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spk05: Thank you for standing by and welcome to the Hamilton Beach Brands Holding Company Second Quarter 2021 Earnings 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 1 on your telephone keypad. If you require any further assistance, please press star 0. I'd now like to hand the conference over to Lou Ann Abham, Head of Investor Relations. Thank you. Please go ahead.
spk02: Thank you, Blue, and good morning, everyone. Welcome to our second quarter 2021 earnings call and webcast. Yesterday after the market closed, we issued our second quarter earnings release and filed our 10-Q with the SEC. Copies are available on our website. Our speakers today are Greg Trepp, President and Chief Executive Officer, and Michelle Mosher, Senior Vice President and Chief Financial Officer. Greg and Michelle will discuss our second quarter results. Also participating in the Q&A will be Scott Teide, Senior Vice President, Consumer Sales and Marketing. Our presentation today includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in either the prepared remarks or during the Q&A. Additional information regarding these risks and uncertainties is available in our earnings release, our 10Q, and our annual report on Form 10-K for the year ended December 31, 2020. The company disclaims any obligation to update these former listing 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.
spk01: Thank you, Luann. Good morning, everyone. Thank you for joining us. I will begin with our second quarter results. After delivering a strong performance in the first quarter, Our second quarter results fell short of our expectations. We were very pleased that our top-line momentum of the past two quarters continued. Our revenue grew nearly 12%, and we experienced broad-based strength in all markets. We were disappointed, however, that profitability decreased significantly. The decline was primarily due to significantly increased inbound and outbound transportation costs resulting from disruptions throughout the global supply chain. An ongoing dramatic rise in ocean shipping container rates accelerated during the quarter and continues to do so, and carrier storage charges increased. We continue to experience cost pressures and disruptions caused by container shortages, more congestion, crowded rail yards, and a shortage of drivers and chassis in the domestic trucking industry. We also experienced higher material and labor costs. As we stated in our previous earnings call, we expected transportation congestion and supply chain disruptions to persist. However, the external environment changed more rapidly than expected, and volatility has been far greater than our expectations. While our second quarter results were not what we planned, our team performed very well under very difficult conditions. I'm very proud of and grateful for the tenacity and resilience. We believe that the many steps our team has taken to manage through the challenges will benefit us in the second half of the year. I'll discuss those steps in a moment. While these challenges have escalated in recent weeks and are expected to persist in the near term, we expect them to normalize over time. More importantly, we firmly believe their current impact does not reflect the fundamental health of our business or our long-term prospects. Our brands are healthy, and we continue to see robust growth. Demand for retail and commercial small appliances remains strong. I will provide more details on revenue and markets in a moment. For now, the unprecedented demand is a two-edged sword that continues to cause significant near-term challenges throughout the supply chain. Let me review our near-term challenges. Transportation supply chain disruptions continue. Record shipping demand from all importers, along with a shortage of ocean shipping containers, is causing dramatically rising rates, as well as longer transit times. Our view is that the current challenges are compounded by the annual inventory building period ahead of the peak holiday selling season. We think that when the holiday stocking is completed later in the second half, the disruption should begin to moderate. We are focused on importing all the inventory we can to meet the strong demand while balancing the challenges of doing so at a reasonable cost. Material and labor costs are increasing, as expected, We were seeing an escalation in product costs due to rapidly rising material costs in the recent devaluation of the Chinese yuan. Unexpectedly, labor costs have also increased, particularly for warehouse personnel, as the high demand for these resources has escalated rapidly. We are addressing constraints with third-party manufacturers. Other supply chain constraints have increased as demand from us and our competitors has been running higher levels of running at higher levels than our third-party manufacturers in China can handle. Further challenging our suppliers is the impact of shipping container shortages on our ability to efficiently move finished goods out of their factories, which in turn affects their production capabilities. Our move to our new distribution center is adding complexity. For our company, we began a planned relocation of our U.S. distribution center during the second quarter. Our move from Olive Branch, Mississippi, to nearby Byhalia, adds additional complexity to our operations. The move is continuing in the third quarter and is on track, but it adds complexity until completed. We expect to incur about the same level of expense in the third quarter as we did in the second quarter. Importantly, let me discuss our mitigation strategies. We are taking many steps to mitigate the supply chain issues and rising cost challenges. We are fortunate to have an experienced, strong team to lead us, as we strive to maximize our ability to meet record demand. Our mitigation strategies include pricing actions, negotiating with carriers for container space and rates, working with our suppliers to minimize constraints, and collaborating with our retail customers. Our first phase of price increases went into effect in June and July, with timing varying by market. These increases will benefit our second half results more than they did our second quarter results. As the challenges in the second quarter accelerated, we decided additional pricing action was required, and that will be in effect this month. If additional pricing is required, we will balance the need to cover rising costs with the need to remain competitive. We never take pricing actions lightly, and we understand they cause stress for retailers and consumers. Our discussions with customers have been constructive as they are experiencing the impact of rising costs in their own operations. Depending on the rate of continued cost escalation, price increases may not fully offset in the short term. We have taken additional steps that are alleviating pressures in the supply chain. In China, we have moved some product to nearby warehouses to free up supplier space and capital so our suppliers will produce more for the coming holiday build. We are working with our retail customers for more products to be shipped through direct import programs when possible. At our U.S. distribution center, We are maintaining peak season staffing, and we are adjusting labor rates as necessary to attract and retain personnel. I'd like to now shift to a discussion of market demand in our revenue performance. Our top-line performance this year has been strong. Earlier in the year, revenue growth was driven by increased sales in our U.S., Canadian, and Latin American markets. In the second quarter, we were pleased to also see growth in our Mexican and global commercial markets, as they continue to rebound from last year's COVID-driven demand weakness. In our U.S. consumer market, while the growth rate moderated compared to last year's dramatic demand surge, revenue was in line with last year, underscoring continued strong demand. In the Canadian market, sales also were in line with prior year, despite a new COVID-driven retail lockdown during the quarter. As stores reopen, we expect a return to sales growth. In the Latin American market, demand strengthened further. Sales increased significantly and exceeded our expectations. In the Mexican market, demand strengthened considerably compared to last year and sales increased significantly. In the global commercial market, sales growth exceeded our expectations and revenue grew by almost 80%. The very important message here is that demand is very strong across our entire company. Our strategic initiatives are playing an important role in our revenue growth. E-commerce channel penetration remains strong at 32%, even as consumers have begun to shop more in stores, and brick-and-mortar channel sales strengthened. Sales of our premium products increased 35% in the second quarter. I'd like to spend a little time on our new strategic initiative, which is to expand our presence in the large and fast-growing home health and wellness market. These programs should benefit Hamilton Beach for years to come. During the second quarter, we announced two strategic partnerships that support this goal. First, we are partnering with the Clorox company to launch a new line of air purifiers under the Clorox brand name. Secondly, we are partnering with HealthBeacon Limited, and we are the exclusive marketer and distributor of a smart injection care management system in the U.S. and Canada under the new brand name Hamilton Beach Health. Let me describe in more detail our partnership with Clorox. The air purifier category is growing. It's been growing for years. In fact, if you look at 2020 over 2019, the growth was 78%. The growth was driven in part by the pandemic and concerns about indoor air quality, and it was also driven by one of the worst wildfire seasons and one of the worst allergy seasons on record, all conditions that persist. Clorox, of course, is very focused on disinfecting and removing germs and killing germs. Hamilton Beach has a lot of strength around sales, manufacturing, distribution, and has all the relationships where air purifiers and sanitation devices can play. We will be sourcing and marketing the new line of products, both online and in brick and mortar. We'll launch our first products later this year, and we'll have many products to follow in 2022 and beyond. So we feel like this is a great opportunity to really leverage our capabilities, being able to bring small appliances into these channels and the great brand that Clorox offers. turning to our partnership with HealthBeacon Limited. They are a leading developer of smart tools for managing injectable medications at home. HealthBeacon is headquartered in Dublin, Ireland, and they have achieved great success in several global markets. They needed a partner to expand quickly and efficiently in the U.S. and Canada. We are very excited to partner with them and do business under our new brand name, Hamilton Beach Health. HealthBeacon developed the world's first and only FDA-cleared SmartSharp spin, that intelligently helps patients with a broad range of treatments for chronic conditions. The bin itself works in combination with a map. The total system provides medication management reminders, tracks adherence, provides for the safe and convenient disposal of used sharps. Partnership will leverage our brand equity, our leadership in marketing and distribution, and our retailer relationships. We look forward to helping make it easier for patients in the U.S. and Canada to manage their injectable medications, stay on track with their treatment schedule, and safely manage the disposal of their U sharps. We plan to continue to expand our presence in the home health and wellness market. We have a number of discussions underway and expect to make additional announcements this year and next. In summary, on the one hand, we are fortunate that demand for retail and commercial small appliances remains strong. Our brands and products are selling very well. On the other hand, the current operating environment industry-wide remains challenging as persistent supply chain disruptions and ongoing materials and labor costs increases create much uncertainty. At this time, visibility is limited. We're working to gain a deeper understanding of how these dynamics are going to play out, especially as our industry heads into the peak holiday selling season. Our focus is to ensure product availability during the holiday season and We're leveraging all our resources and expertise, as well as our relationships with suppliers, customers, and freight vendors to meet demand as we continue to manage through constraints that most industry participants believe will continue for the rest of this year and likely into next year. We're also monitoring the ongoing global pandemic, especially how the Delta variant evolves. Now I'll turn the call over to Michelle.
spk03: Thank you, Greg, and good morning, everyone. Let me review our second quarter results compared to prior year. Total revenue increased 11.8% to $154.7 million compared to $138.3 million. Greg provided a lot of detail on the revenue performance. I would like to underscore that demand remains strong in all our markets. In our U.S. and Canadian markets, our two largest markets, revenue held steady compared to last year's strong pandemic-driven growth. when consumers sheltering at home purchase more small kitchen appliances to support their needs for meal and beverage preparation. This performance demonstrates that strong consumer demand for small kitchen appliances in our largest markets continues. In our Latin American market, the momentum from the first quarter continues as this market continues to rebound from pandemic-driven demand weakness. We were especially pleased that revenue in our Mexican and global commercial markets turned positive for the first time since the COVID pandemic started as they both continued to rebound strongly. While the unprecedented consumer demand for small kitchen appliances has provided an abundance of opportunity for our industry and our company, we are operating with some major challenges. In the second quarter, we experienced significantly increased inbound and outbound transportation costs and we faced higher material costs and labor costs. All these cost pressures are the result of continued unfavorable impacts of the COVID-19 pandemic on all parts of the supply chain. As a reminder, last year's gross profit margin of 25.5% was significantly higher than our historical range, as we benefited from the very strong pandemic-driven revenue growth in the U.S. and Canadian markets. Our gross profit margin in the current quarter decreased to 18.4%. The global container shipping industry continues to operate under severe constraints. Extremely high consumer and importer demand continues at a time when the industry has not fully ramped back up from last year's scaled-back operations. This has caused capacity shortages, which in turn has caused rates to continue to set new highs. Transportation supply chain disruptions also include significant congestion at U.S. ports and rail yards, further driving up transportation costs. The pandemic also has created a shortage of truck drivers and chassis, which has an unfavorable impact on outbound freight to retail customers. We're continuing with our efforts to mitigate the challenges and have allocated significant team resources to manage through each of them. We're working closely with our suppliers and retail partners to meet customer and consumer demand. We're taking actions such as increasing lead times, prioritizing production needs, expanding inbound and outbound transportation flexibility, and implementing price increases. Our selling general and administrative expenses increased to $27.5 million compared to $24 million in the second quarter of 2020. We incurred $1.2 million of costs related to the relocation of our distribution center. Additionally, our expenses for outside service and personnel-related expenses increased. Last year, when the pandemic hit, we put a freeze on discretionary spending, including filling open positions. As we saw demand increase, we began to fill the open positions, either with outside services or permanent hires. Our new distribution center is a 1.1 million square foot facility that we're leasing and is not far from our former facility. The old lease was due to expire this year and as we considered options, we decided we would stay in the general area for a few main reasons. We can efficiently and effectively serve our customers throughout the U.S. from this area. We have a great team in Mississippi and we wanted to stay close enough to our current location so we could retain all or most of our employees. We believe this area has many other benefits, including a strong talent pool, excellent infrastructure, a business-friendly environment, and local and state governments that are investing in keeping all these elements strong. Our new site has several upgrades that will make it more energy efficient than our current facility, and it includes improvements that will allow us to have a more efficient warehouse operation. Turning to our bottom line, Operating profit was $900,000 compared to $10.9 million last year. Net income from continuing operations was just above break even or one cent per share. This compared to net income from continual operations in the prior year of $8.1 million or 59 cents per share. Cash flow before financing activities for the six months ended June 30th, 2021 was $800,000 compared to $19.7 million. Capital expenditures were $7.6 million, primarily for investment in our new U.S. distribution center. This amount was partially offset by $4 million of lease incentives and tenant improvement allowances, which were classified as cash provided by operating activities. This compares to $1.6 million of capital expenditures in the same period last year, primarily related to our ERP system. Networking capital increased by $71.8 million and reflected an increase in inventory and trade receivables, partially offset by higher accounts payable. Increased inventory is due to our planning for anticipated continued strong demand, as well as the ongoing disruption of the transportation supply chain that has increased the amount of inventory on hand. Higher trade receivables are mainly attributable to the increased sales in the second quarter. Net debt at June 30, 2021 was $98.1 million compared to $40.2 million in the prior year and $96 million at year end and reflects the changes in net working capital. As a reminder, prior year net debt was significantly below our historical range as pandemic-driven retail customer and consumer demand depleted inventory and our shelves were nearly empty. Next, let me turn to our outlook. As we've indicated, demand for our retail and commercial products is expected to remain strong throughout 2021, assuming no drastic lockdown measures related to the COVID Delta variant. We're pleased with the placements and promotions that have been secured for the holiday selling season. The challenge we are facing is our ability to satisfy the anticipated strong demands as ongoing pressures in the global supply chain continue to affect importers in a wide range of industries. We expect to face challenges getting all the product we need timely and at acceptable cost. Due to the limited visibility created by near-term volatility in the operating environment, we determined that it would be imprudent to provide a specific outlook at this time for second-half revenue and operating profits. We expect to gain a deeper understanding of inflationary pressures and supply chain disruption, especially as our company and the industry enter the peak holiday season. We plan to provide an outlook for the full year when third quarter 2021 results are announced. That concludes our prepared remarks. We'll now turn the line back to the operator for Q&A.
spk05: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, this is star 1 to ask a question. Can we draw the question? Just press the band key. Please stand by while we compile the Q&A roster. Your first question comes to the line. This is Justin Kleber from Beard. The line is now open.
spk04: Hey, guys. It's Justin Kleber. Thanks for taking the questions. Hope everyone's doing well. The first one on margins and the cost pressures, Greg, you talked about implementing price increases, but it sounds like you aren't necessarily expecting price cost neutrality this year. I mean, is that a fair characterization? And then just maybe any benchmarks in terms of how much, you know, you are raising price across the portfolio?
spk03: Well, Justin, I'll start, and then maybe Greg and Scott can jump in. You know, to a large degree during the second quarter, the negative margin impact is really a matter of timing. While we expected some of the cost pressures and we developed pricing actions to offset those, the cost impacted Q2 before some of the price increases went into effect. So we believe that in the back half we will the price increases. continues to be a lot of uncertainty in the industry, and so we've taken action for what we can predict and what we know, but the unknown is still out there.
spk01: Just to build on that, I think the biggest part of the ongoing gross margin percentage, as Michelle said, is timing. We had planned on a certain level of increase. We implemented it into that June and July. As certain other costs escalated, we added more in August. So that should benefit in the back half. There was some hit to the margins that related to some of these transportation costs and congestion-related charges that either showed up in gross margin or in SG in our expense lines. And that's the part where we think we've got – ways to avoid that going forward, but that's probably the biggest part we've got to watch. If that gets to be challenging to deal with, then we might get hit with some more in the back half. And if we can keep it under control, then really we should see the margin come back up as these price increases kick in. So just trying to be careful as a lot of the congestion is just things we can't control, so we don't want to predict what might happen in the environment where we can't control all the variables.
spk04: Okay. Yeah, no, that makes sense. Great. Obviously a very, very fluid environment. As you think about, you know, it sounds like to me, your retail partners, obviously working with you guys and accepting price increases. I mean, clearly you're not the only ones pushing through price right now. My question is just, around how sticky price increases have historically been, you know, within your business, within the industry, if and when, you know, these input costs come down, you know, do those price increases hold? And therefore, you know, if you actually margin tailwind, if and when, you know, some of these cost pressures start to rescind a bit.
spk00: Hey, Justin, this is Scott. So, you know, I will say that, We have been fairly successful in executing the price increases out there. We're definitely experiencing the same thing that many of our competitors and even our retailers who source a lot of product on their own. They're also seeing the same challenge. Typically, being able to predict how long the margin sticks after costs start coming down is really hard to do. Usually, the competitive environment, you have to make sure you're not going to lose placements and you have to react to that. So it just depends on how quickly the commodities and the currency change that tells you how much you'll be able to hold on to that or whether you'll be just back to margin neutral. So I think it really varies based on what the competitive environment is seeing.
spk01: Just to build on that, Justin, I'm sorry to interrupt, but I think Scott described that very well. And when things move quickly, you know, sometimes it takes a little time to catch back up, which is kind of what we're doing now. And then as they come down, maybe you can stay ahead of it for a period of time. We're going to end back up in that range we usually do if you look back historically where our cost margin has been. We feel like there's a band there that we're in and can get back into, and then just where we are in that band really depends on the factors that Scott talked about.
spk04: Gotcha. Okay, that's helpful. And then in terms of the U.S. and Canadian consumer business and the revenue profile there, Eric, It seems like the industry demand is growing even relative to last year. So I guess if you guys look at your sell-through at retail, is that also taking place, whereas your sell-through is growing relative to last year and you just simply can't satisfy or refill the channel based on kind of these inventory constraints? Am I thinking about that the right way, or is that logic off-base?
spk00: I think, Justin, again, this is Scott. I think in general, if you look at all retailers that are in both Canada and the U.S., they're all being challenged within stocks right now, and that varies by the different supplier. So there is some need of just getting these retailers back in stock to their normal store levels. But at the same time, demand is still really strong. I think most people would say that they've cut back on promotional spend because supply has been tight. So I think that's another thing that certainly we expect to see as more inventory starts to show up at the store. We'll start seeing more promotions and trying to make sure that consumer continues to to come back in and shop. So we still feel optimistic about the back half of the year. We think that consumers' habits have changed permanently and that they will continue to be needing and using appliances and gifting more than they have in the past. And so we expect that demand to continue. And we still have some out-of-stocks to fill up as well.
spk04: And then this one final question for me, guys, in terms of the partnerships that you've announced, very interesting developments there. Is there anything you can share just on how the economics of these work? I mean, do you guys recognize 100% of the revenue and you pay it royalty, or does this revenue show up in that licensing revenue that you disclose in your SEC funds? Just trying to understand the potential magnitude of the impact on your top line if these partnerships really take off. Thank you.
spk03: Yes, so Justin, it's Michelle. And the two that we recently announced will behave differently. You know, for Clorox, it truly is a licensing agreement. So we will recognize all of the revenue there and pay a licensing fee similar to how we treat Wolf Gourmet and Chi. With HealthBeacon, it's a little bit more of a I want to say it's not defined as a partnership, but similar to that. We will be the take responsibility and own the inventory and sell it, so we will get the top line growth there. But we'll be sharing in the profits with them a little bit more evenly. So, you know, it won't be a licensing fee, but the profit will be split at the end of the day evenly with them.
spk04: Okay. Thank you for that, Michelle. And thanks again, guys. Best of luck over the back half of the year. Appreciate the time. Thanks. Thank you, Joseph.
spk05: If anyone wants to ask a question, please press star one. Speakers, I'm seeing no further questions in the queue. I would now like to turn the conference back to Greg Trapp for closing remarks.
spk01: Thank you. The second half of 2021, we're fortunate that demand for retail and commercial products remains strong. Longer term, we expect our strategic initiatives to drive revenue growth, operating profit margin expansion, and strong cash flow. We are a leader in our industry, and there is proven durable demand beyond the pandemic-driven surge we have been experiencing. Our strengths should enable us to maximize performance, including our broad portfolio of trusted brands, our comprehensive offering, our experienced team, our global infrastructure, our broad range of retail relationships across all channels, and our well-developed e-commerce capability. Our team is doing an incredible job for our customers and our company. Thank you again for joining our call today. This concludes today's conference call. You may now disconnect. Thank you for participating.
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