Q1 2022 Hamilton Beach Brands Holding Co Earnings Call

May 5, 2022

P. J. Thank you for standing by welcome to Hamilton Beach brands, holding company Q1, 2022 earnings call.

This time, all participants are now 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 one on your towers filing.

You require any further assistance. Please press star Zero I would now like turn the conference over to your first speaker today Louis.

Yeah.

Head of Investor Relations. Please go ahead.

Thank you Chris Good morning, everyone. Welcome to our first quarter 2022 earnings conference call and webcast yesterday. After the market close we issued our first quarter 2022 earnings release and filed our 10-Q with the SEC copies 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 also participating in the Q&A will be Scott <unk> Senior Vice President consumer sales and marketing.

Our presentation today includes 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 the breadth of uncertainties is available in our earnings release and our annual report on Form 10-K for the year ended December 31, 2021.

Company disclaims any obligation to update these forward looking statements.

Not be updated until our next quarterly conference call if at all.

And now I'll turn the call over to Greg. Thank.

Thank you Lou and good morning, everyone. Thank you for joining us.

We're going to take the next few minutes to provide an overview of our performance in the first quarter of 2022.

And our outlook for the year.

We are pleased that revenue was in line with our expectations down slightly in the first quarter. We said previously the industry demand would be slightly softer than 2021, mostly due to the comparison.

Two stimulus spending last year.

Additionally, we comped a record quarter last year, which also was significantly higher than our historical average.

Lower sales volume was partially offset by pricing actions that became effective during the quarter.

This increase has enabled us to offset a significant amount of increased transportation and protocols.

As I discussed during our third quarter 2021 coal like all importers from China. The second half of 2021, we face the challenge of securing enough ocean shipping containers to move product from China to the U S contract rates.

We elected to secure a certain number of containers.

Premium rates in order to meet customer commitments and consumer demand for the holiday selling season.

Persistent supply chain constraints.

And the delayed arrival of some inventory a portion of which turned in the first quarter 2022 affecting short term margin.

Our 2022 pricing strategy.

Covered our ongoing transportation on product costs, and we also expect to these premium spark containers to be a pressure in the first half of 2022, when we communicated our outlook.

More of the impact hit the first quarter that being spread out over the first half. So we think the second quarter pressure from these bulk containers will be behind us.

He also we were also impacted by geographic mix, Michelle will cover that in a moment.

When you add it all up we believe this unusual first quarter margin pressure is not going to be it's not an ongoing issue for us based on today's protocols.

Our team has worked diligently and effectively to recover as much as possible for the prior year losses associated with the owner authorized transactions by former employees at our Mexican subsidiaries and the.

First quarter of 2022, we recover $10 million from a crime insurance policy is.

It was very gratifying to be able to recover this value for the company and our shareholders.

Despite the challenges related to inflationary pressures and supply chain constraints. Our team has done an impressive job keeping our business on track and moving forward, enabling us to satisfy the needs of our customers.

I'm delighted by how effectively our operations sales and distribution teams are working together as they manage through some of the most challenging times ever in recent memory.

For our teammates we implemented our return to office plan in March that is designed to balance the needs and desires of our employees with the needs of our business.

We believe we have implemented a plan that combines the best of our pre and post COVID-19 environment.

We are working to build on the many successes we achieved in 2021 with our six strategic initiatives and believe each one will provide growth in 2022.

These initiatives support our overarching goal of long term value creation.

All of our initiatives are focused on expanding our presence in markets, where we have the opportunity to increase the sale of our higher priced higher margin products.

These include the premium commercial.

In home health and wellness markets as well as our core market that focuses on our Hamilton Beach and practice all its brands.

The other two initiatives support our growth plans at all markets. These include accelerating our digital transformation and leveraging partnerships and acquisitions.

We discuss each one.

Our newest initiative is to expand in home health and wellness.

Fast growing multibillion dollar market. This initiative was added in 2021, we are currently focused her career vacation water filtration and home medical categories.

During the past year, we took many steps to prepare for the introduction of new products in these markets.

In the first quarter, we announced progress in three key areas.

We've introduced the first products and a new line of premium Air Purifiers under the Clorox brand name and replacement filters.

This product launch as part of an exclusive multi year trademark licensing agreement, we have with the Clorox company.

Our new Air Purifiers, all have truth hepa filters.

Currently large room tabletop models are available.

Both models have received favorable reviews and have four nine star ratings.

We have developed a robust digital marketing strategy to build awareness of these new products in the category and to drive sales.

The spring allergy season supported sales in March and April .

We anticipate additional sales to be generated as consumers try to deal with the difficulties of the summer wildfire season, and as we build awareness.

Further we have a schedule of additional launches in the coming months new models that will launch yet. This year include a medium room size, it's reconnected technology models, a user's voice integrated services.

We entered the whole medical market through an exclusive multiyear agreement will help me, leaving.

A leading developer of smart tools for managing injectable medications at home.

Under the agreement where.

Or the marketer and distributor of the system in the U S and Canada.

The system includes a countertop appliance, which serves as a sustainable way to store use deals for recycling.

The appliance is supported by a companion app that assist patients managing adherence to the personal medication regimen.

In March we announced the U S launch of the Smart sharp spin from held to Beach health powered by Health Beacon, We plan to launch the system in Canada next year.

We entered into an exclusive multiyear trademark licensing agreement with Britta and plan to launch a new line of countertop water appliances later this year.

Gaining share in the premium market is a significant focus for our team revenue from our premium products grew 13% in the first quarter sales of the <unk> cocktail machine and Chi garment care products were the major contributors to the growth.

We also generated sales increases for our Wolf Gourmet and Hamilton Beach professional brands.

We plan to further expand our presence in the premium market with new product development digital marketing and by pushed and by pursuing additional licensing agreements.

Other collaborative arrangements.

We expect to generate additional sales growth of our Wolf Gourmet countertop appliances brand in 2022.

Our newest Wolf gourmet product the true temperature Kendall is selling well.

For the parts fusion premium cocktail machine.

Plans are in place for its generation to this year. This upgraded model will provide enhanced hospitality line extensions are underdevelopment, including a commercial grade model, which we plan to introduce in the coming months.

<unk> earmarked sports Entertainment announced whether it is installed or artesian cocktail, making appliance and luxury suites and several baseball stadiums.

Sales of our Chi premium garment care brand products are growing new products in that line includes a mini iron and handhelds Tamar.

We're introducing many new products for our western brand, which is targeted to the gardeners hunters.

Items include updated meat grinder installation models smokers food dehydrate, dehydrator and vacuum sealers.

Our Hamilton Beach professional line Leverages, our commercial products expertise for the benefit of home cooks.

New HB pro products include a programmable coffeemaker.

And as Dan mixtures in a cast iron grip.

Our initiative to lead in the global commercial market provides an outstanding opportunity for the sale of higher priced higher margin products, while meeting an important customer needs in the foodservice and hospitality industries.

Last couple of quarters to rebound of the global commercial.

The global commercial market from pandemic, driven demand softness has accelerated.

In North America and around the globe.

We expect the strength to continue.

Of course initiatives.

Focused on market.

Markets is to drive core growth, we plan to drive growth in our flagship brands Hamilton Beach and <unk>.

Through innovative new product development digital marketing and a number of our new products are aimed at the $50 in higher price point.

Every year, we introduced a number of new products under these brand names.

This year new offerings will include several models for the coffee category, we're watching rechargeable cordless appliances in the personal blender and kilo per categories.

Other new products include new hand, and Stan mixtures Air Fry Toaster ovens.

Slow cookers, a to for us and have air Fry attachments.

We're pleased with the progress, we're making to accelerate our digital transformation.

First quarter E Commerce sales were approximately flat overall as consumers shop more in stores.

Pandemic receives.

In last year's first quarter E Commerce sales increased 59%.

So performing close to that difficult comparison was an accomplishment he can.

<unk> sales accounted for 35% of our total company revenue in both the current and prior year quarters.

With our initiatives to leverage partnerships and acquisitions. We are actively engaged in identifying additional trademark licensing agreements strategic alliances and acquisitions that will drive growth in all our markets.

To summarize we have an exciting portfolio of brands with promising growth potential as.

As we drive momentum for all of our initiatives, we're planning for another year of record revenue growth.

Operating profit is expected to improve at a faster pace than our revenue growth.

We believe our base case outlook does not represent our full potential however, given the many unknowns and potential headwinds. This year, we're taking a more conservative view.

Industry demand for small kitchen appliances remains solid.

Higher than pre pandemic levels.

Slightly softer than 2021.

Once the comparison to last year's stimulus spending concludes.

Demand is expected to be flat to slightly down from prior year and to remain ahead of pre pandemic levels.

Even as consumers return to offices to work and engage more evening and weekend activities lifestyles have now reverted to pre pandemic habits.

Tumors are still spending significant amounts of time at home.

<unk>, there wasn't meals and beverages.

At home meal preparation is being driven by new habits formed during the pandemic.

Heightened interest in healthy eating.

And as a means to control expenses during inflationary times.

Closely monitoring any shift in consumer behavior away from home as well as any potential negative impact on consumer demand due to inflation.

The 2022 marketplaces is difficult to predict.

We expect demand for retail and commercial small appliances to be durable overtime.

We expect short term ups and downs as we comp unusual 2021 activity.

At this point consumer demand has been holding up well depending on inflationary pressures could soften from where it is today if it does we would revisit our outlook.

The supply chain environment remains dynamic and unpredictable.

Sherri pressures have been increasing for transportation and product costs, especially for ocean shipping containers.

As we have been doing we will work diligently to mitigate the impact on our margins to the fullest possible extent.

And now I will turn the call over to Michele.

Thank you, Greg and good morning, everyone.

Let me discuss our first quarter 2022 yourself compared to the first quarter of 2021, and then I'll discuss our outlook.

Overall, our top line performance was in line with our expectation.

Net sales were $146 $4 million or one 9% decrease compared to a record 2021 first quarter.

Revenue in our global commercial market increased $6 5 million from 76%.

Food service and hospitality industry rebounds from pandemic driven demand softness.

And our Latin American market and the momentum of the last several quarters continued and raw.

Revenue increased significantly.

And our U S and Canadian markets revenue decreased compared to last year's very strong growth.

And to a large extent, thanks, Kevin with spending.

Gross margin was 19, 3% compared to 21, 2%.

Margin equation with primarily due to less favorable product and customer mix.

Higher product and transportation costs were mostly offset by price increases except for the premium shipping containers that Greg discussed.

The revenue growth in our global commercial market had a positive impact on margin with higher priced higher margin products.

This was offset by lower margin sales in our Latin American market and the decline in sales in the U S and Canadian market.

In Latin America price increases lag due to long term commitments on direct input of orders.

Selling general and administrative expenses were $15 million compared to $26 4 million.

The current quarter included the $10 million insurance recovery that Greg discussed.

We maintain fatality insurance claim to recover losses incurred up to the policy Maximo.

The claim was approved in the first quarter.

The related receivables.

Prepaid expenses and other current assets on our balance sheet as of the end of March the receivable, it's reflected in changes in other assets within operating activities in the cash flow statement and is recognized in selling general and administrative expenses in our P&L.

Receivable was collected in April .

Also contributing to favorable SG&A expenses were lower outside service.

And Luke.

Overall employee related costs.

Operating profit was $12 7 million, including the insurance recovery compared to $5 $3 million last year.

Other expense increased.

<unk> seen losses of $1 8 million.

With currency losses of $400000.

This increase was due to the liquidation of our Brazilian subsidiary.

During the fourth quarter of 2020, we committed to a plan to sell our Brazilian subsidiary and determined that it met all the criteria to classified the assets and liabilities as held for sale and.

In April 2021, we made the decision to wind down the subsidiary and enter into a licensing agreement to serve the market.

The carrying amounts of the assets were classified as held in use during the second quarter of 2021.

During the first quarter 2020, the criteria for substantially complete liquidation were met.

This resulted in $2 $1 million of foreign currency losses previously recorded in accumulated other comprehensive losses being released at the other expenses in line with our previously stated expectations.

The effective tax rate for this year's first quarter was 32% compared to 34, 2%.

Each period, we reported discrete items that resulted in higher than normal effective tax rate.

We reported net income of $7 $2 million or <unk> 51 per diluted share compared to net income of $2 9 million or 21 cents per diluted share.

Now I'll turn to our balance sheet and cash flow.

Net cash used for operating activities was $28 million compared to $1 $9 million in the prior year.

The change was primarily due to an increase in net working capital, which was a use of cash of $24 $9 million in 2022 compared to a use of cash of $2 $5 million from 2021.

In 2022 trade receivables provided net cash of $15 5 million compared to $36 9 million in the prior year.

Tiny collections and the decreased fourth quarter sales in 2021 compared to 2020.

Net cash used for inventory and accounts payable combined with relatively flat year over year, However, inventory increased compared to the first quarter 2021, and the end of 2021, primarily due to longer lead times, resulting from supply chain and transportation disruptions, resulting in an increase in.

In transit inventory year over year.

Capital expenditures decreased $400000 compared to $1 $7 million due to capital spending timing distribution center in the prior year that did not recur.

At the end of the first quarter net debt was $118 3 million.

Compared to $101 2 million at the end of last year's first quarter and $95 million at the end of 2021.

Now, let me turn to our outlook.

Our team is executing well in a difficult operating environment, we are taking action to protect margin and mitigate the impact of significant external pressures.

<unk> rising transportation product.

Persistent supply chain constraints and inflation.

Timing for any easing of these pressures remains uncertain.

Our response this include taking necessary pricing increasing.

Our business units, while also remaining competitive with retailers and consumers.

We never take price increases lately, and we're closely monitoring market acceptance.

We may or may not be able to recover all future cost increases with additional pricing initiatives.

Amid these pressures, we will focus on managing margins and working capital within historical ranges to the fullest extent possible.

For the full year 2022, we expect further progress with our strategic initiatives to enable us to deliver modest revenue growth compared to record revenue in 2021.

For the first half of 2022, we expect revenue to decrease modestly.

The second half of 2022, we expect revenue to increase moderately.

Full year operating profit is expected to increase significantly, including the $10 million insurance recovery.

And mostly by the higher revenue.

Our current outlook could change depending on a number of factors.

These include retailer acceptance with further price increases to offset rising costs.

The impact of the inflationary pressures and stay at home habits on consumer demand.

Any worsening of supply chain constraints.

Covid protocols in China.

And the impact of the conflict for new clients.

That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.

Yes.

As a reminder to ask a question you will need to press star one on your telephone.

To withdraw your question press the pound Sterling.

Once again to ask a question press Star one please.

Please standby, while we compile the Q&A roster.

Your first question comes from the line of Justin <unk> of Baird. Your line is open.

Yeah, Hey, everyone. Its Justin Kleber, thanks for taking the questions.

Good morning, guys first off Greg wanted to ask you I mean, you talked about demand for the category remaining solid which is encouraging.

But how do you think about.

Over consumption in this category.

The past two years.

Seeing any indications of unit demand that's been pulled forward as a result of the pandemic.

Good morning, Justin.

So I think.

So far it has been holding up as we mentioned earlier, we have not seen significant.

The deterioration of the unit to me and Theres, a little bit as prices have gone up.

And it was really this window for the first.

Eight to 10 weeks of the year, where there was a couple of stimulus checks last year that sort of puts a lot of noise in the year ago period eastern moved around.

So those are also it makes it a little bit hard to read but yes.

So the things that were going on during the pandemic of course with people staying at home more but also a big factor pre pandemic was millennials moving into.

Household formations and that continues to go.

Also with <unk>.

People staying home more often a lot of companies now as you know were hybrid so theyre holding for a couple of days working for a few days.

So there is going to be more at home activity.

Then there was pre pandemic also so so so far it's held up there are a lot of move.

Parts as you well know so we're going to watch it closely but so far we have not seen a significant drop off.

Due to some sort of front loading or.

People being overburdened with appliances yet.

Right, Yeah, Okay that makes sense and maybe somewhat related just you've kind of mentioned the.

Prices going up in the category right I mean prices are going up virtually.

Across every consumer products. So are you seeing I guess any.

Customer pushback to date, it doesn't really seem that way, but any indication of.

Maybe trade down to lower price points in response to higher retails.

Yes, Justin this is Scott I think what we're seeing from the marketplace. So far at the prices that we put through a bin.

Have been.

Accepted by our retailers.

The retail prices at the store or online and have been adjusted to account for that I do think that the.

Retailers are starting to try to reset and rethink about okay. If I had a $19 hand mixer and that's moved up to $23 I still feel like I need at $19 hand, mixers. So we're going back and looking at the nice thing that Hamilton VITAS is we really have those offerings all across all the value proposition. So we're good at good better and best.

And even the luxury position so as we have to go back and fill in some of those retail gaps.

Could've been abandoned because retails have gone up we have the products.

But to fill those spots and are being looked at today.

No that's great color. Thank you for that Scott.

Next question just on the strength in commercial.

The $15 million revenue.

Figure for this quarter and you know no noticeable step up from the second half of last year.

Greg or was there anything unique in that.

This quarter from a timing perspective, or a new customer win or is this.

And just kind of 15 million dollar figure a good run rate, we should be thinking about for the balance of the year.

Well there was there was not a.

You know one off large win that drove that there really is very good.

Broad.

We've got our foodservice business and we look at it.

Globally as well as North America, and we have our hospitality business focused on hotels.

They're all showing very strong band.

And a lot of it is related to.

A period of time, when restaurants are either shutdown or now they're opening up trying to catch backup equipment was.

So we sort of came into the year with with growth building and it really accelerated in the first quarter.

And when you look at backlogs as well as go forward projections seems to be widespread and it seems to be likely to continue at least for another quarter or two.

So it's always hard to get to know too much two or three quarters out, but so far its looking like its you should see continued strength last year, we started to build in the fourth quarter.

So comps will get a little bit harder as the year goes on but right now we're up against.

Some some pretty soft quarters in the second quarter and third quarter that that.

That should help us have a very strong growth rate for at least a couple more quarters.

That's great to hear.

On the home health or the home health and wellness categories a lot of.

Adding developments in that space I mean is there any way you could frame or characterize just the revenue opportunity from <unk>.

In this broader initiative over the next year or two I mean is this is this meaningful in your view to the total company.

The goal is certainly they could mean.

Yes, Scott Scott expectations for Scott to deliver.

With a smile on my face here, but do you think you know what.

I think what I feel good about is we don't have.

All our eggs in one one effort.

Certainly air purification is a proven.

Business is still strong that we have to win win our share.

So the demand is there.

Water is a.

Huge.

Existing one, but we're going to be breaking.

New ground with a.

Electric countertop appliance for some of those out there, but it's not a matter of established category. So.

When you're creating a category that's got.

Great upside, but all show to challenge go to educate consumers on why they need it.

But certainly people have water pitchers in their refrigerator.

What are.

Devices. So we do think there's a real good opportunity there and then the health because an example is a brand new market people are doing all sorts of things to dispose of there.

Injectables now and this really isn't the only one that has.

That allows you to improve adherence, which is really exciting for caretakers.

You've got a child or a parent that youre trying to monitor or.

No child or.

Really that's an exciting thing, but again, it's new and we've got to educate people and educate.

So I think the <unk>.

Uneven growth can probably fits and starts but over the course of the next one two and three years I think I'm very very excited about and believe that we're going to generate nice growth from the portfolio of activities I, just mentioned I'm, not sure, which ones would be the lead and which ones will be the follow but we feel pretty good about the numbers there.

Yeah, and I'll just add Justin.

These categories that we're getting into.

They are in the water sector segment that Greg talked about.

Our very nicely balanced from our online and brick and mortar perspective.

So again, we feel like we have got a good infrastructure that can help build share in both of those segments and and then just also add that they also have come with the consumables. So we got some of the <unk>.

We've been trying to get to which is not just selling the appliance and then walking away from the consumer but continue to engage with that consumer for many many years to come with a consumable.

Okay.

Q1 2022 Hamilton Beach Brands Holding Co Earnings Call

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