Hamilton Beach Brands Holding Company (HBB) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Hamilton Beach Brands Holding Company Q4 2020 Earning Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lou Anne Nabhan, Head of Investor Relations. Thank you. Please go ahead.

Thanks Jason. Good morning, everyone. And welcome to our fourth quarter 2020 earnings call and webcast. Yesterday, after the market close, we issued our fourth quarter 2020 earnings release, and a copy is available on our website. Our speakers today are Greg Trepp, President and Chief Executive Officer; Michelle Mosier, Senior Vice President and Chief Financial Officer. Greg and Michelle will discuss our fourth quarter results and outlook. Also participating in the Q&A will be Scott Tidey, 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, and in our SEC filings such as our annual report on Form 10-Q and for the year ended December 31, 2019 and our Form 10-Q for the period ended September 30, 2020. The company disclaims any obligation to update these forward-looking statements, which may or may not be updated until our next quarterly conference call, if at all. And now I'll turn the call over to Greg.

Thank you, Lou Anne. Good morning, everyone. Happy Saint Patrick's Day. And thank you for joining us. I'll first discuss our fourth quarter results. We are pleased to finish the year 2020 on a strong note. Revenue in the fourth quarter increased 14.4%, operating profit increased 49% compared to the fourth quarter of 2019, mostly due to higher sales and gross margin expansion. Our revenue growth was driven by the strength of our U.S. and Canadian consumer markets, as well as the timing of some revenue shifting from the third quarter into the fourth quarter. Sales in the U.S. and Canada increased year-over-year and were greater than we anticipated in our outlook. And certain of our international consumer markets and in our global commercial market pandemic-related issues continued to suppress sales. Revenue from these two markets decreased compared to the same period in 2019, and was below what we anticipated in our outlook. Here at Hamilton Beach Brands, we have a talented, experienced, creative and dedicated team. Our people have deep consumer, customer and industry knowledge. I am very proud of our team and all they have accomplished during extremely challenging conditions. They are what gives me great confidence in our future. We entered 2021 building on continued strong consumer demand for small kitchen appliances. Our many competitive strengths reinforce our position. These include the value of our brands and products, strengthened operating capabilities, including important investments in information technology, as well as continuing to execute on our strategic initiatives. We are well positioned to build on these strengths as we focus on our commitment to build long-term shareholder value. In our U.S. and Canadian consumer markets, we expect demand to remain strong in the first half of this year, as consumers continue to shelter-at-home and cook more than ever before. We expect to see consumers continue to cook at home after the pandemic more than they did before the pandemic, as new habits have formed. We also believe demographic trends support our expectations for continued demand growth. Millennials are moving into the household formation and family phases of their lives, boomers are retiring and moving to new homes or remodeling, both trends create durable, ongoing demand for small kitchen appliances. We’re capitalizing on the strong consumer interest in cooking, trusted brands and digital engagement. Our alignment with these consumer trends combined with the breadth of our portfolio, positions us well for continued growth. In our international markets, while certain trends lag the strength of the U.S. and Canada markets, we expect the Mexico and Latin American markets to rebound this year as more people gain access to vaccines and economies begin to recover. In our global commercial market, the food service was arguably one of the hardest hit by the pandemic. Parts of the food service business began to recover in the second half of last year. Quick-serve restaurants have fared well, while some casual and fine dining restaurants have found success with takeout, curbside pickup and delivery models. As consumers begin to go back out, they expect food service will rebound, although not likely at full pre-pandemic levels in 2021. Hospitality industry is expected to be slower to recover as many consumers remain reluctant to travel. I'll note, however, that demand for certain of our products has been strong during the pandemic. For example, our in-room coffee makers have been in demand as lobby and dining service are not available in many hotels. We’re executing on several strategic initiatives that are designed to build long-term shareholder value. In 2020, we completed a detailed review of all our initiatives, which resulted in changing some initiatives and continuing or increasing focus on others. We continue to make progress with our initiatives and expect to benefit from these efforts in 2021. A key to our continued success is our ability to leverage our trusted, well-recognized, flagship brands, Hamilton Beach and Proctor Silex, particularly in the North American marketplace, where they have been competing successfully for over 100 years. We are reinvesting in these brands to keep them strong and fresh through new product development, refresh packaging, and online content, new digital marketing, and social media campaigns, all with the aim of driving conversion. In 2020, Hamilton Beach was once again, the number one brand in both the brick-and-mortar and ecommerce channels based on units sold. We intend to maintain and grow this position. We plan to drive growth of the Proctor Silex brand with a new, simply better positioning. We recently launched four products in core categories, and we'll have more coming in 2021 and beyond. This new product group merges sleek design with superior performance and durability, a key supporting element as investments in digital marketing. Ecommerce growth accelerated significantly in 2020, which we were well prepared for as a result of our past investments. We expect increased online shopping to continue and we are well positioned for opportunities still ahead. Online ratings and reviews are the lifeblood of ecommerce sales in all nine of our brands average of four-star rating or better. We're supporting growth in this channel with digital marketing programs, expansion of our direct-to-consumer distribution operation and increasing our participation with pure play and omni channel customers. Our direct-to-consumer sales in 2020 significantly exceeded 2019 as we invested in process and infrastructure improvements that enabled us to increase output by over 50%. We continue to increase our participation in the global commercial market. Pre-pandemic, our global commercial products had achieved a compound annual growth rate of more than 5% since 2010 and accounted for 8% of total revenue. While we expect the global commercial market recovery to take some time, we are very optimistic about its potential and expect it to return to growth in 2021. We are investing in new commercial products and expanding our offerings across areas of the kitchen. We’ve also invested in digital marketing and ecommerce we strengthened our partnerships with regional and global chains. Overall, we expect strong revenue and profit growth in our global commercial business in 2021. We continue to expand our presence in the premium market with new product development and by pursuing partnerships and licensing agreements. Our newest entrants in the premium market is the Bartesian cocktail dispenser, which we market through an exclusive multi-year agreement. Bartesian is the first of its kind to use flavored capsules to create a premier mixed drink at home. In its first full year Bartesian received very strong customer responses. Our goal is to double our sales in 2021 and launch the next generation of machines for both the retail and commercial markets. Our Wolf Gourmet team launched the stand mixer in 2020 and in 2021 we're introduced – introducing a high performance electric kettle. For CHI, we continue to gain new distribution both in Canada and in the U.S., CHI has become a number two iron brand in the over $40 category with a 40% share. In 2020, we launched the new Touchscreen Iron and a handheld steamer. This year we will introduce a larger steamer and additional products to round up the line. We continue to build out our Hamilton Beach Professional line, which leverages our commercial expertise for home cooks, have upgraded our existing ovens and toasters, launched a stand mixer, food processor and conical burr grinder and have just introduced a coffee maker and juice extractor. We continue to create products for new categories that leverage our strengths of sourcing, marketing and distribution. This year we're increasing investments in new opportunities in the home, particularly in the large and fast growing, health and wellness space. Two examples of this include expanding our air purification offerings and entering the water filtration category. We're pursuing additional health and wellness opportunities that we expect to be able to discuss in the coming months. Certain emerging markets have experienced greater challenges from the pandemic and our outlook is uncertain. After assessing the potential for growth in emerging markets we are pivoting to a licensing model from a company managed model in countries, such as Brazil, China and India. This change will result in reallocating certain resources to focus on our North American market while others will be eliminated. Commenting further on current business conditions, we're managing through rising product costs and shipping congestion persists. The congestion challenges are in response to record-setting import levels for most industries and imbalance with containers and the inability of ports and rail yards to handle the volume. We ship most of our needs using a contract rate but we are shipping a percentage of our needs at the higher spot rate. We're planning for the high import volume to continue through the first half at a minimum. We are taking a number of steps to manage costs as we had in the past. The company has many strengths that enabled us to successfully navigate the pandemic, our investments in talent, global infrastructure and our strategic initiatives of serving as well. One of our most important investments is a new product development this is truly the lifeblood of this business. In 2020, we introduced nearly 70 new products, even with employees working remotely. We plan to introduce 100 more new products over the next 24 months. Our new products will cross a wide range of brands, price points in categories, leveraging our leading brand portfolio in markets around the world. I will now turn the call over to Michelle, who will review our financial results for the quarter.

Thank you, Greg and good morning everyone. Let me review our fourth quarter 2020 results from continuing operations compared to the fourth quarter of 2019 and discuss our outlook. Total revenue increased 14.4% to $234 million compared to $204.6 million due to the continued strong demand in our U.S. and Canadian consumer markets. Additionally, timing of some revenue shifted from the third quarter of 2020 into the fourth quarter. In our international consumer markets, revenues decreased as consumers in many countries struggled with economic challenges resulting from the COVID-19 restrictions and business closures, more so than they did in the U.S. and Canada. In our global commercial market, fourth quarter revenue decreased due to significant challenges in the food service and hospitality industry, as dining out and travel have declined significantly during the pandemic. Gross profit margin increased to 23.3% compared to 20.7% primarily due to the sale of higher price and higher margin products, particularly through the e-commerce channel. Selling, general and administrative expenses increased to $25.9 million compared to $23 million, mostly due to increased incentive compensation and outside services. Operating profit increased 49% to $28.4 million compared to $19.1 million. Net income increased $19.4 million or $1.40 per diluted share compared to net income of $13.3 million or $0.98 per diluted share last year. Now let me provide some brief comments on the full-year 2020. Our sales through the e-commerce channel increased 30% and accounted for 32% of total revenue. In the fourth quarter of 2020 sales through the e-commerce channel accounted for 41% of total revenue. We continue to develop expertise and take actions to position ourselves to gain share in key e-commerce markets with a focus on the U.S., Canada and Mexico for retail and globally for commercial. Revenue from our premium products increased 12% in 2020 and accounted for 11% of total revenue. We plan to continue our robust new product development efforts and pursue additional partnerships in licensing agreements to further expand our presence in the premium market. Revenue from commercial products in 2020 decreased by 37% and as a percentage of total sales revenue from commercial products dropped to 5% due to the devastating impact of the pandemic on the food service and hospitality industries worldwide. In 2020, we strengthened our position to participate in the rebound of the global commercial market, including investing in new products, expanding digital marketing and building our customer partnership. Use of cash before financing activities in 2020 was $31.7 million compared to use of cash of $3.9 million in 2019. Net working capital increased at $59.9 million due to an increase in inventory and trade receivable, partially offset by higher accounts payable. In combination with longer shipping lead times due to congestion in the freight supply chain globally and the need to source product in advance of the annual Chinese New Year shutdown, we built inventory in anticipation of sales growth in the first half of 2021. Higher trade receivables reflected the timing of collections. We expect net working capital, cash flow and our debt level to improve significantly in the first half of this year. Net debt at December 31, 2020 was $95.9 million compared to $56.4 million at December 31, 2019, reflecting the changes in net working capital. Throughout the year we demonstrated effective management of net working capital with average debt outstanding down $11.6 million compared to prior year. In November, 2020, we amended and restated our credit agreement to extend the term and increase the size of the facility. Now let me turn to our outlook. We continue to believe we are well positioned to effectively navigate the ongoing COVID-19 environment as demand remains elevated and our cost management measures remain in place. For the first half of 2021, we expect moderate revenue growth compared to the first half of 2020. Operating profit is expected to increase from the prior year period despite higher material and shipping costs. In the first half of 2021, we expect to record a non-cash charge of approximately $2 million related to the deconsolidation of our Brazilian subsidiary. We do not expect any additional significant charges due to our change to the licensing model in certain emerging markets. Visibility into the second half of 2021 is limited due to uncertainty regarding the timing for the pandemic to diminish. While capital expenditures related to our ERP system are behind that, we will be moving to a new distribution center in the second quarter. Capital expenditures net of any allowances are expected to be approximately $8.4 million and include costs for a new DC as well as normal level of spending on tooling and maintenance CapEx. For the full year 2021, we expect improved performance compared to 2020 as a result of progress made with the challenges experienced in 2020 related to our Mexican subsidiaries and the cover over to our new ERP system. Beyond this expectation for significant upside to performance, we'll defer any outlook for the full year 2021 to a later time. In the pandemic altered work environment that we've been operating in for the past year, the resiliency of our workforce has been very impressive. We greatly appreciate everyone's efforts to remain safe and productive. We believe our global workforce and our business are well-positioned to manage the pandemic as it begins to recede and to come out of it in a very strong-position. 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 Justin Kleber from Baird. Your line is open.

Hey, good morning guys. Hope everyone's doing well. My first question is just on inventory at your retail partners and thinking specifically about the U.S. and Canadian consumer side of the business, how do in-stock levels look today and have we reached a point where sell-in and sell-through are starting to become more balanced or is demand still outstripping supply?

It's Scott. Yes, so both with the U.S. and the Canada markets, I think that the retailer's inventory is still moving very quickly in general for small kitchen appliances. We also think with the stimulus checks going out in the U.S., there will be some pretty strong demand here coming up in our categories over the next four to six weeks. So we're still pushing to try to keep them in stock. I think, the whole industry is trying to keep the product on the shelf and with the additional transit time and some of the challenges coming out of China, we're all working to try to make sure we've got the long – we've got – we're making sure we're putting our purchase orders in well in advance that we can get the product out of China and be able to react to these kinds of trends that continue to happen in the marketplace.

Okay. Thanks for that color, Scott. Maybe just, you mentioned the increased focused on e-com just a few questions on that front. Can you remind us the size of your DTC operations today? I assume it's pretty small, but just any color there? And then how you manage pricing and promos on your own sites versus what you see on your retail partners’ web properties?

Justin, this is Greg. So two parts there, so on the first part, I know you know this, but we have sort of two ways we support the e-commerce customers or demand. One is we'll go through a retailer who has their own e-commerce site and that's the majority of our business. Some of those customers, we ship truckloads to and they take care of everything from there and some will drop orders to our facility and we'll fulfill it from our facility. So that's what we will internally sometimes call direct-to-consumer. So right now the vast majority of our revenue through e-commerce channels were through that, sending product to these retailers, but we do have a very fast growing important business that is this sort of drop-ship or DTC business. As far as our own website, it is very, very small and a lot of – we sell a lot of parts on there or some product maybe that is consumers are struggling to find somewhere else. So it's more specialized sales than anything really robust, so most of its coming through retail partners. As far as promotions and pricing, I think I you want to touch it upon.

Sure. Yes. So on the promotion side of things, we look at – and we work with the retailer just like we would with a brick and mortar retailer to determine what are the best promotions, we're focused on the categories that seem to be really strong, so there's a lot of consumers that they're baking right now in their homes and we're looking at those consumer trends. And then we're focusing on promoting those products that would support these trends with these accounts. The duration can be a little bit different, with online, if they're not a brick and mortar account they've got more flexibility so we can increase or decrease the duration of that promotion based on what we see as the ROI on that. And then if it's a brick and mortar account, a lot of these promotions, if it's an item that's in their store as well would be thinking with the promotion that we're doing in store. So a lot of flexibility to promote online and really just focusing on maximizing the right price point and working on the right trends where we see the consumers are shopping.

And then the comment on increased participation with pure play and omnichannel customers, are these new accounts or are you guys just deepening your relationships with your existing partners?

In most cases, we're deepening our relationship with existing partners. As we continue to expand more lines into the premium side of the business, we are occasionally finding some new channels that are more relevant for that space, but we've got such a broad assortment and we're trying to make sure we optimize each of the 50 plus categories that we're in. So we're deepening those assortments and increasing those promotions and just trying to maximize those retailers.

Okay. That makes sense. Maybe shifting just over to commercial, the business being down 37% in 2020, can you give us some sense on the cadence of maybe how that business progressed across the year? I assume 4Q was down less than the full year, but then they call it – there would be helpful and then when would you guys expect that business to return to 2019 levels?

Justin, this is Greg. So definitely the last four – three, four or five months were better than whereas as the pandemic hit. And we just really, as each month progressed, it got worse sort of through the summer and early fall. And then just started to get better, a little more demand as these customers reacted, changed their business models, started to come back from working remotely and so that just really allowed for a bit more demand. And we were seeing during the year, the very early months. As far as going forward, we're looking at it – we looked at sort of a three-year average pre pandemic for us. And we are hoping that we can get up to running at an 80% of that three-year average this year. There is a chance that we'll be better than that and of course, in the back half, it's a little harder to know exactly what's going to happen. So, it could be below that. But generally speaking, we think we would hope to be up to 80% of pre-pandemic rate. And hopefully then in 2020 to get back up to that at or above the pre-pandemic rate. But certainly, we're early stages here in 2021. So that's a hard to be real sure of, but I do know that North America trends are strong, Asia trends are strong, Europe is still a little bit soft as they're going through some continued lockdowns, et cetera.

Okay, that's very helpful. Thank you, Greg. Maybe just a couple more here from me. In terms of the full year guidance, I understand the second that visibility is low here, but you mentioned in the script, improved performance in 2021, is that – I guess, do I read that as you expect both revenue and operating profit on a full year basis to grow or improve over 2021 – or 2020 level excuse me?

Well, I think, we're going to focus on the first half for outlook for now. I will say that there's things working in our favor. So, we talked about commercial and international, those are areas that were hurt really badly, that should rebound. The North American strength continues. And then of course, we had issues related to Mexico into our ERP cut over that should not affect us. And Kitchen Collections is a little bit further in the rear-view mirror, but that's also not in the mix anymore. So those are all things that should provide us upside. What's going to happen with consumers when they – we hope, we all hope are open up from a vaccine standpoint, et cetera, it's really hard to tell, we think we've mentioned all these trends that are underlying, that should provide long-term growth. But in the short term will they run out of the house and stop buying appliances and spend money on other things? And if that happens to the North American market, that's going be a headwind. But all in all, we don't expect it to go that way. So, I think really, we want to stick with just the first half outlook, see how things unfold here, knowing that we have some things that really should give us a boost, but really wait and see how the North American market plays out here in the coming months.

Okay. Yes, no, fair enough. Last question from me just on the higher material and shipping costs, is there any way you can maybe contextualize the increases you guys are saying on a year-over-year basis? And just in terms of the mitigation strategies, are you planning for, or have you already started a pass through any of these costs increases in terms of passing through to your retail partners? Thanks.

I’ll let Scott go through the steps we usually go through because, we've been down this path before, it's never easy or fun, but it's something we've done a number of times. But just we can't provide any hard view of what those costs are. We do see some pressure as we speak, but also things could turn the other way in the back half as we go through our process. So, I think our outlook right now includes what our view of the cost position is. And then again, that's one more factor of what we think through as we get to the back half. Scott why don’t you talk about the things we do, when we do have a picture of our cost structure?

Right. So Justin because we're in so many different categories and we've got breadth in some of those categories, we are able to optimize and with other products we're able to switch out with something to make it sure that we're staying margin hold with these retailers. So, we do have the ability to pass on the price increases as we see cost increases coming in. So that's certainly something we do on a regular basis. But we also have a large mix of product that allows us to swap out items and keep us margin neutral with these accounts. And the last thing that we talked about, I think, we talked to this about a year ago is that we can switch our focus on the promotional items. So certain items in our portfolio have more margin than others. And so if we feel like that there's cost pressure in certain categories and not in others, we'll focus on promoting those categories that tend to be a little bit better in margin for us to help offset some of those margin pressures.

Okay, thanks so much guys. That's it from me. And congrats on the strong finish and best of luck in 2021.

Okay.

Thank you, Justin.

[Operator Instructions] There are no further questions at this time. I will now turn the call to CEO, Greg Trepp for closing comments.

Thank you. As we look ahead, we are optimistic on many levels. We know our company was strengthened by facing and overcoming many challenges in 2020. Our team did an incredible job for our customers and our company. I can never thank our employees enough for all [indiscernible] last year. We look forward to vaccines being widely administered and life returning to something that feels more normal. We remain committed to the safety and wellbeing 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. Thank you again for joining our call today.

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