Q4 2022 Helen of Troy Ltd Earnings Call
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Greetings and welcome to the Helen of Troy L. T D fourth quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Jack Johnson Senior Vice President of corporate business development. Please go ahead.
Thank you operator, good morning, everyone and welcome to Helen of Troy's fourth quarter fiscal 2022 earnings conference call.
The agenda for the call. This morning is as follows I will begin with a brief discussion of forward looking statements.
Mr. Julian Minim Baird <unk> co.
<unk> CEO , who will comment on the business performance and key accomplishments and then provide some perspective as we begin the new fiscal year.
Then Mr. Matt Osborne copper.
The company's CFO will review the financials in more detail and comment about current trends and expectations for the upcoming fiscal year.
Following this we will take questions you have for us today.
This conference call may contain certain forward looking statements that are based on management's current expectation with respect to future events or financial performance.
Generally the words anticipates believes expects and other words similar are words identifying forward looking statements.
Forward looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results.
This conference call May also include information that may be considered non-GAAP financial information.
These non-GAAP measures are not an alternative to GAAP financial information and maybe calculated differently than the non-GAAP financial information disclosed by other parties.
The company cautions listeners not to place undue reliance on forward looking statements or non-GAAP information.
Before I turn the call over to Mr. <unk> I would like to inform all interested parties that a copy of today's earnings release has been posted to the Investor Relations section of the company's website at Www Dot Helen of Troy Dotcom.
Our earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP based measures. The release can be obtained by selecting the investor relations tab on the company's homepage.
And then the press releases tab.
I will now turn the conference call over to Mr Min and Barrick.
Thank you Jack good morning, everyone and thank you for joining US today, we're excited to discuss our recent acquisition of curl Smith, and our fourth quarter and full year fiscal 'twenty two results.
On today's call. We will also introduce our outlook for fiscal 'twenty, three and provide an overview of the investments, we're making to continue to drive our transformation in the back half of phase II and beyond.
As we have now completed our third year of Phase two we will also update you on the outstanding progress we have made on the goals we laid out during our May 2019 Investor day.
Boiler alert we are ahead nearly across the board.
Let me start by providing a bit more color on the curl Smith acquisition, we see it as an exciting and excellent strategic fit for our prestige beauty portfolio. It also delivers immediate value creation and strong growth potential.
Our M&A strategy calls for adding leadership brands and up and comers, where we can add value and leverage our scalable operating platform.
In this case, we are adding a fast growing innovative up and comer.
The complements our portfolio of leadership brands.
With approximately 60% of U S consumers, having here with varying degrees of waves and curls prestige textured hair products are growing 10 times faster than products for non textured hair twice as fast as mass market textured hair products.
Smith business more than doubled in size over the last two years and we expect it to continue growing at a double digit rate.
Girl Smith products are designed to make carrying for textured hair easier for consumers, earning at leading net promoter scores impressive repeat purchase loyalty and strong reviews.
Girl Smith further builds our presence in prestige with a brand that complements our successful dry Barr acquisition.
We expect it to immediately become our most profitable brand and further sweeten our mix in beauty.
Consistent with our better together thinking on acquisitions, we expect to add significant further value to curled Smith by capitalizing on our much larger beauty sales force in brick and mortar and online.
Additional D T C capability marketing appliance Knowhow, our international go to market footprint and our robust chairs shared services platform that includes global sourcing distribution I T and back office capability well beyond what Karl Smith has today.
Our acquisition and divestiture activity so far in phase two has significantly improved our beauty portfolio.
With the acquisition of Curl Smith, and dry bar Revlon licensed buyout and divestiture of our mass market personal care liquids four of our last five major deals have been in beauty.
These were strategic moves, which when combined with beauties organic growth and efficiency projects have made it our highest margin segment.
Portfolio now includes a good better best set of winning appliance brands under Revlon bed head hot tools, and dry bar and a growing consumables presence in prestige liquids with dry bar and curled Smith.
Turning to the fourth quarter today, we are pleased to report outstanding results, including double digit growth in consolidated revenue and EPS.
All three business segments performed well ahead of our expectations on both the top and bottom line.
Since Covid has had such a big impact on the comparisons over the past two years. We think it is also helpful to look at the two year stack comparisons which are included in today's press release.
On that basis for the quarter, we grew core net sales by 37% and core adjusted diluted EPS by 45%.
As you have likely noticed in today's earnings release, we breathe named two of our business segments to reflect the substantial changes to our portfolio in recent years.
With OXXO now joined by two iconic brands in the outdoor industry Hydro flask and Osprey, we are renaming our houseware segment to home and outdoor.
We are also renaming our health and home segment, the health and wellness.
Outside of the new name reflects the functional benefits of helping consumers monitor their physical condition and provide relief when family members may be sick.
The wellness side allows us to put even more focus on the emotional benefits of providing peace of mind and wellbeing.
Looking specifically at segment performance home and outdoor sales grew significantly in the fourth quarter aided by the contribution of Osprey.
This comes on top of double digit growth in the comparison period.
Growth this quarter was led by hydro flask, which continued to grow market share.
Turning to beauty demand was especially strong in Volumize reason waivers.
We continue to grow share in this segment as well.
Beauty also continued to perform international posting double digit growth with particular strength in EMEA and Latin America.
This reinforces our strategic focus on appliances and premium beauty products in Latin America.
Fiscal 'twenty two marks two years of dry bar under our ownership delivering performance ahead of our acquisition economics, despite the challenges of the pandemic.
Turning to health and wellness segments significantly exceeded our expectations.
Key drivers in the fourth quarter included higher than expected sales of the monitors and humidifiers related to a late season omicron surge they tended to to produce cough and flu like symptoms.
With the cold and flu season itself, indeed below historical averages as we forecasted on our third quarter call in January .
Turned out that omicron stimulated demand for health related products.
Quarter also benefited from higher sales of seasonal products such as fans.
Turning now to the full fiscal year results. We are proud to continue delivering growth over the elevated based laid down last year and despite the many challenges from supply chain disruption inflation and the EPA matter.
22 marks another record year for revenues and adjusted earnings per share and delivered further adjusted operating margin expansion.
Growth rates on top of the elevated base were ahead of our phase two targets are.
Our business model is working reflecting the power of our diversified portfolio of nine leadership brands.
Investment in our value creation flywheel and excellence in execution of our transformation strategy by a high performance organization, who operates under a winning culture.
Fiscal 'twenty two also demonstrated that the playbook, we executed was effective in helping mitigate supply chain disruption and inflation.
Stepping back now to look at our progress so far in phase two we are proud that our results have contributed to total shareholder returns well ahead of our proxy peer group since the start of phase two and all through phase one.
Even though we were just three years into phase two we have grown significantly with core net sales growth of 50% and core adjusted diluted EPS growth of 68%.
Both represent an acceleration of compound annual growth rates versus phase one.
Looking at other phase two targets. We are also ahead of plan.
For adjusted operating margins, so far in phase two has expanded well beyond our target.
This was achieved primarily through flywheel investments cost reduction projects and new products that have sweetened our mix.
When we started phase two we set a goal of feeding our leadership brands with an average annual increase of at least 10% in growth investments such as consumer centric product innovation and marketing support.
The ROI from these investments has helped expand our margins as has the benefits of our flywheel investments made in international and in shared services.
Doubling down on international is another phase two strategic choice that has paid off with results ahead of plan.
During our 2019 Investor day, we set a goal of adding over $100 million of organic revenue growth outside of the United States by the end of fiscal 'twenty four.
I am pleased to report that we have achieved this goal two years ahead of schedule.
That provides us an opportunity to raise the bar.
Today, we are announcing that we are targeting an additional $130 million of growth outside the United States over the two remaining years of phase two.
This includes further organic growth in the two geographic regions. We originally chose EMEA and Asia Pacific.
Now also adding two new important international growth drivers both of which are expected to grow double digits in the back half of phase two.
The first of those is Latin America, which has been growing rapidly over phase two on a core basis and second is osprey, which is 50% international.
Another impressive outcome from the choice to double down on international is the margin improvements during phase two inter.
International margins have increased significantly over the past three years with EMEA and Latin America, joining Asia Pacific is investment grade, making them a further focus for the back half of phase two.
Rois C is another key metric of our phase II plant.
Careful stewardship and allocation of capital has been a hallmark of our transformation from the beginning.
In priority order, our stated capital allocation strategy has been to invest in our business.
It makes strategic and accretive acquisitions and buy back shares.
We have committed approximately $1 $3 billion of capital in the first three years of phase two which includes investments to date in the new distribution Center.
The dry bar Osprey, and curl Smith acquisition.
The Revlon 100 year licensed buyout and share repurchases.
This is approximately the same amount that we committed over the five years of phase one.
Like all capital allocations that have multi year pay outs. These latest investments require time to deliver their return not just an ROI see but also in the form of an even more robust enterprise that we expect will serve as the foundation for further growth well beyond phase two.
Now looking ahead to fiscal 'twenty three the outlook, we are introducing today projects another year of solid growth in revenue and profitability.
Our two new acquisitions, Osprey, and Karl Smith are expected to drive revenue and margin growth.
We expect their incremental revenues to add operating leverage and make further use of our shared services, which in turn provides further lift from adding critical mass to the flywheel.
Not only in fiscal 'twenty, three but also in future years very similar to what we did with hydro flask and dry bar in the past and continue to do today.
We recognized the broad based concerns about continued supply chain interruption.
Rising interest rates and rising inflation it puts pressure on input costs and also on consumer buying power.
In fact, we are seeing weakness in consumption in some categories in March and April .
It is important to note our outlook includes our current assessment of the impact of each of these headwinds.
The address them, we are reapplying, our proven playbook, which we expect to mitigate more than $3 a share of inflation and supply chain interruption.
We have now contracted all of our expected shipping needs for the year, which locks in sea freight for the full fiscal year at significant discounts to current spot market rates and provides considerable visibility on these costs.
We have also now introduced many of our price increases.
To help offset margin compression from higher costs. We also expect growth from dry bar in hydro flask to sweeten our organic mix.
With regard to the EPA matter. The recent EPA concerns are related to the packaging and labels of certain additional humidifiers and air products that had been in the market for years.
We continue to engage in dialogue with the EPA to resolve the matter as quickly as possible.
Current estimate of the impact of this matter is included in our outlook.
On the spending side for fiscal 'twenty three we continue to believe strongly that executing our transformation strategy is the best way to continue delivering long term value for shareholders.
Our fiscal 'twenty three outlook. Therefore includes carefully considered investments in the most important opportunities for our brands and the key shared service initiatives intended to open new efficiency capability and scalability for the back half of fiscal 'twenty three and beyond.
We also continue to invest in consumer centric innovation, which has been the lifeblood of our leadership brands throughout the transformation.
We are investing in the most attractive brand marketing opportunities customization personalization and international.
Mentioned earlier, we see further upside in EMEA and Asia Pacific and are increasing our focus on Latin America, especially in beauty appliances.
And shared services the major fiscal 'twenty three investments are primarily related to improvements in operations.
And in executing the $10 million plus multi year cost of goods savings programs underway in each business unit.
In operations, we are further diversifying the geographic footprint of our global sourcing across China, Southeast Asia, and Mexico, and creating more dual sourcing to improve cost and certainty of supply.
This in turn opens the door to creating new efficiencies and lower risks such as shortening lead times decreasing inventory lowering freight and reducing exposure to global geopolitical friction and to tariffs.
On the distribution side of operation, the New Tennessee distribution center will significantly increase our capacity and allow us to more efficiently handle the growth of our business over the past five years and the new growth we are planning.
Construction is proceeding on time and on budget and we expect to open by the end of fiscal 'twenty three.
On the it side our outlook includes choice full investments in system upgrades, such as best of breed applications for demand planning and warehouse management, and new direct to consumer capability and capacity to adapt even further to the growing demand for online purchases and increasing service expectations.
We believe we are making the right spending decisions and have been careful especially in this cost environment to focus on the ones. We expect will matter most.
We have a track record of delivering on the annual guidance we provide.
This has been the case throughout the transformation and it was proven again today in our fiscal 'twenty two results.
This track record is driven by our relentless focus on execution of our strategic plan.
Our agility in the face of adversity, and our culture that brings out the very best in our outstanding people.
As we look further out we reiterate our commitment to our long term average annual top and bottom line growth targets for fiscal 'twenty four.
Overall, we expect phase II will deliver a five year run of top and bottom line organic growth well ahead of the average annual targets we set.
Even though we have two years left in phase two and are focused on executing with excellence in all of the areas. Just mentioned we are now beginning to work on phase III.
Over the balance of this fiscal year I will be working with our global leadership team and our board on the strategic planning for Phase III.
As you can see from the previously discussed investments we are making now in infrastructure. We are looking to further build out our platform. So we can scale. It in the next generation of profitable organic and inorganic growth.
We look forward to sharing our phase III strategic choices and plans with you in fiscal 'twenty four.
Moving now to an update on executive leadership I am pleased to report that we have completed our previously announced search for a chief operating officer.
Adding this role will help us focus on continuing our growth and executing the major strategic initiatives for the back half of phase two and beyond with excellence.
Noel Jeff Wang who joined Helen of Troy as the Chief operating officer on May nine 2022.
And will oversee the day to day business the execution of major projects and health plan for Phase III.
Michelle brings over 25 years of experience as a proven leader in President and general manager roles at World class companies, including fantasy and consumer health care Kellogg.
H, J, Heinz and Procter and Gamble.
As a consumer centric leader passionate brand builder, a product innovator and has a strong reputation as an inspirational organizational and cultural leader.
She will report directly to me and will sit on our global leadership team.
Additionally, I am very pleased to announce that we have new leadership in health and wellness Christophe Couturier President of our health and wellness business segment retired from Helen of Troy at the end of February .
It is an honor to see long service leaders like Christophe finish a distinguished career of over 35 years in the consumer products industry.
Mauricio thrown castle has joined Helen of Troy as our new President of health and wellness.
He brings 30 years of domestic and international experience his career spans progressive roles at Kimberly Clark on Tex Mead, Johnson nutrition, and Procter and Gamble.
He has led a wide range of consumer goods businesses reorganizations transformation programs and operational efficiency initiatives as well as acquisition integrations.
Before concluding my remarks, I would like to briefly touch on further progress we have made on ESG and diversity equity inclusion and belonging.
Being with ESG at the corporate level, we recently increased our efforts to minimize our impact on the environment I confirming our plastic packaging targets as part of our participation in the new plastics economy.
Through the global commitment business and governments commit to change on how we produce use and reuse plastic to work towards a circular economy for plastics.
We look forward to providing more details on our corporate and brand specific ESG initiatives and our second annual ESG report, which we expect to issue in June .
Turning to diversity equity inclusion and belonging throughout the transformation. Our focus has been to attract retain unify include and train the very best talent.
Like ESG diversity equity inclusion and belonging is a priority for Helen of Troy and we continued to make significant progress.
This includes adding more diversity of thought experience gender and ethnic background.
With Noel joining next month half of our named executive officers will be women and half of our global leadership team will be women or ethnically diverse.
Beyond senior management diversity and hiring across levels also continues to increase with more and more diverse candidates and are hiring pools.
Our plans for the back half of Phase II include further focus on D E I N V initiatives.
With that I'd like to hand, the call over to our CFO , Matt Osborne.
Thank you Julien good morning, everyone. Our fourth quarter results represent a very strong finish to the year and.
And deliver full fiscal year core business net sales and adjusted diluted EPS growth ahead of our long term phase II targets.
I am very proud of how our entire organization again delivered strong results in what proved to be a very challenging year as we navigated the unpredictable path of COVID-19, inflationary cost headwinds continued supply chain disruption and the EPA matter.
Couple of points before I move on to my discussion of our fourth quarter and full year results.
First I'll be speaking primarily to consolidated results as well as core business results core business results exclude the entire personal care business in all periods and provide the best comparability between historical and future periods.
Second our results include $24 $4 million in sales and six in adjusted diluted EPS from Osprey, which we acquired in December 2021.
Now moving on to results for the fourth quarter.
Core business net sales increased 17, 2%, reflecting growth in brick and mortar and online channels in a home and outdoor and beauty segment.
We benefited from strong consumer demand higher sales into club and closeout channels, the impact of consume of customer price increases and growth in international sales.
Results also reflect approximately $20 million in sales that were pulled forward into the fourth quarter from the first quarter of fiscal 'twenty three as retailers accelerated orders to improve their inventory levels and in anticipation of price increases.
We also had a comparative benefit due to last years winter storm, Yuri which delayed approximately $15 million in orders that were not able to be shipped in the fourth quarter of fiscal 'twenty one.
GAAP consolidated operating income was $54 million or eight 7% of net sales on.
On an adjusted basis operating margin increased four one percentage points to 12, 5% primarily due to a decrease in marketing expense.
Net income was $39 $8 million or $1 64 per diluted share.
non-GAAP core adjusted diluted EPS increased 76, 8% to $2 51.
Primarily due to higher adjusted operating income in the home and outdoor and health and wellness segments and lower weighted average diluted shares outstanding.
Net cash provided by operating activities for the fourth quarter of fiscal 'twenty, two was $145 $9 million, reflecting higher EBITDA strong collection of accounts receivable and a sequential reduction in inventory levels from the third quarter. Despite the incremental inventory added as part of the Osprey.
At acquisition.
Looking at our results on a full year basis, we were able to grow our core business at rates in excess of our long term phase II targets over the high base of fiscal 'twenty one.
Fiscal 'twenty to core net sales grew eight 4%, including the unfavorable impact of approximately $60 million related to the EPA matter.
This growth is on top of 25, 1% growth in fiscal 'twenty one.
We also grew core adjusted diluted EPS by 10, 4% on top of the 26, 5% growth in fiscal 'twenty one.
EPS growth in fiscal 'twenty. Two includes the unfavorable impact of approximately 30 cents per share due to lost sales volume related to the EPA matter as well as approximately $2 25 per share of incremental inflationary costs.
We also expanded our core adjusted operating margin by approximately 30 basis points, despite the EPA matter and inflationary cost headwinds.
Finally, we deployed over $630 million in capital towards the Osprey acquisition share repurchases and investments in our new distribution center.
Our fiscal 'twenty two results illustrate the power of our value creation flywheel and our ability to continue executing our strategy even in the face of significant headwinds.
Although we deployed significant amounts of capital in fiscal 'twenty, two our net leverage ratio as defined in our debt agreements was 2.0 times at the end of the fourth quarter.
Now turning to our full year outlook for fiscal 'twenty three.
Since we have now completed the sale of all of our mass market personal care business, we are not expecting any material activity related to non core business in fiscal 'twenty three.
Therefore, the fiscal 'twenty three amounts we are providing in our outlook or on a consolidated basis, which includes osprey and Karl Smith.
However, due to the fact that the fiscal 'twenty. Two results include material activity related to noncore business the year over year growth rates on a consolidated and core business basis will be different.
Tables provided in today's release compare our outlook to the prior year on both a consolidated and core basis we.
We believe that core business growth is the most relevant basis as it provides the best comparability between historical and future periods.
For fiscal 'twenty, three we expect consolidated net sales revenue in the range of $2 three $8 billion to $2 42 billion, which implies consolidated growth of six 8% to eight 8% and core growth of eight 5% to 10, 5%.
Our net sales outlook reflects the following expectations by segment.
Outdoor net sales growth of 19% to 21%, including net sales from osprey of $180 million to $185 million health.
Health and wellness net sales decline of 1% to growth of 1% and beauty core business net sales growth of four 5% to seven 5%, including net sales from curl Smith of $30 million to $35 million for the pro rata period of fiscal 'twenty three.
We expect consolidated GAAP diluted EPS of $9 92.
To $10 38 and.
And consolidated non-GAAP adjusted diluted EPS in the range of $12 73.
To $13 three.
Which implies consolidated growth of 3% to five 4% and core growth of four 5% to 7%.
This includes an adjusted diluted EPS contribution from Osprey of approximately 50 to 55.
And a pro rata fiscal 'twenty three contribution from Pearl Smith of approximately 20 to 25.
<unk> contribution from both acquisitions includes the impact of interest expense that reflects our current expectation of 225 basis points of interest rate increases in calendar year 'twenty two.
Our fiscal 'twenty three outlook includes the unfavorable category consumption trends, we are seeing in March and April .
Some caution relating to medium term uncertainty of consumer behavior in an inflationary environment.
Our best estimate of incremental inflationary input costs and the impact of forecasted higher interest rates.
While sales and operating results were unfavorably impacted in fiscal 'twenty two by the EPA matter, we expect a favorable effect from the recovery of a portion of that impact in fiscal 'twenty three.
Additionally, as a result of continuing dialogue with the EPA, we are executing further repackaging and re labeling plans uncertain. Additionally, humidifier and air filtration products.
We currently expect to expect us to limit our ability to ship to demand for the newly effective products and result in an unfavorable impact to net sales and EPS in fiscal 'twenty three.
We estimate that the net result of the EPA matter on fiscal 'twenty, three will be a favorable impact to net sales of approximately $10 million and adjusted diluted EPS of approximately 10 cents, which is included in our outlook.
On March 30th 2020 to a third party facility that we utilize for inventory storage incurred severe damage from a weather related incident.
The inventory stored at this facility, primarily relates to our health and wellness and beauty segment.
The inventory is insured some seasonal inventory and inventory designated for specific customer promotions is currently not accessible.
As a result, we expect not to be able to ship certain products on a timely basis and have included an unfavorable impact on net sales of approximately $10 million and adjusted diluted EPS of approximately 10 cents.
We are working with local officials and our insurance provider to understand the extent of the damage. However, the building must be assessed and made to be structurally sound before we will have access to the inventory and be able to fully access assess damages and the related financial impacts.
In fiscal 'twenty three we believe we can expand gross profit margin.
As well as grow our adjusted operating margin by 10 to 20 basis points. Despite the headwind of approximately 100 basis points from the net dilutive effect of price increases to offset the majority of the dollar gross profit impact of higher product and freight costs.
Our outlook includes an estimated after tax impact of incremental inflationary costs of approximately $75 million to $80 million or approximately $3 10.
To $3 30.
Adjusted diluted EPS.
Using our proven playbook, we believe we can mitigate the majority of these costs through a combination of improved mix price increases locking in shipping contracts at rates below current market prices and continuing to implement other cost reduction initiatives across our supplier base.
We are also pleased to be able to expand operating margin as we continue to make further growth investments to transform our business and support the rapid growth we have experienced since we began phase two.
Due to expected higher levels of average debt from the Osprey, and Karl Smith acquisition and capital investments in our new distribution center as well as higher expected interest rates in fiscal 'twenty. Three we expect interest expense in the range of $35 million to $36 million.
We expect that fiscal 'twenty, three GAAP effective tax rate of 13% to 14% and an adjusted effective tax rate of 11, 7% to 12, 7% we.
We do not expect a meaningful impact in fiscal 'twenty three from currently proposed tax legislation changes at this stage. It is still unclear what domestic and global tax laws will be passed in what form and on what timing. We will continue to assess the impacts as proposed legislation is considered and keep you updated.
Capital asset expenditures are expected to be in the range of $180 million to $205 million for fiscal 'twenty, three which includes expected expenditures related to our new distribution facility in the range of $145 million to 100.
Third $70 million as well as further investment in our it systems for other key phase two projects.
We continue to expect the total cost of the new distribution center and equipment to be in the range of $200 million to $225 million spread over fiscal years, 'twenty, two and 'twenty three.
With respect to cash flow and liquidity typically the majority of our operating cash flow is generated in the second half of our fiscal year.
This coupled with a higher concentration of capital expenditures expected in the first half of our fiscal year is expected to lead to higher average debt balances and increasing net leverage ratios during the first half of our fiscal year.
We expect debt levels and net leverage ratios to improve sequentially in the second half of our fiscal year to levels in line with where we finished fiscal 'twenty two.
We expect to end fiscal 'twenty, three with inventory levels approximately flat to fiscal 'twenty two.
As increases in inventory for Osprey, and Karl Smith, as well as higher product and freight costs are planned to be offset by inventory efficiency.
In terms of the quarterly cadence of sales and EPS, we expect the majority of our net sales and adjusted diluted EPS growth to be concentrated in the second and third quarters of fiscal 'twenty three.
This is primarily due to the strong net sales and adjusted diluted EPS growth comparison in the first and fourth quarters of fiscal 'twenty two.
Adverse net sales and earnings impact of the EPA matter in the second and third quarters of fiscal 'twenty two and.
And the impact of approximately $20 million from retailers accelerating orders in the fourth quarter of fiscal 'twenty two.
As I conclude my comments I'm very proud of the fact that despite significant headwinds and challenges during the first three years of phase two we have delivered core net sales growth of 50% core adjusted diluted EPS growth of 68% and core adjusted operating margin expansion of 130 basis.
Points are.
Our fiscal 'twenty three outlook plans for continued core business net sales and adjusted EPS growth as.
As well as adjusted operating margin expansion, even as we plan to make further rosenblatt further growth investments.
And overcome higher inflationary costs continued supply chain disruption and higher interest expense we.
We are also looking forward to leveraging the opportunities in our existing brands as well as the new ones created through the acquisition of Osprey and Karl Smith, We expect these growth investments to set us up for success for the remainder of phase II and beyond.
We have dedicated and talented people a track record of overcoming challenges and proven strategies to further leverage our value creation flywheel to continue to drive growth and incremental shareholder value over the long term.
And with that I'd like to turn it back to the operator for questions.
At this time, we'll be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
One moment, please while we poll for questions.
Our first question is from Bob Lubbock with CGS Securities. Please proceed with your question.
Thank you good morning, congratulations on a great quarter and year end on the Carl Smith's acquisition.
Bob Great to hear from you and thanks for the comment.
Thanks, Yeah. So.
So just wanted to start you you touched on or you alluded to the impact of inflation on demand talks about that a little bit maybe.
Taking a step back could you give us a sense you know a broader sense of the consumer now where are the you know the areas of weakness as it relates to inflation or what are you seeing and what where you're kind of hinting at and you mentioned some softness in I think March and April and then so what are you seeing what's the consumer and then what.
What is your response to that and how do you kind of play through that.
Yeah, a great question I think a lot of folks on the call or are trying to read the tea leaves on where consumers are as the various factors that dominate the headlines every day play through.
The news.
Our take is that the consumer is generally quite healthy and we will continue to stay so and that said there is pressure on the consumer so what we see.
Is it not just more employment, but importantly, more labor participation. So that rate we watch very closely because it's one thing to have a job. It's another thing for more people to be in the workplace altogether and then see the unemployment rate go down means theres, just a lot more jobs.
<unk> are climbing and unfortunately that climb is largely eaten away by inflation and so it impacts buying power and ultimately you know consumer bullishness animal spirits all of that in the case of consumers. They are very wise.
And careful with their money. So I think what we're seeing is people just making choices about where to spend in the face of things like higher gas prices and other stuff that grabs headlines supermarket itself. It's just more expensive to go to the checkout and ask yourself, how does that feel it feels more expensive. So we have a good better best portfolio, we've been very careful to build one.
So think of not just OXXO at the high end, but also softworks at the middle level of the market Revlon, Good hot tools, better dry bar best and on it goes through our portfolio and so we appeal to all the different price points and then from a consumer itself if things like the Michigan consumer confidence indicator.
And their numbers above 100, and it stays there so that says to us that it's back to these are the only other thing. That's on my mind is this a very famous thing that you hear all the time, which is hey, the stimulus money is not in the annual compare.
Now and consumers want experiences it doesn't mean, they don't want goods. It just means they want experiences so as people make choices things rebalance.
All of that added to a little pressure in March and April we said, so and you're right to pick it up but our outlook. Importantly includes every single one of the things I mentioned plus the ones that were not mentioned in supply chain costs of $3 a share of inflation input cost headwinds et cetera. So that's how we see it Bob.
Okay, great. Thanks, and then just kind of sticking along that line, how has kind of the inflation and supply constraints.
Constraints impacted your your marketing your ability to drive sales your.
The desire to get more people.
Into your products because you know the the supply chain has been difficult for quite some time, so where do you stand in terms of that marketing and whereas the balance of demand and your ability to supply.
So I think we're in much better shape than most on this one.
Excuse me hang on one SEC.
I'm, sorry, I think we're in much better shape than most on this front and the reason is because we got ahead of the supply chain.
Disruption with the strategic inventory build more than a year ago remember, we were coming off of the Covid craziness of especially health related products and the scarcity of supply. So we built back more quickly and we went with the tough move of depleting our cash flow in order to have more inventory and meet demand the demand there.
Surged and so our situation on out of stocks and the ability to market. So that demand surge was extremely good and you saw that all through last year. So we just reported a big big number in Q4, and you've seen us do it in earlier quarters. When others were just suffering from more of the supply chain disruption, we're not bulletproof and we do have some places where they are.
<unk>, but we've been very careful you also heard in our statements that we are continuing to carry a bit of elevated inventory, but less than before you see in our balance sheet that our inventory numbers down even though we just put another seven or eight points of growth on the topline and we are just projecting in matts comments to end the year with inventory.
The flat, but remember we also have the curl Smith and the osprey coming in as additional inventory year over year. So all of that is netted into the number but the bottom line of it all is we're in pretty good shape, but not perfect and on the contracting and the sea freight and the rest of it we've been super careful with our suppliers to keep it that way and there.
There are bumps in the road, whether its the backup so ships in the long beach kind of thing that you see all over the place or the Covid scares that sweep still through China, even to this day. So we're not immune but we're in better shape than most and on the marketing side. We spent two to opportunity as mentioned in my comments.
We support the demand and then we support our retail customers. So we're in pretty good shape and on the long term you heard some pretty substantial comments I hope in my prepared remarks about the work to diversify our supplier base. So this was mentioned specifically in southeast Asia Mexico.
And even within China with dual sourcing in multiple places in order to be able to better meet this which also has the benefits of shorter lead times less inventory less steep rate and the other efficiencies I mentioned so the net of it all is better shape than most and we will spend to the demand and we will try to stimulate the demand with the marketing money.
Okay, Great and last one from me I'll jump back in queue, but maybe on Karl Smith, obviously, it's a really attractive asset for you what attracted you to it what's unique about curls from if you touched on and better together, but what are the primary attributes that makes you believe it is poised for significant growth going forward.
What differentiates it in and how can it continue to grow or how can it grow double digits going forward.
Yeah, Great and it's a terrific brand across Smith is quite new so you remember probably from our Investor day back in 2019, we said that we're focusing on adding leadership brands and also some up and comers that can serve us as earlier stage tuck ins, especially when they're disruptive. This one is disruptive in.
Segment of the prestige hair care category that really catches our attention not just because it's in prestige rather than mass, where you've seen us actually exit rather than lean in with the personal care sales, but is this part of prestige I'm talking about curly hair is something like 60% of consumers in fact, just a little bit more half type to a or higher.
Our hair and that those types by the way you can see it on our website. There's a chart in the Pearl Smith deck that shows each of the hair types of that type. It goes that goes with it in terms of currently and as her textured, yes, Chris.
Chris Smith has a unique approach its consumer centric, which is a chapter and verse for us DNA. It has the natural type of ingredients and on product development. It focuses on consumer centric changes to get regimens that really work for a group of consumers who are incredibly loyal to their.
Our products and the reason they're loyal is not unique to curl Smith, it's unique to their hair type, which is when they find something that works they really stick with it. The further thing we liked about it is the speed of growth in the textured hair segment is higher than that of non texture here by by double and within prestige actually by 10 X and then you take curl Smith.
Self and that up and comer in nature on the better together side, we see the opportunity to significantly expand its distribution almost immediately we see international opportunity and then they are at an inflection point as a as an up and coming developing company everything they need next bigger sales force better system supply chain all of it we have and we've invested big.
Time in the platform over the last seven or eight years, so dropping more into it using the beauty machine that we've built in the last four or five years to drive that expansion. This is all super attractive to us and you put the margins the accretion the less than 10 times multiple that we paid for it and what you've got is the most profitable branded Helena.
Troy from day, one and further you've got a business that we think we can grow double digits for the foreseeable future on top of this there talent will joined Helen of Troy to small team less than 15 people.
And we are very glad to have them. So formal welcome and on top of this there expertise can help us in other parts of prestige, where we're still in development mode. So better together in the biggest way and who doesn't want your most profitable brand at less than 10 times Bob.
That sounds great. Congratulations thank you.
Yeah, it's a great business I'm glad we were able to buy it.
Our next question comes from Krish <unk> with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking my questions also congrats on a really nice quarter.
Okay.
I guess my first question I've got.
I've gotten this question a number of times. This morning. So if we look at core sales growth ex M&A or even organic growth in your guide next year is it fair to assume that you guys are essentially guiding to you know maybe 1% ish is that the right way to think about organic growth for for next year.
Yes, but whether sweeter mix so you'll see.
Margin expansion in that guide and you'll see in a total basis, you'll also see.
That we're able to use dry bar and hydro flask growth to sweeten the mix and you'll also see that the pricing moves and other changes, we're making are overcoming all kinds of things, including the 100 basis points or more of a gross margin.
Dilution. So there's a lot in that flatness that youre talking about that on the flatness itself I think youre correct. It you see largely flat to maybe slightly up.
Base business on a total company basis, essentially flat in beauty and health and home health and wellness.
And then on home and outdoor what Youll see is organic growth and then in the case of beauty and home and outdoor youll see them turbocharged by each of the two acquisitions and both by the way the acquisitions that are unattractive mix versus our fleet average.
Okay, Great and then just just on your commentary of weaker consumption in March and April any particular categories, where you're seeing the weakness and is it fair to say that you guys are assuming this headwind could persist for the balance of the year.
We don't presume it'll it'll persist for the balance of the year, but we do believe that the factors that were discussed in response to Bob's questions will continue to be choppy, we watch those indicators that I talked about consumer buying power real income versus nominal.
Inflation rates are all the things that the.
Consumer confidence labor participation of the things that you've heard so we watch them. We just are cautious to be very clear that in our outlook. So if you look at our assumptions and say well will it just be harder and harder we've made an assumption based on what we've seen so far and then in the case of the weakness on which categories.
Just sort of a general a general softness certain categories more than others, we've seen a little bit of it in beauty we.
We've seen some in certain parts of how home and outdoor not the outdoor part more in the home side and then in the health related categories. It is a bit harder to read because of the omicron Serge So omicron as we've talked about search big in Q4, and was kind of like a cold and flu season, but in omicron clothing and that.
It makes it harder to read what the underlying consumption story really is so we'll see how that plays out and then we have a diversified portfolio with fashion people.
Often think category by category, but if you look at the whole thing.
Whether you're talking about the new wildfires like are unfortunately, starting even earlier. This year. This is a sad good guy.
Global warming and the fans thing has been a good guy for US for some time, you heard us call out strength in fans and the specific remarks that we just made in the sell in for the pre season, and then you heard us talk about innovation, especially consumer centric innovation, which never goes out of style. So I think we'll be okay.
In the end and we've certainly put it all into our guidance expectation for fiscal 'twenty three.
Okay and then maybe my last question. So you know historically, how long you know generates significant free cash flow you know obviously last year that your inventory and Capex is weighed on is going to weigh on the cash generation. So if you look out towards dexterity and obviously not looking for guidance. Just anything you can share just from you know where where normalized capex and as you look at your working capital.
Do you see further improvements in working capital of exiting this year as well.
Yeah, we do see improvement in working capital, let me defer to Matt who can speak to both topics, where our free cash flow and also normalization of working capital as we make some of these big strategic investments.
Thanks. Thanks for the question of Apache. So you know I think you guys can see from what we've put out there and we're ending the year fiscal.
Fiscal 'twenty, two with debt balances of $815 million.
We're putting on to Karl Smith acquisition, which was after year end. So you got to add $150 million of that and then we talked about in our prepared remarks today that we're looking at a capex spend on the high end of our range next year or $205 million, which includes the $170 million for the new distribution center so imply.
And that is kind of a business as usual capex of about $35 million, which is a little bit higher than our typical run rate of 25.
And we try to also provide a little bit of context for that is primarily due to us spending a little more on it systems and infrastructure development in the coming years. So if you take where we ended the debt balance at year end, you had $150 million for Karl Smith, you had $205 million of Capex.
Put a reasonable assumption for your operating cash flow, you're going to kind of get back to you know debt balances of almost where we are at the end of the year for fiscal 'twenty, two and we tried to call that out that the timing of the Capex investment.
Because we're building we're in the middle of building that new distribution center will be in the first half of the year when typically our historical pattern of cash flow generation. That's also the low cash flow generation period for us so you'll see that kind of.
Debt balance and leverage build through the first half of the year and then come down as we get to the sweeter portion of cash flow generation in the second half of the year for us. So it's going to it's going to be a little bit of a of an up and down but.
We will finish the year approximately the same type of leverage that we finished fiscal 'twenty two.
We think thats perfect Greenfield I mean, if you think about that including adding <unk>.
Several hundred million dollars' worth of new asset to the company, whether it's the new distribution center of the two district with two acquisitions. If you end up at the same leverage ratio, which is meaningfully below the industry average through the year that takes a lot of cash you just have to burn through that first half home.
To get to the reduction in the back half when we traditionally generate the majority of our cash so we see it as a win that said we appreciate the comment because of the lumpiness of the cash flow. What you saw this fiscal year, we have tremendous cash flow in Q4, we just reported it over $140 million, but on a total year basis, because we had the inventory.
Build cash flow was lower and now we've put these investments so we told to get where you're coming from and we can cure, but if you say well just skip past all of the noise and ask how does it and it ends at two times.
Okay, great. Thank you.
You bet.
Our next question is from Anthony <unk>.
<unk> with Sidoti <unk> Company. Please proceed with your question.
Yes, good morning, and thank you for taking the questions and definitely very solid performance for Q.
So you know frankly I just don't.
So I first more or less kind of a housekeeping item here, so as far as the fourth quarter.
What was the impact of increased product pricing on the sales and then as far as what level of price increases is embedded in your fiscal 'twenty three revenue guidance. If you could if you have that that'd be great.
And do you want to take that one.
Sure. Thanks Anthony.
Yes, we haven't provided that guidance before Anthony and that's not something that we're probably going to be doing it. It's a mix. So in Q4 I would say if youre looking at what made the quarter. It was definitely the operating performance. We definitely benefited from price increases. We also talked about some of the accelerated orders that we had from <unk>.
Taylor's, but even taking those two out towards a very very strong organic performance in the business and for a lot of the reasons Julian talked about within our health and home and strong consumer demand as we look at next year, we called out the amount of inflationary costs that we expect to face as we head into the year 75.
Dollars to $80 million and obviously, we intend to offset the majority of that through price increases, but also through some of the other leverage items, we have in our playbook and so.
He kind of probably gives you a little bit of a of a.
The scope of what that is but.
It's going to be meaningful to the full fiscal year for fiscal 'twenty three because you have two two impacts one is the price increases that were put in in the back half of fiscal 'twenty two.
We'll be annualized during that year, so you'll get kind of a half a year of fiscal 'twenty two price increases that went in place plus you'll get pricing new price increases that have been put in place for fiscal 'twenty three so there'll be more much more meaningful in fiscal 'twenty three than they were in fiscal 'twenty two.
Alright, thank you for that.
Very helpful context, and then in terms of your inventory position, so even with the with.
With the Osprey acquisition your inventory overall was down sequentially from the November quarter.
Just just wondering.
How do you feel about the health of your inventory and then just kind of put that into context in terms of the current lockdowns in China, how does that impact that.
Your inventory the way you guys think about that.
Yeah, Let me start here as I mentioned to Bob and his question were in better position than most and we're pleased to have him.
Coming into the year with a little bit of elevated inventory last year, we did it strategically on the one hand on the other hand, it's awfully hard to deal with the seesaw of supply chain interruption in the post COVID-19 changes so some of it's better.
Better lucky than good some of it's planning and in the case of the inventory position. We are very pleased that we were able to come down from the higher.
The higher inventory base that we reported at the end of last quarter, We said we would.
And yet we added the osprey and now the curl Smith working capital so where.
Feel like we're in a good position, especially given your comment and I saw it in your pre market write up is a pre release write up as well, which is the continued concerns about China such as the <unk>.
Attempted lockdowns there because it could have an impact so we're pretty well covered from a buffer standpoint, what we have on the water and the timing of our plans.
We're also finding that with the consumer purchasing.
Purchasing that we saw was actually a little slower in March and April were able to.
Accumulate a little bit more in certain key categories. During a period when we would otherwise have just been selling through selling from affiliates and then during the year itself, we expect to bring inventory down which will be very good for the cash flow comment that Matt just made in response to <unk> question and it will be good for turns in health and interest expense.
And all of that as we bring it down even if we ended flat.
During during the year I would consider that a win just because we're putting more growth on the company and we just delivered a year, where we put growth on the company and brought inventory.
That versus where where we expect it to be.
So thanks for being flat, if I could make it as simple as possible.
Okay. Thank you for that and then.
Last question for me.
Wanted to get a better sense of sort of the quarterly cadence. So so I know you guys talked about.
Most of the sales and.
And the earnings growth coming in the second and third quarters, but that being said just to.
To clarify as far as taken into account what you just said as far as the March and April kind of softness.
Kind of offset that but with the acquisitions of osprey.
Karl Smith, but just putting everything altogether, so with that being said do you.
Would you expect us to grow sales and earnings in the first and fourth quarters.
Well, let me take this mostly to Matt before I do I just want to point out just so everybody on the call hears directly.
We had a huge first quarter last fiscal so of all of the four quarters that we'll be anniversarying now from the new base that we just laid down the highest year over year growth in all of the four was in Q1 of last year. So just make sure people know in terms of how it will play out during the quarters, maybe Matt could give.
A little perspective beyond.
What you already saw in our press release about quarterly cadence.
Yeah. So I mean, just to highlight a little more what Julien said, we grew 30% sales last year on the top line in Q1 and 37% on the bottom line in Q1. So we tried to highlight in our outlook that those are pretty big basis to grow from and then in Q2 and Q3 is where we had.
The most impact from the EPA matter and so that was a.
Relatively lower base to compare to so we've also just got done delivering a great Q4, which raises the bar on Q4 for next year as well. So we generally suspect that the majority of our earnings and sales growth will be in the second and third quarters of next year.
Alright, well, thanks for that and best of luck going forward.
Thanks.
Yeah.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Hi, how are you Linda.
Good nice to talk to you yes.
Yes, great same here.
So can I just ask you to just to make sure I understand the projection for.
For FY 'twenty three for health and wellness segment, because we had originally expected you to gain back some of the lost sales that you lost from the labeling issue, but then this incremental labeling changes. So is the idea that they kind of offset each other and that's why we're not expecting really any growth or am I.
Standing that correctly can you just give a little bit more explanation.
Sure.
Net tend to the good is the answer meaning 10 million upside net of the two I mean, the good guy in the bad Guy that you're referring to the old.
Recovery in the new labeling matters that were now.
Working through and so the result is $10 million to the good and then turn to the good on the bottom line. So tend to the good $10 million on the top 10 on the bottom and you say well is that.
Less than we expected the answer is yes, what we had originally projected that roughly half of the recovery.
Would occur in fiscal 'twenty, three we're sticking by that actually in our outlook, we may be able to do a bit better. We're certainly trying and on the new stuff its being worked through as we speak but when we net it all together we thought rather than go through all the drama will just make a projection and just put the number out there so that people don't have to sweat. This.
Okay.
And then with regard to this issue with your third party facility.
That may impact sales, a little bit you know I'm just wondering though the.
The E P. A labeling issue and your inability to ship.
Did it affect market shares in certain areas. So I'm wondering if this issue with the other facility could also open up an opportunity for competitors to take advantage of a situation. So can you be a little more specific like what product lines like is it particular beauty product products are like.
What is being affected by the inability to ship.
Sure. So importantly, it was largely a storage facility as Matt mentioned and this was a tornado like event. So I think the weather service classifieds tornadoes, a very specific way they have to touch down for a certain amount of time and all that so we didn't get into.
Deciding exactly what kind of garner was we just called it a big weather thing.
The place you'd see it looks like a tornado hit and in terms of getting in there to assess all the detail. This will be done as Matt mentioned in his remarks as soon as it's safe to go back into building that work is being done right now and we already have a kind of a preliminary estimate which we've included in our outlook based on what we know so far it's a storage facility so very little shipping.
Happens out of their beauty got hurt by a couple of million dollars worth of an item that we couldnt ship.
Therefore, it's cooked into our outlook. It's also in those Q1 comments that we made and in the case of the health and wellness.
Not so much the EPA related so I think of some fans and some other products that are a little further out in our shipping cycle for our upcoming seasonal benefit businesses. So of course, we're working with our suppliers to replace what we think is affected and as soon as we get in there we will find out how much of the product is still good and sellable.
And can be moved to shipping facilities versus how much has to get put into the insurance cycle and then because we are insured.
I'll have a recovery that way. So that's that's how we approach it right now I wish I could put numbers on it all I can tell you exactly which skus. We believe we know and then that said once we get eyes and can do the counts and do the damage check then we'll be able to get very specific.
Linda This is Matt I might be able to add just a little bit to that just on kind of the the concerns over market share losses, Julien pointed out we had some of that loss was a very specific promotion that we're running for beauty. So that was a timely we had to get inventory into it for that one.
Specific promotion and we missed the window on it so that I wouldn't look at it as something that's really a long term product placement on the shelves and some very specific and as Julien said the other part of it was a lot of seasonal inventory for health and wellness and that seasonal inventory a lot of it is a regionally.
He filled by retailers through D. I shipments and then a lot of what we have is replacement and replenishment as they sell through that during the year. So I think it's <unk>.
More temporary than permanent but we'll have to kind of go through the cycle here and see how it plays out and see how fast we can get back into to restoring that inventory.
Okay. Thank you and then.
Wanted to ask about the curl Smith acquisition.
The valuation looks like it was a little bit lower that you paid versus the drive out dry Barr acquisition, which is interesting to me because drive out was actually partly appliances and not all consumables and this is all consumable. So it is it seems like it should be a higher valuation, perhaps so are you finding that deal valuations.
They're coming down a bit here or kind of what.
What can you just kind of help us understand maybe the valuation between the two deals for.
Yeah, well first of all we concur that the valuation is compelling and it's great to see a high quality fast growing high margin prestige product with meaningful differentiation like was talked in response to Bob's question.
You'll be able to trade for this multiple into a strategic portfolio that can add value to it. So we strongly concur.
The attractiveness of the price in terms of the valuations in general I think it's too broad to say that we're generally seeing prices come down, but we are seeing is interest rates going up and when interest rates go up it gives.
Buyers that need to.
Be careful about the impact of interest expense at the higher rates in the valuations that they can bid.
Did that and this valuation does reflect some some discussion between the buyer and the seller on the impact of higher interest rates.
In terms of relative to dry bar, it's true we bought it at a roughly three turns lower the dry bar has some unique features youre probably bar has the moat around it of the.
The bonds. It has the license back to the salons, which puts the name out every day, there's literally thousands of consumers every single day, who are receiving professional treatments at dry bar salons with our products exclusively that are not only us but also recommended also for sale in those stores.
So there's a lot of uniqueness to the dry bar arrangement that made it trade at a higher multiple interest rates were lower at that time and then in terms of accrual Smith as I said before from an infrastructure standpoint, Theres just less of it. So we will be putting that infrastructure, but at a higher level of efficiency, which is attractive to us. So that's that's how it came.
B and Jack I don't know if you have any comment on multiples in general, but it's it's not my view that this is an indication of the old 12, as the new 10, something like that I don't see it that way.
No I wouldn't use this one data point is a.
Trend for what's happening in the marketplace right now.
We.
We paid for the business.
What we work with all the modeling that we did so.
Really liked the deal and we think we can do a really good job with this business.
Both short term long term.
Okay, well, thank you very much I appreciate it.
Yes, no problem and then I saw you had some other questions in the report that you put out on cross Smith, and I know that a lot of those answers are in the Powerpoint that we have posted on our website. So you've probably had a chance to look and then one in particular I want to make sure. It got addressed here, which is that this is not about hair style Karl Smith.
As much as it is about hair type. So there's just a lot of people not just women by the way, but also men.
<unk> textured hair.
And regardless of whether it's.
And ethnic person of color or its just someone with a wave of your curly hair texture here altogether is plenty of people of all types.
This type of hair is difficult to care for so when you meet people with that type of hair and ask them. How do you care for your hair, though quite involved in its care, because it's challenging and when they find products that stick with it they're tremendously loyal to them <unk> has the highest net promoter score we've seen so far in that category. It has the royalty rates.
The reviews that speak to this further and because it's a repurchase of board consumable product that's extremely attractive to us and it's one of the things that made US go for it as opposed to something that might not be as sticky. So that's the and I don't mean, the product I mean the habit.
As sticky so that's attractive to us, but it's not about hey girls might come back. It's more about if you have that type of hair. This is just important in your everyday regimen, regardless of your fashion.
Okay. Thanks for that.
Sure.
Our next question comes from Steve Marotta with C. L. King. Please proceed with your question.
Morning, Julien, Matt Yeah, Julian has the Ukraine conflict negatively impacted the European consumer.
Is that.
Is that a discernible at this moment or still.
Just not impacted.
Not directly that we know of and that said, we're keenly aware in general that Theres a lot of pressures in the world whether it's the stuff that was mentioned earlier about just general pressure on the consumers' confidence in buying power and all that but on the specific topic of has the Ukraine suppressed European demand, we haven't seen clear evidence of that.
But we have seen as the interest rates sorry, not the interest rates the exchange rates move a bit I'm sure you've all seen the pound and the euro have moved we have some hedges in place and that said there have been significant movements in those.
Those currencies.
We don't have a lot of exposure directly in Russia, and in fact, almost none and in Ukraine. In particular I believe the number is less than $1 million, it's actually in our prepaid customers. So that money has already been collected and then from a sell through standpoint, they will do the best they can but it's de Minimis I think is the word I would use and on the sort of broader dark cloud.
Over Europe .
War sucks, so I can speak anything positive about how it's helpful. What I can say is we're not seeing a direct input at this time.
Thank you and I know that Oh, I'm sorry, Steve.
Sorry, Steve I want to mention that the vast majority of our European sales are in western Europe . Some of them are in the middle Eastern countries, but there is a surprisingly small amount in the eastern European countries, especially in the south Eastern European countries, So think of Moldova Belarus.
Ukraine. These types of countries. It's there's just not a big part of our portfolio.
Sure I understand I know that all of the supply chain constraints that are known at this moment are all incorporated within the guidance, but can you talk a little bit about direct exposure to Shanghai is that a is that a new a thorn in the side or is your exposure there relatively not material.
It doesn't help but relatively lean the vast majority of our operational footprint in China is in other parts of China, especially Shenzhen Macau.
Hong Kong from both a supply chain and it goes to market standpoint in the region that said, we do have some people on the ground in Shanghai. So it doesn't help and then in the northern parts of China think Ningbo <unk> and other parts, we do have people on the ground and capability and the infrastructure. So it doesn't affect with Shanghai and <unk>.
Particular is just not a center of gravity for us at this time, so I suppose that's good news and that said the concept of enforcing the lockdowns broadly, whether it's shanghai or in other cities.
Does have an impact right, we see that in port shutdowns and other things and as strong as our inventory buffers are in as good as our supply chain playbook is if the stuff doesn't get made it certainly doesn't ship and if it doesn't ship then it can't get here or to Europe , and so it does affect us, but we have enough buffer to get through the call. It.
The bumps in the road, but not through earthquake.
I understand thank you have a few more I'll take offline. Thank you again.
Yes pleasure, thanks, nice to hear from everybody.
Operator are there more questions at this time.
It appears that we don't have any questions at this time and I would like to turn it back over to Mr. Milligan a minute Eric.
For closing remarks.
Yes, that's me well. Thanks, thanks, everyone. Thanks for joining today and for your continued interest in Helen of Troy.
We're excited about the results. We just posted you heard us speak clearly about what's happened over the last three years as phase two has had its first half and you've heard us speak specifically.
Specifically as we know how on whats our expectation for phase two back half and in particular the guidance that we just provided for fiscal 'twenty three you'll also I hope heard us reiterate our commitment to the long term phase two average annual targets for fiscal 'twenty, four so where we stand.
So we're excited about the future and we're excited to speak to many of you in the coming weeks and with that I'll say, thank you very much and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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