Hamilton Beach Brands Holding Company (HBB) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Hamilton Beach Brands Holding Company Q2 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the conference over your speaker today Lou Anne Nabhan. Please go ahead.

Thank you, Jaqueline. Good morning everyone. Welcome to the second quarter 2020 earnings conference call and webcast for Hamilton Beach Brands Holding Company. Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Senior Vice President, Chief Financial Officer and Treasurer will discuss our second quarter results. Also participating in the Q&A will be Scott Tidey, Senior Vice President, North America Sales & Marketing for Hamilton Beach Brands. Yesterday after the market closed, we issued an earnings release and filed a 10-Q with the SEC. Both documents can be found on our website, hamiltonbeachbrands.com. A replay of today's call will be available on the website this afternoon. 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 available in our earnings release, our 10-Q, and in our annual report on Form 10-K/A for the year ended December 31, 2019. 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'll turn the call over to Greg.

Thank you, Lou Anne. Good morning, everyone, and thank you for joining us. During the unprecedented time, since the COVID-19 pandemic began, Hamilton Beach Brands has effectively navigated the global crisis. Our focus has been on the safety and health of our employees, serving our customers and consumers, moving our business forward, making sure we emerge stronger when we get to the other side. A number of factors have positioned us well to maximize our performance, including our investments in brands, category expansion, our global infrastructure, and team members, our diversified retailer relationships, and years of investment in e-commerce capabilities have enabled us to meet strong consumer demand. We are fortunate to be a leader in an industry that is providing essential products to homebound consumers. Most households are engaging in far more food and beverage preparation than usual, breakfast, lunch, dinner and snacks every day. Our customers and consumers are counting on us to provide appliances they can trust, that work well, that last long, and that play a small part in making their lives a little easier. In mid-March, as the virus spread globally and became a pandemic, some of our customers in the retail business and many in the food service and hospitality industries temporarily shut down and the closures had an unfavorable impact on our business. At the same time, retailers in the U.S. who remained open, thrived as providers of essential products and e-commerce sales took off. In the second quarter, consumer demand in the U.S. and Canada was so strong that these sales -- that sales in those markets offset the declines in international consumer and global commercial markets. Michelle will review our financial results for the quarter, so let me say simply that our second quarter results reflected this demand as well as the benefit of cost containment measures. Through the first half of this year, our effective management of working capital also contributed to our significantly increased cash flow and reduced debt. Meeting the consumer demand that has occurred during the pandemic presents many new challenges and our team has done a fantastic job of rising to the occasion. I'd like to thank all of our employees around the world for the excellent work they are doing. Since March 16th, all of our employees who can work remotely have done so. They are conducting our normal business activities very effectively and will continue working remotely at least through the end of the year. Many of our employees are needed to work on-site in our distribution and customer service facilities and in engineering and research labs. These employees are doing critical work and we very much appreciate and value their dedication. We are taking many precautions to keep our on-site teams safe and healthy. We monitor their situation daily to ensure we balance the needs of the business and the needs of our team members. We continue to capitalize on our many strengths in the e-commerce channel, including our fast-growing direct-to-consumer operation. In the first quarter, our e-commerce sales increased 23% and accounted for 27% of total revenue. In the second quarter, our e-commerce sales increased 77% and accounted for 37% of our sales. We believe the substantial investment we've made in our e-commerce capabilities will continue to pay off. Our products are readily available in whatever channel consumers choose to buy. Our global supply chain is another area of strength for us and has been very critical to our success during this time. Our global sourcing organization has been very agile in responding to the demand surge. All of our third-party suppliers are producing at normal capacities and are working very hard to meet our needs. Our team in China ensures that our products are made to our safety and quality specifications and that we maximize production with our suppliers. I'll add that our consumer and commercial sales teams in China are working very hard to secure every sale possible as those markets begin to rebound. We're managing costs to preserve our financial strength. We asked everyone to batten down the hatches by finding ways to spend as little as possible, but to keep the business going. This includes minimizing discretionary spending and implementing a hiring freeze for most open positions. We will assess this loss on a go-forward basis. We continue to support the business with necessary capital investment for projects that can be deferred or have been. This effort has kept us on solid ground. In the U.S. and Canada, as consumer demand has surged, the small kitchen appliance industry and our company have experienced robust point-of-sale growth. Sales of Hamilton Beach Brands products had outperformed the industry, reflecting our leader position -- leading position in a wide range of categories, a considerable -- since considerable amount of demand is focused on the product categories where we're strong and the price points are in our sweet spot. Many U.S. consumers have demonstrated they prefer trusted brands, affordable price points, key features, and high star ratings. Our strategy in providing a broad portfolio of trusted brands, covering 50-plus categories, at price points ranging from value to luxury, has positioned us well in this current environment. Demand was particularly strong for our slow cookers, blenders, food processors, hand mixers, and coffee makers, among others. Demand has increased substantially for certain specialty appliances, such as bread makers, electric pasta makers, waffle irons and the Bartesian premium cocktail machine that we began selling in the fourth quarter of 2019. In fact, demand in the second quarter was so robust that it led to out of stock positions for certain product categories, which retailers are now starting to replenish. As the second half of the year begins, we also continue to see elevated demand. We believe the shift to eating at home will continue with many people continuing to work from home, many schools offering only virtual learning this fall, and a slow build in consumer confidence with eating out. Moreover, we believe that the new habits formed during shelter-at-home circumstances may lead to an increased preference for cooking at home. More people are learning new cooking skills. There's a heightened focus on healthy eating and wellness, and many believe they can better control ingredients and portions with home cooking. In the international consumer market, we're beginning to see improvement from the weak demand earlier in the year. Many retailers and consumers are just beginning to open up, the e-commerce channel is less developed in many countries, so while orders are starting to flow, we are less certain about how quickly demand will return. While our highest demand is coming from our retail customers, our commercial customers are beginning to order again. Although the commercial market remains weak, we are well-positioned to benefit from any rebound that may occur. Our food service customers are quickly adjusting menu choices and customer service options, and our core products such as blenders and drink mixers are an important part of the meal and beverage preparation for many customers. Additionally, our focus on expanding category participation has broadened our ability to generate revenue outside of the blender and drink mixer business. E-commerce strength also is expected to have a favorable impact on commercial sales when the pandemic recovery unfolds. On the other hand, our hospitality customers remain under significant pressure. Our consumer markets in the U.S. and Canada continue to drive our performance. While we do not expect the current robust consumer demand to be fully sustained over the long-term, we believe it will continue for the remainder of the year. Increasingly, it appears that many people will continue to be at home into 2021. It is challenging to project the demand for our industry in the coming months. However, it seems highly likely that demand should remain strong in the near-term. Innovation and new product development are proven strengths of ours over a long period of time. We have over 50 new products coming to market this year and we are working on over 100 that are scheduled to come to market in 2021 and 2022. Even with employees working remotely, our new product development process is working well. Our line reviews for the holiday selling season have gone well and we've held and gained placements. We serviced core group of large retailers who are experiencing above-average demand and strong sales in stores that are open as well as online. Let me address two more topics before turning it over to Michelle. Two weeks ago, we completed an investigation involving unauthorized transactions by former employees at our Mexican subsidiaries and filed restated financials with the SEC. With this behind us, we expect our performance in Mexico to improve, which will further enhance our total company performance in the coming quarters and years. While we are very disappointed that the situation occurred, it does not change the fundamental strength of our business. I'd also like to remind everyone that Kitchen Collections' net losses and negative cash flow no longer have an impact on our company. I think the benefit of closing the business through a successful liquidation has gotten a little lost in everything else going on this year, but I wanted to make a point that we are fortunate to have completed the wind down last year. We continue to hope that the favorable impact of this move will become more evident in our valuation over time. I'll now turn the call over to Michelle.

Thank you, Greg and good morning everyone. I'm very pleased with how effectively our team is navigating the COVID-19 pandemic. We've been able to play the many strengths during this health crisis and that is evident in our results. Our range measures to maintain financial flexibility continue in place, including eliminating discretionary expenses, implementing a hiring freeze for most open positions, and focusing capital spending on critical projects. We also continue to demonstrate strong working capital management and expect to continue to significantly increase cash flow and reduce debt. Let me review our second quarter results from continuing operations in 2020 compared to the second quarter of 2019. Revenue increased 5.5% to $138.3 million compared to $131.1 million. Excluding the impact of unfavorable foreign currency, revenue increased 7%. The U.S. consumer market continue to drive our overall results as homebound consumers engaged in more meal and beverage preparation during the pandemic. The Canada consumer market also experienced increased demand. Revenue in the international consumer and global commercial markets decreased due to the ongoing adverse impact of COVID-19 pandemic on the emerging markets and on the restaurant and hotel industries. In the U.S. consumer market, the industry and the company experienced robust point-of-sale growth. In the U.S., for the three months ended June 30, 2020, Hamilton Beach Brands remained number one overall based on units sold. Unit growth of the Hamilton Beach Brands outpaced the market and our Weston and Wolf Gourmet brands significantly outpaced the market. In Canada, where the Hamilton Beach Brand is number two based on units sold, growth also outpaced the market. Operating profit in the second quarter increased more than threefold to $10.9 million compared to $3.2 million, including higher revenue, the benefit of $1.6 million for tariff relief and lower SG&A expenses. The tariff relief is related to an exclusion that was granted for certain list three products, including air fryers and some ovens. This exclusion is scheduled to expire this month and efforts are underway to secure an extension. Gross profit increased $6.7 million or 23.7% due to the higher sales volume. Gross profit margin was 25.5% compared to 21.8% due to customer product mix and the tariff relief. Selling, general, and administrative expenses decreased to $24 million compared to $25 million due to lower overall spending, partially offset by expenses related to the investigation of accounting irregularities in our Mexican subsidiary. Cash flow before financing activities was $19.7 million for the six months ended June 30, 2020, compared to a use of cash before financing of $33.6 million for the same period in the prior year. The significant improvement is primarily due to improvements in overall results and net working capital as the result of effective inventory management and collection efforts of accounts receivable. Net working capital was a source of cash of $17.4 million compared to a use of cash of $18.2 million in the same period last year. Capital expenditures were relatively flat at $2.1 million. Net debt at June 30, 2020, decreased to $40.2 million compared to $80.5 million at June 30, 2019, as a result of the improved net working capital and significantly increased cash flow. Next, I'll comment on our capital allocation priorities. The Board has continued to approve the payment of dividends. However, there have been no share repurchases in the first half of the year. As we've previously discussed, we have increased our focus on pursuing acquisitions and strategic partnerships this year. If we find a good strategic fit at the right price, we believe we have the financial flexibility to do a small acquisition or partnership. Finally, let me turn to our outlook. We continue to believe we are well-positioned to effectively navigate the COVID-19 business environment as demand remains strong and our cost management measures remain in place. For the second half of the year, we expect total revenue to increase in the mid to high single-digits compared to the second half of 2019. We have more visibility into the third quarter and at this time; we expect a moderate increase in revenue compared to the third quarter of 2019. The increase will be driven by continued strong consumer demand as well as the fulfillment of significant incremental orders as retailers return to normal inventory levels, following out of stock in certain product categories. For the fourth quarter, we expect a modest to moderate increase in revenue compared to the fourth quarter 2019 based on holding and gaining placements and the strength of promotions planned for the holiday selling season, provided the current robust demand continues. Based on the current revenue outlook, second half operating profit is expected to increase 30% or more compared to the second half of 2019. As we meet the demand for out of stock replenishments and for the holiday selling season and execute using our recently implemented enterprise resource planning system in the U.S., timing of revenue could shift from the third quarter to the fourth quarter, as is typical in the second half. We completed the changeover to our new ERP system in July. As expected, our shipments during July were down compared to normal as we ramped up the new system. We expect August and September shipments to more than offset any shortfall in July. For the full year 2020, we expect to significantly see our goal of generating cash flow before financing of $20 million. That concludes our prepared remarks. I'll now turn the line back to the operator for Q&A.

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

Hello guys. Thanks for the details there on the call. I have two questions. One on the commercial markets. It sounded like you're starting to maybe see some signs of recovery there, but just maybe can you expand a little bit on any green shoots you're seeing from commercial? That's kind of my first question.

Sure. Good morning Peter, this is Greg. On the commercial side, the hospitality side of things remains very much under pressure. So, we're not seeing a lot of movement there yet, but that's a smaller piece of our commercial business, as you know. On the food service side, we are seeing -- our Asia business has begun to rebound. As you know, they were a little ahead or behind us, depending on how you look at on the impact of the pandemic. So, that is starting to pick up. We have a lot of food service customers who have figured out how to adjust their menus, move to more take out menus, and our appliances happen to work those. So, we're getting -- those customers are starting to open back up and try to pivot. We're starting to get more orders on the food service side. I would say that we've sort of -- in our outlook, we have assumed a slow rebound. And right now, I'm not confident enough to say it would be better than that. But I do know that, just talking to our customers, they're working very, very hard to compensate and get back on their feet. So, we're not counting on a robust return to business in the outlook.

Okay. Okay. Good, that's helpful. And just back to the commentary on kind of the third quarter and the fourth quarter. I understand there's still -- there's some shifts that can occur, and we appreciate all that. I guess, a couple of weeks ago, you guys had said maybe 10% to 15% growth in revenue for the third quarter. Now, you're saying moderate. I guess maybe that comment is just maybe a little bit less than the 10% to 15%, but I know the second half kind of view has still remained the same. Maybe that was reflective of the July experience. Is that the right way to think about it or anything else you want to add?

Fair question. I think we talked about it when the release time came on, is that we just tried to see what can we update versus repeat exactly. But really, more importantly, as we look across the back half when we're talking about how do we provide the most balanced view, the things that we still feel very, very good about are strong demand is there for sure. The need to restock is still there for sure. Our supply base is running well, so we have a strong supply here and coming. So, a lot of those core needs for delivering the outlook were there. But we've really stepped back and felt like maybe we should just focus on the back half as a total as we usually do. Just a few of those things that could happen that made us sort of talk about it at both quarters together. As you remember real well, Peter, that for Hamilton Beach and a lot of folks who follow, the COVID environment caused retailers to deemphasize certain categories and increase emphasis. And we just don't know what could happen as the COVID pandemic plays out with retailers. Retailers, some shut down and some thrived. We have -- we do have our new ERP system, so that -- we expected some things, some shortfall in July. We -- that's up and running. We're now moving to a much faster pace. So, that's part of it. But we have customers also who are increasing or decreasing their DI, direct import. If you direct import, you could skip certain aspects of the supply chain, maybe reduce risk for a retailer that could move volume into the third quarter, which would then really exaggerate the third quarter at the expense of the fourth quarter, which we would then find ourselves overpromising in results if that happen. And a big one is, as everyone knows, it's an election year. There's a lot of talk about China. And sometimes, things come out of the blue in terms of tariffs or things. And so we just felt like you just don't know what's going to happen between now and election days. So, we just felt like it's just better to go ahead and just focus on the back half because, again, the demand is there, the product's here, the restocking needs to happen. So, that those core things, I think, are going to keep us solid on the whole back half.

Great. Totally fair. Thank you for that. And then I guess my last question is just turning to gross margin. I don't know if you guys can elaborate a little bit more on the favorable channel mix shift impact that you saw. I understand there's some tariff wild cards going forward. But how sustainable do you guys view some of the margin gains that you're seeing here? What do you think is most likely to stick? What maybe falls off as you think about going forward?

Hey Peter, this is Scott. I can address that. The -- I think in the U.S. consumer business and Canada business, we continue to see the volume shift into some of our -- some of the customers and retail partners that we -- a little bit more profitable with just from a supply flow and just doing more volume. As you know, some of the more challenged retailers have had to close doors, had closed doors permanently, and some of those customers had just a higher cost of doing business, whether it be from a margin standpoint or from a promotional standpoint. So, we feel like the growth that we're getting and the variety that we have across our brands and our value propositions is going to allow us to hold our gross margins as we move forward.

Okay, all right. Great. Thanks a lot guys. And best of luck, we'll stay in touch.

Thank you.

Thank you.

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to your CEO, Mr. Trepp for closing remarks.

Thank you. I'd like to close today by recapping the many factors that give us confidence in our ability to continue to successfully navigate this extraordinary situation. Demand for small appliances in the U.S. and Canada remain strong. Our leading portfolio of iconic consumer brands ranges from value to luxury and covers more than 50 categories. Line reviews for the holiday selling season is doing well and we have held and gained placements, including for many new products. We have strong capabilities in the growing e-commerce channel. We're managing discretionary expenses and have demonstrated strong management of working capital, which has resulted in significantly increased cash flow and reduced debt. More than a century, our company has faced and overcome many challenges. While we have not dealt with the pandemic before, we are very fortunate to have experienced leaders who have managed through challenging situations in the past, including severe economic downturns. We have emerged from these challenges as a stronger company each time. We expect to do so this time as well. What this crisis has clearly demonstrated is what a strong global team our company has. We appreciate our employees' commitment in supporting our customers, while also working diligently to keep themselves and others safe. We remain committed to the safety and well-being of our employees and to meeting the needs of our customers and consumers as we all work together to keep our organization strong and agile. Thank you again for your time on our call today.

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