Hamilton Beach Brands Holding

Hello everyone and welcome to the Hamilton Beach Brands Holding Company Q3 2021 Earnings Conference Call. My name is Charlie and I'll be the coordinator for today's call. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I will now hand over to your host, Luanne Nablan, Head of Investor Relations to begin. Luanne, please go ahead.

Good morning, everyone, and welcome to our third quarter 2021 earnings conference call and webcast. Yesterday after the market closed, we issued our third quarter 2021 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 Moser, Senior Vice President and Chief Financial Officer. Also participating in the Q&A will be Scott Tidey, 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, R10Q, and our annual report on Form 10-K for the year ended December 31, 2020. The company disclaims any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. And now I will turn the call over to Greg Trepp.

Thank you, Luann. Good morning, everyone. Thank you for joining us. It was great to see the strong market demand momentum that we experienced in the first half of this year continue in the third quarter. We were especially pleased that our global commercial market continued its robust rebound from last year's pandemic-driven weakness. Our revenue more than doubled as the food service and hospitality industries continued to recover. Our international consumer markets also continued to rebound strongly. In our Latin American market, revenue more than doubled and in our Mexican market, revenue increased. In the U.S. consumer market, where strong demand continued, revenue increased. Last year's low revenue was due to temporarily decreased shipping volume during a cutover to a new ERP system, and revenue shifted into the fourth quarter of 2020. Overall, our brands are performing well across many measures, including sales, placements, and star ratings. We're pleased with the retail placements and promotions that we have secured for the holiday selling season. We continue to experience strong demand. However, challenges throughout the global supply chain have hampered our ability to fully meet demand. We're fortunate to have an experienced and talented team to lead us as we strive to maximize our ability to navigate these challenges. Our team has worked tirelessly and executed well. I'm deeply grateful for everyone's hard work, dedication, agility, and resilience. The main industry-wide challenge to fully satisfy the demand is the ability to source and transport products in a timely manner and at a reasonable import cost. Throughout this year, we have taken many steps to mitigate the supply chain challenges, including pricing actions, negotiating with carriers for container space and rates, working with our suppliers to minimize constraints, and collaborating with our retail customers. We were pleased that pricing actions that went into effect in the third quarter helped restore our gross margin into its historical range compared to where it was in the second quarter of this year. Product and transportation costs are expected to continue to rise. We plan to balance the need to cover rising costs with the need to remain competitive. Depending on the rate of continued cost escalation, price increases may not fully offset cost increases in the short term. We remain focused on importing all the inventory possible to meet the demand that we are seeing from both brick and mortar and e-commerce retail customers. We feel particularly confident about the strength in our demand in the U.S. consumer, Latin American consumer, and global commercial markets. Our largest obstacles to maximizing our business continue to be the supply chain issues, which we expect to persist at least through the first half of 2022. Our suppliers continue to struggle to keep up with the demand due to power outages and sub-supplier issues, among others. We believe we are managing this challenge well, and we have a very capable team in the U.S. and on the ground in China to work directly with our suppliers. The main transportation challenge is the ability to secure ocean carriers at a reasonable cost. Like others, we have a contracted container rate, but like every company, we have not been able to secure all of our needs at the contract rate. We're balancing the need to manage short-term margin while ensuring we meet customer commitments and retail and commercial demand. Transportation lead times also have increased. We believe we have pivoted well, and we've adjusted our order patterns accordingly. I'd like to now discuss the progress we're making with our strategic initiatives, which are designed to increase revenue, expand margins, and generate strong cash flow over time. expanding our e-commerce leadership and our digital transformation is a key priority. We are the market leader and continue to invest to ensure our leadership continues. Year-to-date sales through the e-commerce channel accounted for 33% of total revenue. We continue to invest in our e-commerce capabilities, including digital marketing programs, expanding our direct-to-consumer distribution operation, and increasing participation with pure play and omnichannel customers. Achieving a significant position in the higher priced, higher margin premium market is also a key focus. Sales of our premium products increased 35% in the quarter. Our premium brands have been well received by consumers, including our Wolf Gourmet countertop appliances, which have been hard to keep in stock. This year, we introduced a true temperature kettle that has been well received. The sale of our cheap premium garment care products has rebounded nicely this year as more employees have returned to offices and pressing close is once again a necessity for many people. Our Hamilton Beach professional brand continues to gain traction and we continue to introduce new products in a number of categories to provide consumers with commercial grade quality at home. The Bartesian premium cocktail machine remains ever popular. We have developed this generation two model which includes a number of updated features, and our partner continues to add new flavors to the extensive line of cocktail capsules. For the premium market, and also for the commercial market, we are focused on expanding our leadership position globally. We hope to continue to invest in new product development, further strengthen customer relationships, and enter additional strategic partnerships and licensing agreements. In 2021, we added a new growth initiative, which is to expand our presence in the large and fast-growing home health and wellness market. In the second quarter, we announced a partnership with a Clorox company to launch a new line of air purifiers under the Clorox brand name. We also announced a partnership with Health Beacon Limited, making us the exclusive marketer and distributor of a smart injection care management system in the US and Canada under the new brand name Hamilton Beach Health. For the Clorox product launch, our marketing and sales teams have spent the past few months presenting the new line of air purifiers to retailers, and it has been well received. We feel confident that our marketing and distribution capabilities and our retail relationships combined with the Clorox brand name and its association with cleanliness positions us well for success in this market. In January, we plan to launch a Clorox large room air purifier in a tabletop air purifier. In February, we will add a medium room air purifier. Later in the spring, our Alexa smart air purifiers are scheduled to launch. Turning to our partnership with HealthBeacon Limited, we are a leading developer of smart tools. I'm sorry, 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. If they needed a partner, to expand quickly and efficiently in the US and Canada, we were very excited to become their partner. HealthBeacon developed the world's first and only FDA-cleared SmartSharps bin, which intelligently helps patients with a broad range of treatments for chronic conditions. The bin, in combination with an app, the total system provides the medication management reminders, tracks adherence, and provides for a safe and convenient disposal of used sharps. Plans are on target to begin online distribution in the fourth quarter of 2021 with a new direct-to-consumer website. Also in the home health and wellness market, we have launched our first product in the water filtration category, AquaFusion. It's available now on Amazon, and we're in the process of rolling it out to other online retailers. AquaFusion is an electric countertop appliance. It provides superior water filtration and fresh taste using a proprietary carbon block filter. We also offer capsules, which provides a consumable revenue stream. AquaFusion is eco-friendly, which each filter eliminates 750 single-use bottles. We expect our expanded participation in the home health and wellness market to add to our momentum in 2022. We're working to further expand our presence in the space and have a number of discussions underway. We hope to make additional announcements, including programs under our Hamilton Beach Health brand. Even as we work to expand in new markets, we remain intently focused on accelerating the growth of our flagship brands Hamilton Beach and Proctor Silex in our heritage North American market. Innovation and new product development have always been the lifeblood of this business, and we're excited about a number of new products for these brands. For the industry's largest category, coffee, we continue to expand our Flex Brew single-serve coffee line. Our next generation FlexBrew machine delivers faster brewing and offers a removable multi-serving reservoir. We will be rolling out several versions of the new FlexBrew 3.0, as well as a variety of single-serving brewers. We've also recently launched the FlexBrew Universal, which allows consumers to brew coffee using K-cup pods, their favorite ground coffee, or Nespresso-style pods. Outside of single-serve coffee, we continue to see increased consumption of cold brew coffee. We recently launched the Hamilton Beach Rapid Cold Brew and Hot Coffee Maker. This is an innovative new product that allows consumers to make a cup of cold brew coffee in under six minutes and has the flexibility of also being able to brew traditional hot coffee. Growth continues in the air fryer toaster oven category and is a significant focus for our product development teams. We continue to build our lineup of SureCrisp air fryer toaster ovens. Recently, we launched a handle-to-beach professional model. We've also recently launched innovation in one of our heritage categories, hand mixers. Our new patented EasyClean beaters provide a smooth, closed beater surface, which prevents clogging and makes cleanup much easier. We're also rolling out a new Proctor Silex line, which offers superior product performance and durability. In summary, demand for our retail and commercial small appliances remains strong. Our brands and products are selling very well. Our focus is to ensure product availability. We're leveraging all of our resources and expertise, as well as our relationships with suppliers, customers, and freight vendors to meet demand as we continue to execute well in the face of persistent challenges and work to deliver a strong finish to the year. I'll now turn the call over to Michelle.

Thank you, Greg, and good morning everyone. Let me review our third quarter results compared to prior year. Total revenue increased 41.8% to $156.7 million compared to $110.5 million. Greg reviewed the performance by market, so I'll just reiterate that we were very pleased to see the rebound in our global commercial Latin American and Mexican markets continue. and we are also very pleased that demand remains robust across all of our markets. Gross profit margin was 21.2% compared to 21.5% in the prior year due to significantly higher transportation costs. As a result of the disruption and congestion in several areas of our supply chain, primarily from China where our products are manufactured, we experienced increased freight and container costs, as well as additional carrier storage charges. There was also an increase in labor costs for our warehouse personnel. Selling, general, and administrative expenses remained flat despite $1.6 million in incremental expenses related to the relocation of our U.S. distribution center. Outside services decreased by $900,000. Employee regulated costs were lower overall, but had offsetting factors. SG&A benefited by a decrease in our accrual for incentive compensation as a result of the decline in our stock price, and this benefit was partially offset by an increase in salaries and benefits. As a reminder, $700,000 of non-recurring expense related to patent litigation was included in the third quarter of 2020. Operating profit increased to $7.4 million compared to an operating loss of $2.4 million. Interest expense increased by $300,000 due to higher average borrowings outstanding under our revolving credit facility. While average borrowings were higher, our weighted average interest rate for the period declined. Net income from continuing operations was $5.7 million, or 41 cents per diluted share, compared to net loss from continuing operations of $2 million, or 15 cents per diluted share. Our cash flow before financing activities was a use of $13.2 million for the nine months ended September 30th, 2021, compared to a use of $8.8 million last year. Capital expenditures were $9.1 million compared to $3.1 million. The current year amount includes our investment in our new distribution center, which is partially offset by lease incentives and tenant improvement allowance classified as cash provided by operating activities. As we've discussed the past few quarters, we began a planned relocation to our U.S. distribution center during the second quarter from Olive Branch, Mississippi to nearby Behalia, Mississippi. The move continued in the third quarter. It was completed on time, is now fully operational, and running efficiently. We were fortunate that we accomplished such a complex move during this challenging environment, and that we finished ahead of the holiday selling season. In the new facility, we have expanded direct-to-consumer shipping capabilities, which increases our ability to ship online orders for many retail customers. We have a great team in Mississippi and were able to retain much of our workforce after the move. We're very grateful to all of our employees who were involved in completing this move successfully. They worked incredibly hard and delivered an outstanding result. Turning to working capital, Networking capital increased $57.3 million. Trade receivables increased by $22.6 million, primarily due to increased sales. Accounts payable decreased $61.1 million. And inventory increased by $26.4 million, driven by the increased sales, partially offset by longer in transit time. At September 30, 2021, net debt was $113.5 million, compared to $69.6 million at September 30, 2020, and $96 million at December 31, 2020. The changes in net debt are attributable to the changes in net working capital. We amended our credit agreement in September. Among other changes, the amendment increased the facility from $125 million to $150 million, amended the pricing grid, and increased eligible inventory included in the borrowing base. Let me now turn to our outlook. The continued uncertainty surrounding supply chain and cost pressures, which Greg discussed in detail, limits our near-term visibility. For that reason, we have determined it prudent to refrain from providing a definitive outlook until the current volatility stabilizes. As a reminder, in the fourth quarter of last year, revenue shifted from the third quarter as we filled order backlogs related to the lower shipping levels in the third quarter, which resulted from the cutover to our new ERP system. Therefore, we expect the fourth quarter 2021 revenues could potentially be lower than the fourth quarter of 2020, depending on the availability and timing of supply. That concludes our prepared remarks. We will now turn the line back to the operator for Q&A.

Thank you, Michelle. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. Our first question comes from Dustin Klaber. Dustin, your line is now open.

Hey, everyone. Thanks for taking the questions. The first one we had was on revenue. And if you look historically, the third quarter tends to build around 15 to 20% from 2Q. This year, your revenue rose about 1% sequentially. So the question is, is it fair to think about that delta versus the historical trend as demand that has just went unfilled given inventory and supply chain constraints? Or is there an internal view you guys have just on the potential impact of revenue from these bottlenecks throughout the supply chain?

Hey, Justin. I'll start off with that, and Scott can add. Thanks for joining us. Good morning. So good question. I think what sort of historically outside of these current conditions, we often have volume move pretty dramatically between the third quarter and fourth quarter. If a retailer has a big promotion or we do some shipping DI one year versus not DI the next year, direct import, You can see something move really just from September to October, which could cause some more fluctuations. So we tend to look at the back half as a group. But your point is well taken. As you compare to second quarter, it's a little different trend here than the usual history. I think what we've seen is demand is real strong. Product definitely is taking longer to get here. And we are working really well to get as much inventory as we can, but it really is, you know, you're pushing hard to get it here, get it off the ships and rail lines and turn back to customers. So I would say we feel good about how strong the demand is through the third quarter into the fourth quarter. We have internally a wide range of potential numbers that we would deliver depending really on supply. The demand is there. So I think we just sort of felt like it's important to demonstrate or communicate the fact that it could be a little lower than last year because last year's fourth quarter was pretty strong. But also, if we can get to product and get it here and get it turned, we could do better than that. It really just depends on how things play out that way. Scott, if you have any other questions.

Yeah, Justin, this is Scott. I just had a couple things. In the second quarter, You know, as Michelle alluded, we were switching warehouse distribution centers. So we did try to shift some volume early to get that into some of our retail partners as we knew we were going to be shifting distribution centers. So that would have increased some sales. And we were also still trying to, you know, we saw the Latin America market and the commercial markets growing. We were still trying to fill up some of those distribution centers from some of our partners. So it kind of even things out between the second and third quarter. But I think it's really back to just the timing perspective of when we're getting goods in from China and when we're able to fulfill. The one other thing was is Prime Day did shift from the third quarter this year in the U.S. to the second quarter. And that was a timing difference. So that also kind of shifted some of the volume.

That's great, great perspective. Thank you for that. I guess as you look across the retail channel, how are you feeling about your in-stock positions relative to your primary competitors as we approach the holidays? And then just any sense on market share and how that's been trending for you guys? Yeah, this is Scott.

So a couple things there. I think that in general, just in looking in the small kitchen appliance segment, I think there's a number of suppliers trying to deal with the shortages that are coming from product out of China. It's in different pockets. Sometimes it's related to components. Sometimes it just seems like there's a little bit longer transit time. But from what we hear from our retailers, we feel like we're doing as well, if not better, than some of the other suppliers out there, and that we certainly are in a better position than we were prior to this quarter. and uh and catching up there so you know overall i think you know i think we're we feel good we're not you know we're still chasing it as greg alluded you know we're trying to get things in as quickly as possible the transit times have been longer uh you know we're we're trying to you know trying to make sure that we're um servicing our retailer partners sometimes it's hard to to you know to um to get those you know promotional volumes in at the quantities they want but we're working really hard to try to reduce those transit times and make sure we're servicing our customers

Yep, no, that makes sense. Shifting gears to the margins and nice progress here during 3Q, and you mentioned the pricing actions that were implemented across the summer. I mean, were there any other factors you'd point to, whether that's a mix of products or customer mix that helped you on the gross margin front, or was it really just a function of these price increases?

As always, there's a lot of things that go into it, so mix it definitely plays a role. And the pricing action was really the biggest factor. We had pricing that went in, as we've mentioned before, over several months. And as the quarter built or went along, that pricing really kicked in in a bigger way each month. And that then therefore positions us for the fourth quarter, too. We're going to see, we did pay for some premium containers. We have contracted rates, so that covers the majority of our needs. We definitely paid for some contract rates. That's going to sort of work its way through the P&L over the next quarter or two, but that will benefit us on the revenue side. So I think there will probably be some up and down on the margin here as we get through the holiday season, but we priced accordingly. Tad Piper- question is, well, you know, as each month goes by, how will the mix along with these premium containers. Tad Piper- You know, along with the pricing across the board roll up and come together, so I think I think we're. Tad Piper- I think we've got all covered, but there's a lot of moving parts here to be sure that we we end up where we think we're going to be by the end of the end of the year.

Yeah, for sure. A lot of moving a lot of moving pieces. I mean, Greg, if you just think about the general supply chain bottlenecks, you know, you mentioned in the prepared remarks, product and transportation costs still expected to rise in 2022. But are you guys seeing any or at least starting to see any signs that were, you know, maybe at the point of peak pressure or peak congestion across the supply chain?

That's a really good question, Jason, Justin. I think the way I articulated it some of the other day was I think it's stopped getting worse, and there's a few signs that it's getting a little better, but it's been a matter of weeks versus anything longer, so it's really hard to tell what it's going to take back off again. And I'm thinking more of sort of broadly speaking. Certainly, we have containers that are stuck somewhere here or there, or we have a product that's a or scrambling on in particular, and some things that are in really good shape. But it seems like it's stopped getting worse. And I think with, I mean, you know so well from everyone you talk to is, we've got Chinese New Year coming up, which is early February. We have the Olympics going on in China in February. And so will this be a little bit of a lull before when scrambles get product out of China before that happens? Hard to say. But right now, I think we've seen it where it's, It seems to have, showing a few signs, but again, we're in a really, really bad place. So it's not getting worse when you're in a bad place is different than it's gotten better. And that's the hard part, which is, yeah, it plays out here. Yeah.

No, I appreciate that. And just last question, you know, bigger picture on the, you know, the operating margin goal the company has had out there. kind of moving to that 9% to 10% range, if you think about bridging the gap between where you sit today and that long-term goal, is it really just revenue growth and scale benefits that get you moving in that direction, into that kind of high single-digit operating margin target?

Yes. Revenue growth is a big part of it. We think we can keep our expenses kind of growing at a much slower pace than the top line. Scott talked a lot about margins. We've got to keep the margins in our historical range. Again, there might be some quarter to quarter up and down, but if we can get in the low end of the range, we're in great shape. We think we can go to a little bit higher when some of these categories like the premium segment and commercial kick in, but we're not counting on that. So it really comes down to controlling our costs while we get revenue growing at a faster clip, which I think we've got a lot of good things going for us. So we feel really good about where we're going. But clearly the volatility here in the short term complicates that. But we think over time we seem to be heading in a good direction. All right.

Well, appreciate all the color and best of luck guys over the fourth quarter. Take care.

Thanks so much. Thank you for your questions.

Ladies and gentlemen, as a reminder, if you wish to submit a question, please press star followed by one on your telephone keypad. At this current stage, we have no further questions, so I'll hand back over to Greg Trepp, Chief Executive Officer of Hamilton Beach Brands Holding Company, for closing.

Thank you. We are fortunate to be a leader in an industry with both strong pandemic-driven demand, as more people are spending time in their homes and durable long-term demand driven by favorable demographic trends with millennials and boomers. We also expect our strategic initiatives to drive revenue growth, operating profit margin expansion, and strong cash flow over time. That concludes our report for today. Before starting off, I'd like to wish you all a wonderful holiday season. Thank you again for joining us.

Thank you all for joining today's call. You may disconnect your lines and have a lovely day.