Hillman Solutions Corp.

Good morning and welcome to the fourth quarter 2023 results and four-year 2024 guidance presentation for Hillman Solutions Court. My name is Tawanda and I will be your conference call operator today. Before we begin, I would like to remind our listeners today's presentation is being recorded and simultaneously webcast. The company's earnings release, earnings presentation, and 10-K 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 conference over to Michael Kaler with Hillman. Sir, you may begin.

Thank you, Tawanda. 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 Adenalfi, our Chief Operating Officer. 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 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, and thank you for joining us. Before we get into our healthy 2023 results and our 24 guidance, I want to take a moment to recognize the rich legacy that this company was built on as we celebrate our 60th anniversary this year. In 1964, the Hillman Bolt and Screw Corporation was founded by Max Hillman in Cincinnati. Back then, the company got its start by distributing fasteners to independent hardware stores in southern Ohio and northern Kentucky. Max grew his business. Every year, due to his relentless commitment to taking care of his customers, a commitment that's ingrained in how we do business today. As Max neared retirement, his sons, Mick and Rick, took the reins of the company during the 80s. The business continued to grow every year, and it was during the 90s that the two brothers doubled down on their dad's commitment to customer service and started Hillman's field sales and service team. Today, this team consists of 1,100 members, and it is the key component of our competitive moat. Building an organization like this from scratch today would be nearly impossible. This field sales and service team enables us to build another key part of the Hillman moat, shipping our products directly to our customers' retail locations, bypassing their distribution networks altogether. These two differentiators have allowed Hillman to become one of the largest value-added partners for hardware and home improvement retailers throughout North America. It also enabled Hillman to grow its sales every year but one over the last 60 years. Mick and Rick ran the company for over 30 years until they retired in 2013 and 2012, respectively. From there, we have continued to do things the Hillman way by remaining committed to building on the legacy of service that Max Hillman began 60 years ago. This is our true north. I'd like to thank the Hillman team, both past and present, for building on this rich legacy, including our 1,100 amazing folks in the field, our hardworking employees in our distribution centers throughout North America, and the entire customer support team which I'm grateful to be part of. After 60 years, we sometimes forget just how solid our business is. Over time, we have earned our customers' trust because of the high level of service and quality we provide, the unique perspective we bring, and our commitment to long-term relationships. We win with our customers because of our competitive moat and the unique advantages we bring to the table. Our customers continue to give us new opportunities and simply put, we grow where our customers encourage us to grow. For example, a top five customer of ours challenged us to enter rope and chain accessories business. Our team worked together with our customer in order to come up with a winning game plan. We flawlessly launched this new business win across our customers national footprint stores on a compressed timeline during the second half of 2023. As a result of the exceptional implementation, we were awarded vendor of the year from this customer. Our successful launch in the rope and chain accessory category sparked interest from other customers while reinforced our decision to acquire Cook Industries, which is in the adjacent rope and chain category. Now we can take care of the entire rope and chain aisle for our customers. We have the unique ability to help manage the complex, skew-intensive categories that we're in today. Our data-driven approach helps optimize the product mix for our customers. In other words, we know what products the DIYer and pickup truck pro want, and Hillman team ensures these products are on our customers' shelves. This type of partnership is unparalleled. particularly in the traditional hardware channel where we continue to convert stores to the Hillman platform and pick up new shelf space with existing customers. Our traditional hardware business makes up about 12,000 hardware stores and is about 27% of our entire business. It grew 4% last year versus 2022. This is demonstrated by our hardware solutions performance over the past 20 years 10 years, and five years, where the hardware's top-line CAGR has increased 7%, 7.3%, and 8.2%, respectively. This consistent growth has been fueled organically by new business wins and price, coupled with the acquisitions that supplement organic growth after year one. More recently, over the past three years, we have won an average of $25 million of new business per year in HS alone. We believe we'll exceed that number during 2024 and into the future as we continue to grow with our customers. Combining that with our ability to do accretive acquisitions that leverage our moat gives us great confidence that we will continue to win with our partners. We believe that our runway for growth is meaningful. We built on the 60-year Hillman legacy again in 2023 Operationally, no matter the challenges, this team continues to execute. During the year, we maintain healthy fill rates of over 94% while reducing inventory by over 100 million across our business. We flawlessly launched multiple new business wins ahead of schedule with some of our biggest customers. On their own, these are three sizable accomplishments, however, We did so while moving our distribution hub from Rialto, California to Kansas City in the midst of our busy season, all while overcoming a cyber incident mid-year. And importantly, we grew our adjusted EBITDA in our hardware and protective solutions segments by 13.4% over 2022. Now I'd like to hit on our financial highlights for the year before turning it to Rocky for details. I'm pleased with how our team successfully navigated the year. At Hillman, repair, maintenance, and remodel projects done by the DIYer and Pickup Truck Pro drive our business. U.S. existing home sales totaled just 4.09 million in 2023, which was nearly a 19% decrease from 2022 and a 33% decrease from 2021. Existing home sales drive all three of our businesses, hardware, protective, and robotics and digital. As home sellers fix up their homes to prepare to sell, and home buyers take on projects to turn their new house into their dream home. We nearly offset the soft macro environment by launching a number of new business wins and help with a bid of price early in the year. Net sales for 2023 totaled 1.476 billion, which was just shy of our four-year 2022 results that included a 53rd week of sales. However, excluding the extra week from 2022, net sales increased by 0.4% and grew for the 59th time in our 60-year history. For 2023, we generated 219.4 million of adjusted EBITDA, an increase of 4.3% from 2022. With our relatively flat top line, our bottom line increased as adjusted gross margins improved over 120 basis points to 44.2% from 43% during 2022. Further, our adjusted gross margins improved each quarter throughout the year, ending at 48.2 during the fourth quarter. a 400 basis point sequential improvement over the third quarter. We believe we can maintain healthy adjusted gross margin throughout 24, which Rocky will touch on in his guidance section later on. Now let's touch on the performance of each business for 2023. Hardware Solutions is our biggest business and it makes up 59% of our overall revenue. This business is the heart and soul of our company the same way Max, Nick, and Rick were for 40 years. For the year, hardware saw 3.7% growth compared to 2022, or 4.7% when you exclude the 53rd week. New business wins drove the majority of the increase as we organically grew our share with our customers. A protective solution business makes up about 14% of our overall revenue. For the year, protective revenues decreased 10.7%. However, excluding COVID-related PPE sales in 2022's 53rd week, protective revenue decreased just 2.5%. The second half of 2023 was up nearly 10% versus the comparable period, and we finished the year strong in protective solutions. Thankfully, this should be the last time we talk about COVID. Robotics and Digital Solutions, or RDS, makes up 17% of our overall revenue. RDS revenue was essentially flat for the year, or up 2%, excluding the 53rd week. A 10% increase in revenue from our self-serve key duplication kiosk, Minikey, offset a relatively soft market. Looking forward, we remain very encouraged about our high-margin RDS business. especially our new MinuteKey 3.5 kiosk. We are leveraging MinuteKey, the number one self-serve home and office machine, to now include RFID 5 duplication and technology that enables transponder and smart auto capability. We currently have 40 MinuteKey 3.5 machines in the field, and the initial results are encouraging. Our top customers are very excited about this machine and are anxious for the rollout during 2024. We believe that these capabilities and services for our new Minikey 3.5 machine are great not only for our retailer, but for their consumers. Additionally, we expect to roll out endless aisle capabilities on our Minikey 3.5 self-serve machine during the middle of this year. This means that our user can get effectively any key duplicated. Our machines will scan the key. We will cut the key at our plant in Tempe, Arizona and mail that key directly to the customer in just a few days. This solves the problem for customers seeking to duplicate unique keys like boat, riding lawnmower, and unique lock keys. Further, the endless aisle allows a customer to get an out-of-market key, for example, Someone living in Los Angeles will now be able to get a Cincinnati red key. Our RDS field service team, which is part of our 1100, is in our customer store on a regular basis. There, they replenish inventory, collect cash, and perform routine and service-related maintenance on our machines. We have several new opportunities to leverage this team of skilled technicians for other companies in the kiosk space, which will drive revenue and profitability for RDS in the second half of 24. Lastly, our Canadian segment, which makes up about 11% of our revenue, saw a 9% top line decrease versus 2022. Following a strong year in 2022, market volumes in foreign exchange were a drag on the 23 results. It's no secret that since mid-23, the Canadian economy has been sluggish, which has been a drag on our business. Our Canadian retail business, which makes up about 70% of their sales, has roughly 60% market share and continues to provide strong service for the major retailers like they have in Canada for now well over 100 years. You all have heard us talk about this before, but I think it's important to touch on again. We have implemented a cumulative total of approximately $225 million in price increases since the beginning of 2021 to cover a like amount of inflation. These costs break down to approximately $120 million of transportation and shipping, which includes the inbound cost of ocean containers, 80 million of commodities and 25 million of labor. As lower cost products flowed out of our inventory and through our income statement during 2023, we experienced sequential improvement in gross margin. We are now getting at the right side of the power curve with margins at or above our historical rates and we expect to stay there. Having said that, we continue to see some costs remain stubbornly high like labor, outbound freight, and drayage, which includes the local port service charges. Additionally, there is uncertainty in the cost of ocean containers as we have seen disruption in the Red Sea at the Suez Canal as well as at the Panama Canal. Since the majority of our products come from Asia to the West Coast, the impact has been minimal to our global product flows but we're keeping a close eye on the situation. Let's change gears and turn to the balance sheet. Back in 2021, we invested in our inventory to protect our fill rates as we saw the supply chain tighten and lead times increased dramatically. I'm proud to report that we have worked through all of the inventory with no negative impact on our fill rates or excess and obsolete inventory. This strategic move is yet another example of doing things the Hillman way, taking care of our customers first. This is why our longstanding relationship with our customers is so strong from the board level to each store level. We believe this decision has and will continue to yield new business wins. With that inventory out of our network, we benefited from a meaningful working capital tailwind during the year generated $172 million of free cash flow, which we used to pay down debt. The resulting year-end leverage ratio of 3.29 times meant that we could once again take advantage of M&A market by making a small tuck-in acquisition subsequent to the end of the year. As we discussed, during January we acquired Cook Industries, a Midwestern-based supplier of rope and chain, and related hardware products. This acquisition marks our expansion into a new product category for us. Having recently won the rope and chain accessories with one of our top five customers, our expansion into rope and chain is a logical place to grow. We can bring these products to our existing customers while realizing synergies in shipping, sourcing, and service. And we have new products for our team to go sell and service. Customer reaction has been outstanding. Since closing Cook during the second week of January, we've had great feedback on the news and real growth opportunity discussions are already on their way. The opportunities to grow via M&A are out there. Our customers are encouraging us to get into certain product categories because of our long track record and the value-added services we provide each and every day. Now with the balance sheet on its way to below three times, we're ready to play offense. We're confident about 2024 because of the resilient end markets we serve, our diverse business with 114,000 SKUs shipping to 46,000 locations across North America, and 60 years of believing that nothing happens until you sell something at Hillman. We are an embedded partner for our customers. And our moat provides value-added differentiation versus our competition. With that, let me turn it to Rocky to talk numbers.