Hillman Solutions Corp.

Good day and thank you for standing by. Welcome to the Hillman 2021 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require assistance during the conference, please press star zero. I would now like to hand the conference over to Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you, Abigail. 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 third 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.hillmanegroup.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 provisions of the securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risk, 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 those factors that could influence the company's results are contained in our periodic and annual reports filed with the Securities and Exchange Commission. Please see slide two 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. Let me start by breaking down our business by segment and review performance during the third quarter and year-to-date. To cut to the chase, our hardware solutions, robotics, and digital solutions in Canadian businesses are all performed well in the quarter, in spite of the historic supply chain challenges and a very strong third quarter last year. But the unwinding of our COVID-related products and protective solutions negatively impacted our earnings. Going deeper, our HS business net sales were down 6.4% during the third quarter versus 2020, and were up 2.6% year-to-date. The third quarter was a bit slower for HS Business than we anticipated for two reasons. First, America said we're getting out of the house in July and August, and they did. And second, higher lumber prices slowed projects down during the quarter. But since mid-September, lumber is more affordable, kids are back to school, retailers' point-of-sale volume has rebounded at the shelf, and people are back to their home projects. You'll remember the very strong third quarter HS experience last year, up 22.7% at the height of the stay home and DIY projects timeframe. If you look at HS over a longer timeframe, you'll see a healthy growing business. On a two-year stack, it's up 15.9% in the third quarter versus 2019. And year-to-date, it's up 19.8% versus 2019. I'll talk much more about HS and hope you'll agree that this business is executing and well-positioned. Our RDS business net sales were up 14% in the third quarter versus 2020, and year-to-date they're up 20.3, so continued great performance by the RDS team. Canada's third quarter was very similar to HS, comping a strong Q3 last year, and net sales were up 15.6 year-to-date, and a very healthy 17.1 ahead of 2019. Our PS, our protective solutions net sales, were down 26.6 in the quarter and were down 8.9 year-to-date with COVID comp that they were up against. PS's net sales were up 21% in the quarter versus 2019, and year-to-date their top line was up 17.4 versus 2019. I will explain in detail what it took to unwind COVID for the PS business in just a few minutes. What we did during COVID was help our retailers satisfy the needs of their consumers and protect their employees so they could continue operating during these unprecedented times. Winning five Vendor of the Year awards in 2020 was evidence we were there for them. I'm probably going to spend less than one minute whining about supply chain and inflation issues because, first of all, you pay us to figure this stuff out. And second, in a strange way, all this craziness is enabling us to separate ourselves with our performance from our competitors. So it will end up being a good thing for Hillman. And here's why. All retailers have three big concerns right now. Number one, labor. Two, shipping issues and costs. And three, share loss to their competitors due to stock outs. Plain and simple, these are the top three. And we help them in all three, I think, better than anybody. We have 1,100 people in the stores every day. That's our in-store labor, so the retailer doesn't have to. We ship to over 42,000 locations with 80% of our hardware products shipped directly to the stores, bypassing the retailer's distribution centers. That's us solving the shipping and distribution center problem so the retailer doesn't have to. Their DCs are short-staffed and stuffed right now with things like lawnmowers that just arrived last month. Bad timing, yes, but they took them so they for sure would have them next spring. And third, if you're a retailer, Hillmans, you're not losing share to stockouts. Chances are you're gaining share. Our year-to-date fill rate for HS is 91%. And more importantly, Hillman's in-stock service level at the shelf for our top five customers reported from their systems is 95% over the past 30 days, which has been the toughest 30 days for fill rates probably ever. So how are we doing that? First, we have invested in additional inventory and working capital, which you have to do when your lead times move from historically 120 days to over 200. Without that investment, our fill rates would be closer to the industry average of 70%. As a result, we're paying for lots of extra inventory as well as outside third-party warehouse space to store this additional inventory needed to service customers in the current lead time world. Secondly, our 1,100 folks in the store and our direct-to-store shipping model gives us the fastest port-to-shelf hardware model in North America. And finally, our 57 years of experience and long-term supplier relationships have enabled us to separate Hillman from our competitors during this global supply mess we're all experiencing. There is, of course, a cost to maintaining these service levels, and you see it on our balance sheet. But I believe it's more than worth it as our differentiated model and our ability to outserve the competition during this period of supply chain disruptions has and will continue to lead to additional market share gains and outsized growth for our hardware solutions business. I can't wait to tell you about current wins in a minute, but before I do, let me address the historic inflation and supply chain issues we're facing. Then I'll talk about what we're doing about it. I've seen many things during my career, but I've never seen anything like what we're currently experiencing with supply chain disruptions and inflation. and I've never seen it as a top story in all outlets. Pre-COVID, it took Hillman, on average, 120 days from the time we would order product from Asia until it would arrive on the West Coast. Today, it is in excess of 200 days. We are experiencing inflation and commodity costs, inbound and outbound freight, as well as labor. To put in perspective, 20-foot container costs that averaged us $1,500 in 2019, $2,000 in 2020, have been averaging $5,600 since July in the U.S., and much higher in Canada. Obviously, spot prices are well above these, but the increases are really staggering. The ships can't get into the ports, and when our container does get on land, We can't pick them up as quickly as we would like due to the congestion and appointment delays. To add insult to injury, after four days, they're charging all of us $250 per container per day to merge on our product. Many times they won't let us pick up, and we hear it's going higher effective November 15th of this year. Okay, let me focus on what we're doing about it. Through all the challenges, I'm so proud of our 1,100 field service employees who work closely with our customers, helping to solve logistics and labor issues in the store and at the shelf. These unprecedented cost increases are being passed on to our retail customers and in consumers. And thankfully, our product categories are not seasonal, nor are they overly price sensitive, and our customers are experiencing these type of increases across the board. Our issue is timing. As we discussed in our last earnings call, we successfully implemented our first price increase of roughly 7% to 8% effective in June. Working together with our retail partners, we've been successful across the board with our second increase of roughly the same percentage, 7% to 8%, that will go into effect in October, November of this year. That puts us up around 15%. after the first two increases, and when we complete our planned third increase, which should go into effect January, February 2022, we will be above 20% price increase when you add the three together. And that's what we think we will need with what we know today to cover our cost increases. Let me touch on a few highlights and new business wins. During the third quarter, we were busy continuing to execute on recent business wins. They're great examples of our competitive moat and the secret sauce of Hillman. In late July, we finished the 150-store reset of 32 linear feet shelf space at a major retailer for construction fasteners at 97% on time and complete. In September, we began to implement our latest win in builder's hardware. What a beautiful set. It's four 8-foot bays in over 1,500 stores. and we will be done next Wednesday. We also sent our hurricane recovery teams, which is a subset of our 1100 team, to the most impacted areas and helped our retail partners get stores and hardware aisles back up and running in record time. We also bailed out one of our retail partners in New Orleans area by providing cap nails that our competitor was unable to service for one of the top five retailers in the area post the hurricane. Cap nails are the number one needed fasteners to keep tarps on and elements out. We shipped and they sold 18 million cap nails in 40 days. We were there for them, and last night we got an order for 6 million more cap nails. The great thing about our network is they will ship today. The next one may be my favorite win, and it's one that I've personally been working on with our almost 40-year veteran sales leader for over five years. So it's near and dear to my heart. We've won the fastener business at one of our top five retailers for the first time ever. This is an exciting win that will change the hardware category for this important retailer with a completely new set. We, along with the retailer, will recreate the fastener aisle in every store during the last week of June 2022. One last tidbit about the story. We created a 20-foot modular with over 400 new SKUs and all new packaging, but we're so worried our shipping carrier would miss the ship window. We actually loaded Suburbans in Cincinnati, and our folks drove 11 hours to make sure it made it to the corporate layout room for a 10 a.m. senior management walkthrough. They unanimously approved the set, and awarded us the business. And the quote from senior management was, this looks nothing like our current aisle, and it's about time we give our consumers what they want in this category. Stay tuned, because I think it's times like these when five years of work are paying off for Hillman. This win will generate $17 million in sales for 2022, and we're really looking forward to seeing what it will do in 2023 and beyond with our people in the stores managing this new fastener aisle. Our robotics and digital solutions business, where we're the leader in key and fob duplication, pet engraving, and knife sharpening is having a great year. Remember, we've designed, developed, and manufactured now 35,000 machines located in retail stores throughout North America, and we continue to own and service every machine out there. These robotic and digital machines help drive in-store traffic, provide great margins, and are destination purchase items for our retailers. The RDS business grew net sales 14% in Q3 over a prior year, and our EBITDA grew 30.5. Year-to-date, that puts their net sales up 20.3, with EBITDA growth of 34.7 over 2020. We have significant runway to continue to roll out RFID FOBs, smart auto FOBs, knife sharpening machines, and further expand our product offering to take both share organically as well as through M&A. This is a great business for Hillman and our retailers, and we're really fired up about what's ahead. Now let's talk protective solutions. Let's discuss P.S. business pre- and post-COVID, and let me explain why we did what we did. Pre-COVID, disposable gloves were not a core retail category for P.S., But part of our offering to several of our major customers, and in 2019, it was approximately 10% of PS's sales. And of those, 80% of the volume was nitrile gloves. Those are the heavier gray, blue, and black gloves we've all seen. We sold every disposable glove we had when COVID hit, and our customers worked closely with our team to secure more ASAPs. it really went from a buying frenzy to a global panic. First, globally, both medical community and governments consumed the nitroglove supply, driving costs up 3x in a matter of weeks. This extended lead times from 90 days to 250 days at its peak. Second, in parallel to the explosive demand growth, Overseas manufacturers were shut down or running at a fraction of their capacity due to increasing COVID cases. And third, retailers were struggling to get enough to even supply store associate needs on a daily basis to keep their stores open and operating. Hillman and our retail partners didn't want to take nitro gloves from the medical community so the clear, thin vinyl gloves became the only option and were quickly sold out. Prices, as you can imagine, skyrocketed. Delivery times were consistently pushed, and when the music stopped March 1, 2021, we had more disposable gloves, not to mention mask sprays and wipes, than we needed with the delayed shipment of product in Asia and some still on the water heading our way. Given our customer support during COVID and the strength of our relationships, our retailers have partnered with us to alleviate any inventory issues on masks, sprays, and wipes, which were all three new products for Hillman. We synced up with our customers and have successfully sold excess inventory in these three product categories to our customers who have and will donate them to various charities. We'll get our money back on these three by the end of the year and are happy with how our retail partners supported us throughout this period. On disposable gloves, we hope to sell them over time since they have a very long shelf life. But the current global supply glut has collapsed the price of vinyl gloves from $6 for a 100-count box to below $2 per 100-count, and in recent sales being quoted, as low as 30 cents per 100-count box. Fortunately, nitroglove cost and retail prices have remained strong throughout. Even though this product has a long shelf life, and our plan was to sell these over time, there is a glut of inventory at both retail and wholesale. The cost of outside warehouse storage continues to rise, and our landed average cost is well above market. Therefore, we will write this inventory off and donate the product. The outcome on disposable gloves did not work as we had planned during the unprecedented times. We are disappointed with the write-off and the negative impact on our 21 sales and profit performance. Different day, same old strategy is not our go-forward game plan on disposable gloves. With the overseas capacity that's been added and the ongoing supply chain issues out there, We've been working with two of our major customers and have been successful securing the first Made in the USA Nitro Disposable Glove exclusive supply agreement for retail. The Made in the USA factory will ship the first product toward the end of the year and they're adding additional capacity scheduled to come online in mid-2022. Our retail partners are excited about the Made in the USA as well as the ability to onshore Nitro Gloves for the first time. This will reduce lead times from over 200 days out of Asia to 30 days out of the United States. This gives us true differentiation and good margin and helps our customers with made-in-USA on-trend goods, not to mention bypassing all the container and port craziness we're seeing every day. Our attempt to take care of our customers and the American consumers in need during COVID on the PS side just had a negative impact on our entire operation and our cost structure. We were forced to rent three outside warehouses to handle the volume and unprecedented, unpredictable arrival times from overseas. And our single warehouse for PS north of Atlanta just got slammed. as we tried to deal with this unprecedented volume and complexity. The base business for protective solutions, which includes the number one selling work glove brand, FirmGrip, continues to perform well with a three-year top-line CAGR of 7%. Our bottom line has suffered and impacted the profitability of the entire business due to COVID turmoil and inefficiencies at PS mentioned above. Our plan forward in PS is to continue to drive growth in our core product categories with continued innovation, new business wins, and new accounts, move into a new distribution center just after mid-year 2022, and improve execution by consolidating several supply chain and other business functions with our U.S. hardware solutions group. We believe these actions, along with a shift in the management team, will allow this business to grow top line in the mid-single-digit range and bottom line 10% organically, matching the rest of the business going forward. To summarize, our hardware, RDS, and Canadian businesses have continued to perform while managing crazy complexity and incurring much higher costs. We've made the working capital commitments to continue to service our customers at the same high level we always have and we'll use this opportunity to strengthen our relationship and take share from our competitors. In 57 years, Hillman has never had to raise prices three times in a 12-month period. So unprecedented is not an understatement. One quick comment on leverage in M&A before I turn it to Rocky. Leverage at the end of the quarter was 4.3. This was much higher actually than Rocky and I had planned for all the reasons I previously discussed. we remain committed to over time reducing our leverage to below 3x. On the M&A front, the pipeline still remains robust, and we're seeing more entrepreneurs looking to sell with all the press surrounding changes in tax laws. We continue to see an opportunity for two to three bolt-on acquisitions a year. With that, Rocky, why don't you take it over and provide more details on the quarter and outlook.