Good morning, and welcome to the Fourth Quarter 2023 Results and Full Year 2024 Guidance Presentation for Hillman Solutions Corp. My name is Tawanda, and I will 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, earnings presentation, and 10-k were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investors Relations website at ir.hillmangroup.com. I would now like to turn the conference over to Michael Koehler with Hillman. Sir, you may begin.

Thank you, Tawanda. 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; Rocky Kraft, our Chief Financial Officer; and Jon Michael Adinolfi, our Chief Operating Officer. Before we begin, I would like to remind our audience that certain statements made on today's call may be considered forward looking and are subject to 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 website 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. Good morning, everyone and thank you for joining us. Before we get into our healthy 2023 results and our 2024 guidance, I want to take a moment to recognize the rich legacy that this company was built on as we celebrate our 60th anniversary this year. In 1964, The Hillman Bolt & Screw Corporation was founded by Max Hillman in Cincinnati. Back then the company got its start by distributing fasteners to independent hardware stores in Southern Ohio and Northern Kentucky. Max grew his business every year due to his relentless commitment to taking care of its customers, a commitment that's ingrained in how we do business today. As Max neared retirement his sons Mick and Rick took the reins of the company during the 80s. The business continued to grow every year and it was during the 90s that the two brothers doubled down on their dad's commitment to customer service and started Hillman's field sales and service team. Today this team consists of 1,100 members and it is the key component of our competitive moat. Building an organization like this from scratch today would be nearly impossible. This field sales and service team enables us to build another key part of the Hillman moat, shipping our products directly to our customers' retail locations, bypassing their distribution networks all together. These two differentiators have allowed Hillman to become one of the largest value-added partners for hardware and home improvement retailers throughout North America. It also enabled Hillman to grow its sales every year but one over the last 60 years. Mick and Rick ran the company for over 30 years until they retired in 2013 and 2012 respectively. From there we have continued to do things the Hillman way by remaining committed to building on the legacy…

Thanks, Doug and good morning, everyone. Before I get into our guidance for 2024, I'm going to provide a quick summary of our fourth quarter and year end results. I would like to remind everyone that the 2022 fourth quarter and full year included an extra week. Net sales in the fourth quarter of 2023 decreased 0.8% to $347.8 million versus the prior year quarter. 2023 full year net sales totaled $1.476 billion, which is down slightly versus 2022 full year, but up slightly when excluding the 53rd week from 2022. Net sales came in toward the top end of our revised guidance range. Remember, because of the resilient nature of our products that are a critical part of repair and maintenance projects, demand for our products is relatively consistent. We don't experience the highs nor the lows that our customers often do. And during 2023, our top line outpaced some of our biggest customers. Fourth quarter adjusted gross profit margin increased over 480 basis points to 48.2% versus the prior year quarter. Sequentially, these margins improved by 400 basis points compared to the third quarter of 2023. For the full year 2023, adjusted gross profit margin increased over 120 basis points to 44.2% from 43% during 2022. As Doug likes to say, the pig is through the python, in the second half of 2023, we finally returned to normal historic margin rates. Q4 2023 adjusted SG&A, as a percentage of sales, increased to 32.5% from 30.6% during the year-ago quarter. For the full year 2023, adjusted SG&A, as a percentage of sales, increased to 29.5% from 28.9%. Adjusted SG&A increases during both periods were driven by an increased investment in IT and a $6 million increase in our standard employee bonus expense during 2023, coming off a disappointing 2022…

Thanks, Rocky. We've made excellent progress during 2023, from reducing inventory and paying down debt, to winning new business and transitioning one of our main distribution hubs from Rialto California to Kansas City and I'm truly impressed with our team's results during the year. Looking forward we fired up the M&A machine and believe that by leveraging the Hillman moat, we can add tremendous value via M&A. We started with Koch and are excited about bringing in additional categories to our customers, either organically or through M&A. As we think about 2024, we're ready to capitalize on the progress we made during 2023. While we can't control the macro, we believe we're very well positioned to drive share gain and a healthy profit increase during 2024. Our true north continues to be the guiding principle of Hillman. We live by the model that nothing happens until you sell something, and once you do, don't disappoint. We know that in today's environment service matters as much as it ever has in our 60-year history. Our commitment to all of our stakeholders remains steadfast. This includes not only our customers, but our suppliers, team members and our investors. We look forward to updating you during the year with our progress. With that, we'll begin the Q&A portion of the call. Let's see Towanda, can you please open up the call?

Thank you. [Operator Instructions] Our first question comes from the line Lee Jagoda with CJS Securities. Your line is open

Hi good morning. It's Pete Lucas for Lee. Congrats on the quarter. I just wanted to know I guess first question, what assumptions are built into the forecast in terms of growth in robotics, both in terms of growth in keys versus engraving and then the ramp of machine placements throughout the year?

So as we think -- and thanks for the question Pete. Thanks for the compliments on the quarter. As we think about robotics for this year, as Doug said in his prepared remarks, we expect to ramp in the back half, but the first half is going to be relatively tough. We're anticipating just given what we've seen in the economy, we continue to see some of the pet retailers struggle a bit. And when you think about anything that's discretionary spend we don't see people spending unless the economy turns towards the back half. So overall, in the robotics and digital, we would say a flattish kind of year. That would be with areas like minuteKEY performing better and areas such as engraving performed a little worse. And then, Doug do you want to comment on rollout?

Yes. When you think about, Pete, the new 3.5%, obviously, we're going to have a machine that can do a lot more than just home and office with the endless aisle, capability as well as RFID, as well as the transponder and auto capability for SmartFob. So, we're excited about that. But we are, as I have said repeatedly, we're not going to run out there and lead with our chin. We're going to make sure that we roll these out and that we've got the back end taken care of those support and service. But again, every retailer is excited about it. I think the one thing about RDS and we're frustrated with the performance, so let me say that upfront, I wish it was growing quicker but when you take -- it makes total sense on engraving and accessories. That's a discretionary and we know that pat and that is way off. But when you think about keys, both full serve and self serve piece, which is the biggest part of RDS, we have one customer that's given us fits and that's Walmart. And if you look at the rest of the customers in 2023, RDS was up about 7.5%. So they had a good year. And what happened at Walmart is they elected to take full serve machines out. We had 100% of that business. We had to do a lot of work that didn't sell the key to get those machines out. And then we relocated all of the self-serve machines throughout the store. We have about 70% of the self-serve share. And unfortunately, we saw machines go from the front vestibule to sporting goods, to painting, to ACC. So, they're not getting to the places that even Walmart wants with their store ops issue. So, we had a tough year with Walmart in lots of machines in and out and around. And -- but when you look at our other major key companies and customers like the Aces of the world and Depot and Lowe's, we had a good year. And so, we should turn that tide second half of 2024 and get this thing going again.

And then just one quick follow-up. You talked about the new services you're introducing on the next generation key making machines. Any sense what that adds to your TAM?

I'll tell you what, it's a really good question and it can vary dramatically. If you think about the average key that would be cut in a minuteKEY machine today, you're talking about probably a $5 key versus -- in the future you'll have keys ranging from $10.99 to $79, to $179 and so big variability. What we don't know is what's the consumer going to do? And that's what's interesting about the first 40. So Pete, it's a little early yet. And I do also believe that we'll see different kinds of numbers based on different geographics. You know, as far as how that store trades out, what it's around and in what areas. And so we're just learning. It's a little early for us to say. But the great news from a retailer standpoint is, we're spending the capital doing all the work and they get a percent of a higher number. And so they're excited about it. And we are as well. But it's a little early for me to tell you average key cut price was, average new key cut price will be. And that's what we're going to work on. It will probably take us -- we're going to need about 500 machines out there around the US for us to get our heads around that.

Very helpful. Thanks. I'll jump back in the queue.

Thanks Pete.

Thank you. Please stand by for our next question. Our next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Hey everyone. Good morning.

Hey Ryan.

I wanted to start off with some of the revenue assumptions for 2024. I think you mentioned price down 1%. Can you just unpack that a little bit?

Yeah. I mean, if you take 1% of our revenue obviously you can do the math there Ryan it's about $15 million. I mean we've said, as you think about price overtime, we expect that we're going to get some price back, because we've seen some deflation in the business and we're anticipating that we'll do that. I think what we've said consistently is as we see -- as cost come down we would expect that we'll hold on about half of that. And so far that's playing out. We're pretty proud of the fact that we've been able to expand gross margin like we have. We've gotten back to where we were historically. Obviously a little bit above it in the fourth quarter, but as we think about 2024, what we're really excited about as we think not only are we at, but we maintained that historic gross margin throughout the year. And we think that's where the business needs to lift.

Got it. Okay. In terms of the timing is that kind of even through the year? Or should we think about that price give back more second half?

I would say, it's more back-end loaded, but we're obviously having those conversations with our retailers as we speak.

Yeah. Okay. And then my second question the market down 1%. I think that's pretty fair. I guess two-part question, what are what are some of the things you're watching? Is it mainly just interest rates and housing turnover? And then the second part of the question Doug do you think there's pent-up demand? Is that how your business works? So if turnover increases do all these people start doing projects again?

Yeah. I think that -- Ryan when you think about existing home sales, we get it helped on both sides of that trade right? People get their house ready and they use our products and then they tried to turn their new one into what they want. And that number being $4 million versus $5 million and $6 million is really probably the biggest drag on Depot and Lowe's and hardware stores in our business. So I think that's a second half begin, but it really probably ends up being a 2025 tailwind. We feel like it'll start to help us in the second half, but I think you'll see that -- our guess, is that you'll see that really help our business in 2025. And that's why we didn't want to put a number out there that had to go perfect we wanted to put a number out there that -- hopefully we could do better, but not solve for volume until we see volume in a consistent way. I think it's always confusing in January and February because of weather this, that and the other. I think the thing that we're really hoping for our retail partners is a good spring. It's been two years without it. It would be great to have a good spring for them. Obviously would help us too. We're not super tied to spring, but they are. And that would really help them to get started because I think Depot and Lowe's are prepared for a good year, but I think just like us, they're trying to look at things saying, it's probably a second half before this thing starts moving and then into 2025.

Yes makes sense. All right, best of luck.

Thanks.

Thanks Ryan.

Thank you. Please stand-by for our next question. Our next question comes from the line of David Manthey with Baird. Your line is open.

Thank you. Good morning everyone. So my question is on new business wins. I think Doug you had said more than $25 million and Rocky referenced this 2% to 3% focusing on 2% for the current year and I guess mathematically 2% is $30 million. Just wanted to check in like, is that your plan? Is that based on discussions you're having? How concrete is that? And secondarily, is that number net of this line that you exited and wrote off quarter?

Yeah, on the line that we wrote, we weren't actually selling much of that, Dave. And so you have that kind of led to where the write-off occurred. So that has nothing to do with the math I would say. As you think about it probably north of two thirds of that business is already done and baked with our retailers. And so you think about the rollover impact plus new business wins that we know of and so we've still got some work to do. But I would say we're in at least as good a spot as we've been the last couple of years and we've been able to hit those numbers each year, as we think about -- even as we speak our guys in the field are out working on new business and we are confident we'll pick up more.

David, the reason I feel even better than I did is because we're actually having some interesting conversations with three of our customers talking about doing things for them that they have historically directly inputted themselves. That tells me that they've got to free up their warehouses and that they want us to service these complicated categories and that -- we haven't seen that as an opportunity in front of us. I haven't seen that. I've been here nine years. So we have three discussions going on right now with people who are importing the product. And quite honestly, it's really tricky for them to do that as they solve through COVID. And again, we're not going to be able to meet the price that they could get, but we can show them with us servicing it and us thinking about the category differently than maybe a merchant who doesn't understand it, how we could actually grow it maybe change the category. So that's why I feel like you'll see us exceed that number this year.

That sounds great. The second question is on a rope and chain. What percentage overlap do you have with Koch currently when you think about the number of locations you're in versus what their overlap is with those locations? And I'm thinking here about the cross-sell opportunity. If you look at the $45 million in Koch's revenues, are you looking to capture multiples of that over three to five years? Or is it more of an incremental opportunity?

Yeah I'll turn it to JMA because he's all over this one, but Dave let me just say first our top three customers we -- Koch has 8% of their share. I love that. That's a good place to start.

Dave, yeah excellent question because we're really excited about Koch. Tiny overlap. Very little I mean accessories rope and chain accessories have a little bit of overlap. But with the acquisition now we're able to bring the bulk and packaged product and then bring our merchandising solutions together to really grow it. And as Doug mentioned it's just a huge opportunity so we really feel good about that really accelerating our growth in '24 and beyond.

We had a major customer when they saw the announcement call and say we're about to make a decision on a line review. If you guys are going to own this we'll delay it. And that says something to me. I think we've had several of the regional players say listen let us know when you're ready. You can take over rope and chain now because you've got service. This is a pain in the ass [ph] product category and Koch didn't have service. It's a great Midwest company, but when you take that was service and the relationships we have Dave, I don't know how big it will be, but we're going to see some really nice growth here.

Yeah. Hey Dave, just that just to make sure that everyone listening is clear, what JMA was talking about is like the category. And so very little overlap. But when you think about customers, they probably don't have a customer that we aren't already servicing. So this is put it through the goose.

Well, that was great. Thanks guys.

Yeah.

Please stand-by for our next question. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open.

Hi good morning and thanks for taking the question.

Hey Michael.

Hi guys. Can we talk about the cadence of your gross margin through the year just so we get all the puts and takes of this sort of the end of the transition out of the $225 million and COVID and rebalancing inventory and all that?

Yes I think the way to think about it Michael is as we said, we expect to be at or above our historic margins all year. So that kind of sets a floor where we believe the margins will be. Obviously, as you think historically about Hillman, our second and third quarters are usually our most profitable just because of seasonality. And I think you will see that again this year with the exception being that the first quarter we expect to be pretty profitable. It's going to probably look a lot like the fourth quarter did. And then when you start to think about some of the price giveback that we anticipate is going to happen et cetera, you would expect that margin to come down a bit, but still again remain at or above historic levels.

Okay. So all year we're at $45 million and then the 2Q and 3Q are even higher and 4Q maybe actually may be below $45 million just to get it to balance.

Again I'll just restate what I said, Michael that we expect all year every quarter to be at or above historic levels.

Okay. And then, so your customer is having real foot traffic issues. What are you doing differently to keep your business on pace despite their foot traffic?

Yes, I think if you think about Depot and Lowe's clearly foot traffic issues we're not seeing that as much in the farm and fleet and these little hardware stores. And I say little when you have 12,000 of them and they represent 27% of your business, they just refused to partake [Technical Difficulty] really well. And then get the servers and M&A [Technical Difficulty] had some strong double-digit kind of move this past year. And so those three areas are not being as impacted by foot traffic. And I think Depot and Lowe's are both certainly hoping that with the spring and kind of midyear that turns around but it's been tough for three years.

Okay. And if I could squeeze one more. What's your M&A pipeline look like?

One of the great thing -- we got lucky let's face it. We wanted to buy Koch a couple of years ago and just didn't feel like it was the right time with what we had to do on inventory. And we spent time with the owners and told them we genuinely wanted to buy it and this is when we thought we could. And they waited for us. Ironically, they also ended up buying stock in Hillman during that time. And I just think that we got to know them. They got to know us. We were very honest about when we wanted to buy. And for two brothers who run a company and build a company honestly, we're a great fit for them. We've already integrated the team. We just had 31 people in Minnesota this week. They love what's happening. And they know, the two brothers know that they can retire and this will be very well taken care of. So we've got half a dozen of those Michael and again not all will come together but the fact that the private equity guys stopped sharpening their year was because there was no debt market has really helped us.

Got it. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Reuben Garner with Benchmark. Your line is open.

Thanks. Good morning, everybody.

Hey, Reuben.

So hardware has been fairly resilient for you guys. You talked about the issues with Walmart at RDS. Can you talk about protective solutions? Maybe what's changed in the last couple of quarters and kind of what's embedded in your outlook in that category for 2024?

Reuben, yeah. I mean, we look at the back half of 2023 really proud of what that team has done the last couple of years. We've I'll say rebuilt that business a bit. We've focused on remixing our 12 mix. We've been introducing new products and we've rebalanced it. We've got some nice off-shelf opportunities incremental shelf space, which we've been able to maximize. And that led to a really good back half of the year. We feel good about where the business is positioned in 2024 and we're excited about that team's got on their plate are the new growth opportunities that Doug referenced earlier. So we feel really good about our go forward in that category we can continue to grow.

I think the other thing Ruben is we've got like a DIGs line that really is a great positioning for the female and the gardening side. And now our retail partner wants us to expand that name into other products because it's really starting to take hold. So we've got some interesting things there. We also are introducing a higher end, if you will tool bag that a lot of the pros want. And it's the first time and the price points up there pretty high, but the quality is fantastic. So we're trying to think differently in that work gear and knee pads because the pro, the more we interview them and get to know them, they don't like buying four or five of these a year. They like buying one and bragging about the fact that it will last three years. And historically, these retailers don't want to hit that price point. They now know they can hit that price point, if they have the right goods.

Yes, I think Ruben, the only thing I would add just -- if people are modeling it, we think PS will look a lot like the overall guide for the year probably, without the price pressure.

Got it. And then it's been a little while since M&A has been part of the story, can you kind of maybe remind us of -- are there other areas like rope and chain that are left from a bolt-on perspective in the hardware aisle? Or are you starting to get to the point where you've got to go outside of hardware to try to grow the business?

You know, I would say there's probably an equal amount inside hardware. I would say that ZIP Code like Koch. And then obviously, we always are looking and thinking through plumbing and electrical, which we would consider more than just around the corner. That we would consider that outside. But we're looking at both. And again, nothing crazy, but when you think about buying something at call it six times pre-synergy, and then you add what we're able to do with the business not just from a cost standpoint but what we -- with our relationship, with our service capability, the top line in that business is not going to look anything like it has historically.

Great. Congrats on the strong close to last year and good luck this year guys.

Thanks.

Thanks, Reuben

Thank you. Please standby for our next question. Our next question comes from the line of Brian McNamara with Canaccord. Your line is open. Q – Brian McNamara: Good morning, guys. Thanks for taking the questions. On pricing Doug, I know you have foreshadowed this for some time, but price minus 1% in 2024 is probably a little bit better than I would have expected. As we've heard, some of your retail customers particularly the home centers haven't been shy to ask for price back. What could it make that minus 1% materially better or worse, as the year goes on? Or is that a pretty good place to lock in?

Yeah, Brian I think it's a little -- so here's the way to think about it, that 1% is a little bigger than 1% as you think about the timing for those decreases. And let's just use, an example. Let's say something goes into effect in June. It may be impacting our 2024 as such, but it then rolls into 2025, in the first half. So the 1% is accurate but it's a little bigger than that. The answer to your question is, how things roll.

The only thing I would add Brian, this is Rocky is, when you think about costs, we've seen a nice benefit on containers and we've talked about that. But virtually, every other category that we look at, there's inflation I mean and we're all seeing it. I mean labor isn't getting cheaper. Once you get product -- we get product into the United States, it's not getting cheaper. And while we did see a bit last year and continue to see a bit of commodity benefit as you know, as we sit today we've seen the cost of steel in Taiwan and China go up pretty dramatically. Now that typically happens during the Chinese New Year, and we'll see what happens after Chinese New Year. But as you know, as we think about our business and think about the future there's a lot of prices, in a lot of different direction that helps us to explain, why our prices need to be what they need to be so we get a fair profit. Q – Brian McNamara: That's fair. I guess with what with Home Depot expecting another year of customers taking on smaller projects deferring larger product projects does this materially impact your ability to plan and guide the business?

I don't think so. I think we play in the pickup truck and the DIYer the thing we're looking for is people to get off cruise ships in and out of concert halls so they get back into the backyard. And I mean that probably -- the DIYer or the pickup truck pros about where they've been the DIYer Brian is the one that's off. And we're hoping that we'll see that start to pick up and normalize a little bit. I don't know how they're going to do what they want to do when you look at the price of airline tickets right now. So that's the part we'd like to see improved.

Got it. And I'll just squeeze in one last one a quick one. After a really nice year of free cash flow generation last year. How should investors think about sustainable cash flow generation in the business given the last few years haven't been particularly normal?

Yeah I think I said in my prepared remarks Brian. We think this is $130 million to $140 million of free cash flow kind of normal benefit. If you look over the last two years, we did $172 million last year. We're guiding to about $110 million this year. If you average those out that's just north of that price $140 million $142 million. And so that's what we think is kind of a normal generation in the business should be. We'll grow that cash flow over time as we grow EBITDA. The one challenge that we will have as we think about the future a bit is around taxes because we're not a full cash taxpayer in the US today we will be eventually. And then the flip side is we expect to continue to pay down debt and as we do we'll obviously bring that interest line down as well. So you know $130 million to $140 million feels like a good number. We've guided to $110 million this year and obviously we would be disappointed if we don't do better than that as we go through the year.

Got it. Thanks a lot guys. Best of luck.

Thanks, Brian.

Thanks, Brian.

Thank you. Ladies and gentlemen that concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. Cahill for closing remarks.

Thank you. Thanks everyone for joining us this morning. Again, we're lucky to have the customers we do. We've got great vendor partners and importantly -- most importantly this team at Hillman continues to do things for us each and every day, particularly, in the store for our customers that that allows us to grow and allows us to continue to be find ways to do more. So we look forward to updating you again in the near future and thank you for joining us this morning.

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