Hamilton Beach Brands Holding Co Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for joining us and welcome to the Hamilton Beach Brands Holding Company Q2 2020 Earnings Conference Call. All participants are currently in listen-only mode. Following the presentation, there will be a question-and-answer session. Now, I would like to turn the call over to our speaker today, Lou Anne Nabhan. Please proceed.

Thank you, Jaqueline. Good morning everyone. Welcome to the second quarter 2020 earnings conference call and webcast for Hamilton Beach Brands Holding Company. Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Senior Vice President, Chief Financial Officer and Treasurer will discuss our second quarter results. Also participating in the Q&A will be Scott Tidey, Senior Vice President, North America Sales & Marketing for Hamilton Beach Brands. Yesterday after the market closed, we issued an earnings release and filed a 10-Q with the SEC. Both documents can be found on our website, hamiltonbeachbrands.com. A replay of today's call will be available on the website this afternoon. Today's presentation contains forward-looking statements, which 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, our 10-Q, and in our annual report on Form 10-K/A for the year ended December 31, 2019. 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, Lou Anne. Good morning, everyone, and thank you for joining us. During this unprecedented time, since the COVID-19 pandemic began, Hamilton Beach Brands has effectively navigated the global crisis. Our focus has been on the safety and health of our employees, serving our customers and consumers, moving our business forward, and making sure we emerge stronger on the other side. A number of factors have positioned us well to maximize our performance, including our investments in brands, category expansion, our global infrastructure, and team members. Our diversified retailer relationships, along with years of investment in e-commerce capabilities, have enabled us to meet strong consumer demand. We are fortunate to be a leader in an industry that is providing essential products to homebound consumers. Most households are engaging in far more food and beverage preparation than usual - breakfast, lunch, dinner, and snacks every day. Our customers and consumers are counting on us to provide appliances they can trust: that work well, that last long, and that play a small part in making their lives a little easier. In mid-March, as the virus spread globally and the pandemic was declared, we experienced temporary shutdowns among some of our retail customers and many in the food service and hospitality industries, which had an unfavorable impact on our business. At the same time, U.S. retailers who remained open thrived as providers of essential products, and e-commerce sales surged. In the second quarter, consumer demand in the U.S. and Canada was so strong that sales in these markets offset declines in international consumer and global commercial markets. Our second-quarter results reflected this demand as well as the benefits of our cost containment measures. Through the first half of this year, our effective management of working capital also contributed to significantly increased cash flow and reduced debt. Meeting the consumer demand that has emerged during the pandemic presents many new challenges, but our team has done a fantastic job rising to the occasion, and I want to thank all of our employees worldwide for their excellent work. Since March 16th, all employees who are able to work remotely have done so. They are conducting our normal business activities very effectively and will continue to work remotely at least through the end of the year. Many employees are essential and need to work on-site in our distribution and customer service facilities, as well as our engineering and research labs. They are doing critical work, and we appreciate their dedication. We are taking many precautions to keep our on-site teams safe and healthy. We monitor their situation daily to ensure we balance business needs with the needs of our team members. We continue to capitalize on our many strengths in e-commerce, including our fast-growing direct-to-consumer operation. In the first quarter, our e-commerce sales increased by 23% and accounted for 27% of total revenue. In the second quarter, our e-commerce sales grew by 77% and made up 37% of our sales. We believe the significant investment we've made in our e-commerce capabilities will continue to pay off. Our products are readily available in whatever channel consumers choose to buy. Our global supply chain is another area of strength and has been critical to our success during this time. Our global sourcing organization has been agile in responding to the demand surge. All of our third-party suppliers are producing at normal capacities and are working diligently to meet our needs. Our team in China ensures our products are made to safety and quality specifications while maximizing production. I'll add that our consumer and commercial sales teams in China are working hard to secure every sale possible as those markets begin to rebound. We're managing costs to preserve our financial strength. We’ve asked everyone to find ways to spend as little as possible, while keeping the business going. This includes minimizing discretionary spending and implementing a hiring freeze for most open positions. We will assess this loss on a go-forward basis. We continue to support the business with necessary capital investments for projects that can be deferred or have been. This effort has kept us on solid ground. In the U.S. and Canada, as consumer demand has surged, the small kitchen appliance industry and our company have experienced robust point-of-sale growth. Sales of Hamilton Beach Brands products have outperformed the industry, reflecting our leading position in a wide range of categories where considerable demand is focused and where our price points are favorable. Many U.S. consumers have demonstrated their preference for trusted brands, affordable price points, key features, and high ratings. Our strategy of providing a broad portfolio of trusted brands, covering over 50 categories at price points ranging from value to luxury, has positioned us well in this environment. Demand was particularly strong for our slow cookers, blenders, food processors, hand mixers, and coffee makers. We experienced substantial increases in demand for certain specialty appliances, such as bread makers, electric pasta makers, waffle irons, and the Bartesian premium cocktail machine that we began selling in the fourth quarter of 2019. In fact, demand in the second quarter was so robust that it led to out-of-stock situations for certain product categories, which retailers are now starting to replenish. As the second half of the year begins, we continue to see elevated demand. We believe the shift to eating at home will persist, particularly with many people continuing to work from home and many schools offering only virtual learning this fall. Additionally, we believe new habits formed during shelter-in-place circumstances may lead to a stronger preference for cooking at home. People are learning new cooking skills, focusing more on healthy eating and wellness, and many believe they can better control ingredients and portions by cooking at home. In the international consumer market, we are beginning to see improvement from the weak demand earlier in the year as many retailers and consumers start to open up. The e-commerce channel remains underdeveloped in many countries, so while orders are beginning to flow, we are uncertain how quickly demand will return. While our highest demand is coming from retail customers, our commercial customers are also beginning to place orders. Although the commercial market remains weak, we are well-positioned to benefit from any rebound that may occur. Food service customers are quickly adjusting menu choices and customer service options, and our core products, such as blenders and drink mixers, are crucial for meal and beverage preparation. Additionally, our focus on expanding participation in more categories has broadened our revenue-generation capabilities outside of blenders and drink mixers. E-commerce strength is also expected to positively impact commercial sales as the pandemic recovery unfolds. Conversely, our hospitality customers are under significant pressure. Consumer markets in the U.S. and Canada are driving our performance. While we do not expect the current strong demand to be fully sustained long-term, we believe this demand will continue for the remainder of the year. It is challenging to project future demand for our industry, but it seems highly likely that demand will remain strong in the near-term. Innovation and new product development have always been our strengths. We have over 50 new products coming to market this year, and we are working on over 100 that will launch in 2021 and 2022. Despite employees working remotely, our new product development process is functioning well. Our line reviews for the holiday selling season have gone well, and we have retained and gained placements. We service a core group of large retailers that are experiencing above-average demand and strong sales in stores that are open, as well as online. Before I turn it over to Michelle, I’d like to address two more topics. Two weeks ago, we completed an investigation involving unauthorized transactions by former employees at our Mexican subsidiaries and filed restated financials with the SEC. With this behind us, we expect our performance in Mexico to improve, further enhancing our overall company performance in the upcoming quarters and years. While we are disappointed the situation occurred, it does not change the fundamental strength of our business. Lastly, I’d like to remind everyone that the net losses and negative cash flow resulting from Kitchen Collections no longer have an impact on our company. I think the benefit of closing the business through a successful liquidation has gotten a bit lost in everything else going on this year, but it’s worth noting that we are fortunate to have completed the wind-down last year. We hope that the favorable impact of this move will become clearer in our valuation over time. I'll now turn the call over to Michelle.

Thank you, Greg, and good morning everyone. I'm very pleased with how effectively our team is navigating the COVID-19 pandemic. We've been able to leverage the many strengths during this health crisis, and that is evident in our results. Our range measures to maintain financial flexibility continue in place, including eliminating discretionary expenses, implementing a hiring freeze for most open positions, and focusing capital spending on critical projects. We also continue to demonstrate strong working capital management and expect to significantly increase cash flow and reduce debt. Let me review our second quarter results from continuing operations in 2020 compared to the second quarter of 2019. Revenue increased 5.5% to $138.3 million compared to $131.1 million. Excluding the impact of unfavorable foreign currency, revenue rose by 7%. The U.S. consumer market continued to drive our overall results as homebound consumers engaged in more meal and beverage preparation during the pandemic. The Canadian consumer market also experienced increased demand. Revenue in the international consumer and global commercial markets decreased due to the ongoing adverse effects of the COVID-19 pandemic on emerging markets as well as the restaurant and hotel industries. In the U.S. consumer market, the industry and our company experienced robust point-of-sale growth. For the three months ending June 30, 2020, Hamilton Beach Brands remained number one overall based on units sold. Unit growth of the Hamilton Beach Brands outpaced the market, and our Weston and Wolf Gourmet brands significantly surpassed market growth. In Canada, where Hamilton Beach is the number two brand based on units sold, growth also exceeded market rates. Operating profit in the second quarter increased more than threefold to $10.9 million compared to $3.2 million, including higher revenue, the benefit of $1.6 million for tariff relief, and lower SG&A expenses. The tariff relief is related to an exclusion granted for certain list three products, including air fryers and some ovens. This exclusion is scheduled to expire this month and efforts are underway to secure an extension. Gross profit rose by $6.7 million, or 23.7%, due to the higher sales volume. Gross profit margin was 25.5% compared to 21.8%, due to customer product mix and the tariff relief. Selling, general, and administrative expenses decreased to $24 million compared to $25 million, owing to lower overall spending, partially offset by expenses related to the investigation of accounting irregularities in our Mexican subsidiary. Cash flow before financing activities was $19.7 million for the six months ending June 30, 2020, compared to a use of cash before financing of $33.6 million for the same period in the prior year. This significant improvement is primarily due to better overall results and net working capital from effective inventory management and accounts receivable collection efforts. Net working capital was a source of cash of $17.4 million compared to a use of cash of $18.2 million in the same period last year. Capital expenditures were relatively flat at $2.1 million. Net debt at June 30, 2020, decreased to $40.2 million compared to $80.5 million at June 30, 2019, as a result of improved net working capital and significantly increased cash flow. Next, I'll discuss our capital allocation priorities. The Board has continued to approve dividends, but there have been no share repurchases in the first half of the year. As we've previously mentioned, we have increased our focus on pursuing acquisitions and strategic partnerships this year. If we find a good strategic fit at the right price, we believe we have the financial flexibility to pursue a small acquisition or partnership. Finally, let me provide our outlook. We believe we are well-positioned to navigate the COVID-19 business environment effectively, as demand remains strong and our cost management measures remain in place. For the second half of the year, we expect total revenue to increase in the mid to high single digits compared to the second half of 2019. We have more visibility into the third quarter, and we expect a moderate increase in revenue compared to the third quarter of 2019. This increase will be driven by continued strong consumer demand as well as the fulfillment of significant incremental orders as retailers replenish their inventory following out-of-stock situations in certain product categories. For the fourth quarter, we expect a modest to moderate increase in revenue compared to the fourth quarter of 2019 based on retaining and gaining placements, as well as the strength of promotions planned for the holiday selling season, assuming the current robust demand continues. Based on the current revenue outlook, second-half operating profit is expected to increase by 30% or more compared to the second half of 2019. As we fulfill out-of-stock replenishments for the holiday selling season, it's important to note that the timing of revenue could shift from the third quarter to the fourth quarter as is typical in the second half. We completed the transition to our new ERP system in July. As expected, our shipments during July were down compared to normal as we ramped up the new system. However, we anticipate that shipments in August and September will more than offset any shortfall in July. For the full year 2020, we expect to achieve our goal of generating cash flow before financing of $20 million. That concludes our prepared remarks. I'll now turn the line back to the operator for Q&A.

Thank you. Your first question comes from Peter Benedict from Baird. Your line is open.

Hello guys. Thanks for the details there on the call. I have two questions. One on the commercial markets. It sounded like you're starting to maybe see some signs of recovery there, but can you expand a little bit on any green shoots you're seeing from commercial? That's my first question.

Sure. Good morning, Peter, this is Greg. On the commercial side, the hospitality aspect remains under pressure, so we aren't seeing many movements there yet. However, that represents a smaller piece of our commercial business. On the food service side, our Asia business has begun to rebound as they were slightly ahead or behind us in terms of experiencing the pandemic's impact. Our food service customers have figured out how to adjust their menus and have moved to more takeout options where our appliances can be very useful. These customers are starting to open back up and trying to pivot, so we are seeing more orders coming in on that side. In our outlook, we've assumed a slow recovery. At this time, I'm not confident that it will improve significantly, but our customers are working very hard to get back on their feet.

Okay. Good, that's helpful. And just to follow up on the comments regarding the third and fourth quarters. I understand there are still shifts that can occur, and we appreciate all the details you've provided. A couple of weeks ago, you mentioned possibly a 10% to 15% growth in revenue for the third quarter. Now, you’re saying moderate. Is this comment reflective of July's performance or anything else you'd want to add?

Fair question. When we made the release, we tried to gauge what we could update versus what was stable. More importantly, looking at the back half, we aimed to provide the most balanced view. We still feel confident about strong demand and the need for restocking. Our supply base is functioning well, and those core needs to deliver our outlook are solid. However, we feel it's better to focus on the back half overall. Factors affecting our outlook include how the COVID environment has led retailers to prioritize certain categories and the overall unpredictability of the situation, including the impending election and the potential implications for tariffs. We just believed it was prudent to maintain a balanced focus given current demand, supplier readiness, and inventory replenishment needs.

Great. Totally fair. Thank you for that. Lastly, can you elaborate on the favorable channel mix shift impact you've seen? How sustainable do you view some of the margin gains occurring now, and what do you think is most likely to stick?

Hey Peter, this is Scott. I can address that. In the U.S. and Canadian consumer businesses, we’re seeing volume shift toward customers and retail partners that are more profitable from a supply perspective, thanks to increased volume. Some of the more challenged retailers have been forced to close their doors permanently, leading to a scenario where some of those customers had higher costs associated with doing business. We believe that the growth we’re experiencing and our varied assortment across brands and value propositions will allow us to maintain our gross margins moving forward.

Okay, all right. Great. Thanks a lot, guys. Best of luck, and we’ll stay in touch.

Thank you.

Thank you.

There are no further questions at this time. I will now hand the call back to our CEO, Mr. Trepp, for his closing remarks.

Thank you. I'd like to close today by recapping the many factors that give us confidence in our ability to continue to successfully navigate this extraordinary situation. Demand for small appliances in the U.S. and Canada remains strong. Our leading portfolio of iconic consumer brands ranges from value to luxury and covers over 50 categories. Our line reviews for the holiday selling season are going well, and we have maintained and gained product placements, including for many new products. We possess strong capabilities in a rapidly growing e-commerce channel. We are managing discretionary expenses and have demonstrated effective working capital management, resulting in significantly increased cash flow and reduced debt. Over more than a century, our company has faced and overcome many challenges. Although we have not dealt with this pandemic before, we are fortunate to have experienced leaders who have managed through challenging situations in the past, including severe economic downturns. Each challenge has made us a stronger company. We expect to emerge stronger this time as well. This crisis has clearly demonstrated the strength of our global team. We appreciate our employees' commitment to supporting our customers while also working diligently to keep themselves and others safe. We remain committed to the safety and well-being of our employees while meeting the needs of our customers and consumers as we work together to keep our organization strong and agile. Thank you again for your time on our call today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.