Hello, everyone, and welcome to the Hamilton Beach Brands Holding Company Q3 2021 Earnings Conference Call. My name is Charlie, and I'll be the coordinator for today's call. I will now hand over to your host, Lou Anne Nabhan, Head of Investor Relations to begin. Lou Anne, please go ahead.

Thank you, Charlie. Good morning, everyone, and welcome to our Third Quarter 2021 Earnings Conference Call and Webcast. Yesterday after the market closed, we issued our third quarter 2021 earnings release and filed our 10-Q with the SEC. Copies are available on our website. Our speakers today are Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Senior Vice President and Chief Financial Officer. Also participating in the Q&A will be Scott Tidey, 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 risks and uncertainties is available in our earnings release, our 10-Q and our annual report on Form 10-K for the year ended December 31, 2020. 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 will turn the call over to Greg Trepp.

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. It was great to see the strong market demand momentum that we experienced in the first half of this year continued in the third quarter. We were especially pleased that our global commercial market continued its robust rebound from last year's pandemic-driven weakness. Our revenue more than doubled as the food service and hospitality industries continue to recover. Our international consumer markets also continued to rebound strongly in our Latin American market, revenue more than doubled, and in our Mexican market revenue increased. In the US consumer market, where strong demand continued revenue increased. Last year's lower revenue was temporarily due to decreased shipping volume during a cutover to a new ERP system, and revenue shifted into the fourth quarter of 2020. Overall, our brands are performing well across many measures, including sales, placements and star ratings. We're pleased with the retail placements and promotions that we have secured for the holiday selling season. We continue to experience strong demand. However, challenges throughout the global supply chain have hampered our ability to fully meet demand. We're fortunate to have an experienced and talented team to lead us as we strive to maximize our ability to navigate these challenges. Our team has worked tirelessly and executed well. I'm deeply grateful for everyone's hard work, dedication, agility and resilience. The main industry-wide challenge to fully satisfy the demand is the ability to source and transport products in a timely manner and have a reasonable import cost. Throughout this year, we have taken many steps to mitigate the supply chain challenges, including pricing actions, negotiating with carriers for container space and rates, working with our suppliers to minimize constraints and collaborating with our retail customers. We were pleased that pricing actions that went into effect in the third quarter helped restore our gross margin into its historical range compared to where it was in the second quarter of this year. Product and transportation costs are expected to continue to rise. We plan to balance the need to cover rising costs with the need to remain competitive. Depending on the rate of continued cost escalation, price increases may not fully offset cost increases in the short term. We remain focused on importing all the inventory possible to meet the demand that we are seeing from both brick-and-mortar and e-commerce retail customers. We feel particularly confident about the strength in our demand in the US consumer, Latin American consumer and global commercial markets. Our largest obstacles to maximizing our business continue to be the supply chain issues, which we expect to persist at least through the first half of 2022. Our suppliers continue to struggle to keep up with the demand due to power outages and sub-supplier issues among others. We believe we are managing this challenge well, and we have a very capable team in the US and on the ground in China to work directly with our suppliers. The main transportation challenge is the ability to secure ocean carriers at a reasonable cost. Like others, we have a contracted container rate. But like every company, we have not been able to secure all of our needs at the contract rate. We're balancing the need to manage short-term margin, while ensuring we meet customer commitments in retail and commercial demand. Transportation lead times also have increased. We believe we have pivoted well and we've adjusted our order patterns accordingly. I'd like to now discuss the progress we are making with our strategic initiatives, which are designed to increase revenue, expand margins and generate strong cash flow over time. Expanding our e-commerce leadership and our digital transformation is a key priority. We are the market leader and continue to invest to ensure our leadership continues. Year-to-date, sales through the e-commerce channel accounted for 33% of total revenue. We continue to invest in our e-commerce capabilities including digital marketing programs, expanding our direct-to-consumer distribution operation and increasing participation with pure-play and omnichannel customers. Achieving a significant position in the higher-priced, higher-margin premium market is also a key focus. Sales of our premium products increased 35% in the quarter. Our premium brands have been well received by consumers, including our Wolf Gourmet countertop appliances which have been hard to keep in stock. This year we introduced a True Temperature Kettle that has been well received. The sale of our CHI premium garment care products has rebounded nicely this year, as more employees have returned to offices and pressing cloths is once again a necessity for many people. Our Hamilton Beach Professional brand continues to gain traction. And we continue to introduce new products in a number of categories to provide consumers with commercial-grade quality at home. The Bartesian Premium Cocktail Machine remains ever popular. We have developed a generation two model, which includes a number of updated features and our partner continues to add new flavors to the extensive line of cocktail capsules. For the premium market, we are also focused on expanding our leadership position globally. We hope to continue to invest in new product development, further strengthen customer relationships and enter additional strategic partnerships and licensing agreements. In 2021 we added a new growth initiative, which is to expand our presence in the large and fast-growing home, health and wellness market. In the second quarter, we announced a partnership with the Clorox Company to launch a new line of air purifiers, under the Clorox brand name. We also announced a partnership with HealthBeacon Limited making us the exclusive marketer and distributor with the smart injection care management system in the U.S. and Canada under the new brand name Hamilton Beach Health. For the Clorox product launch, our marketing and sales teams have spent the past few months presenting the new lines of air purifiers to retailers, and it has been well received. We feel confident that our marketing and distribution capabilities and our retailer relationships, combined with the Clorox brand name and its association with cleanliness positions us well for success in this market. In January, we plan to launch a Clorox large room air purifier in a tabletop air purifier. In February, we will add a medium room purifier. Later in the spring, our Alexa smart air purifiers are scheduled to launch. Turning to our partnership with HealthBeacon, they are a leading developer of smart tools for managing injectable medications at home. HealthBeacon is headquartered in Dublin, Ireland and they have achieved great success in several global markets. They needed a partner to expand quickly and efficiently in the U.S. and Canada; we were very excited to become their partner. HealthBeacon developed the world's first and only FDA-cleared Smart Sharps Bin, which intelligently helps patients with a broad range of treatments for chronic conditions; the BIN in combination with MAP, the total system provides medication management reminders, tracks adherence and provides for a safe and convenient disposal of used sharps. Plans are on target to begin online distribution in the fourth quarter of 2021 with a new direct-to-consumer website. Also in the home, health and wellness market we have launched our first product in the water filtration category, AquaFusion. It's available only on Amazon, and we're in the process of rolling it out to other online retailers. AquaFusion is an electric countertop appliance and provides superior water filtration and fresh taste using a proprietary carbon block filter. We also offer capsules which provide a consumable revenue stream. AquaFusion is eco-friendly which filters out 750 single-use bottles. We expect our expanded participation in the home, health and wellness market to add to our momentum in 2022. We're working to further expand our presence in this space and have a number of discussions underway. We hope to make additional announcements including programs under our Hamilton Beach Health brand. Even as we work to expand in new markets, we remain intently focused on accelerating the growth of our flagship brands, Hamilton Beach and Proctor Silex in our heritage North American market. Innovation and new product development have always been the lifeblood of this business. And we're excited about a number of new products for these brands. For the industry's largest category coffee, we continue to expand our FlexBrew Single-Serve Coffee line. Our next-generation FlexBrew machine delivers faster brewing and offers a removable multi-serving reservoir. We will be rolling out several versions of the new FlexBrew Trio as well as a variety of single-serving brewers. We've also recently launched the FlexBrew Universal, which allows consumers to brew coffee using K-Cup pods, their favorite brand coffee or Nespresso style pods. Outside of single-serve coffee we continue to see an increased consumption of cold brew coffee. We recently launched the Hamilton Beach Rapid Cold Brew & Hot Coffee Maker. This is an innovative new product that allows consumers to make a cup of cold brew coffee in under six minutes and has the flexibility of also being able to brew traditional hot coffee. Growth continues in the Air Fryer Toaster Oven category and is a significant focus for our product development teams. We continue to build our lineup of Sure-Crisp Air Fryer Toaster Oven. Recently we launched the Hamilton Beach professional model. We've also recently launched innovation in one of our heritage categories, hand mixers. Our new patented Easy Clean beaters provide a smooth closed inter-surface which prevents clogging and makes cleanup much easier. We're also rolling out a new Proctor Silex line which offers superior product performance and durability. In summary, demand for our retail and commercial small appliances remains strong. Our brands and products are selling very well. Our focus is to ensure product availability. We're leveraging all of our resources and expertise as well as our relationships with suppliers, customers, and freight tenders to meet demand as we continue to execute well in the face of persistent challenges and work to deliver a strong finish to the year. I'll now turn the call over to Michelle.

Thank you, Greg, and good morning everyone. Let me review our third quarter results compared to the prior year. Total revenue increased 41.8% to $156.7 million compared to $110.5 million. Greg reviewed the performance by market. So, I'll just reiterate that we are very pleased to see the rebound in our global commercial Latin American and Mexican markets continue, and we are also very pleased that demand remains robust across all of our markets. Gross profit margin was 21.2% compared to 21.5% in the prior year due to significantly higher transportation costs. As a result of the disruption and congestion in several areas of our supply chain, primarily from China where our products are manufactured, we experienced increased freight and container costs as well as additional carrier storage charges. There was also an increase in labor costs for our warehouse personnel. Selling, general, and administrative expenses remained flat despite $1.6 million in incremental expenses related to the relocation of our US distribution center. Outside services decreased by $900,000; employee regulated costs were lower overall but have offsetting factors. SG&A benefited by a decrease in our accrual for incentive compensation as a result of the decline in our stock price, and this benefit was partially offset by an increase in salaries and benefits. As a reminder, $700,000 of non-recurring expenses related to patent litigation were included in the third quarter of 2020. Operating profit increased to $7.4 million compared to an operating loss of $2.4 million. Interest expense increased by $300,000 due to higher average borrowings outstanding under our revolving credit facility. While average borrowings were higher, our weighted average interest rate for the period declined. Net income from continuing operations was $5.7 million or $0.41 per diluted share compared to net loss from continuing operations of $2 million or $0.15 per diluted share. Our cash flow before financing activities was a use of $13.2 million for the nine months ended September 30th, 2021 compared to a use of $8.8 million last year. Capital expenditures were $9.1 million compared to $3.1 million. The current year amount includes our investment in our new distribution center, which is partially offset by lease incentives and tenant improvement allowance provided by cash flow from operating activities. As we've discussed the past two quarters, we began a planned relocation of our US distribution center during the second quarter from Olive Branch, Mississippi to nearby Byhalia, Mississippi. The move continued in the third quarter; it was completed on time and is now fully operational and running efficiently. We were fortunate that we accomplished such a complex move during this challenging environment and that we finished ahead of the holiday selling season. In the new facility, we have expanded direct-to-consumer shipping capabilities, which increases our ability to ship online orders from any retail customers. We have a great team in Mississippi and we're able to retain much of our workforce after the move. We're very grateful to all of our employees who were involved in completing this move successfully. They worked incredibly hard and delivered an outstanding result. Turning to working capital, net working capital increased by $57.3 million. Trade receivables increased by $22.6 million, primarily due to increased sales. Accounts payable decreased by $61.1 million and inventory increased by $26.4 million driven by the increased sales, partially offset by longer in-transit tons. At September 30th, 2021, net debt was $113.5 million compared to $69.6 million at September 30th, 2020, and $96 million at December 31st, 2020. The changes in net debt are attributable to the changes in net working capital. We amended our credit agreement in September among other changes and increased the facility from $125 million to $150 million, amended the pricing grid and increased eligible inventory included in the borrowing base. Let me now turn to our outlook. The continued uncertainty surrounding supply chain cost pressures, which Greg discussed in detail, limits our near-term visibility. For that reason, we have determined it prudent to refrain from providing a definitive outlook until the current volatility stabilizes. As a reminder, in the fourth quarter of last year, revenue shifted from the third quarter as we sold order backlog related to the lower shipping levels in the third quarter, which resulted from the cutover to our new ERP system. Therefore, we expect the fourth quarter 2021 revenues could potentially be lower than the fourth quarter of 2020 depending on the availability and timing of supply. That concludes our prepared remarks. We will now turn the line back to the operator for Q&A.

Thank you, Michelle. Our first question comes from Justin Kleber. Justin, your line is now open.

Hi everyone. Thanks for taking the questions. The first one we had was on revenue. And if you look historically the third quarter tends to build around 15% to 20% from 2Q. This year your revenue rose about 1% sequentially. So the question is, is it fair to think about that delta versus the historical trend as demand that has just went unfilled given inventory and supply chain constraints, or is there an internal view you guys have just on the potential impact to revenue from these bottlenecks throughout the supply chain?

Hey, Justin, I'll start off with that and Scott can add. Thanks for joining us. Good morning. So, good question. I think what sort of historically outside of these current conditions, we often have volume move pretty dramatically between the third quarter and fourth quarter. If a retailer has a big promotion, or we do some shipping direct import one year versus not directing import the next year, you can see something move really just from September to October, which could cause some more fluctuations. So we tend to look at the back half as a group. But I think your point is well taken that as you compare to the second quarter, it's a little different trend here than the usual history. I think what we've seen is demand is really strong. Product definitely is taking longer to get here. And we are working really well to get as much inventory as we can, but it really is you're pushing hard to get it here, get it off the ships and realign and turn back to customers. So I would say, we feel good about how strong the demand is through the third quarter into the fourth quarter. We have internally a wide range of potential numbers that we would deliver depending really on supply. The demand is there. So I think we just sort of felt like it's important to communicate the fact that it could be a little lower than last year, because last year's fourth quarter was pretty strong. But also if we can get the product and get it here and get it turned that we could be better than that. It really just depends on how things play out that way. And so Scott, if you have any…?

Yes, Justin, this is Scott. I’d like to add a couple of points. In the second quarter, as Michelle mentioned, we were transitioning our warehouse distribution centers. We attempted to shift some volume early to get it into our retail partners as we anticipated this transition. This contributed to an increase in sales during the quarter. We're observing growth in the Latin America and commercial markets, and we're still working to fill those distribution centers with products from our partners. This helped balance things between the second and third quarters. Ultimately, it comes down to the timing of when we receive goods from China and when we can fulfill orders. Additionally, the shift of Prime Day from the third quarter to the second quarter also affected our volume.

That's a great perspective. Thank you for that. I guess, as you look across the retail channel how are you feeling about your in-stock positions relative to your primary competitors as we approach the holidays? And then just any sense on market share and how that's been trending for you guys?

Yes. This is Scott. So, a couple of things there. I think that in general just looking in the small kitchen appliance segment, I think there's a number of suppliers trying to deal with the shortages that are coming from product out of China. It's in different pockets. Sometimes it's related to components. Sometimes it just seems like there's a little bit longer transit time. But from what we hear from our retailers, we feel like we're doing as well if not better than some of the other suppliers out there and that we certainly are in a better position than we were prior to this quarter, and catching up there. So, overall, I think we feel good. We're still chasing it, as Greg alluded, we're trying to get things in as quickly as possible. The transit times have been longer. We're trying to make sure that we're servicing our retail partners. Sometimes it's hard to get those promotional volumes in at the quantities they want, but we're working really hard to try to reduce those transit times and make sure we're servicing our customers.

Yeah. No, that makes sense. Shifting gears to the margins and nice progress here during 3Q and you mentioned the pricing actions that were implemented across the summer. I mean were there any other factors you'd point to whether that's mix of products or customer mix that helped you on the gross margin front, or was it really just a function of these price increases?

There are many factors involved. The mix certainly plays a role, but the pricing actions were the most significant element. We've implemented pricing changes over several months, and as we built up our core products, those price increases began to have a substantial impact each month. This positions us well for the fourth quarter as well. We've invested in some premium containers with contracted rates, which cover most of our requirements. However, we'll see some of these contract rates reflected in our profit and loss statements over the next quarter or two, and these efforts will be beneficial for revenue. It's likely that there will be fluctuations in margins as we navigate through the holiday season. We have priced our products accordingly, but the challenge is to understand how the mix of products, the premium containers, and the pricing will all align over time. I believe we have everything under control, but it's important to recognize the various factors that could influence our performance as we approach the end of the year.

Yeah. For sure, a lot of moving pieces. I mean Greg, if you just think about the general supply chain bottlenecks. You mentioned in the prepared remarks, product and transportation costs are still expected to rise in 2022. But are you guys seeing any or at least starting to see any signs that we're maybe at the point of peak pressure or peak congestion across the supply chain?

That's a really good question, Justin. I believe the conditions have stopped getting worse, and there are some indications that things might be improving slightly, although we're only looking at a matter of weeks. It's tough to predict what will trigger another decline. Overall, we have containers stuck in various locations, and while we're facing challenges with certain products, others are doing well. It appears that the situation isn't deteriorating further. Additionally, with Chinese New Year approaching in early February and the Olympics happening in China that same month, we might be in a brief lull before we need to expedite getting products out of China. It's difficult to say for sure, but we have noticed a few positive signs, though we are still in a challenging place. The fact that it's not worsening while still being in a bad situation differs from actual improvement, and that’s the tricky aspect. We need to monitor how things unfold in the near future.

Yeah. No, I appreciate that. And just last question, bigger picture, on the operating margin goal that the company has had out there, kind of moving to that 9% to 10% range. If you think about bridging the gap between where you sit today and the long-term goal, is it really just revenue growth and scale benefits that get you moving in that direction into that kind of high single-digit operating margin target?

Revenue growth is a significant focus for us. We believe we can manage our expenses to grow at a much slower pace than our revenue. Margins are crucial, and we aim to maintain them within our historical range. There may be fluctuations from quarter to quarter, but if we can stay at the lower end of that range, we'll be in a strong position, and we believe we can improve further in certain areas like the premium segment and commercial aspects as they develop, although we're not relying solely on that. Ultimately, it boils down to managing costs while increasing revenue at a quicker pace, which we feel optimistic about. While short-term volatility poses challenges, we are confident that we are moving in a positive direction over time.

All right. Appreciate all the color, and best of luck guys for the fourth quarter. Take care.

Great. Thanks so much. Thank you for the questions.

At this current stage, we have no further questions. So, I'll hand back over to Greg Trepp, Chief Executive Officer of Hamilton Beach Brands Holding Company for closing.

Thank you. We are fortunate to be a leader in an industry with both strong pandemic-driven demand as more people are spending time in their homes and durable long-term demand driven by favorable demographic trends with millennials and boomers. We also expect our strategic initiatives to drive revenue growth, operating profit and margin expansion and strong cash flow over time. That concludes our call for today. Before signing off, I'd like to wish you all a wonderful holiday season. Thank you again for joining us.

Thank you all for joining today's call. You may disconnect your lines and have a lovely day.