Hamilton Beach Brands Holding Co Q2 FY2022 Earnings Call

Hello, and welcome to the Hamilton Beach Brands Holding Company Second Quarter 2022 Earnings Call. My name is Lauren, and I will be coordinating your call today. I will now hand you over to your host, Lou Anne Nabhan, Head of Investor Relations, to begin. Lou Anne, please go ahead.

Thank you, Lauren. Good morning, everyone, and welcome to our Second Quarter 2022 Earnings Conference Call and Webcast. Yesterday, after the market close, we issued our second quarter 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 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. I'll now hand 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 discuss our good performance in the second quarter, along with our outlook for the second half. We are pleased with our second quarter results, which demonstrated another quarter of strong execution by our team in a challenging external environment. Revenue, gross margin, and operating profit were in line with our expectations. We achieved our results against a difficult comparison to record sales in the quarter of '21, which increased nearly 12%. Last year's growth was impacted by strong demand softness in our global and Latin American markets. The demand in the U.S. continues to be strong. This year, as we expected, revenue declined in all of our consumer markets except Canada. In our global commercial market, revenue increased 37%. The commercial market continues to benefit from the strong ongoing rebound of the food service and hospitality industries. We continue to make progress with all of our strategic initiatives. Several of them generated strong growth in the second quarter. We've been working to build on our progress and believe each new initiative will generate growth in 2022 and beyond. Our initiatives are focused on expanding our presence in markets where we have the opportunity to increase the sale of higher-priced, higher-margin products. These include the premium, commercial, and home health and wellness markets. We're also focused on growth of our core brands, Hamilton Beach and Proctor Silex. Our initiatives focused on accelerating our transformation and leveraging partnerships and acquisitions are going very well. In the second quarter, e-commerce remained strong. Online revenue increased and accounted for 37% of our total. We continue to accelerate our digital transformation by investing in online selling capabilities and digital marketing for all of our brands and markets. I mentioned that our global commercial revenue growth in the second quarter was plus 37%. We are also participating in this market with product development, digital marketing, and increasing customer relationships with regional and global chains. From our premium brands, we matched our results in last year's second quarter. Growth was particularly strong for the extremely popular Bartesian Cocktail machine and our CHI garment care products. We are introducing a number of new products in time for the holiday selling season. We are excited to launch the Bartesian Generation 2 as well as the Duet, a smaller 2-bottle model, and a commercial model. Our premium portfolio includes five brands, all five of which have an online rating of 4.2 stars or better. Due to the comparison to last year, sales of our core brands, Hamilton Beach and Proctor Silex, declined slightly. However, we expect growth for both brands in 2022, and we are launching new products in multiple categories for the holiday selling season. Hamilton Beach continues to be the number one brand in the U.S. based on units sold. It has extremely high awareness and a 4.4-star average online rating. The brand serves a range of categories and price points with innovative consumer-preferred products. The Hamilton Beach brand did extremely well during this year's Amazon Prime Day held early in the third quarter. Following the event, Amazon issued a press release announcing it was the biggest Prime Day ever. In that announcement, they highlighted some of the brands worldwide, and Hamilton Beach was among them. For us, this year was our best ever as well, with sales nearly doubling compared to last year. Proctor Silex is a brand with a broad portfolio that has a 4.4-star average online rating. We continue to incorporate the Simply Better brand positioning throughout our Platinum Series line as well as introduce products in a broad range of high-demand categories. Our Home Health and Wellness initiatives are progressing as we have begun to launch new products in the air purification and home medical categories. This market is large and fast-growing. We look forward to our new products gaining traction throughout the year and into next year. This market is one where we also have meaningful consumables revenue, particularly for filters for air purification and water filtration products. This year, we have our first products in a new line of air purifiers under the licensed Clorox name. We plan to launch additional new models in the coming months. We launched the Smart Spin - Smart Sharps Bin from Hamilton Beach Health powered by Health Beacon for at-home injection care management in the U.S. home medical market. We plan to launch 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 in early 2023. Turning to our gross profit margin, we were pleased that it was well above last year's second quarter and back within our historical range. Our efforts to mitigate higher transportation and product costs through a number of actions, including pricing programs, have been successful. Inbound freight costs have become a significant portion of our product costs, and securing ocean containers at reasonable rates remains a significant challenge. Outbound freight costs have increased significantly as well due to high demand for trucking services by all shippers. While we are seeing ocean container rates come down somewhat as overall demand eases, the rates remain significantly higher than they were at this time last year. We've begun to benefit from the recent abatement of commodity costs. However, given the increase in container rates, overall product costs are up significantly compared to last year. We are focused on covering the higher costs, particularly for the ocean carrier rate increases, and we continue to work with our retail customers. Currently, we are implementing additional price increases that will become effective in the third quarter. We expect to be successful in these increases that are necessary to maintain our margins at historical levels while staying competitive. Next, I will discuss demand for the second half of the year. Demand for the small kitchen appliance industry was softer in the first half of the year compared to the same period last year, primarily due to the comparison to last year's spending. In the second half, demand is expected to be slightly down from the prior year but remain significantly ahead of pre-pandemic levels. Demand has softened slightly compared to our previous outlook as consumers and retailers adjust to current unfavorable economic conditions, but it is not a dramatic decline. We believe the small kitchen appliance industry has a number of tailwinds supporting continued strength despite the growing economic headwinds. First, the pandemic accelerated broader and deeper consumer adoption of small kitchen appliances that has continued as the pandemic has receded. Significantly, more consumers are engaged in the small kitchen appliance category than they were pre-pandemic. Secondly, even as many people have moved to non-lockdown lifestyles, many others continue to work from home or at least part-time. These folks continue to engage in at-home meal and beverage preparation during the workday for breakfast, lunch, and snacks. Third, for those working in offices with children back in school, the need to be able to prepare healthy and good-tasting meals quickly is more important than ever. Large gatherings with family and friends for holidays and other occasions are back. All of this benefits the small kitchen appliance category. Another consideration is the inflationary times in which we are living. When the economy softens, the small appliance market remains strong as consumers stay home and cook more to save money, especially now given the significant increase in away-from-home meal costs. History tells us that during difficult economic times, people do not eliminate spending on essentials. Products like coffee makers, small appliances used to heat food, and other essentials continue to see spending. We analyzed 16 years of industry data and found that the small kitchen appliance industry has performed well in both difficult and good economic times. There have been pockets of extreme ups and downs, but those have been short-lived, and the industry quickly returns to steady performance. Hamilton Beach brand expects to continue to benefit from a number of strengths and competitive advantages even during difficult times. While we are optimistic about our prospects for a strong second half of the year, we recognize that uncertainties in the macro environment can create challenges. At this point, consumer demand has been holding up, and based on what we know, we feel confident in our outlook. Now I'll turn the call over to Michelle.

Thank you, Greg, and good morning, everyone. Let me discuss our second quarter 2022 results compared to the second quarter of 2021, and then I'll discuss our outlook. Net sales decreased 4.6% to $147.5 million compared to a record $154.7 million last year. As Greg discussed, we had a decline in most of our consumer markets compared to the prior year, partly due to a favorable impact of U.S. government stimulus checks on consumer spend. Offsetting the overall decline in consumer markets was a revenue increase of $4.1 million in our global commercial market. Also contributing to the decrease in total revenue compared to prior year is our transition from a company-managed model to a licensing model for our consumer businesses in Brazil and China, which we completed at the end of 2021. In the second quarter, we improved our gross profit margin to 21.7% from 18.4% last year, primarily due to a full quarter of price increases that offset higher product and transportation costs. Additionally, the prior year included significant carrier storage charges that did not repeat this year. Selling, general, and administrative expenses were $26.5 million compared to $27 million. The decrease was primarily due to incremental expenses incurred last year during our relocation to a new U.S. distribution center. Additionally, expenses decreased for outside services, and our overall employee-related costs declined as a result of lower accruals for incentive compensation due to a lower stock price. Operating profit was $5.4 million compared to $900,000 last year. Our effective tax rate for the six months ended June 30 was approximately 24% compared to 38.1% in the prior year. The prior year was high due to the inclusion of interest and penalties on unrecognized tax benefit as a discrete expense. In the second quarter of this year, we had a change in position related to an unresolved Mexico tax matter, and we were able to reverse the interest and penalties previously recognized. Excluding discrete items, we expect our effective tax rate for this year to be approximately 24%. Interest expense increased by a nominal $200,000 due to rising interest rates as well as increased average borrowings outstanding under our revolving credit facility. We believe we have some protection from rising interest rates with our interest rate response. For the quarter, net income was $5.1 million or $0.36 per diluted share compared to net income of $100,000 or $0.01 per diluted share last year. We repurchased 151,221 shares during the second quarter under our current stock repurchase program, which runs through December 31, 2023. Through July 31, we have repurchased approximately 261,000 shares for approximately $3 million. Now I'll turn to our balance sheet and cash flow. For the six months ended June 30, 2022, net cash used for operating activities was $25.5 million compared to cash provided by operating activities of $8.4 million in the prior year. The change was primarily due to net working capital, which was a use of cash of $36.1 million this year compared to a source of cash of $14.6 million in 2021. This year, trade receivables provided net cash of $19.8 million compared to $35.2 million in the prior year due to the timing of collections and decreased sales in 2022. Net cash used for inventory and accounts payable combined was $55.9 million compared to $30.6 million last year. Our inventory position is attributable to several factors: late production from 2021, late delivery of some 2021 production, increased ocean transit time, the slight slowing of demand compared to last year's elevated and robust levels, and retail overstocking across stores and related rebalancing programs. While our products are not in a stock position, overstock levels in other categories are having a near-term impact on retail orders overall. Our inventory this fall will significantly reduce current levels by the end of the year through ongoing placement and purchase order management. Capital expenditures for the first six months decreased to $700,000 compared to $7.6 million last year. The significant decrease was due to the investment we made last year for our new U.S. distribution center. We expect the investments we've made in our infrastructure in recent years, including our ERP system, will provide us with many benefits for years to come. At the end of the second quarter, net debt was $126.3 million compared to $98.1 million at the end of last year's second quarter and $95.7 million at the end of last year. The increase was due to the higher net working capital position. Now let me turn to our outlook. Our team continues to execute well in a challenging operating environment. We're taking actions to protect margins against the impact of significant internal pressures, including transportation and product costs, persistent supply chain constraints, and inflation. Our core business is solid, and we expect each of our strategic initiatives to provide growth in 2022. Compared to our previous outlook, sales expectations for the second half of 2022 are still expected to grow; however, they have been adjusted slightly to reflect a more conservative outlook for consumer demand. Sales expectations for our commercial products reflect a continued strong rebound from pandemic-driven softness. We continue to expect that for the second half of 2022 sales will increase modestly compared to the second half of 2021. For the full year 2022, we continue to expect modest revenue growth compared to record revenue in 2021. The operating profit is expected to increase significantly compared to 2021, which includes the $10 million insurance recovery in the first quarter of this year. That concludes our prepared remarks. We'll now turn the line back to the operator for Q&A.

Our first question comes from Justin Kleber from Baird.

It's Justin Kleber, Baird. Congrats on the quarter. Just wanted to ask, first off, on looking back at 2Q, Greg, you mentioned revenue was in line with your internal expectations. Curious if that was the case across both commercial and consumer markets.

Justin, yes, basically, yes. I think there's a little bit of movement within retail across North America, but commercial was right at maybe a little higher than we thought and retail was basically in line. I think overall it was right around where we thought, primarily due to the substantial comp we had from last year.

Yes, okay. You mentioned a more cautious approach for the back half of the year within consumer, which makes sense given everything going on in the environment and what we're hearing from retailers. Curious how those commercial expectations compare to your initial plan. It sounds like maybe you're performing a bit better within that segment than you initially planned for? Is that the case? Or are we just in line with the commercial business?

Well, I think, as you know, Justin, we often look at baseline upside and downside as we consider our outlook. Certainly, commercial has the potential to exceed our expectations. But right now, we're keeping in line with our base outlook with what we thought before. There is real strength globally, with China being the exception. We're chasing on the inventory a little bit. I do think there could be some upside there. It could be on the retail side as well, but it's tough to predict. As I mentioned, appliances do hold up pretty well even if things pull back across the economy. So I think when we consider all the factors at play, we have softened our retail outlook a little bit, but that's probably just to be cautious more than anything else. The primary factor influencing this is that retailers, due to their inventory backlogs across their stores, will free up some open-to-buy dollars for the holiday season as their inventory normalizes. If that remains backed up, it might affect their order levels a little bit. That's the one factor that's really tough to forecast.

That's helpful color. Maybe just a follow-up there, Greg. We all know that there's an inventory issue across retail broadly, and it seems to be impacting reorder plans. I just want to clarify what you're seeing within your category and your business. Are your retail partners becoming more cautious with orders they've already placed? Or is it more about maintaining some conservatism as you think about heading into the holiday and how successful they are at working down the excess inventory across the board?

Yes, Justin, this is Scott. I would say it varies across the retailers. We've got some that are very bullish and maintaining a good cadence on bringing in products. We really haven't seen any changes, as they actually want to be in a better inventory position going into the fourth quarter. With others, we feel like, in general, small kitchen appliance is not an area that's overstocked across most of ours, but they have other departments that are overstocked. So the overall open-to-buy dollars may be limited, and they are trying to figure out how to work down their weeks of supply maybe by a week or two, which we have certainly observed. But it varies really widely; some are business as usual, while others have pulled back to clear some of their own goods or seasonal items that they still have in stock, while others continue to be bullish and aim to capture more market share.

That's helpful color. Scott, just maybe 2 more here from me on the nice progress on margin during the quarter. Greg, you mentioned taking another price increase in Q3. How do we think about the stickiness of pricing? What's historically been the case in your business specifically? I ask from the standpoint that we're starting to see a decline in input costs, as you mentioned, and I assume transportation costs will continue to normalize as demand softens. So do you hold onto those price increases, or do you think some of that gets rolled back if these cost pressures continue to decline?

Well, I think generally, the commodity and input costs for production have stopped going up, and some are flat. So on the cost side, as we transitioned into this year, the back half of the year is focused on cost negotiations and our purchasing position with suppliers. While container costs are coming down, they are still significantly elevated from where they were a year ago, as you know. So there has been a lot of coverage in the press regarding those costs dropping, but it's important to understand that this is a decrease from record highs. Going forward, it is very competitive in the marketplace, and to maintain our position, we're working closely with retailers regarding cost increases. My expectation is that we will need to collaborate closely as those costs decline. We aim to keep our margins in historical ranges and drive revenue while controlling our costs effectively, which is essential for operating profit expansion. I think it’s more likely than not that as we move forward, we’ll remain within the gross margin range we are currently in and will continue to work with retailers to align pricing competitively.

Okay. We have no further questions registered. So I'll now hand you back over to Greg for closing remarks.

Thank you. As we look to the balance of the year, we're focused on executing well on our six strategic initiatives that are designed to increase revenue, expand operating margin, and deliver strong cash flow over time. Our commercial business is experiencing record growth, and strong order flow continues. We have a long list of new products introduced in 2021 and 2022 to drive growth. The small appliance market is projected to stay strong. While declining compared to a robust 2021, it remains well above pre-pandemic levels. We're also focused on continuing to execute well as we navigate many ongoing external challenges. We believe we are well-positioned to address them just as we have throughout this year. I am incredibly grateful to our team for all their hard work, diligence, and good thinking, which they continue to demonstrate. That concludes our presentation. Thank you again for joining the call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.