Good morning, and welcome to the Third Quarter 2022 Results Presentation for Hillman Solutions Corp. My name is Therese, 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.

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 from Rocky. Before we begin, I’d like to remind our audience that certain statements made on today’s call may be 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 earning call slide presentation, which is available on our Web site at 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, and good morning, everyone. Today, I'm going to provide an overview of our healthy third quarter and discuss the current operating environment before I turn it over to Rocky to give an update on guidance and talk numbers. For those of you who are new to our story, Hillman is one of the largest providers of hardware products and value-added solutions at leading hardware and home improvement retailers across North America. Our unique approach to innovative design, sourcing, direct to store delivery and in-store merchandizing sets us apart from our competition. This strategy has allowed us to win with our customers since our founding in 1964. We are constantly innovating our products, the majority of which are used for repair, remodel and maintenance projects, which for 58 years has provided insulation against cyclical downturns in new home and commercial construction markets. Our products are in must-have basket building high margin categories for our retail customers. Therefore, keeping products in stock also known as fill rates is critical to the success of our customers in Hillman. Our in-store presence and direct to store delivery not only keep the shelves stocked, but also provides our customers solutions to today's challenging labor markets and certainly the unpredictable supply chains. And finally, we work closely with many of our customers on category management to optimize product mix, allowing them to increase sales and profits, yet another advantage of partnering with Hillman. This differentiated model executed by our hard working team at Hillman strengthened our competitive moat and drove strong results for the quarter. Our 1,100 members sales and service team is critical to our competitive moat and is one of the driving factors as to why we win. For example, during the quarter, we won new business in several categories including picture…

Thanks, Doug, and good morning, everyone. Before I provide a quick summary of our third quarter results, I'll jump into our updated guidance for the remainder of 2022. Since our last earnings call in August, we have executed on additional price increases, maintained our leading fill rates and controlled costs. As such, we are nearing our full year adjusted EBITDA guidance range to 207 million to 211 million, which is in line with our previous guidance. Relative to our expectations during the first half of the year, sales to our retail partners have been lower due to slightly lower foot traffic. The effect of destocking for the quarter only impacted us by about $10 million primarily in our PS business. Altogether, this will impact our net sales and the timing of our free cash flow for the remainder of the year. With this improved visibility, we are providing the following updates. We now anticipate that our full year 2022 net sales will come in between $1.46 billion and $1.5 billion. Last quarter, we told you that we would come in near the low end of the original range which was 1.5 billion. We expect full year 2022 adjusted EBITDA to total between $207 million and $211 million. Last quarter, we told you adjusted EBITDA would come in at the low end of the original guidance, which was 207 million. So we are simply putting some numbers around the directional language we provided in August. And lastly, free cash flow is expected to come in between 75 million and 85 million compared to our original guidance range. This is driven by the timing of the inventory reductions resulting from softer sales. Note that this guidance range excludes any cash settlement relating to the Hy-Ko litigation as the timing of that one-time…

Thanks, Rocky. Despite the choppy macro environment, Hillman continues to take care of its customers first and foremost. Our competitive moat continues to differentiate our offering and deepen our customer relationships. Considering the challenges in supply chain and inventory environment, we're really pleased with how we have executed and maintained strong performance at the shelf with our customers. Our 1,100 field sales and service folks combined with our direct to store delivery bring solutions to our customers' complex needs really an offering unmatched by our competition. The value we bring our customers is reflected by our customers' willingness to accept our pricing actions, grant us additional shelf space, and award us new business, all of which we've seen this year. As we look forward, we remain confident in our differentiated model and believe we can drive long-term value for all of our shareholders. With that, we'll begin the Q&A portion of the call. Therese, can you open up the call for question?

Thank you. [Operator Instructions]. Our first question today will be from David Manthey from Baird. David?

Yes. Thank you. Good morning, everyone.

Hi, David.

First off, I have a theoretical question here. I know it's a moving target and there's some seasonality to your business. But if your price increases that have already been announced and implemented go through and assuming that your input costs don't decline from where they are right now, all we do is we just catch up on the pricing side immediately and fully, what type of EBITDA margin would we be looking at annually? It's 14 sort of the representative level, and then you'll try to improve from there as your input costs come down. Help us with that calculus?

Yes. Hi, David. It's Rocky. I think your numbers are directionally right. I think if we stay where we are, and as we have visibility into the fourth quarter, obviously, we're not going to give guidance at this point for 2023. But I think it's 14-ish at current levels. And we would expect to drive that higher over time, particularly as you think about growth in the RDS business, which obviously is a much higher EBITDA rate than the remainder of the business.

Okay. And speaking of the robotics solutions, you've talked a lot about the pricing actions on the hardware side. Have you also adjusted any pricing on any of your robotic kiosks?

We have. David, we've done some, not a lot. But what we also look at is the difference between full serve and self serve and the cost of the machines. So you can see some of that coming in the future as well as the cost of machinery is up. And certainly with us having both self and full serve machines in most of our retailers, there's an opportunity because today the consumer ironically plays more for a key that they have to cut themselves than one that is cut for them by the labor in the store. And when you really think about that map, it doesn't make sense. So we're working on that as well.

Okay. And last question for you, one more here. Could you tell us your contracted versus spot container rates? And when do those container contracts renew? I think you've told us before, but just to update us.

Yes. Everything renews for almost everybody, David, unless they did a two year in May of 2023. As you know, container rates have gotten soft and the spot market has dropped dramatically. We're in a good position because our contract carriers that we've used for many years don't want to lose the volume. So they're doing the right thing on a monthly basis to make sure they don't lose the buy-in because we have a very small exit penalty to get out of the container and go from contract to spot. And so it's kind of a no-brainer. So we're pretty much at the market, if you will, within a few percentage right now, which is great. And who knows where it's going, but man it has definitely softened for everybody.

Yes, sounds good. All right. Thanks, Doug. Thanks, Rocky.

Thanks, Dave.

Thank you, David. Our next question comes from Lee Jagoda from CJS Securities. Lee?

Hi. Good morning.

Hi, Lee.

So just to piggyback on that last question, obviously you're going to benefit as you go from contract to spot rates or close to spot rates. Can you just remind us of the lag in terms of the stuff that you're getting at spot today, when does that actually hit your P&L in terms of a margin benefit?

Yes. So we actually -- Lee as you think about entering into the new contracts in May, as we go through the fourth quarter and into the first quarter, we're going to see some of the highest cost inventory we have just given the lag time. So it's a challenge for us. But we've got full price in place now. And so we'll offset that. And as we said, we believe fourth quarter margin rate is going to look a lot like what we saw in the second quarter. It's really -- as you think about it, it's a couple of months when we pay the bill, when we float a boat, and then it has to come through the inventory. So think five months on average probably after that. And so as we think about current costs, right, you're thinking about kind of middle of next year when we'll begin to see that benefit from containers. And as we said in our prepared remarks, we would expect some of that just given the timing and what we've paid versus what was happening in the second quarter of this year that we'll begin to see some of that benefit in the second quarter of 2023.

Got it. And then just as it relates to RDS and Resharp, it sounds like you're making some pretty good progress getting machines out to Ace and then there's some new stuff in the hopper, testing at some other companies or other customers. If the current supply chain related to the chip environment stays where it is, how many machines can you manufacture next year? And where are we in terms of Ace turning on more national advertising for the program?

Yes. So Lee, Ace has been awesome. And we had a great conversation with him and said, hey listen, let's not drip this thing in. Let's get to 1,000. And what we'll do Lee is we'll have our service folks move those machines to different stores so that everybody kind of gets a feel, while we take the chips we have make machines and do the testing in accounts that we talked about. So we kind of pivoted to say, let's optimize within Ace moving machines around, let's start to test it at the sporting goods, in the specialty retailers, in the food supply and restaurant. And let's use those chips for those tasks. Then when chips become available, and let's just say second half of '23, we can rock and roll. And that's the plan.

Got it. So as it relates to more national advertising, are we thinking second half of '23 or sooner than that?

Yes, I don't -- I think at 1,000, it's still tough math for them and us. We've said we need to be at 1,500. So I think you're really talking about latter part of the year to get to that. What I like about the strategy change is that Ace was very cool saying, listen, you've given us this machine. We know others want to try it. Why don't you do that now and then when chips become available, we can do a better rollout and get going. So I think you're really talking about probably fourth quarter for that because we are not going to have enough chips to get to that 1,500 level with what we're doing to test in other locations.

Got it. And then one last one for me. Just any early commentary to the extent the test with service has started at that large retailer?

Yes, it's interesting. They have really struggled with labor in the store. Their execution -- remember, we delivered in 997, crushed it. They today still have 400 stores that are not set. It's just crazy. And so if there's ever been a story that says it makes sense for that, it's this category and this retailer, we actually talked to him yesterday about it, but they have really struggled with some execution and it goes back to an overall labor shortage because their initial execution was only a 60% of the store rate. So they're working on it. We're working the test. And I think you'll see something like that start to come together in '23. I'm hopeful for that.

Got it. All sounds great. Thanks very much.

Okay, Lee.

Our next question comes from Brian Butler with Stifel. Brian?

Hi, guys. Thanks for taking my question.

No problem. Brian, do you wear a bowtie when you're pinch hitting for the big guy?

You can imagine me like that if it helps. So I guess on the inventory piece. You gave some good color on kind of how it plays out. So if I understand it correctly, you have about 140 million, 25 million to 30 million is in the fourth quarter. So that leaves you 110 million. And I guess a part of that is in the first quarter of '23, maybe 20 million additional, and then that leaves you another 90 million over the rest of '23 that comes off. Is that the right way to think of it?

Yes. I think, Brian, the one thing you have to remember is we have grown the business. So we're going to need more inventory than we had back in the beginning. So I think as we think about '23, we're not going to give guidance at this point. But we'd be very disappointed if we didn't take another $50 million out of inventory in 2023, minimum.

Okay. So you're not going to actually get back that whole 140 million because you've grown the business to the point?

Yes. And I think, Brian, the other thing to keep in mind, I mentioned it last quarter, but we haven't said anything about it this quarter is we have to balance making sure we've got these 25-year partner suppliers that we've been doing business with all the way back to Mick and Rick Hillman. So part of why we still have 140, Rocky mentioned the sales weren't quite as strong as we'd like. But the other part is we're managing to make sure our suppliers remain healthy. So it's a balancing act -- we don't want to hurt our key suppliers by just turning the spigot off and crushing them. We don't want them to let their employees go. Because when we start to rock and roll again, we can't afford it. We can't have them not be able to keep up. So part of this balancing act is working with our key suppliers.

Okay, that's helpful. And then I guess one on the extra week in the fourth quarter, can you give some color on the magnitude of that? How big from revenues and EBITDA perspective?

Yes. That's always handy. But if you really think about the retailers, there's so slammed with Christmas, they're not thinking about deck screws. There just isn't that much going on that week for us unfortunately. I wish it was an extra week in the spring, Rocky.

Yes, I agree. Brian, what I would tell you is it's actually only three days when you think about holidays, a. And then b, there's just not a lot of activity. So it's really not that meaningful for us from a top line perspective. The only business that really gets a little bit of benefit is RDS because stores are open, those machines are there, but we're not going to ship very much product that week.

Okay. And then maybe one last one. We talked about I guess the container cost coming down and the benefits. What about lower metal prices? As that comes down, how does that work through the P&L in maybe the fourth quarter or more important in probably 2023?

Yes. We've begun to see some softness. If you look at China steel, we would tell you Taiwanese steel is actually still pretty high relative to historic norms. And the way commodities work in our business is you think about the lead time that we have that's 160 days for when we placed the PO. And then it's got to flow through our inventory. So it really is, I'll call it 160 days plus five or six months before we feel that benefit. And so even some of the POs that we've been placing in the second half of this year, we're not going to feel any benefit into the second half of '23.

Okay, that's awesome. That was my questions. Thank you.

Okay. Thanks, Brian.

Thank you, Brian. Our next question comes from Matthew Bouley from Barclays. Matthew?

Hi. Good morning, everyone. Thanks for taking my questions.

Hi, Matt.

So you guys obviously stuck to the long-term EBITDA guide in terms of 10% annual growth. As we're talking about input costs or -- and shipping costs has come down since 90 days ago. I guess the volume outlook is perhaps more dynamic. My question is what kind of changed in your crystal ball 2023 outlook in light of these moving pieces, given that seemingly larger input costs tailwind that you guys are speaking to as of the second quarter? Could we expect EBITDA growth greater than 10% next year? Thanks.

Yes. I think Matt, again, we're not going to give guidance on this call. But as you think about how the benefits from the tailwinds that you speak of are going to flow through, right, as we said in our prepared remarks, they're going to begin in the second quarter. So I think you're probably going to have a tale of two halves, first half with less benefit from that. And quite frankly, in the first quarter, we're going to see some of the highest costs that we've seen as we feel the flow of May, June timeframe containers through our P&L. That said, the second half -- yes, we would expect that there are some tailwinds and we should see some benefit in excess of what the algorithm would suggest. You put those together. And, again, we talk more long term about 10%, we expect that there will be years that we're slightly below that and there are years that we're slightly above it. And again, as we said in our prepared remarks, I think as we think about the second half of '23 and into '24, we feel pretty bullish about where the business is, given the price that we've taken and what we're seeing with commodities.

Got it. That's super helpful. Thanks for that, Rocky. And then second one on -- so you got the lower costs coming through. You spoke earlier about obviously customer willingness to accept these past price actions, the four price increases you've taken. When you think about your kind of different categories, would you expect that your retail customers would try to reduce prices in any category to drive foot traffic? And would that result in any kind of pushing back on Hillman at all from a price perspective?

Yes. I think that when you think about our category being part of -- normally a project, it's just such a small part of it. We don't really have things that drive volume based on price with the exception of we've seen some nice benefits from being able to sell, for example, three pair of gloves for 999. In that case, Matt, that is a price point that makes sense. And when you can't hit it, you'll see volume go either way. But in the hardware solutions business, you're really not talking about any promotional activity or driving really any volume through any kind of pricing either direction. It's pretty mute with the customer. They need to have it as part of the project, but it's not an expensive part of the project. And retailers will do their job. They will make sure that we remain competitive versus the world and that they remain competitive versus their competition. That's just all part of daily hand to hand combat.

Got it. That's helpful, Doug. And then last one for me. I think you mentioned there were some destocking impact on the protective side. Can you just speak to the hardware side there? Should we expect to see any kind of destocking going on, either in the near term or perhaps in a more recessionary scenario in that category? Thank you.

Yes, not much, Matt, at all. As I said last time, there's somebody that would say, oh, I got some SKUs that are slow movers, I can take them down from 26 weeks to 24 weeks. We haven't really seen much of any impact in HS. And the reason, Matt, that you're seeing it with some of your other companies that you follow and the reason you would see it in PS is that's the one product that we do ship some through the retailer's distribution center. And the big change there other than the obvious Asia time is that they've been able to get things through their distribution centers from what was 28 days to get it from front to back to now about 12 days. So straight math, they just don't need the same amount of product that they had. And the majority of that 10 that we talked about is PS, and I don't anticipate we're going to have much, if any, on the HS side, just because it's direct to store, there's not a whole lot they can do. Also, with what's going on in Florida, there's going to be a few drywall and deck screws sold down that way, so we may reposition some stuff to help the retailers out because there's going to be a lot of demand down there once the insurance folks figure out whether they're in business or not.

All right. Well, thanks, Doug. Thanks, Rocky. Good luck, guys.

Okay. Thanks, Matt.

Operator, do you want to take the next question from Ryan Merkel from Blair? We lost Therese. She went to get coffee.

I am so sorry. I was on mute. Our next question is coming from Stephen Volkmann of Raymond James Jefferies. [Operator Instructions]. Stephen?

Great. Good morning, guys.

Stephen, I didn't know there was a big merger this morning, Raymond James and Jefferies.

Yes, I was going to say I wasn't aware of it either. But who knows, maybe it would be an idea. Thanks for taking my question. Most of them that have been answered actually. But I'm just curious sort of directionally, how we should think about kind of SG&A considering 2023 is sort of a -- probably a bit of a choppier year of overall demand? Do you guys -- would you typically sort of pull back on SG&A or do you still need to sort of make the investments that you're making to drive growth into '24 and beyond?

Yes. Stephen, you know from some of the companies that you cover, historically, folks who have a big marketing and ad spend, they hit that first before they hit SG&A and the other bucket. For us, we don't have that bucket. So we're going to do everything we can to control what we control. We're not going to -- actually we'll be adding people to our service network next year in our service organization. But we're going to do everything we can to control what we can control. But we don't have a bucket of marketing or advertising or big promos to hit. So you'll see us do the right thing. But you won't see dramatic cost savings or cost increases either direction. Rocky, anything on this?

No. The only thing I would add and we talked about this on our second quarter call that we did take some actions at the end of the second quarter, early in the third that we think provide more flexibility, I should say, around our SG&A costs and our ability to pull some levers. You can see we had a nice performance in SG&A in the third quarter. We expect that to continue into the fourth. And we're going to continue to make sure that we've got the right cost in the business to drive it forward, not spending in areas that don't provide benefit but spending in areas like Doug said, in the service organization, the sales organization to help fuel the growth that we see in the business.

Okay, super. And then maybe just this might be a new guy question, but how should we think about sort of new business for 2023? And I would define that as I guess sort of SKU expansion with existing customers or adding new customers or any of that, just sort of whatever isn't driven by just end market volume trends, how does that sort of layer in going forward?

Yes. So as we think about the algorithm and the 6% organic top line growth, historically, that's 2% to 3% new business wins every year. And that's principally existing products with existing customers. So it's taking additional shelf space from our competitors. There are a couple of items in play as we sit today like construction, concrete screws, new area for us where we're taking a lot of share that we're really excited about. As we think about 2023 similar to '22 and what we've seen in the last few years, we would expect that to be 2% plus of our revenue and we've got line of sight to that as we think about '23.

Super. Thank you very much.

Sure. Thanks, Stephen.

Thank you. [Operator Instructions]. And our next question comes from Ryan Merkel with William Blair. Ryan?

Hi, guys. Good morning.

Hi, Ryan.

So my first question is on volume trends. Can you just talk about how volume trended through the quarter and into October? And really what I'm curious about is if it's sort of stable or if the trend line is sort of declining?

Yes. When you look, Ryan at our HS business, which I think is the best bellwether, we actually did see an improvement in Q3 and over the first half, and several of our retailers said the same thing. Now remember, part of their 15% down is as a result of this screwy spring that they had. So that definitely got better. But I'll quote one retailer, it was amazing to them that after the July 4 weekend, they seem to see things pick up a little bit better. So I would say they're slightly better than they've been is what we're seeing right now.

Got it. That was kind of my view as well. And then on gross margin, it sounds like 4Q, the 44%. Can we think about that as the baseline for '23? It sounds like maybe the first half of '23 maybe a little below that due to the high cost inventory. But then in the second half, is it 44 or better? Is that right?

Yes, I think 44 we believe is a good baseline for our business. And so yes, Ryan, as you think about it, the first quarter may be slightly below that. I think as we go into the second, through the rest of the year, we would expect to maintain or grow that rate.

Okay. And then last one for me, I think you put through about 225 million of costs. Just curious, how much of that do you think you can keep as costs deflate over the next 12 to 18 months?

Yes, that's a -- if anybody figures that out, let me know. I think the way we look at it is that we've never been here before. Now if you go back to past times, Ryan, price would go up, retails would go up and there's never been a time where we've given back price. I think it would be very naive of us to say that there's not going to be some price given back over time. The one that I would say would be the most suspect to that and worthy of working with our retailers is if we see this container momentum downward and pricing continuing, then there's certainly justification for the fact that that part of it should be worked back with our customers. And that's the one I would say I will look to retailers in the eye and say, let's be honest, we know what's happened. We know what was supposed to happen. What we don't know is what -- so we talked about this big inventory reduction that's taken place in North America as a result of the changes in lead times. That's crossed those guys. We don't know what's going to happen as it normalizes nor do we know what's going to happen with fuel. But that's probably the one, Ryan, that I would say -- you'd have to say long term that we'd worked back with our customers on.

Yes, that makes sense. All right. Thanks, Doug.

Okay. Thanks, Ryan.

Thank you, Ryan. This concludes the Q&A portion of today's call. And I would like to turn the call back over to Mr. Cahill for some closing comments.

Thanks. And thanks everyone for joining us this morning. I really want to thank our customers and suppliers, importantly the folks that do it every day for us at Hillman that contributed to the quarter. We look forward to updating you again in the near future. And again, thanks for joining us today.

This does conclude our program. You may now disconnect. Have a wonderful day.