Hillman Solutions Corp.

Good morning and welcome to the third quarter 2023 results presentation for Hillman Solutions Corp. My name is Cherie and I will 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 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. Please go ahead.

Thank you, Cherie. 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, Rocky Kraft, our Chief Financial Officer, and John Michael Adonofi, our Chief Operating Officer. Before we begin today's call, I would like to remind our audience that certain statements made today 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 FCC. For more information regarding these risks and uncertainties, please see slide two 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 Chairman, President, and CEO, Doug Cahill. Doug?

Thanks, Jackson. Good morning, everyone. I will kick off today's call going through some of the highlights of our strong third quarter. Our results were healthy as we grew both our top and bottom line versus year-ago quarter. I will then give an update on our four-year guidance, highlight Hillman's competitive mode, and provide some additional color on the quarter before I turn it over to Rocky. Our team did a great job during the quarter, and I'm proud of them for successfully navigating this environment. Our results demonstrate the resilience and consistency of our business, and we're in line with our expectations heading into the quarter. Net sales in the third quarter of 2023 increased 5.4% to 398.9 million from the year-ago quarter, driven by a 4% increase in total volumes, which included new business wins, plus a 2% lift from price offset a bit by FX headwinds in our Canadian business. Hardware and protective solutions led the way as HS sales grew by 8% and PS sales grew by a robust 14% over Q3 of 2022. Driving the increase in HS was a launch of rope and chain accessories at one of our top five customers. marking another meaningful new business win for Hillman. This win was the direct result of taking care of our customers during the challenging logistics and supply chain environment over the past few years. This is a new category for Hillman and our service team did an amazing job resetting over 2,000 stores flawlessly. Driving the increase in PS was an increase in our national promotional off-shelf activity and another one of our top five customers. When we say promotional off-shelf, this means we load in product and display quarter pallets near the entrance, near the checkout, and on end caps. These offerings have been very successful and many times they're planned 10 to 12 months in advance with our retail partners. Together, new business wins and increased promotional off-shelf drove healthy growth during the quarter, which more than offset lighter volumes in other categories. For the year-to-date period, our net sales were down less than 1%, demonstrating the resilience of the business during our otherwise soft market throughout the year. Third-party data showed that foot traffic at home improvement centers declined 8% year-to-date compared to the year-ago period. Our results illustrate that demand for our small ticket items that are essential for repair and maintenance projects is consistent and resilient in most any market environment. Turning to our bottom line for the quarter, adjusted EBITDA increased to 66.8 million, up 13.3% over the year-ago quarter, which produced a 110 basis point improvement in adjusted EBITDA margin to 16.7%. Driving this increase was lower cost of goods sold as our margins began to return to historical averages. Remember, we spent most of 21 and 22 chasing inflation-related costs with price increases. We caught costs with our price increase in the fall of 2022, and the benefits are finally flowing through our income statement now. And similar to last quarter, we did a nice job controlling costs and driving operational efficiency. Turning to free cash flow came in ahead of our expectations, totaling $41.3 million for the quarter and $119.3 for the year-to-date period. This is an improvement over the $31 million in the year-ago quarter and $16.8 million for the year-to-date period last year. We used our free cash flow to pay down over $40 million in debt during the quarter and have reduced our net debt to adjusted EBITDA leverage ratio to 3.7 times. I would like to provide an update to our 2023 four-year guidance. As a result of our performance for the first three quarters of the year, coupled with the expectations for the overall market, we are providing the following updates to our four-year 23 guide. We are narrowing our net sales guidance within our original range to between $1.455 to $1.485 billion, which sets a new midpoint at $1.47 billion. We are narrowing our adjusted EBITDA guide within our original range to between $215 to $220 million, which sets our new midpoint at $217.5 million. And we're increasing our fee. free cash flow guidance to between $135 to $155 million, which sets our new midpoint at $145, $10 million above our original guide. As we've talked about, our results for the first nine months have been strong despite slow foot traffic at our retailers. We made the decision to narrow our guidance within our original range but below the midpoint. This was mainly due to the market volumes being a tick softer than we planned for the year and sales being light over the past month, illustrated by the industry reported foot traffic being down 13% in October versus down eight in the first nine months of the year. And I'll take a moment to share what makes us the indispensable strategic partner to our retail customers and allows us to perform well across multiple economic environments. We are one of the largest providers of hardware product solutions in North America. We offer an extensive range of products that cater to the needs of the pickup truck pro and the DIYer. The vast majority of our products are used for repair, remodel, and maintenance projects. Because of the predictable nature of our end markets, we have seen consistent demand for our products in both up and down economic cycles since our founding in 1964. Said differently, we don't see the highs nor the lows of the market like many companies in our sector. Importantly, we help our customers overcome labor, complexity, and supply chain challenges in the critical, highly profitable, and traffic generating product categories we offer. Our competitive moat, which provides our customers with value add they don't get from other companies, consists of three main components. One, we have 1,100 sales and service folks that are in the stores with our customers on a regular basis providing top-notch customer service at the shelf. Two, we ship directly to the store of our retail customers, meaning our products typically do not flow directly through our customer's distribution center, saving them time, money, and corresponding inventory adjustments or investments. A great example of this advantage has been happening live over the past week or so, as one of our top five customers experienced a cybersecurity event. We are one of only a handful of suppliers who could still ship because of our direct store delivery model and the fact that our service teams are in the store and write the orders. I'm happy to report they're back up and running, which is really good for everybody. We get the right products to the right place at the right time at scale. We source over 112,000 SKUs and distribute them to over 40,000 individual locations. And three, approximately 90% of our revenue comes from brands that we own and control. And this allows us to anticipate and meet the evolving needs of our customers and end users. These are the reasons why we're embedded with our customers and why they view us as a partner critical to the success of their business. In fact, during the quarter, we're thrilled to have been named vendor of the year by two of our customers, Tractor Supply, which is one of our top five customers, and MidStates Hardware, a great farm, ranch, and home retail co-op that serves the central and northwest states as well as Canada. We take great pride in being recognized by our customers. And let's face it, it's the Hillman team and the stores that at the end of the day are the ones that win these awards for us. With that, let's move on to our balance sheet. At Hillman, we've always believed nothing happens until you sell something. And we always try to put our customers first. During 21 and 22, we put our money where our mouths are when we invested heavily into inventory to ensure we kept product in our DCs and on the shelves of our customers during a challenging supply chain environment. This strategic move, working closely with our long-term supply partners, separated us from our competition and allowed us to gain market share then, now, and, we believe, in the future. At the peak during the summer of 22, we carried about 180 million more inventory than normal. Since that peak, our supply chain has normalized and inventories have been reduced by $178 million, including $92 million this year. And we think we'll take another $5 to $10 million before the end of the year to put us near our normalized inventory run rate. With our inventory reduction, we have seen a meaningful cash flow benefit and subsequent reduction in our net leverage ratio, which we expect to continue throughout the year. I'm super proud of our entire global supply chain team for being able to surge inventories up and then back down while maintaining healthy fill rates during it all. With 100,000 plus SKUs, it's actually one of the finest examples of total teamwork I've witnessed in my entire career. Now turning to pricing and cost. The peak cost inflation in our business was approximately $225 million. We passed on these higher costs to our customers. via multiple price increases. These costs peaked at approximately 120 million for transportation and shipping, which includes inbound transportation of ocean containers, 80 million for commodities, and 25 million for labor. Over the past several quarters, we've seen ocean container costs come down from the historical highs of 2022, while other inbound costs have remained elevated. Having priced for these more expensive transportation and shipping costs last year, we're now starting to see our gross margin return to our historical rate of 44 to 45% with lower cost of goods sold flowing through our income statement. We expect these margins to expand again in fourth quarter of this year to above 45%. Commodities such as raw materials should be a tailwind for us in the second half of 2024. Typically, cost-related to raw materials can take between nine and 12 months to flow through our income statement. That consists of a 150-day lead time to source the material, make the product, and ship it to our distribution centers. From there, our inventory turns in about four to six months. As we're all familiar, many of these higher costs do not appear to be going away. In fact, many of the costs continue to increase like labor, and transportation costs within the United States. That said, we'll focus on what we can control, something we know our customers are doing as well. Hillman's in-store service team and direct store delivery model continue to be on trend helping our customers minimize these two pressure points, labor and logistics. Now turning to our markets before I turn it to Rocky, even though interest rate increases have definitely slowed existing home sales. We remain optimistic about the customers and end markets we serve, as well as the trends for the future of our business for two meaningful reasons. Number one, home equity values continue to be healthy. Home values are near all-time highs, and the average homeowner in the U.S. has nearly 200,000 of untapped equity. Home equity loan activity has held firm since the beginning of the year and is keeping pace with the pre-pandemic levels. Remodeling, renovation or home repairs are the leading reason homeowners tap equity in their home. And number two is the state of the existing homes in the U.S. The average owner-occupied home is over 40 years old. The older the house, the more repair and maintenance projects are necessary. Additionally, there are over 2 million more homes entering their primary modeling age than there were during the Great Recession. These are homes between 25 and 39 years old, and the number of homes in this category is expected to increase over the next several years as the U.S. housing stock continues to age. Next year, Hillman will proudly celebrate our 60th anniversary. Our service organization will turn 28 years old and the average tenure of our top five customers will be 25 years. Taking care of our customers first has driven our success over a very long period. Our focus today and commitment going forward is to defend our moat, profitably execute our growth strategy and stay disciplined. We believe this sets Hillman up for continued long-term success. With that, let me turn it to Rocky.