Good day. Thank you for standing by and welcome to the Hamilton Beach Brands Holding Company’s Second Quarter 2021 Earnings Call. I’d now like to hand the conference over to Lou Anne Nabhan, Head of Investor Relations. Thank you. Please go ahead.

Thank you, Blu and good morning everyone. Welcome to our second quarter 2021 earnings call and webcast. Yesterday, after the market closed, we issued our second quarter earnings release and filed our 10-Q with the SEC. Copies are available on 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 second quarter results. Also participating in the Q&A will be Scott Tidey, Senior Vice President, Consumer Sales and Marketing. Our presentation today includes forward-looking statements. These statements 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 our annual report on Form 10-K for the year ended December 31, 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 will turn the call over to Greg.

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. I will begin with our second quarter results. After delivering a strong performance in the first quarter, our second quarter results fell short of our expectations. We were very pleased that our top line momentum of the past two quarters continued. Our revenue grew nearly 12% and we experienced broad-based strength in all markets. We are disappointed, however, that profitability decreased significantly. The decline was primarily due to significantly increased inbound and outbound transportation costs, resulting from disruptions throughout the global supply chain. An ongoing dramatic rise in ocean shipping container rates accelerated during the quarter and continues to do so, and carrier storage charges increased. We continue to experience cost pressures and disruptions caused by container shortages, port congestion, crowded rail yards and a shortage of drivers and chassis in the domestic trucking industry. We also experienced higher material and labor costs. As we stated in our previous earnings call, we expect the transportation congestion and supply chain disruptions to persist. However, the external environment changed more rapidly than expected, and volatility has been far greater than our expectations. While our second quarter results were not what we planned our team performed very well under very difficult conditions. I am very proud of and grateful for their tenacity and resilience. We believe that the many steps our team has taken to manage through the challenges will benefit us in the second half of the year. I will discuss those steps in a moment. While these challenges have escalated in recent weeks and are expected to persist in the near term, we expect them to normalize over time. More importantly, we firmly believe their current impact does not reflect the fundamental health of our business or our long-term…

Thank you, Greg and good morning everyone. Let me review our second quarter results compared to prior year. Total revenue increased 11.8% to $154.7 million compared to $138.3 million. Greg provided a lot of detail on the revenue performance. I would like to underscore that demand remains strong in all our markets. In our U.S. and Canadian markets, our two largest markets, revenue held steady compared to last year’s strong pandemic-driven growth when consumers sheltering at home purchased more small kitchen appliances support their needs for meal and beverage preparation. This performance demonstrates that strong consumer demand for small kitchen appliances in our largest markets continues. In our Latin American market, the momentum from the first quarter continued as this market continues to rebound from pandemic-driven demand weakness. We were especially pleased that revenue in our Mexican and global commercial markets turned positive for the first time since the COVID pandemic started as they both continue to rebound strongly. While the unprecedented consumer demand for small kitchen appliances has provided an abundance of opportunity for our industry and our company, we are operating with some major challenges. In the second quarter, we experienced significantly increased inbound and outbound transportation costs, and we faced higher material costs and labor costs. All these cost pressures is a result of continued unfavorable impact of the COVID-19 pandemic on all parts of the supply chain. As a reminder, last year’s group’s profit margin of 25.5% was significantly higher than our historical range as we benefited from the very strong pandemic-driven revenue growth in the U.S. and Canadian markets. Our gross profit margin in the current quarter decreased to 18.4%. The global container shipping industry continues to operate under severe constraints. Extremely high consumer and importer demand continues at a time when the industry has…

Thank you. Your first question comes from the line of Justin Kleber from Baird. Your line is now open.

Hey, guys. It’s Justin Kleber. Thanks for taking the questions. Hope everyone is doing well.

Hey, good morning, Justin.

The first one on margins and the cost pressures, Greg, you talked about implementing price increases, but it sounds like you aren’t necessarily expecting price cost neutrality this year. I mean, is that a fair characterization? And then just maybe any benchmarks in terms of how much you are raising price across the portfolio?

Well, Justin, I will start and then maybe Greg and Scott can jump in. To a large degree, during the second quarter, the negative margin impact was really a matter of timing. While we expected some of the cost pressures and we developed pricing actions to offset those, the cost impact to Q2 before some of the price increases went into effect. So we believe that in the back half, we will benefit from the price increases. There continues to be a lot of uncertainty to the industry. And so we have taken action for what we can predict and what we know, but the unknown is still out there.

And just to build on that, I think the biggest part of the ongoing gross margin percent, as Michelle said, is timing. We had planned on a certain level of increase we implemented into that June and July. As certain other costs escalated, we added more in August. So that should benefit in the back half. There was some hit to the margins, and that related to some of these transportation costs and congestion-related charges that either showed up in gross margin or in our expense lines. And that’s the part where we think we’ve got ways to avoid that going forward, but that’s probably the biggest part we’re going to watch. If that gets to be challenging to deal with, then we might get hit with some more in the back half. And if we can keep it under control, then really we should see the margin come back up as these price increases kick in. So just trying to be careful as a lot of the congestion are just things we can’t control. So we don’t want to predict what might happen in the environment where we can’t control all the variables.

Okay. Yes. Now, that makes sense, Greg, obviously, a very, very fluid environment. As you think about – it sounds like to me, your retail partners are obviously working with you guys and accepting price increases. I mean, clearly, you’re not the only ones pushing through price right now. My question is just around how sticky price increases have historically been within your business within the industry. If and when these input costs come down, do those price increases hold and therefore, you see actually margin tailwind if and when some of these cost pressures start to rescind a bit?

Hey, Justin, this is Scott. So I will say that the – we have been fairly successful in executing the price increases out there. We are definitely experiencing the same thing that many of our competitors – and even our retailers who source a lot of product on their own, they are also seeing the same challenge. Typically, being able to predict how long the margin sticks after costs start coming down is really hard to do. Usually, the competitive environment, you have to make sure you’re not going to lose placements and you have to react to that. So it just depends on how quickly the commodities and the current sea change that tells you how much you’ll be able to hold on to that or whether you’ll be just back to margin-neutral. So I think it really varies based on what the competitive environment is seeing.

Just to build on it, Justin, I am sorry to interrupt, but I think Scott described it very well. And when things move quickly, sometimes it takes a little time to catch back up, which is kind of what we’re doing now. And then as they come down, maybe we can stay ahead of it for a period of time. We’re going to end back up in that range we usually do. If you look back historically where our gross margin has been, we feel like there is a band there that we are in and can get back into. And then just where we are in that band really depends on the factors that Scott talked about.

Got it. Okay, that’s helpful. And then in terms of the U.S. and Canadian consumer business and the revenue profile there, it seems like the industry demand is growing even relative to last year. So I guess if you guys look at your sell-through at retail, is that also taking place whereas your sell-through is growing relative to last year and you just simply can’t satisfy or refill the channel based on kind of these inventory constraints? Am I thinking about that the right way or is that logic off-base?

I think, Justin, again, this is Scott. I think, in general, if you look at the large retail, all retailers that are in both Canada and the U.S., they are all being challenged with in-stocks right now and that varies by the different supplier. So, there is some need of just getting these retailers back in stock to their normal store levels. But at the same time, demand is still really strong. I think most people would say that they have cutback on promotional spend because supply has been tight. So I think that’s another thing that will – certainly, we expect to see as more inventory starts to show up at store, we will start seeing more promotions and trying to make sure that consumer continues to come back in and shop. So we still feel optimistic about the back half of the year. We think the consumers’ habits have changed permanently and that they will continue to be needing and using appliances and gifting more than they have in the past. And so we expect that demand to continue and we still have some out-of-stocks to fill up as well.

Okay. And then just one final question for me guys, in terms of the partnerships that you have announced, very interesting developments there. Is there anything you can share just on how the economics of these work? I mean do you guys recognize 100% of the revenue and you pay a royalty or does this revenue show up in that licensing revenue that you disclosed in your SEC filings, just trying to understand the potential magnitude of the impact on your top line if these partnerships really take off? Thank you.

Yes. So Justin, this is Michelle. And the two that we recently announced will behave differently. For Clorox, it truly is a licensing agreement. So we will recognize all of the revenue there and pay a licensing fee similar to how we treat Wolf Gourmet and CHI. With HealthBeacon, it’s a little bit more of a – I want to say, it’s not defined as a partnership, but similar to that. We will take responsibility and own the inventory and sell it. So we will get the top line growth there, but we will be sharing in the profits with them a little bit more evenly. So it won’t be a licensing fee, but the profit will be split, at the end of the day, evenly with them.

Okay. Thank you for that, Michelle and thanks again guys. Best of luck over the back half of the year. Appreciate the time. Thanks.

Thank you, Justin.

Speakers, I am seeing no further questions in the queue. I’d now like to turn the conference back to Greg Trepp for closing remarks.

Thank you. In the second half of 2021, we are fortunate that demand for our retail and commercial products remain strong. Longer term, we expect our strategic initiatives to drive revenue growth, operating profit margin expansion and strong cash flow. We are a leader in our industry and there is proven durable demand beyond the pandemic-driven surge we have been experiencing. Our strengths should enable us to maximize performance, including our broad portfolio of trusted brands, our comprehensive offering, our experienced team, our global infrastructure, our broad range of retailer relationships across all channels and our well-developed e-commerce capability. Our team is doing an incredible job for our customers and our company. Thank you again for joining our call today.

This concludes today’s conference call. You may now disconnect. Thank you for participating.