Hillman Solutions Corp.

Good morning and welcome to the third quarter 2022 results presentation for Hillman Solutions Corp. My name is Therese and I'll be your conference call operator today. Before we begin, I'd like to remind our listeners that today's presentation is being 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, 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 from Rocky. Before we begin, I'd 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 2 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, and good morning, everyone. Today, I'm going to provide an overview of our healthy third quarter and discuss the current operating environment before I turn it over to Rocky to give an update on guidance and talk numbers. For those of you who are new to our story, Hillman is one of the largest providers of hardware products and value-added solutions at leading hardware and home improvement retailers across North America. Our unique approach to innovative design, sourcing, direct-to-store delivery and in-store merchandising sets us apart from our competition. This strategy has allowed us to win with our customers since our founding in 1964. We are constantly innovating our products the majority of which are used for repair, remodel, and maintenance projects, which for 58 years has provided insulation against cyclical downturns in new home and commercial construction markets. Our products are in must-have, basket-building, high-margin categories for our retail customers. Therefore, keeping products in stock, also known as fill rates, is critical to the success of our customers in Hillman. Our in-store presence and direct-to-store delivery not only keep the shelves stocked, but also provides our customers solutions to today's challenging labor markets and certainly the unpredictable supply chains. And finally, we work closely with many of our customers on category management to optimize product mix, allowing them to increase sales and profits, yet another advantage of partnering with Hillman. This differentiated model executed by our hardworking team at Hillman strengthened our competitive moat and drove strong results for the quarter. Our 1,100-member sales and service team is critical to our competitive moat and is one of the driving factors as to why we win. For example, during the quarter, we won new business in several categories, including pitcher hanging, builder's hardware, deck screws, and solid wall anchors like our new patented concrete screw that are selling very well. We grew quarterly sales by 3.9%, adjusted EBITDA by 4.3% over the prior year. We were also awarded Vendor of the Year at the largest family-owned ACE chain in the country, Costello's in Long Island, New York, a great retail partner of ours. We also completed the execution of our fourth price increase, enabling us to offset $225 million in total cost increases on a dollar-for-dollar basis since the beginning of 2021. And we saw a $40 million decrease in inventory during the quarter while maintaining fill rates at 96% with plans to continue to significantly reduce inventory over the coming quarters. Now, turning to our financial highlights for the quarter. During the third quarter of 2022, we generated 59 million of adjusted EBITDA, up from 56.5 in the prior year quarter. Margins were in line with street expectations as we finalized $50 million price increase we talked about on last quarter's call. Our dedicated sales and service team finished applying over 80 million new price labels at our traditional local hardware stores near the end of the quarter. Net sales for the quarter grew to $379 million, marking a 3.9% increase over the third quarter of 2021. For the year, net sales grew 5% to $1.14 billion. These improvements were driven by the implementation of price increases over the past year, which more than offset lighter volumes. Now let me touch on performance of each business segment during the quarter. Hardware Solutions is our biggest business and makes up over 50% of our overall revenue. For the quarter, hardware saw an 11% increase in revenue compared to the third quarter of 2021. Price increases were the main driver of the top line increase. Lighter volumes, which partially offset the price benefit, were mainly the result of lighter foot traffic at our retailers when compared to a year ago quarter. We believe Hardware Solutions is the bellwether segment of our business. Let me share some numbers with you that will illustrate what's happening in this segment. While hardware volumes were down 3.3% for the first six months of 2022, we saw a comparative improvement during the third quarter of 2022 with volumes down just 1.7% for the quarter. Price was up 12.7% for a total revenue growth of 11%. This demonstrates the resiliency and consistency of the repair, remodel, and maintenance end user. Year-to-date fill rates were 96%. This is an improvement from 91% during 2021 and 95% during 2020. Importantly, our retail partners, Trust Hillman, to keep the shelves stocked no matter the environment. Robotics and digital solutions, our RDS business, makes up just shy of 20% of our overall revenue. During the quarter, lighter foot traffic in our retail customers resulted in a 3% decline in RDS revenue. Engraving and auto key duplication were lighter than last year as padded options slowed. and used car sales decreased when compared to the third quarter of 2021. Also, as retailers continue to struggle with in-store labor, we're seeing a shift in home and office key duplication from our manual full-serve machines to our minute-key self-serve kiosks. This shift improves Hillman's and our retailers' profitability. Overall gross margin and adjusted EBITDA margins for RDS remain healthy, and our market share is strong. We had a very productive quarter working with our major key duplication and engraving customers jointly developing our next generation machines for our RDS business. Two new engraving machines and our new smart auto fob duplication machine are being developed for and with our retail partners. The feedback and interest level has been excellent. Our two new engraving machines will be introduced throughout 2023 and our smart auto-fob duplication machines will be ready for the market in early 2024 on our next-generation minute-key self-serve kiosk. Our engineering team, they've just done an amazing job on this new technology, and our retail partners were able to see it with their own eyes in our Tempe manufacturing and engineering facility this quarter. Regarding our knife sharpening machine, ReSharp, We'll end the year with around 1,000 machines that select ACE hardware locations across the country. And during Q1 2023, we'll test our one-of-a-kind knife sharpening machine in new channels including specialty retailers, food service and restaurant supply, outdoor sporting and recreation retailers, and a leading Canadian retailer. Our protective solution business makes up just shy of 20% of our overall revenue. During the third quarter of 2022, protective revenue was down about 15% compared to the year ago quarter. However, when excluding COVID-related PPE sales from both periods, protective revenues increased just over 5%, which is more in line with the growth expectations of this segment. Lastly, our Canadian segment, which makes up about 10% of our overall revenue, built on strong momentum and is seen throughout the year. Canada posted a 16% top-line increase, which drove strong bottom-line results as well. Our Canadian team is doing a great job, and they've also done an excellent job with the facility consolidation project and realigning their portfolio. Now turning to our business model. We know the consumer is being impacted by inflation and higher interest rates, However, our long track record of growth through up and down cycles gives us confidence that we can achieve strong results no matter the economic environment. This is due to the competitive moat we've built and our estimate that over 90% of our product sales are into the relatively recession resistant repair, remodel, and maintenance market. Let's dig a little deeper on that notion. Housing inventory in the US continues to age With 50% of U.S. homes over 40 years old, consumers will need to repair and maintain these homes. Additionally, we expect to see the consumer invest in their homes more as trends in nesting, aging in place, working from home, and outdoor living remain prominent. One recent data point on aging in place from the United Disability Services states that only 1% of homes in the United States are conducive to aging in place, but more than 75% of Americans want to stay in their homes as long as possible. Our retail partners are proactively preparing to take advantage of this future demand opportunity. As we think about our product sales, pickup truck pros, local contractors, and DIYers make up the vast majority of our end users. Our long history and channel strategy prove that our business is not tied to new home construction. Further driving our confidence is our unique business model, which helps differentiate us amongst the competition. Our moat consists of three main components. Number one, over 80% of our 112,000 SKUs are delivered directly to the retailer's location. In general, this means our customers do not have to worry about managing Hillman inventory in their distribution centers because we ship directly to the stores. Number two, our sales and service team consisting of 1,100 associates provides world-class service at the shelf for our retail customers. This team of warriors ensure that Hillman's must-have, high-margin products are in stock, organized, and optimized for our customers and their consumers. number three over ninety percent of our revenue comes from brands that we own this is not only important to the consumer and the pro it allows us to tailor our products to specific retailer strategies at the end of the quarter we finalized our fourth price increase since the beginning of 2021 all of these have been dollar for dollar increases to cover our cost in total we've implemented approximately $225 million in price increases, which breaks down to approximately $120 million in transportation and shipping, $90 million in commodities, and $15 million in labor. During the Great Financial Crisis and other past recessions, we've seen commodity prices fall, which we've begun to see during the recent months. We expect margin expansion once these costs flow through our income statement beginning in the second quarter of 2023 and beyond. Back in 2001, many remember lead tides increased as the supply chain tightened. As such, we made the strategic decision to invest in our inventory to protect fill rates. While improved from the end of the second quarter of 2022, We ended the third quarter of 2022 with about $140 million more inventory than we would normally need in this environment. This investment paid off, and we were able to deliver 96% fill rate so far this year. Hillman was built on taking care of our customers, which is quarter our moat, and we're proud to say that we have lived up to these expectations through some very challenging times. We know retailers have long memories. and we believe this investment will result in new business wins in the future. Over the past several months, we've seen lead times from Asia settle around 160 days, which is vastly improved from the 250-plus-day lead time the industry experienced in January of this year. The result is that we have started to bring down our inventory levels, and we're beginning to de-lever our balance sheet as we turn the inventory to cash with no impact to our industry-leading fill rates. Sequentially, our inventory decreased by 40 million compared to Q2, and we expect to bring inventory down another 25 to 35 million by year end. As we look to 23, we believe there will be further improved our inventory position, which will put us at a more normalized inventory level by the end of 2023. As such, we will bring down working capital and benefit from lower costs, which will result in de-levering our balance sheet. As we look to the fourth quarter, we continue to expect that our adjusted EBITDA will fall toward the low end of our original guidance range and to pay debt down as we bring inventory down. However, softer volumes and the traffic at retailers during the quarter have impacted our top line and cash flow timing, which Rocky will get into momentarily. That said, our focus remains on successfully navigating this challenging environment and really setting the stage for Hillman to improve our performance during 2023. The $225 million of implemented price increases provide an opportunity for future gross margin and adjusted EBITDA expansion. We expect this will begin to read sometime during the second quarter of 2023 as we sell through our higher cost inventory, and start to see lower costs flow through our P&L. It goes without saying we have a special team of 1,100 loyal, hardworking associates that are in our customers' retail locations every day. The resilience of this team truly shines when a terrible natural disaster like Hurricane Ian hits. Everyone at Hillman is immensely proud that our Florida-based team members have been working tirelessly to be sure our customers have the products in stock so their communities can be safe and begin the rebuilding process. Our thoughts are with those impacted by the hurricane, especially those who have been displaced. We are thankful to be in the position to help Florida rebuild. Looking forward, I'm confident that our talented team and hardworking associates have proven that we can successfully navigate any challenge that comes our way. I believe we are uniquely positioned for success and our focus remains taking care of our customers. Our performance for our customers over the past couple of years has positioned us to drive real value for our shareholders and our employees in 2023 and beyond. With that, let me turn it over to Rocky.