Hillman Solutions Corp.

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

Thank you, Shannon. 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 and a guidance update 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, 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 two in our earnings call slide presentation, which is available on our website at ir.hillmangroup.com. In addition, on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, it's my pleasure to turn the call over to our Chairman, President, and CEO, Doug Cahill. Doug?

Thanks, Michael. Good morning, everyone. Today, I'm going to provide an overview of our strong second quarter results, give an update on our position moving forward, and discuss the current operating environment before I turn it to Rocky to talk numbers. Before we dive in, I'd like to give you a quick overview of Hillman and our differentiated service model, especially for those of you who are new to our story. We're the largest provider of hardware products and solutions in our categories in North America. Our unique approach to sourcing, distribution, and service sets us apart from our competition. We win with our customers because we design and source innovative products and execute inventory and merchandising solutions for complex categories. Not only are these must have high margin categories for our customers, but we helped solve difficult problems for them like labor shortages and logistical challenges. We had a strong quarter driven by the hardworking team in Hillman and our differentiated service model. Our 1,100-member sales and service team is an important part of our competitive moat, and I'll discuss it in a moment. During the second quarter of 2022, we generated $62.3 million of adjusted EBITDA. Margins were healthy during the quarter, We benefited from having fully caught price at the end of March, resulting in three full months with the appropriate price-cost mix. Net sales grew to $394 million. This 4.9% increase over the second quarter of 2021 was driven by the implementation of price increases over the past year despite lighter volume. Now let's dive into how each of our business segments performed during 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 12% increase in revenue compared to the second quarter of 2021. Price increases were the main driver of the top line increase. Also contributing to the improvements were fill rates upwards of 97%, up from 90% a year ago. This is why retail partners trust Hillman. 97% fill rate during one of the worst supply chains any of us can ever remember. Robotics and digital solutions, or RDS, makes up just shy of 20% of our overall revenue. During the quarter, lighter foot traffic coupled with a difficult comp quarter in 2021 resulted in a 2% decline in RDS revenue. Though this was on top of last year's 57% increase in the second quarter, In particular, engraving was soft as pet adoptions declined, and unfortunately, shelter populations are growing, which means there are less new pet owners than there were during 21 when it seemed everyone was adopting a dog or cat. Our Canadian segment, which makes up about 10% of our overall revenue, performed very well during the quarter. Canada posted a 7% top line increase compared to the year ago. quarter and ran their business very well, driving strong bottom-line results. Lastly, our productive solutions business makes up about 20% of our overall revenue. During the second quarter of 2022, protective revenues were down about 12%, driven by retail softness, including fewer promotional sales. COVID-related PPE sales contributed approximately $2 million of revenue for both periods, and did not have a meaningful impact on the comparison. Now, on a year-to-date basis, protective sales were down 10%, but when backing out COVID-related PPE sales, protective is down less than 1% on a year-to-day basis. As we all know, we've now seen two consecutive quarters of negative GDP growth, and there are a lot of factors influencing the economy right now. Many aspects of our business make us resilient and position us well as we navigate these uncertain economic times. They include, number one, our heavy repair and remodel exposure, two, our competitive moat, three, our successful pricing initiatives, and four, with lead time improvements out of Asia, we can now lower inventories while protecting our industry-leading fill rates. To start, it's important to remember our business is focused on repair, remodel, and maintenance. We're not tied to new housing, and we've grown our top line organically in 56 of the 57 years since our founding, with an average top line organic growth of 6% annually since the year 2000. The only year that our top line didn't grow was 2009, which was the bottom of the market during the great financial crisis. While our top line decreased by 5% in 2009, our bottom line increased by 10%, which was the result of our costs coming down. During that crisis and other past inflations without fail, we've seen commodity prices softening, which we're starting to see now. Currently, you can't read Wall Street without reading about the challenges companies have regarding labor, supply chain, and inventory management. In today's environment, our competitive mode is more critical than ever and is helping solve these issues for our customers. This competitive mode consists of three components. Number one, over 80% of our 112,000 SKUs are delivered directly to the retail locations of our customers. We utilize our distribution network, which consists of 22 distribution centers, to send our products to over 42 locations across North America for our customers. In general, our customers do not have to worry about managing Hillman inventory in their distribution centers, supply chain logistics, or shipping and labor costs. Number two, our sales and service team, which consists of 1,100 associates, provides world-class service at the shelf for our retail customers. This team of warriors ensures that Hillman must have high margin products are in stock, organized, and optimized for our blue chip customer base. Mick and Rick Hillman introduced this unique in-store service model over 27 years ago, which has allowed us to serve our five biggest customers on average for over 22 years each. And number three, 90% of our revenue comes from our brands that we own. This is not only important to the consumer and the pro, but allows us to differentiate our offerings based on specific retailer strategies. Additionally, we can implement customer feedback to improve our products to meet the evolving needs of our pro and DIY consumers. These three pillars are the backbone of our retailer partnerships. We allow our customers to overcome complex labor, supply chain, and inventory challenges while delivering industry-leading fill rates in our categories. For example, many of our customers continue to struggle finding quality employees to stock shelves and manage aisles. Our sales and service team do this for them so our customers don't have to. Another example is managing inventory. Today, we're seeing many retailers working to reduce inventory their distribution centers are full of product some retailers have rented additional warehouse space to house in inventory and other categories and have been working around the clock to move products through their distribution networks at Hillman we ship over 80% of our products directly to the store so our customers don't have to worry about managing inventory of our products and lastly Not having products on the shelf, we all know, is the quickest way for our customers to lose revenue and market share. So in today's economic environment, our moat has proven to be an increasingly indispensable part of our relationship with our customers who know they can rely on Hillman to get products on their shelves even during the most challenging times. Let me give you an example of how our moat can also drive new business by providing some detail of a recent new customer win. As we talked about briefly last quarter on the call, we won the fastener business at one of our major retail partners. The incumbent had a difficult time keeping products on the shelves, which gave us the opportunity to get our foot in the door. After securing the new business, we shipped 150 truckloads with store-specific pallets for approximately 4,000 retail locations. This rollout has gone extremely well with fill rates of 99.7%. And we're already receiving orders for more fasteners from this customer. Our customer is thrilled with how this rollout has gone, and we believe this has the potential to drive additional business wins. I've run a bunch of businesses, and I've never seen one like this. We have a strong team, great customers, and a bunch of hardworking folks at Hillman. They ensure we win at the shelf and help nurture the longstanding partnership we have built with our customers over many years. Now turning to pricing and cost. As we talked about in our last earnings call, most U.S. companies, including us, negotiated new contract ocean container rates that became effective May 1, 2022. These rates were dramatically higher than last year, and are expected to increase our costs by about $50 million on an annualized basis. These increases hit all companies that import products from overseas, including all of our major customers, and so we have recently initiated yet another price increase to cover these additional costs. We expect our price increase to wholly offset these increased shipping costs in our P&L for 2022 and beyond. Another quarter, another price increase. Let's recap what we've done from a price cost perspective. The latest price initiative marks our fourth increase since the beginning of 2021, and we expect to have taken approximately $225 million in price since then. Again, all of these have been dollar-for-dollar price increases to cover our costs. This breaks down to approximately $90 million of commodity cost, $15 million of labor, and $120 million of transportation and shipping costs. Going into the past 24 months, our relationships with our customers were strong. And remarkably, even after these four price increases, our relationships with our customers, I think, are even stronger. We believe this is because we have shown our customers that we're only taking price to cover costs, not increasing our profits. We truly respect and are grateful for the healthy partnership we have with our customers. We remain in a strong position with them because of the mutual respect, our longstanding relationship, and our competitive moat. In short, we bring something to our customers that our competitors do not. Thankfully, we do not foresee a need for additional price increases in the near future based on what we're seeing today. Now let me spend a minute talking about some specifics about our business. We've all read about retailers looking to reduce inventories while maintaining their in-stock levels and we'll work together with our customers to help them reach their goals. Because of our direct-to-store model, most of our customers don't have inventory of our product in their distribution center. However, we may see some of our customers consider reducing inventories at the shelf by two or three weeks on slower turning items during the second half of this year. I can tell you with our direct ship network and the in-store Hillman team, we'll make sure either way our customers in stocks continue to be high. We'll be reducing our own inventories as well as we think about lead times from Asia. We saw them peak during January of 2022 at 255 days. This means that when we place an order from our suppliers in Asia, it takes 255 days for that order to arrive in our distribution centers here in the States. Today, we're seeing lead times around 160 days. In normal times, like 2018 or 19, lead times were approximately 130 days. So they've come down significantly since the end of January. We believe that this dynamic will allow us to reduce our inventories by $50 million before the end of the year, while protecting our fill rates, which average 97% in the second quarter. Rocky will get into more detail on how inventory will impact our second half expectations shortly. As we discussed earlier, the majority of our product sales are driven by repair, remodel, and maintenance projects. These are your pickup truck pros, your local contractors, and DIYers. To be clear, we believe that our business is not reliant on new home construction. For that reason, demand for our products has historically been steady through all economic cycles, considering our products are relatively inexpensive, particularly as it relates to the total cost of the project. We believe that the balance sheet of the U.S. homeowner remains healthy, While interest rates may slow new housing transactions, we believe the increase in home prices and therefore homeowners' equity over the past few years will be a meaningful driver of home improvement projects for years to come. We expect to see the continuing investment in the home as trends in nesting, aging in place, and outdoor living remains prominent. At the same time, we're laser-focused on successfully negotiating this environment. We are also working on our growth initiatives, which include the expansion of QuickTags machines, smart FOB auto, and our knife-sharpening kiosk, ReSharp. We are also continuing to focus on new wins and share gains in categories like builder's hardware, deck and drywall screws, anchors, And what's the last one, Rocky? Barn door accessories. I knew you were waiting for it. We strongly believe that we're well situated for the second half of 2022 and into the future. I'm encouraged about the opportunities that lie ahead and the value we will continue to bring for all of our shareholders, customers, and employees. With that, let me turn it over to Rocky.