This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Hello and welcome to the Hamilton Beach Brands Holdings Company Q4 2021 Earnings Call. My name is Charlie and I will be coordinating your call today. If you would like to ask a question during the presentation, you may register to do so by pressing Start followed by 1 on your telephone keypad. I will now hand you over to your host, Luanne Navan, Head of Investor Relations to begin. Luanne, please go ahead. Thank you, Charlie.
spk06: Good morning, everyone. Welcome to our fourth quarter 2021 earnings conference call and webcast. Yesterday after the market closed, we issued our fourth quarter 2021 earnings release and filed our 10-K with the SEC. Copies are available on our website. Our speakers today are Greg Trepp, President and Chief Executive Officer, and Michelle Mosier, Senior Vice President and Chief Financial Officer. Also participating in the Q&A will be Scott Tidy, 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 and our Form 10-K. 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'll turn the call over to Greg.
spk05: Thank you, Luanne. Good morning, everyone. Thank you for joining us. We're going to take the next few minutes to provide an overview of our performance for the fourth quarter of 2021, the full year 2021, and our prospects for growth in 2022. For our company, we see 2022 as a year of opportunity. We expect to grow our top line and our bottom line as we build on the progress we made on many fronts in 2021. Certainly the past few years have brought extraordinary challenges to our company, our industry, and our world. We've navigated some tremendously adverse external conditions. In 2022, we've dealt with the unexpected COVID pandemic as it spread across the globe. In 2021, we worked our way through the many negative effects of the pandemic on the global economy, including supply chain disruptions and inflation. If you add in the hugely onerous tariffs that were imposed on certain imports from China starting in early 2018, our industry has encountered a new crisis every year since our company became public in September of 2017. When you take all these external pressures into account, I could not be prouder of we're more grateful for our outstanding team. They have demonstrated exceptional agility and resilience for several years running. Our people have worked incredibly hard, tirelessly as well as effectively, to mitigate the impact of these external challenges. Our team has also risen to the occasion as we've managed through the execution of some very big internal investments. We have converted to a new ERP system, which was demanding in many ways, Now that it is in place, we expect it to provide significant benefits for years to come. We accomplished moves to new distribution centers in Canada and the U.S., which will support our growth in both the e-commerce and brick and mortar channels for years to come. Our new U.S. facility enabled us to expand direct-to-consumer shipping capabilities, which increases our ability to ship online orders from many retail customers. We did not move far from our former distribution center, and were able to retain much of our workforce. We are grateful to all of our employees who were involved in completing this move. Thinking about challenges in the past few years, we cannot leave out the difficult decision we made to close our kitchen collection business in 2019. The decision becomes even more well-timed after the events of 2020 and 2021 are considered. The pandemic seems to be waning. While supply chain constraints and inflationary pressures continue, They are expected to ease over time. We are certainly better equipped to deal with them while they endure. More importantly, I want to highlight the many successes we achieved in 2021 due to our investments in recent years. I'm very excited about the direction of our company. I want to focus now on our key accomplishments and plans. In 2021, revenue was the highest in our company's history. we realized significant progress on all of our strategic initiatives. Our initiatives for e-commerce, the premium products market, and the global commercial market delivered double-digit revenue growth. We signed two agreements in the fast-growing home health and wellness market. Under these agreements, we plan to introduce new products in the air purification and home medical categories in 2022. Let me delve into more details regarding the progress we made with our initiatives and our plans for additional growth. We made significant progress with each initiative in 2021 and are in a very good position to continue to build on the momentum. We believe each of our initiatives will provide growth in 2022. First, our goal to accelerate our digital transformation is going extremely well. The e-commerce channel represents a very strong and fast-growing part of our business. It enables us to connect directly with consumers through detailed product information, video, and digital marketing is a valuable way to help consumers understand the benefits and value of our products. In 2021, our total company e-commerce sales increased 22% and accounted for 38% of our total revenue. In our US consumer market, e-commerce accounted for 45% of our total revenue. We have a presence across multiple e-commerce platforms All of our nine brands are earning star ratings of 4.2 or better, and five of our brands are rated 4.5 stars or better. Our products receive favorable reviews from consumers, experts, and influencers. Hamilton Beach continues to be the number one brand in the U.S. e-commerce channel based on units sold. Our e-commerce capabilities have become increasingly sophisticated. We are continuing to invest in them. We're supporting growth in digital engagement with online marketing programs, expanding our direct-to-consumer distribution operation, and increasing our participation with pure play and omnichannel customers. Next, I'll discuss our goal to gain share in the premium market. Premium products account for approximately 40% of the U.S. small kitchen appliance industry's annual sales. We began to build out our product in 2014. It has grown to be a meaningful part of our business. Our premium products have higher margins than many of our other consumer products. In 2021, sales of our premium products increased 33% and accounted for 13% of total revenue. We generated significant sales increases for all of our premium brands. They include Westin, Wolf Gourmet, the Partesian Premium Cocktail Machine, SHE Premium Garment Care Products, and Hamilton Peach Professional Appliances. we introduced new products for every brand in 2021. We plan to further expand our presence in the premium market with continued new product development, digital marketing, and by pursuing additional licensing agreements and other collaborative arrangements. The Wolf Gourmet portfolio now covers 10 high-demand categories. The brand is expected to continue to grow in sales in 2022. For the Partesian premium cocktail machine, plans are in place to launch Generation 2 this year, This upgraded model will provide enhanced functionality. Line extensions are under development, including a commercial-grade model. Cartesian revenue stream includes the machine and an extensive and ever-expanding line of TricMix capsules. Achieve Premium Environment Care brand continues to grow as more people return to offices to work and engage in evening and weekend activities, including travel. We are introducing new products from our Western brand, which is targeted to gardeners and hunters, New items include updated meat grinder and slicer models, smokers, food dehydrators, and vacuum sealers. Our Hamilton Beach Professional line leverages our commercial products expertise for the benefit of home cooks. The product portfolio now includes 14 high-demand categories. The brand continues to gain new channel placements. We have a new brand we are adding to our premium portfolio that I will mention today. We recently launched a premium hand mixer for the Magnolia Bakery. Magnolia Bakery started in Manhattan's West Village a little over 20 years ago and has since become a global brand. The bakery has begun to market novelty items and baking tools carrying its brand name along with its line of cookbooks. They asked us to partner with them on a vintage-style hand mixer in their signature blue color. I can't help but suggest that for anyone who will be in the market for a Mother's Day gift in May, our mixer and a Magnolia Bakery cookbook are a great idea. Another initiative is to lead the global commercial market. Our commercial products sell at higher prices and have higher margins than most of our consumer products. Our revenue from commercial products increased 36% in 2021 and accounted for 6.2% of our total revenue. The global commercial business suffered a tremendous downfall in 2020 due to pandemic-driven demand softness as the food service and hotel industry suffered tremendous declines in business. It was great to see it rebound strongly in 2021. Our growth plans for this marketing and expanding customer relationships with regional and global restaurants and hotel chains. We also continue to invest in e-commerce, which is becoming increasingly important to the commercial products market. We expect our commercial business to grow significantly in 2022. Our newest initiative is to expand in the home health and wellness market. This initiative was added in 2021. As mentioned, we entered into two agreements that will enable us to increase our presence in this market. Our focus last year was on developing plans and new home health and wellness products we plan to launch throughout 2022. We entered the water filtration category late last year with our new Hamilton Beach AquaFusion electric countertop system. AquaFusion provides superior water filtration, fresh taste using a proprietary carbon block filter. We also offer flavor capsules, which provides a consumable revenue stream. AquaFusion is eco-friendly. Each filter eliminates 750 single-use plastic bottles. We've expanded our participation in the air purifier category through an exclusive multi-year trademark licensing and product development agreement with the Clorox company. We are introducing three new Clorox air purifier models and replacement filters in the first quarter of 2022. These include Median, and large room models and a tabletop model. We plan to launch additional new models later this year. The air purifier category is expected to continue to be strong given the benefits these machines provide to consumers' consumer concerns. We also entered the home medical market through an agreement with a company called HealthBeacon Limited. HealthBeacon is a leading developer of smart tools for managing injectable medications at home. Certainly the home medical market is newer to us and it offers than the others we are entering in the home health and wellness space. Let me provide an overview of what attracted us to this opportunity. The aging population is increasingly living with and managing chronic health conditions. Demand for personalized health care solutions is rising in lockstep. The need exists in younger demographics as well. Our product called the HealthBeacon HealthSmart ScrubSpin, powered by HealthBeacon, We entered 2022 with a new direct-to-consumer sales website for the system. We are in the process of adding retail distribution for online and brick-and-mortar sales, focusing on placements in pharmacies and relationships with the medical community to recommend the system to their patients. The system will provide revenue from the appliance sale and for monthly subscriptions that help patients manage adherence to their personal medication regimen using our technology in an app. Another initiative is to drive core brand growth. Even as we work to expand to new markets, we remain intently focused on accelerating the growth of our core brands, Hamilton Beach and Proctor Silex. They've competed successfully in our heritage North American marketplace for over 100 years. Innovation and new product development have always been the lifeblood of this business. During 2021 and 2022, we are introducing more than 100 new product platforms, many of them are for our two core brands. Core brand sales increased 6% in 2021. This growth reflects the success of new products, high-volume categories such as coffee, among others, and a repositioning of the Proctosolix brand to a simply better position. Increased digital marketing and optimizing existing products. And the Beach holds the top three market share in more than 25 categories. Finally, we have initiative to leverage partnerships and acquisitions. We have significantly increased our focus on this initiative. We prioritize opportunities that will provide entry into consumer or commercial markets where we can become stronger participants. We are actively engaged in the pursuit of additional collaborations or acquisitions that should drive growth in all of our markets in 2022 and beyond. To quickly summarize, all of our strategic initiatives provide exciting future growth opportunities and potential. We expect to build on the significant progress we made in 2021. Now I'll turn the call over to Michelle.
spk07: Thank you, Greg. Good morning. I'll comment first on our fourth quarter 2021 results compared to the fourth quarter of 2020 and then discuss our outlooks. As a reminder, the 2020 fourth quarter is a difficult comparison as our revenue was unusually high. This was due to a significant amount of order backlog fulfillment that shifted from the third quarter of 2020 during a cutover to our new ERP system in the U.S. Net sales were $197.8 million compared to a record $234 million in the fourth quarter of 2020, a decrease of 15.5%. In addition to the difficult comp, we encountered persistent supply chain congestion which hindered our ability to fully satisfy retailer and consumer demand. Orders were strong in every market, and our products sold well at retail. However, our third-party manufacturers in China struggled to produce our elevated order levels, and the ongoing challenges with securing containers, coupled with the long ocean transit time, floated the movement of finished goods from China to the US, delaying the arrival of inventory. In spite of the overall decline in revenue, we were very pleased to see that the momentum in the Latin American market continued into the fourth quarter and revenue for this market more than doubled. In the global commercial market, revenue also continued to grow and increased 13.9%. Both markets have rebounded from pandemic-driven demand softness in 2020. The revenue decreases compared to prior year occurred in the U.S. Canadian, and Mexican consumer markets. As Greg mentioned, we continue to make progress with our initiatives as demonstrated by sales of our premium brand products increasing 24.6%. Our e-commerce sales were flat year over year, but as a percentage of fourth quarter sales, e-commerce sales grew to 47.7% compared to 40.7% in the prior year. The pandemic drove a significant increase in online shopping in 2020, and in 2021, consumers returned to a higher level of shopping in stores, so we're very pleased with our e-commerce sales level. Turning to gross profit, our margin contracted to 21.8% compared to 23.3%. This was primarily due to less favorable product and customer mix. We implemented price increases in the second half of 2021, which offset higher product and transportation costs in the fourth quarter. Our selling general and administrative expenses decreased about 3% to $25.1 million compared to $25.9 million. The decrease was primarily due to lower outside service expenses and lower overall employee-related costs. Operating profit was $17.9 million compared to $28.4 million. and net income from continuing operations was $12.6 million, or $0.90 per diluted share, compared to net income of $19.4 million, or $1.40 per share. For the year into December 31, 2021, cash flow before financing activities was $6 million, compared to a use of cash of $31.7 million in 2020. Changes in net working capital resulted in the use of cash of $1.5 million in 2021 compared to $66.9 million in the prior year. The benefit of the lower cash use for net working capital was partially offset by capital expenditures in 2021 of $11.8 million compared to $3.8 million the year before. The 2021 amount included our investment in our U.S. distribution center. This was partially offset by $4 million in lease incentives and tenant improvement allowances classified as cash provided by operating activities. Networking capital increased by $4.3 million as trade receivables decreased by $25.2 million due to the timing of receipts and lower sales. Inventory increased by $9.4 million, primarily due to supply chain constraints that delayed arrival of some inventory to late in the fourth quarter that did not provide enough time for us to turn it for the holiday season. Accounts payable decreased by $20.1 million due to timing. Net debt at December 31st, 2021 was $95.7 million compared to $95.9 million at December 31st, 2020. Next, let me turn to our outlook. In 2022, overall demand for small appliances is expected to remain above pre-pandemic levels, although significantly softer than in 2021. Industry expectations are that the pandemic lifestyle likely will not shift entirely back to pre-pandemic modes. As the pandemic wanes, we will monitor closely any shift in consumer needs and behavior away from the home. The global commercial market is expected to continue to rebound strongly from the pandemic driven demand softness. I will note that this view does not take into account any potential negative impact on the global economy of the war in Ukraine. Depending on how things evolve, business conditions could change. For the full year 2022, we expect that continued progress with our strategic initiatives will enable us to deliver modest revenue growth compared to 2021. Our core business is solid. We expect to continue growth in the premium and global commercial market, and we expect to begin to benefit from the sale of new products in the home health and wellness market. For the first half of 2022, we expect revenue to decrease modestly in comparison to a very strong first half of 2021. and as issues related to product availability and supply constraints continue. For the second half of 2022, we expect revenue to increase moderately. This outlook includes the benefit of new products for the home health and wellness market that will launch throughout the year and the continued strength of our core products. We have planned for supply chain constraints and rising product and transportation costs to continue through this year. Timing for any easing of these pressures remains uncertain. To mitigate rising costs, we have implemented pricing initiatives that are becoming effective during the first quarter of 2022. We can plan to continue to adjust prices as necessary to offset rising costs, while also remaining competitive with retail customers and consumers. We may not be able to cover all future cost increases with additional pricing initiatives. Even amid these pressures, we will continue to focus on managing margins and working capital within historic ranges to the fullest extent possible. We expect full-year operating profit to increase, mostly driven by the higher revenue and also due to a modest improvement in gross profit margin. We reported in our 10-K that at December 31, 2021, we had $1.9 million of accumulated other comprehensive losses related to our beryllium subsidiary, which will be recognized in net income upon its substantial liquidation. This event is expected to occur in the first half of 2022. That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.
spk00: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. And if you change your mind, it is star followed by two. Our first question comes from Justin Kleber of Baird. Your line is open. Please go ahead.
spk02: Hi, everyone. Good morning. This is Zach Beckham for Justin. Thank you for taking our questions. Maybe to start off, can you discuss a bit about your relationship with your largest customer? We noticed they accounted for 28% of the business this year versus 35% in 2020. I'm just curious if there have been any changes on that front.
spk05: Hey, good morning. This is Greg, and I'll let Scott follow up on this. So I think we have a great relationship with really across our entire portfolio of customers, and we've got tremendous growth going on with some, and some will go up one year and down another year. So really the reality is we've got a mixed shift going on from across divisions, but then from a customer standpoint, We've got strong growth in some areas, such as e-commerce, and a little slower growth in some other areas. So really, I think it's not an indication of weakness in a particular customer. It's really just short-term ups and downs. And over time, we feel like we're in a really good position with all of our top customers. I don't know if I said that the way you would agree. Okay.
spk01: Yes, Greg, I do agree. I think there's certainly a mix between the different countries where we have our largest customer and some of their different outlets. And so there has been some shift there, but overall our distribution points are still very strong. Some of them had stronger sales in the 2021 time period versus the prior year, and others were a little bit softer. So I think we just kind of moved a little bit with them. And then we had some other retailers in our portfolio that just got bigger. And because of some of our strategic initiatives, some of these other customers just became a bigger part of our portfolio.
spk05: Okay. I think it's a good point Scott mentioned. When we list our top customer, it can be many different banners of that one customer across really our global platform. So there might be one banner in one country that might also throw the mix off a little bit. But I think Scott answered it very well.
spk02: Yeah, no, gotcha. That makes sense. Thanks for the call. Looking at your commercial business, it sounds like the recovery there continued nicely during the fourth quarter. And you guys ended the year with nearly $41 million in sales there. Can you talk a bit about how supply chain constraints are impacting that business in particular? While it grew nicely with 36% growth in 2021. How much stronger do you think it could have been? And then, Greg, going back to your comment about significant commercial growth anticipated in 2022, do you think the commercial business can get back to pre-pandemic levels next year that you guys saw in 2018, 2019?
spk05: So on the supply chain, it is definitely affecting all of our businesses. Getting product produced was one ongoing challenge. as our suppliers struggle with all sorts of things related to production and demand, and then just getting it to where it needed to be on time is a factor. So definitely supply chain hampered what we could have sold in commercial as well as our entire portfolio, the U.S. consumer, Canada, Mexico, et cetera. So I think we definitely missed out on what could have been higher results. I think as we go into 2022, The demand from those customers, the commercial customers, is still very, very strong. We have a solid backlog. So as soon as we can get product produced to them, we have orders in hand. So how that will play out as the year goes on, right now that's how it stands in the first half of this year. Certainly some parts of the world are slowing down here because of what's going on in Ukraine and Russia. But overall,
spk02: demand is very very strong and as long as we can produce products and get them there we expect continued growth in 2022. gotcha yeah that's that's good to hear um shifting gears to your guidance for next year i know michelle you mentioned your outlook includes a modest improvement in gross margin which seem to contribute to operating income growing faster than sales in 2022 As we think about the magnitude of improvement there, do you think you can achieve a rate similar to the 21.8% level at which you exited the fourth quarter of this year?
spk03: Yes. Yeah, Justin, I think – sorry, Zach, I apologize.
spk07: Don't worry. You know, I think – no, no, we did have some – significant costs thrown through the distribution chain this year, particularly with outbound transportation as well as inbound transportation. So, you know, we are in hopes that we'll get back into that normal range of operating profit margin next year. But again, all of it does depend on, you know, what we see in the economy. As we mentioned, we're taking some price increases in the first quarter, and if we can keep up with that throughout the year, then we should be back to where we want to be.
spk02: Sure, that makes sense. And just to follow up on that point, the last question we had was around pricing. As you mentioned, that round of price increases untapped in the first quarter. Can you give us a sense for the magnitude of these compared to your previous price actions taken in the second half of this past year, just given that the cost pressures being across products and freight have escalated? And then on top of that, have you heard of any unit elasticity from your vendor partners in regards to how demand has fared?
spk05: Scott, you want to go ahead and take that one?
spk01: Sure, I can start on that. So, yeah, if you look at the price increases, we had to take several increases in 2021 to offset both the cost coming from our suppliers and the transportation cost. And as we kind of project, we haven't quite finalized what we think will be in the first half of this year, but we're starting to look at our new contract rates on containers and we're working with our suppliers but i do think you know all the retailers that we're dealing with are having the same challenges we're all bringing most of our product from asia and so our increases are in line with the competitive competitive market and you know it seems like our suppliers are certainly understanding that they have to deal with the same types of challenges getting in containers uh so you know we'll definitely be continued to as we get these contracts negotiated and new pricing We feel very effective in passing these on in a timely manner to try to mitigate the margin erosion.
spk05: Zach, just building on what Scott said. Scott and his team and the commercial team have done a great job working closely with retailers to figure out what's best for the retailer, for us, and for consumers. That all went into effect in the first quarter, as Michelle said. Scott's also referencing we're all going through contract negotiations on container rates and we'll be working with our suppliers soon on back half cost. So there'll very likely be more price increases mid-year tied to whatever the cost position is. Again, we'll do the same thing. We'll figure out what it's going to impact on our businesses, work with our retailers to implement it in a way that works for everybody. So my assumption is it will be continued price increases going to the back half of 2022.
spk02: Okay. Yeah, great. Makes sense. Well, thank you all very much. We appreciate your time and congrats on the record year and best of luck in the year ahead.
spk05: Thank you. Thank you, Zach.
spk00: As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. There are no further questions on the line at this time, so I'll hand the call back over to Greg Trepp for any closing remarks.
spk05: Thank you. We appreciate the opportunity to share with you today what we believe are strong prospects for future growth. As we've always said, our company is focused on long-term value creation. We are fortunate to be a leader in an industry with durable demand. We also believe that new cooking habits developed during the pandemic will endure, especially for young people. Many of you have been shareholders since our spinoff in 2017. I thank you for your confidence in our ability to deliver our commitment to build long-term shareholder value. That concludes our report for today. Thank you again for joining our call.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your lines.
Disclaimer