Hamilton Beach Brands Holding Co Q2 FY2025 Earnings Call

Thank you for your patience. I would like to welcome everyone to the Hamilton Beach Brands Second Quarter 2025 Earnings Conference Call. I will now turn the call over to Brendon Frey, partner with ICR. Brendan, the floor is yours.

Thank you, Julian. Good afternoon, everyone, and welcome to the Second Quarter 2025 Earnings Conference Call and Webcast for Hamilton Beach Brands. Earlier today, after the stock market closed, we issued our second quarter 2025 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 includes forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ significantly from what is expressed in our prepared remarks or during the Q&A session. Additional information about these risks and uncertainties can be found in our 10-Q, our earnings release, and our annual report on 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 revised until 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. I'll now turn the call over to Scott. Scott?

Thank you, Brendan, and good afternoon, everyone. Thank you for joining us today. After having a strong 2024 and a good start to the year, the second quarter was marked by a dramatic shift in global trade as the U.S. implemented higher tariffs on imports from most countries in early April. This included a 145% increase on all Chinese exports, which created significant market disruption as purchases were temporarily halted across the industry while the U.S. and China worked towards a longer-term agreement. As the increased trade tensions played out in the headlines and the stock market sold off, retailer demand decreased further as Q2 got underway. Given this backdrop, we strategically reduced our trade advertising and promotional activities during the quarter to better align with the market conditions. While we saw purchasing patterns begin to improve following the announcement of a framework for a new China trade agreement in mid-May, our U.S. business was adversely affected throughout a large portion of the quarter. Despite these significant headwinds, I'm incredibly proud of how quickly our team mobilized to implement decisive strategic actions across several fronts to address these remarkable industry challenges. First, we meaningfully accelerated our manufacturing diversification efforts away from China to other Asia Pacific countries. Through careful planning and execution, we successfully implemented foreign trade zone operations and executed strategic inventory prebuilds to help minimize our tariff exposure. Our goal is to continue minimizing tariff exposure going forward. To do so, we are remaining nimble as multiple trade negotiations play out and agreements are finalized. With a more diversified geographical sourcing structure, we have the ability to quickly shift our procurement to markets that are in the best economic interest of the business. Second, we took decisive pricing actions, implementing increases at the end of June that align with the current tariff rate increases. I'm pleased to report that our retail partners have been understanding and accepting of these necessary price adjustments, which were carefully balanced to maintain our competitive market position margins. Our strong brand equity and market leadership have enabled us to take these necessary steps while maintaining our value propositions to consumers. Third, we enacted comprehensive cost management measures across the organization, including an 8% reduction in force. In total, we realized $10 million in annualized savings and expect to begin seeing the meaningful benefits of these actions materialize in the second half of 2025. Turning now to the specifics of our second quarter performance. We faced a challenging consumer environment across North America, and our financial results reflected these conditions. Total sales declined 18%, driven by lower volumes in our U.S. consumer business as some retailers paused purchasing and sold through on-hand inventory as well as the impact of our strategically constrained marketing initiatives. Despite the headwinds, I'm pleased to report we achieved 160 basis points of gross profit expansion, driven by a favorable shift in customer mix, including our higher-margin commercial and health businesses, which helped lessen the impact on profitability to lower sales. Looking at performance by business, our core business maintained its #1 position in units in North America despite the top line headwinds the industry faced in Q2, which is a testament to our brand strength and consumer value proposition. Looking ahead, we remain optimistic about the market opportunities for our core business with key fall placements secured with big box retailers that position us well for the important holiday season. Our premium business performed well relative to the overall market, and our highly anticipated Lotus brand launch started last week exclusively at a strategic premium retailer in-store and online. Featured are the Lotus Perfectionist oven, which employs advanced confection, precision control, and an integrated temperature probe to deliver fast performance and flawless results; the Lotus Top Drip coffee maker, featuring the Accu-Brew Grounds Scale provides consistent flavor to achieve SCA-certified Golden Cup coffee standards; and the Lotus Four Slice toaster. Seven Lotus Professional series products launched in total, and broader distribution will occur later in the fourth quarter, followed by the Lotus Signature line launch in mid-2026. It is expected that the Lotus line of products will be heavily supported with over $5 million in marketing support over the next 18 months. Our commercial business contributed gross margin expansion and profitability from higher penetration of our overall mix in the period. We continue to evaluate new commercial partnership opportunities, like our Sunkist agreement we announced earlier this year. The early wins from the development and marketing of Sunkist branded commercial juices and sectionizers, which are used in leading restaurants, schools, and a large restaurant chain throughout the U.S., are accelerating faster than expected with substantial runway for continued success. We expect Sunkist revenue to be about 5% of our commercial business in 2025 and double in 2026. Lastly, our newest business, Hamilton Beach Health, also contributed positively to sales and gross margins this quarter as we continue expanding our specialty pharmacy customer base, develop additional health care tools to meet growing market demand, and work towards our goal of increasing our patient subscription base by over 50% this year. We remain optimistic about the future growth and opportunities and strong profit potential of this business. In closing, while near-term challenges persist, we remain confident in our strategy and the strength of our diverse brand portfolio. Our decisiveness in addressing the rapidly changing market conditions has positioned the business to weather the current environment and emerge stronger and more resilient. Our price adjustments have been well accepted, manufacturing diversification continues to progress. Our proactive inventory servicing helped minimize the impact of higher tariffs on gross margins and our cost management measures will positively impact operating margin. These actions, along with the strength of our teams, give me confidence that Hamilton Beach Brands is well positioned to maintain its market leadership and achieve long-term success. With that, I'll turn it over to Sally.

Great. Thank you, Scott, and good afternoon, everyone. As Scott detailed, our second quarter performance reflects the industry-wide challenges brought on by higher tariffs that temporarily paused retailer purchase orders. While some of these headwinds lessened as the quarter progressed, visibility continues to be limited. Turning to our results, starting with revenue. Total revenue in the second quarter was $127.8 million, down 18.2% from last year's second quarter. The decrease was primarily driven by lower volume in our U.S. consumer business as some retailers paused their buying when the new tariffs were implemented in order to assess inventory levels and price increases. As the quarter progressed and a pause on the higher tariff rates went into effect until August, retailers resumed buying. However, as of today, the final tariff rates and the related impacts on consumer buying remain uncertain. Turning to gross profit and margin. Gross profit was $35.1 million in the second quarter compared to $40.5 million in the year-ago period, reflecting the lower sales volume. However, gross profit margin increased 160 basis points to 27.5% compared to 25.9% in last year's second quarter. The increase in gross profit margin in the current quarter was due to a shift in our customer mix within our U.S. consumer business, along with a larger proportion of sales from our higher-margin International Commercial and HealthBeacon businesses. Selling, general and administrative expenses decreased $1.3 million to $29.1 million compared to $30.4 million in the second quarter of 2024. The decrease was primarily driven by adjustments to incentive compensation based on the change in our projected annual performance. This was partially offset by a one-time severance charge from restructuring actions taken by management to optimize our cost structure. Operating profit was $5.9 million or 4.7% of total revenue compared to $10 million or 6.4% of total revenue in the second quarter of 2024. Income tax expense was $1.6 million in the second quarter compared to income tax of $3 million a year ago. Net income was $4.5 million or $0.33 per diluted share compared to net income of $6 million or $0.42 per diluted share a year ago. Quickly summarizing our first half results. Revenue was $261.1 million, down 8.2% from the first half of 2024. Gross margin increased 120 basis points to 26%, and operating margin stayed flat at 3.2%. Now turning to our balance sheet and cash flows. For the 6 months ending June 30, 2025, net cash used for operating activities was $23.8 million compared to a net cash provided of $37.1 million for the 6 months ended June 30, 2024. The decrease was primarily due to a $50.8 million impact from changes in inventory and accounts payable, driven by higher inventory from increased tariffs and accelerated purchases in Q1 of 2025. Slower sales reduced inventory turnover, while fewer purchases in Q2 lowered accounts payable, further affecting cash flow due to the timing difference between inventory buildup and supplier payments. During the 3 months ended June 30, 2025, we continued to return value to our shareholders through the repurchase of approximately 215,000 shares totaling $4 million and paid a total of $1.6 million in dividends. On June 30, 2025, our net debt position or total debt minus cash and cash equivalents and highly liquid short-term investments was $38.7 million compared to a net debt position of $12.8 million at the end of the prior year period. As Scott discussed, we are encouraged with the progress that we've made over the past 3 months, diversifying our sourcing structure and lowering our fixed cost base to provide us with great financial flexibility in these uncertain times. That said, it is still unclear how the outcome of ongoing negotiations between the U.S. and most of its trade partners, combined with current macro and geopolitical events, will impact retailer planning and consumer demand. Therefore, we are going to refrain from reinstating guidance at this time. That concludes our prepared remarks. We will now turn the line back to the operator for Q&A.

Our first question comes from Adam Bradley from AJB Capital.

Sally and Scott, I want to start with HealthBeacon. Can you tell us a little bit about the second quarter's performance in that line of business?

Sure. I mean we continue to be pleased with how the business is growing. We think it's still on path to meet our growth targets with the number of patients as well as being profitable by the end of the year. So I think we're pleased with how that segment is reporting.

Yes. Adam, please proceed.

Well, I'd rather hear what you're going to say first, and then I can add...

Go ahead, Adam. That's okay.

In the 10-Q, it reported quarterly sales of $1.5 million. Will you be reporting in the Q second quarter sales and P&L?

We will. It will be part of our segment reporting.

Yes. Can you share that now then if you could just report that in the Q, what were its sales in the second quarter?

I need a moment to check the numbers. For the three months ending June 30, the Health business generated $1.7 million in revenue, with an operating segment loss of $864,000. This marks a significant improvement compared to last year, when we reported $859,000 in revenue and approximately a $2 million loss. We have effectively halved our losses year-over-year. Overall, these are strong results, and we are moving in the right direction, which makes us quite satisfied with the business.

So I want to switch to buybacks. The stock has been languishing for a while. Can you give investors like me your long-term view of your capital allocation plan as it pertains to buybacks? Is it opportunistic? Is it kind of formulaic per quarter? What's governing the decisions of when and how much to buy back stock?

Yes. I think that's a great question. In terms of stock buybacks, we break it into two pieces. The first piece is that we don't want any stock issuances to be dilutive, right? So we buy back as many shares as we grant as a part of our compensation package, and that's about 300,000 shares. So that's the first...

300,000 per...

Per year, per year. So we look at it on a per year basis. And so this year, it was around $300,000. So we seek to repurchase those in the market. The second piece is opportunistic. So we do take a look at the stock and we take an opportunistic view of whether or not we need to be repurchasing stock or not. We did repurchase quite a bit of stock last year with that opportunistic lens. For this year, if you look at the number of shares we bought in the first 5 months of the year, we've met that anti-dilution goal. At this point, we'll just continue to watch the stock and see if the opportunistic makes sense.

Yes. So the follow-up on that, often, the opportunistic price on a long-term basis occurs at the same time as you're experiencing troubles as you are right now. So right now, you're having to build up your inventory, it looks like this quarter and eat up some working capital, yet the stock has stayed low. So I'm asking kind of philosophically, what is the view of repurchases? Is Hamilton Beach willing to look at the long run and repurchase even when shares are low going through turbulent market conditions in sales and earnings? Or are you holding on to cash during that and then waiting until skies are clear to make repurchases? I think that's what would help investors like me to understand that a little better.

Given our liquidity profile, that's the first thing that we look at. And then once we've met our anti-dilutive goals, I think we are open, from a philosophical perspective, to repurchasing shares when we feel that the shares are undervalued and our liquidity position is in line with repurchasing shares.

Our next question comes from Jake Patterson from Talanta Investment Group.

Just a question on the cost savings program. I know you said $10 million of annualized starting in the second half. Is there any way to kind of bucket that with your segments? Is that going to come mostly out of consumer, I would assume? Or is there any cost savings on the other side?

So of the $10 million that we identified in annualized savings, a good portion of that is headcount related. The majority of that is coming specifically out of the retail segment, the Home and Commercial Products segment.

And then to, I guess, I don't know if you can discuss this now, but any other color on the price increases? I know those kind of sounded like they were late June. So presumably not a huge impact in the quarter, but just kind of maybe framing some expectations on that going forward, if you can.

Yes. This is Scott. So I think if you go back, when tariffs started to appear even before April, we took a price increase at that point. When we got more clarity around the tariffs that are potentially proposed today, we took another price increase that would cover the tariffs that are being negotiated by country. I think we're in the same situation as our competition. We feel like the retailers understand that because they also are sourcing product as well from these Asia Pacific countries. So far, we feel like things have been able to be pushed along nicely. We're getting back into a normal business cadence with them. The challenging thing is, as Sally indicated, there's still just unknown tariff negotiations still ongoing. So we still have to be nimble and able to adjust going forward.

Got it. Okay. If I'm looking at this correctly, it seems that for the last two years, your pricing has been down by 4.5% and 5% for 2024 and 2023. It appears that much of this was a result of reverting some of the additional freight costs that you incorporated into your product prices. As you consider your competitors, how does your pricing compare to theirs over the last couple of years? Additionally, what are your thoughts on the future? Do you feel you have more flexibility to increase your prices relative to competitors, or is there parity across the board?

Yes. I would say it's kind of even across the board. I think our competitors have the same challenges that we face, whether it be tariffs or container rate cost increases. If you look at our distribution points, even going back to 2023 and then through 2024, we feel like we've got solid distribution points across multiple channels throughout North America. From that perspective, we feel very good. If you look back historically coming into the second quarter, we were growing top line sales for seven consecutive quarters. We feel like our strategy has been pretty solid. It's really these unknown issues around tariffs that made us adjust. As I indicated, the retailers understand what's going on. They're directly importing products, they're sourcing products directly, and they're dealing with our competitors that are sourcing from the same countries where we're getting ours. This is not surprising from the retailer's standpoint.

Got it. And then the last one, is that restructuring you guys called out, is that material? Or is there any way you can give me the number for that?

Yes. The restructuring charge was about $800,000 for the quarter.

Our next question comes from Michael Mork from Mork Capital Management.

Michael Mork at Mork Capital here. Just a bigger picture. Back in 2016, you were doing $750 million in revenues, and now you're doing about $650 million in revenues. So you dropped about $100 million. To me, that kind of looks like you add a lot of new products that are fancy and people buy them, but the other ones drop off almost quicker. Going forward, is there a game plan to have the whole company grow at a decent rate? Or do we just go to be treading water?

No, I think strategically, we plan to grow. I can't confirm the $750 million figure for 2016, but our peak is somewhat lower than that. Nonetheless, I believe there’s significant potential for us to continue growing. We see numerous opportunities in the premium segment of our business. In the U.S. consumer market, roughly 45-50% of sales occur in the premium space, where we currently hold a small market share. There’s considerable effort behind this, including our strategy with the Lotus brand, which we believe has strong growth potential in that area over the next couple of years. Our global commercial business also presents many opportunities, and we are continually forming partnerships like the one with Sunkist, which should be beneficial for both North America and worldwide. In our Health segment, we are anticipating a 50% rise in subscriptions, which is progressing as expected each month. We see many avenues to expand that business by reaching more specialty pharmacies and pharmaceutical companies, thereby identifying solid growth opportunities. We are very committed to growth. Despite experiencing a slowdown in the second quarter, primarily due to tariffs that affected the entire industry, we have been working diligently to remain flexible and capitalize on the best economic conditions in various countries. This requires substantial effort, but our relationships with customers remain strong, and our ability to engage with consumers both online and in stores is robust. Therefore, we will continue to pursue growth.

Sounds good. So you think you can grow in line with GDP going forward then?

I mean I think we're obviously not giving forward-looking guidance at this point, but I do think we've said a couple of different times that we have a good strategy, and we believe in our strategy. So we feel good about things to come within our strategy.

This will conclude today's question-and-answer session as well as today's call. Thank you for your participation. You may now disconnect.