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spk04: Hello and welcome to the Hamilton Beach Brands Holding Company Second Quarter 2022 Earnings Call. My name is Lauren and I will be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, please press star floatable 1 on your telephone keypad. I will now hand you over to your host, Luanne Napan, Head of Investor Relations to begin. Luanne, please go ahead.
spk03: Thank you, Lauren. Good morning, everyone, and welcome to our second quarter 2022 earnings conference call and webcast. Yesterday, after the market closed, we issued our second quarter earnings release and filed our 10-Q with the SEC, which is 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 four looking statements. These statements are subject to risk and uncertainties that could cause actual results to materialize from either the prepared remarks or during the Q&A. Additional information regarding these and uncertainties is available in our earnings release and our annual report on 410K for the year ended December 31st, 2021. These companies claim any obligations to update these forward-looking statements, which may not be updated until our next quarterly call, if at all. I'll now call over to Craig.
spk01: Thank you, Luann. Good morning, everyone. Thank you for joining us. We're going to take the next few minutes to discuss our good performance in the second quarter, along with our outlook for the second half. We are pleased with our second quarter results, which demonstrated another quarter of strong execution by our team in a challenging external environment. Revenue, gross margin, and operating profit were in line with our expectations. We achieved our results against a difficult comparison to record sales in the first quarter of 2021, which increased nearly 12%. Last year's growth was impacted by a strong rebound from the pandemic-driven demand softness in our global commercial and Latin American markets. while demand in the U.S. continued to be strong. This year, as we expected, revenue declined in all of our consumer markets except Canada. In our global commercial market, revenue increased 37%. The commercial market continues to benefit from the strong ongoing rebound of the food service and hospitality industries. We continue to make progress with all of our strategic initiatives, Several of them generated strong growth in the second quarter. We've been working to build on our progress and believe each initiative will generate growth in 2022 and beyond. Our initiatives are focused on expanding our presence in markets where we have the opportunity to increase the sale of higher priced, higher margin products. These include the premium, commercial, and home health and wellness markets. We're also focused on growth of our core brands, Hamilton Beach and Procter Silex. Our initiatives focused on accelerating our transformation and leveraging partnerships and acquisitions are going very well. The second quarter, e-commerce remains strong. Online revenue increased and accounted for 37% of our total. We continue to accelerate our digital transformation by investing in online selling capabilities and digital marketing for all of our brands and markets. As mentioned, our global commercial revenue growth in the second quarter was plus 37%. We were also seeing our participation in this market with product development, digital marketing, and increasing customer relationships with regional and global chains. Our premium brands matched our results in last year's second quarter. Growth was particularly strong for the extremely popular Bartesian cocktail machine and our Qi garment care products. We are introducing a number of new products in time for the holiday selling seasons. We are excited to launch the Barclaysian Generation 2, as well as the Barclaysian Duet, a smaller two-bottle model, and a commercial model. Our premium portfolio includes five street brands. All five have an online rating of 4.2 stars or better. Due to the comparison to last year, sales of our core brands, Hamilton Beach and Procter Stylix, declined slightly. We expect growth for both brands in 2022, and we are launching new products in multiple categories for the holiday selling season. Hamilton Beach continues to be the number one brand in the U.S. based on units sold. It has extremely high awareness and a 4.4 star average online rating. The brand serves a range of categories and price points with innovative consumer preferred products. The Hamilton Beach brand did extremely well during this year's Amazon Prime Day, held early in the third quarter. Following the event, Amazon issued a press release announcing that it was the biggest Prime Day ever. In that announcement, they highlighted some of the brands worldwide, and Hamilton Beach was one of them. For us, this year's Prime Day was our best ever as well, and our sales nearly doubled compared to last year. Dr. Salix is a brand with a broad portfolio of products and has a 4.4-star average online rating. We continue to incorporate the Simply Better Brain positioning out our Platinum Series line, as well as introducing new products in a broad range of high-demand categories. Our home health and wellness initiatives are progressing as we have begun to launch new products in the air purification and the home medical categories. We are excited about participating in this large and fast-growing market. We look forward to our new products gaining traction throughout the year and into next year. This market is one where we also will have a meaningful consumables revenue, particularly for filters for air and water filtration products. This year, we have introduced the first products in a new line of air purifiers under the licensed Clorox brand name. We plan to launch additional new models in the coming months. We launched the SmartSharpSpin from Hamilton Beach Health, powered by HealthBeacon, for at-home injection care management in the U.S. home medical market. We plan to launch 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 in early 2023. For gross profit margin, we were pleased that it was well above last year's second quarter and back within our historical range. Our efforts to mitigate higher transportation and with a number of actions, including pricing programs, have been successful. Inbound freight costs have become a significant portion of our product cost, Securing ocean containers at reasonable rates remains a significant challenge. Outbound freight costs have increased significantly as well due to the high demand for trucking needs by all shippers. While we are seeing ocean container rates come down somewhat as overall demand eases, the rates are still significantly higher than they were at this time last year. We've begun to benefit from recent abatement of commodity costs. However, given the increase in container rates, overall product costs are up significantly compared to last year. We are focused on covering the higher costs, particularly for the ocean carrier rate increases, and we continue to work closely with our retail customers. Currently, we are implementing additional price increases that will become effective in the third quarter. We expect to be successful in passing increases that are necessary to maintain our margins at historical levels while staying competitive. Next, I will discuss for the second half of the year, starting with demand. Demand for the small kitchen appliance industry was softer in the first half of the year compared to the same period last year, primarily due to the comparison to last year's spending. In the second half, demand is expected to be slightly down from prior year, but remains significantly ahead of pre-pandemic levels. Demand has softened slightly compared to our previous outlook, as consumers and retailers adjust to current unfavorable economic conditions, but it is not a dramatic decline. We believe the small kitchen appliance industry has a number of tailwinds supporting continued strength despite the economic headwinds that are growing in the environment. First, the pandemic accelerated broader and deeper consumer adoption of small kitchen appliances that has continued as the pandemic has receded. significantly more consumers are engaged in the small kitchen appliance category than they were pre-pandemic. Secondly, even as many people have moved to non-lockdown lifestyles, many others continue to work from home, or at least part of the time. These folks continue to engage in at-home meal and beverage preparation during the workday for breakfast, lunch, and snacks. Third, for consumers who are working in offices with children back in school, The need to be able to prepare healthy and good-tasting meals quickly and easily is as important as ever. Large gatherings with family and friends for holidays and other occasions are back. All of this benefits the small kitchen appliance categories. Another consideration is the inflationary times in which we are living. When the economy softens, the small appliance market remains strong as consumers stay home and cook more to save money. That is especially true now given the significant increase in away-from-home meal costs. History tells us that during difficult economic times, people do not eliminate spending on essentials. Products like coffee makers, small appliances used to heat food, and other products count as essentials. We recently analyzed 16 years of industry data and found that the small kitchen appliance industry has performed well in both difficult and good economic times. There have been pockets of extreme ups and downs, but those have been short-lived. The industry quickly returns to steady performance. Hamilton Beach Brands expects to continue to benefit from a number of strengths and competitive advantages, even during difficult times. While we are optimistic about our prospects for a strong second half of the year, we recognize that there are uncertainties in the macro environment and there can only be uninitiated events. At this point, consumer demand has been holding up, and based on what we know, we feel confident in our outlook. Now I'll turn the call over to Michelle.
spk02: Thank you, Greg, and good morning, everyone. Let me discuss our second quarter 2022 results compared to the second quarter of 2021, and then I'll discuss our outlook. Next sales decreased 4.6% to $147.5 million compared to a record $154.7 million last year. As Greg discussed, decline in most of our consumer markets compared to the previous year, which included the favorable impact of U.S. government stimulus checks on consumer spending. Partially offsetting the overall decline of consumer markets was a revenue increase of $4.1 million in our global commercial market. Also contributing to the decrease in total revenue compared to prior year is our transition from a company managed model to a licensing model for our consumer businesses in Brazil and China, which we completed at the end of 2020. In the second quarter, the improvement in gross profit margin to 21.7% from 18.4% last year, primarily due to a full quarter of price increases. that offset higher product and transportation costs. Additionally, the prior year included significant carrier storage charges that did not repeat this year. Selling general and administrative expenses were $26.5 million compared to $27.4 million. The decrease was primarily due to incremental expenses occurred last year during our relocation to a new US distribution center. Additionally, expenses decreased for outside services and our overall employee-related costs declined as a result of lower accruals for incentive compensation due to our lower stock price. Operating profit was $5.4 million compared to $900,000 last year. And our effective tax rate for the six months ended June 30th was 22% compared to 38.1% in the prior year. The prior year was high due to the inclusion of interest and penalties on unrecognized tax benefits as a discrete expense. In the second quarter of this year, we had a change in position related to an unresolved Mexico tax matter, and we were able to reverse the interest and penalties previously recognized. Excluding discrete items, we expect our effective tax rate for this year to be approximately 24%. Interest expense increased a nominal $200,000 The slightly higher amount was due to rising interest rates, as well as increased average borrowings outstanding under our revolving credit facility. We believe we have some protection from rising interest rates with our interest rate spots. For the quarter, net income was $5.1 million, or $0.36 per diluted share, compared to net income of $86,000, or $0.01 per diluted share. 251,221 shares during the second quarter under our current stock repurchase program, which runs through December 31, 2023. Through July 31, we have repurchased approximately 261,000 shares for approximately $3 million. Now we'll turn to our balance sheet and cash flows. For the six months ended June 30, 2022, net cash used for operating activities was $25.5 million compared to cash provided by operating activities of $8.4 million in the prior year. The change was primarily due to net working capital, which was the use of cash of $36.1 million this year compared to a source of cash of $14.6 million in 2021. This year, trade receivables provided net cash of $19.8 million compared to $45.2 million in the prior year due to the timing of collections and decreased sales in 2022. Net cash used for inventory and accounts payable combined was $55.9 million compared to $30.6 million last year. Our inventory position is attributable to several factors. These include late production of some 2020 orders, late delivery of some 2021 production, increased ocean transit time, a slight flowing of demand compared to last year's elevated and revamped levels, and to re-tailor overstocks across the store and related rebalancing programs. While our products are not in overstock position, overstock Levels and other categories are having a near-term impact on retail orders overall. Our inventory is falling. We attempt to significantly reduce current levels by the end of the year through ongoing placement and purchase order management. Capital expenditures for the first six months decreased to $700,000 compared to $7.6 million last year. The significant decrease was only due to the investment we made last year for our new U.S. distribution center. We expect the investments we've made in our infrastructure in recent years, notably our ERP system in D.C., will provide us with many benefits for years to come. At the end of the second quarter, net debt was $126.3 million compared to $98.1 million at the end of last year's second quarter and $95.7 million at the end of last year. The increase is due to the higher networking capital position. Now let me turn to our outlook. Our team continues to execute well in a challenging operating environment. We're taking actions to protect margins and mitigate the impact of significant external pressures, including rising transportation and product costs, persistent supply chain constraints, and inflation. Our core business is solid, and we expect each of our strategic initiatives to provide growth in 2022. Compared to our previous outlook, sales expectations in half of 2022 are still expected to grow, however, have been adjusted slightly to reflect a somewhat more conservative outlook for consumer demand. Sales expectations for our commercial products a continued strong rebound from pandemic-driven developments. We continue to expect that the second half of 2022 will increase modestly compared to the second half of 2021. For the full year of 2022, we continue to expect modest revenue growth compared to record revenue in 2021. Operating profit is expected to increase significantly compared to 2021 which includes the $10 million insurance recovery in the first quarter of this year. That concludes our prepared remarks. We'll now turn the line back to the operator for Q&A.
spk04: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. We're preparing to ask your question, making sure that your phone is unmuted locally. Our first question comes from Justin Kleber from Baird. Justin, you can go ahead.
spk05: Hey, all. It's Justin Kleber at Baird. Congrats on the quarter. Just wanted to ask first off on looking back at 2Q, Greg, you mentioned revenue was in line with your internal expectations. Curious if that was the case across both commercial and consumer markets.
spk01: Hey, good morning, Justin. Yes, basically, yes. I think there's a little bit of movement within the retail group across North America, but commercial was right at maybe a little higher than we thought, and retail was basically in line. I think overall it was right around what we thought, and really mainly because on the retail side we had such a big comp here to offset from last year.
spk05: Yep. Okay. You know, you mentioned the more cautious approach to the back half of the year within consumer, which I think makes sense given everything going on in the environment, what we're hearing from retailers specifically. Curious how those commercial expectations, though, today compare to your initial plan. It sounds like maybe you're performing a bit better within that segment today. than you initially planned for. Is that the case, or are we kind of just in line on the commercial business?
spk01: Well, I think, you know, as you know, Justin, we often will look at a baseline upside and downside as we look at our outlook. And certainly commercial has the potential to go higher than we expect. But right now we're sort of keeping in line with our base outlook with what we – we thought before. But really, there is really strength globally. I would say China being the exception. And we're chasing on the upside a little bit. So I do think there could be some upside there. There could be upside on the retail also. There is some upside on that. I think it's tough to sort of sign up for that. But as I mentioned, you know, appliances really do hold up pretty well, even if things pull back across the economy. So I just think when we think across all the things that might happen, I do think that retail, we softened it a little bit, but that's probably just to be cautious more than anything else. I think the biggest factor probably in all that is retailers through their backup on inventory they have across their whole store, If that sort of comes back in line, that will free up some open-to-buy dollars for the holiday season. If that stays backed up, that may crimp their orders a little bit. So I think that's kind of got us a little bit. That's the one factor that is really, really hard to predict. So I think for that reason, I'll go back a little bit.
spk05: That's helpful, Collin. Maybe just a follow-up there, Greg. So we all know that there's an inventory glut across retail, broadly speaking, and that It seems to be impacting, you know, reorder plans. I guess I want to just make sure I understand what you're saying specifically or what you're seeing within your category and your business. Are your retail partners becoming more, you know, skittish with orders they've already placed? Or is it more about, you know, just maintaining some conservatism as you think about, you know, heading into the holiday and how successful they are at kind of working down the excesses, I guess, just across the store?
spk00: Yeah, Justin, this is Scott. Now, I would say it kind of varies across the retailer. We've got some that are actually very bullish and keeping very good cadence on bringing in product. We really haven't seen any change, and they actually want to be in a better inventory position going into the fourth quarter, where others, you know, we feel like, in general, small kitchen appliances is not an area that's overstocked across most of our retailers, but they have other departments that are overstocked. So they're overall open to buy dollars across the company may be limited. And so they're kind of trying to figure out how do they work down their weeks of supply, maybe by a week or two. And we certainly saw that with the retailers. But it really is mixed. I mean, again, there's some that are business as usual and some that have pulled back to get rid of some of their own goods or seasonal goods that they still own, while others are being still very bullish and trying to grab some more share.
spk05: That's helpful, Collin. Thank you, Scott. Just maybe two more here from me on the nice progress on margin during the quarter. Greg, you mentioned taking another price increase here in 3.2. How do we think about, I guess, the stickiness of pricing? You know, what's historically been the case across the industry and your business specifically? And I ask it, you know, from the standpoint of we're starting to see, you know, decline in input costs, as you mentioned, and I assume transportation costs, you know, will continue to normalize as demand softens. So do you hold on to those price increases, or do you think that some of that gets rolled back if these, you know, cost pressures start to or continue to decline?
spk01: Well, I think generally the commodity – The input cost for production has stopped going up, down somewhere up. So I think on the cost side, as we went into this year, the back half of this year's cost negotiations and position on the purchase side of things from our suppliers, the commodity costs were relatively flat. It really is all coming from the container cost increases. And container costs are coming down but they're way, way up from where they were a year ago, as you know. So there's a lot of news in the press about cost dropping, but it's dropping from a record high. So I think what will happen as we go into next year is it's a very competitive marketplace, and to remain strong, and we're working very closely with the retailers on those costs going up, and my guess is they're going to make sure we work very closely when they come down. And so that's what we usually always say. We've got to keep our margins in that historical range and try to drive revenue and control our costs. And that's how we're going to get operating profit expansion. So I think it's more likely than not that as we go into the future, we'll just stay in this gross margin range that we're in and just work closely with retailers to right-size the competitive pricing.
spk05: Okay. I think I'll leave it there. Appreciate all the color. Thanks, guys. Great. Thank you, Justin.
spk04: Thank you. As a reminder, to ask any further questions, please press Start later by 1 on your telephone keypads. Okay, we have no further questions registered, so I'll now hand you back over to Greg for closing remarks.
spk01: Thank you. As we look to the balance of the year, we're focused on executing well on our six strategic initiatives that are designed to increase revenue, expand operating margin, and deliver strong cash flow over time. Our commercial business is experiencing record growth, and the strong order flow continues. We have a long list of new products introduced in 2021 and 2022 to drive growth. The small appliance market is projected to stay strong. While declining compared to a robust 2021, it remains well above pre-pandemic levels. We're also focused on continuing to execute well as we navigate through many ongoing external challenges. We believe we are well positioned to address them just as we have throughout this year. I am incredibly grateful to our team for all their hard work, diligence, and good thinking which they continue to demonstrate. That concludes our presentation. Thank you again for joining our call.
spk04: This concludes today's call. Thank you for joining. You may now disconnect your line.
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