Good day, everyone, and welcome to the Hamilton Beach Brands Holding Company Third Quarter 2023 Earnings Conference Call and Webcast. Today's call is being recorded. And I would now like to turn the conference over to Lou Anne Nabhan, Head of Investor Relations. Please go ahead.

Thank you, Lisa, and good morning, everyone. Welcome to our Third Quarter 2023 Earnings Conference Call and Webcast. Yesterday after the market closed, we issued our third quarter 2023 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 Sally Cunningham, Senior Vice President and Chief Financial Officer. Joining us for Q&A will be Scott Tidey, Senior Vice President, Global Sales. Our presentation today does include 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 10-Q and our annual report on Form 10-K for the year ended December 31, 2022. 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. Thank you for joining us. I will take the next few minutes to provide an overview of our performance for the third quarter of 2023 and discuss our expectations for the remainder of the year. Then Sally will discuss our financials in more detail. After that, we will take your questions. We were pleased with our third quarter results. As expected, revenue returned to growth and increased nearly 2% compared to last year's third quarter. Our gross profit margin expanded by 300 basis points to 26.1%. Lower average sales price was offset by lower product costs and lower distribution and warehousing costs. Operating profit increased 54% to $14.4 million compared to $9.4 million in the third quarter of 2022, reflecting the gross margin expansion and flat SG&A. We also continued to deliver significant improvement in net working capital and free cash flow. Sally will discuss the actual results. Regarding our revenue results. In our consumer markets, overall revenue increased approximately 3% and -- by market, revenue increased in our Latin America and Mexican markets as a result of increased distribution across key retailers. Revenue decreased in our U.S. and Canadian markets as a result of softer demand in the small kitchen appliance category compared to last year. In our global commercial market, revenue decreased 11%. This decline is attributable to demand normalizing compared to the third quarter of 2022 when revenue grew nearly 36% due to strong post-pandemic demand in the food service and hospitality industries. Additionally, the current year sales decline occurred in international markets, while sales in the U.S. food service and hospitality industries performed well. As we have discussed in our previous calls this year, for the full year 2023, we expect a solid performance for the soft first half…

Thank you, Greg. Good morning, everybody. I will start with our third quarter 2023 results compared to the third quarter of 2022. Net sales increased to $153.6 million in the third quarter of 2023 compared to $150.8 million last year. Due to increased unit volume that was partially offset by lower average sales price. Gross profit for the quarter was $40.1 million or 26.1% of total revenue compared to $34.8 million or 23.1% in the prior year. The increase was due to lower product costs and lower distribution and warehousing costs, offset by lower average sales price. Selling, general and administrative expenses were relatively flat year-over-year at $25.6 million compared to $25.4 million last year. With increased personnel-related expenses offset by a nonrecurring insurance recovery this year. Operating profit increased significantly to $14.4 million for the third quarter of 2023 compared to $9.4 million last year. Reflecting gross profit expansion and relatively flat SG&A. Net interest expense decreased by $700,000 to $600,000 for the third quarter of 2023 versus $1.3 million last year. This decrease reflects significantly lower average debt outstanding, partially offset by higher interest rates. Other expense net was flat compared to last year and included currency losses of $400,000 this year. The effective tax rate for the third quarter was 21.6%, and compared to 22.8% in last year's same period. The lower rate in the third quarter of 2023 was due to a discrete benefit on foreign income in the current year. Net income for the quarter was $10.3 million or $0.74 per diluted share compared to net income of $5.9 million or $0.43 per diluted share in last year's third quarter. Now turning to our balance sheet and cash flows. Year-to-date, net cash provided by operating activities increased nearly $109 million to $68.7 million compared to…

[Operator Instructions] We'll take our question from Adam Bradley with AJB Capital. Please go ahead.

Hey, Greg and Sally, how are you? Hey, so solid quarter, strong profitability through gross margins. That was great to see and great to see the free cash flow improving with net working capital. I've just a couple of questions. I'll start with one or two and then get back into the queue. Looking longer term, it's helpful for investors when you share your strategic initiatives. As you kind of look out over the next, say, three years or whatever your outlook is -- where do you see the greatest opportunities for dollar sales growth from your strategic initiatives? Just speaking kind of broadly?

Thank you, Adam, for the question. And I think what I feel good about is we do have a nice mix of initiatives. They all have a high potential we feel really good about all of them. And as we've experienced and as folks know that some of those things will grow at different rates than others. So I think right now that -- if I think about the core business, Hamilton Beach and Proctor Silex, given the fragmentation in the market that has significant upside, it's hard to get that growth, but it has upside. Certainly, the commercial market has a global -- it's a global business that we're expanding in a number of categories that has strong growth potential. The premium business is one third of the market dollars. And so while this has moved up in our mix -- as a weight of our mix, we have a long way to go to get a top share in the premium segment and then home health and wellness area is really all new to us. So it's one of those positions that we're in that we feel really good that every year we're investing in have high growth potential. They all won't reach their full potential and some of them will take longer than others. But I do feel like the core probably has the highest growth opportunity. And then I think sort of followed very closely by the other markets I mentioned, the home health, commercial and premium.

All right. Well, yeah, thanks for that. So I'll ask one more follow-up and then I'll get back into the queue a very strong gross margin quarter, in fact, I looked back through historic numbers, I can't find another quarter with 26% gross margin. So great job on that for investors. Can you tell us a little bit more about what's driving this? You -- I think you mentioned in the Q and in your release that it's driven by mix. If we overlay that to the strategic initiatives, is it premium? Is it -- is it more of a cost thing? Can you just give us a little more color on gross margin? And to give it more context, gross margin is the -- historically for Hamilton Beach has been the single greatest driver of profitability and the one that's most variable and helping investors understand what really drives that would give us a better line of sight into the company's performance.

Great. Good question, and thank you. And that's certainly expanding our gross margin percentage is a big focus of us -- of the management here and the initiatives that we're focused on and the potential to do that, help us with that goal. I will say that as costs skyrocket is higher over the past two years, particularly last year, we worked very, very hard to pass along those costs. We were not trying to do anything other than to offset our cost to retailers and consumers, but it's very hard to keep up with a skyrocketing cost position. As they've dropped pretty quickly, we have adjusted our prices to be competitive, but also, we have not had to pass them all along yet. We also have a nice movement in some of our initiatives, some of our premium products and commercial and other areas to play an important role in our gross margin percentage. So I think right now, there's been enough movement up and down that it is difficult to know over the long term, how much of that will be able to be consistent about. These are very, very strong numbers. In the past, what we've said is we've we believe we are confident we can stay in our historical range of gross margin percent. And our goal is to move higher than that historical range. So really, our biggest focus is let's run our business where we drive top line we deliver gross margin in or slightly above our historical range, and we control our costs, and that should drive or profit percentage and dollar expansion pretty nicely. So what I would say is we'll see how the volatility in the cost structure settles out over the coming quarters. we're going to stay competitive and hold on as much margin as we can. So we'll see how that plays out in the coming year.

[Operator Instructions] And we do have follow-up questions from Adam Bradley with AJB Capital.

All right. So kind of following on that, your -- I think your press release or the Q talked about your gross margin being driven in part by savings from warehouse and distribution. And I know you guys took on a big project to relocate and now you have a newer and better distribution warehouse system. Can you tell us a little bit about -- can you quantify the savings from at least to start, like how should investors look at that on a go-forward basis? And how much of the gross margin capture here was due to warehousing and distribution?

We're not going to break it out specifically, Adam, but just directionally, I will say that, again, with the pandemic surge in labor, surge in gas prices, the whole -- this whole supply chain went crazy last year, as you all know. And so we also do have moved to a facility that we are very excited about, and we continue to work on ways to be more efficient in all aspects of our distribution system. So I think we are improving on the efficiencies of our system compared to the year before and the year before that. The market costs have become more normalized, -- there's still some pressures in certain areas. But overall, I think it's -- I think it is a combination of our new facility, our team getting settled in there and then the market conditions being more favorable as we go forward. So I'd say, to me, the key driver was the change in product cost and inbound freight costs and an important but lesser influence was the distribution of the outbound costs in terms of the margin change.

This is Sally. The only thing that I'll add to that, right, as you've obviously seen us through our net working capital, there's a significant reduction in inventory, right? And so from a -- think about distribution and warehousing, there's a direct correlation, if you have less inventory on hand, you have lower warehousing costs, right? And to a point where this time last year -- or this year, I guess, I would say we've consolidated warehouses, right? So we're actively working to keep our inventory levels lower, so we can keep our warehousing costs lower. So you'll see that as a continued theme going forward, too.

All right. So that gives investors like me a little bit of a better window into performance. So along the lines of net working capital as a follow-on to that. So first of all, just tremendous performance in unwinding the net working capital position that had been built up over time. Historically, your business has been one that assuming normality in supply chain or at least stability, let's call it that amount of stability. It's a -- you're a cash-generating business due to your kind of asset-light nature. So as we look at your strategic initiatives and your opportunities, and now cash production rather than consumption through net working capital. Kind of you tell us a little bit more about the capital allocation plan for Hamilton Beach. I know you've laid out dividends and acquisitions. But just kind of your view over the next three years of where the best places to build value are in terms of capital allocation?

Yes. This is Sally again. That's a great question. I think that's something that we're working through right now as we're thinking through our 2024 plan and our kind of 3- to 5-year strategic plan. I mean obviously, we've allocated the cash flow to reduce debt, right? And we're getting it down to a comfortable level. I think we've talked about 1.5x to 2x EBITDA, right, as a comfortable debt level. And so as we look out, I think we'll continue to have the viewpoint that we want to allocate free cash flow to our strategic initiatives and opportunistically to M&A where it makes sense. -- specifically, which initiatives, I think we're still working through right now. But certainly, we want them to be growth drivers.

Yes. And I guess it seems like some of the strategic initiatives are maybe more capital intensive than others. But overall, the M&A space, it's a tough time to sell a business and a better time to buy one right now. Can you tell us a little bit more about what you're seeing in the market? And your overall view of acquisitions -- are they -- do you look for more bolt-on that you can easily integrate? Or are you looking -- if you found something that was big, would you go after it? Just -- I know it's tough to be hypothetical, but I think investors want to understand what the thinking is at least and if opportunity is available, how you might respond?

So Adam, on the -- how opportunities are presenting themselves or bubbling up. I do think that this environment is putting pressure on those folks that were not well positioned or overextended or whatever might cause a company to go into pressure situations. So this is definitely a time when having done the blocking and tackling and the important work during the pandemic puts a company in a better position post-pandemic. And I feel really good the team here did that. So I do think there will be an increase in opportunities for us to look at. It had been still relatively quiet, but there's been a little bit of activity on the front of opportunities presenting themselves. But we're going to look at anything and everything that makes sense for us and evaluate it. I will say, more likely it's going to be a bolt-on sort of opportunity. But -- we have a very sophisticated board who views -- they're really focused on driving long-term shareholder value. So there was something that was more a larger opportunity to combine or buy or do something in the long term, they would definitely look at whatever opportunity presented itself. So in the end, I think I'm assuming we're going to see something here in the coming year to at least evaluate whether it makes sense for us or not, we'll be really focused on it was at the right price for the opportunity in front of us.

And there are no further questions at this time. I'd like to turn the call back over to our CEO, Greg Trepp, for any additional or closing remarks.

Thank you. Today, we discussed our commitment to building long-term shareholder value. supported by our many competitive advantages in our strategic initiatives. We benefit from our leadership in the small kitchen appliance industry, which has a long history of strong durable demand. Our team is experienced with strong industry, customer and consumer knowledge. We have a strong portfolio of well-known trusted brands anchored by our flagship brands, Hamilton Beach and Proctor Silex. We are a proven innovator -- our retailer relationships span a broad group of customers in brick-and-mortar, omnichannel and e-commerce channels. We have an asset-light global infrastructure. We plan to leverage all of these strengths in 2024 and beyond. That concludes our report for today. Thank you again for joining our call.

Thank you. And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.