Good morning, and welcome to the First Quarter 2022 Results Presentation for Hillman Solutions Corp. My name is LaTonya, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release, presentation and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investor Relations Web site at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman. Please begin.

Thank you, operator. Good morning everyone and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, our Chairman, President and Chief Executive Officer; and Rocky Kraft, our Chief Financial Officer. We will begin today's call with a business update and quarterly highlights from Doug, followed by a financial review of the quarter from Rocky. Before we begin, I would like to remind our audience that certain statements made on today's call maybe considered forward-looking and are subject to the Safe Harbor provisions of applicable securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements. Some of the factors that could influence our results are contained in our periodic and annual reports filed with the SEC. For more information regarding these risks and uncertainties, please see Slide 2 in our earnings call slide presentation which is available on our Web site ir.hillmangroup.com. In addition, on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, it's my pleasure to turn the call over to our Chairman, President and CEO, Doug Cahill. Doug?

Thanks, Michael. Good morning, everyone. For those of you who are new to the Hillman story, we are one of the largest providers of hardware products and solutions in North America. Our team distributes over 112,000 SKUs to over 40,000 locations with roughly 80% of our shipments delivered directly to the store. We also stock the shelves in the store for the customers which are some of America's leading home improvement centers; hardware stores, big box retailers and pet supply stores. Importantly, 90% of our revenue comes from brands that Hillman owns. Our differentiators are world class supply chain team and our in-store sales and service teams that are 1,100 associates strong. Every day, they team up to provide best-in-class service and industry leading fill rates on must-have high margin products for our blue chip customer base. This is our competitive move and we have been steadily growing by winning at the shelves since we were founded in 1964. Looking forward, I remain encouraged about the future growth opportunities that lie ahead for Hillman. We're off to a strong start in '22, and I couldn't be more proud of how our team has performed so far this year. From our warriors in the field to our sourcing and distribution center employees, to all the dedicated support folks, we continue to outperform our competition and provide best-in-class service to our customers. We win, thanks to our people and our deep partnerships we have built with our customers over the many years. Remember, we've been selling our top five customers on average for 22 years. Our competitive mode has never been stronger, and we continue to help our customers overcome labor, complexity and supply chain challenges in categories that are critical to their businesses. Today, I'm going to provide an overview of…

Thanks, Doug. I will provide a quick summary of our first quarter results, and then turn to our outlook and guidance for the remainder of 2022. Net sales in the first quarter of 2022 were $363 million, an increase of 6.4% versus the prior year quarter. The improvement was driven by hardware solutions, which increased sales 13.6% to 189.3 million. The improvement was driven by price increases implemented over the past 12 months and strong volume to finish out the quarter. RDS sales grew by a healthy 10.6% to $61.8 million as foot traffic and sales continued to improve from the COVID impacted 2021 levels. Our Canadian business had terrific performance in the quarter. While sales were up 1% compared to the prior year, we significantly improved profitability as product margin outperformed and foreign currency exchange was a tailwind. While we don't anticipate maintaining 13% EBITDA margins for the remainder of 2022 in Canada, we are well on our way to our minimum expected adjusted EBITDA goal of 10% across this business. Partially offsetting these gains was an 8.6% or $7.2 million decline in protective solutions as we comped against COVID-related sales with higher margins in the prior year. COVID-related sales for the quarter were $13.4 million compared to $28 million in the prior year quarter. As a better proxy for understanding demand, excluding COVID-related sales from both periods, protective solution sales were up about 10%. On a GAAP basis, net loss for the first quarter of 2022 totaled $1.9 million or $0.01 per diluted share compared to $9 million or $0.10 per diluted share in the prior year quarter. Adjusted earnings per diluted share for the first quarter of 2022 was $0.09 per share compared to $0.16 per diluted share in the prior year quarter. On an adjusted basis,…

Thanks, Rocky. Our investment to maintain our fill rates continues to pay off which we believe will be a meaningful benefit over the long term. Confidence in our team, our strategy and our long-term business model remains strong. Our differentiated model with the 1,100 field sales and service folks combined with our direct-to-store delivery model have created tremendous value for our customers value that I think they recognize. At Hillman, we provide simple solutions to complex problems faced by our customers, like immense logistical and labor challenges. The willingness of our customers to allow us in their stores each and every day and to accept our pricing action, grant us additional shelf space and award us new business wins demonstrates I think how they value our partnership. While the current environment is still uncertain, we'll continue to control what we can and focus as we always have on our customers and our employees. We remain well positioned to drive growth over the long term and build meaningful value for all shareholders. With that, we'll begin the Q&A portion of the call. LaTonya, can you please open the call up for questions?

Certainly. [Operator Instructions]. Our first question comes from David Manthey of Baird. Your line is open.

Question is on the supply of fasteners. Another fastener distributor we talked to said that they had broadened out their supply base. I think they tripled the number of suppliers they're using. I'm just wondering, especially in light of this new retail relationship, have you made changes in sourcing that could help you going forward particularly if this China shutdown starts to feed through?

Dave, good question. We've got a great supplier base now and they have always been able to be ready for growth. But what we've done, really one stage short of that I think we have qualified new locations and new suppliers so that if we need to, we have not seen the need to -- I don't think we have any issues as I look over the next two years. But because we don't control the political landscape and the moving pieces around the world, we have started to get new suppliers qualified with samples and making sure they could do it, if we need that.

Okay. Thank you. And second on RDS, up 11%. Can you disaggregate between same unit sales and then sort of the increase in the number of machines out there? And then related, I'm wondering on the margin side of RDS, all else equal, does a slower than expected rollout, does that hurt or help margins in that segment?

Yes. I think as you think about new placements, Dave, it's kind of a mid single digit portion of our growth. And so I think that's how you should look at it. So as you think about 11%, call it about half is related to new placements. The other half is growth and existing. And then as you think about margin, yes, it actually -- an incremental sale or incremental placement of a machine, while it does take six months to get a full run rate, those do incrementally hurt the full business as you think about a plus 30% EBITDA margin in RDS compared to the rest of the business kind of in a mid teens type location.

All right. Thank you, guys.

Thanks, Dave.

Thanks, Dave.

And our next question comes from Brian Butler of Stifel. Your line is open.

Good morning. Thanks for taking my question.

Hi, Brian.

Just the first one, on the inventory, can you remind everybody what was the size of that working capital build for the inventory in '21? And then when you think about the modest kind of drawdown that you alluded to in the prepared remarks, kind of any color on that magnitude?

Yes. This is Rocky. At the end of '21, we had about $140 million more inventory than we would have expected at the beginning of the year. Clearly, that was to maintain fill rates that we had in our business as we saw lead times double and also inflation around the commodity component of our products. Those were split about 50/50 when you think about the component that was inflation and the component that was lead time. We did build inventory in the first quarter of this year. That's our normal seasonal build going into the spring. As we think about the full year as compared to 2021, we're still confident that we'll probably take $20 million to $30 million out of that inventory number based upon where current lead times are.

Okay, that's great. And then thinking about kind of on the hardware side, when you look at like the point of sales kind of through April, are you seeing any trends considering the inflation the consumers facing on their purchases? Is this impacting what they're buying or reducing their purchases? Any color on those trends?

Yes, Brian, we haven't seen anything yet in that regard. I would say that my gut tells me in some of the hardware stores, the consumer has such a great option to take three or four screws or three or four washers or three or four bolts out of a drawer or buy a bag or box. You got to believe that at some point, people are going to start picking through pieces instead of, call it, the $25 ring for a box. But we have not seen anything change yet. We just want to be able to be there in all of our locations so that the consumer can get what they want for the project or for whatever they may be working on. But no, we haven't seen any change yet.

Okay. And then one last one maybe on the M&A pipeline and what you're seeing there. With the current environment, is there any opportunity that some sellers are maybe looking to sell sooner rather than later? Any color on those fronts?

Yes, I think the only thing that's probably -- the benefit would be their expectations have probably come down a little bit, which is a good thing when you think about us over the next couple of years. But I think the other thing that's interesting, Brian, is we've talked -- we don't plan to do anything until we get our balance sheet in a better place. And that should happen pretty quickly when things begin to normalize because of the inventory coming to cash and our margin expensing that we should enjoy. But I would just say, they have to go back to the market with another price increase if they are doing what most people are doing, which is bringing stuff from all over Asia. So it gives us some time because if they were trying to look at their model right now, they'd say, we got to go get another price increase. So it probably buys us some time. But if you're an entrepreneur, you got to be nervous that this thing doesn't seem to want to end. And we've looked at this container increase pretty unemotional. It's just something we got to do. Everybody's -- you even saw the quotes in the big retailers that container rates doubled. So it's not something that's a Hillman problem, but it probably buys us a little time. But I think it probably changes the future multiple for them being an entrepreneur with not very many options.

Okay, great. Thank you. Thanks for taking my questions.

Sure.

Thank you. Our next question will be from Lee Jagoda of CJS Securities. Your line is open.

Hi. Good morning, guys.

Hi, Lee.

Hi, Lee.

Can we start in the Canada segment and just talk about some of the company's specific actions you're taking there, and how we should think about EBITDA margins in light of the 13% plus margin you had in Q1 which should be kind of a seasonally weaker period for you?

Yes. Lee, half the damn country had snow. It was crazy. So yes, you're right. I think Scott Ride and his team have done a really nice job. A little over 30% of our business up there is industrial, commercial and the rest are the same retailers basically that we sell here, except for Canadian Tire. Scott's done a great job of consolidating operations from seven into one big DC in the Toronto area. We've got more than one in Canada, but we had seven in the Toronto area because of acquisitions. That's one piece. But the other piece is, we just decided to stop chasing the silliness of the industrial, commercial margin account. These guys were buying on price on every order. And we finally said, listen, if they want to shop around, let them go get it from whoever needs the business. We're going to take care of our customers. We're going to price it to make a fair profit. So it's really -- their operations have improved. And we decided to stop chasing some of this commercial, industrial stuff and say, if you want it, we're going to make a fair profit. I think those, Rocky, are the two things, probably with the exception of we did have a positive variance in exchange rate.

Yes, there is some FX out there, Lee. I think as we think about the rest of the year, we think Canada should achieve kind of that low double digit EBITDA margin in the second and third quarter. And then the fourth quarter again -- like you said, usually first and fourth are seasonably tough, particularly for Canada. So they'll probably be in the low singles in that. So I think we'll blend out to probably 8%, 9% this year, which is nice progress towards that 10% minimum EBITDA that we expect out of that business.

Great. And then just looking at the large customer where you're selling in this year, can you talk about the margins on the initial stock-in and sell-in versus the recurring margins you expect from that business? And then the other part of that is, I think when you initially negotiated the agreement, you did so without the in-person sales force in the aisles. Is there any change or anything new to update there?

Yes, so let's talk about that service. We decided to quote it on an apples-to-apples basis versus their current competition and other folks because their current supplier, our current competition, their current supplier and others don't have a service organization. And a lot of times, Lee, we'll quote a piece of business with service built in, and we're quoting against somebody that doesn't have it. So what's exciting I think about this is we quoted it without -- and in the late third quarter, we're going to test stores with and that will be awesome because we'll be able to see how stores do with it. How stores do without it? It will be a great I think opportunity for us to prove what we can do with our folks. Now we have people in their stores handling key and engraving and other things today, so we won't ignore it, but they won't have the full flap service organization on them. And for us, the margin side of it, we don't talk customer specific margins. But, Lee, the only thing that would cost us was because we were going to nail this launch, we had to do some 3PL storage to get ready because it's about 75 containers, they get this thing loaded. And so we paid a little outside storage, so we didn't over jam our current DCs. But other than that, that would be it.

Got it. And if I could sneak one more in just on the engraving Resharp side, revenues were down year-over-year and frankly down sequentially. Is there any explanation on that? And how should we think about that one in the next couple of quarters?

Yes, I think that's -- what you saw there was a little bit of foot traffic, Lee. And we would expect that that will be a nice growth business, particularly as Doug talked about Quick-Tag and as we're able to get the Resharp machines into the field over the next -- the next quarter is probably not as much growth as we'll see over the next year or two.

Okay, great.

Thank you. And our next question comes from Ryan Merkel of William Blair. Your line is open.

Hi, guys. Thanks for taking the questions.

Hi, Ryan. Sure.

So I'm sorry if I missed it. Are you expecting lead times to improve in the second half of '22? And then any worry about the [indiscernible] did that impact lead times at all?

Yes. So first question, Ryan, we've just not baked in any improvement. I would tell you that I think they will improve a bit from call it 240 days to I think something closer to low 200s. But we haven't been able to witness that yet. All we really saw with the Shanghai issue in China is they couldn't get truck drivers even though the port remained open. So we floated containers for probably an extra 10 or 12 days that would have normally been coming our way. So it's a small bubble. But fortunately, we had all that stuff for the new launch here. And it may take a point, half a point out of our fill rate, but I think that's it. I think it's just a little air pocket for us.

Okay, that's good to hear. And then just to follow up on demand, obviously, a lot of worry out there on the consumer in housing. Your business has been stable in the past. I guess a two-part question, Doug. With the low supply homes out there, people can't move. Is your view that people will just invest in their existing home? And then what about pull forward demand? Any fear that that could be an issue?

So let's take the first one. It's interesting how -- just as we do our research and as we talk to the pros at these retailers, people are feeling that an investment in their home is going to pay off, whether they plan to sell it or stay in it because of how home pricing and home equity has grown. And so I think that's a good thing for us versus it used to be the old rule. Well, if you didn't do bathroom or kitchen, you couldn't get any money back for it or couldn't get a fair return. I think that's actually changed. Ryan, the second question, I want to make sure I understand it. Can you come with that again? The pull forward, I'm not sure I understood it.

Yes. I was getting some questions. Just with people stuck at home, maybe doing a bunch of remodeling projects, could demand have been pulled forward in '21? I don't know if that's a fear that you have or I know it's hard to quantify it.

Yes. Okay, got it. Listen, I think that we saw in deck screws and drywall screws in the second half of '20, definitely there was a -- you just couldn't believe how many we sold. And in the first half of '21, it was still solid. So I have to believe some people did some stuff that they wouldn't have normally done. But when we talk about COVID-related products, we stick to the protective solution business. But we probably saw some deck screw and drywall screw volume that was either pull forward or people so damn bored, they had to do something.

Okay. Yes, it makes sense. And lastly for me, you probably don't want to talk about '23. But I'm getting a lot of questions about gross margin. What would be the minimum gross margin that you'd be happy with in '23, if that's a fair question?

Yes. I think when you look at gross margin, Ryan, the thing that you obviously know is that we've been very clear we're going to go dollar-for-dollar. So if you look at the first three increases, the impact is probably 3 points, right, on hardware and protective. And again, we've got another one coming. So call it 3 to 3.5 or 3 to 4 points. As things start to normalize, you'll see that return to more normal. And we've never been here, Ryan. So we've never had $200 million cost or price increases over a 15-month period with a market that may not go back to where it was but certainly will normalize. So I got to tell you, we're in uncharted waters. But I'm excited because I think our inventories will come into line. We'll put that to cash and our margins will improve about the same time, which is why Rocky and I are excited about what we'll be able to do with our leverage. But we're in a world we haven't been in on gross margins.

Yes, the only thing I would add to what Doug said is we do expect incremental gross margin improvement and EBITDA margin as we go through the quarters this year from a cadence perspective. And so we would expect to exit the year at a higher level clearly than we are today. And obviously, as we think about '23, we would expect to maintain that rate. And to Doug's point, at some point when we see the headwinds turn, we would expect our margins to get back or above in each of our businesses where they were historically.

Very helpful. I'll pass it on. Thanks.

Thanks, Ryan.

And this concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. Cahill for closing comments.

There's one more question.

Hang on a second. LaTonya, I think maybe there's one more question or at least our guys think there is.

And excuse me. We do have an existing question from Matthew Bouley of Barclays. Your line is open.

Hi. Thanks for letting me in there, guys. So I wanted to ask about that fourth price increase and the negotiations to offset the container rate increase. I was curious what exactly is embedded in the guide there? So it sounds like -- I think Rocky I heard you say expect to realize the price kind of in line or ahead of the costs rolling through. But I'm just curious if that price increase is relatively set in terms of magnitude and just your conviction that it will be implemented at those levels, because it sounds like it's not yet final? Thank you.

Yes, we do. It is not yet final. We're still negotiating with some of our customers. But we do believe as you said, Matt, and I had in my prepared remarks, we expect that to be in place before it hits. And we expect no impact on our P&L, and we haven't put any in our plan or into the guidance. So it's a net neutral. It will increase revenue. We'll have increased cost commensurate with that. And right now, we're highly confident that that will be the outcome.

Yes. I think, Matt, the last thing is we've seen this -- when we first saw it, I'll be honest, I was like, wait a minute, I can't believe that. And now we've seen it quoted by major retailers, the same thing. And so I feel really good about our chances, because it's an industry thing. Everybody sees it. It's not a Hillman self inflicted wound, and we've been successful in the past. So I think we will be on this one as well.

Got you. No, I appreciate that color. And then, secondly, on the foot traffic in April, which you said was soft and that the retailers were attributing that to weather. I'm just -- again, a similar question but curious how that plays into your guidance? If that April activity sort of holds at these levels, would you be sort of towards the midpoint or lower end of the revenue guide? Or just kind of how that -- if these trends hold, kind of how would you expect the full year to play out?

Yes, I think on -- as you think about the revenue guide, we're highly confident that we'll be at or above the midpoint on the revenue guide. I think more importantly, as you think about EBITDA and the flow through and the profitability in the business from that revenue, the one thing that it does give us a little bit of pause. And so, obviously, we beat the Street in the first quarter. You would initially think, well, is this a beat and raise? We're still cautious, because, to your point, and as Doug said in his remarks, while the retailers consider this to be mostly weather related, there's a lot of structural things going on clearly in the macroeconomic environment, and there could be a bit of a slowdown. If there is, we still feel really good about being at or above the midpoint of all of the guidance that we've given in our ranges.

Matt, I would just say, we're not selling Claritin-D and Zyrtec-D, which I wish we were right now. But thank God, we're not selling lawnmowers or fertilizers. So I think that lawn and garden is the one that you never know if you're going to make it up when you miss three weeks to weather. For us it's not something that changes our year. But obviously, we want to make sure that with the gas and grocery impact to the consumer that the consumer is going to hang in there. And that's the question nobody can answer right now.

Got it. Well, that's great color. Thank you, Doug. Thank you, Rocky. And good luck, guys.

Thanks. I think we got one more.

Yes. Our last question comes from Reuben Garner of Benchmark. Your line is open.

Good morning, everybody. Thanks for squeezing me in. So a quick clarification on the guidance. Since you last gave guidance, I think a couple things have changed. It sounds like you've got some new business wins and another price increase. Is it fair to assume that maybe you're being a little bit more conservative on kind of the core volume side, just in light of everything going on with the consumer and the foot traffic? And that's why there was no reason to take up the guidance based on the -- at least for the top line based on the new business win and the pricing action?

Yes. Reuben, I think the win that's midyear was in our numbers. We knew that was coming, right. So that's not a new one. We obviously went a little early with a little more and we continue to I think win day-in, day-out. But I would just say, for us, the pricing should be neutral -- the next one, the cost and the pricing should be neutral. I feel like that will work its way through just the way we had hoped. And that wasn't in our plans. But I don't know how you can't be cautious at some point right now with what's going on. And we feel really good about this model, because we're not tied to new construction. But there's no question, the consumer, the lack of stimuli, the inflation, you just have to -- that would put Rocky and I in a more cautious state.

Got it. And then the Quick-Tag machines, I think you guys were doing a test early. Any indications yet on kind of what kind of revenue or profit per machine those have versus the legacy pet tag machines? And then, ultimately, is the plan or the thought that those machines would replace all the pet tag machines that are out in the marketplace?

Yes, it's early. And because we've only got it at one place, we won't give you the numbers, but we're excited. Anytime you go from a consumer having six options for pet only to 25 options, then they start thinking about who the hell doesn't need a luggage tag? I don't know where mine go. So there's an opportunity there. The biggest opportunity, Reuben, is not necessarily replacing a machine in the front vestibule that cuts six tags or engraves six pet tags today. The biggest opportunity is to put it somewhere else in the store, like in the pet aisle or on an end-to-end cap and then it would be very interesting. And that's why I was so excited that this thing is going to actually be at an annual shareholder meeting. But it's a little early to tell. We're excited about what we did. We had a charity event where we support and sponsor Humane Society and we put a machine there and people didn't go through the buffet line. They were waiting in line to get a tag. And most of them were luggage and backpack tags at this event last Friday, which was interesting. So it's just too early yet.

Okay, great. Thanks. And congrats guys on the good start to the year. Good luck going forward.

Thanks, Reuben. Any more questions?

No.

No. Okay, looks like we're good. LaTonya, thanks. With that, thanks for joining us today. Certainly we are grateful for our customers and our vendors and our suppliers in a period of time like this. And we look forward to updating you again in the near future. Thanks for joining us today.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect.