Hello and welcome to the Hamilton Beach Brands Holding Company Q4 2021 Earnings Call. My name is Charlie and I will be coordinating your call today. I will now hand you over to your host, Lou Anne Nabhan, Head of Investor Relations to begin. Lou Anne, please go ahead.

Thank you, Charlie. Good morning, everyone. Welcome to our fourth quarter 2021 earnings conference call and webcast. Yesterday after the market closed, we issued our fourth quarter 2021 earnings release and filed our 10-K with the SEC, copies are available on our website. Our speakers today are Greg Trepp, President & Chief Executive Officer, and Michelle Mosier, Senior Vice President & Chief Financial Officer. Also participating in the Q&A will be Scott Tidey, Senior Vice President, Consumer Sales & 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 and our Form 10-K. 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. We are going to take the next few minutes to provide an overview of our performance for the fourth quarter of 2021, the Full-Year 2021 and our prospects for growth in 2022. For our company, we see 2022 as a year of opportunity. We expect to grow our top line and our bottom line as we build on the progress we made on many fronts in 2021. Certainly the past few years have brought extraordinary challenges to our company, our industry and our world. We've navigated some tremendously adverse external conditions. In 2020, we dealt with the unexpected COVID pandemic as it spread across the globe. In 2021, we worked our way through the many negative effects of the pandemic on the global economy, including supply chain disruptions and inflation. If you add in the hugely onerous tariffs that were imposed on certain imports from China starting in early 2018, our industry has encountered a new crisis every year since our company became public in September of 2017. We take all of these external pressures into account. I could not be prouder of or more grateful for our outstanding team. They have demonstrated exceptional agility and resilience for several years running. Our people have worked incredibly hard, tirelessly, as well as, effectively to mitigate the impact of these external challenges. Our team has also risen to the occasion as we manage through the execution of some very big internal investments. We have converted to a new ERP system, which was demanding in many ways. Now that is in place, we expect it to provide significant benefits for years to come. The accomplished moves to new distribution centers in Canada and the U.S. which will support our growth…

Thank you, Greg. Good morning. I'll comment first on our fourth quarter 2020 results compared to the fourth quarter of 2020, and then discuss our outlook. As a reminder, the 2020 fourth quarter is a difficult comparison, as our revenue was unusually high. This was due to a significant amount of order backlog fulfillment that shifted from the third quarter of 2020 during a cut-over to our new ERP system in the U.S. Net sales were $197.8 million, compared to a record $234 million in the fourth quarter of 2020, a decrease of 15.5%. In addition to the difficult comp, we encountered persistent supply chain congestion, which hindered our ability to fully satisfy retailer and consumer demand. Orders were strong in every market, and our products sold well at retail. However, our third-party manufacturers in China, struggled to produce our elevated order levels. And the ongoing challenges with securing containers coupled with the long ocean transit time slowed the movement of finished goods from China to the U.S., delaying the arrival of inventory. In spite of the overall decline in revenue, we were very pleased to see that the momentum in the Latin American market continue into the fourth quarter and revenue for this market more than doubled. In the global commercial market, revenue also continued to grow and increased 13.9%. Both markets have rebounded from pandemic driven demand softness in 2020. The revenue decreases compared to prior year occurred in the U.S., Canadian, and Mexican consumer markets. As Greg mentioned, we continue to make progress with our initiatives as demonstrated by sales of our premium brand products increasing 24.6%. Our e-commerce sales were flat year-over-year, but as a percentage of fourth quarter sales, e-commerce sales grew to 47.7% compared to 40.7% in the prior year. The pandemic drove a…

Thank you. Our first question comes from Justin Kleber of Baird. Your line is open. Please go ahead.

Hi, everyone, good morning. This is Beck, on for Justin. Thank you for taking our questions. Maybe to start off, can you discuss a bit about your relationship with your largest customer? We noticed they accounted for 28% of the business this year versus 35% in 2020. I'm just curious if there are any changes on that front.

Hey, good morning, this is, Greg, and I'll let Scott follow up on this. I think -- yeah, there's -- we have a great relationship with -- really across our entire portfolio of customers and we've got tremendous growth going on with some and some are -- some will go up one year and down another year. So really the reality is we've got a mix shift going on across divisions, but then from a customer standpoint, we've got strong growth in some areas such as e-commerce and a little slower growth in some other areas. So really, I think it's not a indication of weakness at customer -- particular customer, it's really the short-term ups and downs and over time we feel like we're in a good position with all of our top customers. said that, you would agree?

Yes, Greg. I do agree. I think there's a mix between the different countries where we have our largest customer and some of their different outlets. And so there is -- there has been some shift there, but overall our distribution points are still very strong. Some of them had stronger sales in the 2021 time period versus the prior year, and others were a little bit softer. So I think we're just try to move a little bit with them. And then we had some other retailers in our portfolio that just got bigger. And because of some of our strategic initiatives, they just -- some of these other customers became a bigger part of our portfolio.

I think it's a good point. As you said, we're good point discussed, mentioned when we list our top customer, it can be negative on banners of after one customer across really our global platform. So there might be one banner in one country that might also throw the next off a little bit. But, thanks. Scott explained it very well.

Got you. That make sense. Thanks for the color. Looking at your commercial business, it sounds like the recovery there continued nicely during the fourth quarter, and you guys ended the year with nearly $41 million in sales there. Can you talk a bit about how supply chain constraints are impacting that business in particular? While it grew nicely with 36% growth in 2021, how much stronger do you think it could have been? And then, Greg, going back to your comment about significant commercial growth anticipated in 2022, do you think the commercial business can get back to pre -pandemic levels next year as you guys saw in 2018, 2019?

On the supply chain is definitely affecting all of our businesses. Getting product produced was one ongoing challenge, as our suppliers struggle with all sorts of things related to production and demand. And then just getting it to where it needed to be on time is factor. So definitely supply chain hampered what we could've sold in commercial, as well as our entire portfolio just consumer, Canada, Mexico, etc. So we definitely missed out on what could've been higher results. I think as we go into 2022, that the demand from those customers, the commercial customers is still very, very strong. We have a solid backlog, so as soon as we get product produced and to them, and we have orders in hand. So how that will play out as the year goes on right now, that's how it has been in the first half of this year. Certainly some parts of the world are slowing down here, because of what's going on in Ukraine and Russia. But overall, the demand is very strong and as long as we can produce products and get them there, we expect continued growth in 2022.

Got you. Yeah, that's good to hear. Shifting gears to your guidance for next year. And Michelle, you mentioned your outlook includes a modest improvement in gross margin, which seem to contribute to the operating income growing faster than sales in 2022. As we think about the magnitude of improvement there, do you think you can achieve a rate similar to a 21.8% level, at which you exited the fourth quarter of this year?

Yes, Justin, I think -- sorry. I apologize. I think we no -- know we did have some significant costs thrown through the distribution chain this year, particularly with outbound transportation as well as inbound transportation. We are in hopes that we'll get back into that normal range of operating profit margin next year. But again, all of it does depend on what we've seen in the economy, where, as we mentioned, we're taking some price increases in the first quarter. And if we can keep up with that throughout the year, then we should be back to where we want to be.

Sure. That makes sense. And just to follow up on that point, the last question we had was around pricing. As you mentioned, that roundup price increases untapped in the first quarter. Can you give us a sense for the magnitude of these compared to your previous price actions taken in the second half of this past year, just given that cost pressures across products and freight has escalated. And then on top of that, have you heard of any unit elasticity from your vendor partners in regards to how demand has fared?

Scott, you would pick that one.

Sure. I can start on that. So, yes. If you look at the price increases, we needed to take several increases in 2021 to offset both the cost coming from our suppliers and the transportation costs. And as we project, we haven't quite finalized where we think we'll be in the first half of this year, but we're starting to look at our new contract rates on containers and are -- we're working with our suppliers. But I do think all the retailers that we're dealing with are having the same challenges. We're all bringing most of our product from Asia. And so our increases are in line with the competitive market. And it seems like our suppliers are certainly understanding as they have to deal with the same types of challenges getting in containers. So, we'll definitely be -- continue to, as we get these contracts negotiated a new pricing, we've been -- we feel very effective in passing these on in a timely manner to try to mitigate the margin erosion.

Exactly. Just building on what Scott said and so Scott and his team and the commercial team has done a great job working closely with retailers to figure out what's best for the pillar for us and for our consumers. And that all went into effect in the first quarter, as Michelle said. Scott is also referencing that we're going through contract negotiations on container rates and we'll be working with our suppliers soon on back half call. So there will very likely be more price increases mid-year tied to whatever the cost position is. Again, will do the same thing. We'll figure out what it's going to impact our businesses, work with our retailers to implement it in a way that works for everybody. So my assumption is there will be continued price increases going the back half of 2022.

Great. Makes sense. Well, thank you all very much. We appreciate your time and congrats on the record year and best of luck in the year ahead.

Thank you.

Thank you, sir.

There are no further questions on the line at this time so I'll hand the call back over to Greg Trepp for any closing remarks.

Thank you. We appreciate the opportunity to share with you today what we believe are strong prospects for future growth. As we've always said, our company is focused on long-term value creation. We are fortunate to be a leader in an industry with durable demand. We also believe that new cooking habits developed during the pandemic will endure, especially for young people. Any of you have been shareholders since our spin-off in 2017, I thank you for your confidence in our ability to deliver, our commitment to build long-term shareholder value. That concludes our report for today. Thank you again for joining our call.

This concludes today's call. Thank you for joining. You may now disconnect your lines.