Q3 2023 Hamilton Beach Brands Holding Co Earnings Call
Yes.
Good day, everyone and welcome to the Hamilton Beach brands holding company third quarter 2023 earnings Conference call and webcast. Today's call is being recorded and I would now like to turn the conference over to Lou Anne Nabhan head of Investor Relations. Please go ahead.
Oh, Thank you Lisa and good morning, everyone welcome to our third quarter 2023 earnings conference call and webcast yesterday. After the market close we issued our third quarter 2023 earnings release and filed our 10-Q with the SEC copies are available on our website our.
Our speakers today are Greg Trepp, President and Chief Executive Officer, and Sally Cunningham Senior Vice President and Chief Financial Officer, joining us for Q&A will be Scott Tidy Senior Vice President Global sales.
Our presentation. Today does include 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 10-Q.
And our annual report on Form 10-K for the year ended December 31, 2022, the company disclaims any obligation to update these forward looking statements, which may not be updated until our next quarterly conference call. If at all and now I'll turn the call over to Greg.
Thank you Lou Ann Good morning, everyone. Thank you for joining us.
I will take the next few minutes to provide an overview of our performance for the third quarter of 2023 and.
And discuss our expectations for the remainder of the year.
Then sallie will discuss our financials in more detail after that we will take your questions.
We were pleased with our third quarter results.
<unk> revenue returned to growth.
Increased nearly 2% compared to last year's third quarter.
Our gross profit margin expanded by 300 basis points to 26, 1%.
Our average sales price was offset by lower product costs, and lower distribution and warehousing costs.
Operating profit increased 54% to $14 $4 million compared to $9 4 million in the third quarter of 2022, reflecting the gross margin expansion and flat SG&A.
We also continued to deliver significant improvement in net working capital and free cash flow Sally will discuss the actual results.
Regarding our revenue results.
Our consumer markets overall revenue increased approximately 3%.
By market revenue increased in our Latin America, and Mexican markets as a result of increased distribution across key retailers.
Revenue decreased in our U S and Canadian markets as a result of softer demand in the small kitchen appliance category compared to last year.
Our global commercial market revenue decreased 11%.
The decline is attributable to demand normalizing compared to the third quarter of 2022, when revenue grew nearly 36% due to strong post pandemic demand and the foodservice and hospitality industries.
<unk> the current year sales decline occurred in international markets.
Sales in the U S foodservice and hospitality industries performed well.
As we have discussed in our previous calls this year for the full year 2023, we expect a solid performance for the soft first half and a stronger second half, which is how the year has unfolded.
Our expectations for the stronger second half, where based on increasing and the increase in placements and promotions across many of our north American customers.
This year, we're introducing more than 40, new product platforms across a wide variety of categories. These include products in high demand categories like single serve coffee personal blenders ovens grill slow cookers, Garmin steamers and many others are.
Our team has done an outstanding job securing placements and promotions for our new products across a broad range of customers and channels.
Our new products that are in the marketplace now are selling well overall.
We have also gained market share this year that we expect will benefit us in the fourth quarter and in 2024.
We believe our incremental placements planned holiday promotions new products.
And increased market share position.
Position us well for the salt for a solid holiday selling season.
I'll comment on the small kitchen appliance industry in a moment, but first I will note. We are further encouraged that retail sales overall in the U S have continued to grow year over year and consumer spending has been resilient.
At the same time economists and retailers have expressed uncertainty regarding continued momentum due to inflation and high interest rates.
Sequentially consumer spending for the small kitchen appliance industry in the overall marketplace remains challenging to predict there.
There are mixed signals with some data pointing towards solid trends, while others are indicating a potential softening is underway.
Small appliance industry sales decreased modestly through September compared to the same period last year.
But remained above pre pandemic levels.
Well, we have seen no indication of a significant drop in spending on the small kitchen appliance category in the near future. We do expect it to end the year down slightly.
As always our final results will depend on the sell through at retail and retail replenishment orders given.
Given the uncertainty in the macroeconomic environment, we've adopted a slightly more conservative view regarding full year 2023 revenue and have slightly lowered our expectation from flat with 2022 to modestly below 2022.
We could we could end up chasing demand depending on consumer spending, but we want to avoid generating increased levels of excess inventory by being too optimistic.
Despite the slightly lower revenue outlook, we continue to expect operating profit to be above last year, excluding the nonrecurring $10 million insurance recovery in 2022.
I also wanted to take a few minutes to discuss our longer term view since our spin off into an independent public company. In 2017, we have said that we operate our business for the long term.
As a reminder, we have six strategic initiatives to drive long term growth.
We continue to make progress with these initiatives that are designed to drive revenue growth expand margins and generate strong cash flow over time.
The initiatives are focused on increasing sales of innovative higher priced higher margin products in our core North American market.
Across our initiatives, we are continuing to expand our portfolio of leading trusted brands.
We also continue our commitment to consumer driven innovation and launched 250, new product platforms in the last five years, we expect.
The momentum to continue in 2024, let me briefly summarize each initiative.
First we want to gain share in the premium market. We are a growing number of licensed brands in the premium market, including Wolf Gourmet and Chi.
Originally we have established new partnerships with <unk> and new milk.
Acquired Western brands and created the Hamilton Beach professional brand.
2022 sales of our premium brands accounted for 15% of total revenue, we expect premium brand sales to be on track with or ahead of that amount in 2023.
Next we plan to expand in home health and wellness.
We launched an initiative to expand our participation in the large and fast growing home health and wellness market and 2021.
We entered into a trademark licensing agreement with Clorox and launched a new line of premium air Purifiers under the Clorox brand in 2022.
We entered into a licensing agreement with Britta in 2022.
In early 2023, we launched a new category for electric count up water filtration under the name Britta hub.
So electric countertop appliance creates fresh great tasting water much faster than traditional pitchers.
We've also begun to participate in the home medical market.
Several trends are converging that we believe we can drive strategic opportunities for us.
The aging population in our country is creating a large pool of individuals who are living with and managing chronic health conditions. Many.
Many younger people are doing so as well.
There is also a growing shortage of primary care physicians nurses and other medical clinicians.
For these and other reasons, including advances in technology. The health care industry is implementing new solutions that enable patients to manage many of their health care needs at home.
Often these solutions combine a connected medical device and digital communications, which can provide key information to patients report information back to medical providers.
We believe.
Our company can help both the patients and the medical providers through solutions created under the Hamilton Beach Health banner.
Over the past few years, we've had discussions with many companies in the whole medical market about prospective collaborations.
A few years ago, we met with a company called <unk>, which is based in Dublin.
<unk> is a digital therapeutics company. It has created a patent protected the FDA cleared system for managing injectable medications.
Which are used to treat a broad range of chronic conditions and home.
Their system is connected countertop medical device that combines.
With a digital support system to help patients manage their adherence to their prescribed treatment.
Device also provides for the safe disposal of Sharps.
<unk> was seeking a relationship with a company that can help them market and distribute their system and the large U S and Canadian markets.
In June of 2021, we entered into an exclusive multiyear commercial relationship to do that.
March 2022, we introduced the smart sharp spin from Hamilton Beach health powered by <unk> in the U S.
<unk> has an agreement with a major specialty pharmacy company and there is a strong pipeline of prospects.
As healthy can prepared to deploy the system to market. They experienced delays. Unfortunately this is Carlos <unk> speaking to experience financial pressures and ultimately our cash squeeze.
Last Friday.
Can entered examiner ship.
Irish statutory framework for restructuring companies in financial difficulty.
Yeah, well to reach brands has entered into a facility agreement with health Beacon.
Under which we will make secured loans to help beacon up to a total of 185 million euros or approximately $2 million.
To fund its operations during the examiner ship.
Which is a period up to 100 days.
Due to our existing commercial relationships with <unk> and our knowledge of current and prospective specialty pharmacy orders, we believe <unk> should be able to stabilize and continue to operate.
Yeah.
Now, let me turn to how we are working to increase our leadership in the global commercial market.
We are a leading participant in the global commercial market, serving the foodservice and hospitality industries with small kitchen appliances.
We continue to develop products that support our competitive advantage in the core blending and mixing categories and we have expanded we have expanded into new categories as well, we continue to increase our relationship with regional and global change in.
In 2022 sales of our commercial products accounted for 10% of our total revenue.
Our sales of commercial products increased 50% in 2022 as businesses in the foodservice and hospitality industries engaged significant post pandemic restocking.
While we do not expect that growth rate to continue we do expect the commercial products will continue to be 10% or more total revenue in 2023 and beyond.
As we as we expand into new markets, we continued to drive the growth of core brands.
<unk> continued to invest in driving the growth of our flagship brands Hamilton Beach, and Proctor Silex core North American markets.
Almost a beach remains the number one unit brand in the U S.
Our rebranding of <unk> is simply better has gained traction in the marketplace.
We are accelerating.
<unk>, our digital transformation for the benefit of all the markets we serve we.
We continue to make significant investments in our well developed e-commerce capability in digital marketing.
Through the first nine months of this year E Commerce sales accounted for 36, 5% of our total sales up from 35% the same period last year.
In addition to organic growth we plan to also leverage partnerships and acquisitions. We are actively engaged in the pursuit of additional trademark licensing agreements strategic alliances and acquisitions to drive growth in all of our markets for all these reasons. We believe we are well positioned to deliver strong results and increase shareholder.
Shareholder value in the years to come.
Let me conclude by sharing some early thoughts about 2024 over the past.
A few years, our strong team has managed through an extraordinarily extraordinary operating environment due to a wide variety of factors such as tariffs.
Pandemic, driven historic surgeon demand disruptions across the supply chain and spiking, then falling product and container costs.
Early this year, we were still working through the remnants of that environment.
At this time, however, most suppliers have returned to normal lead times transit times have returned to normal.
Our biggest challenge in the short term is understanding the expected retailer and consumer demand.
Retailers reduced their on hand inventory levels earlier this year.
The point of sale trends are down slightly but its still above pre pandemic levels.
Hello revenue is now increasing over 2022.
Continued to receive orders that are slightly lower than expected.
Economists and retailers are focused.
Consumers will be able to remain is resilient.
Consequently, we expect retailers to remain cautious in the near term at.
At the same time, we are excited about favorable feedback from retailers regarding our products and brands.
Our investments in our brands and innovation as well as our leading shares in many categories are all benefits.
We are in the process of filing our 2024 plan, we expect to provide more details regarding our outlook for next year, when we announce our fourth quarter results.
Now ill turn the discussion over to Sally.
Yeah.
Thank you, Greg and good morning, everybody.
I will start with our third quarter 2023 results compared to the third quarter of 2022.
Net sales increased to $153 $6 million in the third quarter of 2023 compared to $150 8 million last year.
Increased unit volume that was partially offset by lower average sales price.
Gross profit for the quarter was $40 1 million or 26, 1% of total revenue compared to $34 8 million or 23, 1% in the prior year.
The increase was due to lower product product costs, and lower distribution and warehousing costs.
Set by lower average sales price.
Selling general and administrative expenses were relatively flat year over year at $25 $6 million compared to $25 $4 million last year with increased personnel related expenses.
Set by a nonrecurring insurance recovery this year.
Yeah.
Operating profit increased significantly to $4 4 million for the third quarter of 2023 compared to $9 4 million last year.
Reflecting gross profit expansion and relatively flat SG&A.
Net interest expense decreased by 700000 to 600000 for the third quarter of 2023 versus $1 3 million last year.
This decrease reflects significantly lower average debt outstanding partially offset by higher interest rates.
Other expense net was flat compared to last year and included currency losses of $400000. This year.
Okay.
The effective tax rate for the third quarter was 21, 6% compared to 22, 8% in last year's same period, the lower rate in the third quarter of 2023 with Guidant with due to a discreet benefit on foreign income in the current year.
Net income for the quarter was $10 $3 million or <unk> 74 per diluted share compared to net income of $5 $9 million or <unk> 43 per diluted share in last year's third quarter.
Now turning to our balance sheet and cash flow.
Year to date net cash provided by operating activities increased nearly $109 million to $68 7 million compared to an outflow of $40 2 million in the prior year period.
The significant improvement was driven by our focus on net working capital improvement, we continue to reduce inventory, which declined more than $84 million versus the prior year period, reflecting our inventory reduction and control actions.
Accounts payable was $116 $1 million compared to $111 $5 million last year, primarily due to the timing of purchases.
And trade receivables were $102 2 million compared to $97 8 million, reflecting our higher sales.
We allocated our strong cash flow primarily to reduce debt as well as return value to shareholders through our quarterly dividend and repurchase of stock.
At the end of the third quarter net debt was $49 $7 million compared to $144 5 million in the same period last year.
During the third quarter, we paid $1 $5 million in regular cash dividends and repurchased 82676 shares at prevailing market prices for an aggregate purchase price of $900000.
Capital expenditures for $2 $4 million for the nine months ended September 32023, and compared to $1 6 million for the same period last year.
This increase primarily related to internal use software development costs.
Now turning to our outlook for the full year 2023, as Greg reported we expect total revenue to be modestly below full year 2022.
Operating profit is expected to increase compared to 2022, excluding the $10 million insurance recovery in 2022.
Cash flow before financing is expected to increase significantly compared to 2022 as a result of our improvements in networking capital.
Our outlet to change if consumer demand and retailer replenishment orders are softer than currently expected.
This concludes our prepared remarks, we will now turn the line back to the operator for Q&A.
Thank you if you would like to ask a question on the phone lines. Today, you can press star one on your telephone keypad, if you would like to remove yourself from the queue that is star one again.
We will pause for a moment allow everyone a chance to signal.
We will take our question from Adam Bradley with a JV capital. Please go ahead.
Hey, Greg and Sally how are you.
Good morning, Adam.
Hey.
Solid quarter.
Wrong profitability through gross margin, so that was great to see and great to see the free cash flow improving with networking capital.
Just a couple of questions I'll start with one or two and then and then get back into the queue.
Looking longer term it's helpful for investors when you share your strategic initiatives.
You kind of look out over the next say three years or whatever your outlook is.
Where do you see the greatest opportunities for dollar sales growth from your strategic initiatives, just speaking kind of broadly.
Sure. Thank you Adam for the question.
I think.
What I feel good about is we do have a nice mix of initiatives.
They all have high potential we feel really good about all of them.
As we've experienced and as folks know that some of those things will grow at different rates than others. So I think right now that.
But if I think about the core business <unk> practice Alex.
Given the fragmentation of the market that has significant upside.
It's hard to get that growth, but it has upside.
Certainly the commercial market has.
Global it's a global business that we're expanding in a number of categories that has strong growth potential.
Potential.
The premium business as a third of the market dollars.
So while this has moved up and are our mix is a weighted weight of our mix. We have a long way to go to get a top share in the premium segment.
Home health and wellness areas is really all new to us So it's one of those.
Physicians that were in that we feel really good that every area. We are investing and have high growth potential. They all won't reach their full potential and some of them will take longer than others, but I do feel like.
The core probably has the highest growth opportunity and then I think sort of followed very closely by the the other the other market as I mentioned the home health commercial.
And premium.
Okay.
Alright, well thanks for that so I'll ask one more follow up and then I'll get back into the queue.
It was a very strong gross margin quarter in fact, I looked back through historic numbers I can't find another quarter with 26% gross margin. So.
Job on that for investors.
Can you tell us a little bit more about what's driving this you I think you mentioned in the Q and in your release that it's driven by mix.
We overlay that.
To the strategic initiatives is it.
<unk> is it is.
More of a cost thing can you just give us a little more color on gross margin and and to give it more context.
Gross margin is.
Historically for Hamilton Beach has been the single greatest driver of profitability and the one that's most variable.
And.
Helping investors understand what really drives that would give us a better line of sight into the company's performance.
Good question, Dan Thank you and Thats certainly.
Expanding our gross margin.
Percentages is a big focus of us of the band.
Been here and the initiatives that we're focused on.
Has the potential to do that to help us with that goal, but I will say that.
It was cost skyrocketed higher over the past two years, particularly the last year, we worked very very hard to pass along those costs, we were not trying to.
<unk>.
<unk>.
Do anything other than to offset our costs to retailers and consumers.
But it is very hard to keep up with a skyrocketing cost position as they've dropped pretty quickly.
We had adjusted our prices to be competitive, but also we have not had to pass them all along yet.
We also have a nice movement in some of our initiatives some of our premium products in commercial in other areas too.
Play an important role in our gross margin percentage. So I think right now there's been enough movement up and down that it is difficult to do.
No over the long term how much of that will be able to be consistent about these are very very strong numbers.
In the past what we've said is we've.
We believe we are confident we can stay in our historical range of gross margin percent.
And our goal is to move higher than that historical range. So our really our biggest focus is lets run our business, where we drive top line, we delivered gross margin at or slightly above our historical range and we control our costs and that should drive.
Profit percentage and dollar expansion pretty nicely. So what I would say is.
We'll see how the volatility in the cost structure settles out over the coming quarters.
We're going to stay competitive and hold on as much margin as we can so we'll see how that plays out in the coming year.
All right ill jump back in the queue and wait my turn for the next for the next question. Thanks for that great. Thank you Adam.
Okay.
As a reminder, everyone that is star one to ask a question, we'll pause for a moment.
And we do have a follow up question is from Adam <unk> with <unk> capital.
Alright, so kind of following on that your I think your press release your Q talked about your.
Gross margin being driven in part by savings from warehouse and distribution and I know you guys took on a big project to relocate and now you have a newer and better.
Distribution warehouse system can you tell us a little bit about but can you quantify the savings from at least to start Mike how should investors look at that on a go forward basis and how much of the gross margin capture here was in was due to warehousing and distribution.
Yes, we're not going to break that out specifically, but just directionally I will say that again.
The.
Pandemic.
Uh huh.
Surgeon in labor surgeon.
Gas prices.
The whole this whole supply chain.
Crazy last year as you all know.
So we also do have moved to a facility that we are very excited about and we continue to work on ways to be more efficient in all aspects of our distribution.
System. So I think we are improving the efficiencies of our system compared to the year before and the year before that the.
The market cost of it become more normalized or theres still some pressures in certain areas, but overall I think it is.
I think our I think it is a combination of our new facility our team getting settled in there and then the market conditions being more favorable as we go forward. So I would say, yes to me the.
The key driver was the change in product costs and inbound freight costs.
The important but lesser influence was the distribution of the outbound costs.
In terms of the margin change.
Okay.
Well thanks, Alex.
This is all I have and then I'll add to that is you've obviously seen us through our networking capital of this significant reduction in inventory and.
And so if I think about distribution and warehousing, there's a direct correlation if you have less inventory on hand, you have lower warehousing costs right and.
And to the point, where this time last year.
This year I guess I would say, we've consolidated warehouses right. So we're actively working to keep our inventory levels lower so we can keep our warehouses warehousing costs lower so you will see that as a continued theme going forward too.
Alright, so thanks for that color that gives us gives us investors like me a little bit of a better.
Window into into performance, so along the lines of networking capital as a follow on to that.
So first of all just tremendous tremendous performance.
And unwinding the networking capital position that had been built up over time here.
Historically your business has been one that assuming normality in supply chain or.
Or at least stability, let's call it nanometer stability.
It's a euro cash generating business due to your kind of asset light nature.
As we look at your strategic initiatives and your opportunities.
And now.
Cash production rather than consumption through networking capital.
Can you tell us little bit more about the capital allocation plan for Hamilton Beach, I know you've laid out.
Dividends and acquisitions, but just.
Kind of your view over the next three years of where the best places to build value.
Or in terms of capital allocation.
Yeah. This is Sally again, Thats a great question I.
I think that's something that we're working through right now for vacancy at our 2024, our plan and our kind of three to five year strategic plan.
Obviously, we have allocated the the cash flow to reduce debt and we're getting it down to that comfortable level I think we've talked about one five to two times EBITDA.
The comfortable debt level and so as we look out I think we'll continue to have.
The viewpoint that we want to allocate free cash flow to our strategic initiatives and opportunistically to M&A, where it makes sense.
Specifically, which initiatives I think we're still working through right now, but that certainly we want them to be cross drivers.
Yes.
It seems like some of the strategic initiatives or maybe more capital intensive than others.
But overall.
The M&A space.
It's a tough time to sell a business at a better time to buy one right now can you tell us a little bit more about what youre seeing in the market and in your overall view of acquisitions are.
Are they or do you look for more bolt on that you can easily integrate or are you looking if you found something that was big would you go after it just I know, it's tough to be hypothetical, but I think investors want to understand.
What the thinking is at least.
And if opportunity.
It is available.
How you might respond.
So Adam on the.
How opportunities are.
Presenting themselves are Bubbling up I do think this environment is putting pressure on those folks that were that were.
Not well positioned.
Or overextended or whatever might cause a company to go into pressure situations. So this is definitely a time when.
You are having.
The blocking and tackling and important work during the pandemic puts the company in a better position post pandemic I feel really good the team here did that.
So I do think there will be an.
An increase in opportunities for us to look at.
It has been still relatively quiet, but theres been a little bit of activity.
On the front of opportunities presenting themselves.
But we're going to look at anything and everything that makes sense for us and evaluated I'll say.
More likely it is going to be a bolt on sort of opportunity, but we have a very sophisticated board who views.
They are really focused on driving long term shareholder value. So there was something that was more.
The larger opportunity too.
To combine or buy or do something in the long term they would definitely look at whatever opportunity presented itself. So in the end I think.
I'm, assuming that we're going to see something here in the coming year.
To at least evaluate.
Whether it makes sense for us and that will be really focused on it was the right price for the opportunity in front of us.
Okay.
Okay well. Thanks. Thank you for that I think we got it.
That answers.
That answers my question and kind of general terms, so I appreciate it.
Great. Thank you for your questions out.
Thank you and there are no further questions at this time I would like to turn the call back over to our CEO, Greg Clark for any additional or closing remarks.
Thank you today, we discussed our commitment to building long term shareholder value supported by our many competitive advantages in our strategic initiatives.
We benefit from our leadership in the small kitchen appliance industry, which has a long history of strong durable demand.
Our team is experienced with strong industry customer and consumer knowledge.
We have a strong portfolio of well known trusted brands anchored by our flagship brands Hamilton Beach and Proctor Silex.
We are a proven innovator our retailer relationships span a broad group of customers in brick and mortar Omnichannel and E. Commerce channels, we have an asset light global infrastructure.
We plan to leverage all of these strengths in 2024 and beyond that concludes our report for today. Thank you again for joining our call.
Thank you and that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Yeah.
Okay.
And for joining our call.
Thank you.