Hamilton Beach Brands Holding Co (HBB) 2022 Q4 法說會逐字稿

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Hamilton Beach Brands Holding Company Q4 2022 Earnings Call. (Operator Instructions)

Lou Anne Nabhan, Head of Investor Relations. You may begin.

Thank you, Chris. Good morning, everyone. Welcome to our fourth quarter 2022 earnings conference call and webcast.

Yesterday, after the market closed, we issued our earnings release for the quarter and full year and filed our 10-K with the SEC. Copies are available on our website. Our speaker today is Greg Trepp, President and Chief Executive Officer. Also joining us this morning is Sally Cunningham, who will become Senior Vice President and Chief Financial Officer on March 17.

Our presentation 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 the earnings release and our annual report on Form K (sic) [Form 10-K] that was filed yesterday.

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 will turn the call over to Greg.

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. Before I begin my prepared remarks, I would like to introduce Sally Cunningham, give her a chance to say a few words.

Sally joined us on February 13, initially as a Senior Financial Adviser, and she will become our CFO on March 17. Sally is an accomplished senior finance leader also brings a strong track record in value creation, digital transformation and M&A integration. Sally, most recently was engaged by the private equity firm One Rock Capital Partners as a finance operating partner.

Prior to that, she was Senior Vice President and Chief Financial Officer at Synalloy Corporation. We expect to benefit significantly from Sally's breadth and depth of experience. Sally?

Thank you, Greg. I just wanted to take a few minutes to say hello and that I'm very excited to join Hamilton Beach Brands. I think this is a time of great opportunity as the company continues to expand its brands and product offerings and make further progress with its strategic initiatives. I look forward to meeting many of you and working with our shareholders, the analysts who follow the company and other investors who are interested in learning more about Hamilton Beach Brands.

I will be a full participant on our call when we announced first quarter results. Now back to Greg.

Thank you, Sally. I'm going to take the next few minutes to provide an overview of our performance for the fourth quarter of 2022, the full year 2022 and our outlook for 2023. After that, we'll take your questions.

While the small kitchen appliance market proved to be slightly softer than we anticipated in the fourth quarter, we were pleased with our results. Our total revenue was virtually flat in the fourth quarter of 2021. We attribute our results to our investments in several areas, including the global commercial and premium products market, which I will elaborate on in a moment.

Additionally, we believe our performance underscores the strength of our business model, the value of our portfolio of trusted, well-known brands and products and the ability of our team to execute well in the face of industry-wide challenges. Our investments in our strategic initiatives over the past several years generated important support.

In the fourth quarter, the softer consumer demand was due to households adjusting spending patterns in response to inflationary pressures and economic uncertainty. Many retailers slowed replenishment orders in order to control their inventory levels. While we were on track to significantly reduce inventory in response to retailer and consumer trends, we decided to provide additional promotional support.

These efforts, while successful, with short-term pressure on our gross profit margin, we expect our gross profit margin to return to its historical range as the year unfolds. Operating profit in the fourth quarter was $11.3 million compared to $17.9 million in the 2021 period. This reflected the short-term gross profit margin contraction, partially offset by lower SG&A expense.

By the end of 2022, our inventory position improved significantly at a slightly better rate than expected. Our post-holiday inventory levels at retail are clean. At the end of December, our inventory level was $156 million compared to $183 million at the end of 2021 and $245 million at the end of September. Our debt came down as well.

Debt was $111 million at the end of 2022 compared to $97 million at the end of 2021 and $146 million at the end of September. As of today, we have further decreased our debt and expect to end the first quarter at approximately $90 million. We're also excited about several other important accomplishments in the fourth quarter.

In the global commercial market, we finished the year at a record level and revenue increased 57%. Our premium market initiative continued to generate strong results and sales increased 14.5% and E-commerce sales accounted for 45% of total revenue. And while our core brand revenue declined slightly, we grew our retail dollar share in the North American market.

For the full year 2022, revenue was the second highest in our company's history and decreased only 2.6% compared to the record revenue of $658.4 million in 2021. Our operating profit increased 23% to $30.8 million compared to $31.5 million in 2021, including a $10 million insurance recovery. Net income was $25.3 million or $1.81 per diluted share compared to net income of $21.3 million or $1.53 per diluted share.

Navigating the year 2022 successfully required significant effort on the part of our team. Early in the year, we still faced supply chain disruptions. We implemented pricing actions in response to rapidly and significantly raising costs Our team worked tirelessly, often above and beyond normal job performance. I thank everyone for their extraordinary performance, diligence and commitment to our good thinking culture. With major investments in infrastructure behind us, including our new ERP system and our new U.S. distribution center, we were able to decrease capital investments to $2.3 million compared to $11.8 million in 2021.

Next, I want to highlight the many successes we achieved in 2022 due to the investments we have made in our 6 strategic initiatives. These initiatives are ongoing programs that have helped us stay strong over the past several years. They are designed to increase revenue, expand operating margin and generate strong cash flow over time. We made significant progress in each initiative [and] are in a very good position to continue to build upon the momentum. We believe each of our strategic initiatives will provide growth in 2020 and beyond. First, our initiative to lead in the global commercial market. Our revenue in the global commercial market increased 50% and accounted for 9.6% of total revenue. Both our food service and the hotel amenity businesses experienced significant revenue and profit growth in 2022. We have made important progress expanding our business with new and existing customers in both industries. This growth is partly due to strong post-pandemic demand and the backlog of orders coming into 2022.

It is also due to our success in expanding our category coverage. Examples of new product -- new commercial products that are gaining track and include our MixStation, which makes milkshake treats, high-performance blenders in our new big rig line of immersion blenders that we introduced as part of our strategy to expand into back-of-the-house products. We have secured incremental wins as we increase our focus on the needs of global and regional restaurants and hotel chains. Our growth plans for this market include new products and expanding customer relationships. We also continue to invest in e-commerce, which is becoming increasingly important to the commercial products market. We expect our commercial business to continue to grow in 2023.

Next, our initiative to gain share of the premium market. We continue to develop, license and acquire brands and products to increase participation in the premium market. New products and digital marketing support underpin the strategy to grow this business.

Premium bring revenue increased 16% in 2022 and accounted for 15% of total revenue. Sales of Bartesian premium cocktail machine continued to increase significantly. We launched the Bartesian professional dot models. It has been exciting to partner with Bartesian on the creation of a fast growth -- of the fast growth in this new category. A key growth driver has been Bartesian's commitment to develop more than 50 cocktail flavors. Our CHI brand continues to grow in sales and share for the garment category and has established itself as a leading premium brand.

Our newest CHI products include a mini iron and full-size handheld steamer. Our Hamilton Beach Professional line leverages our commercial products expertise for the benefit of home cooks. The product portfolio now includes 14 high-demand categories. We continue to aggressively pursue new placements in the U.S. and Canada, and we are focused on building the brand in the e-commerce channel.

We remain focused on driving higher sales of our Western product brands -- Western brand products that are targeted to hunters and gardeners. This includes maximizing online growth opportunities, increasing distribution in the sporting goods channel expanding promotional opportunities and launching new innovations in the core preservation, processing and prep categories.

The Wolf Gourmet brand continues covers 10 high-demand categories and continues to generate steady sales with the luxury market. Almost 40% of sales for this brand now occur online. This week, we announced an agreement with a company known as Numilk, which produces raw ingredients that -- when combined with water to create a variety of plant-based milk products.

They needed a partner to design next-generation specialty appliances for use by consumers at home and in commercial establishments. We are delighted they have chosen to work with us. This market is fast growing, and we are excited about the potential. Numilk's products are known for the high quality and excellent taste.

The Numilk system also saves customers money, reduces shipping costs and has a positive environmental impact. We are in the design and engineering phase for in-home and commercial appliances and expect to launch the new products in early 2024. Next, our initiative to expand in the home health and wellness market.

We are pleased with the progress we are making to increase our participation in the large and fast-growing home health and wellness market. Our focus is on the air purification, water filtration and home medical markets. We have expanded our participation in the air purifier category through an exclusive multiyear trademark licensing and product development agreement with the Clorox Company. In '22, we introduced 6 new Clorox models.

This year, we plan to introduce an extra large-sized model. The air purifier category is expected to continue to be strong given the benefits these machines provide to address numerous consumer concerns. This year, we are introducing a countertop Clorox team sanitizer that consumers can use to kill bacteria on brushes, spunges and other kitchen items that still have a useful life.

In 2022, we signed a trademark licensing agreement with Brita. We have designed a new electric countertop water filtration system, creating a new category of easy-to-use appliances for consumers to access clean, great-tasting water from their tap while reducing plastic bottle waste. Last month, we introduced the innovative Brita Hub electric countertop water appliance. This product is available online, and we are presenting to retailers for in-store placements later in 2023.

We've entered the home medical market through an agreement with a company called Health Beacon Limited, Health Beacon is a leading developer of smart tools for managing injectable medications at home. The home medical market has tremendous growth potential as home-based medical management continues to grow. We expect to become a larger participant over time. Trends are well known.

The aging population is increasingly living with and managing chronic health conditions, demand for personalized health care solutions is rising in lockstep. The need exists in younger demographics as well. The health care industry increasingly is looking for new ways to enable patients to manage their medical needs in their homes due to a scarcity of health care professionals.

Our product is called the Smart Sharps Bin from Hamilton Beach Health powered by Health Beacon. The system provides revenue from the appliance sale and for monthly subscriptions that help patients manage adherence to their personal medication regimen using an app. It recently became Medicare and Medicaid eligible for certain applications, which is expected to drive increased adoption.

We've also secured recent placements with specialty pharmacies. Our partner, Health Beacon is a global leader in digital technology. We are exploring additional opportunities to collaborate with Health Beacon in the at-home medical adherence and monitoring market. Now we'll turn to our initiative to drive core growth.

We remain intently focused on accelerating the growth of our core brands, Hamilton Beach and Proctor Silex. They have competed successfully in our heritage North American marketplace for over 100 years. Innovation and new product development have always been the lifeblood of this business.

In 2022, we introduced 40 new product platforms, 32 for Hamilton Beach and for 8 for Proctor Silex. While sales of our core Hamilton Beach and Proctor Silex brands decreased slightly. In 2022, we outperformed the industry and gained dollar share in North America. For both brands, we increased our support for marketing communications, including online content, visuals and video to engage shoppers. We also increased focus on SEO optimization, social media advertising and influencer campaigns, gaining an important endorsements, awards and recommendations from a number of known trusted sources. Hamilton Beach continued to hold the #1 brand position for small kitchen appliances in 2022 based on units sold. In the e-commerce channel, our flagship consumer products earned an average 4.3 star rating.

Plans are in place to drive growth of our Hamilton Beach and Proctor Silex brands, including innovative new product development and continued investment in digital market. Moving on to our initiative to accelerate our digital transformation. The e-commerce channel represents a very strong and fast-growing part of our business, brand reputation, product features, innovation and star ratings, all play a critical role in driving online sales, and these are all areas where we excel. We also are investing in digital marketing and online selling capabilities.

In 2022, e-commerce sales accounted for 38% of total revenue and increased 3% on top of 22% growth in 2021. We have a presence across multiple e-commerce platforms. All of our brands are earning Star ratings at 4.3% or better and 5 of our brands are rated 4.5 stars or better. Our products receive favorable reviews from consumers, experts and influencers. Our e-commerce capabilities have become increasingly sophisticated. We are continuing to invest in them. We're supporting growth in digital engagement with online marketing programs, expanding our direct consumer distribution operation and increasing our participation with pure play and [online sales] customers.

Finally, we have an initiative to leverage partnerships and acquisitions. We have significantly increased our focus on this initiative we prioritize opportunities that will provide entry into consumer or commercial markets where we can become stronger participants. We're actively engaged in the pursuit of additional collaborations for acquisitions.

At this time, I'll turn our outlook -- I'll turn to our outlook for 2023. I'll start with a few comments about the marketplace. As we consider the 2023 landscape, we see a number of headwinds and tailwinds to manage. The overall retail and the marketplace trends for general merchandise, home goods and small appliances are difficult to predict.

We believe that over time, the small appliance industry will remain resilient even in a soft economy. However, it is challenging to predict the impact a softening economy will have on our industry over the next several quarters. We don't believe there will be a significant falloff in demand for small appliances, but there likely will be some softening.

Retailers are acting cautiously across our portfolio, which can impact HPV and all companies in the short term. It is clear that the U.S. consumer is pulling back to some degree, basing our outlook on an expected moderate decline in industry demand this year.

Next, I'll discuss the company outlook. For the full year 2023, we expect total revenue to be flat to 2022, including a more challenging first half of the year, particularly in the first quarter. We expect a stronger back half to offset the softer first half.

Specifically, in the first half of 2023, we see a continuation of soft consumer consumption trends. As a result, we have taken a more conservative view and expect a moderate decrease in revenue compared to the first half of 2022, particularly in the first quarter. The second half of 2023, we expect to benefit from continued progress with our strategic initiatives, we are optimistic about our new product offerings, potential placements for the second half selling season.

Our plan anticipates that revenue in the second half will increase modestly compared to the second half of 2022. Operating profit for the full year 2023 is expected to increase compared to 2022, excluding the $10 million insurance recovery. In 2023, we expect gross profit margin expansion compared to full year 2022.

We expect moderately higher SG&A expense, mostly due to increased employee-related costs and some investment in new product advertising. Again, we expect a stronger back half to offset a softer first half with the first quarter being the most challenging period. Product costs for small kitchen appliances and transportation expenses have been moderating as many of the supply chain challenges of the past few years have subsided.

We're working with our retail partners on appropriate rollbacks of previous price increases in ways that will keep us competitive while also protecting margins. It is difficult to predict the outcome of the decline in prices. We believe the most important action is to remain competitive and work closely with our retail partners. Cash flow before financing in 2023 is expected to increase significantly compared to 2022 as a result of improvements in net working capital.

As always, our outlook could change if consumer demand or retailer replenishment orders are softer than currently expected.

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

(Operator Instructions) The first question is from Justin Kleber with Baird.

This is Zach on for Justin. Congrats to Sally. First on top line guidance. Greg, you mentioned a few puts and takes that are leading to flat revenue for 2023. Just curious if you can speak to how much growth you're expecting in commercial this year. And then overall, how much contribution are you seeing from (inaudible) innovation?

Sure. Zach. So I think commercial is expected to grow for the year. It's -- we feel that it will be not as strong as 2022, but certainly strong, probably somewhere in the mid- to high single digits, is the way it's currently looking, but that could change, of course.

But we expect it to be a solid contributor. Our other programs that we're investing in some of these newer areas of innovation like the home health area, like some of our premium categories are also expected to grow. We had some nice success, and we've got to see how things would offset each other.

But in general, I feel that we have enough areas working for us that once we get through the first quarter in the first half of this year where there's tough to know what the consumers are doing and retailers are doing to rebalance things. I think we have enough of these programs working that should help not only the core business Hamilton Beach and Proctor Silex but some of these newer areas as well. I will say that we're also in the next month or 2 or 3, we'll have a better picture on placements for the back half of the year. We're in the middle of line reviews just starting promotional discussions for the back half of the year. So I think also we'll be able to talk more in the future about what direction we're going on in core placement. So far, we're pleased with the way things are going, but nothing is firm. And we have a lot of good things to talk about with our retail partners. We just need to firm things up.

So generally speaking, I think we've got to get through the first quarter and the first half. And then a lot of the things we've been working on should provide us some support in the back half of the year.

Got you. Maybe on those placements, kind of somewhat related. How do you think your sell-through at retail during the holidays in 4Q compared to that of some of your peers? And can you maybe share a bit more on how customers responded to promotions for the category overall.

Sure. So our performance in the fourth quarter this past year was better than the market. Our share -- our dollar share increased in the full year as well as the fourth quarter. And so that was due to really strength of many of the programs we talked about during the prepared remarks and a softer marketplace than we expected. So I think in general, we've got good support from our retail partners, a very strong online business, which is sort of is the best place for us to showcase our products, quality, star ratings, et cetera. So I think solid performance both in store and online helped us do better than the marketplace in the fourth quarter.

However, it was less than we were hoping for expecting just in general, there was the -- the overall lower performance of the overall industry as we talked about. So I think in general, we did better. We'll see how this year unfolds. Again, we hope to -- our goal is to grow share all year long. Again, quarter-by-quarter can always be a challenge, but we have things going for us, where I'm hopeful that we'll do better in the marketplace.

Got you. Kind of I know you also mentioned rolling back pricing. Can you share any color on the magnitude of those rollbacks. Are you guys seeing any others in the marketplace start to change their pricing as well? And then how elastic do you think demand typically is for the category? Do you guys expect maybe to see a rebound in units from taking prices down this year?

Sure. So Zach, on this front, it's always a little hard to know how it's going to play out. A few things to point out. One is cost -- product costs are -- have come down. And as you know, I'm sure transportation costs have come down significantly. So what we always try to do is whether costs are going up or down to work closely with our retail customers to just stay whole when it comes to those cost changes.

So as they've come down, we've proactively worked with retailers to price our products to be sure we're competitive, protect our margins, but also try to be sure that we're putting pricing out there that's going to excite customers to purchase more. So as we went into last year and we had to raise prices, it was very difficult to know whether that would drive top line and units would hold or whether consumers would just trade up and down, and it really wouldn't impact sell-through or heard sell-through. It turns out the market was a little softer.

So clearly, the price increases that we took and everybody took did not -- were not additive to the marketplace. The consumer just changed their purchase happens to buy different products and the market is still a little soft, softer than expected. So as we go into 2023, as we reduce prices, there's a couple of things that we'll have to figure out. So in the short term, month-to-month, we're going to be dropping our invoices to retailers, and that will flow through their -- on hands.

So there could be some short-term ups and downs on our performance as we pass along those price decreases. It's hard to know whether the consumers will continue to purchase the same way they were. So therefore, those lower prices will actually hurt our performance revenue ongoing. Early on, we're seeing some response by consumers that when we reduce prices, the units are picking up and they're responding favorably to those.

So our general set of thought is that just like when prices went up, it was not all additive and when prices go down, it will not decrease from our performance that consumers will move around their purchase desires, and it will be a modest change up or down. that's a big assumption. But right now, we're seeing that consumers as prices come down, consumers are responding to those products that are now at lower prices. Competitively, everyone is buying from the same part of the world for the most part.

Everyone is experiencing lower transportation costs. The retailers are very good at demanding competitive prices. So I'm not 100% sure of where all our peers are. But my sense is that sooner or later, they're all going to be either with us or following suit because it's just the marketplace is going to try all of us to be competitive on pricing.

Got you. It makes sense. Shifting over to margins. What gives you guys the confidence that gross margin pressure in the fourth quarter related to those promotions will be short-lived. You mentioned anticipating a return to a more normal gross margin level in the first half -- is that view based on trends you guys are seeing so far in the first quarter?

Good question. I think really, our view is that that's probably a full year 2023 where we'll end up for the full year. As I mentioned, in the first quarter, we're working through balancing tailers demand here earlier in the year, sort of uncertain how things are going. So we expect a more challenging first quarter. As second quarter goes on the back half of the year. We think that's where the chance is going to be to balance out our full year performance. I think right now, as we've as costs have come down, and we pass along price decreases and we also monitor our promotional cadence. We're starting with how do we protect our margins and stay competitive.

And right now, we feel we can do both those things. The big challenge will be is just if demand softens further, then we have to promote some more if demand is like we think it's going to be, then we really can have our traditional level of promotional support and make sure our margins are (inaudible). So I think all in all, I think the first quarter and first half will probably be a little softer. It will be a little bit stronger in the back half and the full year should come in our normal range.

Got you. Makes sense. Last one from us on SG&A. You expect this to grow moderately in 2023. Is that off of last year's GAAP number, which includes that $10 million insurance recovery? Or should we expect dollars to grow off of the adjusted base, excluding that recovery?

Yes. Everything is excluding the [comp] or excluding the $10 million recovery. We've got a little bit of inflation on comp in this environment. We're finding ways to save money elsewhere, $12 some of that. We're investing a little more in some of our programs. So we do think putting aside the $10 million recovery that we'll see a little bit of SG&A increase, but nothing that's too out of the ordinary. So thank you, Zack, for those questions.

(Operator Instructions) And it appears that we have no further questions. I'll turn it over to Mr. Trepp for any closing comments.

Thank you. While the macro environment in 2023 remains uncertain as consumers continue to invest spending patterns due to inflationary pressures, we've always said our company is focused on long-term value creation, I'm very proud of our team. They have no doubt our employees will continue to be agile and resilient and demonstrate good thinking every day in all aspects of our business. I am confident that we are stronger than ever and well positioned to build on the successes we have achieved our investments in infrastructure, combined with our asset-light model as well as our net working capital returning to historical ranges, and continued progress with our strategic initiatives should enable us to resume generating strong cash flow and higher returns on total capital employed in the company. That concludes our report for today. Thank you again for joining our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.