Q2 2021 Hamilton Beach Brands Holding Co Earnings Call
Good day, Thank you for standing by and welcome to Hamilton Beach branch holding companies second quarter tiny tiny 1 earnings call at this time on a participant 19 and listen on the mode. After the speaker's presentation and there'll be a question and answer session Classic question and during the session and you will need to press star 1 on your telephone keypad.
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Thank you Blue and good morning, everyone welcome to our second quarter 2021 earnings call and webcast yesterday. After the market closed we issued our second quarter earnings release and filed our 10 key with the S. E. C copies are available on our website.
Our speaker today are Greg trap, President and Chief Executive Officer, and Michelle Mosier, Senior Vice President and Chief Financial Officer, Greg and Michelle will discuss our second quarter resolved.
Also participating in the Q&A will be Scott Tidy, senior Vice President and consumer sales and marketing.
Our presentation today and creeps forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed and either the prepared remarks or during the Q&A additional information regarding these rats and uncertainty and available in our earnings release or 10 keys.
And our annual report on form 10-K for the here and in December 31.2020.
Company disclaims any obligation to update these formats and statements, which may or may not be outdated until our next quarter Day conference call. If at all and now I'll turn the call over to Greg.
Thank you Lou in good morning, everyone. Thank you for joining us.
And will begin with our second quarter results.
After delivering a strong performance and the first quarter or second quarter results feel short of our expectations.
We were very pleased that our top line momentum of the past 2 quarters continue.
Ah revenue grew nearly 12 per cent and we experienced broadbase strength and all markets.
So we're disappointed however, the profitability decrease significantly.
The decline was primarily due to significantly increased inbound and outbound transportation costs, resulting from disruptions throughout the global supply chain.
And ongoing dramatic rise and ocean shipping container rates accelerated during the quarter and continues to do so and carrier storage charges increased.
We continued to experience cost pressures and disruptions caused by container shortages or congestion crowded railyards and a shortage of drivers and chassis and the domestic trucking industry and you also experienced higher material and labor costs.
As we sit and our previous earnings call, we expect to transportation congestion and that's it.
July chain disruptions to persist however, the external environment changed more rapidly than expected and volatility has been far greater and our expectations.
Well a second quarter results were not what we planned our team performed very well under very difficult conditions, I'm very proud of proud of and grateful for their tenacity and resilience.
We believe that the many steps our team was taken to manage through the challenges will benefit us and the second half of the year I will discuss all discuss those steps on a moment.
While these challenges have escalated in recent weeks and are expected to persist and the near term, we expect them to normalize overtime.
More importantly, we firmly believe their current impact does not reflect the fundamental health for a business or a long term prospects.
Brands are healthy and we continue to see robust growth.
Demand for retail and commercial small appliances remained strong I'll provide more details on revenue and markets and a moment.
For now the unprecedented unprecedented demand is a 2 edged sword that continues to cause significant near term challenges throughout the supply chain let.
Let me review on near term challenges.
Transportation.
Supply chain disruptions continue.
Record shipping demand from all and porters along with a shortage of ocean shipping containers is causing a dramatically rising rates as well as longer transit times.
Our view is that the current challenges are compounded by the annual inventory building period ahead of the peak holiday selling season.
We think that when the holiday stocking is completed later and the second half.
The the disruption should begin to moderate.
We are focused on importing all the inventory we can to meet the strong demand while balancing the challenges of doing so at a reasonable cost.
Material and labor costs are increasing and.
As expected, we were seeing and escalation and protocols due to rapidly rising material costs and the recent devaluation of the Chinese 1 on.
Unexpectedly labor costs have also increased particularly for warehouse personnel is the high demand for these resources and escalated rapidly.
We are addressing constraints with third party manufacturers.
Other supply chain constraints have increases demand from us and our competitors has been running higher levels.
Running at higher levels that are third parties manufacturers and trying to can handle.
Further challenging our suppliers as the impact of shipping container shortages on our ability to efficiently and finished because out of their factories, which in turn affects their production capabilities.
A move to our new distribution center is adding complexity.
For a company we had begun began to play and relocation of our U S distribution center. During the second quarter are moved from Olive branch, Mississippi to nearby by he'll you as additional complexity to operations.
The movie's continuing and the third quarter and is on track.
But it adds complexity and told completed.
We expect to incur about the same level of expense and the third quarter as we did and the second quarter.
Importantly, let me discuss our mitigation strategies.
We were taking many steps to mitigate the supply chain issues and rising cost challenges.
We are fortunate to have an experienced strong team to lead us as we strive to maximize our ability to meet record demand or.
Or mitigation strategies include pricing actions negotiating with carriers for container space and rates working with our suppliers to minimise minimized constraints and collaborating with a retail customers.
Our first phase of price increases went into effect and June and July with timing bearing by market.
These increases these increases will benefit our second half results more than they did our second quarter results.
As the challenges and the second quarter accelerated we decided additional pricing action was required and that will be in effect. This month.
And additional pricing is required we will balance and need to cover rising costs with and he to remain competitive.
And we never take pricing actions lately, and we understand that cause stress for retailers and consumers are discussions with customers have been constructive because they are experiencing the impact of rising costs and their own operations.
Pending on the radio continued cost escalation price increases may not fully offset and the short term.
We have taken additional steps that are alleviating pressures and the supply chain.
And China, we have move some product to nearby warehouses to free up supplier space and capital sore suppliers will produce more for the coming holiday built.
We are working with or retail customers from more products to be shipped through direct import programs when possible.
And are there and R U S distribution center, where.
We are maintaining peak season, and staffing and we are adjusting labor rates is necessary to attract and retain personnel.
Alright, and I'd like to now shifts to a discussion of market demand and a revenue performance.
Our top line performance. This year has been strong earlier and the year revenue growth was driven by increased sales and R. U S Canadian and Latin American markets.
The second quarter, we were pleased to also see growth and our Mexico, Mexican and global commercial markets as they continued to rebound from last year's Kobe, driven demand and weakness.
And are you as a consumer market will the growth rate moderated compared to last year's dramatic demand Serge revenue was in line with last year underscore and continued strong demand.
And the Canadian market sales also we're in line with per year, Despite a new COVID-19 driven retail locked down during the quarter his stores reopened and we expect a return to sales growth.
And the Latin American market demand strength, and further sales increased significantly and exceeded our expectations.
And the Mexican market demand strengthen consist considerably compared to last year and sales increased significantly.
And the global commercial market sales growth exceeded our expectations and revenue group I almost 80 per cent.
The very important message here is that demand is very stroll across our entire company.
Our strategic initiatives are playing and important role you know or.
Revenue growth e-commerce.
Channel penetration remains strong at 32 per cent, even as consumers have begun to shop, more and stores and brick and mortar channel sales strengthened.
Sales of our premium products increased 35 per cent and the second quarter.
I would like to spend a little time on our newest strategic initiative, which is to expand our presence and the large and fast growing home health and wellness market.
These programs should benefit Hamilton beach for years to come.
During the second quarter, we announced 2 strategic partnerships that support this goal.
First we are partnering with the Clorox company to launch a new line of air Purifiers under the Clorox brand name.
Secondly, we reported with partnering with health beak, and limited and we are the exclusive marketer and distributor of a smart injection care management system and the U S and Canada under the New brand name Hamilton Beach Health.
Let me describe and more detail our partnership with Clorox.
The air Purifier categories growing and it's been growing for years and.
And and in fact, if you look at 2020 over 2019 the growth was 78%.
The growth was driven in part by the pandemic and concerns about indoor air quality and it was also driven by 1 of the worst wildfire seasons, and 1 of the worst allergy seasons on record all conditions that persist.
Clorox of course is very focused on disinfecting and are moving germs and killing germs.
Hamilton Beach is a lot of strength or on sales manufacturing distribution and has all the relationships, where it air purifiers and sanitation devices can play.
We will be sourcing and marketing and the new line of products with online and and brick and mortar.
We'll watch our first products later this year and will have many products to follow on 2022 and beyond.
So we feel like this is a great opportunity to really leveraged our capabilities being able to bring small appliances and to this these channels and a great brand that clorox offers.
Turning to our partnership with Health Beacon limited.
They are a leading developer of smart tools for managing injectable medications at home health.
Health because headquartered in Dublin, Ireland, and they have achieved great success and several global markets. They.
And they needed a partner to expand quickly and efficiently and the U S and Canada.
They're excited to partner with them and do business under our new brand name Hamilton Beach Health.
Health Beacon developed the world's first and only FDA cleared smart sharp spin that intelligently helps patients with a broad range of of treatments for chronic conditions.
They've been itself works and a combination in combination with an F.
The total system provides medication management reminders treks adherence provides for the safe inconvenient disposal of use sharps.
Partnership will leverage our brand equity, our leadership and marketing and distribution and retail or relationships.
We look forward to helping make it easier for patients and the U S and Canada to manage their injectable medications.
Stay on track with a treatment schedule and safely manage the disposal of their you sharps.
We plan to continue to expand our presence and the home health and wellness market. We have a number of discussions underway and expect to make additional announcements this year and next.
And summary on the 1 hand, we are fortunate demand for retail and commercial small appliances remained strong brands and practice on selling very well on.
On the other hand, the current operating environment Industrywide remains challenging is persistent supply chain disruptions and ongoing materials and labor costs increase increases create much uncertainty.
At this time, Visibilities limited or working to gain a deeper understanding of how these dynamics are going to play out, especially as our industry heads into the peak holiday selling season.
Our focus too is to ensure a product availability during the holiday season.
We're leveraging all our resources and expertise as well as our relationships with suppliers customers and fruit vendors to meet demand because we continue to manage through constraints that most industry participants believe will continue for the rest of this year and likely into next year.
And we're also monitoring and the ongoing global pandemic, especially how the delta variant evolves.
And I will turn the call over to Michelle.
Thank you and Craig and good morning, everyone let.
Let me review, our second quarter results compared to prior year.
And it all revenue increased 11, 8% to $154 and $7 million compared to $190.839 Greg.
Greg provided and a lot of detail on the revenue performance and.
And I'd like to underscore that demand remains strong and all our market.
And are U S and Canadian market, our 2 largest market revenue held steady compared to last year strong pandemic and cries and consumers sheltering at home purchase more small kitchen appliances to support their need for meal and beverage preparation.
This performance demonstrates that strong consumer demand for small kitchen appliances, and our largest market continue.
And a Latin American market and momentum from the first quarter continues and this market continues to rebound from pandemic and demand weakness.
We were especially pleased that revenue and our Mexican and global commercial market turned positive for the first time since because it pandemic started and say.
Continue to rebound strongly.
While the unprecedented consumer demand for small kitchen appliances has provided and abundance of opportunity fine history and.
We are operating with the major challenges.
And the second quarter, we expect significantly increased inbound and outbound transportation costs, and we faced higher materials costs and labor costs.
All these cost pressures and the results continue unfavourable impact of the COVID-19 pandemic on all parts of the supply chain.
As a reminder, last year's gross profit margin of $25.5 per cent significantly higher and our historical range and.
As we benefited from the very strong pandemic, Kevin revenue price and the U S and Navy and market.
Gross profit margin and the quarter.
Quarter decreased $18.4 per cent.
The global container shipping industry continues to operate under severe constraints extremely.
Extremely high consumer and and quarter demand continues at a time and the industry has not fully ramp back up from last year's scaled back operations.
This is cost capacity shortages, which in turn is cause right to continue to set new highs.
Transportation supply chain disruption also include significant congestion at you and supports and Railyard.
Further driving up transportation costs.
The pandemic also has created a shortage of truck drivers and chassis, which hasn't unfavourable impact on outbound Frank to retail customers.
We're continuing with our efforts to mitigate the challenges and have allocated significant team and resources to manage through each of them.
We're working closely with our suppliers and retail partners to meet customer and consumer demand where.
And we're taking actions such as increasingly time.
Prioritizing production knee and expanding inbound and outbound transportation flexibility and implementing price increases.
Are selling channel and administrative expenses increased to $27.5 million compared to $24 million from the second quarter of 2020.
We incurred $1.2 million from costs relates to the relocation of our distribution center.
Additionally, our expenses for outside service and personnel related expenses increased.
Last year, when the pandemic kit, we put a freeze on discretionary spending including filling his and position.
As we saw on demand increase we began to fill out and positions either without type services are from and a higher.
I need distribution center as a 1.1 million square foot facility that we're leasing and is not far from a form of facility.
The old lease was due to expire this year and is.
We can sit and options we decided we would stay on the channel area for a few main reason.
We can efficiently and effectively and serve us.
Customers throughout the U S from this area.
We have a great team and Mississippi, and we wanted to stay close enough to our current location. So we could retain all or most of our employees.
We believe this area has many other benefits, including a strong talent pool.
<unk> infrastructure business friendly environment, and the local and state and government that are investing and keeping all of these elements strong.
Our new site has several upgrade that will make it more energy efficient and our current facility and it includes improvements that will allow us to have a more efficient warehouse operation.
Turning to our bottom line operating profit with $900000 compared to $10.9 million last year.
Net income from continuing operations was just above breakeven 1 cent per share. This.
This compared to net income from continue operations and the prior year of $8.1 million or 59 cents per share.
Cash flow and before financing activities and the 6 months ended June 30th 2021, with $800000 compared to $19 and $7 million.
Capital expenditures were $7.6 million, primarily for investment and our new U S distribution center.
This amount was partially offset by $4 million of least incentives and tenant improvement allowance, which were classified as cash provided by operating activities.
This compares to $1.6 million of Catholics expenditures from the same period last year, primarily related to our ERP system.
Networking capital and increased by $71.8 million and reflected and increase in inventory and trade receivable, partially offset by higher accounts payable incur.
Increased inventories due to our planning for anticipated continued strong demand as well and the ongoing disruption that transportation and supply chain that has increased the amount of inventory on hand higher.
Higher trade receivables and mainly and attributable to the increased sales and on the second quarter.
Net debt and June 30th 2021 was $98 and $1 million compared to $42.42 million and the prior year and $96 million, a year and and reflects the changes and networking capital.
And from a reminder, prior year net debt was significantly below our historical range and pandemic, driven retail customer and consumer demand depleted inventory and our shelves for nearly empty.
Next let me turn to our outlook.
As we've indicated demand for a retail and commercial products.
Expected to me means strong throughout 2021, and assuming net a drastic lockdown measures related to the Covid Delta area.
We're pleased with the placement and promotion that have been secured for the holiday selling season.
The challenge we are facing is our ability to satisfy the anticipated strong demand is ongoing pressures and the global supply chain continue to affect importers and a wide range of industries.
We expect to face challenges getting all the product, we need timely and and acceptable cost.
Due to the limited visibility created by near term volatility and the operating environment, we determined that it would be and prudent to provide specific outlook at this time per second half revenue and operating process.
We expect to gain and deeper understanding and inflationary pressures and supply chain disruption, especially with our company and the industry and or the peak holiday season.
We plan to provide an outlet for the full year when third quarter of 2021 results are announced.
That concludes our prepared remarks and will now turn on my back to the operator for Q&A.
As a reminder to ask that question you will need to press 1 on your telephone keypad again and the star once asked that question.
Can we draw the question just pressed spanky.
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Your first question comes from the lines, Justin Bieber from Beer day lines now open.
Hey, guys, it's just and claver and thanks for taking the questions hope everyone's doing well.
The first 1 on the on margins and the cost pressures, Greg you talked about and.
Implementing price increases, but it it sounds like you are necessarily expecting price cost.
Neutrality this year and I mean is that a fair characterization and then just maybe any benchmarks in terms of how much you know.
You're raising price across the across the portfolio.
Well adjusted I'll start and then maybe Greg and Scott can jump in.
To a large degree during the second quarter and.
Negative margin impact is really a matter of timing, while we expected some of the cost pressures and we developed pricing actions thoughts set those.
The cost impact the key to before some of the price increases went into effect.
So we believe that in the back half, we will benefit from the price increases.
B and it continues to be a lot of uncertainty the industry and so we've taken action for what we can predict and what we know but the unknown is still on there.
And just to build on that.
I think the biggest.
Part of the ongoing gross margin per cent of his Michelle said is timing.
We had planned on a certain level of increase we implemented that June and July is certain other costs escalated we added more and August.
So that should benefit and the back half.
There was some.
A hit to the margins that related to some of these transportation costs and congestion related charges that either either showed up and gross margin or an S. G R expense lines and.
And that support where we think we've got.
Ways to avoid that going forward, but that's probably the biggest.
Part, we get to watch if that gets to be challenging to deal with them, we might get hit with some more on the back half and.
And if we can keep it under control them and it really we should see the margin come back up as these price increases kick in so just try and be careful as a lot of the congestion and I was just things we can't control. So we don't want to.
Predict what might happen and the environment, where we can't control the all the variables.
Okay, Yeah, I know it makes sense, Greg obviously, a very very fluid environment.
And you think about it sounds like to me your retail partners, obviously, working with you guys and accepting price increases I mean, clearly you're not the only ones pushing through price right now.
My question is just.
Around how sticky price increases have historically been within your business within the industry, if and when you know these input costs come down do.
And do those did those price increases hold and therefore, you know you you see actually margin tailwind if and when some of these cost pressures.
Start to understand a bit.
A just and this is Scott so.
I will say that.
We have been fairly successful and and executing the the price increases out there. We are definitely experiencing the same thing that many of our competitors and and even a retailers who source and a lot of product on their own. They're also seeing the same challenge.
Typically you know, how and being able to predict how on the margin sticks. After costs are coming down is is really hard to do you.
You usually the competitive environment, you're you have to make sure you're not going to lose placements and you have to react to that so it just depends on how quickly the the commodities and the currency change that.
And that tells you that how much you and you'll be able to hold on to that or whether you'll be just you know back to margin neutrals. So I think I think it really varies you and based on with the competitive environment thing.
Just to build guide adjusted just saw him sorties were up at the.
So I think Scott described it very well and and.
When things move quickly sometimes it takes a little time to catch back up which is kind of what we're doing now and then as they come down and maybe you can we can stay ahead of it for a period of time, we're gonna and back up in that range. We usually do if you look back historically world gross margin has been we feel like there was a.
A band there that were that were were.
And and can get back into and then just where we are and that being it really depends on the factors that Scott talked about.
Gotcha, Okay. That's helpful.
And then.
In terms of the.
You know the the U S and Canadian consumer business and the revenue profile there.
It seems like the industry demand as is growing even relative to last year. So I guess, if you guys look at your cell through at retail is that also.
Taking place, whereas you yourself or was growing relative to last year and you just simply can't satisfy.
Or rebuild the channel based on kind of the inventory constraints and I am I thinking about that the right way or or does that logic off base.
And I think just and again this is Scott and I think in general if you look at the large retail all retailers that are and both Canada and the U S.
They're all being challenged within stocks right now and that varies by either different supplier. So there is some need of just getting getting these retailers back and stock to the normal no store levels, but.
But at the same time, you demand is still really strong and I think most people would say that they've cut back on promotional spin because supply has been tight. So I think that's another thing that will certainly we expect to see is more inventory starts to show up at the store will start seeing more promotions and trying to make sure that consumer continues to.
To come back in and shop, So we still feel optimistic about the back half of the year, we think the consumer's habits have changed and.
Permanently and the day will continue to be meeting and using appliances and.
And gifting more than they have in the past and so we expect that demand to continue and and we still have some some on stocks to fill up as well.
Okay and then just 1 final question from you guys in terms of the partnerships that you've announced very interesting developments. There are is there anything you can share just on how.
How the economics of these work I mean do you guys you guys recognize 100 per cent of the revenue and any pay a royalty or or does this revenue show up and that licensing.
Revenue you know <unk> that you disclose and your and your SEC filings just trying to understand.
And shall magnitude of the impact on your top line.
You know these partnerships wrote really take off thank you.
It suggests and it's Michelle and the 2 that we've recently announced will behave differently for clorox. It truly is a licensing agreement. So we will recognize all of the revenue there and pay a licensing fee similar to how we treat wolf gourmet and Chi.
With health Beacon, it's a little bit more of them on.
On this day, it's not defined as a partnership but similar to that we will be the take responsibility and and and the inventory and sell it. So we will get the top line growth there, but we'll be sharing and the profit with them a little bit more evenly so uhm.
It won't be a licensing fee, but the profit will be split at the end of the day, even linked with them.
Okay. Thank you for that Michelle and thanks, again, guys best to block over the back half of the year I. Appreciate your time. Thanks. Thank you Justin.
And on the wants to ask a question. Please press star 1.
Speaker, saying seeing no further questions in the queue and they like to turn the conference back to Greg trip for closing remarks.
Thank you from the second half of 2021, we're fortunate that demand from a retail and commercial products remained strong longer term, we expect our strategic initiatives to drive revenue growth operating profit margin expansion and strong cash flow.
We are a leader and our industry and there is proven durable demand and beyond the pandemic driven surge we've been experiencing our strength should enable us to maximize performance, including a broad portfolio of trust and brands are comprehensive offering or experienced team of global infrastructure, a broad range of retailer relationships across all Chan.
Holes and are well developed ecommerce capability. Our team is doing a credible job for our customers and our company. Thank you again for joining our culture.
This concludes today's conference call and you may now disconnect. Thank you for participating.
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