Olive & June, LLC (HELE) Earnings Call Transcript & Summary

Greetings. Welcome to Helen of Troy Limited announces agreement to acquire Olive & June LLC. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference call is being recorded. It is now my pleasure to introduce Sabrina McKee, Senior Vice President, Business Development and Investor Relations. You may begin.

Thank you, operator. Good morning, everyone. On today's call are CEO, Ms. Noel Geoffroy; and our CFO, Mr. Brian Grass. We'll discuss Helen of Troy's signing of a definitive merger agreement to acquire the business of Olive & June LLC. Ms. Geoffroy will highlight the strategic rationale of the acquisition and Mr. Grass will provide a summary of the transaction. Ms. Geoffroy will then introduce Olive & June Founder and CEO, Sarah Gibson Tuttle, a few words. Following Ms. Tuttle's remarks, the operator will open the call so that we may take any questions you may have for us related to the transaction. We will not be taking questions related to trends for our organic business in the current quarter and we'll defer those to when we report our third quarter fiscal 2025 results, which we expect will be in early January. Before I turn the call over to Ms. Geoffroy, I would like to note that this conference call may contain certain forward-looking statements on management's current expectations with risk future events or financial performance. Generally, the words anticipates, believes, expects and other similar words 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 nonfinancial information. These non-GAAP measures are not an alternative to GAAP financials information and may be calculated differently than the non-GAAP financial information closed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. A copy of today's release as well as an investor presentation with further detail about the transition has been posted in the Investor Relations section of the company website at www.helenoftroy.com. These can be obtained by selecting the Investor Relations tab on the company's homepage selecting Press Releases and the Events and Presentations tab. Please note that our comments today are limited to this transaction. We will be releasing and discussing our results from the third quarter of fiscal year 2025 during our earnings call in early January. I will now turn the conference call over to Ms. Geoffroy.

Thank you, Sabrina, and good morning, everyone. Thank you for joining. Yesterday, we announced the signing of a definitive merger agreement to acquire the business of Olive & June, a fast-growing in omni-channel nail care brand in a growing category. We believe this acquisition is an excellent fit with our strategic goal of continuing "better together" M&A. As a reminder, this strategic goal prioritizes businesses where the acquisition is better for both Helen of Troy and for the acquired business. Better for Helen of Troy and that the acquisition is accretive to our fleet average financial metrics and better for the acquired business that Helen of Troy can add value with our capabilities and our scale. Olive & June has demonstrated exceptional performance with a track record of strong growth and is on track to achieve net sales of approximately $92 million in calendar year 2024. The addition of Olive & June to our portfolio brings a high-margin and consumables business that complements our existing beauty portfolio while diversifying us outside of hair tools and liquids. Before any better together synergies are realized, we expect the acquisition to be immediately accretive to our top and bottom line growth rates. When CEO, Sarah Gibson Tuttle, SGT, as she's known to everyone, founded Olive & June, permission was simple to make salon quality hails accessible to everyone, everywhere. The brand's poularity grew as it broadened its product assortment, earned multiple awards and expanded into major national retailers. And just a very short time, Olive & June became a category innovator that uniquely plays across all nail care categories. In 2024, it was recognized in Fast Company's Most Innovative Companies and Bain Consulting's List of Insurgent Brands, further reinforcing the brand's disruptive status. Olive & June's solution-driven product innovation, coupled with the unique digital first model to engage and educate consumers has earned the brand well above category average loyalty and social media engagement. The brand has called an attractive consumer base over-indexing with Gen Z and Millennials who are strong repeat customers and brands advocates. Olive & June aligns seamlessly with Helen of Troy's strategic choice, including distribution expansion and consumer obsessed product and commercial innovation, fueled by best-in-class content, engagement and growth investments. The management team has built a distinctive modern consumer-centric brand that has clear growth opportunities and they are eager and passionate to accelerate growth with the support of Helen of Troy. We intend to operate Olive & June in a stand-alone but supported model, and it will continue to be led by its current management team including SGT and its Chief Operating and Revenue Officer, Sarah Leech Aucutt. The stellar Olive & June management team will continue to define and execute the brand's growth strategy, including development sales and marketing functions. While we will not be fully integrating Olive & June into the organization initially, we have identified specific Helen of Troy capabilities that we believe can help accelerate near-term growth opportunities as we continue to focus on elevating the health and performance of our core Helen of Troy portfolio. Over time, the brand will further benefit from our shared services platform as we leverage the full suite of Helen of Troy capabilities. In summary, we could not be more excited to add Olive & June to our portfolio of leading brands, and we welcome is a visionary leadership team and passionate associates to the Helen of Troy family. The brand has multiple building blocks for growth, including a strong pipeline of new products, engaging commercial innovation and meaningful distribution white space opportunities in the U.S. and longer term internationally. We believe Olive & June is exceptionally positioned to continue to grow share and grow the category. With that, I'd like to turn the call over to Brian to review the financial aspects of the transaction with you in more detail.

Thank you, Noel. Good morning, everyone. I'm pleased to provide some background on Olive & June's historical financial performance, the expected accretion from the transaction, some perspective on valuation and our estimated pro forma net leverage ratio at the expected time of closing in mid-December. We are excited about the opportunity to acquire another highly respected beauty brand that can elevate the financial profile of our Beauty & Wellness segment and is poised to capture additional market share and drive category growth. O&J has achieved significant sales growth over the past decade, driven by new product innovation that address consumer pain points, expansion into new categories with points of difference and distribution gains with key retailers while maintaining strong margins during its growth. The business is expected to achieve net sales revenue of approximately $92 million in calendar year 2024, resulting in a 3-year CAGR of approximately 26%. We expect our businesses will be better together with Helen of Troy and ONJ offering the opportunity to benefit -- Helen of Troy offering ONJ the opportunity to benefit from our scale and retail expertise and Helen of Troy leveraging ONJ's strong consumer engagement formula. The acquisition also helps diversify our beauty business beyond hair. We plan to integrate ONJ into our tax structure and begin to realize tax efficiency after a transition period of 3 to 6 months. Before synergies, we expect the acquisition to be immediately accretive to Helen of Troy's consolidated revenue growth rate, gross profit margin, adjusted EBITDA margin, adjusted diluted EPS growth rate and free cash flow conversion, and we expect it to be highly accretive to our beauty and wellness segment. The total purchase price of the acquisition is $240 million, consisting of $225 million of cash at closing and a $15 million earnout subject to performance over 3 years. The total purchase price implies a multiple of less than 11x estimated calendar year 2025 adjusted EBITDA before any synergies, which we expect to slightly harvest over time. Based on third-party data, we believe the valuation compares favorably to recent transactions in the market for fast-growing beauty brands. We expect to finance the purchase with our existing revolving credit facility. We anticipate a pro forma net leverage ratio of 3x or less at closing. In September 2024, we executed interest rate swaps on an additional $250 million of notional value with respect to our outstanding debt at a favorable fixed rate. As of November 20, 2024, approximately 71% of our total outstanding debt is now fixed at an average SOFR rate of 3.9% and through February of 2026. As such, we believe our balance sheet is well positioned for further capital deployment in fiscal 2026. We expect to provide an update on our fiscal 2025 outlook to include the incremental impact from acquisition when we report our results for the third quarter in early January. And with that, I'll turn the call back over to Noel.

Thank you, Brian. I'm now pleased to introduce you all to the Founder and CEO of Olive & June, SGT.

Thank you, Noel. As Noel said, I created Olive & June with the mission of bringing salon quality nails to everyone everywhere. In a little over a decade, we have shaken up the industry by constantly innovating to solve our consumers' pain points. Most importantly, we did this at an affordable price, achieving our goal of truly democratizing the salon manicure. From our nail systems to our award-winning press-on and our most recent launch of Gel Polish, we are leading the DIY nail revolution. We are one of the only brands in a full range of quality products for at-home nail care, providing everything our consumers need to do their nails at home. It is our product excellence and dedication to the Olive & June community that have been a hallmark of our brand success and has made us one of the fastest-growing brands in nails. So we are thrilled to become part of the Helen of Troy team. This is exactly what I dreamed about for Olive & June, and I'm honored to be working for a female CEO of Noel's stature. Helen of Troy is a company known for elevating lives through a great brand and a commitment to consumer obsession and quality products. We are excited to have Olive & June join brands that are household names like Hydro Flask, OXO, Drybar and Hot Tools, and we are equally excited to become the first nail brand in the Helen of Troy family. One of the factors that led us here is that Helen of Troy immediately understood that the relationship we have with our consumers is at the center of everything we do. They also saw the value of our digital engagement with Gen Z and Millennials. In addition to sharing our consumer-centric focus, Helen of Troy can help us expand beyond the retail stores we currently sell our products and nationwide, allowing us to expand our mission and our brand awareness. As Noel already mentioned, I will continue to lead Olive & June, along with our Chief Operating and Revenue Officer, Sarah Leech Aucutt. We will operate as a stand-alone but supportive business with our team to whom we owe our exponential growth. By joining Helen of Troy, we will have more resources to expand our reach. And together, we will bring Olive & June to everyone everywhere.

Thank you, SGT. Operator, we are now happy to answer any questions.

[Operator Instructions]. Our first question is from Susan Anderson with Canaccord Genuity.

I was wondering if maybe you could expand on the distribution opportunities you see, I guess, beyond the current space in Walmart and Target. And then also, do you think there's more opportunity to expand within those large mass stores? And then also as well as category expansion. I think you mentioned in the presentation that there's opportunity for adjacent categories. Maybe just give some color on what you think this could be?

Susan, thanks for joining. I'll start and ask SGT to provide any builds. What we see from a distribution standpoint is we do see continued upside with the retailers that Olive & June currently plays in. These are great categories with seasonal opportunities, with in-line, off-shelf collaborations, et cetera. And so I think we will continue to partner with Olive & June to realize all of those opportunities in addition to incremental distribution opportunities in the U.S., whether that's additional retailers, e-commerce, et cetera. And so we do see further opportunities. I think in terms of new product innovation, this is a brand that has continued to show great innovation across a range of categories within nail. And as we bring the brand on board, we'll assess what kinds of other future opportunities there might be for the brand. SGT, any builds?

I would echo what Noel has said and also just clarify that it's currently Target, Walmart and Walgreens, and excited to expand in the future.

Great. And then if I could maybe just add one more. I would love to hear your thoughts just on the industry and kind of how you see the industry -- the nail -- at-home nail category in general, shaping up over the next couple of years. It does seem like it definitely had a big resurgence over the past couple of years. I guess -- maybe if you could talk about kind of what's changed there and what drove that? And then also how you see it going forward? And then just the competitive landscape as well.

Yes. Thanks, Susan. I'll start. And again, as SGT if she has any builds because she certainly does category better than I do. But as we looked at the opportunity, what I loved about this category is the growth that I think COVID help to spawn where people couldn't get to salons and adopted some of the habits and what's great about the category is it's really stuff, the growth has continued on since that time. And lots of different parts of the category, whether it's polish or gel or artificials, et cetera, there's lots of different options and choices for consumers, and we see those opportunities continuing. And I think Olive & June been right at the center of that with their innovation, with the strength and distinctiveness of their brands that have helped consumers address pain points or fears they might have about doing it themselves, but also building their confidence that they can, in fact, get a salon quality manicure at home by themselves.

Great. The only build that I would add is that we have been focused on the DIY category since before COVID. So one of our advantages going into COVID was that we had a product line that was a full assortment ready for the consumer at home, this full mani system so they could get the salon quality experience at home. And so we were really well positioned going into COVID and into what exactly as Noel said, which is a permanent shift into at-home in this category, really well positioned to serve the consumer in the best way possible.

Our next question is from Rupesh Parikh with Oppenheimer & Company.

So my first one is just on competition. Would love to hear how competition looks like within the category. And just I don't know, along with any additional color in terms of maybe some of the bigger competitors.

Again, as I look at the category and the competitive set, what I love about Olive & June is how distinctive it is in the category. It really has that, as SGT explained, kind of the DIY, everyone can do it, every person, everyone is included and being able to do this versus maybe some of the other parts of the category that are a little bit more focused on glam. This is a brand that's really for everyone every day. And I think that's what makes us distinctive in the category. I also love that it has the whole system. So it has all of the different areas covered from polish to now gel, which is the newest launch to the artificial pedicure system, the manicure system, nail care. So it's not just one area. It really is unique in spanning all the different areas, so the consumer can really choose what works for them and what's right for them. SGT?

And I would, again, and I would again echo what Noel is saying. Our positioning -- we believe our positioning as a cross-category mail brand supports the consumer in that nail journey. I think it's reflective in our ranking #2 among other artificial nail suppliers within about 18 months of launch that the consumer sees us as their solution across category. And it's really exciting to see.

Great. And then maybe just my follow-up question for Noel. Just the timing of the acquisition, just given -- you guys have a lot going on with their base business, concerns out there on tariffs coming up. So -- just wanted to get a sense like how your team feels about managing the complexity of taking on an acquisition. But you still have a lot going on with your base business right now.

Yes. Thanks, Rupesh. The way again, unique in this particular opportunity is our ability to run this as a stand-alone but supportive. So we're able to keep the Beauty and Wellness team really focused on the core business and those brands and what we need to do to elevate the health and performance there while bringing in a passionate experience, motivated team with Olive & June who can run this business fairly autonomously but selectively leveraging some of the capabilities of scale to help elevate their growth. So it was unique in the ability to bring it into the family, complement what we have, leverage capabilities and scale, but also allow our beauty and wellness team to continue to focus on what they're focusing on. So we're not going to burden -- overburden parts of the organization who have other areas that they're focused on.

Our next question is from Linda Bolton-Weiser with D.A. Davidson.

I was just curious if the brand is being sold on Amazon. And if not, does that represent an opportunity for additional distribution?

Linda, so currently, the brand is not sold on Amazon. So certainly, that would be an interesting opportunity.

Okay. And then is there any way -- well, I think you mentioned salons, I didn't see in the PowerPoint. I didn't get a chance to look, but are there brick-and-mortar salons somehow that are associated with the brand? And can you explain how -- is that something you're going to add to? Or just can you explain that, please?

So I can jump in here. We had brick-and-mortar salons booked for COVID. They were closed in 2020, not currently on the road map to add funds back into the mix. We're really focused on the DIY nail journey and serving the consumer in that way.

And can I just sneak in one more about is there any way to break down the -- like the sales category, like what percentage of sales is on -- is in press on nails versus polish versus equipment and tools?

Yes. So what we would share, Linda, is sales are pretty balanced right now between polish and artificial. Artificial as a subcategory is seeing a lot of growth right now. There's a lot of opportunity and acceleration there. But right now, balance sales across. I would say the representation, as I mentioned earlier, a unique point of difference for Olive & June and other systems. And so their systems also do quite well for the brand and part of what is an entry for consumers to kind of get into being feeling that confidence and having the right tools to get the results they're looking for at home.

Our next question is from Bob Labick with CJS Securities.

Maybe could you give us a little background on the acquisition process? Was this an auction? How did you guys meet? How did it come about?

Yes, Bob, it was an auction process. There were multiple parties kind of involved at the beginning of the process, and it evolved over a period of months. And then ultimately, there was a point where selection was made to go into exclusive negotiations and we happen to see the party that was chosen. We think we differentiated ourselves in terms of what we are able to offer. I think, qualitatively as well as resources and kind of strategically thinking things. And so I felt like we did a good job being selected as a buyer of choice kind of through building the relationship and just discussing the 2 businesses and where the opportunities were. And so it occurred over a period of months and culminated with yesterday's announcement.

That's great. SGT, do you want to build?

I would say, for us, it was an immediate fit with Helen of Troy because they are consumer success just like us. And so our company values and culture really align. They also understood our strength in digital engagement and are allowing us to remain as a stand-alone business. So we are keeping our team and our vision, which is really giving us the capability to scale with the current team, which is really exciting and at a great moment for us.

Okay. And maybe how big is this total category? I apologize, but I'm a generalist, I don't know this. And how big was it kind of during the pandemic? And how big do you think ONJ can be in 5 years?

Yes. So the total category right now is a little over $2 billion, Bob. And as we did work leveraging the insight from the Olive & June management team as well as our own understanding of the retail landscape, the beauty category, et cetera. We foresee double-digit growth rate for the brand over the foreseeable future.

Our next question is from Olivia Tong with Raymond James.

This is [ Lilian ] on for Olivia. And if you could just talk a little bit about manufacturing and then also if there's any tariff risk associated with that.

Yes. So there -- if you want just the landscape of the supplier base, there's a little bit over -- a little bit less than 50% exposure to China. And Olive & June, like us has been trying to diversify their supplier base outside of China and have initiatives that we believe will bring that exposure down over time. So if you're focused on the tariff aspect that, that's the supplier base, we also -- there's also some suppliers in other parts, Southeast Asia and other locations. And again, Olive & June is already working on diversification there, and we expect that to continue.

And we expect to help, partner with them post close. We'll collaborate on where they are and where we are and look to maximize across that.

With no further questions in the queue. You can now -- I would now like to turn the conference back over to Noel for closing remarks.

Great. Well, thank you again for your time today and for joining us. We hope that you're as excited about this opportunity as we are. Thanks so much.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.