Hamilton Beach Brands Holding Company (HBB) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome, everyone, to the Hamilton Beach Brands Holding Company Q1 2019 Earnings Conference Call. All lines have placed on mute to prevent any background noise. After the speakers remark, there will be a question-and-answer session. [Operator instructions] Thank you. Lou Anne Nabhan, you may begin your conference.

Thank you, Marcella, and good morning, everyone. Welcome to the first-quarter 2019 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 first-quarter results. Also present for the Q&A will be Scott Tidey, Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands. Yesterday, after the market closed, the Company issued an earnings release announcing the first-quarter 2019 results and filed a 10-Q with the SEC. Those documents can be found on our website at www.hamiltonbeachrands.com. A replay of today's call will be posted on the website 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-Q. 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. Greg Treppr Thank you, Lou Anne. Good morning, everyone, and thanks for joining our call. My remarks will cover the first-quarter performance of our two business segments, Hamilton Beach Brands and Kitchen Collection. As most of you know, both businesses are seasonal. The majority of the revenue and operating profit is typically earned in the second half of the year due to the fall holiday selling season. The first quarter is the smallest of the year and the first half is the smallest half, but first-quarter results were only slightly behind our expectations, and we expect the first half to be in line with our previous outlook. At Hamilton Beach Brands, revenue for the first quarter was $126.7 million, compared to $125.4 million last year. Revenue growth in the U.S. consumer market was partially offset by decreases in some of the international consumer markets. Global commercial revenue was comparable to last year. Unfavorable foreign currency movements reduced revenue by $700,000 as the Canadian dollar and Mexican peso weakened against the U.S. dollar. Progress with our strategic initiatives continued to drive growth in new areas. In the U.S. e-commerce channel, initiatives we put into place to address the challenges we experienced in the fourth quarter of 2018 were beneficial, and e-commerce sales increased significantly in the first quarter compared to last year. Sales increased for our Only the-Best products which are sold under the Weston and Hamilton Beach Professional brands and the license to Wolf Gourmet and CHI brands driven in part by a number of new products launched for each brand in 2018. Gross profit margin decreased to 20.7% from 22.1% last year, primarily due to higher spot ocean freight rates on routes from China to the U.S. as importers accelerated container deliveries ahead of impending tariff increases. While we were prepared for the impact of tariffs and expected some level of container cost increases, the size of the increase during our peak shipping period was difficult to offset. We expect our full-year 2019 gross margin percent will be comparable to 2018 and we expect sequential improvement in each of the remaining quarters this year. Operating profit was $1.6 million, compared to eight -- $3.8 million last year, primarily due to the higher freight costs and to increased SG&A expenses for the legal and professional fees, including patent litigation expense. Next, I'd like to provide additional details regarding the important progress we continue to make with our key long-term growth drivers. New product platforms introduced in 2018, 90 in all, will benefit us in 2019 and beyond. This year, we are introducing a similarly strong line up of new products, including a full line of air fryers and pressure cookers, and we expect to gain share in these new fast-growing categories. In the first quarter, the Hamilton Beach Brand continued to hold the No. 1 unit share position in the U.S. small kitchen appliance industry in both brick-and-mortar and e-commerce channels. Each of the Only the-Best brands generated double-digit growth last year and all of them benefited from new product introductions and expanded retail distribution, which we expect will benefit us this year and beyond. We're introducing additional new products this year, including a Wolf Gourmet stand mixer, a Weston electric food mill and sous vide circulator, two Hamilton Beach Professional hand mixers and new CHI irons. We expect growth from each of the brands, continued distribution channel expansion and growth -- and share growth in stores and online. Global e-commerce continues to grow for small kitchen appliances. Success in this channel requires providing products at the right price, strong ratings and reviews and meaningful engagement with online shoppers. Our objective is to grow faster than the e-commerce rate in each market where we compete. We continue to focus on providing best-in-class retailer support, increasing engagement with end users and enhancing programs designed to make us the preferred partner globally. Our products generally earn online ratings of four stars and above and favorable reviews. In 2019, we expect e-commerce sales growth in all markets. In our Global Commercial business, we have experienced strong growth across the Americas, Europe, and Asia in the past few years. We expect that broader distribution of several newer products will generate incremental revenue in the coming years. Increasingly, the e-commerce channel is becoming more significant in the commercial marketplace for both food service and hospitality. Purchase decision makers in those markets are using the Internet more each day to both research products and purchase products. We've invested in a leading way to provide a digital marketing platform while maintaining our presence in traditional channels. In international markets, we plan to continue to expand in Canada and Mexico, as well as Latin America, Brazil and China where we have full teams in place. We're finalizing plans to enter the India market with a soft launch in the second quarter. We continue to evaluate additional markets through direct participation or brand licensing. Revenue in all the international markets in which we participate is expected to grow in 2019. We believe that our leadership in satisfying unmet consumer needs will enable us to continue to excel at providing products that are specifically designed to meet unique consumer needs, in particular, global markets. Examples of such items include a removable reservoir iron for the consumers in Brazil, the Hamilton Beach Professional high-performance blender for consumers in China and the Hamilton Beach Professional juicer mixer grinder for consumers in India. We launched new products in new categories outside of the traditional kitchen appliances in 2017 and 2018, including compact refrigerators, coffee airpots, knife sharpeners, laundry accessories, kitchen and bathroom scales among others. Revenue from new categories is expected to grow in 2019 as we introduce more products and gain traction. The e-commerce channel in particular enables us to introduce new products quickly and relatively inexpensively and react on a timely basis to consumer responses to new offerings. We're excited about the progress we are making toward our long-term growth objectives of reaching $750 million to $1 billion in annual revenue and 9% to 10% operating profit margin over time. Our initiatives provide many paths to reaching our revenue goals. While some of our initiatives are delivering faster growth than others, all of them have shown momentum, and we will build upon them in the coming years. Next, I will discuss The Kitchen Collection segment. In 2018 and in the first quarter of this year, Kitchen Collection continued to make solid progress with initiatives to return to profitability by closing underperforming stores, moving all stores to a one-year lease term, maintaining gross margins, reducing expenses and managing working capital. At the end of 2018, Kitchen Collection had 189 stores. In the first quarter of this year, Kitchen Collection closed 21 stores and currently plans to close an additional 10 stores by the end of the year with the majority of the closures occurring in the second quarter. By the end of 2019, Kitchen Collection expects to have 158 stores. At that time, 85% of the stores will have a lease term of approximately one year, greatly increasing operating flexibility to respond to low store profitability levels. Kitchen Collection believes it can rightsize its store portfolio aggressively over the next year or two with a core group of 100 to 150 adequately profitable stores in favorable outlet mall locations. Store lease decisions will be based on store-by-store profitability. In the first quarter, Kitchen Collection generated revenue of $19.3 million, compared to $22.1 million last year. The decrease was due to the closure of underperforming stores and lower comparable store sales, both of which reflected a continued downward trend in customer traffic. While the gross margin rate was down from last year given the number of stores we closed in the quarter, we believe Kitchen Collection delivered a very good performance in gross margin percent. We expect the full-year gross margin to be in line with 2018. Kitchen Collection reduced its operating loss compared to last year. The operating loss was $3.7 million, an improvement of $600,000, compared to the operating loss of $4.3 million last year. As a result of store closures and corporate expense reductions, Kitchen Collection reduced operating expenses by $2.2 million compared to the first quarter of 2018. As most of you know, Kitchen Collection typically has a loss in the early quarters of the year due to the seasonality of the business. So in the first half, our goal is to reduce the loss versus the prior year as we execute our strategy, and the team accomplished that. Even with a large number of stores closing, we offset the cost of closing, which includes things like severance, clearance promotions, travel costs to and from the stores, etc. We're encouraging -- we're encouraged that Kitchen Collection is on track with the strategy we have been communicating and that its performance is improving. As always, if foot traffic to the malls is in line with our expectations, as it was in the first quarter, then we should be able to lever our improved performance. If foot traffic improves or declines meaningfully, Kitchen Collection's performance will likely follow. With that overview of our two segments, I'll turn the call over to Michelle who will discuss our consolidated results.

Thank you, Greg, and good morning, everyone. My comments will focus first on our consolidated results for the first quarter of this year compared to the first quarter of last year. Since Greg has already reviewed our two segments in detail, my comments will be mostly high level. After discussing our consolidated first-quarter results, I will discuss our outlook for 2019. Consolidated revenue was $145.4 million, compared to $146.6 million last year. At Hamilton Beach Brands, revenue increased to $126.7 million, compared to $125.4 million. At Kitchen Collection, revenue decreased to $19.3 million, compared to $22.1 million. Consolidated gross profit was $34.7 million, compared to $37.8 million last year. As a percentage of revenue, gross profit was 23.9%, compared to 25.8%. As Greg said, we expect full-year gross profit margin in both segments to be comparable to 2018. Consolidated selling, general and administrative expenses were $36.5 million, compared to $38 million last year. The decrease was primarily due to expense reductions in Kitchen Collection, partially offset by increased legal and professional service fees at HBB. The consolidated operating loss was $2.1 million, compared to an operating loss of $500,000 last year. Operating profit at Hamilton Beach Brands was offset by an operating loss at Kitchen Collection. Consolidated net interest expense was $746,000, compared to $532,000 last year. The increase was due to higher average borrowings outstanding under Hamilton Beach Brands and Kitchen Collection's revolving credit facility and higher average interest rate. We recognize an income tax benefit of $800,000 on a loss before income taxes of $2.5 million, an effective tax rate of 30.8%. The effective tax rate increased from 25.9% for the first quarter of 2018, primarily due to an insignificant one-time tax benefit recorded in 2019 related to our non-U.S. pension plan. Consolidated net loss was $1.8 million or $0.13 per diluted share, compared to a consolidated net loss of $400,000 or $0.03 per diluted share for 2018. Next, I'll discuss cash flow. Consolidated use of cash before financing activities was 100 -- excuse me, $51 million, compared to $41.5 million last year. At both segments, efforts to lower inventory were successful. However, the benefit was more than offset by a change in accounts payable due to the timing of payments. Capital expenditures were $900,000, compared to $2.4 million last year. The decrease was primarily due to lower capital spending related to Hamilton Beach Brands software development costs. Total cash expenditures for the year are expected to be approximately $4.5 million at Hamilton Beach Brands and $300,000 at Kitchen Collection. The remaining planned capital expenditures are primarily for the development of our ERP system and tooling for new products at Hamilton Beach Brands. The Company had cash on hand of $1.7 million, compared to $2.4 million last year. Debt was $94.2 million, compared to $85.5 million. The higher debt level was due to fund -- was used to fund working capital. At Hamilton Beach Brands, we're focused on getting our inventory, cash flow and debt back to our desired level with inventory being the key element. Given the large volume in the fourth quarter, traditionally, the post-holiday period brings large swings in working capital between the first and second quarters. Inventory in the first quarter was down meaningfully compared to the 2018 first quarter and we expect that trend to continue. We continue to work to improve our DSO and DPO. And now, let me turn to our outlook. Hamilton Beach Brands expects its 2019 revenue to grow moderately as a result of the continued successful implementation of its strategic initiatives, including new customer -- new consumer and commercial product introduction, Only the-Best placements and continued expansion in the e-commerce channel and international markets. Revenue for each of the strategic initiatives is expected to be above 2018. Full-year operating profit is currently expected to increase moderately over 2018, including a decrease in the first half of the year and an increase in the second half of the year compared to 2018. The second-half outlook may change as customer commitments for the fall holiday selling season are confirmed in the second and third quarters. While it's too early to confirm the final picture, we have encountered new unfavorable issues that will pull our outlook down. Hamilton Beach Brands expects cash flow before financing activities to increase significantly in 2019 compared to 2018. Kitchen Collection expects its full -- future performance to be closely aligned with customer traffic trends, including any potential improvements or further declines. For 2019, Kitchen Collection's revenue is expected to decrease compared to 2018 as a result of store closures and low comparable store sales. As a result of progress with its initiatives to return to profitability, including significant expense reduction, Kitchen Collection expects its operating loss and use of cash before financing activities in 2019 to improve. If customer traffic to stores is line with expectations as it was in the first quarter, Kitchen Collection expects to be able to deliver its anticipated improved performance. Based on the outlooks for the Hamilton Beach Brands and Kitchen Collection segments, Hamilton Beach Brands Holding Company expects 2019 net income to increase and cash flow before financing activities to increase significantly over 2018. That concludes our prepared remarks. We'll now turn the line back to the operator for Q&A.

[Operator instructions] Your first question comes from the line of Peter Benedict from Baird. Your line is open.

I guess a couple of questions. First, just on the new categories, you talked about the air fryers and pressure cookers coming. Just curious, the timing, when we should expect to see these in the market? And is there any way to frame maybe the size of these categories relative to the broader market? That's my first question.

Hey, Peter, this is Scott. We have talked about air fryers. We currently have two air fryers in the market today. One under Proctor Silex and one under Hamilton Beach, and we've got three more that are coming in the third quarter. So we've got two different sizes out there right now, I think a one-and-a-half and a two-and-a-half liter with some larger capacities coming in the back half of the year. And we continue to see that category grow. Also, to go after that category, we see that -- we think that business will transfer a little bit into the air fry and oven category. And so we also work on new product development for that space as well. For the pressure cookers, we've got two pressure cookers coming out, one in the second quarter -- late in the second quarter and one in the third quarter. So again, a couple of platforms there that we'll be able to go after that size of business. That category has slowed down a little bit, but we do feel like that there's a good opportunity for us to come out with the two products that we have. We think we're priced competitively and we'll be able to get some decent distribution in the marketplace.

The next one is just around in a private label, which I know -- I think in the past you guys -- has been a big focus or even in this category necessarily. But just curious, I mean a lot of retailers working aggressively around private brands across their store. Curious kind of where you guys -- where your thought process is around private label, maybe remind us what you've done in the past and just how you're thinking about it going forward? Is it anything that's part of the plans that we should be thinking about? A - Greg Treppr So we -- this is Greg. So private label has been a part of small appliances for a long time. And sort of -- it's a little different than some other categories and mainly because once you put a plug on something, there are safety issues, there are performance issues. You need a product that cooks properly or works properly and then certainly, making sure you're understanding consumer needs and coming up with products that meet those needs. So what we sort of found is that the -- in the small appliance business, our private label will fluctuate between the low single digits -- I'm sorry, low double digits to maybe 15% to 20% of the market, but it has not pushed up past that in the past. So we assume that will continue to be the case. We definitely have participated with retailers in the past. And we currently do work with retailers in some areas on brands that are protected brands for them. We have some meaningful business with some retailers. So for us, it's certainly a part of our portfolio. It's one of the services we want to provide. But generally speaking, if it stays in that 10% to 15% range, we won't find a role for ourselves in a lot of the businesses given the cost structure that the retailers need. So my -- our belief is that it will sort be something that we participate in, but not tried here, at least in the near term.

Greg. So you're not seeing just like a notable change in some of your customers' desire to kind of -- to build out private brands further. Is that fair? A - Greg Treppr That is fair. Yes. We definitely -- many of our retail partners want a private label business as part of their portfolio for sure, but that's sort of been the case for a long time. So we don't see it changing in any way that's changing the whole industry.

And Peter, this is Scott. I do think we see some retailers are looking for more exclusive items. So we will create an item that might be for one particular retailer and have a different feature set or different -- for different retailers. So there could be exclusives, but it would be under our brand and not under a private label brand name.

That's makes sense, Scott. And then my last question, just on the revenue outlook within HB, I mean you're saying grow moderately now. I think you were saying increase modestly. My sense is that's an incrementally favorable comment, but just wanted to clarify that. And then just how do you think your '19 revenue plan compares to just the overall industry? What -- is there anything going on from an industry standpoint that's noteworthy in terms of what you guys are seeing or expecting for growth in 2019? Thank you. A - Greg Treppr Sure. So for the full year, I think where we are right now with worrying about customer decisions and watching other markets going, I think we kind of feel pretty much in line with what we talked about in the past. So any small changes in wording has not been intentional for the full-year view of things. But -- so we think we're -- from what we know now, we think we're in a position to grow. As we learn more about placements and promotional support, we'll adjust that outlook moving forward. In the overall market, I think what we've seen is -- we've done particularly well in a number of categories that we've been in traditionally. When you -- if you put pressure cookers and air fryers aside, we've held up very well and adjust to things like e-commerce and things. But we certainly are very focused on also entering that fast-growing part of the market to participate there and that ties into the products Scott brought up. So for pressure cookers and multi-cookers, as they finished the year last year, still very strong, very big, big share of business. That -- to Scott's point they are still growing and the growth has slowed noticeably. However, it's been a quarter or two not -- I think could sort of pick back up, who knows. Certainly very popular products, it's not rolling over, it's not tanking. So I think if the -- these fast-growing categories all sort of flatten out, maybe grow a little bit, maybe decline a little bit, we don't expect them to go through the roof again or tank. But they sort of stay modestly growing and modestly declining. Yeah, they could -- well, I think will be in a position to keep up with the market and hopefully beat the trend. If pressure cookers were to roll over in a big way because we -- the silver lining for not participating in that growth would have been that it wouldn't hurt us as it came down, so we would probably be ahead of the market. But I say as we stand right now, we're assuming that it's going to sort of soften to a lower growth rate, and our goal is to grow a little faster than the overall market.

[Operator instructions] Our next question comes from the line of Mitchell Lolley from Nixon Capital. Your line is open.

I was just wondering, first, if you guys could give a little bit more color on the accounts payable timing shift issue in the quarter. A - Greg Treppr Sure. As you go into -- Mitchell, this is Greg. As you go into the -- through the holiday season, each year, we have between -- we order in our inventory, we have -- depending on the time of the inventory sometimes the retailer will have a big event in September, October, November, depends on which ones we win. Sometimes, they'll do direct import, perhaps they will do through our warehouse system, so that affects when we buy it -- therefore our payables are when we receive it. And it's such a big part of the year that as that flows through the fourth quarter, it impacts when all those elements, the working capital, are coming to fruition during first quarter, second quarter. And a lot of times, this spills over into early second quarter. So as we look forward, we feel like we've made good improvement on our inventory, as Michelle said. And then as the payables work through the -- based on, again, the timing that we experienced in the fourth quarter, it really will just sort of roll off naturally in the second quarter and be in line with what we thought. So really, we naturally have a late first quarter, second-quarter movement of some of these things, receivables and payables. And I think we're sort of at a little point here where it moved a little bit on us, but it's just timing more than anything else.

And then another question I had is I noticed that operating losses at Kitchen Collection were almost -- they're about 14%, 15% lower year over year. Is that a pace of year-over-year improvement in operating losses that you think could hold for the rest of the year? A - Greg Treppr Well, we don't give specific guidance in that front. But last year was a performance we were not happy with, and we've -- the things we've talked about doing, closing stores and holding our margin in line and all those, getting out of stores that are causing a loss. We have a lot of that hard work coming to fruition this year. So our -- really, with foot traffic being the big wild card, we could see continued positive improvement versus the loss all year long. If the foot traffic, as we said earlier, gets better or gets worse, it's going to change it pretty fast. But we've assumed some level of foot traffic decline, and our goal is to keep working margin, expenses, etc, to make sure we improve in 2019 over 2018.

You just mentioned that changes in foot traffic can have a pretty dramatic and quick increase on the results. And that leads me to kind of my broader question, which is, why is it a good strategy in general to continue dragging around a money-losing asset that will never earn its cost of capital? A - Greg Treppr Well, we've talked in some of the past calls that we look at our business from a long-term shareholder value improvement point of view. And so as we look at all of our portfolio, whether it's parts of the Hamilton Beach business or The Kitchen Collection business, we're going to come up -- we're going to work a strategy that allows us to improve shareholder value over time. So as we work to improve Kitchen Collection, we could take steps today that would provide some short-term news, but wouldn't be the most shareholder-friendly way to make the business move to a different place. So what I will say is that we are being very focused and very deliberate and very strategic, but also very cold about the steps we've got to take to move both HB and KC to a better place. And so our view is that we got to keep working at this year and getting it to a much better place. So I think we don't view it as we're dragging things around, but we definitely know that we need to get that business and our whole business to a better place to help increase shareholder value.

There are no more questions at this time. I turn the call back over to the presenters. Greg Treppr And just a few last comments. So we are excited about the prospects for advancing our strategic initiatives in our Hamilton Beach Brands segment and for making further progress with our strategy to rightsize our Kitchen Collection store portfolio. As we've communicated, our company takes a long-term view and we are committed to building shareholder value over the long term. We remain focused on the innovation, initiatives and investments that are needed for the long-term success of the business. And before signing off, I'd like to note that in June, we are participating in the Baird Consumer Technology and Services Conference in New York. Our presentation is scheduled for Wednesday, June 5 at 3:10 p.m. and we hope to see some of you there. So with that, I will conclude our call today, and thank you for joining us.

As a reminder, a replay of today's call will be available as of 12:30 p.m. Eastern Standard Time. You may access the replay by dialing 1 (800) 585-8367 or 1 (416) 621-4642 and entering the passcode 8475297. This concludes today's conference call. You may now disconnect.