Q3 2021 Hamilton Beach Brands Holding Co Earnings Call

It's also continued to rebound strongly.

Latin American market revenue more than doubled in.

And in our Mexican market revenue increased.

In the U S consumer market.

We're strong demand continued revenue increased last year's lower revenue was due temporarily due to temporarily decreased shipping volume during our cutover to our new ERP system and revenue shifted into the fourth quarter of 2020.

Overall, our brands are performing well across many measures, including sales placements and star ratings.

We're pleased with the retail placements and promotions that we have secured for the holiday selling season.

We continue to experience strong demand.

Wherever challenges throughout the global supply chain have hampered our ability to ability to fully meet demand.

<unk> fortunate to have an experienced and talented team to lead us as we strive to maximize our ability to navigate these challenges.

Our team has worked tirelessly and executed well I'm deeply grateful for everyone's hard work dedication agility and resilience.

The main industry wide challenge to fully satisfy the demand is the ability to source and transport products in a timely manner and at a reasonable import cost.

Throughout this year, we have taken many steps to mitigate the supply chain challenges, including pricing actions negotiating with carriers for container space and rates.

Working with our suppliers to minimize constraints.

And collaborating with our retail customers.

We were pleased that pricing actions that went into effect in the third quarter helped to restore our gross margin intuit's historical range compared to where it was in the second quarter of this year.

Product and transportation costs are expected to continue to rise we plan to balance the need to cover rising costs with the need to remain competitive depending.

Depending on the rate of continued cost escalation price increases may not fully offset cost increases in the short term.

We remain we remain focused on importing all the inventory possible to meet the demand that we're seeing from both brick and mortar and e-commerce retail customers.

We feel particularly confident about the strength.

Our demand in the U S consumer Latin American consumer and global commercial markets.

Our largest obstacles to maximizing our business continues to be the supply chain issues, which we expect to persist at least through the first half of 2022.

Our suppliers continued to struggle to keep up with the demand due to power outages and sub supplier issues. Among others. We believe we are managing this challenge well and we have a very capable team in the U S and on the ground in China to work directly with our suppliers.

The main transportation challenge is the ability to secure ocean carriers at a reasonable cost.

Like others, we have a contracted container rate.

Like every company, we have not been able to secure all of our needs at the contract rate, we're balancing the need to manage short term margin, while ensuring we meet customer commitments and retail and commercial demand.

Transportation lead times also have increased we believe we have pivoted well and we've adjusted our patter order patterns accordingly.

I'd like to now discuss the progress, we're making with our strategic initiatives, which are designed to increase revenue expand margins and generate strong cash flow over time.

Expanding our E Commerce leadership, and our digital transformation is a key priority.

We are the market leader and continue to invest to ensure our leadership continues.

Year to date sales through the E Commerce channel accounted for 33% of total revenue.

We continue to invest in our e-commerce capabilities, including digital marketing programs, expanding our direct to consumer distribution operation and increasing participation with pure play and omni channel customers.

Achieving a significant patient and our position in the higher priced higher margin premium market is also a key focus.

Sales of our premium products increased 35% in the quarter.

Our premium brands have been well received by consumers, including a wolfcamp a counter countertop appliances, which have been hard to keep in stock. This year, we introduced a true temperature Kendall that has been well received.

The sale of our Chi premium garment care products has rebounded nicely. This year as more employees have returned to offices and pressing close is once again and necessity for many people.

Our Hamilton Beach professional brand continues to gain traction and we continue to introduce new products and a number of categories to provide consumers with commercial grade quality at home.

<unk> premium cocktail machine remains ever popular we have developed this generation two model, which includes a number of updated features and our partner continues to add new flavors to the extensive line of cocktail capsules.

From a premium market, but you also and also for the commercial market.

We are focused on expanding our leadership position globally.

Hope to continue to invest in new product development further strengthened customer relationships and enter additional strategic partnerships and licensing agreements.

In 2021, we added a new growth initiative, which is to expand our presence in the large and fast growing home health and wellness market.

The second quarter, we announced a partnership with the Clorox company to launch a new line of air Purifiers under the Clorox brand name.

We also announced a partnership with help making limited, making us the exclusive marketer and distributor with smart injection care management system in the U S and Canada under the New brand name Hamilton Beach Health.

For the Clorox product law launch our marketing and sales teams have spent the past few months presenting the new lines of air Purifiers to retailers.

And it has been well received.

Feel confident that our marketing and distribution capabilities and our retailer relationships combined with the Clorox brand name.

And its association with cleanliness positions us well for success in this market.

In January we plan to launch a clorox large room air Purifier and a tabletop air Purifier in February we will add a medium room air purifier.

Later in the spring or Alexa Smart Air Purifiers are scheduled to launch.

Turning to our partnership with <unk> and limited we are a leading developer of smart tools. They im sorry, they are a leading developer of smart tools for managing injectable medications at home health.

<unk> is headquartered in Dublin, Ireland, and they have achieved great success in several global markets.

They needed a partner to expand quickly and efficiently in the U S and Canada, we were very excited to become their partner.

<unk> developed the world's first and only FDA cleared smart sharp spin, which intelligently helps patients with a broad range of treatments for chronic conditions.

<unk> in combination with Nab.

The total system provides the medication management reminders tracks adherence and provides for a safe and convenient disposal of use sharps.

Plans are on target to begin online distribution in the fourth quarter of 2021 with a new direct to consumer website.

Also in the home health and wellness market, we have launched our first product in the water filtration category Aqua fusion is available now on Amazon and we are in the process of rolling it out to other online retailers.

Ill confusion is as an electric countertop appliance can provide superior water filtration and fresh taste using our proprietary carbon black filter.

We also offer capsules, which provides a consumable revenue stream.

Confusion is eco friendly, which filters, which each filter eliminated 750 single use models.

We expect our expanded participation in the home health and wellness market to add add to our momentum in 2022.

We are working to further expand our presence in this space.

A number of discussions underway.

Hope to make additional announcements, including programs under our Hamilton Beach Health brand.

Even as we work to expand in new markets. We remain intently focused on accelerating the growth of our flagship brands and also beach and Proctor Silex.

Our heritage North American market.

Innovation and new product development have always been the life blood of this business and we're excited about a number of new products for these brands.

For the industry's largest category coffee, we continued to expand our flex brew single serve coffee line.

Our next generation Flex brew machine delivers faster brewing and offers a removable multi serving reservoir.

We will be rolling out several versions of the new flex portfolio.

As well as a variety of single serving Brewers.

We've also recently launched the flex brew Universal, which allows consumers to brew coffee using K Cup pods their favorite ground coffee or an espresso style pods.

Outside of single serve coffee, we continued to see increased consumption of cold Brew coffee. We recently recently launched the Hamilton Beach rapid cold Brew and hot coffee maker.

This is an innovative new product that allows consumers to make a couple of cold brew coffee in under six minutes has a flexibility of also being able to through traditional hot coffee.

Growth continues in the air Fryer Toaster oven category is a significant focus for our product development teams. We continue to build our lineup of shrimp Crisp air Fryer Toaster ovens.

<unk> launched a handle the beach professional model.

We've also recently launched innovation and one of our heritage categories and mixers, our new patented easy clean theaters provide a smooth closed either surface, which prevents clogging it makes cleanup much easier.

We're also rolling out a new Proctor silex lines, which offer superior product performance and durability.

In summary demand for our retail and commercial small appliances remains strong our brands and products are selling very well our focus is to ensure product availability.

We're leveraging all of our resources and expertise.

As well as our relationships with suppliers customers and freight vendors to meet demand as we continue to execute well in the face of persistent challenges and work to deliver a strong finish to the year.

I'll now turn the call over to Michele.

Thank you Greg and good morning, everyone. Let me review, our third quarter results compared to prior year.

Total revenue increased 41, 8% to $156 7 million.

Compared to $110 5 million.

Greg reviewed the performance by market. So I'll just reiterate that we are very pleased to see the rebound in our global commercial Latin American and Mexican markets continue.

And we are also very pleased that demand remains robust across all of our market.

Gross profit margin was 21, 2% compared to 21, 5% in the prior year due to significantly higher transportation costs.

As a result of the disruption in congestion in several areas of our supply chain, primarily from China, where our products are manufactured we experienced increased freight and container costs as well as additional carriers towards charges.

There was also an increase in labor costs for warehouse personnel.

Selling general and administrative expenses remained flat, despite $1 6 million and incremental expenses related to the relocation of our U S distribution center.

Outside services decreased by $900000.

Employee related costs were lower overall that have offsetting factors SG.

SG&A benefited by a decrease in our accrual for incentive compensation as a result of the decline in our stock price.

And this benefit was partially offset by an increase in salaries and benefits.

As a reminder, $700000 of nonrecurring expense related to patent litigation was included in the third quarter of 2000 and planning.

Operating profit increased to seven 4 million.

<unk> operating loss of $2 $4 million.

Interest expense increased by $300000 due to higher average borrowings outstanding under our revolving credit facility.

While average borrowings were higher our weighted average interest rate for the period declined.

Net income from continuing operations was $5 7 million of <unk> 41 per diluted share.

<unk> to net loss from continuing operations of $2 million or <unk> 15 per diluted share.

Our cash flow before financing activities was a use of $13 2 million for the nine months ended September 32021, compared to a use of $8 $8 million last year.

Capital expenditures were $9 1 million compared to $3 $1 million.

The current year MAU increased our investment in our new distribution center, which is partially offset by lease incentives and tenant improvement allowance classified as cash provided by operating activities.

As we've discussed the past few quarters, we began a planned relocation to our EBITDA distribution center during the second quarter from Olive branch, Mississippi to nearby behaving in this setting.

And moves continued in the third quarter. It was completed on time and is now fully operational and running efficiently we.

We were fortunate that we have.

Complex such a complex move during this challenging environment and then we finished ahead of the holiday selling season.

And the new facility, we have expanded direct to consumer shipping capabilities, which increases our ability to ship online orders for many retail customers.

We have a great team in Mississippi, and we're able to retain much of our workforce after the <unk>.

We're very grateful to all of our employees who are involved in completing the smooth successfully.

Incredibly hard and delivered an outstanding result.

Turning to working capital net working capital increased $57 3 million trade.

Trade receivables increased by $22 $6 million, primarily due to increased sales.

Accounts payable decreased $61 $1 million and inventory increased by $26 4 million driven by the increased sales, partially offset by longer and transit time.

At September 32021, net debt was $113 5 million compared to $69 6 million at September 30 of 2020 and $96 million at December 31 2020.

The changes in net debt are attributable to the changes in networking capital.

We amended our credit agreement in September among other changes the amount of increase the facility from $125 million to $150 million amended.

Amended the pricing grid and increased eligible inventory in credit in the borrowing base.

Let me now turn to our outlook. We continue excuse me the continued uncertainty surrounding supply chain and cost pressures, which Greg discussed in detail limit our near term visibility.

That reason, we have determined it prudent to refrain from providing a definitive outlook until the current volatility stabilizes.

As a reminder, in the fourth quarter of last year revenue shifted from the third quarter as we fill the order backlog related to the lower ship in levels in the third quarter.

Which resulted from the cutover to our new ERP system.

Therefore, we expect the fourth quarter 2021 revenues could potentially be lower than the fourth quarter of 2020, depending on the availability and timing of supply.

That concludes our prepared remarks, we will announce that in line back to the operator for Q&A.

Thank you Michele if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two.

When preparing to ask your question. Please ensure you're on mute locally.

Our first question comes from Dustin Cleve Justin Your line is now open.

Yes, hi, everyone. Thanks for taking the questions.

The first one we had was on revenue.

If you look historically, the third quarter tends to build around 15% to 20% from <unk> This year.

Revenue rose about 1% sequentially.

The question is is it fair to think about that delta versus the historical trend as demand.

Just went on sale given inventory and supply chain supply chain constraints or is there an internal view you guys have just on the potential impact of revenue from.

The bottlenecks throughout the supply chain.

Hey, Justin I'll start off with that and Scott can add color.

Thanks for joining us good morning.

So good question I think what sort of historically outside of these current conditions, we often have volume move pretty dramatically between.

The third quarter and fourth quarter.

A retailer has a big promotion or we do some some shipping DIY one year versus not the next year direct import.

You can see something move really just from.

September to October, which could could cause more fluctuation. So we tend to look at the back half as a group but.

But your point is we will take those at that.

As you compare to the second quarter saw a different trend here.

<unk> history, I think what we've seen is.

Demand is real strong.

Product definitely has taken longer to get here.

We are working really well and get as much inventory as we can but it really is.

Youre pushing hard to get at here getting all the ships in.

In rail lines and turned back to customers. So I would say we feel good about how strong the demand is.

Through the third quarter into the fourth quarter.

We have internally a wide range of.

Potential.

The numbers that we would deliver depending really on supply the demand is there.

So I think we just sort of felt like it's important to.

The dentist or communicate the fact that it could be a little lower than last year, because last years fourth quarter was pretty strong.

But also if we can get the product and get it here and get a term that we could do better than that and it really is just depends on how things play out that would help us kind of through any of them.

And this is Scott.

Had a couple of things in the second quarter as Michelle alluded, we were switching warehouse distribution center. So we did prior to <unk>.

Some volume early to get that into some of our retail partners as we knew where to be shifting distribution centers.

That would've increased sales in second quarter.

And we're also still trying to we still have a Latin American market and the commercial market is growing we are still trying to fill up some of those.

There is distribution centers from some of our partners. So it kind of even things out between the second and third quarter, but I think it's really back to use the timing perspective of when we're getting goods from China, and we were able to fulfill the one other thing was it Pandey did shift from the third quarter of this year in the U S to the second quarter.

So that was a timing difference so that also kind.

Kind of shifting some of the bonds.

That's great Great perspective, thank you for that.

I guess as.

If you look across the retail channel.

Are you feeling about your in stock positions relative to your primary competitors as we approach the holidays.

And then just any sense on market share and how that's been trending for you.

You guys.

Yes. This is Scott.

A couple of things there.

I think that in general just in looking at the small kitchen appliance segment I think.

Theres a number of suppliers trying to deal with the shortages that are coming are coming from product out of China.

It's in different pockets, sometimes it's related to components, sometimes it just seems like theres, a little bit longer transit time.

From what we hear from our retailers, we feel like we're we're doing as well if not better than some of the other supply.

Suppliers out there and that we certainly are in a better position than we were.

Prior to this quarter and catching up there. So overall I think I think we feel good we're not we're still chasing it as Greg alluded, we're trying to get things done as quickly as possible the transit times have been longer.

We're trying to we're trying to make sure that we're.

Servicing our retailer partners that sometimes it's hard to tell.

Two.

To get those promotional volumes ended the quantities. They want but we are working really hard to try to reduce those transit times and make sure we're servicing our customers.

Yes, no that makes sense.

Shifting gears to the margins and nice progress here during.

During <unk> and you mentioned the pricing actions that were implemented.

Across the summer I mean were there any other factors you'd point to whether thats.

Mix of products, our customer mix that that.

It helps you on the gross margin front or was it really just a function of these price increases.

As always there is a lot of things that go into it so mix is definitely.

Plays a role.

And the pricing action was really the biggest factor.

We had pricing that went in as we've mentioned before over several months.

As the quarter built build.

We're well along that pricing really kicked in in a bigger way each month, and then therefore positions us for.

The fourth quarter to now.

We're going to see we did pay for some premium containers, we have contracted rates so that covers.

The majority of our needs, but we definitely paid for some contract rates.

Two that's going to sort of work its way through the P&L over the next quarter or two but that was that will benefit us on the revenue side. So I think we'll probably be some up and down on the margin here as we get through the holiday season, but we priced accordingly, the question as well as each month goes by how will the mix.

Along with these premium containers.

Along with the pricing across the board.

Roll up and come together, so I think I think we're.

We think we've got it all covered but theres a lot of moving parts here to be sure that we ended up where we think we're going to be by the end of the end of the year.

Yes for sure a lot of moving a lot of moving pieces I mean, Greg if you just think about the general supply chain.

Bottlenecks you mentioned in the prepared remarks.

Product and transportation costs still expected to rise in 2022, but are you guys seeing any or at least starting to see any signs that work.

Maybe at the point of peak pressure or peak congestion.

Across the supply chain.

Yes.

That's a really good question Jason.

Yes.

I think the.

We articulate some of the other day was <unk>.

<unk>.

Stopped getting worse.

And there's a few signs that it's getting a little better.

But it's been a matter of weeks versus anything longer. So it's really hard to tell what's going to kick back off again, I don't think any more sort of broadly speaking certainly there's we have containers that are stuck somewhere here or there or we have a product thats. We're scrambling on in particular and some things that are in really good shape.

But.

It seems like it's stopped getting worse.

And I think with.

You know so well from from everyone you talk to us and we've got Chinese new year coming up with show in February We had the Olympics going going on in China in February and so will this be a little bit of a lull before everyone scrambled to get product out of China before that happens hard to say, but right now I think we've.

Seen it where it's at.

It seems to have.

It was a little bit higher when we when some of these categories like the premium segment and commercial kick in.

But we're not counting on that.

So it really comes down to controlling our our our costs, while we get revenue.

Growing at a faster clip, which I think we've got a lot of good things going for it. So we feel really good about where we're going but clearly the you know the volatility here in short term.

Set, but we think.

Over time, we seem to be having a good day.

Erection.

[noise] alright, well I appreciate all the caller and best of luck and jumping to the fourth corner take care. Thanks. So much. Thank you for your questions.

Ladies and gentlemen, as a reminder, if you wish to submit a question. Please press star followed by one on your telephone keypad.

Yeah.

This current stage, we have no further questions. So hammock over to Greg <unk>, Chief Executive Officer of Hamilton Beach brands holding company for clothing.

Thank you.

We are fortunate to be a leader in the industry with bold strong pandemic driven demand as more people are spending time in their homes and durable longterm demand driven by favourable demographic demographic trends with Mel O'neill's and Bloomers. We also expect our strategic initiatives to drive revenue growth.

Operating profit margin expansion and strong cash flow overtime that concludes our report for today before shutting off I'd like to wish you all a wonderful holiday season. Thank you again for joining us.

Thank you.