Q1 2021 Hamilton Beach Brands Holding Co Earnings Call
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Good morning, and thank you for standing by and welcome to the Hamilton Beach brands Holdings' first quarter of 2021 earnings Conference call. At this time, all participant lines are in listen only mode and.
After the Speakers' presentation, we will have a question and answer session to ask a question during the session you'll need the press star one on your telephone keypad. Please be advised today's conference is being recorded if you require operator assistance. Please press star zero and it's now my pleasure to hand, the conference over the head of Investor relation.
Louis and Jay Natkin Lewin.
Thank you Holly and good morning, everyone welcome to our first quarter 2021 earnings call and webcast yesterday. After the market closed we issued our first quarter 2021 earnings release and filed the 10-K with the SEC.
Copies of both are 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 first quarter results and our outlook also participating in the Q&A will be Scott Tidy senior Vice President consumer sales and marketing.
Our presentation today contains 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 10-Q.
And you as well as our annual report on form 10-K for the year ended December 31 2020.
The company disclaims any obligation to update these forward looking statements, which may not be updated at all 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. Thank you for joining us.
And we'll begin with our strong first quarter results the momentum we experienced in the fourth quarter of 2020 has continued into 2021 total.
Total revenue and the first quarter increased 23, 5%.
And our core North American consumer market revenue increased significantly.
The growth was driven by strong demand and our U S Canadian and Latin American markets.
And our global commercial market, while revenue decreased compared to 2020, the GAAP to last year closed significantly compared to the GAAP to prior year, we experienced throughout most of 2020.
And while trends vary by geographic market, the foodservice and hospitality markets are currently rebounding from last year's pandemic driven declines as the foodservice and hospitality industries continue to recover and 2021, we expect results for this market to improve significantly compared to the prior year.
And the E Commerce channel, we have been well positioned to benefit from consumers demonstrating and increased preference for purchasing online during the pandemic.
Our well known brands and the wide range of categories, we participate in and enable us to benefit from the e-commerce demand that is occurring.
<unk> across the small appliance industry.
We were an early leader and the ecommerce channel and we continue to increase our investments and the online sales capabilities and the first quarter of E. Commerce sales increased 59% and accounted for 35% of total revenue.
Revenue from our premium products grew 46% and the first quarter the <unk>.
Cartesian cocktail of machine, our newest entrant and the premium category has been very well received and the market and was a major contributor to the growth. We also experienced strong sales for our Wolfcamp, a western and Hamilton Beach brands Hamilton Hamilton Beach professional brands.
Gross margin increased 50 basis points for the first quarter operating profit net income and earnings per share all increased significantly compared to the first quarter of 2020.
As a reminder, kitchen collection as a discontinued operation, it's net losses and negative cash flow no longer have an impact of our company.
We continue to execute on our strategic initiatives that are designed to deliver long term profitable growth.
Last year, we conducted a detailed review of our progress with our initiatives. As a result, we are continuing to focus on certain initiatives, such as increasing our investment and the E Commerce channel and and the premium and commercial markets.
We are expanding our focus to include the large and fast growing home health and wellness market and.
And emerging markets. We are pivoting from a company managed model to a licensing model and reallocating resources to accelerate growth and our heritage North American market.
Let me provide some details for each initiative.
First.
And our core North American market, we compete effectively in the U S, Canada, Mexico, and Latin America markets, we have been and industry leader and North America for more than 100 years the.
The first quarter, our Hamilton Beach brand remains number one and the U S and both the brick and mortar and e-commerce channels based on units sold and.
And held the sizable lead over the other players in the marketplace.
Hamilton Beach.
Top three brand and 25 categories and gained share and 22.
We are also a leading brand in Canada, and Mexico and throughout Central America, we intend to maintain and grow our leading market position.
Our strong portfolio of consumer preferred brands and products has.
Broad channel category and price point coverage.
Our brand and product offerings range from value to luxury and cover more than 50 categories. This is a key competitive advantage for us we.
We continue to focus on strengthening our owned brands as well as pursue new brands through licensing and acquisition.
Another key competitive advantage is that we have a proven track record as an innovator in our industry year. After year, we introduced new on trend and innovative products that consumers want and.
Our success is the result of highly engaged and dedicated team members leveraging consumer insight and.
And continuously evolving our processes and capabilities to generate consumer preferred solutions.
Last year, we introduced 76, new product platforms plans are in place to launch of approximately 130 more over the next two years.
And with most employees working remotely during the pandemic, our new product development process is working well these.
These accomplishments are playing an important role and our ability to benefit.
From the small from the broad small appliance demand.
Across the cooking and beverage categories.
I will touch on just a few of our new platforms.
First we have expanded our successful flex brew coffee maker platform of several additions.
Our original top selling flex brew allows consumers to brew of full product coffee or a single cup using their own grounds or of K Cup type pod.
Many of consumers want to be able to use the espresso capsules as well our newest edition is the flex brew Universal which is compatible with grounds of K Cup type pod or the <unk> or in the special capsule oil and one machine.
And the industry is number one category of coffee, we're also introducing new craft cold brew and pour over machines.
Two of the most popular small kitchen appliances are slow cookers and air Fryers, we were excited to introduce our new slow cooker with and air Fryer Lids consumers can air Fry and slow Cook and the same appliance providing important versatility.
And the vacuum sealer category is a large and important market our western acquisition got us into this category.
However, we saw very little of innovation and we knew that vacuum sealers were not well designed to seal liquid foods.
We developed a vacuum sealer and makes it easy.
And it also provides the first integrated heat stamp date feature that can be placed on the bag another innovative solution.
Our hand mixers are.
It had been the number one brand for a long time, one annoying pain point of hand mixers is the process to claim the beaters. We just introduced the hand mixture of that features easy clean beaters and provides a superior mixing performance.
Finally, we are repositioning our practice of X brand is simply better to meet consumers' needs for basic durable and quality of appliances.
<unk> products had been around for more than 100 years and can be found and tens of millions of homes across North America.
Our new line incorporates and intuitive design with superior performance.
The <unk> products of launch so far this year and we have many more that will follow this year and next one new Proctor Silex product. We have just introduced as our sound shield coffee grinder, which is designed to reduce crowding noise by 50%.
Our second initiative is to expand our e-commerce leadership as industry online sales continue to grow and.
And what's the beach remains the number one brand and the U S E Commerce channel based on units and the first quarter goal of line of our brands had star ratings of $4, two or better and five of our brands were for five or higher.
We expect the increased online shopping trend to continue even as the pandemic wanes and as more people are now accustomed to is convenience.
We plan to continue to drive e-commerce growth across all markets brands and categories.
We are supporting growth and the E Commerce channel by further expanding our e-commerce team.
Adding investments and digital marketing programs, expanding our direct to consumer distribution operation and.
The increasing our participation with both pure play and omni channel customers.
We are taking the steps throughout North America, as ecommerce growth accelerates and our core markets.
The third initiative is to increase our presence and the premium products marketplace.
Revenue from our premium products increased 12% in 2020 and accounted for 11% of total revenue.
Growth accelerated in the first quarter two of 46% growth rate. We believe this is an exciting market and we expect to further grow our participation.
I've already mentioned, our new Cartesian cocktail dispenser, which we market through a multi year agreement.
Cartesian is the first of its kind of use flavor capsules to create a premier mixed shrink at home.
His first full year parties and received very strong consumer response, we expect to double our sales this year and launch the next generation of machines for both the retail and commercial markets.
The partition system includes and extensive line of flavors, which continues to be expanded.
There were of flavors to go with all of the base spirits flavors for traditional cocktails and flavors for ex out of the cocktails. The flavors are offered and individual or convenient variety packs and monthly subscriptions are available.
And the Western line continues to grow we have recently launched several products and some key categories that align with how consumers for storing cooking and preparing foods.
And a full line of Wolf Gourmet countertop appliances, our entire line of the selling extremely well and particular ovens coffee makers and toasters and 2021, we are introducing a beautifully designed true temperature of electric kettle complete with the signature Redknapp. We expect this product will be well received and the U S and and international <unk>.
Markets.
For our Chi garment care line, and we continue to gain new distribution growth in Canada and the U S.
Since we introduced this line and 2017 she has become the number two I and brand in the over $40 category with a 40% share.
And 2020, the garment care cat.
The category declined as many consumers worked from home, however, and 2021 the category is rebounding.
We continue to build out of our Hamilton Beach professional line, which leverages, our commercial expertise for home cooks, we've upgraded our existing ovens and toasters and.
We have introduced stand mixer food processor with the spire laser coffeemaker and use of tractor our distribution and revenue are growing.
We plan to continue to expand our presence and the premium market with the robust new product development and by pursuing partnerships and licensing agreements.
A big focus for this year is to increase investment and new opportunities and the fast growing multibillion dollar of home health and wellness market.
Two examples of this include expanding our air purification offerings.
And entering the water filtration category.
We recently launched our first entry and the water filtration market.
Our new electric Hamilton Beach, Aqua fusion appliance filters water and allows for the use of flavor capsules when desired.
Demand for air Purifiers, as very strong for use in homes and businesses.
It's a big category and both appliances and replacement filter sales, we've been a participant in the market for more than 20 years, and we are working to leverage our experience into new growth opportunities. We expect the soon announced plans for new offerings that should launch later this year and next.
Our fifth initiative focuses on growth and the global commercial market to enhance our leadership position and this market, we continue to invest and new commercial products and expand our offerings across the foodservice kitchen.
And we're also investing in digital marketing and E Commerce, and we continue to strengthen our partnerships with regional and global chains.
We are optimistic about the current trajectory of the rebound and the market. We initially expected the market to fully return to pre pandemic levels sometime next year, However, order patterns of strong as businesses reopen globally.
We expect significant revenue and profit growth and 2021 based on order patterns and customer input and.
Historically, our global commercial market has delivered operating margins that are much higher than our retail business.
In summary, our many competitive strengths have enabled us to capitalize on the strong consumer demand for small kitchen appliances. These include the value of our brands and products, our strong supply chain management and.
Investments and great and of Great talent pool, and continuing to execute on our strategic initiatives.
Our team has worked extremely hard and perform exceedingly well and the face of truly extraordinary circumstances over the last year and into this new year.
Cannot be prouder of our people as they have kept themselves and other safe and healthy and keep the business moving forward on very strong footing and thank our employees for their commitment and perseverance I will now turn the call over to Michelle who will review our financial results for the first quarter and discuss our outlook.
Thank you Greg and good morning, everyone. Let me review, our first quarter 2020 results from continuing operations compared to prior year.
Total revenue increased 23, 5% and $149 $2 million compared to $128 million.
As Greg highlighted revenue and the North American consumer market increased significantly driven by strong demand and the U S Canadian and Latin American market.
And the global commercial market revenue decreased from the first quarter, but this market is currently rebounding and results are expected to improve significantly in 2021 compared to 2020.
Gross profit margin increased to 21, 2% compared to 27%, primarily due to customer and product mix.
Selling general and administrative expenses increased to $26 4 million compared to $24 $2 million, mostly due to increased third party and consulting services and employee related costs.
Operating profit increased to $5 3 million compared to $500000.
And net income from continuing operations increased to $2 $9 million of 21.
The share compared to the net loss of $1 $4 million or <unk> 10 cents per diluted share.
Use of cash before financing activities and the first quarter was $3 6 million compared to the use of $10 $7 million from the prior year period.
Net working capital increased by $71 $1 million and reflected an increase of inventory and trade receivable, partially offset by higher accounts payable.
The increase of inventory is primarily due to anticipated continued strong consumer demand for our products and the coming months.
As well as the ongoing congestion and the transportation and supply chain, which has increased the days of inventory on hand the.
The higher inventory positions us well to meet the elevated levels of demand and reduce the risk from supply chain disruption that is now affecting nearly all companies.
Higher trade receivables are mainly attributable to the higher sales from the first quarter.
We expect net working capital cash flow and our debt level to improve as the year unfolds.
Net debt at March 31, and 2021 was 10 $101 2 million compared to $67 5 million at March 31, 2020, and 96 million at December 31, 2020, and reflected the changes in net working capital.
On April 9th we entered into an amendment number nine to our amended and restated credit agreement due.
And due to the highly seasonal nature of our primary markets. Our credit agreement provides for increases and advance rate used to determine the borrowing base during periods of the second half of the calendar year Amendment.
The amendment nine increase.
The facility from $125 million to $140 million for a period of 60 days from its effective date to provide similar flexibility as demand for small kitchen appliances and expect it to remain strong and the first half of 2020 one.
The amendment and did not result, and any other changes to the terms are due date of the credit facility.
Next let me turn to our outlook.
Demand is expected to.
It remained relatively strong throughout 2021, we believe that consumers will continue to cook more of them and they did before the pandemic.
The development of new cooking behaviors.
Additionally, household formation by millennials, and boomers transitioning to new homes or remodeling, our ongoing demographic trends.
We believe the strong industry backdrop will drive demand for our products for years to come.
While the unprecedented consumer demand for small kitchen appliances.
London's of opportunity for our industry and our company.
We are not operating with the major challenges.
Material and transportation costs continue to increase and.
And shipping and transportation congestion challenges persist.
These continued pressures and the global supply chain could have an impact and our ability to satisfy the anticipated strong demand and the second half of 2021.
We also continue to face the uncertainty regarding the pace and degree of the recovery from the pandemic.
We are continuing our efforts to mitigate these risks and we have allocated team resources to manage through these challenges.
We are working closely with our supplier and retail partners to meet the needs of consumers and customers as demand remained strong.
We're taking actions such as increasingly time prioritizing production needs.
Expanding inbound and outbound transportation flexibility and implementing price increases.
For the first half of 2021, including better than expected results from the first quarter, we expect revenue to increase and operating profit to increase significantly compared to the first half of 2020.
While capital expenditures related to our ERP system are behind us.
We'll be moving to a new distribution center during the second and third quarters of 2021.
Capital expenditures for 2021 net of any allowances.
<unk> to be approximately $8 $4 million and include costs for the new DC as well as a normal level of spending on tooling and maintenance capex.
Our new distribution center is of one 1 million square foot facility that we will lease and that is currently under construction and behavior of Mississippi not far from our current facility and Olive branch the.
From our Olive branch facility was due to expire this year.
As we considered our Shannon, we decided we would stay and the general areas for a few main reasons, we can efficiently and effectively serve our customers throughout the U S from this area.
We have a great team there and we wanted to stay close enough to our current location. So we could retain all our most of our employees.
We believe this area has many benefits, including a strong pool of talent excellent infrastructure of business friendly environment and local and state governments are investing and keeping all of these elements strong.
Our new site.
We will have several upgrades that will make it more energy efficient and our current facility and will include improvement that will allow us to have a more efficient warehouse operation.
For the full year 2021, as a reminder, we expect improved performance compared to 2020 because of the progress made with challenges experienced in 2020 that were related to our Mexican subsidiaries and to the cutover to our new ERP system.
We will provide a more detailed outlook on the second half and full year, when we announce second quarter results.
That concludes our prepared remarks, we'll now turn the line back to the operator for Q&A.
And as a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then one on your telephone keypad again that the star one to come in for the question queue.
And our first question is going to come from the line of Peter Benedict with Baird.
Hi, good morning, everybody.
The first question Greg.
On the on the last call you mentioned commercial the commercial business and maybe hopes to get back.
And maybe 80% of pre pandemic levels the.
This year.
Today kind of sounded maybe a little bit more bullish and that just wanted to.
Kind of tease that out of a little bit. The do you think there's a chance you could get back.
Back to those pre pandemic levels this year.
That's my first question.
Sure Good morning, Peter.
Yes.
So right now I think we sort of started the year in line with what I mentioned and.
And what we've really seen over the past.
All of shorter period as the demand taking off.
Much stronger rate.
Hard to tell whether that's sort of catch up demand that will soften and back out a little bit, but certainly right now the of the pace of which orders are coming in both for the foodservice.
Products, we sell as well as even the hospitality side of things.
And as much stronger than we thought just a little while ago and.
And so we're chasing some of that demand for a little bit of backlog and.
The hope is that we'll we'll sort of see how that settles out here and the back half of the year is again is there a sort of short term spike above what we expected to catch up or is.
Is it going to stay at that level. So right now I think we're we're thinking that we could go higher than what I mentioned earlier.
Based on what we're seeing but we will see how that plays out.
Okay. Good yeah, well good to hear that.
Scott I guess, maybe for you.
And just maybe curious to understand.
How you guys are managing product cost increases.
And maybe how willing the retail part of your retail partners are to accept price increases we know a lot of people are trying to push those through and just curious how that.
Is trending right now.
In terms of cost pass through.
Yes, great question Peter.
So we're getting cost increase from two different areas. One is just the pure cost coming out of our China suppliers and.
And obviously the premium transportation cost.
I think it's been pretty clear for us.
Net debt, we're not the only person or company and the situation that is experiencing these and I think for for.
And for most of us and our competitors, where we're having very Frank conversations with our retailers talking about what the true cost are occasionally you have to adjust our mix of product or just our promotions on things that might be more profitable, but we are passing along the cost increases that we're seeing both from a from a cost standpoint, and the transportation stand.
Point.
Okay. That's good to hear and I guess as we think about kind of gross margin.
Over the balance of the year and it was up here and this quarter, but is it safe to should we be expecting gross margin on a year over year basis to be down over the balance of the year or is that kind of of a good base assumption here or the things you can do the to either hold what you had last year of improve on it.
Peter This is Greg so I think and the past we've talked about we sort of been able to stay within a range that the.
We sort of flexes up and down and certainly recently sort of flexed up I think.
As we as we work through this.
Passing the pricing alone, but also seeing what products move around.
And be able to stay in that range and of whether we.
Dropdown and the middle of the range or step toward the top of the range. Its hard to say I would say, it's probably more likely will be back and the middle of the range.
But I do feel comfortable that we're doing enough things to mitigate these things to make sure we're not.
Moving below the shortage of angles and deliver.
Sure.
It makes sense and I guess.
As we think kind of maybe just in terms of the top line.
Comments on commercial certainly encouraging and as well.
The.
The regular business the consumer business, but.
Historically I guess.
Second quarter revenue is kind of always been.
Higher than the first quarter and I'm just curious if there's anything there.
That would prevent that from being the case. This year is there anything unusual in terms of maybe the inventory and inventory looks really good right. Now. So I don't think there is but I just wanted to see if there was anything we needed to keep in mind on that front.
No I think youll see obviously, our inventory levels are high so that's for the as Michelle said Thats too.
Support.
The the <unk>.
Coming months.
And both from a demand standpoint, and trying to make sure we of inventory on hand, and given the congestion so I think.
I think we feel like we're well positioned there are things, we're chasing of course here and there but.
But overall, we feel like we're well positioned.
If you think about the the rest of the year Peter it's.
It is difficult to clarify of where we're all going to go.
And we'll sort of give you a little more clarity when we do the second quarter, but.
What we can say as you think about the some some positive things of some tier ones, maybe and some some headwinds and the.
Positive.
We expect.
We.
Specced and our retailers are expecting demand to stay strong through the end of the year.
So that's an important part of it of course is the underlying basis for all the things we're working on.
As you well know we had a real challenging third quarter of last year, So that's pretty easy comp to overcome.
Growth is really coming across all markets. We're fortunate right now that we're seeing strong demand and the U S, Canada and Mexico throughout Latin America and commercials, so thats of.
And certainly a good trend of CSL as we go forward and.
And we're excited about the continued progress on the premium side of things and the commercial market as I said those are higher average selling prices.
And so that's all good and the headwinds for the back half and and to some degree of the second quarter.
As well, we had a tough third quarter, we hit and we shipped a lot of the fourth quarter that was sort of of catch up from the third quarter. So that's a bit of a.
A little bit we have to make sure we overcome that.
The congestion and the supply chain with our suppliers as well as just the distribution side of things and that's really tough to call of how that's going to play out we're working it real hard and we feel like we're doing all of the right things but.
And it really is you know the whole world is working.
Dealing with that so that's a big deal.
And.
I think also we.
Talked about the higher costs. So that's something we've got to make sure we deal with.
And so I think as we think about the the.
And how the year and the second quarter plays out I think we of lot of good things going for us, but I think we'll just know a lot more about that.
All of those the all of those headwinds and when.
And we get to the to the second quarter timeframe.
Yes fair enough that's helpful and I guess the last question is just around just the M&A environment out there and kind of what are you guys seeing and do you have any appetite there I know.
I guess bigger picture has been maybe part of the story, but certainly the hasn't nothing's really been happening on that front, but just when you get an environment like we've been through sometime.
And sometimes that can shakes and things loose, but just curious your broader thoughts on on the M&A environment and your portfolio what role that might play over the next.
12, 24 months of yourself.
Okay.
So.
I feel really good as you know.
And we've added the team member of George to focus on that and he is doing a great job really looking.
Across a wide range of opportunities of feel really good about the the process we have in place and.
And we've done some things that weren't acquisitions, but we're really been very helpful.
And building revenue and things like the parties and partnership so it's net of acquisition, but it's the.
Sort of a.
The different different way to kind of partner up with the.
Outside the.
The benefit both of us so.
I think.
I feel good that we have a very good pipeline of both.
Particularly on the partnership front things that could play out well for us here.
And the near term and.
The acquisition front, we're talking to a lot of folks.
The biggest issue right now that we're seeing is valuations you know as you know very very well the the home.
Market.
And is driving valuations real real high.
Also there's a lot of PE firms and specs running around trying to find the targets and they are.
More of some of them, particularly the specs or focused on getting a deal done more than what's the right valuation. So I think I feel better about finding some really interesting.
Partnership opportunities such as the partition than I do on getting an acquisition opportunity, but I will tell you we are talking to a lot of folks.
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I think there's I wouldn't say that it would rule it out and it's just that one is a little bit harder given the valuations.
Okay understood it sounds like the wise approach.
And that's it for me. Thanks, so much guys I appreciate it.
Great. Thank you.
Once again to ask a question. Please press Star then one on your telephone keypad again, Thats star one to come into the question queue.
And once again to come into the question queue Press Star one on your telephone keypad.
And seeing none I will turn the conference over to you for any closing comments.
Okay. Thank you.
We look ahead, we are optimistic for many reasons, we are leader in our industry and there is a proven durable demand beyond the pandemic driven surge we had been experiencing are.
And our team is doing and incredible job for our customers and our company. We're very encouraged the vaccines are being widely administered and life has started to return to some level of normal.
Our strength from our investments should enable us to maximize performance, including our broad portfolio of trusted brands, our comprehensive offering our experienced team our global infrastructure, a broad range of retail relationships across all channels and our well developed e-commerce capability.
We're excited about the many prospects for profitable growth that are available through our strategic initiatives. We are focused on strong execution as we work to increase our participation and the e-commerce premium commercial and home environment markets as well as our heritage North American market. Thank you again for joining our call today.
Once again, we'd like to thank you for participating and the Hamilton Beach brands Holdings' first quarter 2021 earnings Conference call. You May now disconnect. Thank you.
And so.
Ladies and gentlemen.
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