Hamilton Beach Brands Holding Co (HBB) 2021 Q1 法說會逐字稿

Good morning, and thank you for standing by. Welcome to the Hamilton Beach Brands Holdings First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised today's conference is being recorded. (Operator Instructions) It's now my pleasure to hand the conference over to Head of Investor Relations, Lou Anne Nabhan. Lou Anne?

Thank you, Holly. Good morning, everyone. Welcome to our first quarter 2021 earnings call and webcast. Yesterday, after the market closed, we issued our first quarter 2021 earnings release and filed a 10-Q with the SEC. Copies of both 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. Greg and Michelle will discuss our first quarter results and our outlook. Also participating in the Q&A will be Scott Tidey, Senior Vice President, Consumer Sales and Marketing.

Our presentation today contains 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 10-Q as well as our annual report on Form 10-K for the year ended December 31, 2020. The company disclaims any obligation to update these forward-looking statements, which may not be updated at all until our next quarterly conference call, if at all.

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

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. I will begin with our strong first quarter results. The momentum we experienced in the fourth quarter of 2020 has continued into 2021. Total revenue in the first quarter increased 23.5%, and our core North American consumer market revenue increased significantly. The growth was driven by strong demand in our U.S., Canadian and Latin American markets.

In our global commercial market, while revenue decreased compared to 2020, the gap to last year closed significantly compared to the gap to prior year we experienced throughout most of 2020. While trends vary by geographic market, foodservice and hospitality markets are currently rebounding from last year's pandemic-driven declines. As the foodservice and hospitality industries continue to recover, in 2021, we expect results for this market to improve significantly compared to the prior year.

In the e-commerce channel, we have been well positioned to benefit from consumers demonstrating an increased preference for purchasing online during the pandemic. Our well-known brands and the wide range of categories we participate in enable us to benefit from the e-commerce demand that is occurring across the small appliance industry. We were an early leader in the e-commerce channel, and we continue to increase our investments in online sales capabilities. In the first quarter, our e-commerce sales increased 59% and accounted for 35% of total revenue.

Revenue from our premium products grew 46% in the first quarter. The Bartesian cocktail machine, our newest entrant in the premium category, has been very well received in the market and was a major contributor to the growth. We also experienced strong sales for our Wolf Gourmet, Weston and Hamilton Beach Brands, Hamilton Beach Professional brands. Gross margin increased 50 basis points in the first quarter. Operating profit, net income and earnings per share all increased significantly compared to the first quarter of 2020. As a reminder, Kitchen Collection is a discontinued operation. Its net losses and negative cash flow no longer have an impact on our company.

We continue to execute on our strategic initiatives that are designed to deliver long-term profitable growth. Last year, we conducted a detailed review of our progress with our initiatives. As a result, we are continuing to focus on certain initiatives such as increasing our investment in the e-commerce channel and in the premium and commercial markets. We are expanding our focus to include a large and fast-growing home health and wellness market. In emerging markets, we are pivoting from a company-managed model to a licensing model and reallocating resources to accelerate growth in our heritage North American market.

Let me provide some details for each initiative. First, in our core North American market, we compete effectively in the U.S., Canada, Mexico and Latin America markets. We have been an industry leader in North America for more than 100 years. In the first quarter, our Hamilton Beach brand remained #1 in the U.S. in both the brick-and-mortar and e-commerce channels based on units sold and held a sizable lead over the other players in the marketplace. Hamilton Beach was the top 3 brands in 25 categories and gained share in 22. We are also a leading brand in Canada and Mexico and throughout Central America. We intend to maintain and grow our leading market position.

Our strong portfolio of consumer-preferred brands and products has broad channel category and price point coverage. Our brand and product offerings range from value to luxury and cover more than 50 categories. This is a key competitive advantage for us. We continue to focus on strengthening our owned brands as well as pursue new brands through licensing and acquisition.

Another key competitive advantage is that we have a proven track record as an innovator in our industry. Year after year, we introduced new on-trend and innovative products that consumers want. Our success is a result of highly engaged and dedicated team members, leveraging consumer insight and continuously evolving our processes and capabilities to generate consumer-preferred solutions. Last year, we introduced 76 new product platforms. Plans are in place to launch approximately 130 more over the next 2 years. Even with most employees working remotely during the pandemic, our new product development process is working well. These accomplishments are playing an important role in our ability to benefit from the small -- from the broad small appliance demand across the cooking and beverage categories.

I will touch on just a few of our new platforms. First, we have expanded our successful FlexBrew coffeemaker platform with several additions. Our original top-selling FlexBrew allows consumers to brew a full pot of coffee or a single cup using their own grounds or a K-Cup type pod. Many consumers want to be able to use Nespresso capsules as well. Our newest addition is the FlexBrew Universal, which is compatible with grounds, a K-Cup type pod or Nespresso -- or a Nespresso capsule all in one machine. In the industry's #1 category, coffee, we are also introducing new craft, cold brew and pour over machines.

Two of the most popular small kitchen appliances are slow cookers and air fryers. We are excited to introduce a new slow cooker with an air fryer lid. Consumers can air fry and slow cook in the same appliance, providing important versatility. The vacuum sealer category is a large and important market. Our Weston acquisition got us into this category. However, we saw very little innovation, and we knew that vacuum sealers were now well designed to seal liquid foods. We developed a vacuum sealer that makes it easy and also provides the first integrated heat stamp date feature that can be placed on the bag, another innovative solution.

Our hand mixers are -- had been the #1 brand for a long time. One annoying pain point of hand mixers is the process to clean the beaters. We just introduced a hand mixer that features easy clean beaters and provides a superior mixing performance.

Finally, we are repositioning our Proctor Silex brand as simply better to meet consumers' needs for basic, durable and quality appliances. Proctor Silex had been around for more than 100 years and can be found in tens of millions of homes across North America. Our new line incorporates an intuitive design with superior performance. Four products have launched so far this year, and we have many more that we'll follow this year and next. One new Proctor Silex product we have just introduced is our Sound Shield coffee grinder, which is designed to reduce grinding noise by 50%.

Our second initiative is to expand our e-commerce leadership as industry online sales continue to grow. Hamilton Beach remains the #1 brand in the U.S. e-commerce channel based on units. In the first quarter, all line of our brands had star ratings at 4.2 or better, and 5 of our brands were 4.5 or higher. We expect the increased online shopping trend to continue even as the pandemic wanes as more people are now accustomed to its convenience. We plan to continue to drive e-commerce growth across all markets, brands and categories. We are supporting growth in the e-commerce channel by further expanding our e-commerce team, adding investments in digital marketing programs, expanding our direct-to-consumer distribution operation and by increasing our participation in both pure-play and omnichannel customers. We are taking these steps throughout North America as e-commerce growth accelerates in our core markets.

Our third initiative is to increase our presence in the premium products marketplace. Revenue from our premium products increased 12% in 2020 and accounted for 11% of total revenue. Growth accelerated in the first quarter to a 46% growth rate. We believe this is an exciting market, and we expect to further grow our participation.

I've already mentioned about our new Bartesian cocktail dispenser, which we market through a multiyear agreement. Bartesian is the first of its kind to use flavor capsules to create a premier mixed drink at home. In its first full year, Bartesian received a very strong consumer response. We expect to double our sales this year and launch the next generation of machines for both the retail and commercial markets. The Bartesian system includes an extensive line of flavors, which continues to be expanded. There are flavors to go with all the base spirits, flavors for traditional cocktails and flavors for exotic cocktails. The flavors are offered in individual or convenient variety packs and monthly subscriptions are available.

The Weston line continues to grow. We have recently launched several products in some key categories that align with how consumers are storing, cooking and preparing foods.

In our full line of Wolf Gourmet countertop appliances, our entire line is selling extremely well, in particular, our ovens, coffee makers and toasters. In 2021, we are introducing a beautifully designed true temperature electric kettle complete with the signature red knob. We expect this product will be well received in the U.S. and in international markets.

For our CHI garment care line, we continue to gain new distribution both in Canada and the U.S. Since we introduced this line in 2017, CHI has become the #2 iron brand in the over $40 category with a 40% share. In 2020, the garment care category declined as many consumers worked from home. However, in 2021, the category is rebounding.

We continue to build out our Hamilton Beach Professional line, which leverages our commercial expertise for home cooks. We've upgraded our existing ovens and toasters and we have introduced a stand mixer food processor with a spiralizer, coffee maker and juice extractor. Our distribution and revenue are growing. We plan to continue to expand our presence in the premium market with a robust new product development and by pursuing partnerships and licensing agreements.

A big focus for this year is to increase investment in new opportunities in the fast-growing multibillion-dollar home health and wellness market. Two examples of this include expanding our air purification offerings and entering the water filtration category. We recently launched our first entry in the water filtration market. Our new electric Hamilton Beach AquaFusion appliance filters water and allows for the use of flavor capsules when desired. Demand for air purifiers is very strong for use in homes and businesses. It is a big category in both appliances and replacement filter sales. We've been a participant in the market for more than 20 years, and we are working to leverage our experience into new growth opportunities. We expect to soon announce plans for new offerings that should launch later this year and next.

Our fifth initiative focuses on growth in the global commercial market. To enhance our leadership position in this market, we continue to invest in new commercial products and expand our offerings across the foodservice kitchen. We are also investing in digital marketing and e-commerce, and we continue to strengthen our partnerships with regional and global chains.

We are optimistic about the current trajectory of the rebound in the market. We initially expected the market to fully return to pre-pandemic levels sometime next year. However, order patterns are strong as businesses reopen globally. We expect significant revenue and profit growth in 2021 based on order patterns and customer input. Historically, our global commercial market has delivered operating margins that are much higher than our retail business.

In summary, our many competitive strengths have enabled us to capitalize on the strong consumer demand for small kitchen appliances. These include the value of our brands and products, our strong supply chain management, investments in a great talent pool and continuing to execute on our strategic initiatives. Our team has worked extremely hard and performed exceedingly well in the face of truly extraordinary circumstances from last year and into this new year. I cannot be prouder of our people as they have kept themselves and others safe and healthy and kept the business moving forward on very strong footing. I thank our employees for their commitment and perseverance.

I will now turn the call over to Michelle, who will review our financial results for the first quarter and discuss our outlook.

Thank you, Greg, and good morning, everyone. Let me review our first quarter 2020 results from continuing operations compared to prior year.

Total revenue increased 23.5% to $149.2 million compared to $120.8 million. As Greg highlighted, revenue in the North American consumer market increased significantly, driven by strong demand in the U.S., Canadian and Latin American markets. In the global commercial market, revenue decreased in the first quarter but this market is currently rebounding and results are expected to improve significantly in 2021 compared to 2020. Gross profit margin increased to 21.2% compared to 20.7%, primarily due to customer and product mix.

Selling, general and administrative expenses increased to $26.4 million compared to $24.2 million, mostly due to increased third-party and consulting services and employee-related costs. Operating profit increased to $5.3 million compared to $500,000. And net income from continuing operations increased to $2.9 million or $0.21 per diluted share compared to a net loss of $1.4 million or $0.10 per diluted share.

Use of cash before financing activities in the first quarter was $3.6 million compared to a use of $10.7 million in the prior year period. Net working capital increased by $71.1 million and reflected an increase in inventory and trade receivables, partially offset by higher accounts payable. The increase in inventory is primarily due to anticipated continued strong consumer demand for our products in the coming months as well as to ongoing congestion in the transportation supply chain, which has increased the days of inventory on hand. The higher inventory positions us well to meet the elevated levels of demand and reduce the risk from supply chain disruption that is now affecting nearly all companies. Higher trade receivables are mainly attributable to the higher sales in the first quarter. We expect working capital, cash flow and our debt level to improve as the year unfolds.

Net debt at March 31, 2021, was $101.2 million compared to $67.5 million at March 31, 2020, and $96 million at December 31, 2020, and reflected the changes in net working capital. On April 9, we entered into amendment #9 nine to our amended and restated credit agreement. Due to the highly seasonal nature of our primary markets, our credit agreement provides for increases in advanced rate used to determine the borrowing base during periods of the second half of the calendar year. Amendment 9 increased our credit facility from $125 million to $140 million for a period of 60 days from its effective date to provide similar flexibility as demand for small kitchen appliances are expected to remain strong in the first half of 2021. The amendment did not result in any other changes to the terms or due date of the credit facility.

Next, let me turn to our outlook. Demand is expected to remain relatively strong throughout 2021. We believe that consumers will continue to cook more at home than they did before the pandemic due to the development of new cooking behaviors. Additionally, household formation by millennials and boomers transitioning to new homes or remodeling are ongoing demographic trends. We believe this strong industry backdrop will drive demand for our products for years to come.

While the unprecedented consumer demand for small kitchen appliances has provided an abundance of opportunity for our industry and our company, we are not operating with some major challenges. Material and transportation costs continue to increase, and shipping and transportation congestion challenges persist. These continued pressures in the global supply chain could have an impact on our ability to satisfy the anticipated strong demand in the second half of 2021. We also continue to face uncertainty regarding the pace and degree of the recovery from the pandemic.

We are continuing our efforts to mitigate these risks, and we have allocated team resources to manage through these challenges. We are working closely with our supplier and retail partners to meet the needs of consumers and customers as demand remains strong. We are taking actions such as increasing lead time, prioritizing production needs, expanding inbound and outbound transportation flexibility and implementing price increases.

For the first half of 2021, including better-than-expected results in the first quarter, we expect revenue to increase and operating profit to increase significantly compared to the first half of 2020.

While capital expenditures related to our ERP system are behind us, we'll be moving to a new distribution center during the second and third quarters of 2021. Capital expenditures for 2021, net of any allowances, are expected to be approximately $8.4 million and include costs for the new DC as well as a normal level of spending on tooling and maintenance CapEx.

Our new distribution center is a 1.1 million square foot facility that we will lease and that is currently under construction in Byhalia, Mississippi, not far from our current facility in Olive Branch. The lease on our Olive Branch facility was due to expire this year. As we consider options, we decided we would stay in the general area for a few main reasons. We can efficiently and effectively serve our customers throughout the U.S. from this area, we have a great team there and we wanted to stay close enough to our current location so we can retain all or most of our employees. We believe this area has many benefits, including a strong pool of talent, excellent infrastructure a business-friendly environment and local and state governments that are investing in keeping all these elements strong. Our new sites will have several upgrades that will make it more energy efficient than our current facility and will include improvements that will allow us to have a more efficient warehouse operation.

For the full year 2021, as a reminder, we expect improved performance compared to 2020 because of the progress made with challenges experienced in 2020 that were related to our Mexican subsidiaries into the cutover to our new ERP system. We will provide a more detailed outlook on the second half and full year when we announce second quarter results.

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

(Operator Instructions) And our first question is going to come from the line of Peter Benedict with Baird.

First question, Greg, I think on the last call, you mentioned commercial -- the commercial business and maybe hopes to get back to maybe 80% of pre-pandemic levels this year. Your comments today kind of sounded maybe a little bit more bullish on that. Just wanted to kind of tease that out a little bit. Do you think there's a chance you could get back to those pre-pandemic levels this year? That's my first question.

Sure. So right now, I think we sort of started the year in line with what I mentioned and what we've really seen over the past little shorter period is demand taking off at a much stronger rate. Hard to tell whether that's sort of catch-up demand that will soften back out a little bit. But certainly, right now, the pace at which orders are coming in, both for the foodservice products we sell as well as even the hospitality side of things, is much stronger than we thought just a little while ago.

And so we're chasing some of that demand, a little bit of backlog. And the hope is that we'll sort of see how that settles out here in the back half of the year as again, is there a sort of short-term spike above what we expected to catch up? Or is it going to stay at that level? So right now, I think we're thinking that we could go higher than what I mentioned earlier based on what we're seeing, but we'll see how that plays out.

Okay. Good. Yes. Good to hear that. Scott, I guess maybe for you, just maybe curious to understand how you guys are managing product cost increases and maybe how willing the retail -- your retail partners are to accept price increases as we know a lot of people are trying to push those through? I'm just curious how that is trending right now in terms of cost pass-through?

Yes. Great question, Peter. So we're getting cost increase from 2 different areas. One is just the pure cost coming out of our China suppliers and then, obviously, the premium transportation cost. I think it's been pretty clear for us that we're not the only person or company in this situation that is experiencing these. And I think, for most of us and our competitors, we're having very frank conversations with our retailers, talking about what the true costs are. Occasionally, we have to adjust our mix of product or adjust our promotions on things that might be more profitable, but we are passing along the cost increases that we're seeing both from a cost standpoint and a transportation standpoint.

Okay. That's good to hear. And I guess as we think about kind of gross margin over the balance of the year, I know it was up here in this quarter. But is it safe to -- should we be expecting gross margin, on a year-over-year basis, to be down over the balance of the year? Is that kind of a good base assumption here? Or are there things that you can do to either hold what you had last year or improve on that?

Peter, this is Greg. So I think in the past, we talked about we've sort of been able to stay within a range that we -- sort of flexes up and down and certainly, recently, sort of flexed up. I think as we work through this passing the pricing along but also seeing what products move around, I think we're going to be able to stay in that range. Whether we drop down the middle of the range or stay up toward the top of the range is hard to say. I would say it's probably more likely that we'll be back in the middle of the range. But I do feel comfortable that we're doing enough things to mitigate these things to make sure we're not going below what we (inaudible) we deliver.

Sure. That makes sense. And I guess, as I think kind of maybe just in terms of the top line, I mean, your comments on commercial is certainly encouraging as well as the regular business, the consumer business. But historically, I guess, second quarter revenue has kind of always been higher than the first quarter. And I'm just curious if there's anything that would prevent that from being the case this year. Is there anything unusual in terms of maybe inventory? I mean inventory, looks really good right now. So I don't think there is, but I just wanted to see if there was anything we needed to keep in mind on that front?

No. I think you already said, you can see, obviously, our inventories levels are high. So we're -- that's -- as Michelle said, that's to support the coming months and -- both from a demand standpoint and trying to make sure we have inventory on hand given the congestion. So I think -- we feel like we're well positioned. There are things we're chasing, of course, here and there. But overall, we feel like we're well positioned.

If you think about the rest of the year, Peter, it's again difficult to clarify where it was all going to go, and we'll sort of give you a little more clarity when we do the second quarter. But what we can say is you think about there's some positive things, there are some tailwinds maybe and some headwinds. On the positive side, we expect and our retailers are expecting demand to stay strong through the end of the year. So that's an important part of it, of course, as the underlying basis for all things we're working on.

As you well know, we had a real challenging third quarter last year. So that's a pretty easy comp to overcome. Growth is really coming across all markets. We're fortunate right now that we're seeing strong demand in the U.S., Canada, Mexico, throughout Latin America and commercial. So that's certainly a good trend to see as we go forward. And we're excited about the continued progress on the premium side of things in the commercial market, as I said, those are higher average selling prices. So that's all good.

The headwinds for the back half and to some degree, the second quarter is, while we had a tough third quarter, we shipped a lot in the fourth quarter that was sort of a catch-up from the third quarter. So that's a bit of -- a little bit we had to make sure we overcome that. The congestion, the supply chain with our suppliers as well as just the distribution side of things, that's really tough to call how that's going to play out. We're working it real hard, and we feel like we're doing all the right things. But really, as you know, the whole world is working -- dealing with that. So that's a big deal.

And I think also, we talked about the higher cost, so that's something we're going to make sure we deal with. And so I think as we think about the -- how the year and the second quarter plays out, I think we have a lot of good things going for us. But I think we'll just know a lot more about that, all those headwinds, when we get to the second quarter time frame.

Yes. Fair enough. That's helpful. And I guess the last question is just around just the M&A environment out there and kind of what you guys are seeing. And do you have any appetite there? I know -- I guess bigger picture is then maybe part of the story, but certainly not hasn't had nothing has really been happening on that front. But just when you get an environment like we've been through, sometimes that can shake some things loose. But just curious, your broader thoughts on the M&A environment, your portfolio and what role that might play over the next 12, 24 months or so?

Okay. So I feel really good -- as you know, we've added a team member, Rob George, to focus on that, and he's doing a great job really looking across a wide range of opportunities. We feel really good about the process we have in place. And we've done some things that weren't acquisitions but were really been very helpful in our -- in building revenue, things like the Bartesian partnership. So it's not an acquisition, but it's sort of a different way to kind of partner up with an outside group to benefit both of us. So I think I feel good that we have a very good pipeline on both -- particularly on the partnership front, things that could play out well for us here in the near term.

On the acquisition front, we're talking to a lot of folks. The biggest issue right now that we're seeing is valuations. As you know, very, very well the home market is driving valuations really, really high. Also, there's a lot of PE firms and specs running around trying to find targets, and they are more -- some of them, particularly the specs are focused on getting a deal done more than what's the right valuation. So I think -- I feel better about finding some really interesting partnership opportunities such as the Bartesian than I do on getting an acquisition opportunity. But I will tell you, we are talking to a lot of folks. So I think there's -- I wouldn't say that we'd rule it out. It's just that one is a little bit harder given the valuations.

(Operator Instructions) And seeing none, I will turn the conference over to you for any closing comments.

Okay. Thank you. As we look ahead, we are optimistic for many reasons. We are a leader in our industry, and there's a proven durable demand beyond the pandemic-driven surge we've been experiencing. Our team is doing an incredible job for our customers and our company. We're very encouraged that vaccines are being widely administered and life has started to return to some level of normal. Our strengths from our investments should enable us to maximize performance, including our broad portfolio of trusted brands, our comprehensive offering, our experienced team, our global infrastructure, our broad range of retail relationships across all channels and our well-developed e-commerce capability. We're excited about the many prospects for profitable growth that are available through our strategic initiatives. We are focused on strong execution as we work to increase our participation in the e-commerce, premium, commercial and home environment markets as well as our heritage North American market. Thank you again for joining our call today.

Once again, we'd like to thank you for participating in the Hamilton Beach Brands Holdings First Quarter 2021 Earnings Conference Call. You may now disconnect. Thank you.