Hello, everyone, and welcome to the Hamilton Beach Brands Holding Company Q3 2021 Earnings Conference Call. My name is Charlie, and I'll be the coordinator for today's call. I will now hand over to your host, Lou Anne Nabhan, Head of Investor Relations to begin. Lou Anne, please go ahead.

Thank you, Charlie. Good morning, everyone, and welcome to our Third Quarter 2021 Earnings Conference Call and Webcast. Yesterday after the market closed, we issued our third quarter 2021 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. 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 not be updated until our next quarterly conference call, if at all. And now I will turn the call over to Greg Trepp.

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. It was great to see the strong market demand momentum that we experienced in the first half of this year continued in the third quarter. We were especially pleased that our global commercial market continued its robust rebound from last year's pandemic-driven weakness. Our revenue more than doubled as the food service and hospitality industries continue to recover. Our international consumer markets also continued to rebound strongly in our Latin American market, revenue more than doubled, and in our Mexican market revenue increased. In the US consumer market, where strong demand continued revenue increased. Last year's lower revenue was due temporarily – due to temporarily decreased shipping volume during a cutover to a new ERP system, and revenue shifted into the fourth quarter of 2020. Overall, our brands are performing well across many measures, including sales, placements and the star ratings. We're pleased with the retail placements and promotions that we have secured for the holiday selling season. We continue to experience strong demand. However, challenges throughout the global supply chain have hampered our ability to fully meet demand. We're fortunate to have an experienced and talented team to lead us as we strive to maximize our ability to navigate these challenges. Our team has worked tirelessly and executed well. I'm deeply grateful for everyone's hard work dedication, agility and resilience. The main industry-wide challenge to fully satisfy the demand is the ability to source and transport products in a timely manner and have a reasonable import cost. Throughout this year, we have taken many steps to mitigate the supply chain challenges, including pricing actions, negotiating with carriers for container space and rates, working with our suppliers to minimize constraints and collaborating with our retail customers. We were…

Thank you, Greg and good morning everyone. Let me review our third quarter results compared to prior year. Total revenue increased 41.8% to $156.7 million compared to $110.5 million. Greg reviewed the performance by market. So, I'll just reiterate that we are very pleased to see the rebound in our global commercial Latin American and Mexican markets continue and we are also very pleased that demand remains robust across all of our markets. Gross profit margin was 21.2% compared to 21.5% in the prior year due to significantly higher transportation costs. As a result of the disruption and congestion in several areas of our supply chain, primarily from China where our products are manufactured, we experienced increased freight and container costs as well as additional carrier storage charges. There was also an increase in labor costs for our warehouse personnel. Selling, general, and administrative expenses remained flat despite $1.6 million in incremental expenses related to the relocation of our US distribution center. Outside services decreased by $900,000; employee regulated costs were lower overall but have offsetting factors. SG&A benefited by a decrease in our accrual for incentive compensation as a result of the decline in our stock price and this benefit was partially offset by an increase in salaries and benefits. As a reminder, $700,000 of non-recurring expense related to patent litigation was included in the third quarter of 2020. Operating profit increased to $7.4 million compared to an operating loss of $2.4 million. Interest expense increased by $300,000 due to higher average borrowings outstanding under our revolving credit facility. While average borrowings were higher, our weighted average interest rate for the period declined. Net income from continuing operations was $5.7 million or $0.41 per diluted share compared to net loss from continuing operations of $2 million or $0.15 per…

Thank you, Michelle. Our first question comes from Justin Kleber. Justin, your line is now open.

Hi everyone. Thanks for taking the questions. The first one we had was on revenue. And if you look historically the third quarter tends to build around 15% to 20% from 2Q. This year your revenue rose about 1% sequentially. So the question is, is it fair to think about that delta versus the historical trend as demand that has just went unfilled given inventory and supply chain constraints, or is there an internal view you guys have just on the potential impact to revenue from these bottlenecks throughout the supply chain?

Hey, Justin, I'll start off with that and Scott can add. Thanks for joining us. Good morning. So, good question. I think what sort of historically outside of these current conditions, we often have volume move pretty dramatically between the third quarter and fourth quarter, if a retailer has a big promotion, or we do some shipping DI one year versus not DI the next year direct import, you can see something move really just from September to October, which could cause some more fluctuations. So we tend to look at the back half as a group. But so -- but your point is well taken that as you compare to the second quarter, it's a little different trend here than the usual history. I think what we've seen is demand is real strong. Product definitely is taking longer to get here. And we are working really well to get as much inventory as we can, but it really is you're pushing hard to get it here, get it off the ships and realign and turn back to customers. So I would say, we feel good about how strong the demand is through the third quarter into the fourth quarter. We have internally a wide range of potential numbers that we would deliver depending really on supply. The demand is there. So I think we just sort of felt like it's important to demonstrate or communicate the fact that it could be a little lower than last year, because last year's fourth quarter was pretty strong. But also if we can get the product and get it here and get it turned that we could be better than that. It really just depends on how things play out that way. And so Scott, if you have any…?

Yes, Justin, this is Scott. I'd just add a couple of things. In the second quarter, as Michelle alluded, we were switching warehouse distribution center. So we did try to shift some volume early to get that into some of our retail partners as we knew were to be shifting distribution centers. So that would have increased some sales in the quarter. And we're also still trying to -- we saw the Latin America market and the commercial markets growth and we're still trying to fill up some of those distribution centers from some of our partners. So, it kind of even things out between the second and third quarter. But I think it's really back to just the timing perspective of when we're getting goods in from China and when we're able to fulfill. The one other thing was as prime date did shift from the third quarter of this year in the US to the second quarter and that's what was a timing difference. So that also kind of shifted some of the volume.

That's a great perspective. Thank you for that. I guess, as you look across the retail channel how are you feeling about your in-stock positions relative to your primary competitors as we approach the holidays? And then just any sense on market share and how that's been trending for you guys?

Yes. This is Scott on. So, a couple of things there. I think that in general just looking in the small kitchen appliance segment, I think, there's a number of suppliers trying to deal with the shortages that are coming from product out of China. It's in different pockets. Sometimes it's related to components. Sometimes it just seems like there's a little bit longer transit time. But from what we hear from our retailers, we feel like we're doing as well if not better than some of the other suppliers out there and that we certainly are in a better position than we were prior to this quarter, and catching up there. So, overall, I think we feel good. We're not -- we're still chasing it, as Greg alluded, we're trying to get things in as quickly as possible. The transit times have been longer. We're trying to make sure that we're servicing our retailer partners. Sometimes it's hard to get those promotional volumes in at the quantities they want, but we're working really hard to try to reduce those transit times and make sure we're servicing our customers

Yeah. No, that makes sense. Shifting gears to the margins and nice progress here during 3Q and you mentioned the pricing actions that were implemented across the summer. I mean were there any other factors you'd point to whether that's mix of products or customer mix that helped you on the gross margin front, or was it really just a function of these price increases?

As always, there's a lot of things that go into it. So mix definitely plays a role. And the pricing action was really the biggest factor. We had pricing that went in, as we've mentioned before over several months. And as the core build or went along that pricing really kicked in, in a bigger way each month. And that therefore positions us for the fourth quarter too. Now, we're going to see -- we did pay for some premium containers. We have contracted rates. So that covers the majority of our needs but we definitely paid for some contract rates to -- that's going to sort of work its way through the P&L over the next quarter or two, but that was all benefit us on the revenue side. So I think there'll probably be some up and down on the margin here as we get through the holiday season. But we priced accordingly. The question is well, as each month goes by how will the mix along with these premium containers along with the pricing across the board, roll up and come together. So I think we're I think we've got all covered but there's a lot of moving parts here to be sure that we end up where we think we're going to be by the end of the year.

Yeah. For sure, a lot of moving pieces. I mean Greg, if you just think about the general supply chain bottlenecks. You mentioned in the prepared remarks, product and transportation costs still expected to rise in 2022. But are you guys seeing any or at least starting to see any signs that we're maybe at the point of peak pressure or peak congestion across the supply chain?

That's a really good question Jason -- Justin. I think the way I articulated some of the day was I think it's stopped getting worse. And there's a few signs that it's getting a little better, but it's been a matter of weeks versus anything longer. So it's really hard to tell what it's going to take back off again. I don't think any more sort of broadly speaking. Certainly there's -- we have containers that are stuck somewhere here or there. We have a product that we're scrambling on in particular and some things that are in really good shape. But it seems like it's stopped getting worse. And I think with -- I mean you know so well from everyone you talk to is, we've got Chinese New York coming up, which is early February. We have the Olympics going on in China in February. And so, will this be a little bit of a lull before when scrambles get product out of China before that happens. Hard to say. But right now, I think we've seen it where it's -- it seems to have showing a few signs but again, we're in a really, really bad place. So it's not getting worse when you're in a bad place is different than it's gotten better and that's the hard part. We have to see how it plays out here.

Yeah. No, I appreciate that. And just last question bigger picture, on the operating margin goal that the company has had out there, kind of moving to that 9% to 10% range. If you think about bridging the gap between where you sit today and the long-term goal, is it really just revenue growth and scale benefits that gets you moving in that direction into that kind of high single-digit operating margin target?

Yeah. So revenue growth is a big part of it. We think we can keep our expenses kind of growing at a much slower pace than the top line. Scott talked a lot about margins. We've got to keep the margins in our historical range. Again, there might be some quarter-to-quarter up and down. But if we can get in the low end of the range, we're in great shape and we think we can go a little bit higher when we -- in some of these categories like the premium segment and commercial kick in, but we're not counting on that. So, it really comes down to controlling our costs while we get revenue growing at a faster clip, which I think we've got a lot of good things going for us. So we feel really good about where we're going. But clearly the volatility here in the short-term complicates that. But we think over time we seem to be heading in a good direction.

All right. Appreciate all the color, and best of luck guys for the fourth quarter. Take care.

Great. Thanks so much. Thank you for questions.

At this current stage, we have no further questions. So, I'll hand back over to Greg Trepp, Chief Executive Officer of Hamilton Beach Brands Holding Company for closing.

Thank you. We are fortunate to be a leader in an industry with both strong pandemic-driven demand as more people are spending time in their homes and durable long-term demand driven by favorable demographic trends with millenials and boomers. We also expect our strategic initiatives to drive revenue growth, operating profit and margin expansion and strong cash flow over time. That concludes our call for today. Before showing off, I'd like to wish you all a wonderful holiday season. Thank you again for joining us.

Thank you all for joining today's call. You may disconnect your lines and have a lovely day.