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Hamilton Beach Brands Holding Company  (NYSE:HBB)
Q4 2018 Earnings Conference Call
March 07, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Hamilton Beach Brands Holding Company Q4 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you, Lou Anne Nabhan, Head of Investor Relations, you may begin your conference.

Lou Anne J. Nabhan -- Head of Investor Relations

Thank you, Denise. Good morning, everyone. Welcome to the fourth quarter 2018 conference call and webcast for Hamilton Beach Brands Holding Company. Gregory Trepp, President and Chief Executive Officer and Michelle Mosier Vice President, Chief Financial Officer and Treasurer, will discuss the Company's fourth quarter results. Scott Tidey, Senior Vice President, North America Sales and Marketing for Hamilton Beach Brands will participate in the Q&A.

Yesterday after the market closed, the Company filed its annual report on Form 10-K with the SEC and issued an earnings release. Those documents can be found on our website at hamiltonbeachbrands.com. A replay of today's call will be posted on the website this afternoon, and when available, a transcript will be posted.

Today's presentation contains forward-looking statements, which 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 was included in our earnings release and 10-K. The Company disclaims any obligation to update these forward-looking statements, which may or may not be updated until our next quarterly conference call, if at all.

And now, I'll turn the call over to Greg.

Gregory H. Trepp -- President and Chief Executive Officer

Thank you, Lou Anne. Good morning everyone, and thanks for joining our call. My remarks will cover the fourth quarter performance of our two business segments; Hamilton Beach Brands, The Kitchen Collection.

At Hamilton Beach Brands, despite being well positioned for the holidays selling season with strong placements and solid promotional support, revenue in the fourth quarter was down from last year and from our expectations, primarily as a result of lower sales volume in the US consumer market. As we compare our actual performance to our internal expectations, the primary driver of the shortfall is a reduced order flow from the US e-commerce channel. We delivered growth in many areas and we experienced the usual ups and downs of certain brick-and-mortar retailers. However, the primary reason for the revenue decrease was due to the e-commerce channel.

The decrease in operating profit in the fourth quarter of 2018 was primarily attributable to the decreased revenue and to a lesser extent, higher consumer advertising, transportation and warehousing expenses. Higher product costs were mitigated by higher selling prices that were implemented throughout the year.

After reporting revenue growth of 12.3% for the third quarter of 2018 and based on comparisons to the strong 2017 fourth quarter, we had expected 2018 fourth quarter revenue to increase modestly over prior year. Meeting that expectation was dependent upon consumer spending patterns and the pace of sell-through and reorders from retailers during the holiday selling season. While the miss to our expectations in the key holiday selling period was disappointing, as we focus on building our business over the long term, we are confident that we remain a leading competitor in the e-commerce channel.

Our Hamilton Beach Brand obtained the Number 1 ranking in units across the e-commerce channel in the fourth quarter. And for the full-year of 2018, we increased sales across a number of e-commerce partners due to our consumer preferred products, high star ratings and our investment in content among other strikes.

Unfortunately, certain partners in the e-commerce channel changed their reordering criteria. There was also strong interest by consumers in some categories such as pressure cookers and air fryers, where Hamilton Beach Brands is not positioned as strongly as we should have been. There was also pressure for many competitors that as always causes challenges in certain categories. However, the combination of changing criteria by some customers, our desire to ensure we maintain a competitive position, but don't chase revenue at all cost among other factors, resulted in the reduced ordering -- order pattern from those channels. Some of you will ask about retailer-specific activity, however, as I'm sure you might expect, we cannot go into specific customer details.

Investors in the Hamilton Beach Brands Holding Company have come to know that we are focusing -- focused on building long-term shareholder value. As I've stated previously, our progress will not be delivered in a straight line, and I expect to succeed at our goals to grow revenue and profit over time.

We also realized that our short-term performance is important. But my disappointment in a particular quarter is not as important as I believe we are positioned for long-term growth. We had many parts of our business show exciting and significant growth in the fourth quarter and second half of 2018, and I will highlight that in a moment. The growth in these areas showed impressive gains and that is the key to achieving our long-term goals.

We also believe the e-commerce channel shortfall will not be a persistent one, although I expect upside and downside surprises to continue over time. Our first quarter of 2019 is relatively small. We are currently trending above 2018 in the e-commerce channel. In our team projects, we will reverse the portfolio's (technical difficulty) in this channel throughout 2019.

Now I'd like to provide more detail about the important progress we have made in key long-term growth drivers for Hamilton Beach Brands. Our only the-best products, which are sold under the Wolf Gourmet, Weston, Hamilton Beach Professional and CHI brand names, delivered strong and double-digit growth in the second half of 2018 and in the fourth quarter. We generated solid increases in our international sales, especially in the emerging markets in which we participate and in our global commercial group in the second half of 2018.

Sales increased for FlexBrew coffeemaker line in the back half of 2018, doing well across all retail channels and partners. We introduced 90 new product platforms last year, including stand mixers, hand mixers, blenders, multi-cookers, bread makers, coffee makers, pasta makers among many others. We have a full line of air fryers and pressure cookers coming to market in 2019. All of our new items should benefit us in 2019 and beyond, and we are scheduled to introduce a similarly strong lineup of new products this year.

For the full-year 2018, sales of our only the-best products increased by more than 40% over 2017. Each brand benefited from new product introductions, along with retailer expansion. Under the Wolf Gourmet brand, we introduced a deluxe drip coffeemaker, a multi-function cooker Precision Griddle, and we refreshed our top-selling countertop oven. We demonstrated the new Wolf Gourmet stand mixer at the International Housewares Show this past week.

In our CHI garment care line, we introduced a new touchscreen iron. In the Weston line, we introduced a new electric tomato strainer and a new meat grinder and sausage stuffer. Our Hamilton Beach Professional line continues to expand, and last year we've launched hand mixers, a digital kettle, a digital countertop oven, as well as the steam tank (ph) iron designed for consumers in Latin America and a higher performance blender designed for consumers in China. I am pleased to share that our Hamilton Beach Professional hand mixer received the Good Housekeeping Editors Pick Award at the Housewares show. We expect additional growth from each of our only the-best brands in 2019 and continued product and channel expansion.

Our global commercial products have achieved a compound annual growth rate of more than 6% since 2010, driven by a reputation for performance, reliability and differentiated products. Over the past few years, we have experienced strong growth across the Americas, Europe and Asia. In 2018, our global commercial sales grew by 7%. The key elements that have driven our progress in global commercial market have been having an experienced strong team in place, expanding our high-performance blender and mixing line, and more recently to the further expansion of our product line into new categories and price points.

We generated significant growth in recent years in our total international revenue and -- particularly in emerging markets. 2018, our total international revenue grew by 7% and the emerging market portion increased by 21%. We generated strong growth in Mexico, Central America and South America. Despite a slowing economy, we saw double-digit revenue growth in China in 2018 and expect the momentum to continue in 2019. Succeeding global markets is driven by products that meet local consumer needs. For example in 2019, we plan to enter the Indian market with the new Hamilton Beach Professional juicer, mixer, grinder platform, the largest sales category in that country. But one without significant penetration are products with the quality and durability levels needed to consistently perform (inaudible) required for Indian cooking.

By capitalizing on several opportunities to expand outside traditional small kitchen appliances, in 2018 we launched 12 products in new categories, including coffee airpots, laundry care items and knife sharpeners among others. While this strategic initiative is in the beginning stages, we expect revenues from this area to grow in 2019 and 2020 as we introduce more products and gain traction. We believe that by leveraging our branding, sourcing, distribution and e-commerce expertise, we will be able to generate meaningful new revenue in the years to come. In 2019, we're introducing additional categories and products.

Let me wrap up my summary of accomplishments in 2018 with one more comment about our e-commerce efforts. Despite the fourth quarter issues we experienced, our global e-commerce sales increased in 2018 and we experienced strong double-digit growth in Canada, Mexico and Brazil. As consumer online shopping habits continue to evolve, we are focused on providing best-in-class retail support, increasing engagement with end users and enhancing programs designed to make us the preferred partner (technical difficulty).

Next, let me discuss our Kitchen Collection segment. 2018 was a challenging year, but we are pleased with our progress as we continue to execute our strategy, which is to optimize Kitchen Collection store portfolio, while working aggressively to maintain gross margins, reduce operating expenses and manage working capital. The cornerstone of our strategy is to move all stores to a one-year lease term, thereby creating more optimal operating flexibility.

This process also involves the closure of underperforming stores. In 2018, we closed 22 stores and ended the year with 189 locations. As a result of store closures and headquarter expense reductions, Kitchen Collection reduced operating expenses in 2018 by $3.4 million compared to 2017. By the end of 2019, we expect to close an additional 25 stores to 30 stores mostly in the first half of the year through natural lease expirations. After these expected closures and anticipated lease renewals, Kitchen Collection expects over 85% of the stores will have a lease term of approximately one year. Kitchen Collection expects to cost-effectively optimize its store portfolio over time to a small core group of 100 to 150 profitable stores and more favorable outlet mall locations. As a result of progress in 2018, we expect Kitchen Collection's operating loss and use of cash will improve in 2019. Overall, we believe that Kitchen Collection is doing aggressively with a difficult operating environment.

With that overview of our two segments, I'd like to turn the call over to Michelle, who will discuss our consolidated results.

Michelle O. Mosier -- Vice President, Chief Financial Officer and Treasurer

Thank you, Greg, and good morning everyone. As Greg noted, my comments will focus on our consolidated results for the fourth quarter of this year compared with the fourth quarter of last year. Consolidated revenue was $241.7 million compared with $265.8 million last year. Revenue in the Hamilton Beach Brand segment decreased 9% and in the Kitchen Collection segment, revenue decreased 10% for the reasons Greg discussed.

Operating profit was $21.1 million compared with $31 million last year. For the Hamilton Beach Brand segment, operating profit was $17.7 million compared with $26.5 million in the fourth quarter of last year. As Greg reported, the decrease was primarily attributable to lower revenue, and to a lesser extent, higher consumer advertising, transportation and warehousing expenses. Higher product costs were mitigated by higher selling prices that were implemented throughout the year.

For our Kitchen Collection segment, operating profit was $3.2 million compared with $4.5 million last year. The decrease was due to a lower comparable store sales from reduced customer traffic, as well as from the closure of 22 underperforming stores since December 2017. We realized an increase in average sales transaction value as a result of product and promotional offerings for the holiday selling season. As a result of store closures and expense reductions at headquarters, the Kitchen Collection segment reduced operating expenses in the fourth quarter by $1.1 million as we continue to make progress toward our goal of optimizing our store portfolio. Kitchen Collection generated $11.4 million in cash flow before financing activities in the fourth quarter and ended the year with no debt.

The tariffs that were enacted by the United States in July and September of 2018 on imports from China impact approximately 10% of total product purchases on an annual basis. We work closely with our customers and our suppliers to manage the impact of these tariffs in a fair and balanced manner. We were pleased that the increase from the September tariffs to 25% that was scheduled to go into effect on January 1 was deferred. We continue to closely monitor potential future tariff actions, commodity and other input costs, as well as currency fluctuations and intend to continue to make additional adjustments to price and placements as necessary and as market conditions permit.

Consolidated net interest expense was $855,000 compared with $531,000 in the fourth quarter of 2017, driven by a combination of an increase in average borrowings outstanding at Hamilton Beach Brand and a higher interest rate.

Net income was $15 million or $1.09 per diluted share compared with $13.8 million or $1.01 per diluted share for the fourth quarter of 2017. As a reminder, net income in 2017 included a $4.7 million charge or $0.34 per share related to US tax reform. For the full-year, consolidated revenue increased to $743.2 million compared with $740.7 million in 2017, primarily as a result of higher sales volume in the international consumer market and increased sales of new and higher-priced products mainly in the US consumer and global commercial markets, partially offset by the decline in Kitchen Collection revenue.

Operating profit in 2018 decreased to $32.3 million compared with $48.1 million (ph) primarily due to higher operating warehousing and transportation expenses and the operating losses at Kitchen Collections.

On a consolidated basis, cash flow before financing activities in 2018 was $3.8 million compared with $26.1 million in 2017. For the Hamilton Beach Brand segment, cash flow before financing activities decreased to $11.3 million from $22.6 million in 2017, primarily due to changes in working capital and increased capital expenditures. Hamilton Beach Brands continues to focus on prudent management of working capital and believes cash flow before financing activities will return to more appropriate levels in the near term. The Kitchen Collection segment reported a use of cash before financing activities of $7.5 million compared with cash flow before financing activities in 2017 of $3.5 million. A higher operating loss 2018 and changes in working capital were the main drivers of the decline.

Capital expenditures in 2018 were $7.8 million at Hamilton Beach Brand and $300,000 at Kitchen Collection. The Company had cash on hand of $6.4 million at the end of the year, compared with $10.9 million as of December 31, 2017. Debt at December 31 2018 was $46.6 million compared with $51.3 million last year.

Regarding our outlook for 2019, Hamilton Beach Brands expects revenue to increase modestly compared with 2018 as a result of the continued successful implementation of our strategic initiative, including new consumer and commercial product introductions, the sale of higher-priced products, only the-best placements and continued expansion in the e-commerce channel and international market. Operating profit in the first half of 2019 is expected to be modestly lower than in the first half of 2018, while operating profit in the second half is expected to increase over the prior-year period. For the full-year, operating profit is expected to be moderately higher than in 2018. Firmer commitments for the second half of the year and the fall holiday selling season are expected to occur in the second and third quarters, and as better visibility is gained, expectations will be revised. Cash flow before financing activities is expected to increase in 2019 compared with 2018. And capital expenditures are expected to be approximately $4.5 million.

Kitchen Collection expects revenue to decrease compared with 2018 as a result of the reduction in the number of stores and continued downward trend in customer traffic. Kitchen Collection expects that its operating loss and use of cash before financing activities in 2019, will both improve over 2018 as a result of the Company's expected progress executing its strategy to right-size its store portfolio and manage working capital. In 2019, capital expenditures are expected to be approximately $300,000. On a consolidated basis, Hamilton Beach Brand Holding Company expects full-year net income and cash flow before financing activities to increase over 2018.

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

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Peter Benedict with Baird. Your line is open.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

Hi. Good morning, everybody. Few questions here. So you mentioned that first quarter was trending above last year in e-commerce. Is that a similar trend for the broader HB business segment? That's my first question.

Gregory H. Trepp -- President and Chief Executive Officer

Yes, this is Greg. Good morning. I think -- think our view of the first quarter, first half kind of in line with what Michelle said, which is we think we will be just trending flat to -- push to flat on total revenue for Company. So e-commerce growing a little bit is really being offset by some brick-and-mortar ups and downs.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

Okay, that's fair. And with the e-commerce turning back up here, what's driving that? Is that orders from just -- is that the customer or customers that you kind of washed out with in 4Q coming back a little bit, or is it just others picking up the slack?

Gregory H. Trepp -- President and Chief Executive Officer

Let me -- yes, I'll -- I think maybe what we'll do is have -- Scott can give you a little more color on the fourth quarter change in criteria and how that affected us, and therefore, sort of the changes in what we do and how that has sort of been put in place to help us get back on track in '19. So Scott why don't you follow on that.

R. Scott Tidey -- Senior Vice President, North America Sales, Marketing-Hamilton Beach Brands, Inc.

Sure. Good morning, Peter. This is Scott. Hi. So if you go back and look at the back half of 2018, both at the three-month and a six-month time period, if you look at the total small kitchen appliance market, it was up double-digits. And pressure cookers and air fryers were driving about 75% of that growth. So if you take those categories out, the market was up low-single digits. HBB was -- total HBB was flat in both periods with low growth in e-commerce, but lower than overall. The total e-commerce market was up more even though we had low growth in e-commerce. Total e-commerce market was up about mid-teens and we were kind of in that mid-single digits. So while we knew going into the holidays that the category -- you know those hot categories like air purifiers and pressure cookers would do well, we thought we'd be able to offset some of that with some of our new products and strong lineup.

However, we saw several changes, the way online sales were going on in the fourth quarter. And really the two primary reasons we've lost share in online sales, the first one was, we saw a number of online retailers change the way they supported products in the fourth quarter. And instead of looking at a vendor in total across all of our product portfolio, they started making every product stand on its own from a profitability standpoint. And therefore, when you do that, the lower retail products have a tough time because the cost to ship directly to the consumers house puts pressure on that retail. So we typically, have a nice business at some of those lower price points and we needed to adjust and move some of our promotional support up to upper price points, which we've now done in the -- starting to do in the first quarter.

The second thing that we saw was, there is a number of online retailers that are trying to play catch-up and really drive share. And as a result of that, they were doing some really hot promotions across the number of products, but also across the number of our key products. And we do have an IMF (ph) policy out in the marketplace. And as people promote below that IMF policy, we do have to enforce that, so we had to not ship some of our key products during that fourth quarter time period.

So in the first quarter, we've adjusted some of our policies around that. We've looked at the items that we're doing and we have in our IMF program. And we're also looking at those retailers and third-party sellers to make sure that we really want them to be authorized sellers of Hamilton Beach product and that they're going to be aggressive on the retail prices, which they have the right to do, but we don't think that, that's going to be the best case for our business. We may not authorize those retailers to sell those specific products. But we are making adjustments, we are seeing improvements on the first half, we are refocusing our promotional efforts and support to our higher-priced retail items.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

That's super helpful, Scott. Thank you, thanks for that color. Two more questions. The first, when we think about the HB gross margin down over 200 basis points, I know you guys spoke to raising prices to offset some of the costs. I understand that, that could still have a little bit of a rate pressure associated with that. But what -- can you breakdown the drivers of that 200 plus gross margin, how much of that was kind of fixed cost to leverage just because of the revenue and how much was maybe underlying rate?

Gregory H. Trepp -- President and Chief Executive Officer

I think that -- so that was -- there was some customer mix and certainly we expected to have the stronger sales we were also spending in terms of bottom line profitability. We expect to do higher rate sales (ph). But I think really most of that's the -- coming from the customer mix as things -- as we have some customers that were -- with a different cost structure, doing better than or doing worse than the ones that we projected to.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

Okay.

Gregory H. Trepp -- President and Chief Executive Officer

There is an underlying inability to pass along price increases or the tariffs. It was more -- more about just the way the revenue flow came out between customers.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

Okay, OK, great. And then the last question, just you mentioned entering India, just curious, how you guys are going in there? Is it primarily just online or are there any partners you can speak to? But just curious how you're going to be executing that entry into the Indian market.

Gregory H. Trepp -- President and Chief Executive Officer

Sure, I'll give you a little bit of color. So this -- the product line we mentioned, the juicer, mixer, grinder is by far the largest category. So we are going to focus on one product. And sometimes as we enter a country, we go with the full line and sometimes we pick one product as sort of a hero product. So we're going to go in, yes, throughout the second quarter. We're going to start with just a real select list of customers, because it will be a -- very much a premium-priced product and our goal would be to see that through high-end outlets, a large part of which will be e-commerce players, but probably some select brick-and-mortar players, not a broad list of brick-and-mortar players, but some very select ones and really use 2019 to get the consumers, the high-end consumers used to that product and that idea. So we expect it to be -- 2019 to be about seeding the product and gaining awareness, and then hopefully, if that works out well, we will gain traction later in the year and then into 2020.

Peter Benedict -- Robert W. Baird & Co. -- Analyst

Okay, great. That's all I've got. Thanks so much guys.

Operator

(Operator Instructions) And there are no further questions queued up at this time. I'll turn the call back over to Mr. Greg Trepp for closing remarks.

Gregory H. Trepp -- President and Chief Executive Officer

Thank you. In closing, we are excited about the prospects 2019 brings to advance our strategic initiatives in our Hamilton Breach Brand segment and to make further progress in our strategy to right-size our Kitchen Collection store portfolio. And we believe we have put the right steps in place to do so. We expect both segments to deliver improvements in cash flow before financing activities compared with the full-year 2018, which will enable us to report a significant improvement in our consolidated results.

Our outlook is based on our middle-of-the-road view. And as I've explained before, internally we work toward uplift goals, but as always, we try to beat our plan. We are committed to building shareholder value over the long term.

And with that, I will conclude our call today. Thank you for joining us.

Operator

Thank you for participating in today's Hamilton Beach Brands Holding Company Q4 2018 Earnings Conference Call. This call will be available for replay beginning at 12:30 Eastern today through until 11:59 PM Eastern Time on March 14, 2019. The conference ID number for this replay is 5644 -- 5646429. Again the conference ID number for the replay is 5646429. The number to dial for the replay is 1-800-585-8367. This concludes today's conference call. You may now disconnect.

Duration: 30 minutes

Call participants:

Lou Anne J. Nabhan -- Head of Investor Relations

Gregory H. Trepp -- President and Chief Executive Officer

Michelle O. Mosier -- Vice President, Chief Financial Officer and Treasurer

Peter Benedict -- Robert W. Baird & Co. -- Analyst

R. Scott Tidey -- Senior Vice President, North America Sales, Marketing-Hamilton Beach Brands, Inc.

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