Hamilton Beach Brands Holding Co Q1 FY2022 Earnings Call

Thank you, Kris. Good morning, everyone. Welcome to our first quarter 2022 earnings conference call and webcast. Yesterday, after the market closed, we issued our first quarter 2022 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 and our annual report on Form 10-K for the year ended December 31, 2021. 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. Thank you for joining us. We're going to take the next few minutes to provide an overview of our performance in the first quarter of 2022 and our outlook for the year. We are pleased that revenue was in line with our expectations, down slightly in the first quarter. We said previously that industry demand would be slightly softer than 2021, mostly due to the comparison to stimulus spending last year. Additionally, we compared a record quarter last year, which also was significantly higher than our historical average. Lower sales volume was partially offset by pricing actions that became effective during the quarter. Our price increases enabled us to offset a significant amount of increased transportation and product costs. As I discussed during our third quarter 2021 call, like all importers from China in the second half of 2021, we faced the challenge of securing enough ocean shipping containers to move product from China to the U.S. at contract rates. We elected to secure a certain number of containers at premium rates in order to meet customer commitments and consumer demand for the holiday selling season. Persistent supply chain constraints resulted in the delayed arrival of some inventory, a portion of which turned in the first quarter of 2022, affecting short-term margin. Our 2022 pricing strategy covered our ongoing transportation and product costs, and we also expected these premium spot containers to be a pressure in the first half of 2022 when we communicated our outlook. More of the impact hit the first quarter than being spread out over the first half. So we think the second quarter pressure from these spot containers will be behind us. We were also impacted by geographic mix. Michelle will cover that in a moment. When you add it all up, we believe this unusual first quarter margin pressure is not going to be an ongoing issue for us based on today's product loss. Our team has worked diligently and effectively to recover as much as possible of the prior year losses associated with the unauthorized transactions by former employees and our Mexican subsidiaries. In the first quarter of 2022, we recovered $10 million from a crime insurance policy. It is very gratifying to be able to recover this value for the Company and our shareholders. Despite the challenges related to inflationary pressures and supply chain constraints, our team has done an impressive job keeping our business on track and moving forward, enabling us to satisfy the needs of our customers. I am delighted by how effectively our operations, sales, and distribution teams are working together as they manage through some of the most challenging times ever in recent memory. For our teammates, we implemented a return to office plan in March that is designed to balance the needs and desires of our employees with the needs of our business. We believe we have implemented a plan that combines the best of our pre- and post-COVID environment. We are working to build on the many successes we achieved in 2021 with our six strategic initiatives and believe each one will provide growth in 2022. These initiatives support our overarching goal of long-term value creation. Four of our initiatives are focused on expanding our presence in markets where we have the opportunity to increase the sale of our higher-priced, higher-margin products. These include premium, commercial, and home health and wellness markets as well as our core market that focuses on our Hamilton Beach and Proctor Silex brands. The other two initiatives support our growth plans in all markets. These include accelerating our digital transformation and leveraging partnerships and acquisitions. Let me briefly discuss each one. Our newest initiative is to expand in home health and wellness, a fast-growing multibillion-dollar market. This initiative was added in 2021. We are currently focused on the air purification, water filtration, and home medical categories. During the past year, we took many steps to prepare for the introduction of new products in these markets. In the first quarter, we announced progress in three key areas. We've introduced the first products, a new line of premium air purifiers under the Clorox brand name and replacement filters. This product launch is part of an exclusive multiyear trademark licensing agreement we have with The Clorox Company. Our new air purifiers all have true HEPA filters. Currently, large room and tabletop models are available. Both models have received favorable reviews and have 4.9-star ratings. We have developed a robust digital marketing strategy to build awareness of these new products in a category and to drive sales. The spring allergy season supported sales in March and April. We anticipate additional sales to be generated as consumers try to deal with the difficulties of the summer wildfire season and as we build awareness. Further, we have scheduled additional launches in the coming months. New models that were launched this year include a medium room size and three connected technology models that use voice integrated services. We entered the home medical market through an exclusive multiyear agreement with HealthBeacon, a leading developer of smart tools for managing injectable medications at home. Under the agreement, we are the marketer and distributor of the system in the U.S. and Canada. The system includes a countertop appliance that serves as a sustainable way to store used needles for recycling. The appliance is supported by a companion app that assists patients in managing adherence to their personal medication regimen. In March, we announced the U.S. launch of the Smart Sharps Bin from Hamilton Beach Health powered by HealthBeacon. We plan to launch the system in Canada next year. We entered into an exclusive multiyear trademark licensing agreement with Brita and plan to launch a new line of countertop water appliances later this year. Gaining share in the premium market is a significant focus for our team. Revenue from our premium products grew 13% in the first quarter. Sales of the Bartesian cocktail machine and CHI garment care products were the major contributors to the growth. We also generated sales increases for our Wolf Gourmet and Hamilton Beach Professional brands. We plan to further expand our presence in the premium market with new product development, digital marketing, and by pursuing additional licensing agreements and other collaborative arrangements. We expect to generate additional sales growth of our Wolf Gourmet countertop appliances brand in 2022. Our newest Wolf Gourmet product, the true temperature kettle, is selling well. For the Bartesian premium cocktail machine, plans are in place to launch generation two this year. This upgraded model will provide enhanced functionality. Line extensions are under development, including a commercial-grade model, which we plan to introduce in the coming months. Recently, Aramark Sports & Entertainment announced that it has installed the Bartesian cocktail-making appliance in luxury suites at several baseball stadiums. Sales of our CHI premium garment care brand products are growing. New products in the line include a mini iron and handheld steamer. We're introducing many new products for our Weston brand, which is targeted to the gardeners and hunters. New items include updated meat grinder and slicer models, smokers, food dehydrators, and vacuum sealers. Our Hamilton Beach Professional line leverages our commercial products expertise for the benefit of home cooks. New HB Pro products include a programmable coffee maker, air fryer ovens, hand and stand mixers, and a cast iron griddle. Our initiative to lead in the global commercial market provides an outstanding opportunity for the sale of higher-priced, higher-margin products while meeting important customer needs in the food service and hospitality industries. In the last couple of quarters, the rebound of the global commercial market from pandemic-driven demand softness has accelerated in North America and around the globe. We expect the strength to continue. Our initiative focused on markets is to drive core growth. We plan to drive growth in our flagship brands, Hamilton Beach and Proctor Silex, through innovative new product development, digital marketing, and a number of our new products are aimed at the $50 and higher price point. Every year, we introduce a number of new products under these brand names. This year, new offerings will include several models for the coffee category. We're watching rechargeable cordless appliances in the personal blender and can opener categories. Other new products include new hand and stand mixers, air fry toaster ovens, and slow-cookers that defrost and have air fry attachments. We're pleased with the progress we're making to accelerate our digital transformation. In the first quarter, e-commerce sales were approximately flat overall as consumers shop more in stores as the pandemic recedes. In last year's first quarter, e-commerce sales increased 59%. So performing close to that typical comparison was an accomplishment. E-commerce sales accounted for 35% of our total company revenue in both the current and prior year quarters. With our initiative to leverage partnerships and acquisitions, we're actively engaged in identifying additional trademark licensing agreements, strategic alliances, and acquisitions that would drive growth in all our markets. To summarize, we have an exciting portfolio of brands with promising growth potential. As we drive momentum for all of our initiatives, we're planning for another year of record revenue growth. Operating profit is expected to improve at a faster pace than our revenue growth. We believe our base case outlook does not represent our full potential. However, given the many unknowns and potential headwinds this year, we're taking a more conservative view. Industry demand for small kitchen appliances remains solid, higher than prepandemic levels, slightly softer than 2021. Once the comparison to last year's stimulus spending concludes, demand is expected to be flat to slightly down from prior year and to remain ahead of prepandemic levels. Even as consumers return to offices to work, engaging in more evening and weekend activities, lifestyles have now reverted to prepandemic habits. Consumers are still spending significant amounts of time at home, preparing their own meals and beverages. At-home meal preparation is being driven by new habits formed during the pandemic, a heightened interest in healthy eating, and as a means to control expenses during inflationary times. We're closely monitoring any shift in consumer behavior away from home as well as any potential negative impact on consumer demand due to inflation. The 2022 marketplace is difficult to predict. While we expect demand for retail and commercial small appliances to be durable over time, we expect short-term ups and downs as we compare unusual 2021 activity. At this point, consumer demand has been holding up well. Depending on inflationary pressures, it could soften from where it is today. If it does, we would revisit our outlook. The supply chain environment remains dynamic and unpredictable. Inflationary pressures have been increasing for transportation and product costs, especially for ocean shipping containers. As we have been doing, we will work diligently to mitigate the impact on our margins to the fullest possible extent. And now I'll turn the call over to Michelle.

Thank you, Greg, and good morning, everyone. Let me discuss our first quarter 2022 results compared to the first quarter of 2021, and then I'll discuss our outlook. Overall, our top line performance was in line with our expectations. Net sales were $146.4 million, a 1.9% decrease compared to a record 2021 first quarter. Revenue in our global commercial market increased $6.5 million or 76% as the food service and hospitality industries rebound from pandemic-driven demand softness. In our Latin American market, the momentum of the last several quarters continued, and net revenue increased significantly. In our U.S. and Canadian markets, revenue decreased compared to last year's very strong growth, which was driven to a large extent by stimulus spending. Gross margin was 19.3% compared to 21.2%. Margin erosion was primarily due to less favorable product and customer mix. Higher product and transportation costs were mostly offset by price increases, except for the premium shipping containers that Greg discussed. The revenue growth in our global commercial market had a positive impact on margin with higher-priced, higher-margin products. However, this was offset by lower-margin sales in our Latin American market and the decline in sales in the U.S. and Canadian markets. In Latin America, price increases lagged due to long-term commitments on direct import orders. Selling, general and administrative expenses were $15.4 million compared to $26.4 million. The current quarter included the $10 million insurance recovery that Greg discussed. We maintained fidelity insurance and filed a claim to recover losses incurred up to the policy maximum. The claim was approved in the first quarter. The related receivable was inclusive of prepaid expenses and other current assets on our balance sheet as of the end of March. The receivable is reflected in changes in other assets within operating activities in the cash flow statement and is recognized in selling, general and administrative expenses in our P&L. This receivable was collected in April. Also contributing to favorable SG&A expenses were lower outside service expenses and lower overall employee-related costs. Operating profit was $12.7 million, including the insurance recovery, compared to $5.3 million last year. Other expenses include currency losses of $1.8 million compared with currency losses of $400,000. This increase was due to the liquidation of our Brazilian subsidiary. During the fourth quarter of 2020, we committed to a plan to sell our Brazilian subsidiary and determined that it met all the criteria to classify the assets and liabilities as held for sale. In April 2021, we made the decision to wind down the subsidiary and enter into a licensing agreement to serve the market. The carrying amount of the assets was classified as held and used during the second quarter of 2021. During the first quarter of 2022, the criteria for substantially complete liquidation were met. This resulted in $2.1 million of foreign currency losses previously recorded and accumulated other comprehensive losses being released into other expenses, in line with our previously stated expectations. The effective tax rate for this year's first quarter was 32% compared to 34.2%. In each period, we reported discrete items that resulted in higher-than-normal effective tax rate. We reported net income of $7.2 million or $0.51 per diluted share compared to net income of $2.9 million or $0.21 per diluted share. Now I'll turn to our balance sheet and cash flow. Net cash used for operating activities was $20.8 million compared to $1.9 million in the prior year. The change was primarily due to an increase in net working capital, which was a use of cash of $24.9 million in 2022 compared to a use of cash of $2.5 million in 2021. In 2022, trade receivables provided net cash of $15.5 million compared to $36.9 million in the prior year due to the timing of collections and the decreased fourth quarter sales in 2021 compared to 2020. Net cash used for inventory and accounts payable combined was relatively flat year-over-year. However, inventory increased compared to the first quarter of 2021 and the end of 2021, primarily due to longer lead times resulting from supply chain and transportation disruptions resulting in an increase in transit inventory year-over-year. Capital expenditures decreased to $400,000 compared to $1.7 million due to capital spending for our new distribution center in the prior year that did not recur. At the end of the first quarter, net debt was $118.3 million compared to $101.2 million from the end of last year's first quarter and $95.7 million at the end of 2021. Now let me turn to our outlook. Our team is executing well in a difficult operating environment. We're taking action to protect margins and mitigate the impact of significant external pressures, including rising transportation product costs, persistent supply chain constraints, and inflation. The timing for any evening of these pressures remains uncertain. Our responses include taking necessary pricing increases across all business units while also remaining competitive with retailers and consumers. We never take price increases lightly, and we're closely monitoring marketplace acceptance. We may not be able to recover all future cost increases with additional pricing initiatives. Amid these pressures, we will focus on managing margins and working capital within historical ranges to the fullest extent possible. For the full year 2022, we expect further progress with our strategic initiatives to enable us to deliver modest revenue growth compared to record revenue in 2021. For the first half of 2022, we expect revenue to decrease modestly. For the second half of 2022, we expect revenue to increase moderately. Full-year operating profit is expected to increase significantly, including the $10 million insurance recovery, driven mostly by the higher revenue. Our current outlook could change depending on a number of factors. These include retail acceptance of further price increases to offset rising costs, the impact of inflationary pressures and stay-at-home habits on consumer demand, any worsening of supply chain constraints, COVID protocols in China, and the impact of the conflict in Ukraine. That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.

Your first question comes from the line of Justin Kleber of Baird.

Everyone, it's Justin Kleber. First off, Greg, I wanted to ask you, you talked about demand for the category remaining solid, which is encouraging. But how do you think about overconsumption in this category the past two years? I mean, are you guys seeing any indications of unit demand that's been pulled forward as a result of the pandemic?

Justin, so I think so far, it has been holding up. As we mentioned earlier, we have not seen significant deterioration of unit demand. There's a little bit as prices have gone up, and there's really this window for the first 8 to 10 weeks of the year where there were a couple of stimulus checks last year, that certainly put a lot of noise in the year-ago period. Easter moved around. So those also make it a little bit hard to read. But the things that were going on during the pandemic, of course, were people staying at home more, but also a big factor of prepandemic was millennials moving into household formations, and that continues to go. And I think also with people staying home, a lot of companies now, as you know, were hybrid and so they're home for a couple of days and working for a few days. So there is going to be more at-home activity than there was prepandemic also. So, so far, it's held up. There are a lot of moving parts, as you well know. So we're going to watch it closely. But so far, we have not seen a significant drop-off due to some sort of front-loading or people being overburdened with appliances yet.

Yes. Okay. That makes sense. And maybe somewhat related, just you kind of mentioned the prices going up in the category, right? I mean prices are going up virtually across every consumer product. So are you seeing, I guess, any customer pushback to date? It doesn't really seem that way, but any indication of maybe trade-down to lower price points in response to higher retails.

Yes, Justin, this is Scott. What we're observing in the marketplace is that the price increases we've implemented have been accepted by our retailers. Retail prices, whether in-store or online, have been adjusted accordingly. I do believe that retailers are starting to reconsider their pricing strategies. For example, if a hand mixer was priced at $19 and has now increased to $23, they still feel a need for that $19 hand mixer. We’re revisiting our offerings because Hamilton Beach has a wide range of products across various value propositions. We’re positioned well with options from good to better, best, and even luxury items. As we work to address some of the retail gaps that have arisen due to rising prices, we have the products that can meet those needs and are currently being evaluated.

That's great color. The next question, just on the strength in commercial. The $15 million revenue figure for this quarter, notable step-up from the second half of last year. Greg, is there anything unique in that in this quarter from a timing perspective or a new customer win? Or is this kind of $15 million figure a good run rate we should be thinking about for the balance of the year?

There wasn't a single significant win that caused this increase. Overall, we have strong performance across our food service business, which we assess both globally and in North America, as well as our hospitality sector focused on hotels. All areas are experiencing robust demand, much of which stems from a time when restaurants were shut down and are now reopening and trying to catch up on equipment needs. We started the year with momentum that really took off in the first quarter. When we examine our backlog and future projections, the growth appears to be broad-based and likely to continue for at least another quarter or two. It's challenging to predict too far ahead, but currently, it seems we should expect ongoing strength. Last year, we began to see growth in the fourth quarter, so comparisons will become more difficult as the year progresses. However, we are currently comparing against relatively weak periods in the second and third quarters, which should contribute to a strong growth rate for at least the next few quarters.

That's great to hear. In the home health and wellness categories, there are many exciting developments happening. Can you provide any insights or details about the revenue potential from this broader initiative over the next year or two? Do you think this will significantly impact the overall company?

The goal is to make it meaningful. I'm optimistic about Scott and the expectations for him here. What I feel good about is that we're not relying on just one effort. Air purification remains a strong and proven business where we must capture our share, and there is demand for it. Water is a significant existing market, but we're also venturing into new territory with an electric countertop appliance, which is not yet an established category. Creating a new category presents great potential but also many challenges, as we need to educate consumers on its necessity. People already use water pitchers and devices, indicating a real opportunity. HealthBeacon, for instance, represents a brand-new market, as people are currently exploring various ways to dispose of their injectables. Our product is unique in that it features an app to enhance adherence, which is appealing for caretakers monitoring children or parents. However, it is a new concept that requires education for both users and caretakers. I anticipate uneven growth with potential fits and starts, but over the next few years, I'm excited about our prospects and believe we will achieve solid growth from the activities I've mentioned. I'm unsure which initiatives will lead and which will follow, but we are optimistic about the potential outcomes.

Yes. And I will just add, Justin, these categories that we're getting into, both in the air and the water segment that Greg talked about, are very nicely balanced from an online and brick-and-mortar perspective. So again, we feel like we have got a good infrastructure that can help build share in both these segments. And then just also add that they also have come with the consumables. So another focus that we've been trying to get to, which is not just selling the appliance and then walking away from the consumer, but continue to engage with that consumer for many, many years to come with the consumable.

Yes. Okay. Two more questions from me. Just on supply chain and given the lockdowns in China, how would you guys characterize the magnitude of disruption today versus what you've been dealing with at various points in time here over the past few years? And just trying to understand how you feel about inventory flow and your ability to secure product ahead of this year's holiday selling season.

Sure. Let me provide you with an overview of the current situation. There are always unexpected challenges that arise on a go-forward basis, which makes it a bit difficult to discuss. However, the good news is that we have around 100 employees in China. Having a team on the ground who is directly affected greatly helps us navigate these challenges, which is a significant advantage. We have a strong team in China that has been with us for many years and we have a diverse supply base. This diversification means we are not overly dependent on just one or two suppliers. So far, as disruptions have occurred, primarily in Hong Kong, Shenzhen, Shanghai, and now heading towards Beijing, these disruptions have been temporary, lasting only a few weeks at a time in different locations. Fortunately, they have not caused significant disruption to our operations. While we anticipate some fluctuations in supply, nothing severe is expected at this time. However, if a port were to face prolonged issues during peak season, that could pose challenges for us and others as well. Currently, regarding small appliances for Hamilton Beach, the situation has been manageable. It has required considerable effort from our team, but we have been able to keep our customers supplied.

Okay. That's good to hear. Last question just maybe for Michelle on the guidance for operating profit to increase this year. If you exclude the insurance recovery, I mean do you still expect that to be the case?

Justin, I would say we haven't moved off our guidance from year-end. So maybe just remove the word significantly.

If there are no further questions at this time. I'd like to turn the call back to Greg Trepp, President and CEO.

Thank you. As we look ahead, even as we address the many ongoing challenges facing our company, industry, and all businesses, we're optimistic for many reasons. We're a leader in our industry. There is proven durable demand. Our broad portfolio of trusted brands, our comprehensive product offerings, our experienced team, our global infrastructure, our product range of retail relationships across all channels, and our well-developed e-commerce capability are all key competitive advantages, which enable us to maximize performance. We're excited about the many prospects for profitable growth that we believe will be available through our initiatives. We're focused on effective execution as we work to increase our participation in premium, commercial, home health and wellness markets as well as our core market. That concludes our report today. Thank you for taking the time to join our call.

This concludes today's conference call. Thank you for participating. You may now disconnect.