Hamilton Beach Brands Holding Co Q3 FY2022 Earnings Call

Good day, everyone. My name is Kellyanne, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the Hamilton Beach Brands Holding Company Third Quarter 2022 Earnings Call. At this time, I'd like to turn the conference over to Ms. Lou Anne Nabhan, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Kellyanne, and good morning, everyone. Welcome to our third quarter 2022 earnings conference call and webcast. Yesterday after the market closed, we issued our earnings release and filed our 10-Q with the SEC. This information is 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; Scott Tidey, Senior Vice President, Consumer Sales and Marketing, will participate in our Q&A. Our remarks today, including answers to questions, may contain forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed today. Information regarding these risks and uncertainties is available in our earnings release, 10-Q, and our annual report on Form 10-K for the year ended December 31, 2021. We disclaim 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 discuss our third quarter results, along with our outlook for the remainder of 2022. Our team continued to execute well in a challenging retail environment. We were pleased to deliver a 26% increase in operating profit as a result of gross profit margin expansion and lower SG&A. Gross profit margin expanded by 190 basis points, reflecting price increases that offset higher costs, a favorable product mix, and lower expenses for outside warehousing and labor compared to the prior year. Total revenue declined modestly as continued strength in our global commercial market partially offset lower sales in our consumer markets. Global commercial sales increased 36%, reflecting continued recovery in the food service and hospitality industries, as well as the sale of new products, which I will discuss in a moment. While consumer demand in the U.S. continues to trend after being down somewhat compared to 2021, it remains solid and continues to be up significantly compared to pre-pandemic levels. The revenue decrease in consumer markets in the third quarter was primarily due to many retailers remaining cautious and continuing their broad inventory rebalancing programs that began earlier this year. While our products have not been in an overstock position at retail, the broad rebalancing contributed to a shift in timing for some holiday orders for us and, in some cases, a reduction in pre-holiday build order quantities compared to historic levels. Holiday timing from month to month can always be difficult to predict. We expect to capture some of the delayed orders in the fourth quarter. There was a slight softening in the point-of-sale movement in the third quarter, but that was only a small contributor. We expected sales in the Latin American market to be lower than last year as we comped very strong sales in 2021. We also expected that last year's revenue in China and Brazil would not repeat because we have changed our business to a licensing model in those markets, effective at the end of last year. In the third quarter, the amount attributable to this change was $1.9 million, and for the first 9 months, it was $5.9 million. We continue to make progress with our strategic initiatives. These initiatives are ongoing programs that have helped us stay strong over the past several years. They are designed to increase revenue, expand operating margin, and generate strong cash flow over time. Our initiatives are focused on increasing sales in the e-commerce channel, leading in the global commercial market, gaining share in the premium market, expanding in the home health and wellness market, and driving growth of our core brands, Hamilton Beach and Proctor Silex. In the third quarter, e-commerce revenue increased 8% and accounted for 35% of our total. Brand reputation, product features, innovation, and star ratings all play a critical role in driving online sales, and these are all areas where we excel. We are also investing in digital marketing and online selling capabilities as we work to accelerate our digital transformation. Our global commercial revenue in the third quarter increased 36%. This is partly due to strong post-pandemic demand. It is also due to our success in expanding our category coverage. Examples of new commercial products that are gaining traction include our mix station, which makes milkshake treats, high-performance blenders, and our new big rig line of immersion blenders that we have introduced as part of our strategy to expand into back-of-the-house categories. We have secured incremental wins as we increase our focus on meeting the needs of global and regional chains. Revenue from our premium brands grew 35%, growth was particularly strong for the extremely popular Bartesian cocktail machine, our CHI garment care products, and our line of Weston products. We have introduced a number of new premium products for the holiday selling season. These include new models in our Bartesian line, a CHI full-size handheld steamer, a Weston 2-in-1 indoor smoker and slow cooker, and several new products in our Hamilton Beach Professional line. Our newest Wolf Gourmet product, an electric kettle introduced earlier this year, is selling very well. Revenue from our new home health and wellness products increased nearly 30% from a very small base as we just introduced new products into this market. We are pleased with the consumer reception to our new Clorox brand air purifiers. We're also creating a new category with a countertop Clorox steam sanitizer that consumers can use to kill bacteria on brushes, sponges, and other cleaning tools that still have a useful life. We look forward to introducing the first electric countertop water filtration products under the Brita brand in early 2023. In the home medical market, the injection care management system that we market and distribute under an exclusive agreement recently became Medicare and Medicaid eligible for certain applications, which is expected to drive increased adoption. We have also secured recent placements with specialty pharmacies. Sales of our core brands decreased in the third quarter. However, we expect growth for both brands in 2022. Hamilton Beach is a top three share brand in 26 categories. Hamilton Beach continues to be the number one brand in units in the U.S. We're making great progress with our brand repositioning for Proctor Silex. Hamilton Beach and Proctor Silex have an average star rating across key e-commerce platforms that remains strong at 4.4 each. For both brands, we have launched a number of exciting new products in multiple high-demand categories for the holiday selling season. To name just a few examples of exciting new products for our Hamilton Beach brand, the Quantum Air Fryer Toaster Oven, a toaster oven with 47% faster air frying in a larger oven. Our team designed patented technology that increases airflow and cooking performance and allows for a larger cooking cavity, expanding consumer food options to make in the oven. We believe this combination is unique in the marketplace. Our Big Mouth Juice & Blend is a 2-in-1 combination juicer and blender that significantly reduces time and complexity for juicing and making juice-based blended drinks. Our portable food warmer is a new category we are creating that makes it easy for consumers to bring lunch to school or work in a post-COVID world. It features a Bento-style food tray. It includes a 12-volt car adapter as well as a 120-volt plug for reheating meals on the go. For Proctor Silex, we are very excited about our Quick Clean food processor, a simply better food processor that slices, shreds, chops, and purees, and then can be cleaned hands-free with our quick clean cycle. Good Housekeeping announced its 2022 kitchen gear and coffee awards just last week. The awards are based on innovation, performance, ease of use, and problem-solving attributes. We are very excited that our Bartesian cocktail machine, our new Proctor Silex food processor that I just described, and our Hamilton Beach Scoop single-serve coffee maker made it to Good Housekeeping's prestigious list. Switching topics to supply chain. We have experienced challenges for more than a year that have contributed to our elevated inventory levels. Fortunately, these issues have begun to moderate, and we expect to significantly reduce our inventory and debt levels by the end of this year and into the first quarter of 2023. Virtually all of our inventory is of very good quality. Many products have solid store placements or strong e-commerce order patterns, which will help us work the inventory down over the coming months. Although the forward look is favorable due to the size of our position on September 30, I would like to review the factors that have been at play. In 2021, our third-party manufacturers in China required their customers to release purchase orders months earlier than they did before the pandemic. Even so, they struggled to meet demand. As we have previously discussed last year, a large portion of our supply was produced late, resulting in deliveries in 2022 for goods we needed in 2021. During this year, we have adjusted our forecasts as demand patterns shifted. However, due to the purchase order lead time suppliers have required, product was already produced or committed to at higher forecasted levels. We have negotiated reduced lead times with many suppliers. We are now better able to adjust orders in a timely manner as demand ebbs and flows. While some products were produced late, some were produced on time but were deliberately delayed due to the challenge of securing container space in the fall of 2021. Due to the increased transit times from our suppliers' factories to our distribution centers as a result of congestion across the transportation supply chain, we have owned inventory for a longer period before we can turn it. Retailers have experienced similar issues for products they manage on their own. Since stock levels are high across the store, retailers reduced open-to-buy dollars, while we expected the industry demand to flatten or decline slightly in 2022. We did not expect retailers to pull back on orders and allow low inventory levels to continue, impacting order patterns for our products. Demand for small kitchen appliances is expected to remain solid and well ahead of pre-pandemic levels. Our industry has grown as consumers learned how to cook and make drinks at home during the pandemic. We're also benefiting from demographic trends with millennials moving into a household formation phase of life in very large numbers. We believe more people are using a broader range of appliances more frequently. During inflationary times, many consumers stay home and cook more to save money, which is especially true now given the significant increases in away-from-home meal costs. History tells us that during difficult economic times, people do not eliminate spending on essentials; coffeemakers, small appliances used to prepare food, and many other small appliance products are regarded as essential. While we may experience slight ups and downs in the coming 18 to 24 months, we believe our industry will have solid underlying support that should prevent a significant and prolonged downturn. Our company has introduced a broad array of innovative new products this year that are available for the holiday selling season. Material costs are moderating. Ocean shipping rates are dropping significantly, and container space availability has improved. We expect these trends to benefit Hamilton Beach, our retail partners, and consumers more in 2023. Based on what we now know, we believe we are well-positioned to deliver a strong finish to the year. And now I'll turn the call over to Michelle, who will review our third quarterly numbers in detail and discuss our outlook.

Thank you, Greg, and good morning, everyone. Let me discuss our third quarter 2022 results compared to the third quarter of 2021, and then I'll discuss our outlook. Net sales decreased 3.8% to $150.8 million compared to $156.7 million, primarily due to lower unit sales, partially offset by price increases and a favorable product mix. Lower sales volumes in our Latin American, Mexican, and U.S. consumer markets were partially offset by increases in our global commercial and Canadian consumer markets. Gross profit margin expanded to 23.1% compared to 21.2% last year. As Greg discussed, this expansion was due to pricing initiatives that offset higher product costs, a favorable product mix, and lower expenses for outside warehousing and labor compared to last year. Selling, general and administrative expenses decreased by $400,000 to $25.4 million, primarily due to nonrecurring expenses for last year's distribution center relocation. Operating profit increased to $9.4 million compared to $7.4 million, reflecting the gross margin expansion and lower SG&A. Interest expense increased by $600,000 due to rising interest rates as well as an increased average borrowings outstanding under our revolving credit facility. Higher interest rates were partially offset by our interest rate swaps. The other expense includes currency losses of $400,000 in the current year compared to currency losses of $200,000 in the prior year. The currency losses arise from the remeasurement of liabilities related to inventory purchases by foreign subsidiaries denominated in U.S. dollars. Also in the third quarter of 2022, we reported a $300,000 pension settlement charge related to our U.S. defined benefit pension plan. For the quarter, net income increased to $5.9 million or $0.43 per diluted share compared to net income of $5.7 million or $0.41 per diluted share. We repurchased 109,828 shares during the third quarter under our current stock repurchase program, which runs through December 31, 2023, for an aggregate purchase price of $1.4 million. Year-to-date through September 30, we repurchased a total of 261,049 shares at prevailing market prices for an aggregate purchase price of $3 million. Now I'll turn to our balance sheet and cash flows. For the 9 months ended September 30, 2022, net cash used for operating activities was $40.2 million compared to $4.1 million in the prior year. This increase was primarily due to net working capital, which was the use of cash of $62.1 million in 2022 compared to a use of $4.4 million in 2021. Trade receivables provided cash of $21.4 million compared to $26.5 million, which reflected the lower sales as well as improvement in days outstanding. Net cash used for inventory and accounts payable combined was $83.5 million in 2022 compared to $30.9 million in 2021. Capital expenditures through the third quarter of 2022 decreased to $1.6 million compared to $9.1 million through the third quarter of 2021. The decreases mostly reflect nonrecurring capital spending for our new distribution center last year. Net debt was $144.5 million compared to $113.5 million at September 30, 2021, and $95.7 million at December 31, 2021. As Greg discussed, we expect to significantly reduce inventory and debt levels by the end of the year. Now let me turn to our outlook. We expect that revenue in the fourth quarter will increase modestly compared to last year. We expect to benefit from some shift in timing of retail holiday build orders from this year's third quarter. Our placements are strong for the holiday selling season, and we have introduced many new and exciting products across all of our brands. Results will depend on consumer pull-through and retail reorders throughout the holiday selling season, which could be affected by inflation, rising interest rates, and consumer sentiment. For the full year 2022, we have adjusted our outlook for a modest increase in revenue to a slight decline following our third quarter results. We continue to expect full-year operating profit to increase significantly compared to 2021, including the $10 million insurance recovery that we recognized 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.

Thanks for all the info. First, just following up quickly here on the fourth quarter visibility. Just curious how much visibility you have in there? I mean, it sounds like there's clearly some dependence on reorders and sell-through. Just I don't know, I mean, is that a more material part of the equation for 4Q this year than it typically is? Just trying to understand kind of that comment and that dynamic for 4Q.

Peter, yes, I think it's sort of the more normal aspect of the holiday season. Certainly, there's a lot of strange things going on in the retail world, as you all know. But generally speaking, what happens is we'll get a large order in to load stores or to load warehouses for an e-commerce player, consumers will either buy early or buy late or it will be higher or lower than their retailers' expectations. And what will happen is we'll start getting reorders. The timing could be early if it's a nice start to the season or if consumers are delayed and wait for deals and those sorts of things; we sort of miss a turn. So this is a time of year where it really depends on the consumer pull and the retail reorder. That's a pretty normal thing. I think as we stand here at the end of October, things are going along still aligned with the outlook we just gave in terms of how it's unfolding so far. But as you well know, we'll sort of make or break things over here in the next four to six weeks, so we'll have to see how it goes.

No, that makes sense. And then on inventory, I know you said that you expect that to come down pretty significantly. I'm not sure if you can add any color there. How do we think about maybe the optimal level of inventory or where you think you can get it? I don't know what kind of metrics you want to use, but day sales or something along those lines. I'm just trying to understand the magnitude of inventory reduction we might expect as we look to the end of this year and into early next year.

So we track and monitor our inventory, every SKU. We're able to sort of have a visibility to understand when it's going to be used up, when it will turn. Given our current level, we've been having multiple meetings per week to review how things are going, what adjustments we're making to purchases, to our suppliers, and what else we can do to move things along. As you can guess, it has been a pretty high focus for us. I think based on the forecast, which is updated weekly throughout the week, we sort of revisit when we think we're going to run down on the inventory. Right now, we feel good that we'll come down the hill through the end of the year and down to better levels in the first part of next year, somewhere in late first quarter, early second quarter. Next year, we should be positioned to get back to four turns a year in our inventory. If the forecast is good and our business goes as we think, that will be the case. That number also, as you know, Peter, Lunar New Year is a little early this year. So people are buying up, and some of that might have to ship before year-end, which will end up on our books. If we can delay it a little bit until next year, we'll do that. But it's kind of hard to thread that needle too much. Hopefully, if our forecast holds up, we'll be in pretty good shape, as I said, by late first quarter, early in the second quarter.

Could you provide some insights on input costs and the outlook? You mentioned factors easing in the supply chain. What is the timing of line reviews with your retail partners? Have you received any feedback from them regarding the need to recover some of the higher costs that have accumulated over the past couple of years? Has this process started yet, and if not, when do you anticipate it will begin? Based on your experience, how has this situation typically unfolded?

There are a few points to make about this. As Greg mentioned, we are definitely seeing those costs decrease. The timing with our e-commerce retailers is quite dynamic, with no established cycles for changes; it shifts daily and weekly. We assess our pricing compared to the competition, which leads to our business decisions about margin goals and alignment with costs. For our physical retailers, they follow more traditional assortment changes. Some larger retailers are already discussing fall resets, while mid-tier retailers are focusing on spring resets at the moment. I can tell you that discussions around costs have been open; when costs were increasing, primarily due to container costs, we indicated we would adjust to remain competitive as those costs drop. These conversations are ongoing and depend on factors like container costs, SKU size, retailer specifics, and inventory levels. In Canada, we face some challenges due to currency fluctuations, so while costs are decreasing, the currency situation is a bit of a disadvantage for us, and those discussions have been somewhat subdued. Nonetheless, we aim to stay competitive and will adjust based on the latest container rates and our new pricing agreements, collaborating with our retailers to find the right timing that balances our gross margins and competitiveness in the market.

No, that's great. My last question, just strategically, how do you guys think about the initiatives or even just from an M&A standpoint or a potential M&A standpoint, taking advantage of a downturn in the global economy? I mean, the sector has been pretty resilient, I guess, in past recessions, but how do you think about strategically maybe in the next 12 to 18 months if the economy is as tough as some people think it might get?

That is difficult to forecast. What I feel really positive about is the additions we made to our team, including Brita, Clorox, HealthBeacon, and Bartesian. We are very excited about these developments, and they should positively impact us in 2023. From our perspective, there has been a notable silence on the M&A front, with fewer inbound opportunities lately. Previously, we were seeing a lot of activity, but that has slowed down. It will be interesting to see how this environment affects organizations that were barely getting by. We are keen to identify the right strategic opportunity in our retail commercial business to enhance our portfolio. I must mention that we need to get our inventory and debt levels in order, which we hope to achieve in the first quarter, as discussed. If we can make progress in this area and improve our debt levels, we expect our business to remain stable. There may be some ups and downs as usual, but if our situation stabilizes and the right opportunity arises, we will definitely consider it.

And with no other questions at this time, I'd like to turn things back to our CEO, Mr. Greg Trepp for closing remarks.

Thank you. As we work to deliver a strong finish to this year, we remain well positioned to benefit from our strong portfolio of leading brands. We are focused on executing well on our strategic initiatives. Our commercial business is experiencing record growth and the strong order flows continue. We have a broad array of innovative new products that should drive growth of our core Hamilton Beach and Proctor Silex brands. The small appliance market is projected to stay strong and above pre-pandemic levels. We have many reasons for optimism based on what we know at this time. We are, however, in uncertain times. It is not known how inflation and rising interest rates are going to play out in the macro environment of the global economy. As always, our actual results will depend on consumer pull-through and retailer reorders. It takes an incredible focus to manage through these sorts of times. I'm very grateful to our team for all their hard work, diligence, and good thinking, which they continue to demonstrate every day. That concludes our presentation. Thank you again for joining our call.

And again, that does conclude today's conference. Thank you for joining us. You may now disconnect.