Ladies and gentlemen, thank you for standing by, and welcome to the Hamilton Beach Brands Holding Company Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Lou Anne Nabhan, Head of Investor Relations. You may begin. Thank you.

Thank you, Lindsay, and good morning, everyone. Welcome to Hamilton Beach Brands Third Quarter 2020 Earnings Call and Webcast. Yesterday after the market closed, we issued our earnings release and filed our 10-Q. Copies have been posted to our website. Our speakers today are Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Senior Vice President and Chief Financial Officer. Greg and Michelle will discuss our third quarter results and outlook. Also participating in the Q&A will be Scott Tidey. Scott is our Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands. Our presentation today 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, 10-Q and 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. Thank you for joining us. I will provide color on the third quarter in a moment, but first, I'd like to focus on the underlying strength of our business. We delivered a solid first half. While third quarter results were disappointing as a cutover to our new ERP system temporarily reduced shipping capabilities at our U.S. distribution center, we expect the elevated demand from our consumers -- our customers to remain strong over the back half of 2020 and at least into the first quarter of 2021. A large portion of the third quarter revenue shortfall is expected to shift to the fourth quarter as we focus on maximizing our shipping capabilities to capture as much of the market demand as possible. Based on early fourth quarter results, shipments are ahead of last year. The ERP-related shipping challenges have been resolved and are behind us. While the cutover was more difficult than expected, we now have a system in place that is more efficient than our decades-old legacy system, which will benefit us in future years. The small kitchen appliance market in the U.S. and Canada is growing at a rate of approximately 30% compared to 2019, driven by consumers who are sheltering at home during the pandemic and engaging in far more than usual meal and beverage preparations. We expect this demand to remain elevated into 2021 as the pandemic continues to keep people at home. Hamilton Beach Brands is well positioned to meet the unprecedented demand. Customer order levels are high, and we have the necessary inventory on hand and more in transit to meet this demand. We've been increasing the in-stock levels with our customers and shipping product at elevated levels. We held and gained placements for the holiday selling…

I, too, am very pleased with how our entire organization has faced and overcome the many challenges of 2020. Our teams have our deepest appreciation for the excellent job they're doing to fulfill customer orders at a time of unprecedented demand for our products. Throughout this year, we've maintained a range of measures to ensure financial flexibility, including eliminating discretionary expenses, implementing a hiring freeze for most open positions and focusing capital spending on critical projects. We have demonstrated effective working capital management and expect to continue to increase cash flow and reduce debt. We remain disciplined, yet opportunistic in our expense and capital investment approach, focusing on maintaining a strong balance sheet to ensure we have the necessary flexibility as we navigate these uncertain times. Now let me review our third quarter 2020 results from continuing operations compared to the third quarter of 2019 and discuss our outlook. Total revenue decreased 26%. The main reason for the decline was lower sales volume in the U.S. consumer market, which occurred as a result of greater-than-expected challenges implementing our new ERP system. While unprecedented demand continued, the cutover to the new system temporarily reduced shipping capabilities at our U.S. distribution center. Additionally, constraints in the transportation industry also adversely affected shipping capabilities. The shipping hurdles related to ERP are resolved and behind us, and operations at our U.S. distribution center are operating effectively. In the international consumer and global commercial markets, lower sales were expected and driven by pandemic-related demand softness. In the Canadian consumer market, sales volumes increased as we expected. Our operating loss in the third quarter was $2.4 million compared to an operating profit of $4.4 million last year. Gross profit declined due to lower sales volume, however, gross profit margin increased 80 basis points from customer and…

[Operator Instructions] Our first question comes from the line of Peter Benedict with Baird.

A couple of questions. One, just on the fourth quarter revenue growth. It seems like it's implied up around 20%. Curious how much of that is recapturing some of the lost sales from 3Q versus kind of future reorders expected from retailers given the strong demand? That's my first question.

Peter, this is Greg. It was tough to put an exact number on that, but we certainly are still restocking shelves with certain customers, which we were hoping to do more of that in the third quarter. And there is some business that went to other competitors who had product in the shelves or online. But we have some very big promotions and programs in place with retailers that were going to ship in the fourth quarter and will continue to. So it's hard to put tough -- a hard number on that, but certainly, there is a significant amount of the third quarter that will flow over into the fourth quarter. We'll get as much out in the fourth quarter as possible, and some of that might -- if it sells through as well as we expect, there could be continued restocking going on in the first quarter.

Okay. Okay. And then just can you maybe talk a little bit about the shape of recovery you're seeing in the commercial markets, which is obviously interesting given lockdown, reopening, kind of the give and take from that. But it sounds like you're starting to see some commercial -- some life in the commercial markets. I don't know what else you can share, where you're seeing it and what your expectations are for that part of your business as you look going forward?

Sure. So the U.S. market is doing better than Europe. Europe continues to have, as you said, some pretty significant activity on locking down on and off again. Also, the European market is not as developed when it comes to drive through and take out as the U.S. has proven to be. So in the U.S. market, after a period of completely being shut down, the customers are preordering to get their facilities going in, some menu items are rolling out again, not a lot, mostly it's keeping -- or modifying their -- how they run their operations more than it is adding new menu items yet. But just modifying as required them to keep investing in replacing equipment or upgrading equipment, et cetera. So we're seeing better rebound in the U.S., slow rebound throughout Europe, but some rebound as they've opened back up and actually a pretty decent movement in China.

Okay. That's helpful. You mentioned the shipping constraints, separate from the ERP situation. Maybe just expand on that a little bit more. I mean you mentioned kind of it's inbound, it's out by -- it feels like it's all over. Just how are you guys kind of addressing that? Again, you mentioned a little bit of this in your prepared remarks. Just curious how you kind of see the, I guess, the shipping challenges or -- as we look -- particularly as we go through the holiday, just as -- and when we have the -- if there's going to be a big increase in e-commerce like there has been for the last several months, that obviously elevates the pressure on shipping channels when you get to the holiday when volumes naturally lift anyway. So I don't know. Just curious kind of how you see it and your level of confidence you can get the product where it needs to be for the holiday season?

Peter, this is Scott. I think that's -- we've got a number of different areas where the supplies have been -- supply chain has been challenged. We start with where our goods come from in China. We've definitely seen out of a number of ports over there, sailings that have been delayed for a couple of weeks. But we do have a lot of inbound inventory and a lot of inventory in our distribution center. If you look at last year at this time, we had most of our retailers that were probably picking up and sending equipment to pick up their orders on our docks in 24 to 48 hours. We now see that can be anywhere from 2 to 10 days to try to get that equipment in. So it is -- there is some congestion on our docks. I do think we're well positioned on the e-commerce side. We worked through a lot of those constraints. Our ability to ship a lot of units out of our distribution facility is certainly there, and we're ready for that increased demand. And we don't think that has the same challenge as to getting some of this inventory to some of our retailers when they're trying to get equipment. So I think that -- I think the challenges will continue for a couple more weeks on the inbound side and on the outbound side, and then we'll start seeing some relief in December.

Okay. Okay. I guess just the last one. I know on the last call, the ERP system has now come up a couple of times. And look, you're not the first company to have experiences with ERP implementations. Just -- what gives you the confidence that we now are kind of past this, and we're not going to hear about this in 3 months, but anything you can tell us that would give us confidence that, that's going to be the case?

Sure, Peter. So when we all met or had the call last time, we were working through some of the challenges and really had a work plan and a game plan and people had assignments and all the things you do to kind of say, okay, here's where we think this is going to play out. And just some of the surprises and persistent challenges getting some of those requirements fixed just took longer than we thought and then really just kept backing us up. So I think the good news is when you look at how we have performed in September, specifically in October, as we ship day-to-day-to-day, we're just not having those issues like we were back in August. So then it became more about how do you catch up and how do you deal with some of the congestion. But on a day-to-day basis, we are just -- we're -- the facility is running really well, and it's not being impacted by the ERP system in a negative way.

[Operator Instructions] And there are no further questions in queue at this time. I'll turn the call back over to Mr. Trepp for closing comments.

Thank you. It remains a challenge to manage through the COVID-19 situation. However, we have demonstrated an ability to successfully navigate the global pandemic. While we have not dealt with the pandemic before, we have managed through challenging situations in the past and emerged as a stronger company each time. This crisis has clearly demonstrated what a capable global team our company has. 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 agile and able to respond quickly to changing needs and circumstances. In addition to benefiting from the ongoing unprecedented demand for small kitchen appliances, as people continue to shelter in place, our industry is increasingly optimistic that the new habits that have been formed will drive healthy post-pandemic demand. All this is in our sweet spot, and we are optimistic and excited about the future of our business. Despite some challenges we have faced and overcome this year, all signs point to finishing this year strong and continuing momentum into 2021. Thank you again for joining us on our call today.

This concludes today's conference call. You may now disconnect.