Hamilton Beach Brands Holding

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.

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.

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.