Q4 2020 Hamilton Beach Brands Holding Co Earnings Call
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Ladies and gentlemen, and thank you for standing by and welcome to the Hamilton Beach brands holding company Q4, 2020 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then one.
And one on your telephone if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today.
And how can I.
And Investor Relations. Thank you. Please go ahead.
Thanks, Jason Good morning, everyone and welcome to our first quarter, 2020 earnings call and webcast yesterday. After the market closed we issued our fourth quarter 2020 earnings release and a copy is available on our website.
Our speakers today are Greg Trepp, President and Chief Executive Officer, and Michelle Mosier, Senior Vice President and Chief Financial Officer, Greg and Michelle will discuss our fourth quarter results and outlook also participating in the Q&A will be Scott Tidy Senior Vice President North American sales and marketing for Hamilton Beach brands.
Our presentation today contains forward looking statements.
Subject to risks and uncertainties that could cause actual results to differ materially from those expressed in either the prepared remarks.
Additional information regarding these risks and uncertainties is available in our earnings release and in our SEC filings such as our annual report on form 10-K for the year ended December 31, 2019, and our form 10-Q for the period and the 30th 2021 and the company disclaims any obligation.
To update these forward looking statements, which may or may not be updated until our next quarterly conference call. If at all and now I'll turn the call over to Greg.
Thank you Lou and good morning, everyone and happy St. Patrick's day, and thank you for joining us.
I'll first discuss our fourth quarter results, we were pleased to finish the year 2020 on a strong note.
Revenue in the fourth quarter increased 14, 4% operating profit increased 49% compared to the fourth quarter of 2019, mostly due to higher sales and gross margin expansion.
Our revenue growth was driven by the strength of our U S and Canadian consumer markets as well as the timing of some revenue shifting from the third quarter into the fourth quarter.
Sales and the U S and Canada increased year over year and were greater than we anticipated and our outlook.
And certain of our international and consumer markets and and our global commercial market pandemic related issues continue to suppress sales.
Revenue from these two markets decreased compared to the same period and 2019 and was below what we anticipated and our outlook.
Here at Hamilton Beach brands, and we have a talented experienced creative and dedicated team our.
And our people have deep consumer customer and industry knowledge and I'm very proud of our team and all day of accomplished during an extremely challenging conditions. There what gives me great company and our future.
We entered 2021 building on continued strong consumer demand for small kitchen appliances.
Our many competitive strengths reinforce our position.
These include the value of our brands and products strengthen operating capabilities, including important investments and information technology as well as continuing to execute on our strategic initiatives. We are well positioned to build on these strengths as we focus on our commitment to build long term shareholder value.
And our U S and Canadian consumer markets, we expect demand to remain strong and the first half of this year as consumers continue to shelter at home and cook more than ever before we.
We expect to see consumers continue to cook at home after the pandemic.
More than they did before the pandemic as new habits are formed.
We also believe demographic trends support our expectations for continued demand growth.
Millennials are moving into the household formation and family faces other lives boom.
Boomers, who are retiring and moving to new homes and remodeling.
Trends create durable ongoing demand for small kitchen appliances.
We're capitalizing on the strong consumer interest and cooking trusted brands and digital engagement.
Our alignment with these consumer trends combined with the breadth of our portfolio positions us well for continued growth.
And our international markets, while certain trends lag the strength of the U S and Canada markets, we expect on Mexico, and Latin American markets to rebound this year as more people gain access to vaccines and economies begin to recover.
And our global commercial market the foodservice industry was arguably one of the hardest hit by the pandemic.
Parts of the foodservice business began to recover the second half of last year.
<unk> served restaurants have fared well, while some casual and fine dining restaurants have found success with takeout curbside pickup and delivery models as consumers begin to go back out we expect foodservice will rebound, although not likely a full pre pandemic levels in 2021.
The hospitality industry is expected to be slower to recover as many consumers remain reluctant to travel.
I will note however that demand for certain of our products has been strong during the pandemic for example, our in room coffee makers have been in demand as lobby and dining service or net available and many hotels.
We're executing on several strategic initiatives that are designed to build long term shareholder value.
In 2020, we completed a detailed review of all of our initiatives, which resulted and changing some initiatives and continuing or increasing focus on others.
We continued to make progress with our initiatives and expect to benefit from these efforts in 2021.
A key to our continued success is our ability to leverage our trusted well recognized flagship brands Hamilton Beach, and Proctor, Silex, particularly and in North American marketplace, where they have been competing successfully for over 100 years.
We are reinvesting and these brands to keep them strong and fresh.
Through new product development, refreshed packaging and online content new.
New digital marketing and social media campaigns, all with the aim of driving conversion.
And 2020 Hamilton Beach was once again, the number one brand and both the brick and mortar and E. Commerce channels based on units sold and we intend to maintain and grow this position.
We plan to drive growth of the practice, Alex brand with a new simply better positioning.
We recently launched four products and core categories, and we'll have more coming in 2021 and beyond.
This new product group and were just sleek design with superior performance and durability of key supporting element as investments and digital marketing.
E Commerce growth accelerated significantly in 2020, which we were well prepared for as a result of our past investments. We expect the increased online shopping to continue and we are well positioned for opportunities still ahead.
Online ratings and reviews are the lifeblood of E Commerce sales and all nine of our brands average a four star rating or better.
We're supporting growth and this channel with digital marketing programs and expansion of our direct to consumer distribution operation and increasing our participation with pure play and omni channel customers are direct to consumer sales and 2020 significantly exceeded 2019, as we invested and process and infrastructure improvements that enable.
US to increase output by over 50%.
We continue to increase our participation and the global commercial market prepay.
Pre pandemic, our global commercial products had achieved a compound annual growth rate of more than 5% since 2010 and accounted for 8% of total revenue.
While we expect the global commercial market recovered. It takes some time, we're very optimistic about its potential and expect it to return to growth and 2021.
We're investing and new commercial products and expanding our offerings across all areas of the kitchen.
We've also invested and digital marketing and e-commerce, and strengthen our partnerships with regional and global chains. Overall, we expect strong revenue and profit growth and our global commercial business and 2021.
We continue to expand our presence and the premium market with new product development and by pursuing partnerships and licensing licensing agreements.
Our newest our newest entrants and the premium market as the parties and cocktail dispenser, which we market through and exclusive multiyear agreement Cartesian is the first of its kind to use flavor capsules to create a premier mixed shrink at home.
His first full year parties and received very strong customer responses.
Our goal is to double our sales and 2021 and launch the next generation and machines for both the retail and commercial markets.
I will from 18 launched the stay and mixture and 2020 and in 2020 one were introduced introducing a high performance electric kettle.
Per cheap we continue to gain new distribution, both in Canada and the U S.
She has become the number two iron brand and the over $40 category with a 40% share.
And 2020, we launched the new touchscreen iron and a handheld steamer this.
This year, we will introduce a larger steamer and additional products to round up the line.
We continue to build out our Hamilton Beach professional line, which leverages, our commercial expertise for home cooks and.
We upgraded our existing ovens and toasters launched the <unk> food processor and chemical Berg grinder and have just introduced a coffee maker and juice extractor.
We continue to create products for new categories that leverage our strengths of sourcing marketing and distribution. This year, we're increasing investments and new opportunities and the home, particularly and the large and fast growing health and wellness space.
Two examples of this include expanding our air purification offerings and entering the water filtration category, we're pursuing additional health and wellness opportunities that we expect to be able to discuss in the coming months.
Certain emerging markets have experienced greater challenges from the pandemic and our outlook is uncertain.
And for assessing the potential for growth and emerging markets. We are pivoting to a licensing model from a company managed model and countries, such as Brazil, China and India.
This change will result, and reallocating certain resources to focus on our north American market, while others will be eliminated.
Commenting further on current business conditions were managing through rising product costs and shipping congestion persists.
And congest the congestion challenges are and response to record setting import levels for most industries.
And then balance of containers and the inability of ports and rail yards to handle the volume.
We ship most of our needs using our contract rate but.
But we are shipping a percentage of our needs and at.
At the higher spot rate, we're planning for the high import volume to continue through the first half and a minimum.
We are taking a number of steps to manage cost as we have and the past.
The company has many strengths that has that enabled us to successfully navigate the pandemic, our investments and talent global infrastructure and our strategic initiatives of serving us well.
One of our most important investments and new product development. This is truly the lifeblood of this business.
And 2020, we introduced nearly 70 new products.
Even with employees working remotely.
We plan to introduce 100 more new products over the next 24 months or.
Our new products will cross a wide range of brands price points and categories, leveraging our leader leading brand portfolio and markets around the world.
I'll now turn the call over to Michelle who will review our financial results for the quarter.
Thank you, Greg and good morning, everyone.
Let me review, our fourth quarter 2020 results from continuing operations compared to the fourth quarter of 2019 and discuss our outlook.
Total revenue increased 14, 4% to $234 million.
Compared to $204 $6 million due to the continued strong demand and our U S and Canadian consumer market.
Additionally, timing of some revenue shifted from the third quarter of 2020 into the fourth quarter.
And our international consumer markets revenue decreased as consumers and many countries struggled with economic challenges, resulting from the COVID-19 restrictions and business closures more so than they did and the U S and Canada.
And our global commercial market fourth quarter revenue decreased due to significant challenges and the food service and hospitality industry and <unk>.
Dining out and travel have declined significantly during the pandemic.
Gross profit margin increased to 23, 3% compared to 27% primarily due to the sale of higher price and higher margin products, particularly through the E Commerce channel.
Selling general and administrative expenses increased to $25 9 million compared to $23 million, mostly due to increased incentive compensation and outside services.
Operating profit increased 49% to $28 4 million compared to $19 1 million.
Net income increased $19 4 million or $1 40 per diluted share compared to net income of $13 3 million or <unk> 98 per diluted share from last year.
Now let me provide some brief comments on the full year 2020.
Our sales to the E Commerce channel increased 30% and accounted for 32 percentage of total revenue.
And the fourth quarter of 2020 sales through the E Commerce channel accounted for 41% of total revenue.
We continue to develop expertise and take actions to position ourselves to gain share and key e-commerce market with a focus on the U S, Canada, and Mexico for retail and globally for <unk>.
Revenue from our premium products increased 12% and 2020 and accounted for 11% of total revenue.
We plan to continue our robust new product development efforts and pursue additional partnerships and licensing agreements to further expand our presence and the premium market.
Revenue from commercial products, and 2020 decreased by 37% and as a percentage of total sales revenue from commercial products dropped to 5% due to the devastating impact of the pandemic on the foodservice and hospitality industries worldwide.
And 2020, we strengthened our position to participate in the rebound of the global commercial market, including investing in new products, expanding digital marketing and building on customer partnership.
Use of cash before financing activities, and 2020 was $31 7 million compared to a use of cash of $3 $9 million and 2019.
Net working capital increased by $59 $9 million due to an increase in inventory and trade receivable, partially offset by higher accounts payable and.
In combination with longer shipping lead times due to congestion and the freight supply chain globally, and the need to source product and advance the annual Chinese new year shutdown and we built inventory in anticipation of sales growth and the first half of 2021.
Higher trade receivables reflected the timing of collection.
We expect net working capital cash flow and our debt level to improve significantly and the first half of this year.
Net debt at December 31, 2020 was $95 9 million compared to $56 $4 million at December 31, 2019.
Afflicting the changes in net working capital.
Throughout the year, we demonstrated effective management of net working capital with average debt outstanding down $11 $6 million compared to prior year.
In November 2020, we amended and restated our credit agreement to extend the term and increase the size of the facility.
Now, let me turn to our outlook.
Continue to believe we are well positioned to effectively navigate the ongoing COVID-19 environment as demand remains elevated and our cost management measures remain in place.
For the first half of 2021, we expect moderate revenue growth compared to the first half of 2020.
Operating profit is expected to increase from the prior year period, despite higher material and shipping costs.
And the first half of 2021, we expect to record a noncash charge of approximately $2 million related to the deconsolidation of our Brazilian subsidiary.
We do not expect any additional significant charges due to our change to a licensing model and certain emerging markets.
Visibility into the second half of 2021 is limited due to uncertainty regarding the timing for the pandemic to this manish.
While capital expenditures related to our ERP system are behind US, we will be moving to a new distribution center and the second quarter cash.
Capital expenditures net of any allowances are expected to be approximately $8 4 million and includes costs for our new DC as well as normal level of spending on tooling and maintenance capex.
For the full year 2021, we expect improved performance compared to 2020 as a result of progress made with the challenges experienced from 2020 related to our Mexican subsidiaries and they cover over to our new ERP system.
Beyond this expectation for significant upside to performance, we'll defer any outlook for the full year 2021 to a later time.
And the pandemic altered work environment that we've been operating and for the past year. The resiliency of our work force has been very impressive.
Greatly appreciate everyone's effort to remain safe and productive.
We believe our global workforce and our business are well positioned to manage through the pandemic as it begins to recede and to come out of it and a very strong position.
That concludes our prepared remarks, I will now turn the line back to the operator for Q&A.
As a reminder, this too.
If you would like to ask a question. Please press Star then the number one on your telephone keypad.
And we will pause for just a moment chicken and follow the Q&A roster.
Your first question comes from the line of Justin Kleber from Baird. Your line is open.
Hey, good morning, guys Hope hope everyone's doing well.
My first question is just on inventory at your retail partners and thinking specifically about the U S and Canadian consumer side of the business how to how to in stock levels look today.
And have we reached a point where sell in and sell through are starting to become more balanced or is demand still.
Stripping supply.
And this is Scott.
From the USA and Canada markets, I think that the retailers' inventories still moving very quickly and general for small kitchen appliances.
We also think with the stimulus checks going out and the U S.
There will be some pretty strong demand here coming up and our categories over the next four to six weeks.
So we're still we're still pushing to try to keep them and stock I think the whole industry is trying to keep keep the product on the shelf and with the additional transit time and some of the challenges coming out of it.
China, We're all we're all working to try to make sure we got from alone.
We've got we're making sure we're putting on purchase orders and and well in advance that we can get the product out of China and be able to react to these kinds of trends that continue to happen in the marketplace.
Sure.
Okay. Thanks, Thanks for that color Scott.
Maybe just you mentioned the increased focus on E. Com. So just a few questions on that front.
Can you remind us the size of your DTC operations today, I assume it's pretty small, but just any color there and then how you manage pricing and promos.
On your own sites vs.
What you see on your retail partners web properties.
Yes.
Just on Hey, this is Greg.
So two parts here so on the first part.
And I know you know this.
But we have sort of two ways, we support the.
e-commerce customers or demand one is we'll go through a retailer.
Who has their own e-commerce sites and Thats the majority of our business some of those.
And customers we ship to.
<unk>, two and they take care of everything from there and some will drop orders to our facility and we'll fulfill it from our facilities. So that's what we will internally sometimes called direct to consumer so.
Now the vast majority of our.
Revenue through e-commerce channels and through that.
Sending product to these retailers, but we do have a very fast growing important business that is this sort of drop ship, our DTC business as far as you are on website is very very small.
And a lot of we sell a lot of parts on there or some product maybe that.
As consumers are struggling to find somewhere else. So it's more specialized sales than anything really robust. So most of that's coming through retail partners.
Promotions and price, yes, Scott why don't you answer that one for sure yes. So on the promotion side of things. We look at we work with on the retailer just like we would with a brick and mortar retailer to determine where the best promotions and we're focused on the categories that seem to be really strong. So there's a lot of a lot of consumers that they're baking right now and in their homes and we're looking at.
Those consumer trends and then we're focusing on promoting those products that would support these trends with those accounts on the.
A duration can be a little bit different with online.
If they were not a brick and mortar account they've got more flexibility. So we can increase or decrease the duration of that promotion.
Just on what we see is the ROI on that and.
And if it is a brick and mortar account a lot of these promotions.
If it is an item thats in their stores well, we'd be thinking with the promotion that we're doing and store. So a lot a lot a lot of flexibility to promote online and really just focusing on maximizing the right price point and.
And working on the right trends, where we see the consumers are shopping.
And then the comment on increased participation with pure play and omni channel customers are these new accounts are you guys just deepening your relationships with.
Your existing partners.
And in most cases, we are deepening our relationship with existing partners as we continue to expand more lines into the premium side of the business. We are occasionally findings from some new channels that are more relevant for that space, but we've got such a broad assortment and we are.
And we're trying to make sure we optimize each of the 50 plus categories that we're in so we're deepening those assortments and increasing those promotions and just trying to maximize those retailers.
Okay, no that makes sense, maybe shifting just over to commercial business being down.
37% and in 2020 can you give us some sense on the cadence.
Maybe how that business progressed across the year I assume <unk> was was.
It was down less and the full year, but any color there would be helpful. And then when would you guys expect that business to return.
2019 levels.
Just and this is Greg so definitely the the last.
For 345 months were better than the right as the pandemic hit.
And we just really as each month.
<unk> got worst sort of through the summer and early fall and then just sort of get a better a little more demand is are these customers.
Reacted change there.
Business models.
<unk> started to come back from working remotely and so that just really allowed for a bit more demand and we were seeing during the very early months.
As far as going forward were looking at it we looked at sort of a three year average pre pandemic.
For us and.
And you.
And you were hoping that.
And we can get up to.
And we're running at 80% of that three year average this year.
<unk> will be better than that and.
Of course on the back half is a little harder to know exactly what's going to happen. So it could be below that but generally speaking, we think we would hope to be up too.
80% of.
Pre pandemic rate and hopefully then and 2022.
Get back up to that.
And are at or above the pre pandemic rate, but certainly we're early stages here in 2020, once thats hard to be real share of but I do know that.
North America trends are strong.
Asia trends and strong Europe still sold as soft as they're going through some continued lockdowns et cetera.
Okay. That's very helpful. Thank you Greg.
Maybe just a couple more here from me in terms of the full year guidance on.
Understand the second half visibility.
Is low here, but you mentioned and the script.
<unk> performance in 2021 is that.
I guess do I read that as you expect both revenue and operating profit on a full year basis, two to grow or improve over 2021 2020 level Steven.
Well.
I think we're going to focus on the first half.
For outlook for now I will say the other things working in our favor. So we talked about commercial Internet international those are areas that were hurt really badly that should rebound.
The North American strength continues.
And then of course, we had.
Issues related to Mexico into our ERP cutover that should not affect us and and kitchen collections a little bit further in the rearview mirror, but that's also not the mix anymore.
So.
Those are all things that should provide us.
Upside.
And <unk>.
And what's going to happen with consumers when they.
We hope we all hope.
Our opened up from a vaccine standpoint etcetera.
It's really hard to tell we think we have mentioned all of these trends that are underlying and should provide long term growth, but in the short term.
Will they run out of the house and stop buying appliances and spend money on other things and if that happens and the north American market Thats, that's going on.
Headwind, but it all and all we don't expect it to go that way. So I think really we wanted to stick with just the first half outlook see how.
And how things unfold here, knowing that we have some things that really should give us a boost but.
And really wait and see how the north American marketplace out here in the coming months.
Okay, Yeah, no fair enough.
Last question from me just on the higher material and shipping costs is.
Is there any way you can.
Can you contextualize the increases you guys are saying on a on.
On a year over year basis, and just in terms on the mitigation strategies.
Are you planning for or have you already.
And now starting to pass through any of these these cost increases.
In terms of passing through to your retail partners.
Thanks.
Go through the steps, we usually go through because we've been down this path before it's never easy or fun, but it's something we've done a number of times.
But just we can't provide.
And any hard view of what those costs or we we do see some pressure as we speak but also things could turn on the other way and the back half as we go through our process. So.
And I think our outlook right now includes what our view of the cost.
Our position is and then that's one more factor that will have to think through as we get to the back half Scott when you talk about the things we do when we do have a picture of our cost structure right and so adjusted.
Because we're in so many different categories and we've got breadth and some of those categories. We are able to.
And optimize.
And with with other products and we're able to switch out something to make sure that we're staying margin wholesale margin hole with these retailers. So we do have the ability to pass on the price increases as we see cost increases coming in so thats certainly something we do on a regular basis, but we also have a large mix of product that allows us to swap out items.
And and keep us on a margin neutral on with these accounts.
And then last thing that we've talked about I think we talked with us about a year ago.
We can switch our focus on the promotional items and certain items on our portfolio have more margin and others and so we feel like that there is.
Cost pressure in certain categories, and not and others. We will focus on promoting those categories that tend to be a little bit better and margin for us.
And to help offset some of those margin pressures.
Okay.
Thanks, So much guys that's it for me and.
Congrats on the strong finish and best of luck in 2020 one okay.
Great. Thank you Joseph.
Once again and if anybody has a question. Please press star and then.
And number one on your telephone keypad once again, let us start on low number one on your telephone keypad. If you would like to ask a question.
There are no further questions at this time on I will now turn the call to CEO, Greg Trepp for closing comments.
Thank you as we look ahead, we are optimistic on many levels. We know our company was strengthened by facing and overcoming many challenges in 2020.
Our team did an incredible job for our customers and our company.
And I can never thank our employees enough for oil and contribute last year.
And we look forward to vaccines being widely administered and life returning to something that feels more normal.
And 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. Thank you again for joining our call today.
That concludes today's conference call you may now disconnect.
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