Hamilton Beach Brands Holding Company (NYSE:HBB) Q1 2023 Earnings Call Transcript May 5, 2023
Operator: Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Beach Brands First Quarter 2023 Earnings Conference Call. All lines have been place on mute to prevent any background noise. After the speaker’s remarks there will be question-and-answer session. Thank you. Lou Anne Nabhan, Head of Investor Relations you may begin your conference.
Lou Anne Nabhan: Thank you, Emma, and good morning, everyone. Welcome to our first quarter 2023 earnings conference call and webcast. Yesterday, after the market closed, we issued our first 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. Also participating in the Q&A will be Scott Tidey, Senior Vice President Global Sales. 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 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 will turn the call over to Greg.
Greg Trepp: Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. I plan to take the next few minutes to provide an overview of our performance for the first 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. During our last earnings call, I discussed that we expected a solid full year for the soft first half, with the first quarter being the most challenging period. As a result of the expected continuation of both soft consumer demand and retailer inventory rebalancing, our total revenue decreased 12.4%. Early in the first quarter many large retailers significantly reduced their orders as they continue to rebalance their inventory levels in connection with finalizing their fiscal year 2022 results.
Retailer order patterns rebounded to more normalized levels as the first quarter unfolded. Our company has also made good progress addressing the inventory challenges from last year, which were driven by supply chain disruptions. We gained strong momentum in the fourth quarter of 2022 and entered this year in a good position. In the first quarter, we further reduced our inventory levels and at a slightly better rate than anticipated. We ended the first quarter with inventory at $132 million compared to $196 million at the end of last year’s first quarter and our peak of $244 million at the end of September. Our debt came down as well. At the end of March, our debt was $79 million. If you recall, we said in our last call, we expected to end the first quarter at approximately $90 million, and we were pleased to beat that estimate.
We delivered strong cash flow before financing in the first quarter of $34.3 million compared to a use of $21.2 million in the 2022 first quarter, because of our progress and significantly improving working capital. Despite our first soft first quarter, we are optimistic about the potential for a solid full year. We are encouraged by the placements and promotions we have secured for the back half of the year across a wide variety of categories and customers. Our commercial market is expected to grow in 2023 not as strong as 2022, but certainly strong somewhere in the mid to high-single digits. That could change of course, but we expect it to be a solid contributor. While we continue to project total revenue in 2023 to be flat with 2022 we believe there could be upside depending on consumer and retailer spending patterns.
Over a longer horizon, we are excited about the prospects provided by the significant groundwork that we have laid over the past few years. We successfully navigated many challenges that were related to the pandemic and supply chain disruptions. Throughout that period, we continue to invest in the development of innovative products and expand our brand portfolio. We now have a growing number of licensed brands for premium products. We also have several new exclusive multiyear agreements, under which we develop market and distribute appliances in markets that are new to us. We began to focus on the large and fast-growing home health and wellness market in the past few years and believe this initiative will begin to have a positive impact on our results this year.
We expect to benefit from our growing participation in the global commercial market. We believe we are well-positioned to benefit from these investments in 2023 and beyond. Our company has a long record of developing innovative solutions that improve everyday living, based on studying consumer preferences and pain points. Our innovation in new products continues to play a key role in our ability to secure placements and promotions. To give you a few examples, we have introduced a number of new slow cookers including our Proctor Silex Double-Dish that enables cooks to prepare two menu items at a time. Our Weston 2-in-1 Indoor Smoker and Slow Cooker is very popular and early models can be frost and brown. We have many new oven models that can air fry, bake, broil or toast.
We put a lot of innovation in our coffee makers. We offer more capacity, rapid brew, multiple brew strengths, personal brewing in one machine, hot or iced options and a choice of thermal or glass carafes. We also continue to invest in our strategic initiatives, which are ongoing programs that have helped us stay strong over the past several years. They are designed to increase revenue, expand operating margin and generate strong cash flow over time. These initiatives support our overarching goal of long-term value creation. Four of our initiatives are focused on expanding our presence in markets where we can increase the sale of higher-priced higher-margin products. These include the premium commercial Home Health and Wellness markets as well as our core market that focuses on our Hamilton Beach and Proctor Silex brands.
The other two initiatives support our growth plans in all markets. These include accelerating our digital transformation and leveraging partnerships and acquisitions. Let me briefly discuss each one. First, our initiative to lead in the global commercial market. Our growth plans for this market include new products, expanding customer relationships in both the food service and hospitality businesses and investing in e-commerce. We continue to leverage our leadership and heritage positions in the blending and mixing categories while we expand into new areas including back-of-the-house solutions. Examples of new products with excellent market reception are our new Summit Edge high-performance blender our MixStation heavy-duty drink mixer that makes milkshake treats and our new BigRig line of immersion blenders, all of which are gaining traction globally.
Next our initiative to gain share in the premium market. We plan to further expand our presence in the premium market with continued new product development, digital marketing and by pursuing additional licensing agreements and other collaborative arrangements. We are very excited about our newest agreement that we announced in early March with a company known as Numilk. The company provides fresh ingredients for making plant-based milks, including almond milk and oat milk, lattes and protein shakes, either in the home or by commercial establishments such as coffee shops. Numilk’s ingredients are delivered in pouches. Users combine the ingredients with water in a blender-type appliance to produce fresh non-dairy drinks on demand. Numilk’s products are known for their high quality and excellent taste.
The Numilk system also saves customers money, reduces our shipping costs and has a positive environmental impact. What Numilk needed was a next-generation appliance and a partner to help scale their business. We are delighted to have been selected to design the new specialty appliances for use by consumers and commercial customers. We also will provide sales marketing and distribution of the new appliances. We are in the design and engineering phase and plan to launch the new products in early 2024. The plant-based milk market and household penetration are growing fast. Globally sales were approximately $20 billion. We expect US sales to grow approximately 10% annually. More people are trying plant-based milks and we are very excited about the potential for this business.
We are also excited about the continued strong growth prospects for the Bartesian cocktail machine, which we also helped design and sell. Last year, we introduced the new duet model and the professional model for commercial use. It has been exciting to partner with Bartesian for the creation of fast growth in this new category. A key growth driver has been Bartesian’s commitment to develop more than 50 cocktail flavors. Our CHI brand continues to grow in sales and share of the garment care category and has established itself as a leading premium brand. Our newest CHI products include a mini-iron and a full-sized handheld steamer. New Hamilton Beach Professional products include our cast iron electric griddle, cordless hand mixer and a variable speed hand blender.
Our Weston line includes a number of new products in several categories, including vacuum sealers, dehydrators and other innovations in the preservation, processing and prep categories. Our Wolf Gourmet, countertop appliances continue to appeal to consumers in the luxury market. Next our initiative to expand in the home health and wellness market. We are pleased with the progress we are making to increase our participation in the large and fast-growing home health and wellness market. Our focus is on the air purification, water filtration and home medical markets. We are particularly excited about the prospects for the home medical market. The trends are well known. An aging population is increasingly living with and managing chronic health conditions.
Demand for personalized healthcare solutions is rising in lockstep. The need exists in younger demographics as well. The healthcare industry increasingly is looking for new ways to enable patients to manage their medical needs in their homes due to decreasing supply of physicians, nurses and clinicians. Emerging technologies are enabling patients to manage many medical needs at home, using adherence tools, diagnostic systems and connected solutions. Our sweet spot is working with companies, specialized in breakthrough technologies that need a commercialization partner. These partnerships enable us to leverage our strengths in brand, product development, sourcing and logistics. Our initial participation in the home medical market is through an agreement with a company called HealthBeacon Limited.
HealthBeacon is a great partner and a leading developer of smart tools for managing injectable medications at home. Our initial product is called the Smart Sharps Bin from Hamilton Beach Health powered by HealthBeacon. In 2022, we set up a selling infrastructure and began initial distribution. Together with our partner, we expect to drive sales through new agreements with specialty pharmacies. We are also exploring additional opportunities to collaborate with HealthBeacon and other prospective partners in the home medical market and hope to finalize additional partnerships over the next few quarters. We have expanded our participation in the air purifier category. In 2022, we introduced six new Clorox-brand True HEPA models and initial consumer response has been favorable.
This year we are adding an extra large room model. The air purifier market is expected to continue to be strong, given the benefits these machines provide in addressing consumer concerns about indoor air quality. Earlier this year, we created a new category with the launch of Brita Hub, an electric countertop water filtration system. The electric system processes clean, great-tasting water from the tap much faster than traditional pitchers. Initial reception has been favorable. Now I will turn to our initiative to drive core growth. As we work to expand in new markets, we remain intently focused on accelerating the growth of our core brands, Hamilton Beach and Proctor Silex. In 2022, we introduced 40 new product platforms, 32 for Hamilton Beach and eight for Proctor Silex.
Plans are in place to drive growth of these two brands including innovative new product development and continued investment in digital marketing. To point out, just one example of our innovation, this year we are celebrating the 10-year anniversary of the introduction of our highly successful breakfast sandwich maker, an innovation created entirely by our product development team. This appliance continues to resonate with consumers and sell well. Moving on to our initiative to accelerate our digital transformation. The e-commerce channel represents a very strong and fast-growing part of our business. Brand reputation, product features, innovation and star ratings all play a critical role in driving online sales and these are all areas where we excel.
Our e-commerce capabilities have become increasingly sophisticated and we are continuing to invest in them. Approximately 50% of the US retail industry revenue is now sold through the e-commerce channel and the Internet is increasingly influencing brand perceptions and consumer purchases. We are increasing our participation with pure-play and omni-channel customers, supporting growth in digital engagement with online marketing programs and expanding our direct-to-consumer distribution operation. Finally, we have an initiative to leverage partnerships and acquisitions. We have significantly increased our focus on this initiative. We prioritize opportunities that will provide entry into consumer or commercial markets where we can become a stronger participant.
We are actively engaged in the pursuit of additional partnerships that could drive growth in all of our markets. Looking ahead, as we have indicated, we expect the second quarter to still be challenging, although not as much as the first quarter. As we enter the second half of the year, we believe that our strategic initiatives and innovative new products position us well to deliver a solid year. Now, I will turn the call over to Sally.
Sally Cunningham: Great. Thank you, Greg. Good morning, everyone. I’ll start with our first quarter 2023 results compared to the first quarter of 2022. Net sales for the first quarter of 2023 were $128.3 million compared to $146.4 million for the prior year. This decrease was primarily driven by overall lower unit volume resulting from the previously mentioned soft consumer demand and retailer rebalancing early in the quarter. Gross profit was $20.9 million or 16.3% of total revenue, compared to $28.2 million or 19.3% in the prior year. Margin compression was due to unfavorable customer and product mix and de-leveraging of fixed charges. These were offset slightly by lower expenses for outside warehousing and labor compared to the prior year due to lower inventory levels.
Selling, general and administrative expenses were $25.9 million for the first quarter of 2023, compared to $15.4 million in the prior year. As previously disclosed in the first quarter of 2022, we recorded a $10 million insurance recovery. Excluding the insurance recovery, the first quarter 2022 SG&A was $25.4 million. Operating loss in the first quarter was $5.1 million, compared to operating profit in the prior year of $12.7 million or $2.7 million excluding the insurance recovery. Net interest expense increased from $1.3 million compared to $700,000 due to higher interest rates offset by lower average debt compared to the prior year. Other expense was $16,000 for the first quarter compared to $1.5 million in the prior year. First quarter 2022 included losses driven by the liquidation of our former Brazilian subsidiary which did not recur in 2023.
The effective tax rate on loss was 24.7% for the first quarter of 2023 compared to 32% on income for the prior year. The first quarter 2022 effective tax rate was unfavorably impacted by interest and penalties on unrecognized tax benefits and a valuation allowance related to the Brazil liquidation that did not recur in 2023. Net loss for the first quarter was $4.8 million or $0.34 per diluted share compared to net income of $7.2 million or $0.51 per diluted share for the prior year. Excluding the tax-affected insurance recovery net loss for the prior quarter was $300,000 or $0.02 per diluted share. Now turning to our balance sheet and cash flows. Net cash provided by operating activities was $34.9 million compared to cash used for operating activities of $20.8 million in the prior year.
The change was primarily due to net working capital which provided cash of $39.9 million in 2023 compared to a use of cash of $24.9 million in the first quarter of 2022. On March 31, 2023, net debt was $77.1 million compared to $110 million on December 31, 2022 and $118.3 million on March 31, 2022. Net debt was significantly reduced year-over-year due to our focus on working capital improvements. As of March 31, 2023, we had $53.1 million of available borrowing capacity under our credit facility. First quarter, capital expenditures totaled $464,000, which was flat compared to last year. With major investments in infrastructure behind us including our new ERP system, and our new US distribution center, we have been able to significantly decrease capital investments compared to recent years.
Capital expenditures for 2023, are expected to be in the $4 million to $5 million range. Now turning to our outlook. For the full year 2023, we expect revenue to be flat compared to 2022. At this time, revenue in the second half of 2023 is expected to increase modestly. As Greg reported, we are pleased with our progress in securing incremental placements and promotions for the second half. We believe there could be upside to our full year revenue outlook, as we continue to finalize placements and promotions for the holiday selling season and depending on what happens, with consumer consumption trends and retailer purchasing patterns. We expect gross profit margin to return to its historical range, as the second half of the year unfolds. SG&A expenses excluding the $10 million insurance recovery in 2022, are expected to increase moderately for the year due to higher employee-related costs, as well as investments in new product advertising and additional staff to support direct sales of the company’s commercial products in international markets.
Operating profit for the full year 2023 is expected to increase compared to 2022 excluding the $10 million insurance recovery. Interest expense in 2023, is expected to increase compared to 2022 due to higher interest rates. Cash flow before financing in 2023 is expected to increase significantly compared to 2022, due to continued improvements in net working capital. That concludes our prepared remarks. We will now turn the line back to the operator, for Q&A.
Operator:
Greg Trepp: Thank you, Emma. Hamilton Beach Brands has invested in the people and best practices to ensure we develop consumer-preferred products that have the right balance of trusted branding, innovation and quality to offer to our customers and consumers, at the right price. As the company has expanded into more categories and price points, we have increased the attractiveness of our company to serve the needs of our customers. In 2023, we are very pleased to have been awarded incremental placements and promotions across a wide range of categories, and a wide range of North American customers in brick-and-mortar, omni-channel and e-commerce retailers. We’ve also experienced very nice progress increasing our customer base, within our global commercial business.
We expect these gains to positively impact on the company in the third and fourth quarters. We continue to pursue additional promotions focused on the peak holiday period. That concludes our report today. Thank you again, for joining our call.
Operator: This concludes today’s conference call. You may now disconnect.
