Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Beach Brands Holding Company Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Lou Anne Nabhan, Head of Investor Relations, you may begin your conference.

Thank you, Denise. Good morning, everyone. Welcome to the fourth quarter 2018 earnings conference call and webcast for Hamilton Beach Brands Holding Company. Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Vice President, Chief Financial Officer and Treasurer will discuss the company's fourth quarter results. Scott Tidey, Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands will participate in the Q&A. Yesterday, after the market closed, the company filed its annual report on Form-K with the SEC and issued an earnings release. Both documents can be found on our Web site at hamiltonbeachbrands.com. A replay of today's call will be posted on the Web site this afternoon. And when available, a transcript will be posted. Today's presentation contains forward-looking statements which 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 was included in our earnings release and 10-K. The company disclaims any obligation to update these forward-looking statements, which may or 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 Anne. Good morning everyone, and thanks for joining our call. My remarks will cover the fourth quarter performance of our two business segments, Hamilton Beach Brands and Kitchen Collection. At Hamilton Beach Brands despite being well-positioned for the holidays selling season with strong placements and solid promotional support, revenue in the fourth quarter was down from last year and from our expectations primarily as a result of lower sales volume in the U.S. consumer market. As we compare our actual performance to our internal expectations, the primary driver of the shortfall was a reduced order flow from the U.S. e-commerce channel. We delivered growth in many areas. And we experienced the usual ups and downs in certain brick and mortar retailers. However, the primary reason for the revenue decrease was due to the e-commerce channel. Decrease in operating profit in the fourth quarter of 2018 was primarily attributable to the decreased revenue and to a lesser extent higher consumer advertising, transportation, and warehousing expenses. Higher product costs were mitigated by higher selling prices that were implemented throughout the year. After reporting revenue growth of 12.3% for the third quarter of 2018 and based on comparisons to a strong 2017 fourth quarter, we had expected 2018 fourth quarter revenue to increase modestly over prior year. Meeting that expectation was dependent upon consumer spending patterns and the pace of sell-through and reorders from retailers during the holiday selling season. While the [indiscernible] store expectations in the key holiday selling period was disappointing. As we focused on building our business over the long-term, we are confident that we remain a leading competitor in the e-commerce channel. Our Hamilton Beach Brand obtained the number one ranking in units across the e-commerce channel in the fourth quarter and for the full-year 2018,…

Thank you, Greg, and good morning everyone. As Greg noted, my comments will focus on our consolidated results for the fourth quarter of this year compared with the fourth quarter of last year. Consolidated revenue was $241.7 million compared with $265.8 million last year. Revenue in the Hamilton Beach brand segment decreased 9%, and in the Kitchen Collection segment, revenue decreased 10% for the reasons Greg discussed. Operating profit was $21.1 million compared with $31 million last year. For the Hamilton Beach brand segment, operating profit was $17.7 million compared with $26.5 million in the fourth quarter of last year. As Greg reported, the decrease was primarily attributable to lower revenues and to a lesser extent higher consumer advertising, transportation, and warehousing expenses. Higher product costs were mitigated by higher selling prices that were implemented throughout the year. For our Kitchen Collection segment, operating profit was $3.2 million compared with $4.5 million last year. The decrease was due to a lower comparable store sales from reduced customer traffic, as well as from the closure of 22 underperforming stores since December 2017. We realized an increase in average sales transaction value as a result of product and promotional offerings for the holiday selling season. As a result of store closures and expense reductions at headquarters, the Kitchen Collection segment reduced operating expenses in the fourth quarter by $1.1 million as we continue to make progress towards our goal of optimizing our store portfolio. Kitchen Collection generated $11.4 million in cash flow before financing activities in the fourth quarter and ended the year with no debt. The tariffs that were enacted by the United States in July and September of 2018 on imports from China, impact approximately 10% of total product purchases on an annual basis. We work closely with our customers…

[Operator Instructions] Your first question comes from Peter Benedict with Baird. Your line is open.

Hi, good morning everybody. A few questions here, so you mentioned the first quarter was trending above last year in ecommerce. Is that a similar trend for the broader HB business segment? That's my first question.

Yes, this is Greg. Good morning. I think our view of the first quarter and first-half kind of are inline with what Michelle said, which is we think we'll be just trending flat to -- closer to flat on total revenue for the company, so ecommerce growing a little bit is really being offset by some brick-and-mortar ups and downs.

Okay, that's fair. And with the ecommerce turning back up here, what's driving that? Is that orders from just -- is that by customer or customers that you kind of lost out with in 4Q coming back a little bit, or is it just others picking up the slack.

Yes, I think maybe what we'll do is that Scott can give you a little more color on the fourth quarter change in criteria and how that affected us, and therefore sort of the changes in what we do and how that has sort of been put in place to help us get back on track in '19. So, Scott, why don't you follow on that?

Sure. Good morning, Peter. This is Scott. Hey. So if you go back and look at the back-half of 2018, both as a three-month and a six-month time period, if you look at the total small kitchen appliance market it was up double digits. And pressure cookers and air fryers were driving about 75% of that growth. So if you take those categories out, the market was up low single digits. Total HBB was flat in both periods, with low growth in ecommerce, but lower than overall -- the total ecommerce market was up more even though we had low growth in ecommerce. Total ecommerce market was up about mid teens, and we were kind of in that mid single digits. So, while we knew going into the holidays that those hot categories like air purifiers and pressure cookers would do well, we though we'd be able to offset some of that with some of our new products and strong lineup. However, we saw several changes the way online sales were going on the fourth quarter. And really the two primary reasons we've lost share in online sales, the first one was we saw a number of online retailers change the way they supported products in the fourth quarter. And instead of looking at a vendor in total across all of our product portfolio, they started making every product stand on its own from a profitability standpoint. And therefore, when you do that, the lower retail products have a tough time because the cost to ship directly to the consumer's house puts pressure on that retail. So we typically had a nice business at some of those lower price points, and we needed to adjust and move some of our promotional support up to upper price points, which we've now…

That's super helpful, Scott. Thank you, thanks for that color. Two more questions. The first, when we think about the HB gross margin over 200 basis points, I know you guys spoke to raising prices to offset some of the costs. I understand that that could still have a little bit of rate pressure associated with that. But can you breakdown the drivers of that 200-plus gross margin. How much of that was kind of fixed cost to leverage just because of the revenue, and how much was maybe underlying rate?

I think that you saw that with some customer mix, and that certainly we expected to have the stronger sales. We were sort of spending in terms of bottom line profitability when we expected the higher rate sales. But I think really most of that is the -- coming from the customer mix as things -- as again as we hit some customers that were a different cost structure doing better than -- or doing worse than the ones that we projected to.

Okay.

So there's an underlying inability to pass along price increases or the tariffs, or what -- it was more about just the way the revenue flow came out between customers.

Okay, great. And then the last question. You mentioned entering India, just curious how you guys are going in there? Is it primarily just online, are there any partners you can speak to, but just curious how you're going to be executing that entry into the Indian market.

Sure. I'll give you a little bit of color. So this is product line we mentioned, the juicer, mixer, grinder is by far the largest category. So we are going to focus on one product. And sometimes as we enter a country we go with a full line and sometimes we pick one product, and sort of the hero product. So, we're going to go in throughout the second quarter. We're going to start with just a real select list of customers because it'll be very much a premium priced product, and our goal would be to see that through high end outlets, a large part of which will be ecommerce players, but probably some select brick-and-mortar players. Not a broad list of brick-and-mortar players, but some very select ones and really used 2019 to get the consumers, the high-end consumers used to that product and that idea though we expect it to be -- 2019 to be about seeding the product and gaining awareness. And then hopefully, if that works out, well, we will gain traction later in the year and then into 2020.

Okay, great. That's all I've got. Thank you so much guys.

Thank you.

[Operator Instructions] And there are no further questions. At this time, I'll turn the call back over to Mr. Greg Trepp for closing remarks.

Thank you. In closing, we're excited about the prospects 2019 brings to advance our strategic initiatives and are handled of each brand segment. And to make further progress in our strategy, the right size of kitchen collection store portfolio, and we believe we have put the right steps in place to do so we expect both segments to deliver improvements in cash flow before financing activities, compared with the full-year 2018, which will enable us to report a significant improvement in our consolidated results. Our outlook is based on our middle of the road view. And as I explained before, internally, we work toward uplift goals. So as always, we try to beat the plan. You're committed to building shareholder value over the long-term and with that I'll conclude our call today. Thank you for joining us.

Thank you for participating in today's Hamilton Beach Brands Holding Company Q4 2018 earnings conference call. This call will be available for replay beginning at 12:30 Eastern today through until 11:59 p.m. Eastern Time on March 14, 2019. The conference ID number for this replay is 5646429. Again, the conference ID number for the replay is 5646429. The number to dial for the replay is 1800-585-8367. This concludes today's conference call. You may now disconnect.