Good morning. My name is Chris, 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 2022 Earnings 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.

Thank you, Chris. Good morning, everyone. Welcome to our fourth quarter 2022 earnings conference call and webcast. Yesterday after the market closed, we issued our earnings release for the quarter and full year and filed our 10-K with the SEC. Copies are available on our Web site. Our speaker today is Greg Trepp, President and Chief Executive Officer. Also joining us this morning is Sally Cunningham who will become Senior Vice President and Chief Financial Officer on March 17th. Our presentation 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 their prepared remarks or during the Q&A. Additional information regarding these risks and uncertainties is available in earnings release and our annual report on Form K that was filed yesterday. The company disclaims any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call, if at all. And now I'll turn the call over to Greg.

Thank you, Lou Anne. Good morning, everyone. Thank you for joining us. Before I begin my prepared remarks, I would like to introduce Sally Cunningham and give her a chance to say a few words. Sally joined us on February 13th, initially as Senior Financial Advisor, and she will become our CFO on March 17th. Sally is an accomplished senior finance leader also brings a strong track record in value creation, digital transformation and M&A integration. Sally most recently was engaged by the private equity firm, One Rock Capital Partners as a finance operating partner. Prior to that, she was Senior Vice President and Chief Financial Officer at Synalloy Corporation. We expect to benefit significantly from Sally's breadth and depth of experience. Sally?

Thank you, Greg. I just wanted to take a few minutes to say hello and then I'm very excited to join Hamilton Beach Brands. I think this is a time of great opportunity as the company continues to expand its brands and product offerings and make further progress with its strategic initiatives. I look forward to meeting many of you and working with our shareholders, the analysts who follow the company and other investors who are interested in learning more about Hamilton Beach Brands. I will be a full participant on our call when we announce first quarter results. Now back to Greg.

Thank you, Sally. I plan to take the next few minutes to provide an overview of our performance for the fourth quarter of 2022, the full year 2022 and our outlook for 2023. After that, we'll take your questions. While the small kitchen appliance market proved to be slightly softer than we anticipated, in the fourth quarter, we were pleased with our results. Our total revenue was virtually flat to the fourth quarter of 2021. We attribute our results to our investments in several areas, including the global commercial and premium products market, which I will elaborate on in a moment. Additionally, we believe our performance underscores the strength of our business model, the value of our portfolio of trusted well known brands and products and the ability of our team to execute well in the face of industry wide challenges. Our investments in our strategic initiatives over the past several years generated important support. In the fourth quarter, the softer consumer demand was due to households adjusting spending patterns in response to inflationary pressures and economic uncertainty. Many retailers slowed replenishment orders in order to control their inventory levels. While we were on track to significantly reduce inventory in response to retailer and consumer trends, we decided to provide additional promotional support. These efforts while successful [put] short term pressure on our gross profit margin, we expect our gross profit margin to return to its historical range as the year unfolds. Operating profit in the fourth quarter was $11.3 million compared to $17.9 million in the 2021 period. This reflected the short term gross profit margin contraction, partially offset by lower SG&A expense. By the end of 2022, our inventory position improved significantly at a slightly better rate than expected. Our post holiday inventory levels at retail are clean.…

[Operator Instructions] The first question is from Justin Kleber with Baird.

This is Zach on for Justin. First off on top line guidance. Greg, you mentioned a few puts and takes that are leading to flat revenue for 2023. Just curious if you can speak to how much growth you're expecting in commercial this year and then overall, how much contribution are you assuming from [indiscernible] and innovation?

So I think commercial is expected to grow for the year. We feel it will be not as strong as 2022 but certainly strong, probably somewhere in the mid to high single digits, is the way it's currently looking, but that could change, of course. But we expect it to be a solid contributor. Our other programs that we're investing in some of these newer areas of innovation like the home health area, like some of our premium categories are also expected to grow. We had some nice success and we've got to see how things would offset each other. But in general, I feel that we have enough areas working for us that once we get through the first quarter and the first half of this year where there’s tough to know what the consumer is doing and retailers are doing to rebalance things. I think we have enough of these programs working that should help not only the core business Hamilton Beach and Proctor Silex but some of these newer areas as well. I will say that we're also in the next month or two, or three, we'll have a better picture on placements for the back half of the year. We're in the middle of line reviews, just starting promotional discussions for the back half of the year. So I think also we'll be able to talk more in the future about what direction we're going on in core placement. So far, we're pleased with the way things are going but nothing is firm. And we have a lot of good things to talk about with our retail partners, we just need to firm things up. So generally speaking, I think we've got to get through the first quarter and the first half. And then a lot of the things we've been working on should provide us some support in the back half of the year.

Maybe on those placements, kind of somewhat related. How do you think your sell-through at retail during the holidays in 4Q compared to that of some of your peers, and can you maybe share a bit more on how customers responded to promotions for the category overall?

So our performance in the fourth quarter this past year was better than the market. Our dollar share increased in the full year as well as the fourth quarter. And so that was due to really strength of many of the programs we talked about during the prepared remarks. And a softer marketplace than we expected. So I think in general, we've got good support from our retail partners, a very strong online business, which is sort of is the best place for us to showcase our products, quality, store ratings et cetera. So I think solid performance both in store and online helped us do better than marketplace in the fourth quarter. However, it was less than we were hoping for expecting. Just in general, there was the overall lower performance of the overall industry as we talked about. So I think, in general, we did better. We'll see how this year unfolds. Again, we hope to -- our goal is to grow share all year long. Again, quarter-by-quarter can always be a challenge but we have things going for us where I'm hopeful that we'll do better in the marketplace.

Kind of I know you also mentioned rolling back pricing. Can you share any color on maybe the magnitude of those rollbacks, are you guys seeing any others in the marketplace start to change their pricing as well? And then how elastic do you think demand typically is for the category, do you guys expect maybe to see a rebound in units from taking prices down this year?

So Zach, on this front, it's always a little hard to know how it's going to play out. A few things to point out. One is product costs are -- have come down. And as you know, I'm sure transportation costs have come down significantly. So what we’ve always tried to do is whether costs are going up or down, work closely with our retail customers to just stay whole when it comes to those cost changes. So as they've come down, we've proactively worked with retailers to price our products to be sure we're competitive, protect our margins, but also try to be sure that we're putting pricing out there that's going to excite customers to purchase more. So as we went into last year and we had to raise prices, it was very difficult to know whether that would drive top line and units would hold or whether consumers would just trade up and down, and it really wouldn't impact sell through or hurt sell through. It turns out the market was a little softer. And so clearly, the price increases that we took and everybody took did not -- were not additive to the marketplace. The consumer just changed their purchase -- happens to buy different products and the market is still softer than expected. So as we go into 2023, as we reduce prices, there's a couple of things that we'll have to figure out. So in the short term, month-to-month, we're going to be dropping our invoices to retailers and that will flow through their on hands. So there could be some short term ups and downs on our performance as we pass along those price decreases. It is hard to know whether the consumers will continue to purchase the same way they were. So therefore, those lower prices will actually hurt our performance [revenue] ongoing. Early on we're seeing some response by consumers that when we reduce prices, the units are picking up and they're responding favorably to those. So our general set of thought is that just like when prices went up, it was not all additive that when prices go down, it will not decrease from our performance that consumers will move around their purchase desires, and it will be a modest change up or down, that's a big assumption. But right now, we're seeing that consumers -- as prices come down, consumers are responding to those products that are now at lower prices. Competitively, everyone is buying from the same part of the world for the most part. Everyone is experiencing lower transportation costs. The retailers are very good at demanding competitive prices. So I'm not 100% sure of where all our peers are. But my sense is that sooner or later they're all going to be either with us or following suit, because the marketplace is going to drive all of us to be competitive on pricing.

Shifting over to margins. What gives you guys the confidence that gross margin pressure in the fourth quarter related to those promotions will be short lived? You mentioned anticipating a return to a more normal gross margin level in the first half. Is that view based on trends you guys are seeing so far in the first quarter?

I think really, our view is that that's probably a full year 2023 where we'll end up for the full year. As I mentioned, in the first quarter we're working through balancing retailers’ demand here earlier in the year, sort of uncertain how things are going. So we expect a more challenging first quarter. As second quarter goes on the back half of the year, we think that's where the chance is going to be to balance out our full year performance. I think right now, as we've -- as costs have come down and we pass along price decreases and we also monitor our promotional cadence, we're starting with how do we protect our margins and stay competitive. And right now, we feel we can do both those things. The big challenge will be just if demand softens further then do we have to promote some more. If demand is like we think it's going to be then we really can have our traditional level of promotional support and make sure our margins are doing well. So I think all in all I think the first quarter and first half will probably be a little softer. It will be a little bit stronger in the back half and the full year should come in our normal range.

Last one from us on SG&A. You expect this to grow moderately in 2023. Is that off of last year's GAAP number, which includes that $10 million insurance recovery, or should we expect dollars to grow off of the adjusted base, excluding that recovery?

Everything is excluding the comments or excluding the $10 million recovery. We've got a little bit of inflation on comp in this environment. We're finding ways to save money elsewhere to offset some of that. We're investing a little more in some of our programs. So we do think putting aside the $10 million recovery that we'll see a little bit of SG&A increase but nothing that's too out of the ordinary. So thank you, Jack, for those questions.

[Operator Instructions] And it appears that we have no further questions. I'll turn it over to Mr. Trepp for any closing comments.

Thank you. While the macro environment in 2023 remains uncertain as consumers continue to invest spending patterns due to inflationary pressures, we've always said our company is focused on long term value creation. I'm very proud of our team. They have no doubt our employees will continue to be agile and resilient and demonstrate good thinking every day in all aspects of our business. I am confident that we are stronger than ever and well positioned to build on the successes we have achieved, our investments in infrastructure, combined with our asset light model as well as our net working capital returning to historical ranges. And continued progress with our strategic initiatives should enable us to resume generating strong cash flow and higher returns on total capital employed in the coming years. That concludes our report for today. Thank you again for joining our call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.