Hamilton Beach Brands Holding Company (NYSE:HBB) Q3 2023 Earnings Call Transcript

Hamilton Beach Brands Holding Company (NYSE:HBB) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: 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.

Lou Nabhan : 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.

Gregory Trepp : 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.

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Q&A Session

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 and a stronger second half, which is how the year has unfolded. Our expectations for the stronger second half were based on increase in placements and promotions across many of our North American customers. This year, we are introducing more than 40 new product platforms across a wide variety of categories. These include products in high-demand categories like single-serve coffee, personal blenders, ovens, grills, slow cookers, garment steamers and many others.

Our team has done an outstanding job securing placements and promotions for our new products across a broad range of customers and channels. Our new products that are in the marketplace now are selling well overall. We have also gained market share this year that we expect will benefit us in the fourth quarter and in 2024. We believe our incremental placements, planned holiday promotions, new products and increased market share position us well for a solid holiday selling season. I will comment on the small kitchen appliance industry in a moment, but first, I will note, we are further encouraged that retail sales overall in the U.S. have continued to grow year-over-year and consumer spending has been resilient. At the same time, economists and retailers have expressed uncertainty regarding continued momentum due to inflation and high interest rates.

Consequently, consumer spending for the small kitchen appliance industry and the overall marketplace remains challenging to predict. There are mixed signals with some data pointing towards solid trends, while others are indicating a potential softening is underway. Small Appliance industry sales decreased modestly through September compared to the same period last year, but remained above pre-pandemic levels. While we have seen no indication of a significant drop in spending on the small kitchen appliance category in the near future, we do expect it to end the year down slightly. As always, our final results will depend on the sell-through at retail and retail replenishment orders, given the uncertainty in the macroeconomic environment, we’ve adopted a slightly more conservative view regarding full year 2023 revenue and have slightly lowered our expectation from flat with 2022 to modestly below 2022.

We could end up chasing demand depending on consumer spending, but we want to avoid generating increased levels of excess inventory by being too optimistic. Despite the slightly lower revenue outlook, we continue to expect operating profit to be above last year, excluding the nonrecurring $10 million insurance recovery in 2022. I also want to take a few minutes to discuss our longer-term view. Since our spinoff into an independent public company in 2017, we have said that we operate our business for the long term. As a reminder, we have six strategic initiatives to drive long-term growth. We continue to make progress with these initiatives that are designed to drive revenue growth, expand margin and generate strong cash flow over time. The initiatives are focused on increasing sales of innovative, higher-priced, higher-margin products in our core North American market.

Across our initiatives, we have continued to expand our portfolio of leading trusted brands. We also continue our commitment to consumer-driven innovation and launched 250 new product platforms in the last five years. We expect the momentum to continue in 2024. Let me briefly summarize each initiative. First, we want to gain share in the premium market. We have a growing number of licensed brands in the premium market, including Wolf Gourmet and CHI. More recently, we have established new partnerships with Bartesian and Numilk. We acquired Weston Brands and created the Hamilton Beach Professional brand. In 2022, sales of our premium brands accounted for 15% of total revenue. We expect premium brand sales to be on track with or ahead of that amount in 2023.

Next, we plan to expand in home health and wellness. We launched an initiative to expand our participation in the large and fast-growing home health and wellness market in 2021. We entered into a trademark licensing agreement with Clorox and launched a new line of premium air purifiers under the Clorox brand in 2022. We entered into a licensing agreement with Brita in 2022. And in early 2023, we launched a new category for electric countertop water filtration under the name Brita Hub. This electric countertop appliance creates fresh, great tasting water, much faster than traditional pictures. We’ve also begun to participate in the home medical market, where several trends are converging that we believe we can drive strategic opportunities for us.