Hamilton Beach Brands Company [HBB] Conference call transcript for 2022 q1
2022-05-07 17:09:03
Fiscal: 2022 q1
Operator: Good day and thank you for standing by. Welcome to Hamilton Beach Brands Holding Company Q1 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to turn the conference over to your first speaker today, Lou Anne Nabhan, Head of Investor Relations. Please go ahead.
Lou Anne Nabhan: Thank you, Kris. Good morning, everyone. Welcome to our first quarter 2022 earnings conference call and webcast. Yesterday, after the market closed, 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 Tidey, 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 these risks and uncertainties is available in our earnings release and our annual report on Form 10-K for the year ended December 31, 2021. 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.
Greg Trepp: Thank you, Lou Anne. 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 that industry demand would be slightly softer than 2021, mostly due to the comparison to 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. Our price increases enabled us to offset a significant amount of increased transportation and product costs. As I discussed during our third quarter 2021 call, like all importers from China in the second half of 2021, we faced the challenge of securing enough ocean shipping containers to move product from China to the U.S. at contract rates. We elected to secure a certain number of containers at premium rates in order to meet customer commitments and consumer demand for the holiday selling season. Persistent supply chain constraints resulted in the delayed arrival of some inventory, a portion of which turned in the first quarter of 2022, affecting short-term margin. Our 2022 pricing strategy covered our ongoing transportation and product costs, and we also expected these premium spot containers to be a pressure in the first half of 2022 when we communicated our outlook. More of the impact hit the first quarter than being spread out over the first half. So we think the second quarter pressure from these spot containers will be behind us. We 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 -- is not an ongoing issue for us based on today's product loss. Our team has worked diligently and effectively to recover as much as possible of the prior year losses associated with the unauthorized transactions by former employees and our Mexican subsidiaries. In the first quarter of 2022, we recovered $10 million from a crime insurance policy. It is very gratifying to be able to recover this value for the Company and our shareholders. Despite the challenges relating 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 am 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 a 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 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. 4 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 premium, commercial, and home health and wellness markets as well as our core market that focuses on our Hamilton Beach and Proctor Silex brands. The other two initiatives support our growth plans in all markets. These include accelerating our digital transformation and leveraging partnerships and acquisitions. Let me briefly discuss each one. Our newest initiative is to expand in home health and wellness, a fast-growing multibillion-dollar market. This initiative was added in 2021. We are currently focused on the air purification, 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, a new line of premium air purifiers under the Clorox brand name and replacement filters. This product launch is part of an exclusive multiyear trademark licensing agreement we have with The Clorox Company. Our new air purifiers all have true HEPA filters. Currently, large room and tabletop models are available. Both models have received favorable reviews and have 4.9 star ratings. We have developed a robust digital marketing strategy to build awareness of these new products in a 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 scheduled additional launches in the coming months. New models that were launched yet this year include a medium room size and three connected technology models that use voice integrated services. We entered the home medical market through an exclusive multiyear agreement with HealthBeacon, a leading developer of smart tools for managing injectable medications at home. Under the agreement, we are the marketer and distributor of the system in the U.S. and Canada. The system includes a countertop appliance that serves as a sustainable way to store used needles for recycling. The appliance is supported by a companion app that assists patients in managing adherence to their personal medication regimen. In March, we announced the U.S. launch of the Smart Sharps Bin from Hamilton Beach Health powered by HealthBeacon. We plan to launch the system in Canada next year. We entered into an exclusive multiyear trademark licensing agreement with Brita 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 Bartesian 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 pursuing additional licensing agreements and 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 kettle, is selling well. For the Bartesian premium cocktail machine, plans are placed to launch generation two this year. This upgraded model will provide enhanced functionality. Line extensions are under development, including a commercial grade model, which we plan to introduce in the coming months. Recently, the Aramark Sports & Entertainment announced that it has installed the Bartesian cocktail making appliance in luxury suites at several baseball stadiums. Sales of our CHI premium garment care brand products are growing. New products in the line include a mini iron and handheld steamer. We're introducing many new products for our Weston brand, which is targeted to the gardeners and hunters. New items include updated meat grinder and slicer models, smokers, food dehydrators 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, air fryer ovens, hand and stand mixers and a cast iron griddle. Our initiative to lead in the global commercial market provides an outstanding opportunity for the sale of higher-priced, higher-margin products while meeting important customer needs in the food service and hospitality industries. The last couple of quarters, the rebound of the global commercial market from pandemic-driven demand softness has accelerated in North America and around the globe. We expect the strength to continue. Our initiative focused on markets is to drive core growth. We plan to drive growth in our flagship brands, Hamilton Beach and Proctor Silex through innovative new product development, digital marketing and a number of our new products are aimed at the $50 and higher price point. Every year, we introduce 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 can opener categories. Other new products include new hand and stand mixers, air fry toaster ovens, slow-cookers that defrost and have air fry attachments. We're pleased with the progress we're making to accelerate our digital transformation. In the first quarter, e-commerce sales were approximately flat overall as consumers shop more in stores as the pandemic recedes. In last year's first quarter, e-commerce sales increased 59%. So performing close to that typical comparison was an accomplishment. E-commerce sales accounted for 35% of our total company revenue in both the current and prior year quarters. With our initiative to leverage partnerships and acquisitions, we're actively engaged in identifying additional trademark licensing agreements, strategic alliances and acquisitions that would drive growth in all our markets. To summarize, we have an exciting portfolio of brands with promising growth potential. 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 prepandemic 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 prepandemic levels. Even as consumers return to offices to work, engaging more evening and weekend activities, lifestyles have now reverted to prepandemic habits. Consumers are still spending significant amounts of time at home, preparing their own meals and beverages. At-home meal preparation is being driven by new habits formed during the pandemic, a heightened interest in healthy eating and as a means to control expenses during inflationary times. We're 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 marketplace is difficult to predict. While we expect demand for retail and commercial small appliances to be durable over time, 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, it could soften from where it is today. If it does, we would revisit our outlook. The supply chain environment remains dynamic and unpredictable. Inflationary 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'll turn the call over to Michelle.
Michelle Mosier: Thank you, Greg, and good morning, everyone. Let me discuss our first quarter 2022 results compared to the first quarter of 2021, and then I'll discuss our outlook. Overall, our top line performance was in line with our expectations. Net sales were $146.4 million, a 1.9% decrease compared to a record 2021 first quarter. Revenue in our global commercial market increased $6.5 million or 76% as the food service and hospitality industries rebound from pandemic-driven demand softness. In our Latin American market, the momentum of the last several quarters continued and net revenue increased significantly. In our U.S. and Canadian markets, revenue decreased compared to last year's very strong growth, which was driven to a large extent by stimulus spending. Gross margin was 19.3% compared to 21.2%. Margin erosion was 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. However, this was offset by lower-margin sales in our Latin American market and the decline in sales in the U.S. and Canadian markets. In Latin America, price increases lagged due to long-term commitments on direct import orders. Selling, general and administrative expenses were $15.4 million compared to $26.4 million. The current quarter included the $10 million insurance recovery that Greg discussed. We maintained fidelity insurance and filed a claim to recover losses incurred up to the policy maximum. The claim was approved in the first quarter. The related receivable was inclusive of prepaid expenses and other current assets on our balance sheet as of the end of March. The receivable is 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. This receivable was collected in April. Also contributing to favorable SG&A expenses were lower outside service expenses and lower overall employee-related costs. Operating profit was $12.7 million, including the insurance recovery, compared to $5.3 million last year. Other expense includes currency losses of $1.8 million compared with currency losses of $400,000. 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 classify the assets and liabilities as held for sale. In April 2021, we made the decision to wind down the subsidiary and enter into a licensing agreement to serve the market. The carrying amount of the assets were classified as held and used during the second quarter of 2021. During the first quarter of 2022, the criteria for substantially complete liquidation were met. This resulted in $2.1 million of foreign currency losses previously recorded and accumulated other comprehensive losses being released into 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%. In each period, we reported discrete items that resulted in higher-than-normal effective tax rate. We reported net income of $7.2 million or $0.51 per diluted share compared to net income of $2.9 million or $0.21 per diluted share. Now I'll turn to our balance sheet and cash flow. Net cash used for operating activities was $20.8 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 in 2021. In 2022, trade receivables provided net cash of $15.5 million compared to $36.9 million in the prior year due to the timing of collections and the decreased fourth quarter sales in 2021 compared to 2020. Net cash used for inventory and accounts payable combined was relatively flat year-over-year. However, inventory increase compared to the first quarter of 2021 and the end of 2021, primarily due to longer lead times resulting from supply chain and transportation disruptions resulting in an increase in transit inventory year-over-year. Capital expenditures decreased to $400,000 compared to $1.7 million due to capital spending for our new 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 from the end of last year's first quarter and $95.7 million at the end of 2021. Now let me turn to our outlook. Our team is executing well in a difficult operating environment. We're taking action to protect margins and mitigate the impact of significant external pressures, including rising transportation product costs, persistent supply chain constraints and inflation. Timing for any evening of these pressures remains uncertain. Our responses include taking necessary pricing increases across all business units while also remaining competitive with retailers and consumers. We never take price increases lightly, and we're closely monitoring marketplace acceptance. We 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. For 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, driven mostly by the higher revenue. Our current outlook could change depending on a number of factors. These include retail acceptance of further price increases to offset rising costs, the impact of 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 in Ukraine. That concludes our prepared remarks, and we'll now turn the line back to the operator for Q&A.
Operator: Your first question comes from the line of Justin Kleber of Baird.
Justin Kleber: Everyone, it's Justin Kleber. First off, Greg, I wanted to ask you, you talked about demand for the category remaining solid, which is encouraging. But how do you think about overconsumption in this category the past two years? I mean are you guys seeing any indications of unit demand that's been pulled forward as a result of the pandemic?
Greg Trepp: Justin, so I think so far, it has been holding up. As we mentioned earlier, we have not seen significant deterioration of unit demand. There's a little bit as prices have gone up, and there's really this window for the first 8 to 10 weeks of the year where there was a couple of stimulus checks last year, that certainly put a lot of noise in the year ago period. Easter moved around. So those are also -- makes it a little bit hard to read. But the things that were going on during pandemic, of course, were people staying at home more, but also a big factor of prepandemic was millennials moving into household formations, and that continues to go. And I think also with people staying home, often a lot of companies now, as you know, were hybrid and so they're home for a couple of days and working for a few days. So there is going to be more at-home activity than there was prepandemic also. So, so far, it's held up. There are a lot of moving 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.
Justin Kleber: Yes. Okay. That makes sense. And maybe somewhat related, just you kind of mentioned the prices going up in the category, right? I mean prices are going up virtually across every consumer product. 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.
Scott Tidey: Yes, Justin, this is Scott. I think what we're seeing from the marketplace so far, the prices that we put through have been accepted by our retailers. The retail prices at the store or online 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 that $19 hand mixer. So we're going back and looking at -- the nice thing that Hamilton Beach has is we really have those offerings all across all the value propositions. So we're good and good, better and best in even the luxury position. So as we have to go back and fill in some of those retail gaps that have been abandoned because retails are going up, we have the products that are able to fill those spots and are being looked at today.
Justin Kleber: That's great color. The next question, just on the strength in commercial. The $15 million revenue figure for this quarter, notable step-up from the second half of last year. Greg, is there anything unique in that in this quarter from a timing perspective or a new customer win? Or is this kind of $15 million figure a good run rate we should be thinking about for the balance of the year?
Greg Trepp: Well, there was not a one-off large win that drove that. There really is very good broad -- we've got our food service business, and we look at it globally as well as North America, and we have our hospitality business focused on hotels. And really, they're all showing very strong demand. And a lot of it is related to a period of time when restaurants were either shut down or now they're opening up, trying to catch back up equipment-wise. So we sort of came into the year with growth building and it really accelerated in the first quarter. And when we look at backlog as well as go-forward projection, it seems to be widespread and 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, it's looking like you should see continued strength. Now last year, we started to build in the fourth quarter, so comps will get a little bit harder as the year goes on. But we're right now up against some pretty soft quarters in the second quarter and third quarter that should help us have a very strong growth rate for at least a couple more quarters.
Justin Kleber: That's great to hear. On the home and health -- or the home health and wellness categories, a lot of exciting developments in that space. I mean is there any way you could frame or characterize just the revenue opportunity from this broader initiative over the next year or 2? I mean is this meaningful in your view to the total company?
Greg Trepp: The goal is certainly make it mean -- I'm looking at Scott, the expectations for Scott to deliver with a smile on my face here. But I do think -- I think what I feel good about is we don't have all our eggs in one effort. So certainly, air purification is a proven business that is still strong that we have to win our share at, so that demand is there. Water is a huge existing one, but we're going to be breaking new ground with a electric countertop appliance or some of those out there, but it's not an established category. So when you're creating a category that's got great upside, but all sorts of challenges, you got to educate consumers on why they need it. But certainly, people have water pitchers in their refrigerator, water devices. So we do think there's a real good opportunity there. And then HealthBeacon, as an example, is a brand-new market. People are doing all sorts of things to dispose of their injectables now. And this really is the only one that has an app that allows you to improve the adherence, which is really exciting for caretakers. If you've got a child or a parent that you're trying to monitor or a child or -- really, that's an exciting thing. But again, it's new and we've got to educate people and educate caretakers. So I think there will probably be uneven growth and probably fits and starts, but over the course of the next one, two and three years, I think I'm 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 will be the lead and which ones will be to follow, but we feel pretty good about the numbers there.
Scott Tidey: Yes. And I will just add, Justin, these categories that we're getting into, both in the air and the water segment that Greg talked about, are very nicely balanced from an online and brick-and-mortar perspective. So again, we feel like we have got a good infrastructure that can help build share in both these segments. And then just also add that they also have come with the consumables. So another focus that 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 the consumable.
Justin Kleber: Yes. Okay. Two more questions from me. Just on supply chain and given the lockdowns in China, how would you guys characterize the magnitude of disruption today versus what you've been dealing with at various points in time here over the past few years? And just trying to understand how you feel about inventory flow and your ability to secure product ahead of this year's holiday selling season.
Greg Trepp: Sure. So I'll sort of give you a flavor for the current situation. Again, it's -- things seem to always pop up here that we didn't expect on a go-forward basis. That's a little harder to talk about. But so far -- and the good news, first of all, is we have about 100 employees in China. So we have folks on the ground that are impacted, but it will really help us navigate in a way that maybe some companies don't. So that's been a huge benefit. A very, very strong team in China that's been with us for many years. We have a very diverse supply base. So we are spread out over a wide range of suppliers, which, again, doesn't have us rely on one or two particularly. And so far as these shutdowns or disruptions have rolled through, they were in Hong Kong and in Shenzhen, and they've moved up into Shanghai and now on our way up to Beijing, the disruptions have tended to be a few weeks at a time and a supplier here and a supplier there or a port for a short period of time. They have not been massively disruptive to us yet, fortunately. So we're going to have some ups and downs on supply, but nothing that is dramatic. Now as the year goes on, if something were to happen and the port goes down for a longer period of time or right during the peak season, build those issues, of course, that might come back to bother us and everybody. At the moment, for small appliances for Hamilton Beach, it's been manageable. Certainly, we still required a lot of hard work by people but it's been manageable from the standpoint of keeping our customers supplied.
Justin Kleber: Okay. That's good to hear. Last question just maybe for Michelle on the guidance for operating profit to increase this year. If you exclude the insurance recovery, I mean do you still expect that to be the case?
Michelle Mosier: Justin, I would say we haven't moved off our guidance from year-end. So maybe just remove the word significantly.
Operator: If there are no further questions at this time. I'd like to turn the call back to Greg Trepp, President and CEO.
Greg Trepp: Thank you. As we look ahead, even as we address the many ongoing challenges facing our company, industry and all businesses, we're optimistic for many reasons. We're a leader in our industry. There is proven durable demand. Our broad portfolio of trusted brands, our comprehensive product offerings, our experienced team, our global infrastructure, our product range of retail relationships across all channels and our well-developed e-commerce capability are all key competitive advantages, which enable us to maximize performance. We're excited about the many prospects for profitable growth that we believe will be available through our initiatives. We're focused on effective execution as we work to increase our participation in premium, commercial home health and wellness markets as well as our core market. That concludes our report today. Thank you for taking the time to join our call.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
