Good morning. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Beach Brands Holding Company Q2 2019 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.Ms. Lou Ann Nabhan, Head of Investor Relations, you may begin your conference.

Thank you Cheryl and good morning everyone. Welcome to the second 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 second quarter results and our outlook. Also present for the Q&A will be Al Rankin, Chairman of Hamilton Beach Brands Holding Company and Scott Tidey, Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands.Yesterday, after the market closed, we issued an earnings release announcing our second quarter 2019 results and filed a 10-Q with the SEC. Both documents can be found on our website at www.hamiltonbeachbrands.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 is included in our earnings release and 10-Q. 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 Ann. Good morning everyone and thanks for joining our call. My remarks will focus on the second quarter performance and back half outlook of our two business segments, Hamilton Beach Brands and Kitchen Collection.At Hamilton Beach Brands, revenue was $130.9 million compared to $135.9 million in the second quarter of last year. The decrease was attributable to lower sales in the U.S. consumer and global commercial markets, partially offset by growth in some of our international consumer markets. In our U.S. consumer business, e-commerce sales were up from last year, however brick-and-mortar sales of some retailers were soft. The lower revenue in our global commercial business was primarily due to timing of product shipments and new opportunities shifting into the second half of the year.Gross profit margin decreased to 21.2% from 22.4% primarily due to higher inbound freight costs and unfavorable currency movements. In the back half of 2019, we expect to deliver higher margins due to product mix and slightly favorable product costs and we continue to expect our full year 2019 gross margin percent to be comparable to 2018. Hamilton Beach Brands' operating profit was $3 million compared to $4.2 million for last year's second quarter, primarily attributable to the lower revenue.As you know, our business is seasonal and a majority of our revenue and operating profit is earned in the second half of the year when sales increase significantly for the full holiday selling season. For the past five years, on average, 60% of revenue and 86% of operating profit have been earned in the back half of the year. We are pleased with the placements and promotional support that we have secured for the second half and we expect operating profit to increase over last year.We are working on finalizing customer commitments and…

Thank you Greg and good morning everyone. After discussing our consolidated results for the quarter, I will review our outlook for 2019.Consolidated revenue was $148.4 million compared to $157.9 million last year and reflects the decreases in both segments, as Greg discussed. Consolidated gross profit was $35.7 million compared to $40.9 million last year. Consolidated selling, general and administrative expenses were $35.7 million compared to $40.1 million last year. The decline reflected the significant cost reduction at Kitchen Collection, from a decrease in net corporate expenses and from closing unprofitable stores.Hamilton Beach Brands expenses also decreased and in the second quarter, operating expenses were $24.7 million compared to $26.3 million last year. The decline was mainly due to the favorable impact of a $3.7 million decrease in environmental reserves at one of our sites and a $600,000 decrease in employee related expenses, which included a decrease in accrued incentive compensation driven by a lower market price of the company's stock during the second quarter of 2019. These benefits were partially offset by a one-time charge of $3.2 million for contingent loss related to patent litigation. The decrease in the environmental reserve is the result of a change in the expected type and extent of investigation and remediation activities at one of our sites.The company reported a consolidated operating loss of $306,000 compared to operating income of $384,000 last year. Operating profit at Hamilton Beach Brands was offset by an operating loss at Kitchen Collection. Consolidated net interest expense remained consistent with the prior year. While we saw higher average interest rates, the impact to interest expense was mitigated by lower average borrowings at Hamilton Beach Brands.Other income net in the second quarter of 2019 was $126,000 compared to an expense of $687,000 last year driven by foreign currency movements. We…

[Operator Instructions]. Our first question comes from Michael Fisherman from Zuckerman Investment. Your line is open.

Hi. Good morning.

Good morning.

I am sorry if I missed it, but have you stopped disclosing free cash flow by segment?

Yes, Mike, we have.

Could you maybe talk about your expectations for each brand for the second half, please?

I think we just said that we expected free cash flow for the Hamilton Beach Brands to be approximately or above our $20 million target, back in line with pre-2018 levels.

And what about Kitchen Collection? I am just trying to figure out how much free cash flow you guys expect to generate on a total company basis in the second half.

We expect it to improve compared to prior year for the Kitchen Collection segment.

So are you thinking maybe about $60 million of free cash flow for the total company for the second half?

Well, we haven't disclosed that number.

Yes. So I think just if you look at where we are today, Mike and our goal to get HB over $20 million, in case we do improve, yes, that will get you into the range of what the back half look like.

Okay. And what do you expect to do with those proceeds?

Well, we have talked in the past about our priorities. And so it really depends on the business facts as they present themselves. But basically, we have talked about reinvesting in our initiatives is the first priority. We are continuing to fund our dividend and this year, as we talked about, it's at a 6% higher rate. When the stock price is at a level that we think makes sense, we will continue to repurchase stock. And then if there's an acquisition opportunity that comes along, we would certainly use the cash for that reason.

And when I look back at the fourth quarter press release, I think you talked about Hamilton Beach Brand free cash flow being up. And I think in Q1 and now in Q2 you are seeing up significantly and I appreciate that exceed $20 million. Has something changed from when you gave the original guidance? Or that was the same?

Well, as we came into this year, Mike, as you know, our inventory levels were not the level we want. And so we felt like if we could achieve the management of the inventory and debt levels down that we thought we could, that that would just give us more confidence and clarity on the ability to reach our goal for the full year. And at the first quarter, we made good progress. We made continued good progress in the second quarter. So that puts us in a position where, as we model things out for the rest of the year, we feel more confident having that progress behind us.

Okay. And when you look at Hamilton Beach Brands, the business itself, with the first half and then what you are guiding the second half, maybe just explain why you expect things to inflect positive in the second half vis-à-vis the first half.

So one of the important things we needed to take care of in the first half of the year is to work with our retailers, see what programs and placements that we can secure, see what competitive activity goes on, see how the consumer is reacting to our products and our brands and our retail partners. And so as we firmed up the back half placements and promotions across our divisions, we have a clearer picture.So as we came into this first half of the year, we knew that we would be a little softer than last year, bearing on revenue and our profit. As we move into the back half of the year, based on those placements and promotions, our expectations were that we could have a much stronger year.Also, as Michelle mentioned, while we had a very nice third quarter last year, we had a fourth quarter performance that was lower than we would like it to have been. So when you put that all together, particularly with the more knowledge around the placements and promotions, that gives us an opportunity to feel like we are well positioned to have a strong back half.

Nothing in the release or the commentary on tariffs. Could you just talk about tariffs impacting your business from topline and gross profit?

Sure. On tariffs, right now, as the current set of tariffs exist, it's around 10% of our revenue. We have mitigated the impact of those through pricing. Sometimes the pricing is stuck, sometimes it is not. So we have adjusted that. But generally speaking, we have covered most of that tariff impact.With the delay or postponement, not sure exactly how to characterize the discussed remaining tariffs. While we were ready to take action if we had to, right now we have put those on hold and we will monitor what happens in the negotiations and how that impacts the tariffs going forward. So for now, we feel as if we have things under control on where they need to be and we will just have to be ready to react if the tariff situation changes further.

And now with, I know Hamilton Beach, it's a sell-in model. Given brick-and-mortar was down, obviously, in Q2, given the e-commerce strength, could you maybe give some commentary on the sell-through and what the inventory looks like in the channel?

Yes. Sure. This is Scott. I think if you look at U.S. consumer, you would see that the brick-and-mortar, there was a couple of retailers that have had some sluggish comps there. And I think we were seeing the results of that as some of that foot traffic was slower in some of those retailers. We just weren't seeing the pull through our typical core business.Overall, I think we are not loaded in with inventory in those channels and we think that we have looked at the back half of the year. We think that unlike last year, we had the issues with the e-commerce channel in the fourth quarter. We think that the strength that we have had in the first half of the year will continue to go forward in the back half of the year.

How much was e-commerce up in Q2? And what's changed in Q1 and Q2 versus what happened in Q4 for e-commerce?

We don't break out the e-commerce specifically, but we looked at both the first quarter and second quarter. That part of the business continues to outpace the brick-and-mortar growth in our industry and I think we continue to feel like we are well positioned in that. And so as a result, we are seeing growth as well with our core businesses and that's really in all of North America. We are seeing that in Canada, U.S. and Mexico.And then as we have discussed last year, in the fourth quarter, some of our bigger misses were some issues that we had on the online side of the business. And while we are still far from the fourth quarter, we feel like we are in a better position to avoid the issues that we had last year.

Okay. And I appreciate the added commentary on the Investor Perspective. The OTB growing 20% and I think you said that should continue. If that does, how much would that help get you to that 4% to 5% organic growth you mentioned in the release?

Yes. That certainly would help, Mike. We are really counting on probably mostly the e-commerce and the OTB and commercial initiatives to ensure we deliver that 4% to 5%. I think the acquisitions, obviously, is a tough one to predict. And the new category is one that we are pretty happy the way it's going, but it's really early on that one. So it has less of a topline impact yet. So certainly, OTB success is one of the top three or four areas to drive topline growth.

But how much is OTB as a percentage of Hamilton Beach Brands revenue in 2018?

We haven't broken that out. We have talked that is about a third of the industry and that we are just over the past three years started to move in that in meaningful way. But we have not broken out what the percent of our total is.

But if let's say you grow 20% per year, is that going to add 100 bips, 200 bips, 50 bips? Can you at least give some color on how much it would help grow your organic growth?

No. I think as each year-end comes up, we try to decide what's the additional color we want to add around some of these things. I think last year, we added a bunch more and we will sort of see how things go within this year, Mike. But right now, as we go quarter-to-quarter, we are not going to provide that data.

But clearly, given the current stock price, you bought some stock personally. It looks like the company actually repurchased some. The market clearly doesn't believe your Investor Perspective. So it would be helpful if you could just be a little more transparent. So maybe just disclosing OTB as percentage of sales, e-commerce as percentage of sales, emerging markets as percentage of sales and just quantify how much of those are going to impact your organic growth would be very helpful.

Okay. We will keep looking at all the things we disclose quarter-to-quarter and year-to-year. So I appreciate that input. And clearly, we deliver our back half like we think we will, we think that's going to help the stock price. But clearly, at the moment, it's not at a place that any of us are happy about.

And also, you brought up acquisitions. I think as Mr. Rankin's on the call, maybe I can get his perspective as well. But just given where your stock is, the multiple, the market not believing your Investor Perspective, the multiple of companies you are going to acquire, like why are you talking about being a buyer when maybe you should be talking about being a seller?

We are trying to build the business. So this is Al Rankin. We are trying to build the business. Over time, if we see opportunities that are fairly valued, we would use the free cash flow that we are generating to take advantage of those opportunities. It's really a pretty simple equation in that sense and one where we would try to continue to strengthen the company through the strategic initiatives that Greg has outlined and that are in the Investor Perspective.And we would be opportunistic. It may not be that the right opportunities will come along in this environment. I think for the time being, the most important initiatives are those that develop new products and build the e-commerce channel. And as I think Scott mentioned and Greg has mentioned, there's a lot of opportunity to build a business and build new categories ourselves in the e-commerce channel what in comparison, it's much harder to do that in the brick-and-mortar channel because shelf space is expensive and scarce from the retailer's point of view.When we are introducing new products, such as the electric toothbrush, we can develop a first-class product and then manage its promotion and sales development through the online channels. And I think, as a practical matter that is going to continue to be a major focus of building value in the company. On the other hand, the company will continue to be opportunistic if something does come along.

But Al, I am just curious. When you look at to maximize shareholder value, are you juxtaposing the execution of this Investor Perspective plan versus what you could sell the company for?

You know, we don't think about selling the company in any active way. The objective is to build shareholder value through continuing to own the company.

Okay. Greg and do you have any comment on that?

I think Al said it very well.

Okay. And then I noticed on Kitchen Collection, I think you have already lowered the amount of stores. I think it was 100 to 150, now it's 100 to 135. Is that something that you think is going to continue to happen?

Well, I think as we execute the strategy we have been saying all along, which is we are going to take it store-by-store and as we go through the negotiations, see how the stores perform, we are going to keep adjusting that range based on what stores can return profit. So I would imagine you might see that range stay the same for a couple of quarters. You might see it change when we know more.We are talking to landlords as we speak. So as each month goes by and negotiation goes by, they will affect the projected number. But right now, based on where we stand, we think that 100 to 135 is our best view as of today.

All right. Thank you.

Okay. Thanks Mike.

[Operator Instructions]. Our next question comes from Todd Lechtenberger from Amalfi Investments.

Hi guys.

Good morning.

I just want to kind of follow-up since Al is there. Have you guys thought, the Board and the company collectively, but it seems like there's a lot of opportunity on the brand side and a lot of growth potential and you talked about emerging markets and talked about e-commerce, about just selling the Kitchen Collection side of the business and focusing where your strengths are in the broader scheme of things? Growth is going to be on the brand side. And even right now, if you just sold the company, if there was a buyer, if you just gave it away, I mean, operating cash flow would increase by 20%. So has there been any thought around that? I know you are trying to right-size that business, but it just seems like a lot of work for a very little incremental potential income and the ROI, the ROC or however you want to think about it will be a lot higher with that cash flow and those resources being utilized to the brand side.

With all respect, I think you have got the equation upside down. We have to manage the Kitchen Collection business. There is no buyer. It's a very, very difficult and troubled industry. The whole mall environment is difficult. The key is lowering rental rates to make the stores more profitable and adequately profitable. And in the meantime, as Greg has pointed out previously, we are managing down the liability exposure in the business, which is particularly related to leases that extend out for more than one year and also the inventory levels represent some exposure.So we believe that the most prudent way to manage the business is to manage the capital down on a consistent basis and to enhance our flexibility by entering into no leases longer than a year. And as Greg has indicated to you, we will not sign up on a lease, unless we think the store is adequately profitable. And that equation will work itself out over time. It's one we have to manage in a prudent way. There's no way to walk away from it.

Okay. Fair enough. And is there any kind of forward for the third quarter and the fourth quarter about what you guys see in terms of the number of stores in Kitchen Collections that will be shut down? Is it too early to look at those?

Well, let me just reiterate what Greg said, which is that the discussions with the landlords are going on as we speak. We are being very prudent about how we handle the ultimate decision on which stores to continue to sign up. We will assess that. But let me say, in addition, just to put it in perspective, that the Hamilton Beach Brands' Board meets separately with the Kitchen Collection business and with the Hamilton Beach Brands business.And in that way, the Board is very closely involved with the efforts to deal with the difficult mall store environment, particularly in housewares category but also in many others and is paying a great deal of attention to the overall program to sign up only stores that can make an adequate profit as we look forward and to bring down the central headquarters' overhead expense at the same time. So it is certainly too early to say how all those negotiations are going to come out. But Greg has given you pretty clear guidance as to what we think a landing point might be.If things deteriorate further, that would change those numbers. If more footsteps to the malls occur and there's a leveling out of the declines, that, again, would lead to a change in the number of stores. So all of those are sort of work in process at this time. And as we develop clearer perspectives, we will include them in the future earnings releases.

Okay. Thank you very much. I appreciate it.

Okay. Thank you.

Thank you. Our next question comes from Michael Fisherman, Zuckerman Investment. Please go ahead. Your line is open.

Sorry. Just to follow-up on Kitchen Collection. I know what your strategy is on winding it down over time but clearly the negative free cash flow is hurting the stock. I just wanted to get your thoughts on, Greg, your compensation, your long-term compensation not being tied to Kitchen Collection and just seeing do you think that's fair for shareholders.

Well, let me just interrupt and say that's not an accurate assumption on your part. Greg's compensation is very much tied and so is mine. And in fact, anyone who is on long-term incentive plan and receiving stock in the company is tied to it because the management is required to hold those shares for a significant number of years. And to the extent that the results in Kitchen Collection can be improved or the losses avoided, presumably the value of the stock will increase. So there is a very direct involvement in Kitchen Collection that affects the compensation worked out over the long term in terms of the way that our compensation system works.We feel that's extremely important because the whole concept behind granting restricted shares, which are entirely owned by the executive but which cannot be sold for a certain number of years, is designed to ensure that the executive's long term interests are aligned with the shareholders in having maximum long term value. So I think that everybody's very much tied to Kitchen Collection. And the important thing is, if we are winding down the number of stores to an appropriate level, whatever that may turn out to be in an orderly way and managing the business in a way that the Board concurs is the most reasonable way for us to manage it.

But hold on a second, Al, because if I look at is, I hear what you are saying about the stock going up or down. But the truth is performance criteria for Greg's long term comp is brands, sales and HBB operating profit. There's no performance criteria for Kitchen Collection and that's what I am asking about. Why?

And that's the answer I gave you and I am going to leave it at that. We have outlined this in great detail, as you know and we have answered your question individually for you at prior times. And I think it's quite fully outlined in the proxy. And the perspective of the Board concurred in by the management is just what we have outlined. I am going to leave it at that.

Okay. Thank you.

[Operator Instructions]. I don't show any further questions in the queue at this time. I will turn the call back over to Greg Trepp for closing remarks.

Thank you. I would like to leave you with a few key takeaways. We are pleased with the progress we are making, ensuring that our inventory, debt and cash flow are returning to historical levels. Based on our plans for new product introductions and customer commitments for the holiday selling season, we expect the back half that is strong enough to deliver a 2019 that will keep us on our path toward our long term goals.In the second quarter, we returned capital to shareholders in two important ways: our dividend increased by 6% demonstrating our confidence in our 2019 outlook, our cash flow generation and financial position. And we have repurchased shares, as Michelle reported.We are excited about our prospects for advancing our strategic initiatives in our Hamilton Beach Brands segment. And at Kitchen Collection, we expect to make further progress with our strategy to improve its financial performance. And really, a key point, as always, is our company takes a long term view and we are committed to building long term shareholder value.So with that, I will conclude our call today. Thank you for joining us.

Thank you very much, ladies and gentlemen. The recording for this program will be available as of 12:30 P.M. Eastern Time. Please dial (800)-585-8367 or (416)-621-4642 and use the passcode 7837809 to access the recording. This concludes today's program. You may now disconnect.