Hillman Solutions Corp.

Good morning, and welcome to the first quarter 2022 results presentation for Hillman Solutions Corp. My name is LaTanya, and I'll be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release, presentation, and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investor Relations website at at ir.hillmangroup.com. I would now like to turn the call over to Michael Kaler with Hillman. Please begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us. I am Michael Kaler, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, our Chairman, President, and Chief Executive Officer, and Rocky Kraft, our Chief Financial Officer. We will begin today's call with a business update and quarterly highlights from Doug, followed by a financial review of the quarter from Rocky. 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 the safe harbor provisions of applicable securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions, and other factors associated 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, 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. For those of you who are new to the Hillman story, we are one of the largest providers of hardware products and solutions in North America. Our team distributes over 112,000 SKUs to over 40,000 locations with roughly 80% of our shipments delivered directly to the store. We also stock the shelves in the store for the customers, which are some of America's leading home improvement centers, hardware stores, big box retailers, and pet supply stores. Importantly, 90% of our revenue comes from brands that Hillman owns. Our differentiators are our world-class supply chain team and our in-store sales and service teams that are 1,100 associates strong. Every day, they team up to provide best-in-class service and industry-leading fill rates on must-have high-margin products for our blue-chip customer base. This is our competitive moat, and we have been steadily growing by winning at the shelves since we were founded in 1964. Looking forward, I remain encouraged about the future growth opportunities that lie ahead for Hillman. We're off to a strong start in 22, and I couldn't be more proud of how our team has performed so far this year. From our warriors in the field to our sourcing and distribution center employees to all the dedicated support folks, we continue to outperform our competition and provide best-in-class service to our customers. We win thanks to our people and our deep partnerships we have built with our customers over the many years. Remember, we've been selling our top five customers on average for 22 years. Our competitive mode has never been stronger, and we continue to help our customers overcome labor, complexity, and supply chain challenges in categories that are critical to their businesses. Today I'm going to provide an overview of our first quarter, discuss the current operating environment, and finish with a customer update before I turn it over to Rocky to talk numbers. As we announced last month, during the first quarter of 2022, overall revenue grew by 6.4% to $363 million. Excluding COVID-related PPE sales from both periods, our revenue grew by about 12% over the first quarter of 2021. Each of our businesses performed at or above our expectations for the quarter. Hardware Solutions is our biggest business and makes up approximately 50% of our overall revenue. For the quarter, hardware led the way with a 14% increase in revenue compared to last year. Driving that improvement were fill rates upwards of 94% and price increases that we've implemented over the past 12 months. Robotics and digital solutions, or RDS, make up just shy of 20% of our overall revenue. During the quarter, a return to normal foot traffic led to an 11% increase in RDS revenue. Our Canadian segment, which makes up about 10% of our overall revenue, increased 1% compared to a year-ago quarter. And lastly, our protective solution business makes up about 20% of our business, Protective was down about 9% for the quarter. However, excluding the unpredictable COVID-related revenue from both periods, protective revenues were up around 10% compared to the prior year quarter. As we announced last month, we generated $44 million of adjusted EBITDA in the first quarter. We saw strong margins and an uptick in sales volume at the end of the quarter and as all businesses performed well, and particularly hardware was able to offset inflationary pressures with price increases. As of mid-March, we have priced in place to fully offset the inflation we had experienced over the past 18 months. However, I will discuss more on pricing and costs in just a minute. Overall, our performance during the first quarter of 2022 was healthy, and you have probably already heard April foot traffic at retail has been soft, and overall industry credit card transaction activity is also down. In discussions with our retailers, they believe the majority of the softness in April is weather-related, but as we all know, there are lots of factors influencing the economy right now, and we believe Hillman's business is well positioned for 2022 and the future. Now let me spend the next few minutes giving you my current view on the state of our business operations. Our investment in inventory and incredible work from our teams has allowed us to continue to maintain industry-leading fill rates, and we believe we've stretched our lead within our industry. During Q1, our average fill rate increased just above 94%, which has allowed our customers to meet their expectations of in-stock rates at the shelf and satisfy their consumers. We believe the investment made in the inventory and fill rates will pay dividends over the long term as we seek to expand our product offerings to adjacent shelves and aisles with our leading customers. As customers know, they can rely on Hillman to get products on their shelves even during the most challenging times. Another key factor is our ability to serve our customers comes from our suppliers, many of whom we've worked with for over 20 years. The state of the global supply chain environment has required us to work closely with our suppliers, and those relationships have never been stronger. This, coupled with our team of 25 on the ground in Asia, has allowed us to successfully navigate the global supply constraints and enabled our customers to continue to win with Hillman. Now turning to price and cost, we continue to monitor lead times from Asia and overall inflation in our business. Most U.S. companies, including us, negotiate new contracted container rates annually ahead of the new rates becoming effective in May each year. Similar to many other companies, the contract renewal rates for containers were meaningfully higher than anticipated for May 22 renewal. We are already moving to offset these higher shipping costs in a new round of price increases that are currently in negotiation. As we have done in the three previous price increases since mid-2021, we plan to pass these costs on dollar-for-dollar basis with our customers, and we expect our price increase to wholly offset the cost escalations in our P&L for 2022. Now let me spend a minute talking about some specifics about our business. The majority of our products are driven by repair, remodel, and maintenance projects. These are your pickup truck pros, local contractors, and DIYers. Our business is not reliant on new home construction. Historically, demand for our products has been healthy through all economic cycles, considering our products are relatively inexpensive, particularly as it relates to the total cost of a project. While there are concerns around the current state of the economy, Hillman has seen top-line growth, in 56 out of our 57-year history. We believe the growth drivers for our business are strong. In our hardware and protective business, we have seen solid consumer demand as trends in nesting, aging in place, outdoor living, and millennials buying homes have been a wind in our sails. And we continue to see meaningful opportunities with our high margin RDS business. We believe the longer-term macroeconomic growth drivers for our business are really healthy. I love our leading position in the market, and while we can't control some of the short-term factors, we are laser-focused on controlling everything we can optimize for customer satisfaction and financial results. We continue to win new business and outperform with each of our customers, and let me give you just a few examples. Our planned fastener launch at one of our major retail partners will not only be on time and complete, but we've already shipped 79 of the 400 SKUs to 3,900 stores early to help fill holes in the shelf caused by their current supplier. To me, that's world-class work by our team and very much appreciated by the retailer. To quote the retailer, Hillman is hardware. and we can't wait to combine your expertise in this category with our 140 million consumers who visit our stores in the U.S. every week. We continue to gain share in Farm and Ranch Channel with a new fastener win at a bellwether retailer that's regional. We have won this business for the first time in our company's history, and don't think We did not rub it in with Mick and Rick Hillman when the grandson of the founder landed this account. Why did we win it after never having it? One word, service. They needed our service model, and we serve most major retailers, and the Farm and Ranch Channel today is the clear partner of choice in this channel. We continue to roll out new kiosks in our RDS business, and we have been successful in securing some chips and boards that, while modest in number, should allow us to install machines a bit faster than initially planned for 2022. We've also just introduced our new QuickTag 3 machine for the first time. It's an engraving machine. The consumer will have 25 different options for not only pet tags, but also luggage and backpacks versus the current machine, which today gives the customer only six PEC tag options. It's early for this next-generation machine, but the retailer likes it so much, they will display it at their upcoming annual shareholder meeting. And trust me, our engineers and all of us at Hillman are really excited about that news. And we renamed Vendor of the Year in 2021 in three categories with our retail partners. We have now won Vendor of the Year at each of our major hardware customers over the last three years at least once. The future at Hillman is very bright, and I'm encouraged about where we're taking this business and the value we will continue to build for our shareholders, customers, and employees. With that, let me turn it over to Rocky.

Thanks, Doug. I will provide a quick summary of our first quarter results and then turn to our outlook and guidance for the remainder of 2022. Net sales in the first quarter of 2022 were $363 million, an increase of 6.4% versus the prior year quarter. The improvement was driven by hardware solutions, which increased sales 13.6% to $189.3 million. The improvement was driven by price increases implemented over the past 12 months and strong volume to finish out the quarter. RDS sales grew by a healthy 10.6% to $61.8 million as foot traffic and sales continued to improve from the COVID-impacted 2021 levels. Our Canadian business had terrific performance in the quarter. While sales were up 1% compared to the prior year, we significantly improved profitability as product margin outperformed and foreign currency exchange was a tailwind. While we don't anticipate maintaining 13% EBITDA margins for the remainder of 2022 in Canada, we are well on our way to our minimum expected adjusted EBITDA goal of 10% across this business. Partially offsetting these gains was an 8.6% or $7.2 million decline in protective solutions as we comped against COVID-related sales with higher margins in the prior year. COVID-related sales for the quarter were $13.4 million, compared to $28 million in the prior year quarter. As a better proxy for understanding demand, excluding COVID-related sales from both periods, protective solution sales were up about 10%. On a GAAP basis, net loss for the first quarter of 2022 totaled $1.9 million or 1 cent per diluted share compared to 9 million or 10 cents per diluted share in the prior year quarter. Adjusted earnings per diluted share for the first quarter of 2022 was 9 cents per share compared to 16 cents per share, diluted share in the prior year quarter. On an adjusted basis, first quarter gross profit margin improved by 20 basis points to 41.2% versus the prior year quarter. Sequentially, margins improved 40 basis points. Margin expansion in our RDS business was mostly offset by inflationary pressure in hardware and protective solutions. Hardware only recently caught price near the middle of March as it was playing catch-up for most of the last 12 months. For the first quarter, GAAP SG&A totaled $114.5 million compared to $103.2 million in the prior year quarter. Adjusted SG&A was $106 million in the first quarter of 22 compared to $92.5 million in the prior year quarter. Adjusted SG&A as a percentage of sales, excluding certain restructuring and other costs, increased from 29.4% from 27.1%. This increase was primarily driven by the revenue-sharing arrangements in RDS due to outsized growth in that business and inflation related to outbound freight and labor. Adjusted EBITDA in the first quarter was $44 million compared to $47.8 million in the year-ago quarter. Despite an increase in adjusted EPS from our RDS and Canadian businesses, we saw a decline in our hardware and protective solutions segments for reasons I just discussed. That said, our adjusted EBITDA for the quarter came in better than expected as each business exceeded our original expectations. Now let me turn to cash flow on our balance sheet. For the first quarter of 2022, operating activities used $3.6 million of cash as compared to a $45.4 million use in the prior year quarter. As Doug discussed earlier, we made the strategic decision to meaningfully invest in our inventory during 2021. This investment has allowed us to maintain our industry-leading fill rates that we believe can help us win additional new business in the future. Capital expenditures were $12.5 million compared to $9.1 million in the prior year quarter. We continue to invest in our RDS equipment and merchandising racks, both an important part of our high-return CapEx initiatives. Our CapEx spend remains lower than we would like as chip shortages continue to hinder our ability to produce robotic kiosks to meet demand, particularly our re-sharp knife sharpening machines. Maintenance CapEx remain near 1% of sales as expected. We ended the first quarter of 2022 with $933 million of total net debt outstanding, up from $907 million at the end of 2021. At the end of the first quarter, we had approximately $116 million of liquidity, which consists of $97 million of available borrowing under a revolving credit facility and $19 million of cash and equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 4.7 times, up from 4.5 times at the end of 2021, as expected, given the normal cycle of our business. Let me spend the next few minutes talking about our short-term outlook and guidance. Our third price increase over the past 12 months was fully implemented in March, which is when we finally caught our increased costs. Looking at Q2, we will benefit from a full quarter of price increases. Additionally, due to the seasonality of our business, we typically see an increase in sales during the second and third quarter. Warmer weather during the spring and summer months results in an increase in home repair, remodel, and maintenance projects. Altogether, sales for the second quarter should see a year-over-year increase in the high single digits, and our EBITDA should see a year-over-year decrease in the low to mid single digits. While our Q1 adjusted EBITDA came in a bit higher than the street's expectations, our profit improvement over the prior year remains largely weighted towards the back half of the year. We are optimistic that we can implement our next upcoming price increase at the same time or even slightly before higher contracted container rates begin to flow through our P&L. During the second half of the year, we expect to have full price coverage, new business wins in place, and relatively lighter comps, and therefore we anticipate adjusted EBITDA to be up in the mid-teens on a percentage basis in the second half of 2022 as compared to the second half of 2021. We have assumed we will have a modest benefit from working capital in 22 coming off meaningful inventory investments made in 21. When lead times normalize and inflation subsides, we anticipate a commensurate reduction in working capital that will generate additional free cash flow. Our long-term target for net leverage remains unchanged at below three times, and by the end of 22, we believe we can come down to around four times. As we look toward the remainder of the year, we remain confident we can hit our goals. As such, we are reiterating our full-year guidance. We anticipate our full-year 2022 net sales to be in the range of $1.5 to $1.6 billion. Adjusted EBITDA is expected to be in the range of $207 million to $227 million. And free cash flow is projected to be in the range of $120 to $130 million. As we look a bit farther out, our long-term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact. On the other side of the current headwinds, we have a high level of confidence that our business will see adjusted EBITDA grow in excess of our algorithm. We've discussed the current inflationary pressures and We are hopeful that commodities, containers, freight, and other costs incurred to maintain our industry-leading fill rates will begin to moderate in the second half of 2022. Our business continues to have several structural tailwinds that Doug discussed earlier. We believe these shifts are permanent and position Hillman to capitalize on sustained growth in the home repair, remodel, and maintenance markets. Just to reiterate, we are maintaining our guidance for the year, and longer term, we continue to believe that our differentiated strategy will allow us to perform at or above our stated algorithm for growth. With that, Doug, back to you.

Thanks, Rocky. Our investment to maintain our fill rates continues to pay off, which we believe will be a meaningful benefit over the long term. Confidence in our team, our strategy, and our long-term business model remains strong. Our differentiated model with the 1,100 field sales and service folks combined with our direct-to-store delivery model have created tremendous value for our customers, value that I think they recognize. At Hillman, we provide simple solutions to complex problems faced by our customers, like immense logistical and labor challenges. The willingness of our customers to allow us in their stores each and every day and to accept our pricing actions Grant us additional shelf space and award us new business wins demonstrates, I think, how they value our partnership. While the current environment is still uncertain, we'll continue to control what we can and focus, as we always have, on our customers and our employees. We remain well positioned to drive growth over the long term and build meaningful value for all shareholders. With that, we'll begin the Q&A portion of the call. LaTanya, can you please open the call up for questions?

Certainly. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Our first question comes from David Manthe of Baird. Your line is open.

question is on the supply of fasteners. Another fastener distributor we talked to said that they had broadened out their supply base. I think they tripled the number of suppliers they're using. I'm just wondering, especially in light of this new retail relationship, have you made changes in sourcing that could help you going forward, particularly if this China shutdown starts to feed through?

Dave, good question. We have We've got a great supplier base now, and they have always been able to be ready for growth. But what we've done, really one stage short of that, I think, we have qualified new locations and new suppliers so that if we need to. We have not seen the need to. I don't think we have any issues as I look over the next two years. But because we don't control the political landscape and the moving pieces around the world, we have started to get new suppliers qualified with samples and making sure they could do it if we need that.

Okay, thank you. And second on RDS, up 11%. Excuse me. Can you disaggregate between... same unit sales and then sort of the increase in the number of machines out there? And then related, I'm wondering on the margin side of RDS, all else equal, does a slower than expected rollout, does that hurt or help margins in that segment?

Yeah, I think as you think about new placements, Dave, it's kind of a mid-single-digit portion of our growth, and so I think that's how you should look at it. So as you think about 11%, call it about half is related to new placements. The other half is growth and existing. And then as you think about margin, yeah, it actually, an incremental sale or incremental placement of a machine, while it does take six months to get a full run rate, those do incrementally hurt the full business as you think about, you know, a plus 30% EBITDA margin in RDS compared to the rest of the business kind of in a mid-teens type location.

All right. Thank you, guys.

Thanks, Dave. And our next question comes from Brian Butler of Stiefel. Your line is open.

Good morning. Thanks for taking my question. Hey, Brian. Just the first one on the inventory. Can you remind everybody what was the size of that working capital bill for the inventory in 21? And then when you think about the modest kind of drawdown that you alluded to in your prepared remarks, kind of any color on that magnitude?

Yeah, so at the end of, this is Rocky, at the end of 21, we had about $140 million more inventory than we would have expected at the beginning of the year. Clearly, that was to maintain fill rates that we had in our business as we saw lead times double and also, you know, inflation around the commodity component of our products. Those were split about 50-50 when you think about the component that was inflation and the component that was lead time. You know, we did build inventory in the first quarter of this year. That's our normal seasonal build going into the spring. As we think about the full year as compared to 2021, we're still confident that we'll probably take $20 million to $30 million out of that inventory number based upon where current lead times are.

Okay. That's great. And then thinking about kind of on the hardware side, when you look at like the point of sales kind of through April, Are you seeing any trends considering the inflation the consumer is facing on their purchases? Is this impacting what they're buying or reducing their purchases? Any color on those trends?

Yeah, Brian, we haven't seen anything yet in that regard. I would say that my gut tells me in some of the hardware stores, the consumer has such a great option to take. three or four screws or three or four washers or three or four bolts out of a drawer or by a bag or box, you got to believe that at some point people are going to start picking through pieces instead of, you know, call it the $25 ring for a box. But we have not seen anything change yet. We just want to be able to be there in all of our locations so that the consumer can get what they want for the project or for whatever they may be working on. But, no, we haven't seen anything change yet.

Okay, and then one last one, maybe on the M&A pipeline and what you're seeing there. You know, with the current environment, is there any opportunity that some sellers are maybe looking to sell sooner rather than later? Any color on those friends?

Yeah, you know, I think the only thing that's probably – have probably come down a little bit, which is a good thing when you think about us over the next couple of years. But I think the other thing that's interesting, Brian, is we've talked, you know, we don't plan to do anything until we get our balance sheet in a better place. And that should happen, you know, pretty quickly when things begin to normalize because of the inventory coming to cash and our margin expansion that we should enjoy. But, you know, I would just say they have to go back to the market with another price increase if they are doing what most people are doing, which is bringing stuff from all over Asia. So it gives us some time because if they were trying to look at their model right now, they'd say, oh, we've got to go get another price increase. So it probably buys us some time. But, you know, if you're an entrepreneur, you've got to be nervous that this thing doesn't seem to want to end. We've looked at this container increase pretty unemotional. It's just something we've got to do. I mean, you even saw the quotes in the big retailers that, you know, container rates doubled. I mean, so it's not something that's a Hillman problem. But it probably buys us a little time, but I think it probably changes the future multiple for them being an entrepreneur with not very many options.

Okay, great. That was great, Collin. Thank you. Thanks for taking my questions. Sure.

Thank you. Our next question will be from Lee Jagoda of CJF Securities. Your line is open.

Hi. Good morning, guys. Hey, Lee. Can we start in the Canada segment and just talk about some of the company-specific actions you're taking there and how we should think about EBITDA margins in light of the 13% plus margin you had in Q1, which should be kind of a seasonally weaker period for you?

Yeah, I mean – Lee, half the damn country had snow. It was crazy. So, yeah, you're right. You know, I think that Scott Ride and his team have done a really nice job. About 30, a little over 30% of our business up there is industrial commercial, and the rest are the same retailers, basically, that we sell here except for Canadian Tire. Scott's done a great job of consolidating operations from seven into one big dc and and uh in the toronto area we've got more than one in canada but we had seven in the toronto area because of acquisitions that's one piece but the other piece is we just decided to stop chasing the silliness of the of the industrial um commercial margin account these guys were buying on price on every order and we finally said listen If they want to shop around, let them go get it from whoever needs the business. We're going to take care of our customers, and we're going to price it to make a fair profit. So it's really their operations have improved, and we decided to stop chasing some of this commercial industrial stuff and say, if you want it, we're going to make a fair profit. I think those, Rocky, are the two things. Probably with the exception of we did have a little positive variance in exchange rate.

Yeah, there is some FX out there, Lee. I think as we think about the rest of the year, we think Canada should achieve kind of that low double-digit EBITDA margin in the second and third quarter. And then the fourth quarter, again, like you said, usually first and fourth are seasonably tough, particularly for Canada. So they'll probably be in the low singles in that. So I think we'll blend out to probably – you know, 8%, 9% this year, which is nice progress towards that 10% minimum EBITDA that we expect out of that business.

Great. And then just looking at the large customer where you're selling in this year, can you talk about the margins on the initial stock in and sell in versus the recurring margins you expect from that business? And then the other part of that is I think when you initially – negotiated the agreement, you did so without the in-person Salesforce in the aisles. Is there any change or anything new to update there?

Yeah, so let's talk about that service. We decided to quote it on an apples-to-apples basis versus their current competition and other folks because their current supplier, our current competition, their current supplier and others don't have a service organization. And a lot of times, Lee, we'll quote a piece of business with service built in and we're quoting against somebody that doesn't have it. So what's exciting, I think about this is we quoted it without and, and, and in the, uh, late third quarter, we're going to test, uh, stores with, and that'll be awesome because we'll be able to see how stores do with it, how stores do without it. It'll be a great, I think, opportunity for us to prove what we can do with, uh, with our folks now we have people in their stores handling key and engraving and other things today so we won't ignore about they won't have the full flap service organization on on them and and for us the the margin side of it you know we don't talk customer specific margins but lee the only thing that would cost us was because we were going to nail this launch we had to do some 3pl storage to get ready because it's about 75 containers to get this thing loaded And so we paid a little outside storage so we didn't overjam our current DCs. But other than that, that would be it.

Got it. And if I could sneak one more in, just on the engraving resharp side, revenues were down year over year and, frankly, down sequentially. Is there any explanation on that, and how should we think about that one in the next couple of quarters?

Yeah, I think that's what you saw there was a little bit of foot traffic, Lee, and we would expect that that will be a nice growth business, particularly as Doug talked about QuickTag and as we're able to get the re-sharp machines into the field over the next, you know, the next quarter is probably not as much growth as we'll see over the next year or two.

Okay, great. Thank you.

And our next question comes from Ryan Merkle. Of William Blair, your line is open.

Hey, guys. Thanks for taking the questions. Sure. So I'm sorry if I missed it. Are you expecting lead times to improve in the second half of 22? And then any worry about the data situation? Could that impact lead times at all?

Yeah, so first question, Ryan, we've just not baked in any improvement. I would tell you that I think they will. uh, improve a bit, you know, from the call it 240 days to, I think something closer to low two hundreds, but we haven't, you know, we haven't been able to witness that yet. All we really saw with the Shanghai issue in China is they couldn't get truck drivers, even though the port remained open. So we floated containers for probably an extra 10 or 12 days that would have normally been coming our way. So it's a small bubble, but fortunately we had all that stuff for the new launch here. And, you know, it may take a point, half a point out of our fill rate, but I think that's it. I think it's just a little air pocket for us.

Okay. That's good to hear. And then just to follow up on demand, obviously a lot of worry out there on the consumer and housing. Your business has been stable in the past. I guess two-part question, Doug. With the low supply of homes out there, people can't move. Is your view that people will just invest in their existing home? And then what about pull forward demand? Any fear that that could be an issue?

So let's take the first one. You know, it's interesting how just as we do our research and as we talk to the pros at these retailers and People are feeling that an investment in their home is going to pay off whether they plan to sell it or stay in it because of how home pricing and home equity has grown. And so I think that's a good thing for us versus it used to be the old rule, well, if you didn't do bathroom or kitchen, you couldn't get any money back for it or couldn't get a fair return. I think that's actually changed. Ryan, the second question, I want to make sure I understand it. Can you come with that again, the pull forward? I'm not sure I understood it.

I was getting some questions just, you know, with people stuck at home, maybe doing a bunch of remodeling projects, you know, could demand have been pulled forward in 21? I don't know if that's a fear that you have, or I know it's hard to quantify it.

Yeah, okay. Got it. Yeah. Listen, you know, I think that we saw in deck screws and dry roll screws that In the second half of 20, definitely there was a, you know, you just couldn't believe how many we sold. And in the first half of 21, it was still solid. So I have to believe some people did some stuff that they wouldn't have normally done. But when we talk about COVID-related products, we stick to the protective solution businesses. But we probably saw some deck screw and drywall screw volume that was either pull forward or people so damn bored they had to do something.

Okay. Yeah, that makes sense. And lastly for me, you probably don't want to talk about 23, but I'm getting a lot of questions about gross margin. What would be the minimum gross margin that you'd be happy with in 23? That's a fair question.

Yeah, I mean, I think when you look at gross margin, Ryan, the thing that you obviously know is that we've been very clear we're going to go dollar for dollar. So if you look at the first three increases, the impact is probably three points, right, on hardware and protective. And, again, we've got another one coming. So call it three to three-and-a-half or three to four points, right, you know, as things start to normalize, you'll see that return to more normal. And we've never been here, Ryan. So we've never had a, you know, $200 million cost or price increases over a 15-month period with a market that may not go back to where it was, but certainly will normalize. So I got to tell you, we're in uncharted waters. But I'm excited because I think Our inventories will come into line, we'll put that to cash, and our margins will improve about the same time, which is why Rocky and I are excited about what we'll be able to do with our leverage. But we're in a world we haven't been in on gross margins.

Yeah, the only thing I would add to what Doug said is we do expect incremental gross margin improvement and EBITDA margin as we go through the quarters this year from McCain's perspective. And so we would expect to exit the year at a higher level, clearly, than we are today. And obviously, as we think about 23, we would expect to maintain that rate. And to Doug's point, at some point when we see the headwinds turn, we would expect our margins to get back or above in each of our businesses where they were historically.

Very helpful. I'll pass it on. Thanks. Thanks, Ryan.

And this concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. Cahill for closing comments.

There's one more question. Oh, hang on a second. LaTanya, I think maybe there's one more question, or at least our guys think there is.

And excuse me, we do have an existing question from Matthew Bally of Barclays. Your line is open.

Hey, thanks for sending me in there, guys. So I wanted to ask about that fourth price increase and the negotiations to offset the container rate increase. I was curious what exactly is embedded in the guide there. So, you know, it sounds like I think, Rocky, I heard you say you expect to realize the price kind of in line or ahead of the costs rolling through. But I'm just curious if that price increase is relatively set in terms of magnitude and just your conviction that it will be implemented at those levels, you know, because it sounds like it's not yet final. Thank you.

Yeah, we do. It is not yet final. We're still negotiating with some of our customers, but we do believe, as you said, Matt and I had in my prepared remarks, we expect that to be in place before it hits, and we expect no impact on our P&L, and we haven't put any in our plan or into the guide. And so it's a net neutral. It will increase revenue. We'll have increased costs commensurate with that, and right now we're highly confident that that will be the outcome.

Yeah, I think, Matt, the last thing is we've seen this. You know, when we first saw it, I'll be honest, I was like, wait a minute. I can't believe that. And now we've seen it quoted by major retailers the same thing. And so, you know, I feel really good about our chances because it's an industry thing. Everybody sees it. It's not a human self-inflicted wound, and we've been successful there. in the past. So I think we will be on this one as well.

Gotcha. No, I appreciate that color. And then secondly, on the foot traffic in April, which you said was soft and that the retailers were attributing that to weather. I'm just, again, a similar question, but curious how that plays into your guidance. If if that April activity sort of holds at these levels, would you be sort of towards the midpoint or lower end of the revenue guide or just kind of how that, you know, if these trends hold, kind of how would you expect, you know, the full year to play out?

Thank you. Yeah, I think as you think about the revenue guide, we're highly confident that, you know, we'll be at or above the midpoint on the revenue guide. I think more importantly, as you think about EBITDA, and the flow through and the profitability in the business from, you know, that revenue, the one thing that it does give us a little bit of pause. And so, you know, obviously we beat the street in the first quarter. You know, you would initially think, well, is this a beat and raise? We're still cautious because, to your point, and as Doug said in his remarks, while the retailers are, you know, consider this, you know, to be, mostly weather related. I mean, there's a lot of structural things going on clearly in the macroeconomic environment, and there could be a bit of a slowdown. If there is, we're still, you know, feel really good about, you know, being at or above the midpoint of all of the guidance that we've given in our ranges.

Yeah, Matt, I would just say, you know, we're not selling Claritin D and Zyrtec D, which I wish we were right now, but thank God we're not selling lawnmowers or fertilizers. So, You know, I think that lawn and garden is the one that you never know if you're going to make it up when you miss three weeks to weather. For us, it's not something that changes our year, but obviously we want to make sure that with the gas and grocery impact to the consumer that the consumer is going to hang in there, and that's the question nobody can answer right now.

Got it, got it. Well, that's great, Collar. Thank you, Doug. Thank you, Rocky, and good luck, guys. Thanks. Sure. I think we got one more. Yes.

Our last question comes from Ruben Gardner of Benchmark. Your line is open.

Thank you. Good morning, everybody. Thanks for squeezing me in. So a quick clarification on the guidance. So since you last gave guidance, I think a couple things have changed. It sounds like you've got some new business wins and another price increase. Is it fair to assume that maybe you're being a little bit more conservative on kind of the core volume side, just in light of everything going on with the consumer and the foot traffic. And that's why, you know, there was no reason to take up the guidance based on the, at least to the top line, based on the new business wind and the pricing action.

Yeah. Ruben, I think, you know, the wind that's mid-year is, was in our numbers. You know, we knew that was coming, right? So that's not a new one. We obviously went a little early with a little more, and we continue to, I think, win, you know, day in, day out. But, you know, I would just say for us, the pricing should be neutral, the next one, the cost and the pricing should be neutral. I feel like that will work its way through just the way we had hoped. and that wasn't in our plan. But I don't know how you can't be cautious at some point right now with what's going on. And, you know, we feel really good about this model because we're not tied to new construction. But there's no question, the consumer, the lack of stimulus, the inflation, you know, you just have to – that would put Rocky and I in a more cautious state.

Got it. And then the quick tag machines, I think you guys were doing a test early. Any indications yet on kind of what kind of revenue or profit per machine those have versus the, you know, the legacy pet tag machines? And then, you know, ultimately is the plan or the thought that those machines would replace all the pet tag machines that are out in the marketplace? Sure.

Yeah, I mean, it's early, and because we've only got it at one place, we won't give you the numbers, but we're excited. Anytime you go from a consumer having six options for pet only to 25 options, then they start thinking about who the hell does need a luggage tag. I don't know where mine go. So, I mean, there's an opportunity there. The biggest opportunity, Ruben, is not necessarily replacing – a machine in the front vestibule that cuts six tags or engraves six pet tags today, the biggest opportunity is to put it somewhere else in the store, like in the pet aisle or on an end cap, and then it would be very interesting. And that's why I was so excited that this thing's going to actually be at an annual shareholder meeting. But it's a little early to tell. We were excited about what we did. We had a charity event where we support and sponsor Humane Society, and we put a machine there, and people didn't go through the buffet line. They were waiting in line to get a tag, and most of them were luggage and backpack tags at this event last Friday, which was interesting. So it's just too early yet.

Okay, great. Thanks, and congrats, guys, on the good start to the year. Good luck going forward.

Thanks, Ruben. Any more questions? Okay, looks like we're good. Tanya, thanks. You know, with that, thanks for joining us today. Certainly we are grateful for our customers and our vendors and our suppliers in a period of time like this, and we look forward to updating you again in the near future. Thanks for joining us today.

Ladies and gentlemen, this concludes today's webcast. You may now disconnect.