Hillman Solutions Corp.

Good morning, and thank you for standing by. Welcome to the Hillman 2021 Fourth Quarter and Year End Results Conference Call. At this time, all participants are in a listen-only mode. At speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Today's conference is being recorded, and if you require any assistance during the call, please press store zero. I would now like to hand the conference over to Jennifer Hills, Vice President of Investor Relations. Ms. Hills, please go ahead.

Thank you, Chris. 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 fourth quarter and year-end 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 ir.hillmangroup.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 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 periodic and annual filings 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 and year. Now, let me turn the call over to Doug.

Thanks, Jen. Good morning, everyone. What a year 2021 was for Hillman. We accomplished a ton in a difficult operating environment, maybe the toughest our business has seen in 57 years. And as difficult as 2021 was, we more than held our own and clearly strengthened our company, and I'm excited about 2022 and the future. Before I get too far into my remarks, I want to thank all of our employees at Hillman. From our warriors in the field that help our customers win every day at the show, to our distribution center employees that keep the products flowing, and to all the support folks We continue to outperform our competition and provide the best service model in the markets we compete, thanks to our people. Our moat's never been stronger as we continue to help our customers overcome labor, complexity, and supply chain challenges in categories that are critical to their businesses and ours. Today, I'll start with some of our accomplishments for 2021, then talk a bit about the current environment then give my thoughts on our outlook for 2022 and the future before I turn it over to Rocky to talk numbers and our outlook in more detail. So let's do a quick run through and some highlights from what we accomplished in 2021, along with why these accomplishments create that foundation for our future growth. First, we became publicly traded in July. This was a huge step in the evolution of our company, providing access to the public markets and, importantly, significantly reducing our debt. This provided flexibility to our business when lead times nearly doubled in 2021 and inflation took off. Our new balance sheet allowed us to invest in inventory and additional storage to maintain industry-leading fill rates north of 90%. compared to our industry estimated to be in the high 70s. That was an amazing accomplishment by our folks. This increased our mode and widened our lead as the clear partner of choice for our retail partners. Speaking of partner of choice, our performance in both 2020 and 2021 continued to generate new business wins as our customers allowed us to manage more of their shelf space. We won the entire fastener set at one of our top five retailers for a mid-year 22 launch, and that is on plan. We continue to expand our construction fastener business. Remember, those are deck screws and drywall screws with all of our major customers. We're very excited to be introducing a new line of gloves, work gear, and job site storage under our AWP program. Our tool bags, pouches, and rigs all have our new patented track jaw technology. We continue our market share gains in builder's hardware with a flawless execution in late August with a major retailer. And we successfully expanded our firm grip branded core line and the new winter gov line set for 2022. We won this business at the same time we also took two rounds of price increases totaling approximately 15% in the aggregate to offset cost inflation. More to come on pricing in just a minute. Finally, we launched ReSharp Knife Sharpening and Instafob at scale and saw our robotics and digital business more than rebound from a tough COVID year in 2020. RDS had a great year in 2021. with 19.2% top-line growth and a 38% increase in adjusted EBITDA, and would have performed even better if we weren't held back by chip shortages that are integral to our RDS business and, as you all know, impacting many industries today. All the great work in 2021 resulted in our Q4 being in line with our latest guidance. And despite headwinds from COVID comps, and significant inflation in excess of our enacted price increases, we increased our revenue on a year-over-year basis 4%, and our adjusted EBITDA was down 6%. It's important, I think, for me to put that into perspective. During 2021, even though we saw an annualized increase in inflation of 175 million and a COVID-related adjusted EBITDA drop of 15 million, we were still able to limit our adjusted EBITDA decline to $14 million year-over-year. Let me spend a few minutes giving you my current view on the state of our business and how I see 22 playing out at a high level. We continue to monitor lead times for our products from Asia and the situation at the ports in U.S. as well as Canada. Today, from an order placement to our North American distribution network, our lead times or north of 200 days compared to that historical average in the 120s. However, unlike many of our competitors, we've maintained our industry-leading fill rates with customers and turned a difficult short-term environment into a very big long-term strategic advantage for Hellman. To that, I give credit to our daily pulse at the shelf with our over 1,100 sales and service folks, combined with our longstanding supplier relationships and the investment we made in additional inventory. We averaged 90.3% fill rate for 2021, and our year-to-date 2022 fill rate has improved to 93.4. Hardware Solutions, our largest business, has really performed well over the past 24 months. Their top line rebounded nicely in Q4 with an 11.8% growth over prior year, and that puts top line for the year up 4.7 with adjusted EBITDA coming in just above 2020. Our two-year CAGR for HS is 10.4% growth on top line and 18.3% growth in adjusted EBITDA. This is a big reason why I'm so excited about the future. Our customers love us because we do things for them every day that others don't. We have also been able to get through the largest inflation and global supply chain imbalance most of us have ever seen, standing stronger today than we were 24 months ago. As I think about 2022, I really don't believe we'll see relief in lead times during the first half, but that should moderate in the second half of 2022. When we see lead times and inflation moderate, we believe we see outsized profitability and reduced working capital needs leading to outsized cash flow performance as well. Speaking of inflation, we have recently implemented a third round of price increases, our third increase in less than 12 months. Overall, we have increased prices in our hardware solutions business just over 20%, and our retailers have increased prices at the shelf as well. March will be the first month that we will have price caught up to cost inflation, assuming container costs stay at current levels. We have passed price on dollar for dollar to our customers, which maintains our dollar gross profit, but as we've mentioned in the past, hurts our margin rates. We have done the same and more at Protective Solutions, where returning the business to profit growth is critical to our success. Another big effort at Protective Solutions includes an even greater integration with hardware solutions, which will drive efficiencies and make it easier to sell products across both platforms for all of our channels. During the first quarter, price will have caught up with costs. and this will provide a nice tailwind to produce growth in sales and adjusted EBITDA in 2022, particularly in the second half. Now let me spend a minute on trends with our customers. As a reminder, our business is driven by repair and remodel and not new construction. In general, our products are recession-resistant and are relatively inexpensive, particularly as it relates to the total cost of a project. In our hardware solutions business, we have seen robust customer demand as trends in nesting, aging in place, outdoor living, and millennials buying homes has been a wind in our sails. While many factors such as store traffic and lumber prices and weather impact our business in the short term, the long-term trends are a tailwind to our business, and I love our position in the market. Looking beyond 2022, I continue to believe our differentiated model allows us to grow the top line of the business at least mid-single digits, leveraging the sales growth to 10% plus on an adjusted EBITDA line. Let me finish my remarks by telling you why. One, our unrivaled field sales and service teams continue to give us the largest competitive advantage in our space. They help retailers with labor shortages and we manage the aisle and long-standing category in merchandising expertise. The need for these value-added services has really only increased over the past 18 months as retailers struggle with labor and in-stock levels throughout their store. We are currently in discussions with two of our top five customers about increasing our service force numbers for both of them. Two, we have long-standing relationships with our suppliers plus our volumes allow us to source better than the majority of our competition. This becomes even more important in these difficult times. Three, the sourcing capabilities plus our distribution capabilities enable us to maintain fill rates north of 90% in a very tough supply chain environment. We ship 80 plus percent of our hardware solution accounts directly to the store. We make logistics for our products easy, and we don't gum up our customer's distribution center. Four, innovation is a core strength, and we continue to invest behind our brands, which makes up over 90% of our sales. For example, we designed, developed, and patented a new concrete screw in the anchor category under our PowerPro brand that we rolled out for the first time in January. We have about 25% of the anchor category market today, and we have historically resold only other companies' products and brands in this category, not our own. Our engineering investment and the new state-of-the-art ISO 17025 accredited lab, which opened in late 2020 in Toronto, allows us to create and validate anchor products at industry-recognized certifications like ICC and introduce them under our own respective brands like PowerPro. This gives us instant credibility and better margins in the category. So the anchor category is next up for us to focus on market share growth just like we've done in construction fasteners and builder's hardware. Five, another great example is our PS business. They are great innovators. And in 2021, launched the DuraNet glove under our market-leading FirmGrip brand. The material in this glove is equivalent to a Nike Flyknit shoe. It won a GDUSA Innovation Award in 2021. And last week, we were awarded a Reagan Award, our first, which puts FirmGrip and shared company of many Fortune 500 mega brands. All in, Hillman won six GDUSA Innovation Awards in 2021. In our RDS business, we continue to roll out highly proprietary, digitally driven kiosk product offerings that are traffic drivers and flat-out moneymakers for our customers. Although some of our rollouts have been slowed by chip shortages, these are not These are not demand issues, they're timing issues. This business is an annuity with great margins, and we'll continue to work with our customers to grow the installed base and product offerings that provide outstanding returns for our customers and Hillman. The combination of our unmatched service, logistics, and innovation has deepened our moat with our customers. And finally, the M&A pipeline is strong, and we are evaluating several opportunities. As we improve our leverage in the back half of 2022, and certainly into 2023, we expect to accelerate acquisitions in categories that are low risk and attractive multiples. Think about the Hillman value proposition for companies joining Team Hillman through acquisitions. We know all of the top retailers from the store level to the boardroom. And our 1,100 service and sales folks in the stores are unmasked as we ship products directly to the stores every day, bypassing their distribution centers. It's not hard to show a business how they get better on day one when they join Team Hillman. The future at Hillman is very bright. I'm excited about where we're taking this business and the value we will build for all of our shareholders. With that, let me turn it over to Rocky. Thank you.