Hamilton Beach Brands Holding Co Q4 FY2023 Earnings Call

Thank you, Denny. Good morning, everyone. Welcome to our fourth quarter 2023 earnings conference call and webcast. Yesterday, after the market closed, we issued our fourth quarter 2023 earnings release and filed our 10-K with the SEC. Copies are available on our website. Our speakers today are Greg Trepp, Chief Executive Officer; and Sally Cunningham, Senior Vice President and Chief Financial Officer. 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, 2023. 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.

Thank you, Lou, and good morning, everyone, and thank you for joining us. I will take the next few minutes to provide an overview of our performance for the full year 2023. Then Sally will discuss our fourth quarter results, after that, we will take your questions. Before I review our 2023 results, I would like to discuss our exciting news of last month when we announced that our Board of Directors appointed Scott Tidey as President of our company effective February 19, 2024. Scott's appointment was part of a long-standing succession plan. I will continue in my role as Chief Executive Officer. Scott joined the company in 1993 and increasing responsibility in marketing most recently as Senior Vice President, Global Sales. Scott is an incredibly effective member of our executive leadership team. In addition to his broad experience in sales and marketing, Scott has been involved in most aspects of our business, including managing business partnerships, sourcing, supply chain, engineering, quality and more, and has been instrumental in the successful execution of our strategic initiatives to expand, diversify and grow the business. Given the strong team we have in place, combined with Scott's depth of experience, the company is well-positioned as Scott increases his role. I look forward to working with Scott on a smooth transition of the duties at President. Scott is away this week on a long-planned family vacation, which we wanted him to be able to enjoy to the fullest, so he is not participating in our call today. Scott will rejoin us when we hold our call to discuss our first quarter 2024 results. Now for our results. For the year 2023, we delivered considerable progress across several key aspects of our business, positioning us for success over the long term. We were excited to carry the strong momentum we built last year into 2024. Our top line outperformed the small kitchen appliance industry. Our gross profit margin expanded by 290 basis points. Our operating profit increased 22% compared to 2022 on a one-time insurance recovery of $10 million excluded from the prior year results. We generated cash from operating activities of $88.6 million, the highest in our company's history, reflecting considerable progress with our focus on working capital improvements. Priority uses of cash included significantly reducing debt and returning capital to shareholders through dividends and share repurchases. We continue to make meaningful progress with our six strategic initiatives. The successes we achieved are attributable to the outstanding capabilities of our industrious team. Our culture is centered around good thinking, which incorporates customer focus, innovation and teamwork, and inspires everything we do. We believe our good thinking culture is a core strength. We aim to capitalize on our strengths in 2024 and beyond as we continue our efforts to increase long-term shareholder value. As we discussed in our previous calls, we expected a solid performance for the full year 2023, with a soft first half and a stronger second half, which is how the year unfolded. We introduced nearly 40 new product platforms in 2023 across high-demand categories like single-serve coffee, blenders, ovens, grills, garment steamers and many others. Our team did an outstanding job securing placements and promotions for our products across a broad range of customers and channels. We also gained market share in several categories in 2023. These wins enable us to deliver a strong second-half performance and created the momentum that carried into 2024. For the full year 2023, our total revenue of $625.6 million increased 2.4% compared to 2022, outperforming the industry which decreased by more than 5%. The year got off to a slow start, which was reflected in our first-half results and retailers continued to manage inventory conservatively. As the year unfolded, however, market conditions improved as consumer spending and retail sales showed resilience. For the full year, gross profit margin expanded by 290 basis points to 23.0% compared to 20.1% in 2022 and was attributable to lower product costs and a favorable product mix. Selling, general and administrative expenses were $108.4 million compared to $90.1 million, primarily reflecting higher personnel-related expenses and the benefit in 2022 from the one-time insurance recovery I mentioned earlier. Operating profit was $35.1 million compared to $38.8 million, well ahead of 2022, excluding the insurance recovery. Net income was $25.2 million or $1.80 per diluted share compared to net income of $25.3 million or $1.81 per diluted share. Referring to our strategic initiatives, we made meaningful progress with our six strategic initiatives, which support our overarching goal of long-term value creation by driving revenue growth, expanding margins and generating strong cash flow over time. Four of our initiatives are focused on expanding our presence in markets where we can increase the sales of higher-priced, higher-margin products. These include the premium home health and global commercial markets as well as our core market that focuses on our flagship Hamilton Beach and Proctor Silex brands. Initiatives to accelerate our digital transformation and leverage partnerships and acquisitions support our growth plans in all markets. Let me briefly summarize each initiative. Accelerating growth of our Hamilton Beach Health is the first one. I would like to begin with our newest initiative and our related acquisition last month of Health Beacon, a medical technology company and a strategic partner of ours since 2021. We began to focus on the fast-growing home medical market in 2021 in response to the rapidly evolving use of at-home health care solutions. Drawing on decades of experience as a trusted resource in the home, we created the Hamilton Beach Health brand. In February 2024, Hamilton Beach Health acquired Health Beacon. Their focus has been on developing connected devices that enable patients with chronic conditions to manage their injectable medication regimens at home, and Health Beacon provides other health services. The revenue for all Health Beacon offerings is derived from subscription services. We are very happy to welcome the Health Beacon team to the Hamilton Beach Brands family. Together, we believe we will accelerate the expansion of this business opportunity. In 2024, Hamilton Beach Health is expected to have a modest operating loss due to planned investments in the business and as Health Beacon continues in the startup phase. Hamilton Beach Health is expected to contribute to operating profit in 2025. We believe the acquisition of Health Beacon is an attractive investment with the potential to increase shareholder value over time. We expect growth opportunities to be driven by the development of digitally connected tools using in-home solutions, including remote therapeutic monitoring systems. The acquisition combines the trusted brand name of Hamilton Beach and our leadership in innovation, engineering and product development with Health Beacon's digital capabilities and patented technologies. Hamilton Beach Health is focused on improving patient outcomes and accelerating access to more patients and new opportunities. The initial focus is on providing the smart sharps bin with Hamilton Beach Health to patients in the United States principally through the specialty pharmacy channel and globally through conventional pharmaceutical companies. Combined with a companion app, the injection care management system tracks adherence and persistence with medication schedules through reminders, educational tools and artificial intelligence-driven analytics. It ensures the safe and convenient disposal of used sharps through the U.S. Postal Service approved mail-back program. Hamilton Beach Health is actively engaged in exploring additional collaboration opportunities with other companies in the home medical market. Our next initiative is to drive core growth. This initiative is focused on driving the growth of our flagship Hamilton Beach and Proctor Silex brands in our core North American market. Our company has been servicing consumers across North America for more than 100 years, earning the trust of millions of consumers annually based on product quality, durability and innovation. Sales of our core consumer brands in 2023 were even with 2022, despite the overall softness in the first half of the year. Hamilton Beach continued to hold the number one brand position for small kitchen appliances in 2023 based on units sold. Next, we are focusing on gaining share in the premium market. We have developed licensed and acquired brands to increase our participation in the premium market, which has grown to account for 40% of industry small kitchen appliance sales. In March of last year, we were excited to announce a new agreement to provide the next generation of specialty appliances for use with Numilk raw ingredients to create a variety of fresh plant-based products in the home and in commercial establishments. The new appliances are launching throughout the first half of 2024. An overall 4% decrease in revenue from premium brands in 2023 reflected the impact of inflationary pressures on consumer spending earlier in the year. In the fourth quarter, revenue from premium brands increased 10%. Premium brands accounted for 15% of the total revenue in 2022. 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 agreements. Next, we are focused on increasing our leadership in the global commercial market. This initiative is focused on securing new businesses and increasing sales with existing customers in the food service and hospitality industries throughout the world. In 2023, commercial revenue decreased 15% compared to 2022 when the revenue grew 50%. The prior year's robust growth was driven by the continued strong rebound in demand in the food service and hospitality industries following demand softness during the pandemic when many restaurants and hotels were closed. Sales in the international food service market accounted for the decrease from the prior year as several markets were overstocked and unrest in certain countries had an unfavorable impact on sales. In 2023, sales of our commercial products accounted for 8% of total revenue. Growth plans include expanding customer relationships with regional and global restaurant and hotel chains, building strength in our e-commerce, which is becoming more important in the commercial market is also a focus. Next, we plan to accelerate our digital transformation. The e-commerce channel represents a strong and growing part of our business, where brand reputation, product features, innovation and star ratings all play a critical role in driving online sales. These are all areas where we excel. E-commerce sales as a percentage of total revenue in 2023 were 39%, increasing 1% compared to 2022. All of our brands earned star ratings of 4.3 or better, and four of our brands earned 4.5 stars or better. Our products received favorable reviews from consumers, experts and influencers. High star ratings are a result of our focus on designing and engineering consumer-preferred products and implementing leading quality control standards. We continue to invest in gaining share in the e-commerce channel. Finally, we are focused on leveraging partnerships and acquisitions. This initiative is focused on identifying and securing businesses with a strategic fit to our portfolio. We are actively engaged in the pursuit of additional trademark licensing agreements, strategic alliances and acquisitions to drive growth in our markets, including accelerating growth in the home health market. Over the past several years, we have entered into exclusive agreements with outstanding business partners, combining our strengths and advantages provided by other companies. As a result, we've entered new large and fast-growing markets and, in some cases, created new markets. Many of our collaborations enable us to serve both retail and commercial markets. Looking ahead, our company has many competitive advantages that we plan to leverage in 2024 and beyond. We believe we are well-positioned to continue the momentum we carry into 2024 and deliver a solid performance, all due to the outstanding work of our team. As we emerge from the pandemic and its related challenges, I want to again recognize our team's incredible work and enormous success in navigating the massive supply chain disruptions. Our employees took a one-team approach to overcoming these challenges, often going above and beyond the call of duty under extraordinary pressures. They kept key steps ensuring a bright future, particularly by keeping the pipeline of innovation and new products flowing. Importantly, we kept investing team and company resources into our strategic initiatives. The combination of short-term firefighting and maintaining our focus on building for the future requires a very strong team. On behalf of the Board and our executive team, I thank each and every one of our employees for their dedication and contributions to our successes. And now I will turn the call over to Sally.

Great. Thank you, Greg. Good morning, everyone. I will start with our fourth quarter 2023 results compared to the fourth quarter of 2022. We were pleased with our fourth quarter 2023 results. As expected, revenue grew year-over-year. Net sales in the fourth quarter of 2023 increased 5.3% to $206.7 million compared to $196.2 million in the fourth quarter of 2022. The revenue growth reflected increased unit volume and favorable mix, partially offset by a lower average selling price. This growth reflected increased sales in our consumer markets overall, partially offset by decreased sales in our global commercial market. In our consumer markets, revenue increased in the U.S., Mexican and Latin American markets and decreased in the Canadian market. In our global commercial market, revenue decreased compared to the fourth quarter of 2022 when revenue grew by 57.1%. As Greg mentioned earlier, prior year growth in the global commercial market was attributable to a continued strong rebound in demand in the food service and hospitality industries following demand softness during the pandemic when many restaurants and hotels were closed. The year's decrease was due to lower sales in the international food service industry as several markets were overstocked, as well as unrest in certain key countries that resulted in an unfavorable impact on sales. Our gross profit margin expanded by 940 basis points and mostly reflected lower product costs, which offset a lower average selling price. Gross profit was $55.3 million or 26.8% of total revenue compared to $34.1 million or 17.4% in the prior year. Selling, general and administrative expenses increased to $30.2 million compared to $22.8 million, primarily due to higher incentive compensation, advertising, M&A activities and other expenses. Operating profit increased significantly to $25 million compared to $11.3 million last year, reflecting our gross profit margin expansion. Net interest expense decreased by $1.3 million compared to last year. The fourth quarter of 2023 interest expense was $400,000 as compared to $1.7 million in the fourth quarter of 2022. The decrease reflects significantly lower average borrowings outstanding under our revolving credit facility. The effective tax rate on income for the 12 months ended December 31, 2023, was 20.4% compared to 22.1% for the 12 months ended December 31, 2022. The effective tax rate was lower for the current year due to the favorable impact of foreign operations in the current year. Net income in the fourth quarter was $19.6 million or $1.40 per diluted share compared to net income of $7.1 million or $0.51 per diluted share in the fourth quarter of 2022. Now turning to our balance sheet and cash flows. We continue to deliver significant improvements in net working capital and free cash flow. For the year ended December 31, 2023, net cash provided by operating activities was $88.6 million, the highest in our company's history compared to cash used for operating activities of $3.4 million for the year ended December 31, 2022. This significant increase was driven by progress with our focus on net working capital improvement. Net working capital provided cash of $49.5 million in 2023 compared to a use of cash of $39 million in 2022. Trade receivables used net cash of $18.8 million during 2023 compared to $4.5 million provided in the prior year due to timing of collections and increased sales. We continue to reduce inventory, reflecting our inventory management and control actions throughout 2023. Net cash provided by inventory was $30.8 million in 2023 compared to $26.4 million net cash provided in 2022. Net cash provided by accounts payable was $37.5 million in 2023 compared to $69.9 million of net cash used in 2022. Capital expenditures in 2023 were $3.4 million compared to $2.3 million in 2022, primarily due to internal use software development costs. In 2023, we also issued a $1.6 million secured loan to Health Beacon. We allocated our strong cash flow primarily to reduce debt and return value to shareholders through the quarterly dividend and repurchase of stock. On December 31, 2023, net debt or debt minus cash and cash equivalents was $34.6 million compared to $110 million on December 31, 2022. For the full year 2023, we paid $6.1 million in dividends and repurchased 250,772 shares of our Class A common stock at prevailing market prices for an aggregate purchase price of $3.1 million. Now turning to our outlook for the full year of 2024. The retail marketplace for small kitchen appliances is expected to be modestly below 2023. We believe that continued progress with our strategic initiatives will enable us to deliver above-market revenue performance. For the full year 2024, we expect total revenue to increase modestly compared to full year 2023. Revenue in both the first half and second half of 2024 is expected to increase modestly with the first half expected to be somewhat stronger than the second half, mostly due to comparisons to the prior year. Operating profit for the full year 2024 is expected to increase moderately compared to 2023 based on the expansion of gross profit margin. That concludes our prepared remarks. We will now turn the line back over to the operator for Q&A.

Your first question comes from Adam Bradley with AGB Capital. Your line is open.

Really good quarter. It looks like a record for Q4 income and cash flow is even more impressive. So, all good to see from a shareholder perspective. I have a few questions. I'll start with one or two of them and then pause for a minute. I would like to dive a little bit more into the Health Beacon opportunity. What do you see as the longer-term commercial opportunity with Health Beacon?

Sure, Adam. So, Health Beacon, as we mentioned, is really a subscription services business. So, it certainly is very different from the rest of our business and it is focused on the current device aimed at helping folks manage their injectable medication regimen. We feel like based on current customers and current uses that are approved, that it should be a very attractive opportunity as more and more subscribers come on that will increase the monthly subscriptions coming in. If we can expand to additional customers or different medical or drug regimens over time, that could expand it further. So, it's a brand-new area where we've partnered with Health Beacon and are implementing something that doesn't exist right now. There certainly are unknowns or it could unfold in a different way than we think, but we feel it's a very attractive opportunity. As each month and the year goes on, as we build that subscriber base, that should drive additional subscription revenue and profits over time.

Okay. So, are you also getting revenue from the selling of any of the physical devices? Or is it all subscription?

It's all subscription. So, the devices are provided to end users in return for a monthly subscription from the specialty pharmacy companies. So, it's an opportunity really to help patients adhere to their regimens better which provides a lot of benefits to the end user as well as to the specialty pharmacy companies. So, it's really not about purchasing the device; rather it's about placing it and getting a monthly subscription.

Okay. That helps. And then just to finish this on Health Beacon. The distribution channels, at least in the U.S., you mentioned specialty pharmacies. Is this new ground for Hamilton Beach? I mean I know you're selling some items in there, but what is the access to distribution look like, with Health Beacon? They may know that market well. What is the plan for here in the U.S.?

Sure. That's a very good question. Fortunately, the Health Beacon team has been doing a great job of positioning the company for start-up and launch. While many of their headquarters are based in Ireland, there are already a number of employees based here in the U.S., and they have strong relationships with specialty pharmacy players. We are going to take the relationships, contacts and business arrangements that already exist, both overseas and in the U.S., with the primary focus having been the U.S. by that group already. We believe that we'll bring strength in sourcing the units that are required to place in consumers' homes. We can shift the units person by person as they come onto the program. The Health Beacon team already had relationships and the know-how on the software, the patents, and all the IP that goes with it but also the relationships with the customers. So, I think when we come together, we're really bringing a lot of our strengths with the strengths they already had. Over time, we will continue to learn from each other. I think the access to, and understanding of, those customers is not new to the Health Beacon team; it is new to Hamilton Beach, and we'll just keep learning and growing together.

So, from an accounting standpoint, should we expect that the cost of the units will be amortized over the subscription? Or is there an upfront charge that’s expensing and then recovering through? Can you help investors understand what the P&L might look like when we start to see the impact from actual sales and distribution?

Sure. Sally, you want to take that one?

Sure. Absolutely. So yes, as the units are placed into service, they'll be capitalized in the fixed assets and then the amortization will show up in the cost of sales number. It’s more of a lease accounting type of approach that you would expect to see.

Okay. That makes sense. So finally, on this, you mentioned there will be a loss in '24 as you build the business. Are you going to break that out so investors can separate that from the rest of the business?

Sally, do you want to take that one, too?

Sure. At this point, we don't plan to. It's not a significant portion of the business. But certainly, as the business grows, then it would become more meaningful and we would consider breaking out Hamilton Beach Health as a whole.

Another question from Adam Bradley with AGB Capital. Your line is open.

Yes. So, moving down the P&L to the SG&A line. This number from just a financial reporting standpoint has been pretty predictable in that $100 million to $105 million range over the last couple of years that has grown COVID volatility aside. $108 million for that line this year, should we expect that to be the baseline for '24? And how much of the $108 million was maybe performance-based compensation that's more variable? Just help me understand that number a little better.

Sure. Yes, I'll give you a little bit of color and Sally jump in as well. I think we have some normal variability, as you said. One year might have a little more incentive comp than the other, depending on our goals at the beginning of the year. We went through a phase of some heavier investing in parts of our business. As we go forward, I think we expect modest growth in SG&A. We are considering putting more money into customer support. I think this is a pretty good line that could flow either up or down a bit based on the level of advertising and the incentive comp results or other investments. I don't predict it changing dramatically up or down from that level. Hopefully, I conveyed that clearly, Sally.

Yes, yes. Absolutely, absolutely. I mean I do think that when we talked about the growth drivers, there certainly was some personnel costs and incentive compensation. We also had M&A costs this year that we haven't had in the past. Additionally, with our growth drivers, I would expect to see additional advertising costs. So, for this year, you might think of it as maybe these are rounded numbers, like maybe 30% comp, 30% M&A and then advertising. From a baseline perspective, I think as we look at M&A, you could expect that number to go up in the future. As we look to continue our strategic investments, that could also see an increase. I continue to believe that the $108 million to $110 million, $115 million level is probably the right place for us right now.

Okay. And kind of looking more broadly at your strategic initiatives and your capital allocation plan is very, very helpful. You guys have been consistent in your reporting on it. I think what would help is if we could dive a little deeper into it to understand it. They're stated each quarter and do you could help us understand the specific financial performance of each plan? When you restate them, I think like for today, could you just kind of give us a little bit of a better understanding of the specifics of each initiative, which one has a greater impact on the P&L? I think we understand core, I think we understand some of the premium, but just diving a little bit more into the health market and what the opportunities there are.

Yes, sure. I mean the core, just given the magnitude of our core business, receives significant investment in team members, new product innovation, engineering quality, ensuring that our products are fresh and meet our customer needs, both in brick-and-mortar and online. This core area definitely receives a high portion. If we can keep growing our market share in our business, that will stay consistent as a percent of net sales but should grow in raw dollar amounts. I think our hope is that the premium market will see increased investment as products like Numilk and others come closer to launch. The home health, the Hamilton Beach Health area will not only with Health Beacon, but with other opportunities we are considering and pursuing, could drive additional investment in that area. The digital focus underpins all areas as do acquisitions, which could see a large spike in investment when new opportunities arise. I think from a percentage of net sales standpoint, we would see consistent percentages but higher dollar amounts from core, and then increasing premium, and then significantly increasing Hamilton Beach Health.

So, it sounds like, in general, you are entering a phase of more investment because you see sales and profit opportunities generally speaking, is that accurate? Now that we're through COVID, am I hearing you correctly?

Absolutely. I think again, we're mindful of expanding our operating profit dollars and percentage. So, if we can achieve our goals, both goals over time, that will help support this additional investment. If the Health Beacon business or the Hamilton Beach Health business were to grow slower than expected, we're still going to invest in it, but we're not going to pour money into it blindly. I think what you will likely see is these investments will be adjusted based on the results. We've moved away from some past initiatives that didn't perform as expected. So, we'll continue to push hard on all of these. We're very optimistic on all of them, but we'll be mindful of the P&L as we move forward and the impact that these investments will have.

Okay. And then finally, what are you seeing on the M&A front? Multiples in the consumer goods space have been at or near lows over an extended period. So, there might be good opportunities out there. Can you tell us a little bit about what you're seeing without having to be specific? From just a pure acquisition standpoint, would you do a big deal if you saw one? Would you like to do a bunch of smaller ones? Just help a little with your thinking on acquisition.

Sure. I'll take the first stab at that, and Sally, you chime in, please. The flow of opportunity has actually been pretty low. It hasn't been zero, but it's been significantly lighter than it was during COVID. Our appetite is if there's a good opportunity to build long-term shareholder value, whether it's small or medium, we're very interested in that. The potential for a very large deal is possible; however, those often are difficult to make work. We are definitely open to pursuing additional acquisitions across all of our strategic initiative areas. I will say that Hamilton Beach Health is a particularly interesting area. We see a lot of opportunity for growth and believe we can combine our capabilities with those of other companies. When we come together, it can create an attractive opportunity, like the Health Beacon opportunity. We’ll be careful; we don’t want to jump into something too early, but we think there's a lot of opportunity in that space. Right now, we have our hands full with our current initiatives and programs, but we are very interested in analyzing any opportunities that come along that would support one of our initiatives.

Yes. I think that's exactly right, Greg. With the emergence of Hamilton Beach Health, we're certainly looking at a pipeline of opportunities and talking to different folks as we think that is an area for us in the future. For our other commercial and consumer brands, we always take an opportunistic approach. We’ll assess each opportunity as they come along, but it’s certainly possible that we could engage in a deal; however, nothing is currently in the pipeline right now.

Okay. Thank you for all of that. Really, not only a good quarter but good performance kind of coming out of COVID. It's great to see cash flow and working capital coming back in line. This is, in my view, been a cash-producing business given where it is in its life cycle and just all around good work, so thanks for answering my questions and great job.

There are no further questions at this time. I turn the call back over to Greg Trepp.

Okay. Thank you. Today, we discussed our continued efforts to build long-term shareholder value, supported by our many competitive advantages and our strategic initiatives. We benefit from our leadership in the small kitchen appliance industry, which has a strong history of durable demand. Our team is experienced with strong industry, customer and consumer knowledge. We are a proven innovator, and our retailer relationships span a broad group of customers in the brick-and-mortar, omnichannel and e-commerce-only channels. We have an asset-light global infrastructure. We plan to leverage all of these strengths in 2024 and beyond. That concludes our report for today. Thank you again for joining our call.

This concludes today's conference call. You may now disconnect.