know about the debt levels. The Affordable Care Act is kicking in. And I mean, people, maybe they won't totally realize it now, but next year, they're going to realize that they are supposed to go out and have coverage. If they don't have coverage, then there's a cost to that or, apparently, if they don't do it. So there's a lot of factors that are going on that I think make the next 6 months much harder to predict. Christopher W. Robertson - Cardinal Capital Management, L.L.C.: No, that's fair. I guess the only other question I'd ask around the top line, is how much of the -- particularly, the European one-time sales -- and what level of season impact for HHE in Europe would you say were in your guidance to begin with versus as you continue to look out now? Thomas J. Benson: For the Personal Care, we are aware of the agreement and what we thought it was going to bring to us, so I wouldn't say that was surprising. For the Home Environment, selling all our fans out, we weren't anticipating doing that in Europe, because that was a upside that we were not anticipating. Fans, we're very happy to sell them. They are one of the lower margin categories, so they don't give you a lot of bottom line impact. They gave you nice top line increase. Christopher W. Robertson - Cardinal Capital Management, L.L.C.: Is that part of what you're talking about in the press release, where it talks about the product mix referencing the gross margin, that it had the FX headwind in the product cost increases that you have already discussed with the product? Thomas J. Benson: Yes. The FX is -- but it also had the product mix. The categories -- 2 of the categories in the Home Environment, I said the hot/cold therapy, they had growth and also the fans. Those are lower margin. And in the Personal Care, the margin that we get on -- the gross profit margin that we get on the sales of this agreement we've entered into for this fiscal year is lower than our other gross profit margins. We're very happy to have the business. Christopher W. Robertson - Cardinal Capital Management, L.L.C.: And the last question I had was, on the cost side, will you talk about the lower outbound freight and distribution costs and the reduced media advertising comped against the higher cooperative advertising cost? Is it reasonable to say that on the advertising side and media advertising, that those were just the movement of dollars, and that they sort of offset each other? And then what would you say was helping to bring down the outbound freight costs? Gerald J. Rubin: Okay. On the advertising, you're right. We did move dollars from advertising that's done on TV and magazines to co-op advertising, because we've found out that it's really more effective. So those dollars have shifted over. And as far as warehousing and fuel prices are down, so we're getting some benefit on the fuel pricing and some benefit from our new contract with container rates coming out of China. So that's helped out.

[Operator Instructions] And we'll take our next question from Steven Friedman of Wells Fargo.

Gerry and Tom, just have a couple of quick questions. One, relating to the gross margin, Gerry or Tom, do you have a sort of an objective? I know there are product costs increases from Asia, as well as your price increase offsets that you try to do. But I believe the last quarter was 38.6%? Do you have a target somewhere in the -- close to the 40%, I think, has been, for years, a pretty good target. Or is that reasonable to attain or shoot for? Gerald J. Rubin: Yes, you're right, Steve, 40% is the number that we shoot for. We've -- over the years, you know that we've hit that or surpassed that. So right now, we're somewhere close 38.6%, up to, we think, we're going to be somewhere 39-ish. So we're somewhere close in that area.

So some solid sales growth, decent weather season as Tom has described, and both of you have described. This could be brought down with some savings in SG&A. Well, I think you said that there would be a minimal amount of savings from the new warehouse. But there would be some efficiencies that you could enjoy, maybe the second half could be conservative looking at the earnings per share on the multiple on the stock. Gerald J. Rubin: Yes, as you know, Steve, the expenses of the business are made up of variable and fixed expenses. And the more sales you do on -- in volume, the lower the fixed expenses are. So that's -- that kind of is -- although, we can control those much expenses as we can, increase in sales sure helps us out a lot.

And it does appear there are no further questions at this time. Gentlemen, I'll turn the conference back over to you for any additional or closing comments. Gerald J. Rubin: Well, thank you, everybody, for joining us again today and for your interest in our company. And we look forward to updating you on our business performance in the next third quarter call, which will come up in early January. Thank you, again, for participating.

And that does conclude today's teleconference. Thank you all for your participation.