Hamilton Beach Brands Holding

Good day, everyone, and welcome to the Hamilton Beach Brands Holding Company Third Quarter 2023 Earnings Conference Call and Webcast. Today's call is being recorded, and I would now like to turn the conference over to Luann Nevin, Head of Investor Relations. Please go ahead.

Thank you, Lisa, and good morning, everyone. Welcome to our Third Quarter 2023 Earnings Conference Call and Webcast. Yesterday, after the market closed, we issued our Third Quarter 2023 earnings release and filed our 10-Q with the SEC. Copies are available on our website. Our speakers today are Greg Trapp, President and Chief Executive Officer, and Sally Cunningham, Senior Vice President and Chief Financial Officer. Joining us for Q&A will be Scott Teide, Senior Vice President, Global Sales. Our presentation today does include 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 in 10Q and our annual report on Form 10-K for the year ended December 31, 2022. 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.

Thank you, Luann. Good morning, everyone. Thank you for joining us. I will take the next few minutes to provide an overview of our performance for the third quarter of 2023 and discuss our expectations for the remainder of the year. Then Sally will discuss our financials in more detail. After that, we will take your questions. We were pleased with our third quarter results. As expected, revenue returned to growth and increased nearly 2% compared to last year's third quarter. Our gross profit margin expanded by 300 basis points to 26.1%. Lower average sales price was offset by lower product costs and lower distribution and warehousing costs. Operating profit increased 54% to $14.4 million compared to $9.4 million in the third quarter of 2022, reflecting the gross margin expansion and flat SG&A. We also continue to deliver significant improvement in networking capital and free cash flow. Sally will discuss the actual results. Regarding our revenue results, in our consumer markets, overall revenue increased approximately 3%. By market, revenue increased in our Latin America and Mexican markets as a result of increased distribution across retailers. Revenue decreased in our U.S., and Canadian markets as a result of softer demand in the small kitchen appliance category compared to last year. In our global commercial market, revenue decreased 11%. This decline is attributable to demand normalizing compared to the third quarter of 2022 when revenue grew nearly 36% due to strong post-pandemic demand in the food service and hospitality industries. The current year sales decline occurred in international markets, while sales in the US food service and hospitality industries performed well. As we have discussed in our previous calls this year, for the full year 2023, we expect a solid performance for the soft first half and the stronger second half, which is how the year has unfolded. Our expectations for the stronger second half were based on an increase in placements and promotions across many of our North American customers. This year, we're introducing more than 40 new product platforms across a wide variety of categories. These include products in high-demand categories like single-serve coffee, personal blenders, ovens, grills, slow cookers, garment steamers, and many others. Our team has done an outstanding job securing placements and promotions for our new products across a broad range of customers and channels. Our new products that are in the marketplace now are selling well overall. We have also gained market share this year that we expect will benefit us in the fourth quarter and in 2024. We believe our incremental placements, planned holiday promotions, new products, and increased market share position us well for a solid holiday selling season. I will comment on the small kitchen appliance industry in a moment, but at first I will note we are further encouraged that retail sales overall in the U.S. have continued to grow year-over-year, and consumer spending has been resilient. At the same time, economists and retailers have expressed uncertainty regarding continued momentum due to inflation and high interest rates. Consequently, consumer spending for the small kitchen appliance industry and the overall marketplace remains challenging to predict. There are mixed signals, with some data pointing toward solid trends, while others are indicating a potential softening is underway. Small appliance industry sales decreased modestly through September compared to the same period last year, but remained above pre-pandemic levels. While we have seen no indication of a significant drop in spending on the small kitchen appliance category in the near future, we do expect it to end the year down slightly. As always, our final results will depend on the sell-through at retail and retail replenishment orders. Given the uncertainty in the macroeconomic environment, we've adopted a slightly more conservative view regarding full-year 2023 revenue and have slightly lowered our expectation from flat with 2022 to modestly below 2022. We could end up chasing demand depending on consumer spending, but we want to avoid generating increased levels of excess inventory by being too optimistic. Despite the slightly lower revenue outlook, We continue to expect operating profit to be above last year, excluding the non-recurring $10 million insurance recovery in 2022. I also want to take a few minutes to discuss our longer-term view. Since our spinoff into an independent public company in 2017, we have said that we operate our business for the long term. As a reminder, we have six strategic initiatives to drive long-term growth. We continue to make progress with these initiatives that are designed to drive revenue growth, expand margin, and generate strong cash flow over time. The initiatives are focused on increasing sales of innovative, higher priced, higher margin products in our core North American market. Across our initiatives, we have continued to expand our portfolio of leading trusted brands. We also continue our commitment to consumer-driven innovation and launched 250 new product platforms in the last five years. We expect the momentum to continue in 2024. Let me briefly summarize each initiative. First, we want to gain share in the premium market. We have a growing number of licensed brands in the premium market, including Wolf Gourmet and CHI. More recently, we have established new partnerships with Bartesian and New Milk. We acquired Westin Brands and created the Hamilton Beach Professional brand. In 2022, sales of our premium brands accounted for 15% of total revenue, We expect premium brand sales to be on track with or ahead of that amount in 2023. Next, we plan to expand in home health and wellness. We launched an initiative to expand our participation in the large and fast-growing home health and wellness market in 2021. We entered into a trademark licensing agreement with Clorox and launched a new line of premium air purifiers under the Clorox brand in 2022. We entered into a licensing agreement with Brita in 2022. In early 2023, we launched a new category for electric countertop water filtration under the name Brita Hub. This electric countertop appliance creates fresh, great-tasting water much faster than traditional pitchers. We've also begun to participate in the home medical market, where several trends are converging that we believe can drive strategic opportunities for us. The aging population in our country is creating a large pool of individuals who are living with and managing chronic health conditions. Many younger people are doing so as well. There is also a growing shortage of primary care physicians, nurses, and other medical clinicians. For these and other reasons, including advances in technology, the healthcare industry is implementing new solutions that enable patients to manage many of their healthcare needs at home. Often these solutions combine a connected medical device and digital communications, which can provide key information to patients or report information back to medical providers. We believe our company can help both the patients and the medical providers through solutions created under the Hamilton Beach Health banner. Over the past few years, we've had discussions with many companies in the home medical market about prospective collaborations. A few years ago, we met with a company called HealthBeacon, which is based in Dublin. HealthBeacon is a digital therapeutics company that has created a patent-protected, FDA-cleared system for managing injectable medications, which are used to treat a broad range of chronic conditions in the home. Their system is a connected countertop medical device that combines with a digital support system to help patients manage their adherence to their prescribed treatment. The device also provides for the safe disposal of sharps. HealthBeacon was seeking a relationship with a company that could help them market and distribute their system in the large US and Canadian markets. In June of 2021, we entered into an exclusive multi-year commercial relationship to do that. In March 2022, we introduced the SmartSharp Spin from Hamilton Beach Health, powered by HealthBeacon, in the US. HealthBeacon has an agreement with a major specialty pharmacy company, and there is a strong pipeline of prospects. As HealthBeacon prepared to deploy the system to market, they experienced delays. Unfortunately, this has caused HealthBeacon to experience financial pressures and ultimately a cash squeeze. Last Friday, HealthBeacon entered examinership, an Irish statutory framework for restructuring companies in financial difficulty. Hamilton Beach Brands has entered into a facility agreement with HealthBeacon, under which we will make secured loans to HealthBeacon up to a total of 1.85 million euros or approximately 2 million dollars to fund its operations during the examinership, which is a period up to 100 days. Due to our existing commercial relationships with HealthBeacon and our knowledge of current and prospective specialty pharmacy orders, we believe HealthBeacon should be able to stabilize and continue to operate. Now let me turn to how we are working to increase our leadership in the global commercial market. We are a leading participant in the global commercial market, serving the food service and hospitality industries with small kitchen appliances. We continue to develop products that support our competitive advantage in the core blending and mixing categories, and we have expanded into new categories as well. We continue to increase our relationship with the regional and global chains. In 2022, sales of our commercial products accounted for 10% of our total revenue. Our sales of commercial products increased 50% in 2022 as businesses in the food service and hospitality industries engaged in significant post-pandemic restocking. While we do not expect that growth rate to continue, we do expect that commercial products will continue to be 10% or more of total revenue in 2023 and beyond. As we expand into new markets, we continue to drive the growth of core brands. We continue to invest in driving the growth of our flagship brands, Hamilton Beach and Proctor Silex, in our core North American market. Hamilton Beach remains the number one unit brand in the U.S. Our rebranding of Proctor Silex has simply better has gained traction in the marketplace. We are accelerating our digital transformation for the benefit of all the markets we serve. We continue to make significant investments in our well-developed e-commerce capability and digital marketing. Through the first nine months of this year, e-commerce sales accounted for 36.5% of our total sales, up from 35% in the same period last year. In addition to organic growth, we plan to also leverage partnerships and acquisitions. We are actively engaged in the pursuit to additional trademark licensing agreements, strategic alliances, and acquisitions to drive growth in all of our markets. For all these reasons, we believe we are well positioned to deliver strong results and increase shareholder value in the years to come. Let me conclude by sharing some early thoughts about 2024. Over the past few years, our strong team has managed through an extraordinary operating environment due to a wide variety of factors such as tariffs, pandemic-driven historic surge in demand, disruptions across the supply chain, and spiking, then falling, product and container costs. Earlier this year, we were still working through the remnants of that environment. At this time, however, most suppliers have returned to normal lead times and transit times have returned to normal. Our biggest challenge in the short term is understanding the expected retailer and consumer demand. Retailers reduced their on-hand inventory levels earlier this year. The point of sale trends are down slightly, but are still above pre-pandemic levels. While our revenue is now increasing over 2022, we continue to receive orders that are slightly lower than expected. Economists and retailers are focused on whether consumers will be able to remain as resilient as they have been. Consequently, we expect retailers to remain cautious in the near term. At the same time, we are excited about favorable feedback from retailers regarding our products and brands. Our investments in our brands and innovation, as well as our leading shares in many categories, are all benefits. We are in the process of filing our 2024 plan. We expect to provide more details regarding our outlook for next year when we announce our fourth quarter results. And now I will turn our discussion over to Sally.