Hamilton Beach Brands Holding Company (HBB) Earnings Call Transcript & Summary

Good morning. I'm pleased to welcome back Hamilton Beach Brands. Hamilton Beach, for those who don't know, spun out of NACCO Industries in 2017. It trades under the ticker HBB. The company actually participated here in January of 2020, right before the pandemic. But since that time, Scott Tidey has been promoted to CEO and Sally Cunningham has joined the company as CFO. So I'm going to turn it over to Scott. He's going to walk you through a presentation. And then if there's time for questions, we'll take them. If not, the company does have 2 breakouts later today. So with that, I'll turn it over to Scott.

Great. Thank you. Good morning, everyone, and thank you for joining us today. As indicated, I'm Scott Tidey, President and CEO, that happened back in October, but I have been with the company for about 31 years. And joining with me is Sally Cunningham, our CFO. Sally and I are excited to share with you some of our key insights about Hamilton Beach Brands. Before we get started, just a reminder about our safe harbor statement. Please be sure to read it carefully. Hamilton Beach is a prominent name in the world of small appliances with a legacy of 115 years, our company has a long history of delivering high-quality innovative products. We are a leading designer, marketer and developer and distributor of a diverse range of branded small electric appliances. Our core consumer market is in the North America, including U.S., Canada, Mexico and Latin America. We have made important strides in increasing our share of the premium market and the global commercial market. More recently, we have become a provider of connected devices for home health care management, reflecting our commitment to innovative and improving lives. We became public in 2017. Our stock is traded under the New York Stock Exchange. We generate annually approximately $650 million, and we sell 25 million to 30 million units annually, which underscores our significant market presence and customer trust. We are dedicated to profitable growth. We also are focusing on reducing our working capital and debt and ensuring a healthy financial foundation for continued success. Let me review the key highlights that we believe make our company a compelling investment opportunity. First and foremost, we are a leader in the large and growing consumer housewares market. This addressable market in North America, including the U.S., Canada and Mexico is approximately $11.5 billion. Our strength lies in our powerful portfolio of iconic brands, which are known and trusted by consumers worldwide. Second is our innovation is at our core of our success. With our industry-leading research and development, we have a long history of introducing innovative products that solve consumer pain points. Third, we have established strong relationships with key customers across all markets and channels, including an industry-leading e-commerce presence. Fourth, we are executing 6 strategic initiatives designed to drive revenue and growth and expand our margins over time. Fifth, our asset-light business model allows us to generate healthy free cash flow. And sixth, we follow a disciplined capital allocation strategy of reinvesting in the business and returning value to shareholders. And finally, we have experienced management team to execute against our strategic initiatives. We have a powerful brand portfolio anchored by 2 flagship brands, Hamilton Beach and Proctor Silex, both of which are household names. These brands have been trusted by consumers for more than a century, symbolizing our long-standing commitment to quality and innovation. The solid foundation of our core business enables us to invest in new growth initiatives in the premium, commercial and home health markets. We have secured exclusive multiyear trademark licensing agreements with an increasing number of premium consumer brands. These agreements not only elevate our portfolio, but also allow us to offer products at higher prices and margins. As you can see on the right, our portfolio is diverse, offering a good, better and best product assortment from value to luxury. We participate in more than 50 product categories, demonstrating our ability to meet a wide range of consumer needs. Our Hamilton Beach Brand holds a top 3 position in 26 key product categories in the U.S. This ranking underscores the strength and recognition of our brand across a broad spectrum of product offerings. We participate in high-demand categories where consumer interest is strong and our products are well positioned to capture significant market share. At Hamilton Beach, our good thinking approach drives our commitment to consumer-driven innovation. This philosophy focuses on understanding consumer needs, finding innovative solutions that improve everyday living. We gather data and insights from over 25,000 consumer touch points every year. In the last 5 years, we have introduced over 200 new product platforms, a testament to our dedication to staying ahead of the market and trends and consumer expectations. Our goal with every new product is to offer a unique benefit that exceeds the need of our customers and creating lasting value. Our innovation pipeline supports all the markets in which we participate. As a result of our innovation success, Hamilton Beach has increased dollar share and unit share in the market. Here, you can see a number of the categories that we participate and a number of products that we launched in 2024. Some of the larger categories like coffee and espresso, you can see new product offerings in the upper left and also another large category like ovens, you can see some of our new products on the lower right. Building and maintaining best-in-class customer relationships is a cornerstone of our business strategy. Our success is deeply rooted in the strong partnerships we have cultivated across the industry. In the consumer market, our products and -- are distributed through all key channels, ensuring broad market reach and accessibility. This includes mass, e-commerce and direct-to-consumer channels, allowing us to meet consumers wherever they choose to shop. Our commercial relationships are global with a strong focus on large restaurants and hospitality chains. For home health, in a brief time, we have developed deep relationships with large specialty pharmacies and pharmaceutical companies. In summary, our best-in-class relationships supported by broad distribution across all key channels play a critical role in our ongoing success and market leadership. Our 6 strategic growth initiatives are key to our long-term success. These are drive growth of the core business, gain share in the premium market, lead in the global commercial market, accelerate growth in the Hamilton Beach Health, accelerate our digital transformation and leverage partnerships and acquisitions. I'm going to briefly cover the first 3 and turn it over to Sally. Our first initiative is focused on driving the growth of our core business, a critical area where we are already leading in the market. Hamilton Beach is the #1 small kitchen appliance brand in the U.S. by units sold, a position we intend to strengthen even further. Our Proctor Silex brand also plays a key role in our growth strategy. These products offer sleek practical designs at accessible price points, making quality more attainable for a broader audience. Our growth plans center around innovation and new product development. In 2024, we introduced an exciting lineup of new products across high-demand categories. These included coffee makers, air fryers, toaster ovens, blenders, food processors, hand and stand mixers, slow cookers, garment care and many more. To support these new products, we are increasing our investment in digital and social media and influencer marketing. In summary, by driving core growth through market-leading products, brand positioning and enhanced market efforts, we are poised to drive success in a large part of our business. Our second strategic initiative is gaining a larger share in the premium market, an area we see substantial growth potential. We own some of our premium brands such as Weston and Hamilton Beach Professional, while others are available to us through exclusive multiyear trademark license agreements. Our share of the U.S. premium market, which is approximately $3.7 billion, is about 3%. Our sales of our premium products account for about 15% of our total revenue, illustrating that this is an initiative that is already key to contributing to our business success. Our growth strategy includes introducing new products and innovative brands. For example, in 2024, we launched Numilk machines, which enabled consumers to create fresh plant-based milks on demand. This aligns with consumer trends towards healthier, sustainable options and positions us to meet the growing demand in this category. In summary, by expanding our presence in the premium market through brand partnerships and innovative product offerings, we are well positioned to significantly grow our share and increase our revenue in the high potential market. On this slide, you can see some of the premium products that we launched in 2024. On the left, the Numilk plant-based milk maker, our Clorox air purifier, the Bartesian Duet cocktail maker, the Brita Hub water filtration countertop appliance and our CHI garment steamer. Our third initiative aims at leading in the global commercial market, a multibillion-dollar opportunity with significant growth potential. This market represents substantial upside, especially as we expand our footprint internationally, food service and beverages. Our sales to commercial products account for approximately 8% to 10% of our total revenue. Our growth strategy includes several key components. First, we are driving product innovation to meet the unique needs of our commercial customers. Second, we are increasing sales with our existing customers and by adding new ones. And third, we are leveraging our regional and global chains. We are investing in advanced technologies for blending and mixing our heritage categories. Our Summit Edge blender shown on the left, offers best-in-class performance for blending, while our shaver blenders offer large batch blending solutions. We are implementing new systems and equipment for back-of-the-house food preparation like our BigRig immersion blenders. Internationally, we are -- internationally, Europe, Asia, Africa and India present a significant growth opportunity for us. We are focusing on increasing our market share and expanding our footprint in these dynamic geographic markets. We are introducing Numilk commercial machines. Coffee shops are a prime target for these due to their high volume of beverage sales and increasing demand for innovative solutions. And now I'll turn it over to Sally to discuss our next 3 strategic initiatives.

Great. Thank you, Scott. Good morning, everybody. Our fourth strategic initiative is to accelerate the growth of Hamilton Beach Health. We created Hamilton Beach Health brand in 2021 as a part of our commitment to expand into home healthcare and address increasing healthcare needs with innovative solutions. Last year, we acquired HealthBeacon, a medical technology firm. And we feel that this acquisition provides a robust platform for future Hamilton Beach Health growth. HealthBeacon system is called the Smart Sharps Bin. It's a remote therapeutic monitoring system designed to assist patients with adherence and the safe disposal of Sharps and distribution is primarily through specialty pharma. The revenue model is subscription-based, offering higher margins and recurring income, and this model aligns with our goals for long-term growth and sustainability. We believe that HealthBeacon's Smart Sharps Bin system can continue to grow by adding new patients through new and existing pharmacy customers and expanding the range of conditions that can be treated using the system. Building on the success of HealthBeacon, we are focused on further growth of Beach Hamilton Beach Health through other innovative healthcare management tools or through acquisition. Our fifth strategic initiative is around digital transformation. We have a well-developed e-commerce capability, and we have capitalized on the consumer shift to online shopping. Roughly 1/2 of our U.S. consumer sales are through the e-commerce channel and grew at a 13% CAGR over the last 5 years. This growth has been driven by 2 factors. One, our brands have a best-in-class retailer support, driving prominent placement on leading sites; and two, our brands receive strong consumer ratings and reviews. The average rating for our brands is 4.5 stars with 5 of our brands receiving 4.5 stars or higher. Our focus for continued growth includes investments in online content to drive awareness and sell-through and online advertising and other digital marketing strategies. Our sixth and final strategic initiative is to leverage partnerships and acquisitions. Our approach in this area is disciplined. We seek partnerships, licensing agreements and acquisitions that fit strategically within our portfolio and leverage our strengths. We prioritize opportunities in both the consumer and commercial markets where we can become even stronger participants. As Scott mentioned, we have entered into partnerships with the Bartesian and Numilk brands and created new markets for consumer and commercial product applications that we believe provides strong growth potential. We have trademark licensing agreements with Clorox and Brita, which enabled us to enter the air purifier and water filtration markets, where we believe there is significant upside. And our acquisition of HealthBeacon leverages our strength in small appliances, engineering and distribution, and it provides a foothold in the home health market. We will continue to pursue accretive partnerships, licensing agreements and acquisitions that would drive growth in all our markets. And this brings us to our financial summary for the 12 months ending September 30, 2024, as well as calendar years 2023 and 2022. During the global supply chain challenges, we continue to make strategic investments in our business, and that approach has allowed us to come out the other side with increasing profitability and a strong balance sheet. Looking at our income statement, we are pleased with our top line and bottom line P&L growth over the last few years, and we're trending above historic profitability. Looking at our balance sheet and cash flow. Our focus on working capital management, along with our asset-light model, generated $47 million of free cash flow for the 12 months ending September 30. We have a disciplined capital allocation strategy for that free cash flow. Over the last few years, we allocated much of that free cash flow to significantly reduce debt, and we returned value to shareholders through cash dividends and stock buybacks. And in addition, we used cash to fund our HealthBeacon acquisition. Over the next few slides, I'll speak to our revenue and margin growth drivers, liquidity and capital allocation in more detail. So starting with our revenue growth road map. We believe that our future growth will be driven by the 6 strategic initiatives that we've talked about today. And while we plan continued investments to grow our core business, we believe that the fastest-growing initiatives will be one in premium through new and innovative brands. Two, commercial through higher-margin products; and three, home health by adding new patients and customers and expanding the range of conditions treated by our system. For the calendar year 2024, the Small Kitchen Appliance market in North America is expected to be above 2023, and we expect our revenue growth to outpace the market and increase modestly over 2023. We are focused on expanding our gross margin and our operating margin and health brands, which generate higher margin than our core brands. And the key driver for our operating margin expansion is expected to be continuous rigorous expense management as well as SG&A leverage as the business scales. For the calendar year 2024, our operating profit is expected to increase significantly as a result of gross profit margin expansion. One of our key strengths is our global infrastructure footprint and the asset-light business model. We outsource our manufacturing to third parties in the Asia Pacific region, and we staff our own engineering and quality resources in Asia to work closely with our manufacturing partners. This combination ensures we maintain high-quality standards while driving low CapEx, which provides significant free cash flow for reinvestment. And I'd like to take a moment and talk about tariffs. For the past few years, we have been working to diversify our suppliers -- our supplier base out of China and mitigate tariff risk. At the end of 2024, we had mitigated 35% of our annual spend against tariffs. And by the end of 2025, we expect that number to grow to 75%. We strive to maintain a strong balance sheet and to have ample liquidity to support investments in our business. Our leverage ratio at September 30 was 1.2x on adjusted, which is well beneath our goal of 2.5x to 3x. In 2023, we allocated our outsized cash flow to pay down $75 million of pandemic-related debt. In 2024, we further reduced debt. And at 9/30, our net debt was $22.5 million, and we're expecting further improvements. So our low leverage ratio, our low net debt, along with our recently refinanced $100 million capital facility -- credit facility, provide ample liquidity to support future investments. The combination of our strategic initiatives to drive revenue growth and margin expansion with our stable balance sheet and asset-light low CapEx model is expected to provide normalized free cash flow of $25 million to $35 million per year. And for 2024, we expect to be on the high end of that range. Our priority uses of cash are to reinvest in the business and to return value to shareholders. Investments in our business support organic growth and a disciplined M&A strategy, which is focused on synergistic bolt-on opportunities. And we return value to shareholders through our competitive quarterly dividend and through our share buyback program that seeks to opportunistically repurchase stock while at a minimum offset dilution. So in conclusion, let me reiterate Scott's comments on why we believe our company is a compelling investment opportunity. We're a leader in the industry with a powerful portfolio of iconic trusted brands. We have a proven track record as an innovator. We have established strong relationships with key customers across all markets and channels. We are successfully executing 6 strategic initiatives that are designed to drive revenue and expand margins over time. Our asset-light model allows us to generate healthy free cash flow, and we follow a disciplined capital allocation strategy of reinvesting in the business and returning value to shareholders. And finally, we have an experienced management team and talented employees to drive our continued success. Thank you.

[indiscernible]

Yes, sure. So as Sally indicated, we've got -- we've been trying to diversify our portfolio. If you look at small kitchen appliances in general and all of our competitors, the majority of the sourcing has been in China for many, many years. And so we have been working for the last 2 to 3 years diversifying into other Asia Pacific markets. And through that, through 2023 -- well, first of all, our global footprint allows us to say over 20% of our volume is already not available to be tariff. Just looking at the U.S. domestic business, it's about 80% of our business. Starting back in 2023, we started aggressively starting moving things out of China, and we feel like we'll be over 1/3 of that through -- at the end of 2024. And we're moving quickly in 2025. As indicated by Sally, we expect to have 75% of our purchases being produced outside of the China market.

[indiscernible].

Great. Thank you.