Hamilton Beach Brands Holding Co

NYSE:HBB

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Beach Brands Holding Company Q3 2024 Earnings Conference Call. [Operator Instructions]

I will now hand things over to Lou Anne Nabhan, Head of Investor Relations. Lou Anne, you may begin your conference.

[Lou Nabhan, executive]

Thank you, Ian. Good morning, everyone, and welcome to the Third Quarter 2024 Earnings Conference Call and Webcast for Hamilton Beach Brands Holding Company. Yesterday, after the stock market closed, we filed with the SEC our Form 10-Q for the quarter ending September 30, 2024, and we issued our third quarter 2024 earnings release. Both documents are available on our corporate website. Our speakers today are Scott Tidey, President and CEO; and Sally Cunningham, Senior Vice President, Chief Financial Officer and Treasurer.

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 our prepared remarks or during the Q&A. Additional information regarding these risks and uncertainties is available in our 10-Q, our earnings release and our annual report on Form 10-K for the year ended December 31, 2023. The company disclaims any obligation to update these forward-looking statements, which may not be updated until our quarterly conference call -- our next quarterly conference call, if at all. The company will also discuss certain non-GAAP measures. Reconciliation for Regulation G purposes can be found in our earnings release.

And now I will turn the call over to Scott.

[R. Tidey, executive]

Thank you, Lou Anne. Good morning, everyone, and thank you for joining us. We are pleased with our third quarter results, and I look forward to discussing our strong performance. Before we get to that, I would like to address our recent leadership changes.

I'm excited and deeply honored to be here for my first call as President and CEO of our company, a role to which I was appointed by our Board of Directors, October 1. This leadership change is the result of a thoughtful long-term succession plan. Last month, our former CEO, Greg Trepp, who is with us today, announced his retirement effective year-end. To ensure a smooth transition, Greg stepped down as CEO and Board member on September 30, and will continue to support us in an advisory role for the rest of his time with the company.

It is my pleasure to recognize and thank Greg for his outstanding leadership over his 28 years with our company, especially the past 15 years as CEO. Under his leadership, he built a fantastic global team and cultivated our good thinking culture, which champions innovation.

Together, we have achieved notable successes, including growth in sales and market share for Hamilton Beach and Proctor Silex, a strong presence in the premium and commercial markets, advances in e-commerce, the creation of a global home health care solutions business and important advances with our strategy to leverage partnerships and acquisitions. Greg's leadership has positioned us strongly for the future, and we're incredibly grateful for his contributions.

And now I'd like to ask Greg to say a few words.

[Gregory H. Trepp, executive]

Thank you, Scott. It's truly been a privilege to spend most of my career with a remarkable company, especially in the role of President and CEO. This transition is part of a well-planned leadership succession. Scott was appointed President in February and took on the CEO role in October. Over the past few months, we worked closely to ensure a seamless transition.

Scott brings 31 years of expertise with our company. His strategic focus and deep knowledge of our business, people and values make him the ideal successor. I have full confidence in Scott, our senior management and our global team to carry forward our mission and build upon what we've accomplished together.

Hamilton Beach's strengths come from our commitment -- our committed team and good thinking culture with its focus on innovation and customer satisfaction. These qualities make me very optimistic about our company's future. I want to thank our team, the Board of Directors, our customers, suppliers and business partners for their trust and support. It's also been rewarding to engage with our institutional shareholders since we became a public company in 2017.

Over the past several years, Scott has participated in our quarterly earnings calls and many of the investor conferences that we have attended. I know Scott, Sally and Lou Anne will continue building those relationships. In closing, I congratulate Scott on his well-deserved promotion and wish everyone continued success.

Now back to you, Scott.

[R. Tidey, executive]

Thank you, Greg, for your kind words and your unwavering support. We all wish you a wonderful retirement. Now I'll turn to our financial and operating performance. I'll provide a high-level overview, and Sally will cover the details before we open it up for questions.

We are pleased with the financial results we have delivered this year. For the first 9 months, our revenue grew 5.3% compared to the same period last year. Our gross profit margin expanded by 480 basis points to 25.9% compared to 21.1% last year. Operating profit almost doubled, and net income increased 19.2%.

Let me now discuss the third quarter of this year compared to the same period last year. For context, let me remind you that in last year's third quarter, we saw a post-pandemic normalization of business conditions and trends. Before that turnaround, our strong team had managed through an extraordinary operating environment that spanned several quarters. Pandemic-driven challenges included a historic surge in demand, disruptions across the supply chain and spiking then falling product and container cost.

Early last year, we were still working through the remnants of that environment. By the third quarter, however, most suppliers had returned to normal lead times, shipping transit times have returned to normal and other parts of our business have normalized. As we've said previously, compared to the first half of this year, we are now cycling more challenging comparisons.

At the same time, in the third quarter, we delivered revenue growth of 2%, and our gross profit margin expanded by 190 basis points compared to the same period last year. In fact, our gross profit margin has expanded year-over-year for 5 consecutive quarters. In the current quarter, operating profit and net income were impacted by 2 noncash items: higher incentive compensation expense due to stock price appreciation; and onetime pension termination charge. Both items are favorable for the long term. Our stock price increased 77% for shareholders, while resulting in increased equity incentive comp and SG&A this quarter.

The termination of our overfunded U.S. pension plan resulted in a reclassification of historical losses into net income, while it also realized $13 million of surplus assets that will increase our free cash flow in 2025 and 2026. Overall, we are very pleased with our third quarter results despite these events. We have good momentum, and we finished the year as we head into 2025, and we are reaffirming our outlook for the full year 2024.

Our revenue growth in the third quarter and year-to-date reflects the success of our strategic initiatives. We're focused on expanding our sales of innovative, high-value products that can command premium prices and improve our margins.

Innovation is at the core of our success. With our industry-leading research and development, we've introduced numerous products that address consumer needs from refreshes of existing products to entirely new product solutions as we work to delight our consumers. This year, we are launching more than 40 new platforms across a wide variety of high-demand categories spanning coffee, blending, ovens, grills, slow cookers, kettles, mixers, garment care and many more. Each new product aims to maximize innovation by offering unique consumer benefits.

Our innovation pipeline is robust and supports all the markets in which we participate. Our team has done an outstanding job securing placements and promotions for our new products across a broad range of customers and channels. This success has enabled us to gain market share across North America overall.

I'll now provide some brief insights into our key markets and how our strategic initiatives are driving growth. First, our focus on driving our core brands, Hamilton Beach and Proctor Silex in North America. Our strong portfolio is anchored by these well-known brands. In the third quarter, we introduced numerous innovative products that won placements with key customers.

In the industry's largest category, coffee, we launched the FlexBrew 5-in-1 Coffee Maker in new espresso makers, catering to the demand for high-quality experiences at home. In blending, we offered new models like the versatile Hamilton Beach 3-in-1 Electronic Kitchen System that does the work of 3 separate appliances: a traditional kitchen blender, a food processor and a personal smoothie blender.

We also released the Hamilton Beach Defrost & Go Programmable Slow Cooker that makes life easier for safely defrosting frozen meat and cooking it to perfection. For consumers who want to cook multiple ways but don't want a cluttered countertop, we offer the Hamilton Beach 9-in-1 Searing Slow Cooker, which combines 9 cooking options in 1 versatile appliance. It can sear, brown, sauté, roast, steam, keep food warm, slow cook or use like a rice cooker to prepare rice and whole grains. These new slow cookers are well received by both retailers and consumers.

Countertop ovens with air frying continue to be a fast-growing segment. The new versatile Hamilton Beach Digital Air Fryer Toaster Oven is designed to be powerful for faster cooking. You can choose from 6 cooking functions: bake, boil, toast, air fry, dehydrate and convection. Our new products are selling well, and we received favorable responses from retailers and consumers.

Next, I will discuss our initiative to gain share in the premium market, which represents about 40% of the total industry and is growing faster than the overall market. Hamilton Beach is increasing its participation in this key market. Through owned brands like Weston and multiyear agreements with licensed brands, we're expanding into new premium categories and gaining share.

Our CHI premium garment care products continue to enjoy strong sales and growth. New products include irons and garment steamers. In the fast-growing garment steamer category, we have introduced the CHI Vibes garment steamer, which is the perfect companion for maintaining wrinkle-free clothes at home or on the go. This compact and lightweight steamer is designed for easy travel. And with powerful steam capabilities, it quickly removes wrinkles and heats up in just 35 seconds.

We are pleased with our partnerships for Clorox True HEPA air purifiers and Brita countertop electric water filtration systems. This year, we introduced a new Clorox Ultra Air Purifier, which can treat very large spaces and features an ultraviolet light. We have also introduced a Clorox countertop steam sanitizer and a Clorox humidifier.

Our newest premium brand is Numilk. Our Numilk plant-based milk makers enable consumers to create a variety of fresh milks on demand. This new product aligns with current consumer trends towards healthier, sustainable options and positions us to meet the growing demand in this category. By expanding our presence in the premium market through brand partnerships and innovative product offerings, we are well positioned to significantly grow our market share and increase our revenue in this high potential market.

Next, our strategic initiative to lead in the global commercial market. The global commercial market is a multibillion-dollar opportunity with significant growth potential. This market represents a key area where we see substantial upside, especially as we expand our footprint internationally.

We are investing in higher-margin products designed for use in commercial food service and beverage operations as well as for hotel amenities. Commercial markets offer strong profit potential, and our initiative aligns with the increasing demand for durable, high-performance equipment.

Our growth strategy includes several key components: First, we are driving product innovation that meet the unique needs of our commercial customers; second, we are partnering with medium and large restaurant chains across the world to develop customized products that accommodate their current and new menu offerings; third, we are increasing sales with our existing customers and by adding new ones, including in the hospitality space and with cruise ship operators; and fourth, we are leveraging our partnerships with companies like Bartesian and Numilk to expand our reach and influence in the global commercial market.

Our company is particularly strong in heritage categories such as blenders and drink mixers. We are investing in advanced technologies in these categories. Our Hamilton Beach Summit Edge blender offers best-in-class performance, while our shaver blenders offer large batch blending solutions. We are expanding into the back of the house for food preparation categories with new equipment like our BigRig immersion blenders to streamline the food prep processes, reduce prep time and minimize waste.

Internationally, we see Europe, Asia, Africa and India as presenting significant growth opportunities. We are focusing on increasing our market share and expanding our footprint in these diverse and dynamic geographic markets. We are optimistic about our potential for the global commercial market to provide significant opportunities for revenue growth and margin expansion in future years.

Next is our newest initiative, which is to accelerate the growth of Hamilton Beach Health. More recently, we have become a provider of connected devices and software aimed at home health care management, reflecting our commitment to innovation and improving lives. We began to explore this market about 5 years ago and created our Hamilton Beach Health brand in 2021.

The home health market opportunity is being driven by demographics, in particular, an aging population in need of at-home services as well as increased chronic medical conditions for people of all ages. Technology is making it possible to develop home health care management tools, including remote therapeutic monitoring systems.

In February, we acquired HealthBeacon, bringing us the Smart Sharps Bin, which is designed to increase adherence to medication regimens and support safe sharp disposals. Our revenue model here is subscription-based, offering reoccurring income at higher margins. We are making investments in HealthBeacon as part of their start-up phase. The integration is going well. Revenue is increasing quarterly, and we expect HealthBeacon to contribute to operating profit in 2025.

Growth plans include adding new patients with existing specialty pharmacy customers, attracting new specialty pharmacies and increasing the number of conditions that are treated using the system. We are adding a new specialty pharmacy on January 1, and we are in promising discussions with several others. Hamilton Beach Health is also exploring additional collaborations to further expand our focus on providing home health care management solutions.

In closing, our accomplishments over the first 9 months of this year are rewarding to see, and we're positioned well to carry this momentum forward. We believe our incremental placements, planned holiday promotions, new products, increased market share position us well for holiday -- for a solid season. While consumer spending remains restrained due to the challenges in the economy, we offer a broad line of products with value to luxury price points, and we anticipate solid sales for the holiday. We expect to deliver a very good performance for the year 2024.

And now I will turn our discussion over to Sally.

[Sally Cunningham, executive]

Great. Thank you, Scott. Good morning, everyone. I will start with our third quarter 2024 results compared to the third quarter of 2023.

As you've heard, we are pleased with our third quarter results. We experienced revenue growth and gross profit expansion even as we are starting to cycle over the more difficult comparisons that started in the third quarter of 2023. However, operating profit and net income faced headwinds from noncash expenses, including increased equity incentive expense due to stock appreciation and the onetime pension plan termination expense that was reclassified from accumulated other comprehensive income.

Starting with revenue. Total revenue in the third quarter was $156.7 million, a 2% increase over last year's third quarter. The increase was driven primarily by a favorable product mix as well as higher volume, partially offset by expected average price decreases. Most of the growth was in the U.S. consumer market, which benefited from the incremental and new placements that Scott discussed.

Revenue also increased in our Mexican consumer market, while revenue decreased in our Latin American and Canadian consumer markets. Our global commercial market experienced a decrease in revenue due to soft international markets, especially China. Also included in the third quarter was $1.2 million of new revenue from our HealthBeacon acquisition. While the contribution to total revenue is small at this point, it has grown every quarter this year and is expected to grow in 2025.

Gross profit totaled $43.9 million compared to $40.1 million. Gross profit margin expanded to 28% compared to 26.1% in last year's third quarter. The 190 basis points expansion in gross profit margin in the current quarter was due to favorable product mix and lower product costs. In every quarter this year, we have delivered above prior year quarter and above our historical range. Our team has done an effective job keeping our gross profit margin strong while remaining competitive in the marketplace.

Selling, general and administrative expenses increased to $33.1 million compared to $25.6 million in the third quarter of 2023. The increase was primarily driven by higher employee-related expenses, including $2.9 million of increased noncash equity incentive compensation due to the significant appreciation of our stock price in the third quarter of 2024, the addition of $1.8 million of HealthBeacon's SG&A and the absence of a $900,000 nonrecurring insurance recovery in the prior year. Our team has done a good job managing the expenses that are within our control.

Operating profit was $10.6 million compared to $14.4 million a year ago. The decrease reflected the higher SG&A expenses, partially offset by our expansion of gross profit margin. I want to reiterate Scott's comments that HealthBeacon is still in start-up mode and the integration is progressing as planned, and we expect it to contribute to operating profit in 2025.

Net interest expense was $59,000 compared to $592,000 a year ago due to both lower debt levels and lower interest expense. Pension termination expense in 2024 was a onetime noncash charge of $7.6 million related to the reclassification of historical unrecognized losses from other -- accumulated other comprehensive income.

Our Board approved the termination of our overfunded U.S. defined benefit pension plan in 2022. And as expected, we finalized the termination in the third quarter. The resulting surplus assets estimated at $3.3 million will be deployed over the next few years to fund other existing employee retirement benefits. This is a big win for us as we expect to use -- as we expect this planned use of surplus assets will free cash that would otherwise have been used for this purpose, thereby increasing free cash flow in 2025 and 2026.

Income tax expense was $700,000 compared to $2.8 million a year ago due to the tax benefit of the pension plan termination expense of $1.9 million. Net income, inclusive of the pension plan termination impact, was $1.9 million or $0.14 per diluted share compared to net income of $10.3 million or $0.74 per diluted share a year ago. The impact of the pension plan termination expense to the current period was $5.7 million or $0.41 per diluted share.

Now turning to our balance sheet and cash flows. For the 9 months ended September 30, 2024, net cash provided by operating activities was $35.2 million, which is reflective of normalized post-pandemic working capital. This amount compared to $68.7 million for the same period last year, which was higher than normal due to the benefit of a significant reduction in post-pandemic-driven excess inventory.

Net working capital in the current period provided $20.3 million compared to $64.3 million. The 2024 period benefited from our continued focus on working capital management, which led to improvements in days sales outstanding and days payable outstanding. The change in net cash provided by operating activities reflects the net working capital changes, partially offset by adjustments to net income for the noncash stock compensation and pension termination expenses. Capital expenditures were $2.3 million in both the current and prior year periods.

During the 9 months ending September 30, 2024, we allocated cash flow to fund the acquisition of HealthBeacon for $7.4 million and to return value to shareholders through the quarterly dividend and share repurchases. Year-to-date, we have paid $4.7 million in dividends and repurchased shares totaling $9.3 million at prevailing market prices.

On September 30, 2024, net debt or total debt minus cash and cash equivalents and highly liquid short-term investments was $22.5 million compared to $49.7 million at the end of the prior year period. Our revolving credit facility expires on June 30, 2025. We have not yet completed our refinancing of the facility. And accordingly, all amounts outstanding have been classified as current liabilities on the balance sheet.

Based on the status of the refinancing and our history of successfully refinancing our debt, we believe it is probable that the facility will be refinanced before its maturity. We believe funds available from cash on hand, the facility and operating cash flows will provide sufficient liquidity to meet our operating needs and commitments.

Now let me turn to our outlook, which, as Scott said, we are reaffirming. We continue to expect full year 2024 revenue to increase modestly and operating profit to increase significantly as compared to the full year 2023.

I'd like to add a little more color to our outlook. As Scott discussed, starting in the third quarter of 2023 and each quarter since, we have reported revenue growth and gross profit margin expansion as demand, price and costs have normalized and because of the favorable impact of our focus on cost management and continued progress with our strategic initiatives. As we move into the back half of 2024, our growth comparisons are cycling the normalized results that began in the third quarter of 2023.

For the full year 2024, the retail marketplace for small kitchen appliances is expected to be modestly below 2023. We expect to outpace the industry as a result of our continued progress with our strategic initiatives. As we discussed in our last call, the revenue growth we achieved for the first half of the year was stronger than our expected revenue growth in the second half due to the year-over-year comparisons.

Moving to operating profit. Growth in the first half of this year was stronger than the growth we have estimated for the second half, again, as we cycle over the expanded growth that started in the third quarter of 2023. In the fourth quarter, we expect operating profit will continue to be impacted by higher SG&A. Despite this impact, we continue to expect that operating profit to increase significantly in 2024 compared to the full year 2023 based on expanding gross profit margin. We expect that gross profit margin in the second half of 2024 will be comparable to the second half of 2023.

I'll also comment on cash flow. For the year ended December 31, 2023, cash provided by operating activities less cash used for investing activities was an outsized $83.5 million, which included the significant impact of our focus on net working capital improvement, particularly the reduction of pandemic-driven excess inventory. Our normalized cash from operating activities less cash used for investing activities is in the $25 million to $35 million range. We expect to end 2024 in the upper end of that range.

That concludes our prepared remarks. We will now turn the line back to the operator for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Adam Bradley with AGB Capital (sic) [ AJB Capital ].

[Adam Bradley, analyst]

Sally and Scott, congrats on another great quarter. I've been a shareholder for about -- for several years and have just been really pleased with the profitability expansion, especially recently. So I wanted to ask...

[Sally Cunningham, executive]

Thank you, Adam.

[Adam Bradley, analyst]

Yes. Yes. I mean, good job, guys. And Scott, welcome.

[R. Tidey, executive]

Yes. Thank you.

[Adam Bradley, analyst]

I'm looking forward to your leadership as a shareholder. So I have some like detailed questions about the P&L to help understand and inform the forward-looking. If I start at the gross margin level, there has been significant expansion, as you all highlight, and that has been great. The SG&A line, especially the last few quarters, has expanded as well. You identified $4.7 million here in your remarks of the equity compensation in HealthBeacon. That explains a good amount of it. If I take that out, we're still seeing like this quarter, for example, about 12% year-over-year SG&A growth.

So that is not my question. My question though is, how correlated is the SG&A expense change to that of gross margin rather than sales? Because specifically, sales are growing at a low to mid-single-digit rate, but gross profit is expanding at a very high rate as is SG&A. And what I'm really trying to get to is if we're -- if gross margins were to begin to normalize back to historic levels, would SG&A -- would portions of SG&A also come down? Trying to understand the relationship between your SG&A costs and your gross profit line.

[Sally Cunningham, executive]

I think that's a good question. I mean, I think inherently within SG&A, you have the ability to constrict, right, as needed and expand as you make investments, right? So certainly, if we started to see constriction in our gross profit margin, then we would, of course, take a look at our controllable expenses and rightsize those as well.

I do think you're seeing in our SG&A right now, a couple of things that are beyond our control with the stock price appreciation. I think you're seeing some known investments that we're making, particularly in the HealthBeacon, right? Like we knew that this first year was going to be a little bit of a drain on operating profit, but kind of permanent increase to SG&A because that's the nature of buying another business.

But we feel like that business will be contributing to operating profit in 2025. And then I think the rest of what you're seeing in there is just continued investments from the business as we're trying to continue to grow and pursue our strategic initiatives.

[Adam Bradley, analyst]

Okay. Great. Yes. On the stock price, let's hope that continues...

[Sally Cunningham, executive]

It's a good thing, bad thing. Yes.

[Adam Bradley, analyst]

Yes. Well, I think your compensation, that you can control ultimately in the number of shares that you do issue. But I think that answers my question. So to summarize, some of it -- some of the expansion that we're seeing in SG&A is the result of expanded profitability and investment in new areas as well as some -- okay. Great. I have a second question. I can ask it now or I can get back into the queue.

[Sally Cunningham, executive]

No, go ahead. Yes, go ahead and ask it.

[Adam Bradley, analyst]

Yes. So this gross margin expansion has been really great to see for two reasons from my investor perspective. One is that just on its face, it's great to see better profitability from what you're doing. Two, over the last 5 or 6 quarters, it's been actually the result of higher unit volumes, and your price has actually been -- price per unit has actually been coming down for 6 quarters.

So what you all highlight is that it's more mix and volume contributing to gross profit over price. Can you -- one question, number one, is how sustainable are the existing gross margins? Like you're hitting 28 -- I mean, every quarter now, it's been higher than previous for a little while now on a rolling 12 months basis.

So how much of it is sustainable? And can you give a little more color on what is driving it a little more specifically? Is it investment in new areas, new product lines or -- versus extensions of older product lines? Just help us understand its sustainability and what's really driving it. I think it's key to your profitability, so I think we need to know.

[R. Tidey, executive]

Okay, Adam. I mean, this is Scott. So I think you brought up a couple of reasons why our gross profits have been improving. It is because of mix and also just from the cost decreases that we've had as we've gotten back into a more normalized time period.

But as we talked about, we've got a couple of strategic initiatives that are favored at higher gross profits. As I indicated, we're really working hard to improve our market share in the premium market. In that space, you're going to find higher margins than you are going to find in the mass markets. We've also improved our profits in the commercial space. And as we bring on -- while it's still a small amount, as we bring on the Hamilton Beach Health business, we think that those gross margins will be very healthy for us.

So overall, we'll continue to work on our mix as we look at how do we want to be growing share in certain markets. And so between offering just overall generally higher-priced goods to our retail partners and getting more market share in that more premium segment, that's one of the drivers that's been driving our gross profit.

[Adam Bradley, analyst]

And the sustainability of this level of gross margin...

[R. Tidey, executive]

Yes, Adam, I think we're very focused. If you look at the 40-plus new products that we're bringing out, our goal is to continue to keep pushing up our gross profits. And so we're -- our teams here are designing and developing products that meet those consumer solutions, though, but at higher gross profits. I mean we feel like that that's a thing that we need to continue to do. We feel like there's space there, and we have a lot of ability to continue to grow and drive more market share.

[Adam Bradley, analyst]

All right. Well, great job. Anyone that has looked at the history of the company, it's always been good and stable and is now hitting a new level of profitability. Great job.

[R. Tidey, executive]

Thank you, Adam. Appreciate your questions.

[Operator]

There are no further questions at this time. I would like to hand things back over to Scott Tidey for some closing remarks.

[R. Tidey, executive]

Thank you. As you've heard today, we are pursuing multiple avenues to continue to grow revenue, expand margins and deliver strong cash flow. Our company is committed to increasing long-term shareholder value. For the year 2024, we expect to deliver a significant increase in operating profit, reflecting revenue growth and gross profit margin expansion. We look forward to finishing this year in a strong position.

That concludes our report for today. Thank you again for joining our call.