Q3 2020 Hamilton Beach Brands Holding Co Earnings Call
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I would like to hand, the conference over to your speaker today.
Nathan headwinds.
Head of Investor Relations.
You may be can thank you.
Thank you Lindsey and good morning, everyone welcome to Hamilton Beach brands third quarter Twentytwenty earnings call and webcast.
Yesterday after the market closed we issued our earnings release and filed our 10-Q copies have been posted to our website. Our speakers today are Greg trap, President and Chief Executive Officer, and Michelle Mosher, Senior Vice President and Chief Financial Officer, Gregg and Michelle will discuss our third quarter results and outlook.
Also participating in the Q today will be Scott Tidy, Scott is our senior Vice President North American sales and marketing for Hamilton Beach brands.
Our presentation today contains forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in <unk> paired remarks or during the key Wednesday additional 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 2019.
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'll turn the call over to Greg.
Thank you and good morning, everyone. Thank you for joining us.
I will provide color on the third quarter in a moment, but first I'd like to focus on the underlying strength of our business.
Delivered a solid first half.
Well third quarter results were disappointing as a cut over to our new ERP system temporarily reduced shipping capabilities that our U.S. distribution center, we expect the elevated demand from our consumers.
Our customers to remain strong over the back half of 2020, so at least into the first quarter of 2021.
A large portion of the third quarter revenue shortfall.
Spectra to shift to the fourth quarter as we focus on maximizing our shipping capabilities to capture as much of the market demand as possible.
Based on early fourth quarter results shipments are ahead of last year.
The ERP related shipping challenges had been resolved are behind us.
Well the kovar was more difficult than expected. We now have a system in place that is more efficient are decades old legacy system, which will benefit us in future years.
Small kitchen appliance market in the U.S. and Canada is growing at a rate of approximately 30% compared to 2019, driven by consumers who are sheltering at home during the pandemic and engaging in four more than usual meals and beverage preparation.
We expect this demand to remain elevated into 2021 as a pandemic continues to keep people at home.
Hamilton Beach brands is well positioned to meet the unprecedented demand.
Customer order levels are high and we have the necessary inventory on hand more in transit to meet this demand.
We have been increasing the in stock levels with our customers and shipping product at elevated levels.
We held and gain placements for the holiday selling season, including many new products.
We are benefiting from our leading portfolio of consumer preferred brands and products.
Even with employees working remotely or new product development process is working well.
Robust capabilities and the growing ecommerce channel, our global infrastructure and team members and our diversified retail relationships are important competitive advantages.
Further the retail business in Mexico, and Latin America or slowly rebounding.
Commercial customers in the food service and hospitality industries are beginning to order again as they adjust to the new world created by the global pandemic.
We are well positioned to capitalize on the recovery in these markets.
Our financial position is healthy as we effectively managed net working capital and reduce debt.
Additionally, kitchen collections net losses and negative cash flow no longer have an impact on our company, we close the business through a successful liquidation and completed the wind down earlier this year that timing turned out to be very fortunate.
Well, our focus is continuing to EPS to capitalize on all the Tailwinds that are driving Hamilton beach forward in the coming months and quarters, Let me take a moment to comment on our third quarter.
As we communicated in our last call. We were in the early stages of a cut over to a new ERP system in the U.S. at the time, we reported a reduction in sales in July and expand an expectation to offset the July shortfall in August and September.
As August unfolded, the challenges were more persistent than anticipated, we improved our shipping abilities week by week and as we enter September we were operating more effectively however, the shortfall in July and August was too large to overcome in the third quarter.
Well the ERP challenge was the primary hurdle secondary factor was challenges with shipping and transportation, both inbound from our suppliers and outbound tour customers, which added to our revenue shortfall.
Well shipping challenges related to the ERP implementation had been largely resolved congestion in the shipping and transportation industries persist, which are requiring us our customers to plan differently.
We have enhanced our shipping capabilities by adding warehouse personnel and lift equipment extended shifts and augment capacity with temporary third party facilities. We also have been able to convert some of the order volume their largest retail customers to direct import which helps to ease the strain on our shipping capabilities.
We are also preparing for record direct to consumer shipments, we are well positioned on retailers E. Commerce sites consumers are likely to shop online at elevated levels, and we're positioned well to support our retail partners.
An ongoing challenge of course is the fact that the global pandemic is still with us and likely to be a for many months to come pants.
Pandemic continues to require careful attention to protecting health and safety.
We closely monitor the ever changing COVID-19 environment globally in order to keep our business moving ahead and in compliance with all guidelines.
We are deeply grateful for the efforts of our employees assays to stay safe and healthy, especially those who are not able to work from home. Our team has effectively navigated the global crisis, and the focus teamwork and diligence of an epic.
I, thank our employees around the world for the excellent work that they're doing under the ongoing difficult circumstances brought on by the virus electric.
I'd like to recognize especially the dedication of the folks who work in our distribution centers.
Demands placed on them had been immense and they have risen to the occasion I can never thank them enough for all they have done to keep product flowing to our customers under these circumstances.
Our priority has been and continues to be the health and well being of our employees as they work to serve the needs of our customers and consumers.
In summary, we are fortunate to be a leader in the industry that is providing a central products to homebound consumers, making their lives a little easier during these times.
The Tailwinds, we are experiencing are providing momentum to propel our business forward for the remainder of this year and into 2021.
Our team is doing an outstanding job navigating the pandemic and meeting the unprecedented demand surge. We are encouraged by early fourth quarter results.
We remain committed to protecting the health and safety of our employees as we work together to meet the needs of our customers and consumers and keep our organization agile. So that we may adapt as necessary to the dynamic environment, we're operating in.
I'll now turn the call call over to Michelle who will review our financial results for the quarter.
Thank you, Greg and good morning, everyone I too am very pleased with how our entire organization has faced and overcome the many challenges of 2020.
Our teams have our deepest appreciation for the excellent job there to fulfill customer orders at a time of unprecedented demand for our products.
Throughout this year, we've maintained a range of measures to ensure financial flexibility, including eliminating discretion expenses implementing a hiring freeze for most said some physician and focusing capital spending on critical projects we.
We have demonstrated effective working capital management and expect to continue to increase cash flow and reduce debt.
We remain disciplined yet opportunistic in our expense and capital investment approach focusing on maintaining a strong balance sheet to ensure we have the necessary flexibility as we navigate these uncertain times.
Now, let me review, our third quarter 2020 results from continuing operations compared to the third quarter of 2019 and discuss our outlook.
Total revenue decreased 26%. The main reason for the decline was lower sales volume in the U.S. consumer market, which occurred as a result of greater than expected challenges implementing our new ERP system well.
Well unprecedented demand to continued the cut over to the new system temporarily reduced shipping capabilities that our U.S. distribution center.
Additionally constraints in the transportation industry also adversely affected shipping capability.
The shipping hurdles related to ERP are resolved and behind us and operations that are U.S. distribution center operating effectively.
In the international consumer and global commercial markets.
Our sales were expected and driven by pandemic related demand softness.
And the Canadian consumer market sales volumes increased as we expected.
Our operating loss for the third quarter was $2.4 million compared to an operating profit of $4.4 million last year.
Gross profit decline due to the lower sales volume. However, gross profit margin increased 80 basis points from customer and product mix.
Selling general and administrative expenses decreased $300000. The decline is primarily due to lower overall spending and the benefit and the reduction to environmental reserve at one site.
These benefits were partially offset by increases in employee related costs due to increased incentive compensation, mostly driven by the increase in the market price of our stock.
Legal and other third party fees, primarily related to the irregularities in our Mexican subsidiaries and an increase in the contingent loss related to patent litigation.
The 2019 third quarter includes a charge of $2.6 million to write off unrealizable assets of our Mexican subsidiaries.
Turning to the balance sheet.
As a result of improvement net working capital we have had lower average borrowings outstanding under our revolving credit facility ending the quarter with net debt of $69.6 million as compared to $78.6 million in the prior year.
Yes.
Our average interest rate has resulted in decreased interest expense.
Use of cash before financing activities improved significantly compared to prior year with the use of $8.8 million for the nine months ended September Thirtyth 2020, compared to use of $27.3 million for the nine months ended September Thirtyth 2019.
Because of the seasonal nature of our business, we typically build inventory and accounts payable during the third quarter.
The net impact to cash flows of the change in inventory and accounts payable was relatively consistent year over year.
The increase in inventory is a result of the sales shortfall for the quarter with the expected shift to sales in the fourth quarter and strong demand expected to continue into 2021, we believe that our inventory position supports us well to meet our customers demand.
Next let me turn to our outlook we.
We continue to believe we are well positioned to effectively navigate the ongoing curve in 19 environment is.
Demand remains elevated and our cost management measures remain in place.
For the second half of 2020, we expect total revenue to be in line with the second half of 2019.
An operating profit is expected to increase approximately 20% any.
Any interruptions and shipping costs by a further challenge transportation industry or unexpected ERP complication, while not anticipated could cause results to fall short of expectations.
The revenue outlook includes the impact of converting some order volume to direct import by customers to help in strain on the shipping operation.
Direct import sales excuse me with direct import sale, we recognize lower revenue as cost savings are shared with the customer.
If we imported the converted orders.
Revenue would be higher in the second half of 2020 by approximately $8 million, which will result in modest growth.
Our goal continues to be to exceed $20 million in cash flow from financing activities for the full year.
Timing of some accounts receivable collections could move into the first quarter 2021, due to timing of revenue expected to shift from the third quarter of 2020 to the fourth quarter.
We will know more as the fourth quarter unfolds.
Visibility into 2021 beyond the expectation of continuing strong demand in the first quarter is limited.
So we are deferring any outlook for the full year 2021 to a later time.
Also looking ahead Hamilton Beach brands maintains a $115 million senior secured floating rate revolving credit facility that expires on June Thirtyth 2021.
As of the end of the quarter, we had not yet finalized the amendment to extend this facility.
As a result, all amounts outstanding were classified as current liabilities at the end of the quarter. We're.
We're working very closely with our bank group and expect to finalize the amendment before the end of the month.
I will note that there were no share repurchases during the third quarter.
That concludes our prepared remarks, we'll now turn the line back to the operator for Q and a.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from the line of Peter Benedict with Baird. Your line is now open.
Hi, good morning, guys a.
A couple of questions. One just on the the fourth quarter revenue growth seems like it's implied up around 20% curious how much of that is recapturing. Some of these lost sales from from Threeq to versus you know kind of the future.
Future Reorders expected for retailers given the strong demand that's my first question.
Hey, good morning, Peter This is Greg.
Uh huh.
I It was sold to put an exact number on that but we certainly are still restocking shelves with with a certain customers, which which was we were hoping to do more of that in the third quarter and there. There is some business that what to other compared.
Competitors, who had product in the shelves or online, but we have some very big promotions.
And programs in place with retailers that we're going to ship in the fourth quarter and we'll continue to so.
It's hard to put a tough a hard number on that but certainly there is a there is a significant amount of third quarter that will flow over into the fourth quarter will get as much out in the fourth quarter as possible and then some of that might.
It's a shame that sell through as well as we expect there could be continued restocking going on in the first quarter.
Okay. Okay. Thanks, Craig and then just can you maybe talk a lot about about the shape of recovery you're seeing in.
In the commercial markets I'm, just obviously interesting given a lockdown reopening kind of the give and take from that but it sounds like you're starting to see some some commercial some lights and the commercial markets I don't know what else you can share where you are seeing it and what your expectations are for that that part of your business as usual.
Going forward.
Sure. So the the U.S. market is doing better than than Europe.
Europe continues to have as you said some pretty.
Significant activity on locking down.
It off again also the the European market is not as developed when it comes to drive through and take out has the U.S. has proven to be so in the us market. After a period of completely is being shutdown or the.
Customers are.
Reordering to get there.
Yes.
Silver is going again, some menu items are rolling out again, not a lot, but mostly its a.
Keeping or modifying their how they run their operations more than it is adding new menu items, yet, but just modifying that has required them to keep investing in replacing equipment or upgrading equipment.
Et cetera, So we're seeing a better rebound in the U.S. a.
Slow rebound throughout Europe, but some rebound as we have opened back up and and actually pretty decent movement in China.
Okay. That's that's helpful. I, you mentioned that the the shipping constraints, so you're not going to do it.
Separate from the ERP situation.
Yes, just to expand on that a little bit more I mean, you mentioned kind of its inbound its outpaced feels like it's all over just you know how how are you guys kind of addressing that again, you mentioned a little bit of this in your prepared remarks, you. Just curious how you kind of see the I guess, the shipping challenges or Oh, as we've looked particularly as we go through the holiday just as.
And when we have the.
You know if there's going to be a big increase in it.
Commerce like there has been for the last several months.
That obviously elevates.
The pressure on shipping channels, when you get to the holiday when when volumes natural list anyway. So I don't know just curious kind of how you see it and your and your level of confidence you can get the product.
Where it needs to be for the holiday season.
Hi, Peter this is Scott.
No I think that's.
We've got a number of different areas, where the supplies have been a supply chain has been challenged Tom we start with where our goods come from in China, We've definitely seen out of a number of ports over their sailings that have been delayed for a couple of weeks, but we do have a lot of inbound inventory and a lot of inventory in our distribution center.
If you look at last year at this time, we had most of our retailers that we're probably picking up and sing equipment to pick up their orders on our docks and 24 to 48 hours. We now see that can be anywhere from two to 10 days I'm just trying to get that equipment and so it is there is some congestion on our docks I do.
I think we're well positioned on the ecommerce side.
We've worked through a lot of those constraints.
Our ability to ship a lot of units out of our our distribution facility is certainly there and we're ready for that that increased demand and we don't think that has the same challenges to getting some of this inventory to some of our retailers. When they are trying to get equipment. So I think that you know I think the challenges will continue for a couple more weeks.
On the imbalance side and on the outbound side and then we'll start seeing some relief in December.
Okay.
Okay. I guess, just the last one I know I know on the last call. You said, the New York you systems not come up a couple of times and look you're not the first company to.
Experiences with with the ERP implementations.
Yes.
What what gives you the confidence that we now are are kind of pass this and we're not going to hear about this.
Three months, what anything you can tell us that would give us confidence that that's going to be the case.
Sure Peter.
So when we all met or.
Had the call last time, we were.
Working through.
Some of the challenges and really had a work plan and you know a game plan and you know people.
People had assignments and all the things you do to kind of say, okay, Here's where we think this is going to play out.
And just some of the.
Surprises in persistent.
Challenges getting some of those that those requirements.
Requirements.
Fixed just took longer than we thought and then really just kept backing us up.
So I think the good news is when you look at how we performed in September specifically in October as we ship day to day to day, we're just not having those issues like we were back in August.
So then it became more about how you catch up.
How do you deal with some of the congestion, but on a day to day basis. We're just we're worth the facilities running.
Really well as not being and pin.
Impacted by the ERP system in a negative way.
Well that's good good to hear and then certainly good luck.
In the fourth quarter, but that's it for me.
Thanks, so much guys.
Thank you.
And again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
And there are no further questions in queue at this time I'll turn the call back over to Mr. trip for closing comments.
Thank you.
The remains a challenge to manage through the Coke with 19.
Situation. However, we have demonstrated an ability to successfully navigate the global pandemic.
While we have not dealt with a pandemic before we have managed through challenging situations in the past emerge as a stronger company each time.
This crisis has clearly demonstrated is what a capable global team. Our company has we remain committed to the safety and well being of our employees and to meeting the needs of our customers and consumers as we all work together to keep our organization agile and able to respond quickly to changing needs and circumstances.
In addition to benefiting from the ongoing unprecedented demand for small kitchen appliances as people continue to shelter in place for industry is increasingly optimistic that the new habits that have been formed will drive healthy post pandemic demand.
All this is in our sweet spot and we are optimistic and excited about the future of our business.
Despite some challenges we have faced and overcome this year all signs point to finishing this year strong and continuing the momentum going into 2021. Thank you again for joining us on our call today.
This concludes today's conference call you may now disconnect.
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