Hillman Solutions Corp.

Ladies and gentlemen, today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Music Thank you. Ladies and gentlemen, thank you for standing by and welcome to the Hillman Company's 2021 Second Quarter Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you would need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your host today, Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning. This is Jennifer Hills, Vice President of Investor Relations at Hillman. Thank you for joining us this morning to review and discuss Hillman's second quarter 2021 earnings results. Joining me today are Doug Cahill, Chairman, President, and Chief Executive Officer, and Rocky Kraft, Chief Financial Officer. A copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at www.ir.hellmangroup.com. Before we begin, we would like to caution you that certain statements made today may include forward-looking statements that are subject to the Safe Harbor Commission's provisions of the 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 which could cause actual results to differ materially from those projected in such statements. Some of the factors that could influence the company's results are contained in our previous periodic and annual reports filed with the Securities and Exchange Commission. Please see slide one in our earnings call deck for more information regarding these risks and uncertainties. We will begin the call with a business update from Doug, followed by Rocky, who will be providing a financial review of the quarter. Now, let me turn the call over to Doug.

Thanks, Jennifer. Good morning, everyone. The past few weeks have been an exciting time for Hillman. with the closing of the transaction with Lankadia III, and on July 15th, ringing the bell and becoming a publicly traded company on NASDAQ under the symbol HLMN. With the transaction complete and the recapitalization of our balance sheet, we're even better positioned to do what we do best, solve complexity, labor, and logistics problems for best-in-class retailers from big box to your local hardware stores. And I can't remember a time when these were more important to our retailers than they are right now. We're excited because at Hillman, remember, nothing happens until you sell something. Our unique model continues to result in share gains and new business wins in the second quarter. This includes adding additional stores for construction fasteners, nice winds, and builders' hardware and continued momentum in the traditional channel. We are continuing to gain share in important growth categories as we help solve two of our retailers' biggest challenges, logistics and labor, by shipping to over 40,000 locations and having our people in the stores each and every day, helping to ensure the product is available and easy to find when the retail customer walks into the store. And the same is true for our robotics and digital solutions business. We are the leader in innovation for key and fob duplication, pet engraving, and knife sharpening businesses. We have designed, developed, and manufactured all 34,000 kiosk machines located in retail stores throughout North America and continue to own and service every machine out there. These robotics and digital machines help drive in-store traffic, provide great margins, and are destination purchase items. for our retailer. We have significant runway to continue to expand our product offerings and to take share both organically and through M&A, and we're fired up about what's ahead. Year to date, through the first six months of 2021, we've grown sales 11.6% and adjusted EBITDA 8.9%. During the second quarter of 2021, we were up 8.4% in net sales, and adjusted EBITDA increased 4.6%. I'm very happy with the top line, and while our bottom line growth lagged our top line a bit, it's mainly due to commodity, freight, and ocean container inflation that we've absorbed in the first half before we successfully implemented our initial price increase that went into effect toward the end of the second quarter. As we continue to monitor inflation, particularly steel, freight, and ocean container costs, all three continue to rise really across the board, and therefore will be taking additional price to cover higher costs, which should take effect during the fourth quarter. Let's talk about the second quarter. As previously discussed in early March, we saw the rapid slowdown of our protective solutions business, which was down 21.5% in the quarter as vaccinations rolled out much faster than any of us imagined. We entered new PPE products last year during COVID with masks, wipes, sprays, and vinyl disposable gloves at the urging of our customers. It was good for our customers, their customers, as well as Hillman. As a result of the earlier than planned slowdown, we had negative comp and protective solutions and began the quarter with excess PPE inventory just like everybody else. We worked with our retail partners and have made progress this quarter working down this inventory through markdowns, promotions, and donation efforts to those still in need. We saw a stronger than expected recovery in our robotics and digital solutions business, which was up 57% in the second quarter, and our Canadian business was up 32%. We also saw continued solid demand in our U.S. hardware solutions business, where we were up 5.6% on top of a very strong performance in 2020. These gains really demonstrate the strength of Hillman's operating model and exceptional execution by our in-store sales, service, and supply teams. Let me give you a few examples during the second quarter of why this is our competitive mode and the secret sauce of Hillman. Three quick examples, first in April. We replaced a 25-year incumbent supplier at a major retailer with a brand-new 8-foot program in 1,600 stores flawlessly. Why? Because we have a better mousetrap, and they know our people are the best in the business when it comes to resets, merchandising, and category management. The second example is a new 8-foot expansion of builder's hardware and construction fasteners in 450 stores at a major retailer, and I love this one because it didn't come from an incumbent. It's brand-new shelf space from vendors outside our categories losing shelf space to us because our existing programs continue to outperform. And finally today, hopefully around 2 o'clock, Rocky and I have an under and over on that, we'll finish a 150-store reset at another major retailer for construction fasteners at 97% on time and complete. This is 32 linear feet of shelf space. These three new programs are well over 1,000 SKUs. And to me, I think it's a great example of belly to belly selling and execution at its best. Let's move to sourcing. Consistent with what others are experiencing, If you're sourcing products from overseas like most of this industry does, the lead times have almost doubled due to container and vessel availability challenges. But I'll tell you, having the 1,100 Hillman sales and service folks in the store every day combined with our long-term customer and supplier relationships really differentiated Hillman from the rest of the pack over the past 15 months, and I'm super proud of the team. Given these supply chain pressures and spikes in demand, we're really proud to say our fill rates led our industry last year at 93.5, and we continue to hover in the low 90s through the first six months of 2021. I'd really like to say it's easy since we've been doing this for 57 years, but there really is nothing easy about flowing goods to restock shelves in North America right now. Thankfully, we continue to outform our competitors. due to our unique model. Rocky will have more to say about the outlook, but I'd like to note a few things. First, it has been as difficult as ever in my career for us and our retail partners to accurately plan our business given the wide swings in demand for our products. First, during COVID, and now this post-COVID phase. COVID's impact both up and down on everything from PPE to home improvement items, to keys, plus the impact on retail prices. I mean, just look at lumber prices quadrupling before recently and thankfully coming back to reality. And its impact on all our import costs, from commodities to shipping to labor, has really made planning very tough. The COVID bump and then drop with PPE products, and let's face it, This week's announcement on Tuesday by the CDC makes it difficult to predict where things go from here. That said, our hardware business remains the absolute engine of Hillman. Through the first six months of 2021, our hardware solution sales were up 7.9% over a super strong 2020 and up 20.1% over 2019 if we look at that as a more normal year. During the third quarter, Hillman and our retail partners are planning for challenging comps in categories like deck and drywall screws. But let's think back to last year at this time. A big Saturday event was a trip to Lowe's, Home Depot, Ace, or your local PetSmart. And now this summer, thankfully, consumers are visiting family and friends and getting back to recreational activities and travel. While in-market demand remains firm, We anticipate these two categories could come negative in the third quarter due to the tough comparisons, but this should be more than offset by the new wins and pricing. Resulting in a low single-digit growth rate for hardware solutions in Q3, our new business wins and anticipated resumption of home and backyard projects once the kids get back to school should lead to a stronger fourth quarter and all-around hardware solutions growth rate for 2021 of 10%. In closing, we can't control all the moving pieces in our end markets caused by COVID, but we can't control how we respond. And I'm proud and impressed by the agility of our people and what they've been able to accomplish so far in 21. We have taken market share, won new business, maintained industry-leading fill rates, rolled out new innovations, protected our employees, strengthened our balance sheet, and taking pricing actions to try to mitigate unprecedented inflationary pressures. These actions have enabled us to profitably go year-to-date EBITDA 8.9 percent above 2020's COVID-fueled levels and 21.1 percent above a more normal year of 2019. I'm more excited than ever about our platform for growth going forward. and our new balance sheet. The moat we've built around our businesses provides us a competitive advantage and further strengthens our relationship with our best-in-class retailers. We're well-positioned to take advantage of opportunities as we continue to execute on our long-term growth objectives. With that, let me turn it over to Rocky to provide some more additional details on the quarter and year-to-date results as well as what all of this means. for the rest of this year and next. Rocky.

Thanks, Doug. On a gap basis, our net sales for the second quarter of 2021 were $376 million, an increase of $29 million, or 8.4%, versus the prior year quarter. The increase was driven by 64% growth in our key business, 39% in engraving, and 32% growth in Canada, as all three were negatively impacted in the prior year due to COVID, as well as continued growth in hardware solution sales, which were up 5.6%. Offsetting this growth was a 21.5% decline in protective solution sales due to the reduction of COVID-induced buying of PPE, such as masks and disposable gloves. Year-to-date net sales were $717 million, an increase of 74.5 million, or 11.6%. Growth was driven by the recovery in the key business in Canada and continued growth in the hardware business and COVID-related sales of gloves and masks in the first quarter. As we discussed on our first quarter call, we continued to benefit from incremental sales of COVID-related protective products in the first quarter until about the first week of March, when sales dropped significantly due to the faster-than-expected rollout of vaccines and a proliferation of products in the retail channel. In the quarter, our gross profit increased by $9.4 million over the prior year quarter to $160 million. Gross margin rate contracted 90 basis points to 42.5% from 43.4%. Adjusting for buybacks, margin rate in 2021 was essentially flat with the prior year as increased sales of higher-margin RDS products were able to offset margin pressure from increased sales in the lower-margin construction fastener category and inflationary factors. Year-to-date, gross profit increased $20 million to $299.7 million. Gross margin contracted 170 basis points to 41.8 from 43.5 due to cost inflation and adverse mix. SG&A expense on a GAAP basis in the second quarter increased 17.6 percent to $111.7 million, and as a percentage of sales, increased to 29.7 percent from 27.4 percent. Excluding $7 million in costs associated with the Lancadia merger and litigation costs, SG&A expense increased 10.4 percent and was 27.2 percent of sales. Selling expense increased by roughly $5 million driven by increased marketing spending, incentive compensation, and higher travel and entertainment after a significant decline in the prior year due to COVID lockdowns. Warehouse and delivery expenses increased by $5 million due to higher sales volume and higher freight costs due to inflation. Year-to-date, SG&A increased 16% to $215 million, and as a percentage of sales, increased 130 basis points to 30%, or up 8.5%, or only 50 basis points, excluding the above-mentioned items. Higher selling expenses, inflation in warehouse and delivery costs were the primary drivers of the increase. Excluding the impact of certain restructuring and other costs, adjusted EBITDA was $64.5 million in the second quarter, a 4.6% increase from $61.6 million in the prior year. Year-to-date, adjusted EBITDA increased 8.9 percent to $112 million from 103 in the prior year. Please refer to our 10-Q and investor deck for reconciliations of net income to adjusted EBITDA. Now let me turn to cash flow in the balance sheet. Year-to-date in 2021, operating activities used $60 million of cash as compared to a $12 million source of cash in the prior year. The primary drivers of the change were an increase in inventory to support new business wins and sales growth and increased in-transit inventories as we have had to order more product to accommodate for longer shipping lead times and cost inflation. Year-to-date, net cash used for investing activities was $62 million as compared to $23 million in the prior year and included the acquisition of OSCO building products in the second quarter. Capital expenditures were $22 million and relatively flat year-over-year and were invested primarily in our robotics and digital solutions equipment and merchandising racks, an important part of our high-return CapEx initiatives. Maintenance CapEx remained near 1% of sales as expected. At the end of the second quarter of 2021, we had $1.7 billion of total debt outstanding and $64 million of availability under a revolving credit facility for a net debt to trailing 12-month adjusted EBITDA ratio of 7.1 times. Post the closing of the merger with Lankadia on July 14th and the recapitalization of the balance sheet, we had $944 million of debt outstanding and roughly $58 million of cash on the balance sheet for a net debt to trailing 12-month adjusted EBITDA ratio of 3.8 times. Similar to the experiences of many companies over the past year, COVID has had many different and possible-to-predict impacts on our business, as during COVID, people were stuck at home and businesses were closed. We saw a pickup in hardware sales as DIYers were at home and tackled home projects, while the professionals were not able to get into homes to complete work. We were able to opportunistically take advantage of the strong demand and lack of supply of personal protective products, such as disposable gloves and masks. Offsetting this was weakness in our key and engraving businesses due to significantly reduced foot traffic at our retail customer stores. With the waning of COVID, we began to see a reversal of some of these trends. To cut through this COVID noise, we, like many of our peers and retail customers, believe comparisons of 2021 to the pre-COVID noise 2019 is helpful. It also better reflects the strength in our underlying businesses. We have provided a two-year growth comparison of our results for the second quarter in our slide presentation, which shows that overall sales in the second quarter increased 15.7% from 2019. We also showed strong revenue growth across each of our segments, with hardware and protective solutions up 16.2%, robotics and digital solutions up 10.3%, and Canada up 21.5%. Similarly, we experienced strong growth of 19 percent in adjusted EBITDA and 50 basis points of adjusted EBITDA margin expansion. At the segment level, adjusted EBITDA from 2019 grew 15 percent at hardware and protective, 27.4 percent at robotics and digital, and 11.9 percent in Canada. We want to highlight that this was all organic growth. As you can see from the two-year growth comparisons, our businesses remain strong despite COVID-induced volatility. As we have now locked down our first half and done a deeper dive into our business segments with some better visibility into what a post-COVID environment might look like for our retail partners and end markets, we have modestly reduced our outlook for the balance of 21 and 22. We expect to see continued recovery at RDS in Canada and solid top-line growth in our hardware solutions business, so not much has changed in the aggregate there. but continued inflationary pressures primarily in our hardware business and the delayed timing of offsetting price, coupled with downward revisions in our protective solutions business, are reflected in our new outlook. Rolling this up, we remain optimistic on reaching our initial projections of $1.4 billion in revenues this year and growing to $1.5 billion in 2022. After consideration of all the moving pieces of our business, we believe prudent expectations for adjusted EBITDA to be approximately $220 to $230 million for fiscal 21, and our early preliminary read on 2022 is $245 to $255 million. These compare to $179 million in 2019 and $221 million in 2020. We remain confident in our long-term organic growth goals of 6% top line and 10% adjusted EBITDA growth And we also look forward to completing highly accretive, low-risk M&A. With that, let me turn the prepared remarks back to Doug for some closing comments before we take questions.

Thanks, Rocky. Since we started this journey to becoming HLMN, Rocky and I have been transparent, and that will never change. Right now, it's as crazy as I've ever seen it out there, and I've seen crazy. But my team and I feel confident that we can do 220 to 230 this year in EBITDA and next year, $245 to $255 million. We love our customers and our people, and honestly, I'm glad I don't have to compete with Hillman. Sarah, can you open the call up for questions?

Thank you. As a reminder to ask a question, you would need to press star then 1 on your telephone. To withdraw your question, please press the pound key. first question comes from the line of Ruben Garner with the Benchmark Company. Your line is now open.

Thank you. Good morning, everybody. Hey, Ruben. So maybe just to start on the hardware inflation piece, can you, I guess, walk us through what's changed for you guys? I think previously you were expecting to Because of the timing of when the inflation hits you, you thought the price would offset it. Can you walk us through what inflation you're talking about? Is it just materials, or are you talking about other things like labor and transportation and that sort of thing that's gotten worse than expected?

Yeah, Ruben, here's how I think about it. We basically put in a price increase effective the end of the second quarter. remember with our customers, we give them roughly 60 to 90 days notice so they can figure out what they're going to do with retail prices. So basically tax day is April 15th is when we needed to kind of lock and load on what we thought would be the right level. And we felt good about that. And I can tell you since April 15th, this thing just continues to go up and it's, It's getting on a ship. It's getting it here and what it costs. It's getting it to DCs and stores, and steel's gone crazy. I would love for steel to do what lumber's done, but it hasn't, and you've got currency as well in the steel side of it. So it's those three things, and that's the difference. Now, we will price for it as we have, but again, think about the math. We'll be doing that. We'll be working with our customers. We've always been able to do that. But you're pretty much talking about effective dates in the fourth quarter. And the way I'm thinking about it, Ruben, is that this one, because it's so crazy, is probably a temporary pricing movement, and it could swing with the way things are going. Because honestly, this one just continues to run, and we don't know what it's going to do.

Okay, that's helpful. And then on the top line growth outlook for hardware, specifically, can you tell us how much price is in there? I think you said low single digit growth. Was that just hardware or was that hardware and protective in Q3? If you could clarify that as well.

Yeah, so as you think about the price-volume mix, Ruben, we think for the full year, as Doug said in his prepared remarks, that we'll be up 10% in the hardware business off a crazy strong 2020, so we're really proud of that. Inside that right now is about 3% price, and as Doug said, sorry, 3.5% price, and so you can obviously do the math on volume. As we go through the end of the year, again, we plan to take a little more price, and so That could get a little bit better, but again, if it comes really late in the year, which is likely, those are the rough numbers where we'll end up.

Okay, and virtually all of that is in the second half, correct? The price impact, yes, correct.

And when Rocky says we'll see a little of that, it's just that we've seen increases that are more than a little, but we're basically going to only see the positive impact of the next pricing increase. toward the end of the year. Got it.

And on the protective side, in Q2, it looked like, I understand the elimination of masks and rubber gloves and chemical cleaners and that sort of thing. Was there anything else going on that specifically hit Q2? I don't know if it was a tough comparison, but it looked like it was kind of comparable to Q2 of 19. Is that the way we should think about protective as we move through the year is similar numbers to 2019 on a top line perspective?

Yeah, Ruben, I would say that actually the base business, so let's pull COVID out. It was really solid. And remember last year in the second quarter, the lawn and garden sections were closed. There was just a lot of folks just trying to keep stores open and get people to work. So our base business showed – we had a nice second quarter in our base business. It's just that last year, you know, we shipped everything we had as soon as we could with what went on around the COVID stuff. But, no, our base business is solid. I'm really happy with it.

Okay. last one for me uh i understand the the near-term dynamics every company in the the broader housing and building products well in industrial spaces dealing with uh these crazy times what what is behind the outlook uh for next year you just because there's so much unknown and it doesn't seem to be stopping are you just baking in some extra or incremental inflationary pain, or what's behind the slight cut for next year's outlook?

Really, a couple things. One, it's just that with the way it's moving, it's scary because, again, I've never seen anything like this. What we're seeing, Ruben, for example, right now is we've got people that are bidding five and six times what we pay to get on a ship. And so as I think about all of that, you know, you have to make sure you get the product. And so that concerns me. And then as you think about gloves, disposable, because we've talked about this before, you know, our disposable glove business back in 19 was really a great mix. It was about 85% nitro, about 15% vinyl. You use vinyl for the paint guys. And that's really what we'll be doing in 22. And initially, our customers were saying to us, we'd like you to do more in the disposable gloves ongoing because you've done such a great job. But Ruben, there's so much global capacity that's been put into the disposable market. I don't think we want to play in that market. So we're going to go back to basically a business in disposables that was like it was in 19 and Because I don't want to be in the food fight on disposables. There's just too much capacity out there. So those are the two things.

Yeah, Ruben, just to add to Doug's point, I mean, you know, it's July 30th. We're looking six months from now. You know, looking back a year, it was unprecedented times. And we've told everyone that we believe we grow this business 10% from an EBITDA perspective. So if you take the new base, it's just prudent at this time to say we'll grow 10%, not 10%. something above that, and that's kind of how we thought about it coupled with the thoughts as Doug's thought about the market.

Perfect. And I said last one, but I'm going to sneak one more in. You're at 3.8 times now after the deal's closing. Can you talk to us about, you know, what all of this means from a cash flow perspective and what the deleveraging trajectory will look like? Because I'm assuming, you know, the faster you can get it down, the quicker you're or the more active you can be in the M&A market.

Yeah, so what I would tell you, Ruben, is we will have some modest deleveraging this year. It will probably be less than we had anticipated just given the inflation that we're seeing and the commodity costs in the business. And so we will use a bit more working capital than we had planned. As we think about 2022, it will be our intent to generate over $125 million of free cash flow, and we'll use that cash to pay down debt unless we see some really significant highly accretive, low-risk M&A, in which cases we think our shareholders will want us to do that.

Great. Thanks, guys. Good luck going forward. Thanks, Irvin.

Thank you. Our next question comes from the line of Ryan Merkle with William Blair. Your line is now open.

Thanks. Good morning, guys. Hey, Ryan. So my first question, just to clarify the change in EBITDA outlook for 2021. Looks like it's $10 to $20 million lower than previously. How much is price-cost timing versus the bigger PP&E headwind?

Yeah, I think, Ryan, if you go back at the end of the first quarter, we didn't know what was really going to happen. I think our call was around May 11th, but we had seen PPE stop. Two things have changed since we talked to you last. One is to move PPE. Honestly, it doesn't matter now. Who knows what the hell is going to happen with the CDC and what's going on out there right now. But, Ryan, you could basically discount stuff to a dime and you couldn't give it away. I mean, the consumer said, I'm done. I don't care. And so what we were trying to figure out is how do we move through this and get our money back, and that's what we've been working on. At the beginning, you know, in May, we didn't know what was going to happen. We didn't know where it was going to be. So that's part of it. And then the other part is simply the cost side of nuts and bolts and screws and our ability to price fast enough with how it's moving, not to mention getting on a ship and getting here. Those are the two pieces.

Got it. Yeah, it makes sense to be prudent at this point about 2022. So I see why you did that. And then my follow-up, and I just want to be clear on this. I know you have two price increases out there, so I guess two questions. One, have you seen any pushback from your customers? I think the answer is no, but just clarify that because I think it's a big point. And then secondly, when are you going to get back to neutral on price-cost? I know you're guessing, but it sounds like it's the end of this year, so just clarify that as well.

Yeah. So first of all, remember the ink hasn't dried on our letter for the June 30th. I mean, we really wanted to wait until we saw, we thought if we waited a bit, cause we saw some people go in April and May and we said, God, it's moving around so much. Let's wait. So we went and then fate basically was effective second half of the month of June. So now we're sitting end of July. We're having the conversations with, The retailers, they know what's going on. They're getting crushed across the board. And so what we're trying to work through is the timing, and I believe that we should do this one based on a temporary so that after a 90-day period, if things come back to earth, we'll be fine on that second one. But to answer your last question, Christmas, we should be at a run rate about, we should be there, right, Rocky? That's kind of what it feels like.

Right. Okay. Got it. Thanks. I'll pass it on.

Thank you. Our next question comes from the line of David Manthe with Baird. Your line is now open.

Hey, good morning, guys. Hey, Dave. Good morning. I'm wondering if you have a clear vision for the ramp of Instafob and ReSharp. Is there a contractual number of units that you're going to be placing at any point? How should we think about the ramp there?

Yeah, Dave, let's talk about Instafob first. As we've said, this one's really cool, and we can either build it into our full-serve key machine or do standalone. And we've also said that this is not in the middle of Iowa. This is really around population areas. But we're super excited. Ace, Walmart, Lowe's, and Depot have all taken it, and we're rolling those machines out. Believe it or not, we got caught a little in the chip thing, but we're small enough to where we've been able to catch up. So I think we're in good shape there. And that rollout schedule is kind of evolving and going as fast as we can. But people are happy with it. I know that we're happy with it. On ReSharp, it's ACE hardware first until we get to those 3,000 machines that they've ordered. And in that case, we've got enough to make X. I won't tell you the number, but we are waiting for chips, just like the car guys, for that machine. But Ace is really happy. It was really interesting. We basically said to our partners at Ace, hey, why don't you guys see if you can get them? Because we went on eBay and can't get them. And they came back and said, no, we can't get them either. So we're just going to be working through that as chip availability comes. But, Rocky, at the end of the year, we'll be wire on machines on ReSharp.

We'll probably be close to 500.

Yeah, 500, 600 probably, Dave, by the end of the year. And I was hoping we'd be at 1,000. But we just, you know, we got to – I didn't know it was the same chip as a car, but it's the same one.

The interesting thing, the only color I would give to what Doug said there is given the timings of the rollout and the chips, we think we will be a little behind plan as you think about revenue from those programs. But year to date and even through the rest of the year, we actually feel really good about profitability. The ASP – is actually above what we had planned. And so we're seeing some nice profitability, although it's still very minor.

Yeah, that's a good point. Right. Dave, it won't really have an impact because until we get about a thousand, we're not going to start turning on the marketing machine with a, so yeah, Rocky, good point.

Okay. You may have touched on this, but as you look at the 2022 outlook relative to 21, I think it's about 7% growth. Um, When you think about those two concepts together, what type of contribution are they making to that 7% growth rate? Is it a meaningful amount?

It is not meaningful, quite frankly, even as we've modeled out several years internally. The top line from those businesses is only 2% to 3% of our business. So the top line isn't meaningful. When you start to think about EBITDA, Several years out, we do believe they can be meaningful just because of the flow-through that you have in those businesses. You know, as we've talked about, 70% EBITDA margin because they're service-related businesses that don't have cost of goods. We love those kind of businesses.

Yeah, and, Rocky, the 2% to 3% you just mentioned, what was that in reference to?

The sales side. Oh, on the sales side, just thinking of it as a percentage of total hillman.

Okay, that's 2022 you're saying?

No, it's actually in out years past 2022. So, again, they're relatively minor when you think about the top line relative to the whole of Hillman. But, again, as we begin to grow those, we do love the profile from an EBITDA perspective because of the service-related nature of those. Got it.

Okay, thanks for the help. Sure.

Thank you. Our next question comes from the line of Josh Gonzalez with Blackstone Credit. Your line is now open.

Hi, I appreciate you guys taking the question. You know, I guess just kind of diving into that $10 to $20 million just lower guidance for 2021, would you guys be able to kind of, I guess, parse out what amount of that is just PP not being sustained to the same level and versus kind of the price-cost rate impacts from fasteners?

So here's how I would think about it. You know, we said $230 to $240, you know, we said there was $10 million of pressure after our first quarter call, and that was all from the PPE. We've obviously moved off that number. If you pick a midpoint on $220 to $230, right, and say $225, that's kind of $5 million of additional pressure. You know, we would say that most of that is from the inflationary pressures. There's a little bit more PP&E, but we had most of that baked in.

Okay, great. Sorry, you're saying that the majority of that's PP&E then at the end of the day?

No, no, no, no. I'm saying the change from first quarter to now. If you went 240, right, down to somewhere between 220 and 230... we would probably tell you north of two-thirds of that is the PPE reduction. The remainder is the inflationary pressures that we planned to offset by the end of the year. Okay.

Okay, great. And then it sounds like volumes and fasteners are still pretty favorable. You guys kind of gave the 3.5% price increase. Do you guys see the volumes holding up to the end of the year? How are you thinking about that?

Yeah, I'm super happy with that business. And Josh, remember, 3.5% is just because it's only a half a year. So the price increase is bigger than that, but we're doing really well. And if you think about it, I mean, in this environment, to take 32 linear feet at 150 stores with X thousands of SKUs and to set it at 97%, I mean, even the retailers saying, Holy smokes. So they just do a really good job, and that team's been doing it a long time. So I feel great about that business, but you don't grow the way we're growing if you don't take share, and we're continuing to pick up share. Feeling good about it.

Okay. So a lot of that volume growth, is that demand-related, or is that just your guys' share gains at the end of the day?

Yeah, I think if you go back to the way we've looked at it, Rocky, it's still pretty – pretty good model, you know, when we think about 6% organic, except the pricing that will take place in the next 12 months.

Yeah, I would tell you, as we've thought about our model and compared to our model, obviously, we're a bit above it this year on the hardware side. Other than the pricing, you know, if you take that out and you say 6.5%, 7% of volume, uh, in the year. Um, you know, it's pretty close to what we think. We probably have seen a little bit more market, but we've also taken a lot of share and we're really proud of that. And I think we will continue to, as we think about 2022 in the future.

Yeah. And Josh, I think every investor has said, Hey, come on, you know, deck screws and drywall screws last year went crazy. And, and that's the, probably the negative comp we'll see in the third quarter, but we're still going to be slightly up, uh, which is, I think impressive. And, and, uh, And then when people get back to school, you know, there's going to be projects. Everybody believes this thing's going to fire back up. But right now, there's just, you know, everybody's finally getting the heck out of the house, and we're hoping they can stay out of the house. Yeah, yeah.

And then, you know, again, sorry if the details are off. You guys, I think you said 455 stores, and that fully offsets some of that poor comp. Yeah. I guess just can you kind of give us a size in terms of maybe revenue that that opportunity represents?

You know, we won't do that, Josh, because I want to protect the retailer. We don't want a retailer to be looking at another retailer and say, huh, they do this and this. So, no, I'm not going to talk about the retailer or the size just because it's just too important that we don't say things that would, you know, put our retailers to where, why did you say that?

Okay. All right, I appreciate it. Thank you.

Thank you. Our next question comes from the line of Dick Ryan with Coal. Your line is now open.

Thank you. Hey, Doug, you mentioned this being a crazy time and some key wins here, but can you talk about how the conversations are going with either the big box or other retailers as they look at not necessarily next year, but three to five years down the road and how you might fit into maybe they're changing their plans a bit?

It's interesting, Dick. They're super excited about the fact that we just took debt from $1.7 billion to call it $850, whatever the number is. I mean, we basically cut our debt in half. They love that. What they don't want us to do, and I'll be with the CEO of one of our big retailers this weekend, and what they don't want us to do is they don't want us to just go buy stuff to be big. You know, they've seen companies kind of start believing their roadshow and doing silly stuff. And they say, hey, as long as you're doing things like you've done that fit into our strategy, but we don't want to see you getting into stuff that doesn't have anything to do with us. So, you know, we're going to hang around the rim with them, and I feel really good about it. But they're excited about the debt going down. They really think this is the best thing for the business, and they just want to make sure, you know, we stay on our strategy, which we're not getting off.

Okay, and just a clarification. I thought – I don't have the slide deck open, but I thought I saw in there when I looked earlier – Interest, $30 million a year. Rocky, is that something for 22 as we go forward?

Yeah. Yeah, that's a good number.

Okay. Thank you, and congratulations. Thanks, Dick.

Thank you. Our next question comes from the line of Daniel Lupo with Jefferies. Your line is now open.

Hey, thank you very much for taking the call today. Can you maybe comment a little bit about the M&A environment? What are you seeing out there? Is there anything kind of actionable, or are you kind of on pause for now until some of these headwinds kind of pass by?

You know, we're not on pause, but, man, we're at Dollar General. I mean, we're not going to overpay for anything right now, Daniel, and that's a good place to be in. We've had some really interesting conversations. I've got to be honest, the phone's ringing a bit more now that they see our new capital structure. But what we're doing is I don't want to waste my team's time and certainly not my time. We're saying, listen, we like this thing. We know if we put your stuff through our goose, we're going to grow. But here's kind of what we're thinking from an EBITDA multiple standpoint. And if you're interested, we'll go. If not, don't waste your time or ours. And I think you'll see us be successful in that area. But take HHI as an example. That's been announced. You know, you've got brands like, you know, Kwikset and Pfister and Baldwin. That's going to go at retail pricing. That's going to go at a strategic multiple. That's not us. We're not going to do that kind of thing. So I think it's probably going to be a pretty good time because I got to tell you, just think about this. We do 19,000 containers a year from Asia. People who don't know how to do this are getting their heads handed to them. And so there's going to be some people who are going to want to hook up on trying to figure out how to weather what's going on. And I feel good about our chances, but no, we haven't stopped.

That's helpful commentary. And then just, you know, last one for me here is, can you maybe comment a little bit more on working capital? Kind of how do you feel about that today? Are you over inventory in any places, under inventory in any places? And how do we kind of think about that the rest of the year?

Yeah, so I think as you think at June 30th, obviously we do still have PPE inventory that I would say we're over-inventoried on, although we do still have some masks in the warehouse, and we'll see depending on what happens over the next month or so. We're working through that with our customers, and we think we'll have that cleared out by the end of the third quarter. As you think about the remainder of the business, lead times have lengthened pretty dramatically across the board as you start thinking about products coming out of Asia. And so our inventories are up. They probably will remain elevated through the rest of the year. And so I think as we think about the current year, we do believe we will have a little more working capital usage than we had in our initial plan. You think about inflation, you think about those increased lead times and needing to have more product on our books that's on the water to make sure that we can fill our customers at plus 90% rates. Having said that, as I think I said to one of the earlier questions, we do believe as we think about 2022 or 2023, when inflation begins to come down, I think you will see us flip that working capital, generate cash, and we're confident that as you think about 2022, we can generate $125 million plus of free cash flow.

And, Daniel, the only thing I would add there is you can't have a 90% plus rate in today's environment, fill rate, if you keep your inventories flat. Just not possible. And we're going to keep our fill rates at 90 plus, and that's probably part of the reason that our competition isn't because it's just really hard to do and you've got to play to win. We're going to play to win.

Yeah, that makes a lot of sense. Thanks for your time today, guys. I appreciate it. Sure. Thanks.

Thank you. Our last question comes from the line of Andrew Burke with Postvisory Group. Your line is now open.

Thanks, guys. Just going back to the slight adjustment to Outlook, you guys were pretty good in saying two-thirds was PPE, one-third was price-cost. If we focus on the price-cost component of that, you had mentioned increased shipping rates, which I think you were alluding to, water, freight, which I think is more ground transport, and then steel prices. Can you parse through those three items to give us a sense, order of magnitude, what are the biggest to smallest and roughly the percentage moves that there are for those three categories?

Yeah, good question, Andrew. I think that the other thing, let me just start by saying our moat is that we ship to almost 43,000 locations. And we go direct store to a ton of places. And so when you think about our cost structure, not only do we spend $80 million on the people that are worth it, But we're shipping a bunch straight to store, and we're saving that freight and that handling for our retailers. So our mix of cost is a bit different than typical competitors. But, Rocky, how would you answer the rates, you know, the ocean, the freight in general, and the steel? You had to bracket it.

The biggest today, as we look out, is around the commodity space. So I would say probably half commodities and then the rest is mixed up in some level of freight, either inbound or outbound.

Yeah, probably right. That's good.

That's helpful. Thanks, guys.

Thank you. This concludes today's question and answer session. I would now turn the call over to Jennifer Hill for closing remarks.

Thank you for joining us this morning. A replay of this call will be available on our website. Thank you.

Have a great day. Have a good weekend.

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