Hamilton Beach Brands Holding Co Q4 FY2024 Earnings Call

Thank you, Greg. Good morning, everyone, and welcome to the fourth quarter 2024 earnings conference call and webcast for Hamilton Beach Brands. Earlier today, after the stock market closed, we issued our fourth quarter 2024 earnings release, which is available on our corporate website. Our speakers today are Scott Tidey, President and CEO, and Sally Cunningham, Senior Vice President, Chief Financial Officer, and Treasurer. Our presentation today includes forward-looking statements. These statements are subject to risk and uncertainties that could cause actual results to differ materially from those expressed in either our prepared remarks or during the Q&A. Additional information regarding these risks and uncertainties is available in our 10-Q, our earnings release, and our annual report on Form 10-K for the year ended December 31, 2023, and soon-to-be filed Form 10-K for the year ended December 31, 2024. The company disclaims any obligation to update these forward-looking statements, which may not be updated until our quarterly conference call. Our next quarterly conference call, if at all. The company will also discuss certain non-GAAP measures; reconciliation for Regulation G purposes can be found in our earnings release. And now I will turn the call over to Scott. Scott?

Thank you, Brendan. And good afternoon, everyone. Thank you for joining us today. We are pleased with our fourth quarter results, which represented a solid finish to a successful year. Our Q4 performance was highlighted by low single-digit growth and profitability that exceeded our expectations. Importantly, we maintained strong gross margins north of 26%, despite a promotionally driven market environment during the holidays as consumers remained selective with discretionary spending. These achievements reflect our team's focus on operational excellence as we continue to drive top-line expansion while maintaining the incremental leap in gross margin we've taken this year. Looking at our full-year performance, I'm very proud of our team's accomplishments. We delivered strong financial results across our key metrics. Revenue increased mid-single digits, driven by successful new product launches and new points of distribution. We expanded gross margins by 300 basis points and grew operating profit 23%. Our focus on operational efficiency and working capital management yielded strong cash flow results as well. We generated more than $65 million in operating cash flow, which speaks to the underlying strength of our business model and our team's execution. This robust cash generation, combined with our disciplined approach to capital allocation, allowed us to end 2024 in a net cash position, a significant achievement that was accomplished while continuing to return value to shareholders through both share repurchases and our dividend program. Along with these strong operating results, we took decisive action to add new opportunities to our growth plans, led by further expansion into the healthcare market through our acquisition of HealthBeacon last February. We also took steps to diversify our manufacturing and sourcing to further reduce our exposure to China. This work was not only additive to our 2024 performance, but has positioned the company to maintain its top-line momentum and recent gains we've made in our margin profile. As we've discussed previously, we continue to execute against six strategic initiatives, which serve as the blueprint for driving long-term growth and shareholder value for Hamilton Beach Brands. These strategies include driving core growth, gaining share in the premium market, leading in the global commercial market, accelerating growth of Hamilton Beach Health, accelerating our digital transformation, and leveraging partnerships and acquisitions. Today, I'd like to review the key drivers of our 2024 success in support of these initiatives, starting with our success introducing innovative new products and platforms to help drive future share gains in our core business. As many of you know, Hamilton Beach Brands has a long track record of bringing innovative new products to market. Our new product introductions over the past few years have performed very well, helping us to gain share in both the U.S. and in our international markets. In 2024, our U.S. consumer business grew 3.6%, outpacing the overall market percent. We saw even greater growth in our Mexico and Latin America business, led by strong gains in Mexico, where Hamilton Beach moved up several spots to capture the number three small appliance brand in December. A great example of new product innovation driving our recent performance is the FlexBrew Coffee maker. The FlexBrew advanced 5-in-1 coffee maker offers consumers unprecedented versatility with five ways to brew, a space-saving design with one footprint, and the ability to wake up to either a fresh brewed single cup or 12 cups. Additional features include a dual position 60-ounce water reservoir, fast brewing capabilities that can brew a single cup in less than two minutes, and easy-to-use LED touchscreen and convenient cleaning features. New products also helped us gain share in categories such as blenders, irons, and slow cookers. Along with these new exciting innovations, we also accelerated our efforts to increase our share of large and underpenetrated categories in 2024. Starting with our premium brand strategy, HB operates a powerful portfolio of premium owned and licensed small appliance brands, including Brita, CHI, and Clorox, which accounted for a mid-teens percentage of our overall revenue in 2024. Looking ahead, this represents both an attractive growth and margin expansion opportunity as we are still less than 3% penetrated in the $4 billion U.S. premium market. Consumers reacted positively to several of our premium product introductions in 2024. Our Numilk plant-based milk maker, which offers consumers the ability to create a variety of fresh milk on demand, continues to gain traction. This product perfectly aligns with the current consumer trends towards healthier, more sustainable options. We've seen particular interest from health-conscious consumers who appreciate the ability to create fresh, preservative-free plant-based milks at home. Our CHI closed steamer line has been another success story. We leveraged CHI's strong reputation in the beauty and personal care market to create innovative garment care products. The CHI Vibes garment steamer, in particular, has been a hit. It's compact, lightweight, and heats up in just 35 seconds, making it perfect for both home use and travel. We've incorporated CHI's LAVA Signature Lava technology, which provides exceptional heat conductivity, giving consumers professional-grade wrinkle removal in a convenient portable package. The Clorox air purifier line also performed exceptionally well. We introduced our largest ever room air purifier this year, featuring an ultraviolet light that provides an additional layer of air purification. The product has resonated with consumers increasingly concerned about indoor air quality. We've expanded the Clorox line to include a countertop seam sanitizer and a humidifier, providing a comprehensive approach to home air and surface health. 2024 also saw us work to increase share in our commercial business. While this segment is still relatively a small portion of our overall revenue, it represents another large and under penetrated opportunity. A highlight for our commercial business in 2024 was the performance of our Summit Edge blender, where sales increased more than 50% as we secured placement in a leading convenience store chain with over 1,000 locations and a global coffee retailer with more than 25,000 stores. Summit Edge high-performance blender delivers speed of service and one-touch convenience, perfect for high-volume commercial environments, whether blending acai bowls, green smoothies, protein shakes, or iced coffee drinks, the Summit Edge creates a smooth creamy profile every time. Key features include PowerBlend technology, ultra-quiet operation with QuietBlend technology, OneTouch automatic blending, and an intuitive touchpad with optimized programming. And lastly, regarding our newest business segment, Hamilton Beach Health, we are excited about the prospects for expansion and further market penetration of this subscription-based high-margin business. Since acquiring HealthBeacon in early 2024, we've been developing health care management tools, including remote therapeutic monitoring systems. Our first system, the Smart Sharp Spin, is provided primarily through specialty pharmacies. Our growth plans include increasing our current patient subscription base of 32,000 by over 50% through existing or new specialty pharmacy customers and increasing the conditions treated using the system. To that end, we signed an agreement with OptumHealth in 2024 and look forward to launching this business next quarter. Across each of our businesses, we are focused on growing through our existing distribution and selectively expanding our physical and digital presence. In 2024, we experienced solid growth with many of our major retail partners and commercial customers. Our small consumer appliance brands sold through well, led by mass market and leading specialty retailers. We also saw solid growth online as we continue to focus on accelerating penetration of this channel. This includes leading pure-play e-commerce retailers, our brand websites, and the digital sites of our brick-and-mortar partners. With respect to commercial, as I said earlier, we were successfully placing our Summit Edge blender in over 3,500 total doors. We also expanded our business with several large restaurant and hospitality chains in 2024. As we look ahead to the New Year, we are excited about the opportunities we see across the core, premium, commercial, and health segments of our business. In our core business, we have a robust pipeline of new products that we believe will help us continue to gain market share, particularly in high-growth categories like specialty coffee and air fryers. We look to continue the expansion of our premium product offerings with several new innovative launches planned across our partnerships with CHI, Clorox, and Bartesian brands. We will also accelerate our commercial business expansion, focusing on penetrating new channels and expanding our relationship with large restaurants and hospitality chains. In our Hamilton Beach Health segment, we anticipate seeing the benefit of our OptumHealth partnership materialize, and we have plans to expand both our customer base and the conditions treated using our Smart Sharp system. Additionally, we will continue to explore opportunities to leverage our digital capabilities across all business segments, with a particular focus on enhancing our e-commerce presence and direct-to-consumer channels. To help fuel these initiatives, we expect to meaningfully increase our marketing investment in 2025, which Sally will detail momentarily in her prepared remarks. Before I turn it over to Sally, I want to quickly address tariffs as I know this is top of mind for many investors. In 2023, we took proactive steps with our manufacturing and sourcing to mitigate tariffs. As of year-end, we have mitigated 35% of our business and are on track to mitigate another 25% to 35% this year. Additionally, we anticipate being able to offset the impact of higher tariffs through select price increases and supplier concessions being implemented in the first half of 2025. In closing, I want to thank our global team for their continued dedication and execution excellence throughout 2024. Their commitment to innovation and customer service has been instrumental in delivering these strong results. We enter 2025 with solid momentum across our business and remain focused on executing our strategic initiatives to drive sustainable long-term growth and shareholder value. With that, I'll turn it over to Sally.

Thank you, Scott. Good afternoon, everyone. Let's begin with our fourth quarter 2024 results compared to the fourth quarter of 2023. We were pleased to finish the year strongly. Total revenue in the fourth quarter was $213.5 million, reflecting a 3.3% increase over the same quarter last year. This growth was mainly due to a favorable product mix and higher volume, although it was partially offset by expected average price declines and foreign currency impacts. In North America, consumer markets showed solid growth, especially in the US, while international revenues faced declines. The fourth quarter also included $1.7 million in revenue from our HealthBeacon acquisition. Looking at gross profit and margin, we recorded a gross profit of $55.8 million compared to $55.3 million in the previous year. The gross profit margin was 26.1%, down from 26.8% last year. This margin contraction was anticipated due to recent price reductions on certain products, after benefiting from lower costs that positively impacted margins beginning in the fourth quarter of 2023. We have significantly improved our gross margins, moving from the low 20% range in the past to consistently being in the mid-20s over the last several quarters. Selling, general, and administrative expenses rose to $32.1 million from $30.2 million in the fourth quarter of 2023, largely due to an additional $2.1 million in HealthBeacon expenses, though slightly lower employee-related expenses provided some offset. Operating profit was $23.6 million compared to $25 million a year earlier. Net interest expense decreased to $283,000 from $366,000 last year, thanks to lower debt levels and interest rates. Income tax expense was a $1 million benefit in the fourth quarter, compared to a $5.1 million expense a year ago, primarily due to a $4.3 million foreign tax benefit and a change in US tax accounting method that will not recur. Net income for the fourth quarter was $24 million, or $1.75 per diluted share, compared to $19.6 million, or $1.40 per diluted share, a year ago. For the full year, without detailing every factor, I want to highlight some operational achievements. In 2024, net revenue grew by 4.6% to $654.7 million from $625.6 million, while gross margin increased by 300 basis points to 26%, marking a record for Hamilton Beach since becoming a stand-alone public company in 2017. Operating profit also rose significantly, increasing 23.1% to $43.2 million compared to $35.1 million. Our full-year net income increased to $30.8 million, or $2.20 per share, compared to $25.2 million, or $1.80 per share in 2023. The net income for 2024 includes the previously mentioned foreign tax credit and US tax accounting change, along with a $5.7 million negative impact from the pension plan termination recorded in the third quarter. Additionally, we returned over 65% of our 2024 net income to shareholders through share repurchases and dividends. Turning to our balance sheet and cash flows, for the year ended December 31, 2024, we generated $65.4 million in net cash from operating activities, down from $88.6 million in 2023, which benefited from post-pandemic working capital improvements. Our net working capital for 2024 provided $14.5 million in cash, compared to $49.5 million in 2023. Cash flow performance in 2024 was aided by ongoing working capital initiatives, although there were some non-cash adjustments related to equity compensation and pension settlement charges. Capital expenditures were $3.2 million this year, slightly lower than the $3.4 million in 2023. During the 12 months ended December 31, 2024, we used cash flow to fund the acquisition of HealthBeacon for $7.4 million and to return value to shareholders through share repurchases and dividends. In 2024, we repurchased 668,785 shares for a total of $14.1 million and paid $6.3 million in dividends. We made significant strides in strengthening our balance sheet in 2024. As of December 31, 2024, our net cash position was $600,000, compared to a net debt position of $34.6 million at the end of 2023. In December 2024, we entered into a new credit agreement that replaces our previous facility, extending the terms to December 2029 and converting our $150 million facility into a $125 million facility with an optional $25 million term loan. At year-end 2024, the company carried $50 million in debt, supplemented by favorable interest rate swaps, resulting in a leverage ratio of 1.29 compared to 1.69 at the end of 2023. We believe available funds from our cash reserves, the new facility, and cash flows will sufficiently support our operating needs. Looking ahead to 2025, we expect to build on our momentum from 2024, supported by several initiatives across our business lines. The small kitchen appliance retail market is projected to grow in the low single-digit range in 2025, and we expect to slightly outperform this with revenue growth nearing the mid-single-digit range. We anticipate operating profit to increase at a faster rate than revenue due to expense leverage from higher revenue and maintaining gross profit margins at the 2024 record level, alongside a significant reduction in HealthBeacon’s SG&A expenses. However, this will be partially offset by a notable rise in planned advertising to support our strategic growth initiatives. We have mitigated the impact on about 35% of our products and aim to increase this to an additional 25% to 35% in 2025, working toward a goal of mitigating potential tariff impacts on 75% of our products. We expect to offset any further tariff impacts through selective price increases and supplier concessions and do not foresee these recent tariff changes affecting our profitability in 2025. We anticipate that cash flow from operating activities less cash flow used for investing activities will be in the range of $40 million to $50 million per year in 2025. This concludes our prepared remarks, and we will now return to the operator for Q&A.

Thank you.