Hamilton Beach Brands Holding

Hey, everyone. My name is Kelly, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the Hamilton Beach Brands Holding Company third quarter 2022 earnings call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star 1 on your telephone keypad. If you need to withdraw your question, you may also press star 1 again. At this time, I'd like to turn the conference over to Ms. Luann Nappan, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Kellyanne, and good morning, everyone. Welcome to our third quarter 2022 earnings conference call and webcast. Yesterday, after the market closed, we issued our earnings release and filed our 10-Q with the SEC. This information is available on our website. Our speakers today are Greg Trapp, President and Chief Executive Officer and Michelle Mosher, Senior Vice President and Chief Financial Officer. Scott Teide, Senior Vice President, Consumer Sales and Marketing, will participate in our Q&A. Our remarks today, including answers to questions, may contain forward-looking statements. These statements are subject to risks and uncertainties that could cause factual results to differ materially from those expressed today. Information regarding these risks and uncertainties is available in our earnings release, 10Q and our annual report on form 10K for the year ended December 31st, 2021. We just claim 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.

Thank you, Luann. Good morning, everyone. Thank you for joining us. We're going to take the next few minutes to discuss our third quarter results along with our outlook for the remainder of 2022. Our team continued to execute well in a challenging retail environment. We were pleased to deliver a 26% increase in operating profit as a result of gross profit margin expansion and lower SG&A. Gross profit margin expanded by 190 basis points, reflecting price increases that offset higher costs, a favorable product mix, and lower expenses for outside warehousing and labor compared to the prior year. Total revenue declined modestly, has continued strength in our global commercial market, partially offset lower sales in our consumer markets. Global commercial sales increased 36%, reflecting continued recovery in the food service and hospitality industries, as well as the sale of new products, which I will discuss in a moment. While consumer demand in the US continues a trend of being down somewhat compared to 2021, it remains solid, and continues to be up significantly compared to pre-pandemic levels. The revenue decrease in consumer markets in the third quarter was primarily due to many retailers remaining cautious in continuing their broad inventory rebalancing programs that began earlier this year. While our products have not been in an overstocked position at retail, the broad rebalancing contributed to a shift in timing for some holiday orders for us, and in some cases, a reduction to pre-holiday billed order quantities compared to historic levels. Holiday timing month to month can always be difficult to predict. We expect to capture some of the delayed orders in the fourth quarter. There was a slight softening point of sale movement in the third quarter, but that was only a small contributor. We expected sales in the Latin American market to be lower than last year, as we comped very strong sales in 2021. We also expected that last year's revenue in China and Brazil would not repeat because we have changed our business to a licensing model in those markets, effective at the end of last year. In the third quarter, the amount attributable to this change was $1.9 million, and for the first nine months it was $5.9 million. We continue to make progress with our strategic initiatives. These initiatives are ongoing programs that have helped us stay strong over the past several years. They are designed to increase revenue, expand operating margin, and generate strong cash flow over time. Our initiatives are focused on increasing sales in the e-commerce channel, leading in the global commercial market, gaining share in the premium market, expanding in the home health and wellness market, and driving growth of our core brands, Hamilton Beach and Proctor Silex. In the third quarter, E-commerce revenue increased 8% and accounted for 35% of our total. Brand reputation, product features, innovation, and star ratings all play a critical role in driving online sales, and these are all in areas where we excel. We are also investing in digital marketing and online selling capabilities as we work to accelerate our digital transformation. Our global commercial revenue in the third quarter increased 36%. This is partly due to strong post-pandemic demand. It is also due to our success in expanding our category coverage. Examples of new commercial products that are gaining traction include our Mixtation, which makes milkshake treats, high-performance blenders, and our new Big Rig line of immersion blenders that we have introduced as part of our strategy to expand into back-of-the-house categories. We have secured incremental wins as we increase our focus on meeting the needs of global and regional chains. Revenue from our premium brands grew 35%. Growth was particularly strong for the extremely popular Bartesian cocktail machine, our CHI Garment Care products, and our line of Westin products. We have introduced a number of new premium products for the holiday selling season. These include new models in our Bartesian line, a CHI full-size handheld steamer, a Westin 2-in-1 Indoor Smoker Slow Cooker, and several new products in our Hamilton Beach Professional line. Our newest Wolf Gourmet product, an electric kettle, introduced earlier this year is selling very well. Revenue from our new Home Health and Wellness products increased nearly 30% from a very small base as we just introduced new products into this market. We are pleased with the consumer reception to our new Clorox brand air purifiers, We're also creating a new category with a countertop Clorox steam sanitizer that consumers can use to kill bacteria on brushes, sponges, and other cleaning tools that still have a useful life. We look forward to introducing the first electric countertop water filtration products under the Brita brand in early 2023. In the home medical market, the injection care management system that we market and distribute under an exclusive agreement recently became Medicare and Medicaid eligible for certain applications, which is expected to drive increased adoption. We have also secured recent placements with specialty pharmacies. Sales of our core brands decreased in the third quarter. However, we expect growth for both brands in 2022. Hamilton Beach is a top three share brand in 26 categories. Hamilton Beach continues to be the number one brand in units in the U.S., we're making great progress with our brand repositioning for Proctor Silex. Hamilton Beach and Proctor Silex average star rating across key e-commerce platforms remains strong at 4.4 each. For both brands, we have launched a number of exciting new products in multiple high-demand categories for the holiday selling season. To name just a few examples of exciting new products for our Hamilton Beach brand, the Quantum Air fryer toaster oven, a toaster oven with 47% faster air frying in a larger oven. Our team designed a patented technology that increases air flow and cooking performance and allows for a larger cooking cavity, expanding consumer food options to make in the oven. We believe this combination is unique in the marketplace. Our Big Mouth Juice and Blend is a two-in-one combination juicer and blender that significantly reduces time and complexity for juicing and making juice-based blended drinks. Our portable food warmer is a new category we are creating that makes it easy for consumers to bring lunch to school or work in a post-COVID world. It features a bento-style food tray and includes a 12-volt car adapter as well as a 120-volt plug for reheating meals on the go. For Procter & Salix, we are very excited about our quick clean food processor a simply better food processor that slices, shreds, chops, and purees, and then can be cleaned hands-free with our quick clean cycle. Good Housekeeping announced its 2022 Kitchen Gear and Coffee Awards just last week. The awards are based on innovation, performance, ease of use, and problem-solving attributes. We are very excited that our Partesian Cocktail Machine, our new Proctosolix food processor that I just described, in our Hamilton Beach Scoop single serve coffee maker made Good Housekeeping's prestigious list. Switching topics to supply chain, we have experienced challenges for more than a year that have contributed to our elevated inventory levels. Fortunately, these issues have begun to moderate, and we expect to significantly reduce our inventory and debt levels by the end of this year and into the first quarter of 2023. Virtually all of our inventory is of very good quality, Many products have solid store placements or strong e-commerce order patterns, which will help us work the inventory down over the coming months. Although the forward look is favorable due to the size of our position on September 30th, I would like to review the factors that have been at play. In 2021, our third-party manufacturers in China required their customers to release purchase orders months earlier than they did before the pandemic. Even so, they struggled to meet demand. As we have previously discussed last year, a large portion of our supply was produced late, resulting in deliveries in 2022 for goods we needed in 2021. During this year, we have adjusted our forecasts as demand patterns shifted. However, due to the purchase order lead time suppliers have required, product was already produced or committed to at higher forecasted levels. We have negotiated reduced lead times with many suppliers, We are now better able to adjust orders in a timely manner as demand ebbs and flows. While some product was produced late, some was produced on time but was delivered late due to the challenge of securing container space in the fall of 2021. Due to the increased transit times from our suppliers' factories to our distribution centers, as a result of congestion across the transportation supply chain, we have owned inventory for a longer period of time before we can turn it. Retailers have experienced similar issues for product they manage on their own. Since stock levels are high across the store, retailers reduced open to buy dollars. While we expected the industry demand to flatten or decline slightly in 2022, we did not expect retailers to pull back on orders and allow low in stocks to continue, impacting order patterns for our products. Demand for small kitchen appliances is expected to remain solid and well ahead of pre-pandemic levels. Our industry has grown as consumers learn how to cook and make drinks at home during the pandemic. We're also benefiting from demographic trends, with millennials moving into a household formation phase of life in very large numbers. We believe more people are using a broader range of appliances more frequently. During inflationary times, many consumers stay home and cook more to save money. That is especially true now given the significant increases in away-from-home meal costs. History tells us that during difficult economic times, people do not eliminate spending on essentials. Coffee maker, small appliances used to heat food, and many other small appliance products are regarded as essential. While we may experience slight ups and downs in the coming 18 to 24 months, we believe our industry will have solid underlying support that should prevent a significant and prolonged downturn. Our company has introduced a broad array of innovative new products this year that are available for the holiday selling season. Material costs are moderating, ocean shipping rates are dropping significantly, and container space availability has improved. We expect these trends to benefit Hamilton Beach, our retail partners, and consumers more in 2023. Based on what we now know, we believe we are well-positioned to deliver a strong finish to the year. Now I'll turn the call over to Michelle, who will review our third quarter numbers in detail and discuss our outlook.