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spk05: Ladies and gentlemen, thank you for standing by and welcome to the Hamilton Beach Brands Holding Company Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone. If you require any further assistance, please press star, 0. I would now like to hand the conference over to your speaker today, Thanks, Jason.
spk01: Good morning, everyone, and welcome to our fourth quarter 2020 earnings call and webcast. Yesterday after the market closed, we issued our fourth quarter 2020 earnings release, and a copy is available on our website. Our speakers today are Greg Stratt, President and Chief Executive Officer, and Michelle Moser, Senior Vice President and Chief Financial Officer. Greg and Michelle will discuss our fourth quarter results and outlook. Also participating in the Q&A will be Scott Teide, Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands. Our presentation today contains forward-looking statements that are subject to risks and uncertainties, that could cause actual results to differ materially from those expressed in either the prepared remarks or the ENA. Additional information regarding these risks and uncertainties is available in our earnings release and in our SEC filings, such as our annual report on Form 10-K-A for the year ended December 31, 2019, and our Form 10-Q for the period ended September 30, 2020. The company disclaims any obligation to update these forward-looking statements, which may or may not be updated until our next quarterly conference call, if at all. And now I'll turn the call over to Greg.
spk02: Thank you, Luanne. Good morning, everyone. Happy St. Patrick's Day, and thank you for joining us. I'll first discuss our fourth quarter results. We were pleased to finish the year 2020 on a strong note. Revenue in the fourth quarter increased 14.4%. Operating profit increased 49% compared to the fourth quarter of 2019, mostly due to higher sales and gross margin expansion. Our revenue growth was driven by the strength of our U.S. and Canadian consumer markets, as well as the timing of some revenue shifting from the third quarter into the fourth quarter. Sales in the U.S. and Canada increased year over year and were greater than we anticipated in our outlook. In certain of our international consumer markets and in our global commercial market, Pandemic-related issues continued to suppress sales. Revenue from these two markets decreased compared to the same period in 2019 and was below what we anticipated in our outlook. Here at Hamilton Beach Brands, we have a talented, experienced, creative, and dedicated team. Our people have deep consumer, customer, and industry knowledge. I am very proud of our team and all they have accomplished during extremely challenging conditions. They are what gives me great confidence in our future. We entered 2021 building on continued strong consumer demand for small kitchen appliances. Our many competitive strengths reinforce our position. These include the value of our brands and products, strengthened operating capabilities, including important investments in information technology, as well as continuing to execute on our strategic initiatives. We are well positioned to build on these strengths as we focus on our commitment to build long-term shareholder value. In our U.S. and Canadian consumer markets, we expect demand to remain strong in the first half of this year as consumers continue to shelter at home and cook more than ever before. We expect to see consumers continue to cook at home after the pandemic more than they did before the pandemic as new habits have formed. We also believe demographic trends support our expectations for continued demand growth. Millennials are moving into the household formation and family phases of their lives Boomers are retiring and moving to new homes or remodeling. Both trends create durable, ongoing demand for small kitchen appliances. We're capitalizing on the strong consumer interest in cooking, trusted brands, and digital engagement. Our alignment with these consumer trends, combined with the breadth of our portfolio, positions us well for continued growth. In our international markets, while certain trends lag the strength of the U.S. and Canada markets, We expect the Mexico and Latin American markets to rebound this year as more people gain access to vaccines and economies begin to recover. In our global commercial market, the food service industry was arguably one of the hardest hit by the pandemic. Parts of the food service business began to recover in the second half of last year. Quick serve restaurants have fared well, while some casual and fine dining restaurants have found success with takeout, curbside pickup, and delivery models. As consumers begin to go back out, they expect food service will rebound, although not likely at full pre-pandemic levels in 2021. Hospitality industry is expected to be slower to recover as many consumers remain reluctant to travel. I'll note, however, that demand for certain of our products has been strong during the pandemic. For example, our in-room coffee makers have been in demand as lobby and dining service are not available in many hotels. For executing on several strategic initiatives that are designed to build long-term shareholder value, in 2020, we completed a detailed review of all our initiatives, which resulted in changing some initiatives and continuing or increasing focus on others. We continue to make progress with our initiatives and expect to benefit from these efforts in 2021. A key to our continued success is our ability to leverage our trusted, well-recognized flagship brands, Hamilton Beach and Proctor Silex, particularly in the North American marketplace, where they have been competing successfully for over 100 years. We are reinvesting in these brands to keep them strong and fresh through new product development, refreshed packaging and online content, new digital marketing and social media campaigns, all with the aim of driving conversion. In 2020, Hamilton Beach was once again the number one brand in both the brick and mortar and e-commerce channels based on units sold We intend to maintain and grow this position. We plan to drive growth of the Proctor Silex brand with a new, simply better positioning. We recently launched four products in core categories and we'll have more coming in 2021 and beyond. This new product group merges sleek design with superior performance and durability. A key supporting element is investments in digital marketing. E-commerce growth accelerated significantly in 2020, which we were well prepared for as a result of our past investments. We expect the increased online shopping to continue, and we are well positioned for opportunities still ahead. Online ratings and reviews are the lifeblood of e-commerce sales, and all nine of our brands average a four-star rating or better. We're supporting growth in this channel with digital marketing programs, expansion of our direct-to-consumer distribution operation, and increasing our participation with pure play and omni-channel customers. Our direct-to-consumer sales in 2020 significantly exceeded 2019 as we invested in process and infrastructure improvements that enable us to increase output by over 50%. We continue to increase our participation in the global commercial market. Pre-pandemic, our global commercial products had achieved a compound annual growth rate of more than 5% since 2010 and accounted for 8% of total revenue. While we expect the global commercial market recovery to take some time, we are very optimistic about its potential and expect it to return to growth in 2021. We're investing in new commercial products and expanding our offerings across all areas of the kitchen. We've also invested in digital marketing and e-commerce and strengthened our partnerships with regional and global chains. Overall, we expect strong revenue and profit growth in our global commercial business in 2021. We continue to expand our presence in the premium market with new product development and by pursuing partnerships and licensing agreements. Our newest entrance in the premium market is the Bartesian Cocktail Dispenser, which we market through an exclusive multiyear agreement. Bartesian is the first of its kind to use flavor capsules to create a premier mixed drink at home. In its first full year, Bartesian received very strong customer responses. Our goal is to double our sales in 2021 and launch the next generation of machines for both the retail and commercial markets. Our Wolfgram 18 launched the stand mixer in 2020. And in 2021, we're introducing a high performance electric kettle. For CHI, we continue to gain new distribution, both in Canada and the US. CHI has become the number two iron brand in the over $40 category with a 40% share. In 2020, we launched the new touchscreen iron and a handheld steamer. This year, we will introduce a larger steamer and additional products to round up the line. We continue to build out our Hands of the Beach professional line, which leverages our commercial expertise for home cooks. We've upgraded our existing ovens and toasters, launched a stand mixer, food processor, and conical burr grinder, and have just introduced a coffee maker and juice extractor. We continue to create products for new categories that leverage our strengths of sourcing, marketing, and distribution. This year, we're increasing investments in new opportunities in the home, particularly in the large and fast-growing health and wellness space. Two examples of this include expanding our air purification offerings and entering the water filtration category. We're pursuing additional health and wellness opportunities that we expect to be able to discuss in the coming months. Certain emerging markets have experienced greater challenges from the pandemic, and our outlook is uncertain. After assessing the potential for growth in emerging markets, we are pivoting to a licensing model from a company managed model in countries such as Brazil, China, and India. This change will result in reallocating certain resources to focus on our North American market, while others will be eliminated. Commenting further on current business conditions, we're managing through rising product costs and shipping congestion persists. The congestion challenges are in response to record-setting import levels for most industries, an imbalance of containers, and the inability of ports and rail yards to handle the volume. We ship most of our needs using a contract rate, but we are shipping a percentage of our needs at the higher spot rate. We're planning for the high import volume to continue through the first half At a minimum, we are taking a number of steps to manage costs as we have in the past. The company has many strengths that enable us to successfully navigate the pandemic. Our investments in talent, global infrastructure, and our strategic initiatives are serving us well. One of our most important investments is in new product development. This is truly the lifeblood of this business. In 2020, we introduced nearly 70 new products, even with employees working remotely. We plan to introduce 100 more new products over the next 24 months. Our new products will cross a wide range of brands, price points, and categories, leveraging our leading brand portfolio in markets around the world. I'll now turn the call over to Michelle, who will review our financial results for the quarter.
spk00: Thank you, Greg, and good morning, everyone. Let me review our fourth quarter 2020 results from continuing operations compared to the fourth quarter of 2019 and discuss our outlook. Total revenue increased 14.4% to $234 million compared to $204.6 million due to the continued strong demand in our U.S. and Canadian consumer markets. Additionally, timing of some revenue shifted from the third quarter of 2020 into the fourth quarter. In our international consumer markets, revenues decreased as consumers in many countries struggled with economic challenges resulting from the COVID-19 restrictions and business closures, more so than they did in the U.S. and Canada. In our global commercial market, fourth-quarter revenue decreased due to significant challenges in the food service and hospitality industries, as dining out and travel have declined significantly during the pandemic. Gross profit margin increased to 23.3% compared to 20.7%, primarily due to the sale of higher-priced and higher-margin products particularly through the e-commerce channel. Selling general and administrative expenses increased to $25.9 million compared to $23 million, mostly due to increased incentive compensation and outside services. Operating profit increased 49% to $28.4 million compared to $19.1 million. Net income increased $19.4 million or $1.40 per diluted share compared to net income of $13.3 million or $0.98 for diluted share last year. Now let me provide some brief comments on the full year 2020. Our sales through the e-commerce channel increased 30% and accounted for 32% of total revenue. In the fourth quarter of 2020, sales through the e-commerce channel accounted for 41% of total revenue. We continue to develop expertise and take actions to position ourselves to gain share in key e-commerce markets with a focus on the US, Canada, and Mexico for retail and globally for commercial. Revenue from our premium products increased 12% in 2020 and accounted for 11% of total revenue. We plan to continue our robust new product development efforts and pursue additional partnerships and licensing agreements to further expand our presence in the premium market. Revenue from commercial products in 2020 decreased by 37%, and as a percentage of total sales, revenue from commercial products dropped to 5% due to the devastating impact of the pandemic on the food service and hospitality industries worldwide. In 2020, we strengthened our position to participate in the rebound of the global commercial market, including investing in new products, expanding digital marketing, and building on customer partnership. Use of cash before financing activities in 2020 was $31.7 million, compared to a use of cash of $3.9 million in 2019. Networking capital increased by $59.9 million due to an increase in inventory and trade receivables, partially offset by higher accounts payable. In combination with longer shipping lead times due to congestion in the freight supply chain globally and the need to source product in advance of the annual Chinese New Year shutdown, we built inventory in anticipation of sales growth in the first half of 2021. Higher trade receivables reflected the timing of collections. We expect net working capital, cash flow, and our debt level to improve significantly in the first half of this year. Net debt at December 31st, 2020 was $95.9 million compared to $56.4 million at December 31st, 2019, reflecting the changes in net working capital. Throughout the year, we demonstrated effective management of net working capital with average debt outstanding down $11.6 million compared to prior year. In November 2020, we amended and restated our credit agreement to extend the term and increase the size of the facility. Now let me turn to our outlook. We continue to believe we are well positioned to effectively navigate the ongoing COVID-19 environment as demand remains elevated and our cost management measures remain in place. For the first half of 2021, we expect moderate revenue growth compared to the first half of 2020. Operating profit is expected to increase in the prior year period despite higher material and shipping costs. In the first half of 2021, we expect to record a non-cash charge of approximately $2 million related to the deconsolidation of our Brazilian subsidiary. We do not expect any additional significant charges due to our change to a licensing model in certain emerging markets. Visibility into the second half of 2021 is limited due to uncertainty regarding the timing for the pandemic to diminish. While capital expenditures related to our ERP system are behind us, we will be moving to a new distribution center in the second quarter. Capital expenditures, net of any allowances, are expected to be approximately $8.4 million and include costs for a new DC as well as normal level of spending on tooling, and maintenance capex. For the full year 2021, we expect improved performance compared to 2020 as a result of progress made with the challenges experienced in 2020 related to our Mexican subsidiaries and the cover over to our new ERP system. Beyond this expectation for significant upside to performance, we'll defer any outlook for the full year 2021 to a later time. In the pandemic-altered work environment that we've been operating in for the past year, the resiliency of our workforce has been very impressive. We greatly appreciate everyone's efforts to remain safe and productive. We believe our global workforce and our business are well-positioned to manage through the pandemic as it begins to recede and to come out of it in a very strong position. That concludes our prepared remarks. We'll now turn the line back to the operator for Q&A.
spk05: As a reminder, at this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. You will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Justin Clever from Baird. Your line is open.
spk04: Hey, good morning, guys. Hope everyone's doing well. My first question is just on inventory at your retail partners. In thinking specifically about the U.S. and Canadian consumer side of the business, how do in-stock levels look today? And have we reached a point where sell-in and sell-through are starting to become more balanced, or is demand still outstripping supply? Yeah.
spk03: This is Scott. Yeah, so both with the U.S. and the Canada markets, I think that the retailer's inventory is still moving very quickly in general for small kitchen appliances. We also think with the stimulus checks going out in the U.S. that there will be some pretty strong demand here coming up in our categories over the next four to six weeks. So we're still pushing to try to keep them in stock. I think the whole industry is trying to keep the product on the shelf, and with the additional transit time and some of the challenges coming out of China, you know, we're all working to try to make sure we've got the long, you know, we're making sure we're putting our purchase orders in well in advance that we can get the product out of China and be able to react to these kinds of trends that continue to happen in the marketplace.
spk04: Okay. Thanks for that color, Scott. Maybe just you mentioned, you know, the increased focus on e-comm. Just a few questions on that front. Can you remind us the size of your DTC operations today? I assume it's pretty small, but just any color there. And then how you manage pricing and promos on your own sites versus, you know, what you see on your retail partners' web properties.
spk02: Justin, hey, this is Greg. So two parts there. So in the first part, I know you know this, but we have sort of two ways we support the e-commerce customers or demand. One is we'll go through a retailer who has their own e-commerce site, and that's the majority of our business. Some of those customers we ship truckloads to, and they take care of everything from there, and some will drop orders to our facility. and we'll fulfill it from our facility. So that's what we will internally sometimes call direct-to-consumer. So right now, the vast majority of our revenue through e-commerce channels is through that, you know, sending product to these retailers. But we do have a very fast-growing, important business that is this sort of dropship or DTC business. As far as our own website, it's very, very small. And we sell a lot of parts on there or, some product maybe that consumers are struggling to find somewhere else. So it's more specialized sales than anything really robust. So most of it's coming through retail partners. As far as promotions and prices, Scott, I wanted to answer that one.
spk03: Sure, yeah. So on the promotion side of things, you know, we look at – we work with the retailer just like we would with a brick-and-mortar retailer to determine what are the best promotions. You know, we're focused on the categories that seem to be, you know, really strong. So, you know, there's a lot of consumers out there baking right now and in their homes, and we're looking at those consumer trends. And then we're focusing on promoting those products that would support these trends with those accounts. The duration can be a little bit different. With online, if they're not a brick-and-mortar account, they've got more flexibility so we can increase or decrease the duration of that promotion based on what we see as the ROI on that. And then if it's a brick-and-mortar account, a lot of these promotions, if it's an item that's in their store as well, would be syncing with the promotion that we're doing in-store. So a lot of flexibility to promote online and really just focusing on maximizing the right price point and working on the right trends where we see the consumers are shopping.
spk04: And then the comment on increased participation with PurePlay and omnichannel customers. Are these new accounts or are you guys just deepening your relationships with your existing partners?
spk03: In most cases, we're deepening our relationship with existing partners. You know, as we continue to expand, you know, more lines into the premium side of the business, you know, we are occasionally finding some new channels that are more relevant for that space. But, you know, we've got such a broad assortment, and, you know, we're trying to make sure we optimize, you know, each of the 50-plus categories that we're in. So we're deepening those assortments and increasing those promotions and just trying to maximize those retailers.
spk04: Okay, no, that makes sense. Maybe shifting just over to commercial, the business being down 37% in 2020, can you give us some sense on the cadence of maybe how that business progressed across the year? I assume 4Q was down less than the full year, but any color there would be helpful. And then when would you guys expect that business to return to 2019 levels?
spk02: Justin, this is Greg. So definitely the last three, four, five months were better than right as the pandemic hit. And we just really, as each month progressed, it got worse sort of through the summer and early fall and then just sort of get better, a little more demand as these customers reacted, changed their business models. started to come back from working remotely. And so that just really allowed for a bit more demand than we were seeing during the very early months. You know, as far as going forward, we're looking at it, we looked at sort of a three-year average pre-pandemic for us. And, you know, we're hoping that, you know, we can get up to, you know, running at 80% of that three-year average this year. there's a chance that we'll be better than that. And of course, in the back cap, it's a little harder to know exactly what's going to happen. So it could be below that. But generally speaking, we think we would hope to be up to 80% of pre-pandemic rate and hopefully then in 2022 get back up to that at or above the pre-pandemic rate. But certainly we're early stages here in 2021, so that's hard to be real sure of. But I do know that North America trends are strong. Asia trends are strong. Europe is still a bit soft as they're going through some continued lockdowns, et cetera.
spk04: That's very helpful. Thank you, Greg. Maybe just a couple more here from me. In terms of the full-year guidance, I understand the second half visibility is is low here but you mentioned in the script you know improved performance in 2021 is that i guess do i read that as you expect both revenue and operating profit on a full year basis to to grow or improve over 2021 or 2020 levels excuse me well um i think we're going to focus on the first half for outlook uh for now uh i will say that there's things working
spk02: So we talked about commercial, international. Those are areas that were hurt really badly that should rebound. The North American strength continues. And then, of course, we had issues related to Mexico and to our ERP cutover that should not affect us. And kitchen collection is a little bit further in the rear view mirror, but that's also not the mix anymore. So those are all things that should provide us upside. What's going to happen with consumers when they, we hope, we all hope, are opened up from a vaccine standpoint, et cetera, it's really hard to tell. We think we've mentioned all these trends that are underlying that should provide long-term growth, but in the short term, will they run out of the house and stop buying appliances and spend money on other things? And if that happens in the North American market, that's going to be a headwind. But all in all, we don't expect it to go that way. So I think really we want to stick with just a first-half outlook, see how things unfold here, knowing that we have some things that really should give us a boost, but really wait and see how the North American market plays out here in the coming months.
spk04: Okay. Yeah, no, fair enough. Last question for me, just on the higher material and shipping costs, Is there any way you can maybe contextualize the increases you guys are seeing on a year-over-year basis? And just in terms of the mitigation strategies, are you planning for or have you already started to pass through any of these cost increases in terms of passing through to your retail partners? Thanks.
spk02: I'll let Scott go through the steps we usually go through because we've been down this path before. It's never easy or fun, but it's something we've done a number of times. But just we can't provide any hard view of what those costs are. We do see some pressure as we speak, but also things could turn the other way in the back half as we go through our process. So I think our outlook right now includes what our view of the cost position is. And then that's one more factor that we'll have to think through as we get to the back efforts. Scott, why don't you talk about the things we do when we do have a picture of our cost structure?
spk03: Right. And so, Justin, because we're in so many different categories and we've got breadth in some of those categories, we are able to you know, optimize with other products, you know, we're able to switch out, you know, with something to make it sure that we're staying margin whole, you know, with these retailers. So we do have the ability to pass on the price increases as we see cost increases coming in. So that's certainly something we do on a regular basis. But we also have a large mix of product that allows us to swap out items and keep us margin neutral with these accounts. And the last thing that we talked about, I think we talked about this about a year ago, is that we can switch our focus on the promotional items. And so certain items in our portfolio have more margin than others. And so if we feel like that there's cost pressure in certain categories and not in others, we'll focus on promoting those categories that tend to be a little bit better in margin for us to help offset some of those margin pressures.
spk04: OK. Thanks so much, guys. That's it for me, and congrats on the strong finish and best of luck in 2021. Great.
spk02: Thank you, Justin.
spk05: Once again, if anybody has a question, please press star and the number one on your telephone keypad. Once again, that is star and the number one on your telephone keypad if you would like to ask a question. There are no further questions at this time. I will now turn the call to CEO Greg Trupp for closing comments.
spk02: Thank you. As we look ahead, we are optimistic on many levels. We know our company was strengthened by facing and overcoming many challenges in 2020. Our team did an incredible job for our customers and our company. I could never thank our employees enough for all they contributed last year. We look forward to vaccines being widely administered and life returning to something that feels more normal. We remain committed to the safety and well-being of our employees and to meeting the needs of our customers and consumers as we all work together to keep our organization agile and able to respond quickly to changing needs and circumstances. Thank you again for joining our call today.
spk05: That concludes today's conference call. You may now disconnect.
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