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.