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spk00: and thank you for standing by. Welcome to Hamilton Beach Brands Holding Company Q1 2022 Earnings Call. At this time, all participants are in the 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. If you require any further assistance, please press star 0. I would now like to turn the conference over to your first speaker today, Luan Nebhan, Head of Investor Relations. Please go ahead.
spk01: Thank you, Chris. Good morning, everyone. Welcome to our first quarter 2022 earnings conference call and webcast. Yesterday, after the market closed, we issued our first quarter 2022 earnings release and filed our 10Q with the SEC. Copies are available on our website. Our speakers today are Greg Trapp, President and Chief Executive Officer, and Michelle Moser, Senior Vice President and Chief Financial Officer. Also participating in the Q&A will be Scott Tyee, 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 reference and uncertainties is available in our earnings release and our annual report on Form 10-K for the year ended December 31, 2021. The company exclaims 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.
spk03: Thank you, Luann. Good morning, everyone. Thank you for joining us. We're going to take the next few minutes to provide an overview of our performance in the first quarter of 2022 and our outlook for the year. We are pleased that revenue was in line with our expectations, down slightly in the first quarter. We said previously that industry demand would be slightly softer than 2021, mostly due to the comparison to stimulus spending last year. Additionally, we comped a record quarter last year which also was significantly higher than our historical average. Lower sales volume was partially offset by pricing actions that became effective during the quarter. Our price increases enabled us to offset a significant amount of increased transportation and product costs. As I discussed during our third quarter 2021 call, like all importers from China, in the second half of 2021, we faced the challenge of securing enough ocean shipping containers to move product from China to the US at contract rates. We elected to secure a certain number of containers at premium rates in order to meet customer commitments and consumer demand for the holiday selling season. Persistent supply chain constraints resulted in the delayed arrival of some inventory, a portion of which turned in the first quarter of 2022, affecting short-term margins. Our 2022 pricing strategy covered our ongoing transportation and product costs, and we also expected these premium spot containers to be a pressure in the first half of 2022 when we communicated our outlook. More of the impact hit the first quarter than being spread out over the first half, so we think the second quarter pressure from these spot containers will be behind us. We were also impacted by geographic mix. Michelle will cover that in a moment. When you add it all up, We believe this unusual first quarter margin pressure is not an ongoing issue for us based on today's product loss. Our team has worked diligently and effectively to recover as much as possible of the prior year losses associated with the unauthorized transactions by former employees and our Mexican subsidiaries. In the first quarter of 2022, we recovered $10 million from a crime insurance policy. It is very gratifying to be able to recover this value for the company and our shareholders. Despite the challenges related to inflationary pressures and supply chain constraints, our team has done an impressive job keeping our business on track and moving forward, enabling us to satisfy the needs of our customers. I am delighted by how effectively our operations, sales, and distribution teams are working together as they manage through some of the most challenging times ever in recent memory. For our teammates, we implemented a return to office plan in March that is designed to balance the needs and desires of our employees with the needs of our business. We believe we have implemented a plan that combines the best of our pre and post-COVID environment. We are working to build on the many successes we achieved in 2021 with our six strategic initiatives and believe each one will provide growth in 2022. These initiatives support our overarching goal of long-term value creation. Four of our initiatives are focused on expanding our presence in markets where we have the opportunity to increase the sale of our higher-priced, higher-margin products. These include premium, commercial, and home health and wellness markets, as well as our core market that focuses on Hamilton Beach and Parque Solix brands. The other two initiatives support our growth plans in all markets. These include accelerating our digital transformation and leveraging partnerships and acquisitions. Let me briefly discuss each one. Our newest initiative is to expand in home health and wellness, a fast-growing multi-billion dollar market. This initiative was added in 2021. We are currently focused on air purification, water filtration, and home medical categories. During the past year, we took many steps to prepare for the introduction of new products in these markets. In the first quarter, we announced progress in three key areas. We've introduced the first products in a new line of premium air purifiers under the Clorox brand name and replacement filters. This product launch is part of an exclusive multi-year trademark licensing agreement we have with the Clorox company. Our new air purifiers all have true HEPA filters. Currently, large room and tabletop models are available. Both models have received favorable reviews and have 4.9 star ratings. We have developed a robust digital marketing strategy to build awareness of these new products in a category and to drive sales. The spring allergy season supported sales in March and April. We anticipate additional sales to be generated as consumers try to deal with the difficulties of the summer wildfire season and as we build awareness. Further, we have scheduled additional launches in the coming months. New models that will launch yet this year include a medium room size and three connected technology models that use voice-integrated services. We entered the home medical market through an exclusive multiyear agreement with HealthBeacon, a leading developer of smart tools for managing injectable medications at home. Under the agreement, we're the marketer and distributor of the system in the U.S. and Canada. The system includes a countertop appliance that serves as a sustainable way to store used needles for recycling. The appliance is supported by a companion app that assists patients in managing adherence to the personal medication regimen. In March, we announced the US launch of the SmartSharp Spin from Hamilton Beach Health, powered by HealthBeacon. We plan to launch the system in Canada next year. We entered into an exclusive multi-year trademark licensing agreement with Brita and plan to launch a new line of countertop water appliances later this year. Gaining share in the premium market is a significant focus for our team. Revenue from our premium products grew 13% in the first quarter. Sales of the Bartesian Cocktail Machine and Sheed Garment Care products were the major contributors to the growth. We also generated sales increases for our Wolf Gourmet and Hamilton Beach Professional brands. We plan to further expand our presence in the premium market with new product development, digital marketing, and by pursuing additional licensing agreements and other collaborative arrangements. We expect to generate additional sales growth of our Wolf Gourmet countertop appliances brand in 2022. Our newest Wolf Gourmet product, the True Temperature Kettle, is selling well. For the Bartesian 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, which we plan to introduce in the coming months. Recently, Aramark Sports Entertainment announced that it has installed the Bartesian cocktail-making appliance and luxury suites at several baseball stadiums. Sales of our cheap premium garment care brand products are growing. New products on the line include a mini iron and handheld steamer. We're introducing many new products for our Western brand, which is targeted to the 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. New HB Pro products include a programmable coffee maker, air fryer ovens, hand and stand mixers, and a cast iron griddle. Our initiative to lead in the global commercial market provides an outstanding opportunity for the sale of higher priced, higher margin products, while meeting important customer needs in the food service and hospitality industries. The last couple of quarters, The rebound of the global commercial market from pandemic-driven demand softness has accelerated in North America and around the globe. We expect the strength to continue. Our fourth initiative, focused on markets, is to drive core growth. We plan to drive growth in our flagship brands, Hamilton Beach and Proctor Silex, through innovative new product development, digital marketing, and a number of our new products are aimed at the $50 and higher price point. Every year, we introduce a number of new products under these brand names. This year, new offerings will include several models for the coffee cannery. We're launching rechargeable cordless appliances in the personal blender and can opener categories. Other new products include new hand and stand mixers, air fry toaster ovens, slow cookers that defrost, and have air fry attachments. We're pleased with the progress we're making to accelerate our digital transformation. In the first quarter, e-commerce sales were approximately flat overall as consumers shopped more in stores as the pandemic recedes. In last year's first quarter, e-commerce sales increased 59%, so performing close to that typical comparison was an accomplishment. E-commerce sales accounted for 35% of our total company revenue in both the current and prior year quarters. With our initiative to leverage partnership acquisitions, we're actively engaged in identifying additional trademark licensing agreements, strategic alliances, and acquisitions that would drive growth in all our markets. To summarize, we have an exciting portfolio of brands with promising growth potential. As we drive momentum for all of our initiatives, we're planning for another year of record revenue growth. Operating profit is expected to improve at a faster pace than our revenue growth. We believe our base case outlook does not represent our full potential. However, given the many unknowns and potential headwinds this year, we're taking a more conservative view. Industry demand for small kitchen appliances remains solid, higher than pre-pandemic levels, slightly softer than 2021. Once the comparison to last year's stimulus spending concludes, demand is expected to be flat to slightly down from prior year and to remain ahead of pre-pandemic levels. Even as consumers return to offices to work and engage in more evening and weekend activities, lifestyles have not reverted to pre-pandemic habits. Consumers are still spending significant amounts of time at home preparing their own meals and beverages. At-home meal preparation is being driven by new habits formed during the pandemic, a heightened interest in healthy eating, and as a means to control expenses during inflationary times. closely monitoring any shift in consumer behavior away from home, as well as any potential negative impact on consumer demand due to inflation. The 2022 marketplace is difficult to predict. While we expect demand for retail and commercial small appliances to be durable over time, we expect short-term ups and downs as we comp unusual 2021 activity. At this point, consumer demand has been holding up well, Depending on inflationary pressures, it could soften from where it is today. If it does, we would revisit our outlook. The supply chain environment remains dynamic and unpredictable. Inflationary pressures have been increasing for transportation and product costs, especially for ocean shipping containers. As we have been doing, we will work diligently to mitigate the impact on our margins to the fullest possible extent. And now I'll turn the call over to Michelle.
spk02: Thank you, Greg, and good morning, everyone. Let me discuss our first quarter 2022 results compared to the first quarter of 2021, and then I'll discuss our outlook. Overall, our top line performance was in line with our expectations. Net sales were $146.4 million, a 1.9% decrease, compared to our record 2021 first quarter. Revenue in our global commercial market increased $6.5 million, or 76%, as the food service and hospitality industries rebound from pandemic-driven demand softness. In our Latin American markets, the momentum of the last several quarters continues, and revenue increased significantly. In our U.S. and Canadian markets, revenue decreased compared to last year's very strong growth, which was driven to a large extent by stimulus spending. Gross margin was 19.3% compared to 21.2%. Margin erosion was primarily due to less favorable product and customer mix. Higher product and transportation costs were mostly offset by price increases, except for the premium shipping containers that Greg discussed. The revenue growth in our global commercial market had a positive impact on margin with higher price, higher margin products. However, this was offset by lower margin sales in the Latin American market and the decline in sales in the U.S. and Canadian markets. In Latin America, price increases lagged due to long-term commitments on direct import orders. Selling, general, and administrative expenses were $15.4 million compared to $26.4 million. The current quarter included the $10 million insurance recovery that Greg discussed. We maintained fidelity insurance and filed a claim to recover losses incurred up to the policy maximum. The claim was approved in the first quarter. The related receivable was included in prepaid expenses and other current assets on our balance sheet as of the end of March. The receivable is reflected in changes in other assets within operating activities in the cash flow statement and is recognized in selling general and administrative expenses in our P&L. This receivable was collected in April. Also contributing to favorable SG&A expenses were lower outside service expenses and lower overall employee related costs. Operating profit was $12.7 million including the insurance recovery compared to $5.3 million last year. Other expense includes currency losses of $1.8 million compared with currency losses of $400,000. This increase was due to the liquidation of our Brazilian subsidiary. During the fourth quarter of 2020, we committed to a plan to sell our Brazilian subsidiary and determined that it met all the criteria to classify the assets and liabilities as held for sale. In April 2021, we made the decision to wind down the subsidiary and enter into a licensing agreement to serve the market. The carrying amounts of the assets were classified as held and used during the second quarter of 2021. During the first quarter of 2022, the criteria for substantially complete liquidation were met. This resulted in $2.1 million of foreign currency losses previously recorded and accumulated other comprehensive losses being released into other expenses in line with our previously stated expectations. The effective tax rate for this year's first quarter was 32% compared to 34.2%. In each period, we reported discrete items that resulted in higher than normal effective tax rates. We reported net income of $7.2 million, or 51 cents per diluted share, compared to net income of $2.9 million, or 21 cents per diluted share. Now I'll turn to our balance sheet and cash flow. Net cash used for operating activities was $20.8 million, compared to $1.9 million in the prior year. The change was primarily due to an increase in net working capital, which was a use of cash of $24.9 million in 2022 compared to use of cash at $2.5 million in 2021. In 2022, trade receivables provided net cash at $15.5 million compared to $36.9 million in the prior year due to the timing of selections and the decreased fourth quarter sales in 2021 compared to 2020. Net cash used for inventory and accounts payable combined was relatively flat year over year. However, inventory increased compared to the first quarter of 2021 and the end of 2021, primarily due to longer lead times resulting from supply chain and transportation disruptions, resulting in an increase in transit inventory year over year. Capital expenditures decreased to $400,000 compared to $1.7 million due to capital spending for our new distribution center in the prior year that did not occur. At the end of the first quarter, net debt was $118.3 million, compared to $101.2 million at the end of last year's first quarter, and $95.7 million at the end of 2021. Now let me turn to our outlook. Our team is executing well in a difficult operating environment. We're taking action to protect margins, and mitigate the impact of significant external pressures, including rising transportation product costs, persistent supply chain constraints, and inflation. Timing for any easing of these pressures remains uncertain. Our responses include taking necessary pricing increases across all business units while also remaining competitive with retailers and consumers. We never take price increases lightly and we're closely monitoring marketplace acceptance. We may not be able to recover all future cost increases with additional pricing initiatives. Amid these pressures, we will focus on managing margins and working capital within historical ranges to the fullest extent possible. For the full year 2022, we expect further progress with our strategic initiatives to enable us to deliver modest revenue growth compared to record revenue in 2021. For the first half of 2022, we expect revenue to decrease modestly. For the second half of 2022, we expect revenue to increase moderately. Full-year operating profit is expected to increase significantly, including the 10 million insurance recovery, driven mostly by the higher revenue. Our current outlook could change depending on a number of factors. These include retailer acceptance of further price increases to offset rising costs, the impact of inflationary pressures and stay-at-home habits on consumer demand, any worsening of supply chain constraints, COVID protocols in China, and the impact of the conflicts in these things. That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.
spk00: As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Once again, to ask a question, press star one. Please stand by while we compile the Q&A roster. Your first question comes from the line of Justin Glover of Baird. Your line is open.
spk05: Yeah, hey, everyone. It's Justin Kleber. Thanks for taking the questions. First off, Greg, wanted to ask you, you talked about demand for the category remaining solid, which is encouraging. But how do you think about overconsumption in this category the past two years? I mean, are you guys seeing any indications of unit demand that's been pulled forward as a result of the pandemic?
spk03: Good morning, Justin. So I think so far it has been holding up as we mentioned earlier. We have not seen significant deterioration of unit demand. There's a little bit as prices have gone up. And there's really this window for the first eight to ten weeks of the year where there was a couple of stimulus checks last year. That puts a lot of noise in the year-ago period. Easter moved around. So those are also makes it a little bit hard to read. But the things that were going on during pandemic, of course, were people staying at home more. But also a big factor pre-pandemic was millennials moving into household formations. And that continues to go. And I think also with people staying home, often a lot of companies now, as you know, are hybrids. So they're home for a couple of days and working for a few days. So there is going to be more at-home activity than there was pre-pandemic also. So far, it's held up. There are a lot of moving parts, as you well know, so we're going to watch it closely. But so far, we have not seen a significant drop-off due to some sort of front-loading or people being overburdened with appliances yet.
spk05: Okay, that makes sense. Maybe somewhat related, you kind of mentioned the you know, prices going up in the category, right? I mean, prices are going up virtually across every consumer product. So are you seeing, I guess, any customer pushback to date? It doesn't really seem that way, but, you know, any indication of maybe trade down, you know, to lower price points in response to higher retail?
spk04: Yeah, Justin, this is Scott. You know, I think what we're seeing, you know, from the marketplace so far, you know, the prices that we've put through have been, have been accepted by our retailers. The retail prices at the store or online have been adjusted to account for that. I do think that the retailers are starting to try to reset and rethink about, okay, if I had a $19 hand mixer and that's moved up to $23, I still feel like I need that $19 hand mixer. So we're going back and looking at The nice thing that Hamilton Beach has is we really have those offerings all across all the value propositions. So we're good at good, better at best, and even the luxury position. So as we have to go back and fill in some of those retail gaps that have been abandoned because retails have gone up, we have the products that are able to fill those spots and are being looked at today.
spk05: That's great, Culler. Thank you for that, Scott. The next question, just on the strength in commercial, the $15 million revenue figure for this quarter, notice we'll step up from the second half of last year. Greg, is there anything unique in this quarter from a timing perspective or a new customer win, or is this kind of $15 million figure a good run rate we should be thinking about for the balance of the year?
spk03: Well, there was not a one-off large win that drove that. There really is very good, broad... We've got our food service business, and we look at it globally as well as North America, and we have our hospitality business focused on hotels. And really, they're all showing very strong demand. And a lot of it is related to... a period of time when restaurants were either shut down or now they're opening up, trying to catch back up equipment-wise. So we sort of came into the year with growth building, and it really accelerated in the first quarter. And when we look at backlogs as well as go-forward projection, it seems to be widespread and seems to be likely to continue at least for another quarter or two. It's always hard to get too much two or three quarters out, but So far, it's looking like she should see continued strength. Now, last year, we started the bill in the fourth quarter, so it comes to get a little bit harder as the year goes on. But we're right now up against some pretty soft quarters in the second quarter and third quarter that should help us have a very strong growth rate for at least a couple more quarters.
spk05: That's great to hear. On the home health and wellness categories, a lot of exciting developments in that space. I mean, is there any way you could frame or characterize just the revenue opportunity from this broader initiative over the next year or two? I mean, is this meaningful in your view to the total company?
spk03: The goal is certainly to make it meaningful. I'm looking at Scott's expectations for Scott to deliver with a smile on my face here. But I do think I think what I feel good about is we don't have all our eggs in one effort. So certainly air purification is a proven business that is still strong that we have to win our share at. So that demand is there. Water is a huge existing one, but we're going to be breaking new ground with a electric countertop appliance or some of those out there, but it's not an established category. So when you're creating a category that's got great upside, but also it's a challenge. You've got to educate consumers on why they need it. But certainly people have water pitchers and their refrigerator water devices. So we do think there's a real good opportunity there. And then HealthBeacon, as an example, is a brand-new market. People are doing all sorts of things to dispose of their injectables now, and this really is the only one that has an app that allows you to improve the adherence, which is really exciting for caretakers. You know, if you've got a child or a parent that you're trying to monitor or, you know, a child or... Really, that's just an exciting thing, but, again, it's new, and we've got to educate people and educate... So I think there will probably be uneven growth and probably fits and starts, but over the course of the next one, two, and three years, I think I'm very excited about and believe that we're going to generate nice growth from the portfolio of activities I just mentioned. I'm not sure which ones will be the lead and which ones will be the follow, but we feel pretty good about the numbers there.
spk04: Yeah, and I would just add, Justin, these categories that we're getting into, both in the air and the water segment that Greg talked about, are very nicely balanced from an online and brick-and-mortar perspective. So, again, we feel like we've got a good infrastructure that can help build share in both of those segments. And then just also add that they also have come with the consumables. So that's another focus that we've been trying to get to, which is not just selling the
spk05: appliance and then walking away from the consumer but continue to engage with that consumer you know for many many years to come with a consumable yep okay um two more questions uh from me just on supply chain and given the lockdowns in china how would you guys characterize the magnitude of disruption today versus you know what you've been dealing with at various points in time here over the past few years and just trying to understand you know, how you feel about inventory flow and your ability to secure a product, you know, ahead of this year's holiday selling season.
spk03: Sure. So, you know, I'll sort of give you a flavor for the current situation. Again, you know, things seem to always pop up here that we didn't expect on a go-forward basis. That's a little harder to talk about. But, you know, so far, and the good news, first of all, is we have about 100 employees in China. So we have folks on the ground that are impacted, but able to really help us navigate in a way that maybe some companies don't. So that's been a huge benefit. Very, very strong team in China that's been with us for many years. We have a very diverse supply base. So we are spread out over a wide range of suppliers, which, again, doesn't have us rely on one or two particularly. so far as these shutdowns or disruptions have rolled through they were in Hong Kong and then Shenzhen and they're moved up into Shanghai and now on the way up to Beijing the disruptions have tended to be a few weeks at a time and a supplier here a supplier there or a port for a short period of time they have not been massively disruptive to us yet fortunately so we're going to have some you know, some ups and downs on supply, but nothing that is dramatic. Now, as the year goes on, you know, if something were to happen and the port goes down for a longer period of time or right during the peak season build, there's issues, of course, that might come back to bother us and everybody. At the moment, for small appliances for Hamilton Beach, it's been manageable. Certainly, we've required a lot of hard work by people, but it's been manageable from the standpoint of keeping our customers supplied. That's good to hear.
spk05: Last question just maybe for Michelle on the guidance for operating profit to increase this year. If you exclude the insurance recovery, do you still expect that to be the case?
spk02: Yep, Justin, I would say we haven't moved off our guidance from your end, so maybe just remove the word significantly.
spk05: Okay, perfect. That's all I had. Thanks so much, guys, and best of luck.
spk03: Okay, thanks for your question, Justin. Thanks, Justin.
spk00: If there are no further questions at this time, I'd like to turn the call back to Greg Trapp, President and CEO.
spk03: Thank you. As we look ahead, even as we address the many ongoing challenges facing our company, industry, and all businesses, we're optimistic for many reasons. We're a leader in our industry. There's proven durable demand, our broad portfolio of trusted brands, our comprehensive product offerings, our experienced team, our global infrastructure, our product range of retail relationships across all channels, and our well-developed e-commerce capability are all key competitive advantages which should enable us to maximize performance. We're excited about the many prospects for profitable growth that we believe will be available through our initiatives. We're focused on effective execution as we work to increase our participation in the premium commercial home health and wellness markets as well as our core market. That concludes our report today. Thank you for taking the time to join our call.
spk00: This concludes this conference call. Thank you for participating. You may now disconnect.
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