Good day, everyone. My name is Kellyanne, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the Hamilton Beach Brands Holding Company Third Quarter 2022 Earnings Call [Operator Instructions]. At this time, I'd like to turn the conference over to Ms. Lou Anne Nabhan, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Kellyanne, and good morning, everyone. Welcome to our third quarter 2022 earnings conference call and webcast. Yesterday after the market closed, we issued our earnings release and filed our 10-Q with the SEC. This information is available on our Web site. Our speakers today are Greg Trepp, President and Chief Executive Officer; and Michelle Mosier, Senior Vice President and Chief Financial Officer; Scott Tidey, Senior Vice President, Consumer Sales and Marketing, will participate in our Q&A. Our remarks today, including answers to questions may contain forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed today. Information regarding these risks and uncertainties is available in our earnings release, 10-Q and our annual report on Form 10-K for the year ended December 31, 2021. We disclaim 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. We're going to take the next few minutes to discuss our third quarter results, along with our outlook for the remainder of 2022. Our team continued to execute well in a challenging retail environment. We were pleased to deliver a 26% increase in operating profit as a result of gross profit margin expansion and lower SG&A. Gross profit margin expanded by 190 basis points, reflecting price increases that offset higher costs, a favorable product mix and lower expenses for outside warehousing and labor compared to the prior year. Total revenue declined modestly as continued strength in our global commercial market partially offset lower sales in our consumer markets. Global commercial sales increased 36%, reflecting continued recovery in the food service and hospitality industries as well as the sale of new products, which I will discuss in a moment. While consumer demand in the U.S. continues to trend after being down somewhat compared to 2021, it remains solid and continues to be up significantly compared to pre-pandemic levels. The revenue decrease in consumer markets in the third quarter was primarily due to many retailers remaining cautious and continuing their broad inventory rebalancing programs that began earlier this year. While our products have not been in an overstock position at retail, the broad rebalancing contributed to a shift in timing for some holiday orders for us, and in some cases, reduction to pre-holiday build order quantities compared to historic levels. Holiday timing in month-to-month can always be difficult to predict. We expect to capture some of the delayed orders in the fourth quarter. There was a slight softening in the point-of-sale movement in the third quarter, but that was only a small contributor. We expected sales in the Latin American…

Thank you, Greg, and good morning, everyone. Let me discuss our third quarter 2022 results compared to the third quarter of 2021, and then I'll discuss our outlook. Net sales decreased 3.8% to $150.8 million compared to $156.7 million, primarily due to lower unit sales, partially offset by price increases, and a favorable product mix. Lower sales volumes in our Latin American, Mexican and U.S. consumer markets were partially offset by increases in our global commercial and Canadian consumer markets. Gross profit margin expanded to 23.1% compared to 21.2% last year. As Greg discussed, this expansion was due to pricing initiatives that offset higher product costs, favorable product mix, and lower expenses for outside warehousing and labor compared to last year. Selling, general and administrative expenses decreased $400,000 to $25.4 million, primarily due to nonrecurring expenses for last year's distribution center relocation. Operating profit increased to $9.4 million compared to $7.4 million, reflecting the gross margin expansion and lower SG&A. Interest expense net increased $600,000 due to rising interest rates as well as an increased average borrowings outstanding under our revolving credit facility. Higher interest rates were partially offset by our interest rate swaps. Other expense includes currency losses of $400,000 in the current year compared to currency losses of $200,000 in the prior year. The currency losses arise from the remeasurement of liabilities related to inventory purchases by foreign subsidiaries denominated in U.S. dollars. Also in the third quarter of 2022, we reported a $300,000 pension settlement charge related to our U.S. defined benefit pension plan. For the quarter, net income increased to $5.9 million or $0.43 per diluted share compared to net income of $5.7 million or $0.41 per diluted share. We repurchased 109,828 shares during the third quarter under our current stock repurchase program, which runs through…

[Operator Instructions] We will hear first today from Peter Benedict with Baird.

Thanks for all the info. First, just following up quickly here on the fourth quarter visibility. Just curious how much visibility you have in there? I mean, it sounds like there's clearly some dependence on reorders and sell-through. Just I don't know, I mean, is that a more material part of the equation for 4Q this year than it typically is? Just trying to understand kind of that comment and that dynamic for 4Q.

Peter, yes, I think it's sort of the more normal aspect of the holiday season. Certainly, there's a lot of strange things going out there in the retail world, as you all know. But generally speaking, what happens is we'll get a large order in, to load stores or to load warehouses for an e-commerce player, consumers will either buy early or buy late or it will be higher or lower than their retailers' expectations. And what will happen is we'll start getting reorders. The timing could be early if it's a nice start to the season or if consumers are delayed, and wait for deals, and those sorts of things, we miss sort of miss a turn. So this is a time of year where it really depends on the consumer pull and the retail reorder. That's a pretty normal thing. I think as we stand here at the end of October, things are going along -- still aligned with the outlook we just gave in terms of how it's unfolding so far. But as you well know, we'll sort of make-or-break things over here in the next four to six weeks, so we'll have to see how it goes.

No, that makes sense. And then on inventory, I know you said that you expect that to come down pretty significantly. I'm not sure if you can add any color there. How do we think about maybe the optimal level of inventory or where you think you can get it? I don't know what kind of metrics you want to use, but day sales or something along those lines. I'm just trying to understand the magnitude of inventory reduction we might expect as we look to the end of this year and into early next year.

So we track and monitor our inventory, every SKU. And we're able to sort of have a -- we have visibility to understand, when it's going to -- when it's based on the forecast when it will be used up, when it will turn. And we have -- given out the level we're at, we've been having multiple meetings per week to review kind of how things are going, what adjustments we're making to purchases, to our suppliers, what else can we do to move things along. So as you can guess, a pretty high focus for us. I think based on the forecast, which is updated weekly, throughout the week, but a full roll up weekly, we sort of revisit when we think we're going to run down on the inventory. And right now, we still feel good that we're coming -- we'll come down the hill through the end of the year and down to better levels in the first part of next year, kind of sort of maybe late first quarter, sometime in the second quarter. But we think next year, we should be positioned to get back to 4 turns a year in our inventory. And if the forecast is good and our business goes like we think, that will be the case. That number also, as you know, Peter, Lunar New Year is a little early this year. So people are buying up. Some of that might have to ship before year-end, which will end up on our books. If we can delay it a little bit to next year, we'll do that. But it's kind of hard to thread that needle too much. So I think really what we'll end up to do is probably feel, hopefully, forecast holds up, we'll be in pretty good shape, come, like I said, late first quarter, sometime in early in the second quarter.

Maybe just something on maybe the input cost and outlook. You talked about some of the factors that are starting to ease up on the supply chain. Just kind of -- like where are you guys -- or what's the cycle with line reviews with your retail partners? When do those tend to happen? And have you been hearing any requests from those retailers to start to clawback some of the higher cost that has been kind of in the system over the last couple of years. Has that happened yet? If not, when do you think that might start to happen? I guess has -- given your experience in the business, how has that tended to play out?

So yes, a couple of things around that. We're definitely, as Greg indicated, we're seeing those costs coming down. And from a timing perspective, with our e-commerce retailers it's pretty dynamic. There's no set cycles for them to change out. It's changing every day, every week. And we kind of look at where our pricing is relative to the competition. And then comes a business decision as to where we want to be from a margin perspective and how that aligns to our cost. From our brick-and-mortar retailers, there are, as you know, more traditional changes in their assortments. And so some of those larger retailers were already talking about the fall resets today and then some of them, what we would call mid-tier retailers, we're talking about the spring resets at this point. Now I will tell you that the discussion around the cost, we've been pretty transparent that we -- as costs were increasing and a lot of that was tied to containers, that we would be adjusting and remaining competitive with them as costs decreased. So those conversations are active. It really kind of varies based on the container cost relevant to the size of the SKU and to the retailer and to the amount of inventory that we have or the amount of inventory that they have from a timing perspective. And we kind of look at that in the detail by SKU with customers. If you look at Canada, there's a little bit of a headwind with them on the currency side of things. And so while costs are coming down, the currency is kind of working against us. So those conversations have been a little bit quieter. But yes, we are -- we want to be competitive. We're going to be dynamic. We're going to look at the latest container rates and our latest negotiated pricing, and we're going to work with our retailers on what's a appropriate time that works to keep our gross margins but also keeps us competitive in the field.

No, that's great. My last question, just strategically, how do you guys think about the initiatives or even just from an M&A standpoint or a potential M&A standpoint, taking advantage of a downturn in the global economy. I mean, the sector has been pretty resilient, I guess, in past recessions, but how do you think about strategically maybe in the next 12 to 18 months if the economy is as tough as some people think it might get?

That is a tough one to predict. I'd say what I feel really good about is that the things that we brought on to our team here with Brita and Clorox and HealthBeacon, Bartesian those things are really -- we're very excited about those, and they're going to benefit us. They should benefit us nicely in 2023. From our standpoint, it's been very quiet for a pretty good part of this year on the M&A front, on the inbound opportunities. As you know, for a period of time there, we were seeing stuff every -- all the time, and it's been pretty quiet. So I think what will be interesting is I think this environment is going to stress those folks that were kind of skating by. And so we would very much like to find the right strategic opportunity in our retail commercial business and add that to our portfolio. I will say we've got to get our house in order on the inventory and debt level, which hopefully will happen in the first quarter, like we talked about. If that happens and our debt level improves, we assume our business will hold up fine. I'm sure there will be a little bit of a roller coaster ride like it always is. But if things hold up for us well that if something comes along, we'd be very interested in taking a hard look at something.

[Operator Instructions] And with no other questions at this time, I'd like to turn things back to our CEO, Mr. Greg Trepp for closing remarks.

Thank you. As we work to deliver a strong finish to this year, we remain well positioned to benefit from our strong portfolio of leading brands. We are focused on executing well on our strategic initiatives. Our commercial business is experiencing record growth and the strong order flows continue. We have a broad array of innovative new products that should drive growth of our core Hamilton Beach and Proctor Silex brands. The small appliance market is projected to stay strong and above pre-pandemic levels. We have many reasons for optimism based on what we know at this time. We are, however, in uncertain times. It is not known how inflation and rising interest rates are going to play out in the macro environment in the global economy. As always, our actual results will depend on consumer pull-through and retailer reorders. It takes an incredible focus to manage through these sorts of times. I'm very grateful to our team for all their hard work, diligence and good thinking, which they continue to demonstrate every day. That concludes our presentation. Thank you again for joining our call.

And again, that does conclude today's conference. Thank you for joining us. You may now disconnect.