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spk21: 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 10K were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's investor relations website at .HillmanGroup.com. I would now like to turn the conference over to Michael Kaler with Hillman. Sir, you may begin.
spk01: 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 Adinalti, 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 .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?
spk09: Thanks, Michael. Good morning, everyone, and thank you for joining us. Before we get into our healthy 2023 results and our 2024 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 of 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 5 years, where the hardware's top-line CAGR has increased 7%, 7.3%, and .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 a creative 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 build 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 solution segments by .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. Our total sales 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 .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 .3% from 2022. With our relatively flat top line, our bottom line increased as adjusted gross margins improved over 120 basis points to .2% from 43% during 2022. Further, our adjusted gross margins improved each quarter throughout the year, ending at .2% during the fourth quarter, a 400 basis point sequential improvement over the third quarter. We believe we can maintain healthy adjusted gross margins throughout 2024, 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, Mick, and Rick were for 40 years. For the year, hardware saw .7% growth compared to 2022, or .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 MinuteKey, 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 MinuteKey 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 MinuteKey 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 2024. Lastly, our Canadian segment, which makes up about 11 percent of our revenue, saw a 9 percent top line decrease versus 2022. Following a strong year in 2022, market volumes and 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 percent of their sales, has roughly 60 percent market share, and continues to increase. We have a total of about 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 increase in the price of the machine, 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 drades, 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.
spk07: Since
spk09: 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 increase 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, generating 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.
spk02: Thanks, Doug, and good morning, everyone. Before I get into our guidance for 2024, I'm going to provide a quick summary of our fourth quarter in year end results. I would like to remind everyone that the 2022 fourth quarter and full year included an extra week. Net sales in the fourth quarter of 2023 decreased .8% to 347.8 million versus the prior quarter. 2023 full year net sales totaled 1.476 billion, which is down slightly versus the previous quarter. We were up slightly when excluding the 53rd week from 2022. Net sales came in towards the top end of our revised guidance range. Remember, because of the resilient nature of our products that are a critical part of repair and maintenance projects, demand for our products is relatively consistent. We don't experience the highs nor the lows that our customers often do, and during 2023, our top line outpaced some of our biggest customers. Fourth quarter adjusted gross profit margin increased over 480 basis points to .2% versus the prior year quarter. Sequentially, these margins improved by 400 basis points compared to the third quarter of 2023. For the full year 2023, adjusted gross profit margin increased over 120 basis points to .2% from 43% during 2022. As Doug likes to say, the pig is through the python, and in the second half of 2023, we finally return to normal historic margin rates. Q4 2023 adjusted SG&A is a percentage of sales increased to .5% from .6% during the year ago quarter. For the full year 2023, adjusted SG&A is a percentage of sales increased to .5% from 28.9%. Adjusted SG&A increases during both periods were driven by an increased investment in IT and a $6 million increase in our standard employee bonus expense during 2023 coming off a disappointing 2022 bonus payout. Adjusted EBITDA in the fourth quarter increased .8% to 54.4 million, exceeding the comparable year ago quarter for the second quarter in a row. Adjusted EBITDA for the 2023 full year increased .3% to 219.4 million and came in ahead of the midpoint of our revised guidance range, which was 217.5 million. Adjusted EBITDA was driven by a positive mix of price cost, partially offset by a soft macro environment, which had outsized impacts on our RDS and Canadian businesses. Let's talk cash flow and balance sheet. During 2023, operating activities generated $238 million of cash versus $119 million in 2022. Driving the improvement was a $104 million reduction in net inventories improved in cash management. Capital expenditures for the year were $66 million, compared to $170 million in 2022. We continued to invest in our Minikeek 3.5 and QuickTag 3.0 machines, which are important parts of our CapEx initiatives. Free cash flow for the year totaled $172.3 million versus $49.4 million in 2022. Driven by a meaningful and accelerated working capital benefit, free cash flow exceeded the high end of our guidance and surpassed our internal expectations. During the year, we used free cash flow to pay down $160 million of debt. We ended 2023 with $722 million of net debt versus $888 million at the end of 2022. Towards the end of Q4, we took advantage of the $370 million of cash flow to pay down $1,680 million in 2022. Currently, we have $360 million of the existing swaps that expire on July 31st of 2024. These swaps are fixed at 74 basis points plus our 270 basis point spread for an all-in borrowing cost of about 3.5%. In December, we entered into new swap agreements for the $370 million of cash flow to pay down $360 million that go into effect on the day our existing swaps expire. These swaps are fixed at .69% plus our 270 basis point spread for an all-in borrowing cost of about 6.4%. These new swaps will expire on January 31st, 2027. Our net debt to trailing 12 months adjusted to EBITDA ratio at the end of the quarter was 3.29 times, which improved from 3.7 times at the end of the third quarter and 4 times at the end of Q2. Our long-term net debt to adjusted EBITDA ratio target remains unchanged at below 3 times, and we expect we will end 2024 around 2.7 times, assuming we fall near the midpoint of our guidance and we do not make any sizable acquisitions during the remainder of 2024. Speaking of, let me spend a few minutes talking about our outlook and guidance for 2024. We anticipate full-year net sales to be between 1.475 to 1.555 billion, with a midpoint of 1.515 billion. Historically, our top line has grown about 6% volume growth. The 5% volume growth is made up of -3% market growth, which looks a lot like GDP, and -3% growth from new business wins. As it relates to our 2024 top line guide, our midpoint assumes a 1% headwind from price, a 1% decrease from market volumes, a 2% lift from new business wins, and a 3% lift from the cook acquisition. As you would expect, our top line is going to be dependent upon sales volume at our customers, which is predominantly driven by their POS. Our ability to win new business, the strength of the consumer, and the health of the economy and housing market will impact our results. For our bottom line, we expect full-year 2024 adjusted EBITDA will total between $230 and $240 million. The midpoint of $235 million represents an increase of about 7% versus 2023. During 2024, we expect our full-year adjusted growth margin to come in above 45% for the year, which is where we expect the business to perform over the long term. Lastly, free cash flow for the full year of 2024 is expected to come in between $100 to $120 million with a midpoint of $110 million. There was some pull forward of cash flow from 2024 into 2023, and we anticipate our normalized level of free cash flow to be in the $130 to $140 million range for the next several years following 2024. During 2024, we expect to be able to purchase products from our vendors a bit less expensively than we did in 2023 because of lower raw material commodity prices, but expect this to be partially offset by a return to more normal purchasing patterns, which will provide a modest working capital benefit in the range of $5 to $15 million. Keep in mind that these guidance figures are made with the following full-year assumptions. Interest expense will be between $55 and $65 million. Cash interest will be between $50 and $60 million. We expect to pay cash taxes between $10 and $20 million. CapEx will remain between $65 and $75 million. We anticipate restructuring related or other expenses of approximately $10 million. And our adjusted diluted weighted average share count for 2024 will be approximately $199 million. Our success reducing inventory and paying down debt during 2023 has put us in the position to play offense and use our improved balance sheet to execute low-risk acquisitions like Cook. As we look forward, we believe our competitive mode and long-standing relationships with customers will allow us to continue to win and to perform at or above our historic growth rate over the long term. With that, back to you, Doug.
spk09: Thanks, Rocky. We've made excellent progress during 2023 from reducing inventory and paying down debt to winning new business and transitioning one of our main distribution hubs from Rialto, California to Kansas City. And I'm truly impressed with our team's results during the year. Looking forward, we fired up the M&A machine and believe that by leveraging the Hillman moat, we can add tremendous value via M&A. We started with Cook and are excited about bringing additional categories to our customers, either organically or through M&A. As we think about 2024, we're ready to capitalize on the progress we made during 2023. While we can't control the macro, we believe we are very well positioned to drive share gain and a healthy profit increase during 2024. Our true north continues to be the guiding principle of Hillman. We live by the model that nothing happens until you sell something, and once you do, don't disappoint. We know that's in today's environment. Service matters as much as it ever has in our 60-year history. Our commitment to all of our stakeholders remains steadfast. This includes not only our customers, but our suppliers, team members, and our investors. We look forward to updating you during the year with our progress. With that, we'll begin the Q&A portion of the call. Let's see, Tuando, can you please open up the call?
spk21: Thank you. Ladies and gentlemen, to ask the question, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question and one follow-up, and then you may get back into the queue. Please stand by while we
spk20: compile the Q&A roster. Our first question comes from the line of Lee Jagoda with CJS
spk21: Securities. Your line is open.
spk25: Hi, good morning. It's Pete Lucas for Lee. Congrats on the quarter. Just wanted to know, I guess, first question, what assumptions are built into the forecast in terms of growth in robotics, both in terms of growth in keys versus engraving, and then the ramp of machine placements throughout the year?
spk02: Yeah, so as we think, and thanks for the question, Pete. Thanks for the compliments on the quarter. As we think about robotics for this year, as Doug said in his prepared remarks, we expect to ramp in the back half, but the first half is going to be relatively tough. We're anticipating, just given what we've seen in the economy, we continue to see some of the spending that we're expecting to spend. We don't see people spending unless the economy turns towards the back half. So overall, in the robotics and digital, we would say a flattish kind of year. That would be with areas like minute key performing better and areas such as engraving performing a little worse. And then, Doug, do you want to comment on rollouts?
spk09: Yeah, when you think about, Pete, the new 3.5, obviously, we're going to have a machine that can do a lot more than just home and office with the endless aisle capability as well as RFID as well as the transponder and auto capability for SmartBob. So we're excited about that, but we are, as I have said repeatedly, we're not going to run out there and lead with our chin. We're going to make sure that we roll these out and that we've got the back end taking care of for the support and service. But again, every retailer is excited about it. I think the one thing about RDS, and we're frustrated with the performance, so let me say that upfront. I wish it was growing quicker, but when you take, it makes total sense on engraving and accessories. That's a discretionary and we know that, Pat, and that is way off. But when you think about keys, both full serve and self serve keys, which is the biggest part of RDS, we have one customer that's given us fits, and that's Walmart. And if you look at the rest of the customers in 2023, RDS was up about 7.5%. So they had a good year, and what happened at Walmart is they elected to take full serve machines out. We had 100% of that business. We had to do a lot of work that didn't sell a key to get those machines out. And then we relocated all of the self serve machines throughout the store. We have about 70% of the self serve share, and unfortunately we saw machines go from the front vestibule to sporting goods, to painting, to ACC. So they're not getting to the places that even Walmart wants with their store ops issues. So we had a tough year with Walmart in lots of machines in and out and around, but when you look at our other major key companies and customers like the Aces of the World and Depot and Lowe's, we had a good year. And so we should turn that side second half of 24 and get this thing going again.
spk25: And then just one quick follow up. You talked about the new services you're introducing on the next generation key making machines. Any sense what that adds to your TAM?
spk09: I'll tell you what, it's a really, really good question and it can vary dramatically. If you think about the average key that would be cut in a minute key machine today, you know, you're talking about probably a $5 key versus, you know, in the future, you'll have keys ranging from 1099 to $179 to $179. And so the big variability. What we don't know is what's the consumer going to do? And that's what's interesting about the first 40. So, Pete, it's a little early yet. And I do also believe that we'll see different kinds of numbers based on different geographics, you know, as far as how that store trades out, what it's around and what areas. And so we're just learning. It's a little early for us to say, but the great news from a retailer's standpoint is we're spending the capital doing all the work and they get a percent of a higher number. And so they're excited about it and we are as well. But it's a little early for me to tell you average key cut price was average new key cut price will be. And that's what we're going to work on. It'll probably take us that, you know, we're going to need about 500 machines out there around the U.S. for us to get our heads around that.
spk24: Very helpful. Thanks. I'll jump back in the queue.
spk21: Thank you. Please stand by for our next question. Our next question comes from the line of Ryan Merkle with William Blair. Your line is open.
spk22: Hey, everyone. Good morning. I wanted to start off with some of the revenue assumptions for 24. I think you mentioned price down one percent. Can you just unpack that a little bit?
spk02: Yeah, I mean, if you take one percent of our revenue, obviously you can do the math there, Ryan. It's about fifteen million dollars. We've said as you think about price over time, we expect that we're going to get some price back because we've seen some deflation in the business and we're anticipating that we'll do that. I think what we've said consistently is as costs come down, we would expect that we'll hold on to about half of that. And so far that's playing out. We're pretty proud of the fact that we've been able to expand gross margin like we have. We've gotten back to where we were historically, obviously a little bit above it in the fourth quarter. But as we think about 2024, what we're really excited about is we think not only are we at, but we maintain that historic gross margin throughout the year. We think that's where the business needs to live.
spk22: Got it. Okay. In terms of the timing, is that kind of even through the year or should we think about that price gives back more second half?
spk02: I would say it's more back and loaded, but we're obviously having those conversations with our retailers as we speak.
spk22: Yeah. Okay. And then my second question, I think we're seeing the market down 1%. I think that's pretty fair. I guess two part question, what are some of the things you're watching? Is it mainly just interest rates and housing turnover? And then the second part of the question, Doug, do you think there's pen up demand? Is that how your business works? So if turnover increases, do all these people start doing projects again?
spk09: Yeah, I think that, you know, Ryan, when you think about existing home sales, man, we get helped on both sides of that trade, right? People get their house ready and they use our products and then they try to turn their new one into what they want. And that number being 4 million versus five and six is really probably the biggest drag on you know, depot lows and hardware stores in our business. So I think that's a second half begin, but it really probably ends up being a 25 tailwind. We feel like it'll start to help us in the second half, but I think you'll see that our guess is that you'll see that really help our business in 25. And that's why we didn't want to put a number out there that had to go perfect. We wanted to put a number out there that, you know, hopefully we could do better, but not solve for volume until we see volume in a consistent way. I think it's always confusing in January and February because of weather, this, that, and the other. You know, I think the thing that we're really hoping for for our retail partners is a good spring. It's been two years without it. It would be great to have a good spring for them. It obviously would help us too. We're not super tied in spring, but they are. And that would really help them to get started because I think, you know, depot and lows are prepared for a good year, but I think just like us, they're trying to look at things saying it's probably a second half before this thing starts moving and then end of 25. Yep, makes sense. All right. That's a lot. Thanks, Ray.
spk21: Thank you. Please stand by for our next question. Our next question comes from the line of David Manthe with Bear. Your line is open.
spk15: Thank you. Good morning, everyone. So my question is on new business wins. I think Doug, you had said more than 25 million and Rocky referenced this 2 to 3 percent focusing on two for the current year. And I guess mathematically 2 percent is 30 million dollars. I just wanted to check in. Is that your plan? Is that based on discussions you're having? How concrete is that? And secondarily, is that number net of the line that you exited and wrote off this quarter?
spk02: Yeah, I on the line that we wrote, we weren't actually selling much of that, Dave. And so that kind of led to where the write off occurred. So that has nothing to do with the math. I would say, as you think about it, probably north of two thirds of that business is already done and baked with our retailers. And so you think about the rollover impact plus new business wins that we know of. And so we've still got some work to do, but I would say we're in at least as good a spot as we've been the last couple of years. And we've been able to hit those numbers each year as we think about today. Even as we speak, our guys in the field are out working on new business and we are confident we'll pick up more.
spk09: The reason I feel even better than I did is because we're actually having some interesting conversations with three of our customers talking about doing things for them that they have historically directly inputted themselves. That tells me that they've got to free up their warehouses and that they want us to service these complicated categories. And that I haven't seen that. I've been here nine years. So we have three discussions going on right now with people who are importing the product. And quite honestly, it's really tricky for them to do that as they solve through COVID. And again, we're not going to be able to meet the price that they could get, but we can show them with us servicing it and us thinking about the category differently than maybe a merchant who doesn't understand it, how we could actually grow it and maybe change the category. So that's why I feel like you'll see us exceed that number this year.
spk15: That sounds great. The second question is on rope and chain. What percentage overlap do you have with Cook currently when you think about the number of locations you're in versus what their overlap is with those locations? And I'm thinking here about the cross-sell opportunity. If you look at the $45 million in Cook's revenues, are you looking to capture multiples of that over three to five years or is it more of an incremental opportunity?
spk09: Yeah, I'll turn it to JMA because he's all over this one. But, Dave, let me just say first, our top three customers, Cook has 8% of their share. I love that. That's a good place to start. JMA, anything you want to
spk03: add? Excellent question because we're really excited about Cook. Tiny overlap, very little in rope and chain accessories. A little bit of overlap. But with the acquisition, now we're able to bring the bulk and package product and then bring our merchandising solutions together to really grow it. And as Doug mentioned, it's just a huge opportunity. So we really feel good about that. Really accelerating our growth in 2024, to be honest.
spk09: We had a major customer, one day saw the announcement call and say, we're about to make a decision on a line review. If you guys are going to own this, we'll delay it. And that says something to me. I think we've had several regional players say, listen, let us know when you're ready. You can take over our rope and chain now because you've got service. This is a pain in the ass product category and Cook didn't have service. It's a great Midwest company. But when you take that with service and the relationships we have, Dave, I don't know how big it will be, but we're going to see some really nice growth here.
spk02: Hey, Dave, just to make sure that everyone listening is clear. What JMA was talking about is like the category. So very little overlap. But when you think about customers, they probably don't have a customer that we aren't already servicing. So this is put it through the goose.
spk16: That sounds great. Thanks, guys.
spk21: Yep. Thank you. Please stand by for our next question. Our next question comes from the line of Michael Hoffman with Steve. The line is open.
spk13: Hi, good morning and thanks for taking the question.
spk12: Hi,
spk13: guys. Can we talk about the cadence of your gross margin through the year just so we get all the puts and takes of this sort of the end of the transition out of the 225 and COVID and rebalancing inventory and all that?
spk02: Yeah, I think the way to think about it, Michael, is, you know, as we said, we expect to be at or above our historic margins all year. So that kind of sets a floor where we believe the margins will be. Obviously, as you think historically about Hillman, our second and third quarters are usually our most profitable just because of seasonality. And I think you will see that again this year with the exception being that the first quarter we expect to be pretty profitable. It's going to probably look a lot like the fourth quarter did. And then when you start to think about some of the price give back that we anticipate is going to happen, et cetera, you would expect that margin to come down a bit, but still again remain at or above historic levels.
spk13: Okay, so all year we're at 45 and then the Q and 3Q are even higher and 4Q may be actually maybe below 45 just to get at the balance.
spk02: Again, I'll just I'll restate what I said, Michael, that we expect all year every quarter to be at or above historic levels.
spk13: Okay. And then so your customer is having real foot traffic issues. What are you doing differently to keep your business on pace despite their foot traffic?
spk09: Yeah, I think if you think about Depot and Lowe's clearly foot traffic issues, you know, we're not seeing that as much in the farm and fleet. And these little hardware stores and I say little when you have 12,000 of them and they represent 27% of your business, they just refuse to partake in this load and they're doing
spk17: really well and they've got the service and they've got the product and now I think my group of people are starting to say, I can't get this brand here. And so, there are a lot of other counties where I would say that our hardware and our hardware and sanitary industry is doing
spk09: better. And then I had some strong double-digit kind of move this past year and so those three areas are not being as impacted by foot traffic. And you know, I think Depot and Lowe's are both certainly hoping that with the spring and kind of mid-year that turns around, but it's been tough for three years.
spk13: Okay. And if I could squeeze one more, what's your M&A pipeline look like?
spk09: We got lucky this face. We wanted to buy Cook a couple of years ago and just didn't feel like it was the right time with what we had to do on inventory. And we spent time with the owners and told them we genuinely wanted to buy it and this is when we thought we could. And they waited for us. Ironically, they also ended up buying stock in Hillman during that time. And I just think that we got to know them, they got to know us, and we were very honest about when we wanted to buy. And for two brothers who have run a company and built a company, honestly, we're a great fit for them. We've already integrated the team. We just had 31 people in Minnesota this week. They love what's happening and you know, they know, the two brothers know that they can retire and this will be very well taken care of. So we've got half a dozen of those, Michael, and again, not all will come together. But the fact that the private equity guys stopped chirping in their ear because there was no debt market has really helped us. Thank
spk13: you.
spk21: Please stand by for our next question. Our next question comes from the line of Ruben Gardner with Benchmark. Your line is open.
spk14: Thanks. Good morning, everybody. Hey, Ruben. So hardware has been fairly resilient for you guys. You talked about the issues with Walmart at RDS. Can you talk about protective solutions, maybe what's changed in the last couple of quarters and kind of what's embedded in your outlook in that category for 24?
spk03: Ruben, yeah, I mean, we look at the back half of 23, we're really proud of what that team has done the last couple of years. We've, I'll say, rebuilt that business a bit. We've focused on remixing our glove mix. We've introduced some new products and we've rebalanced it. We've gotten some nice off-shelf opportunities, incremental shelf space, which we've been able to maximize. And that led to a really good back half of the year. We feel good about where the business is positioned in 24 and we're excited about what that team's got on the plate. It's part of the new glove opportunities that Doug referenced earlier. So we feel really good about our go-forward. That being a category, we can continue to grow.
spk09: I think the other thing, Ruben, is we've got like a digs line that really is a great positioning for the female and the gardening side. And now our retail partner wants us to expand that name into other products because it's really starting to take hold. So we've got some interesting things there. We also are introducing a higher end, if you will, tool bag that a lot of the pros want and it's the first time and the price point's up there pretty high, but the quality is fantastic. So we're trying to think differently in that work gear and the other thing is we're really trying to keep our customers informed about knee pads because the pro, the more we interview them and get to know them, they don't like buying four or five of these a year. They like buying one and bragging about the fact that it lasts three years. And historically these retailers don't want to hit that price point. They now know they can hit that price point if they have the right goods.
spk02: Yeah, I think, Ruben, the only thing I would add just as people are modeling is we think PS will look a lot like the overall guide for the year, probably without the price pressure.
spk14: Got it. And then it's been a little while since M&A's been part of the story. Can you kind of maybe remind us of are there other areas like rope and chain that are left from a bolt-on perspective in the hardware aisle or are you starting to get to the point where you've got to go outside of hardware to kind of grow the business?
spk09: Yeah, no, I would say there's probably an equal amount inside hardware, I would say that zip code like a cook and then obviously we always are looking and thinking through plumbing and electrical, which Ruben, we would consider more than just around the corner, that we consider that outside. But we're looking at both. And again, nothing crazy, but when you think about buying something at, call it six times pre-synergy and then you add what we're able to do with the business, not just from a cost standpoint, but what we, with our relationship and with our service capability, the top line in that business is not going to look anything like it has historically.
spk14: Thanks,
spk23: Ruben.
spk21: Thank you. Please stand by for our next question. Our next question comes from the line of Brian McNamara with Countacourt. Your line is open.
spk10: Good morning, guys. Thanks for taking the questions. Pricing, Doug, I know you have foreshadowed this for some time, but price minus 1% in 2024 is probably a little bit better than I would have expected as we've heard. Some of your retail customers, particularly the home centers, haven't been shy to ask for price back. What could make that minus 1 materially better or worse as the year goes on or is that a pretty good place to lock in?
spk09: Yeah, Brian, I think it's a little... So here's the way to think about it. That 1% is a little bigger than 1% as you think about the timing for those decreases. And let's just use an example. Let's say something goes into effect in June. It may be impacting our 24 as such, but it then rolls into 25 in the first half. So the 1% is accurate, but it's a little bigger than that to answer your question as to how things roll.
spk02: The only thing I would add, Brian, is when you think about cost, we've seen a nice benefit on containers and we've talked about that, but virtually every other category that we look at, there's inflation. And we're all seeing it. Labor isn't getting cheaper. Once we get product into the United States, it's not getting cheaper. And while we did see a bit last year and continue to see a bit of commodity benefit, as we sit today, we've seen the cost of steel in Taiwan and China go up pretty dramatically. Now that typically happens going into Chinese New Year, and we'll see what happens after Chinese New Year, but as we think about our business and think about the future, there's a lot of prices going a lot of different directions that helps us to explain why our prices need to be what they need to be so we get a fair profit.
spk10: That's
spk11: fair.
spk10: I guess with Home Depot expecting another year of consumers taking on smaller projects, deferring larger projects, does this materially impact your ability to plan and guide the business?
spk09: I don't think so. I think we play in the pickup truck and the DIY, or the thing we're looking for is for people to get off cruise ships and out of concert halls so they get back into the backyard. I mean, that probably, the DIY, the pickup truck pros, about where they've been, the DIY Ryan is the one that's off, and we're hoping that we'll see that start to pick up and normalize a little bit. I don't know how they're going to do what they want to do when you look at the price of airline tickets right now. That's the part we'd like to see improve.
spk10: Got it. I'm just going to squeeze in one last one, a quick one. After a really nice year of free cash flow generation last year, how should investors think about sustainable cash flow generation in the business given the last few years haven't been particularly normal?
spk02: Yeah, I think I said in my prepared remarks, Brian, we think this is $130 to $140 million of free cash flow, kind of normal benefit. If you look over the last two years, we did $172 million last year, we're guiding to about $110 million this year. If you average those out, that's just north of that, probably $140 million, $142 million. And so that's what we think kind of the normal generation in the business should be. We'll grow that cash flow over time as we grow EBITDA. The one challenge that we will have as we think about the future a bit is around taxes because we're not a full cash taxpayer in the US today. We will be eventually. And then the flip side is we expect to continue to pay down debt, and as we do, we'll obviously bring that interest line down as well. So, you know, $130 to $140 million feels like a good number. We've guided to $110 million this year, and obviously we would be disappointed if we don't do better than that as we go through the year.
spk11: Thanks a lot, guys. Best of luck. Thanks, Brian. Thanks, Jen.
spk21: Thank you. Ladies and gentlemen, that concludes the Q&A portion of today's call. I would now like to turn the call back over to Mr. Kay here for closing remarks.
spk09: Thank you. Thanks, everyone, for joining us this morning. Again, we're lucky to have the customers we do. We've got great vendor partners, and importantly, most importantly, this team at Hillman continues to do things for us each and every day, particularly in the store for our customers that allows us to grow and allows us to continue to be fine ways to do more. So, we look forward to updating you again in the near future, and thank you for joining us this morning.
spk21: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now
spk20: disconnect.
spk00: Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. You You You You You You You You You You
spk21: You You You You You You You You You You You You 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 10k were issued this morning These documents and a replay of today's presentation can be accessed on Hillman's investor relations website at IR dot Hillman group comm I Will now like to turn the conference over to Michael Kayla with Hillman sir you may begin
spk01: Thank You Tawanda. Good morning everyone. And thank you for joining us I am Michael Kayla vice president of investor relations and Treasury Joining me on today's call are Doug Cahill our chain chairman president and chief executive officer Rocky Kraft our chief financial officer and John Michael Adonoff II 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 the 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 dot Hillman group comm 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 gap 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
spk09: 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 mode 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 mode 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 commit 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 or hard-working 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 DIY 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 5 years where the hardware's top line kegger has increased 7% 7.3 percent and 8.2 percent 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 a creative 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 build 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 a hundred 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 solution segments by 13.4 percent 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 DIY and pickup truck Pro Drive our business US 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 Homesellers 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 bit of price early in the year net sales for 2023 total 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 percent and Grew for the 59th time in our 60 year history for 2023 we generated 219.4 million of adjusted EBITDA an increase of 44.3 percent from 2022 with a relatively flat top line our bottom line increased as adjusted gross margins improved over 120 basis points to 44.2 percent from 43 percent 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 its 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 percent of our overall revenue This business is the heart and soul of our company the same way Max Mick and Rick were for 40 years for the year hardware saw 3.7 percent growth compared to 2022 or 4.7 percent 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 percent of our overall revenue for the year protective revenues decreased 10.7 percent however excluding COVID related PPE sales and 2022 53rd week protective revenue Decreased just two and a half percent The second half of 2023 was up nearly 10 percent versus the comparable period and we finished the year strong in protective solutions Thankfully, this should be the last time we talk about code Robotics and digital solutions or RDS makes up 17 percent 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 minute key Offset a relatively soft market looking forward we remain very encouraged about our high margin RDS business Especially our new minute key 3.5 kiosk We are leveraging minute key 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 minute key 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 minute key 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 minute key 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 -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 and 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 a hundred years Y'all 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 21 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 drades which includes the local port service charges Additionally there is uncertainty in the in the cost of ocean containers And we 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 long-standing relationship with our customers are 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 tail when during the year Generating a hundred and seventy two million of free cash flow which we use to pay down debt The resulting year-end leverage ratio of three point two nine 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 in the 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 in January We've had great feedback on on the news and real growth opportunity Discussions are already on their way The opportunity 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 a balance sheet on its way to below three times We're ready to play offense We're confident about 2024 because of the resilient in markets we serve our diverse business with a 114,000 SKU shipping to 46,000 locations across North America and 60 years of believing that nothing happens until you sell something that Hillman We are an embedded partner for our customers in our moat provides value-added differentiation versus our competition With that let me turn it to Rocky to talk numbers
spk02: Thanks, Doug and good morning everyone before I get into our guidance for 2024 I'm going to provide a quick summary of our fourth quarter in year and results I would like to remind everyone that the 2022 fourth quarter and full year included an extra week Net sales in the fourth quarter of 2023 decreased 0.8 percent to 347 point 8 million versus the prior your quarter 2023 full year net sales total one point four seven six billion Which is down slightly versus 2022 full year, but up slightly when excluding the 53rd week from 2022 Net sales came in toward the top end of our revised guidance range Remember because of the resilient nature of our products that are a critical part of repair and maintenance projects Demand for our products is relatively consistent We don't experience the highs nor the lows that our customers often do and during 2023 our top out line Outpaced some of our biggest customers fourth quarter adjusted gross profit margin increased over 480 basis points to 48.2 percent versus the prior year quarter Sequentially these margins improved by 400 basis points compared to the third quarter of 2023 For the full year 2023 adjusted gross profit margin increased over 120 basis point to 44.2 percent from 43 percent during 2022 As Doug likes to say the pig is through the python in the second half of 2023 We finally returned to normal historic margin rates To for 2023 adjusted SG&A is a percentage of sales increased to 32.5 percent from 30.6 percent during the year ago quarter For the full year 2023 adjusted SG&A is a percentage of sales increased to 29.5 percent from 28.9 percent adjusted SG&A increases during both periods were driven by an increased investment in IT and A six million dollar increase in our standard employee bonus expense during 2023 Coming off a disappointing 2022 bonus payout Adjusted EBITDA on the fourth quarter increased 20.8 percent to 54.4 million exceeding the comparable year ago quarter for the second quarter in a row Adjusted EBITDA for the 2023 full year increased 4.3 percent to 219.4 million and came in ahead of the midpoint of our revised revised guidance range, which was 217.5 million Adjusted EBITDA was driven by a positive mix of price cost partially offset by a soft macro environment Which had outsized impacts on our RDS and Canadian businesses Let's talk cash flow and balance sheet during 2023 operating activities generated 238 million dollars of cash versus 119 million in 2022 Driving the improvement was a 104 million dollar reduction in net inventories and prudent cash management Capital expenditures for the year were 66 million compared to 70 million in 2022 We continued to invest in our minikey 3.5 and quick take 3.0 machines Which are important parts of our cap ex initiatives Free cash flow for the year totaled 172.3 million versus 49.4 million in 2022 Driven by a meaningful and accelerated working capital benefit free cash flow exceeded the high end of our guidance and Surpassed our initial internal expectations During the year we use free cash flow to pay down 160 million dollars of debt. We ended 2023 with 722 million dollars of net debt Versus 888 million at the end of 2022 For the end of end towards the end of 2022 4 We took advantage of the swap market and the inverted yield curve by entering into a new set of swaps Currently we have 360 million dollars of existing squat swaps that expire on July 31st of 2024 These swaps are fixed at 74 basis points plus our 270 basis point spread for an all-in borrowing cost of about three and a half percent in December we entered into new swap agreements for the same 360 million dollars that go into effect on the day our existing swaps expire These swaps are fixed at three point six nine percent Plus our 270 basis point spread for an all-in borrowing cost of about six point four percent These new swaps will expire on January 31st 2027 Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 3.29 times which improved from 3.7 times at the end of the third quarter and four times at the end of q2 Our long term net debt to adjusted EBITDA ratio target remains unchanged at below three times And we expect we will end 2024 around two point seven times Assuming we fall near the midpoint of our guidance and we do not make any sizable acquisitions during the remainder of 2024 Speaking of let me spend a few minutes talking about our outlook and guidance for 2024 We anticipate full year net sales to be between one point four seven five to one point five five five Billions with a midpoint of one point five one five billion Historically our top line has grown about six percent annually this consists of approximately one percent price and five percent volume growth The five percent volume growth is made up of two to three percent market growth Which looks a lot like GDP and two to three percent growth from new business wins As it relates to our 2024 top line guide our midpoint assumes a one percent headwind from price a 1% decrease from market volumes a 2% lift from new business wins and a 3% lift from the cook acquisition As you would expect our top line is going to be dependent upon sales volume at our customers Which is predominantly driven by their POS? Our ability to win new business the strength of the consumer and the health of the economy and housing market will impact our results For our bottom line we expect full year 2024 Adjusted EBITDA will total between 230 and 240 million dollars the midpoint of 235 million represents an increase of about 7% versus 2023 During 2024 we expect our full year adjusted growth margin to come in above 45% for the year Which is where we expect the business to perform over the long term Lastly free cash flow for the full year of 2024 is expected to come in between 100 to 120 million dollars with a midpoint of 110 million There was some pull forward of cash flow from 24 into 2023 and we anticipate our Normalized level of free cash flow to be in the 130 to 140 million dollar range for the next several years following 2024 During 2024 we expect to be able to purchase products from our vendors a bit less expensively than we did in 23 Because of lower raw material commodity prices But expect us to be partially offset by a return to more normal purchasing patterns Which will provide a modest working capital benefit in the range of five to fifteen million dollars Keep in mind that these guidance figures are made with the following full year assumptions Interest expense will be between 55 and 65 million cash interest will be between 50 and 60 millions We expect to pay cash taxes between 10 and 20 million CapEx will remain between 65 and 75 million We anticipate restructuring related or other expenses of approximately 20 million 10 million. Excuse me And our adjusted diluted weighted average share count for 2024 will be approximately 199 million Our success reducing inventory and paying down debt during 2023 has put us in the position to play offense and use our improved balance sheet to execute low-risk acquisitions like cook as We look forward we believe our competitive mode and long-standing relationships with customers will allow us to continue to win and to perform at Or above our historic growth rate over the long term With that back to you, Doug
spk09: Thanks, Rocky we've made excellent progress during 2023 from reducing inventory and paying down debt to winning new business and transitioning one of our main distribution hubs from Rialto, California to Kansas City and I'm truly impressed with our team's results during the year Looking forward we fired up the M&A machine and believe that by leveraging the Hillman moat We can add tremendous value via M&A we started with cook and are excited about bringing additional categories to our customers either organically or through M&A as we think about 2024 we're ready to capitalize on the progress we made during 2023 While we can't control the macro We believe we're very well positioned to drive share gain and a healthy profit increase during 2024 our true north continues to be the guiding principle of Hillman We live by the model that nothing happens until you sell something and once you do don't disappoint We know that's in today's environment service matters as much as it ever has in our 60 year history Our commitment to all of our stakeholders remains steadfast This includes not only our customers, but our suppliers team members and our investors We look forward to updating you during the year with our progress With that we'll begin the Q&A portion of the call Let's see to Wando. Can you please open up the call?
spk21: Thank you Ladies and gentlemen to ask the question Please press star 1 1 on your telephone and then wait to hear your name announced to withdraw your question Please press star 1 1 again We ask that you limit yourself to one question and one follow-up and then you may get back into the queue Please stand by while we compute
spk20: compile the Q&A roster Our first question comes from the line of Lee Jagoda with CJS
spk21: securities your line is open
spk25: Hi, good morning. It's Pete Lucas for Lee. Congrats on the quarter Just wanted to know I guess first question What assumptions are built into the forecast in terms of growth in robotics both in terms of growth in keys versus engraving and Then the ramp of machine placements throughout the year
spk02: Yeah, so as we think and thanks for the question Pete thanks for the compliments on the quarter You know as we think about robotics for this year, you know, as Doug said in his prepared remarks We expect to ramp in the back half, but the first half is going to be relatively tough We're anticipating just given what we've seen in the economy You know, we continue to see some of the pet retailers, you know struggle a bit and when you think about anything that's discretionary spend You know, we don't see people spending unless the economy turns towards the back half So overall in the robotics and digital we would say a flattish kind of year That would be with areas like minute key performing better in areas such as engraving perform a little worse And then Doug do you want to comment on on rollouts?
spk09: Yeah, when you think about Pete the new 3.5 You know, obviously we're going to have a machine that that can do a lot more than just home and office with the endless aisle capability as well as RFID as well as the transponder and auto Capability for smart Bob, so we're excited about that. But we are as I have said repeatedly We're not going to run out there and lead with our chin We're going to make sure that we roll these out and that we've got the back end taking care for the support and service But but again every retailer is excited about it I think the one thing about RDS and we're frustrated with the performance. So let me say that upfront I wish it was growing quicker, but when you take it makes total sense on engraving and and That that's a discretionary and we know that Pat and that is way off but when you think about keys both full serve and And self serve keys, which is the the biggest part of RDS, you know We we have one customer that that's given us fits and that's Walmart And if you look at the rest of the customers in 2023 RDS was up about seven and a half percent So they had a good year And what happened at Walmart is they elected to take full serve machines out We had a hundred percent of that business We had to do a lot of work that didn't sell a key to get those machines out and then we relocated All of the self serve machines throughout the store we have about 70 percent of the self serve share and And and unfortunately we saw machines go from the front vestibule to sporting goods to painting to ACC so they're not getting to the places that even Walmart wants with their store ops issues so we had a tough year with Walmart in lots of machines in and out and around and But when you look at our other major key Companies and customers like the aces of the world and depot and lows. We had a good year And so we should turn that side second half of 24 and get this thing going again
spk25: And then just one quick follow-up You talked about the new services you're introducing on the next generation key making machines. Any sense what that adds to your tam?
spk09: I Tell you what? It's a really really good question and it it can vary dramatically If you think about the average key that would be cut in a minute key machine today You know you're talking about Probably a five dollar key Versus, you know in the future you'll have keys ranging from 1099 to $79 to $179 and so the big variability what we don't know is what's the consumer going to do? And and and that's what's interesting about the first 40 so pete It's a little early yet, and I do also believe that we'll see different kinds of numbers based on Different geographics, you know as far as how that store traits out What it's around and in what areas And so we're just learning it's a little early for us to say but but the great news from a retailer standpoint is we're spending the capital doing all the work and they get a percent of a higher number and And so they're excited about it and we are as well, but it's a little early for me to tell you Average key cut price was average new key cut price will be and that's what we're going to work on It'll probably take us that you know, we're going to need about 500 machines out there around the u.s For us to get our heads around that
spk24: Very helpful. Thanks. I'll jump back in the queue Thanks, pete.
spk21: Thank you Please stand by for our next question Our next question comes from the line of ryan merkle with will blair your line is open
spk22: Hey everyone. Good morning. Hey, ryan Wanted to start off with some of the revenue assumptions for 24. I think you mentioned price down 1% Can you just unpack that a little bit?
spk02: Yeah, I mean if you take 1% of our revenue, obviously you can do the math there ryan That's about 15 million dollars. I mean we've said as you think about price over time We expect that that you know, we're going to get some price back because we've seen Some deflation in the business and and we're anticipating that we'll do that. I think you know what we've said consistently is as As we as costs come down We would expect that we'll hold on to about half of that and and so far that's playing out We're pretty proud of the fact that we've been able to expand gross margin like we have We've gotten back to you know, where we were historically obviously a little bit above it In the fourth quarter, but as we think about 2024 what we're really excited about is we think not only are we at but we maintain That you know that historic gross margin throughout the year and we think that's where the business needs to live
spk22: Got it. Okay It in terms of the timing is that kind of even through the year or should we think about that? That price gives back more second half
spk02: I would I would say it's more back end loaded but you know We're obviously having those conversations with our retailers as we speak.
spk22: Yeah, okay And then my second question You know the market down one percent. I think that's pretty fair. I guess Two part question. What are what are some of the things you're watching? Is it mainly just interest rates and housing turnover and and then the second part of the question? Doug, do you think there's pent up demand? Is that how your business works so if turnover increases do all these people start doing projects again
spk09: Yeah, I think they're you know, ryan when you think about existing home sales man we get We get helped on both sides of that trade, right? People get their house ready and they use our products and then they try to turn their new one into what they want And that number being four million versus five and six is really the probably the biggest drag on on on you know depot lows and and hardware stores in our business, so I think that's a second half begin, but it really probably ends up being a 25 tailwind We feel like it'll start to help us in the second half, but I think you'll see that Our guess is that you'll see that really help our business in 25 and that's why We didn't want to put a number out there that had to go perfect We wanted to put a number out there that that, you know, hopefully we could do better but but you know not solve For volume until we see volume Uh in a consistent way. I think it's always confusing in january and february because of weather this that and the other Um, you know, I think the thing that we're really hoping for for our retail partners Is is a good spring. It's been two years without it. It would be great to have a good spring for them Obviously would help us too. We're not super tied in spring, but they are and that would really help them to get started Because I think you know depot and lows are prepared for a good year But I think just like us they're They're trying to look at things saying it's probably a second half before this thing starts moving and then into 25 Yep, makes sense. All right, that's a lot Thanks. Thanks, rye
spk21: Thank you Please stand by for our next question Our next question comes from the line of david manthee with bear your line is open
spk15: Thank you. Good morning everyone So my question is on new business wins, I think Doug you had said more than 25 million and rocky you referenced this two to three percent focusing on two for the current year And I guess mathematically Two percent is 30 million dollars. I just wanted to check in like Is that your plan is that based on discussions you're having how concrete is that and? Secondarily is that number net of this the line that you? Exited and wrote off this quarter
spk02: Yeah, I on on the line that we wrote We weren't actually selling much of that dave and so you know that kind of led to where where the write-off occurred So that has nothing to do with the math. I would say as you think about it Probably north of two-thirds of that business is already done and baked with with our retailers. And so You think about the rollover impact plus new business wins that we know of and so we've still got some work to do but I would say we're in at least as good a spot as we've been the last couple years and we've been able to hit those numbers Each year as we think about you know today even even as we speak our guys in the field are out working on On new business and we are confident. We'll pick up more
spk09: dave the reason I feel even better Than I did is because we're actually having some interesting conversations with three of our customers Talking about doing things for them that they have historically directly imported themselves That tells me that they've got They've got to free up their warehouses And that they want us to service these complicated categories And and that we haven't seen that as an opportunity in front of us. I haven't seen that i've been here nine years Um, so we have we have three discussions going on right now with people who are importing the product And and quite honestly, it's really tricky for them to do that As they saw through covid and again, we're not going to be able to meet the price that they could get but we can show them With us servicing it and us thinking about the category differently than maybe a merchant who doesn't understand it How we could actually grow it and maybe change the category. So that's why I feel like you'll see Us exceed that number this year
spk15: That sounds great. Um, the second question Is on rope and chain What percentage overlap do you have with cook currently? I mean when you think about the number of locations you're in versus What their overlap is with those locations and i'm thinking here about the cross sell opportunity You look at the 45 million in cook's revenues. Are you looking to capture? Multiples of that over three to five years or is it more of an incremental opportunity?
spk09: Yeah, i'll turn it to jma because he's all over this one. But but dave let me just say first our top three customers We cook has eight percent of their share I love that Um, that's a good place to start jma and yeah, i'll
spk03: add to that dave Excellent question because we're really excited about cook tiny overlap very little In accessories rope and chain accessories a little bit of overlap But with the acquisition now we're able to bring the bulk and package product and then bring our merchandising solutions together To really grow it and as doug mentioned, it's just a huge opportunity So we really feel good about that really accelerating our growth in 24 and beyond.
spk09: We had a major customer When they saw the announcement call and say we're about to make a decision on a line review If you guys are going to own this we'll delay it um and and that that says something to me, I I think we've had Several the regional players say listen, let us know when you're ready You can take over our rope and chain now because you've got service This is a pain in the ass product category and and cook didn't have service. It's a great midwest company But when you take that with service and the relationships we have dave I don't know how how big it'll be Uh, but but we're we're going to see some really nice growth here
spk02: Yeah, hey dave just to just to make sure that everyone listening is clear What jma was talking about is like the category and so very little overlap, but when you think about Customers, they probably don't have a customer that we aren't already servicing. So this is put it through the goose.
spk16: Yeah That also sounds great. Thanks guys.
spk21: Yep. Thank you. Please stand by for our next question Our next question comes from the line of michael hoffman with steve. Oh your line is open
spk13: Hi, good morning and thanks for taking the question.
spk12: Um Hey michael
spk13: Hi guys, um, can we talk about the cadence of your gross margin through the year just so we Get all the puts and takes of this sort of the end of the transition out of the 225 in covid and Rebalancing inventory and all that
spk02: Yeah, I I think the way to think about it michael is you know, as we said we expect to be at or above Our historic margins all year so that kind of you know sets a floor where we believe the margins will be Obviously as you think historically about hillman our second third quarters are usually our most profitable just because of seasonality And I think you will see that again this year with the exception being that the first quarter we expect to be pretty profitable It's going to probably look a lot like the fourth quarter Did and then when you start to think about some of the price give back that we anticipate is going to happen, etc You would expect that margin to come down a bit that still again remain at or above historic levels
spk13: Okay, so all year we're at 45 and then the Two q and three q are even higher and four q maybe actually maybe below 45 just to get it to balance
spk02: Uh again i'll just i'll i'll restate what I said michael that we expect all year every quarter to be at or above historic levels
spk13: Okay, and then so your customer is having real foot traffic issues. What are you doing differently? To keep your business on pace despite their foot traffic
spk09: Yeah, I think if you think about depot and lo's clearly foot traffic issues Um, you know, we're not seeing that as much in the farm and fleet and these little hardware stores and I Say little when you have 12 000 of them and they represent 27 of your business They uh, they just refuse to partake in this low time. They're doing
spk17: really well and they've got the service and then And they've got the product and then now I think my People are now starting to say And
spk09: so Are not being as impacted by foot traffic Uh, and you know, I think depot and lo's are both certainly hoping That uh with a spring and kind of mid-year that that turns around but it's been it's been tough for three years
spk13: Okay, and if I could squeeze one more, what's your m&a pipeline look like?
spk09: You know is one of the great things we got lucky Let's face it. We we wanted to buy cook a couple of years ago and and just didn't feel like it was the right time What we had to do on inventory and you know We we spent time with the owners and and told them we genuinely wanted to buy it and this is when we thought we could um And and they waited for us. Um, ironically Uh, they also ended up Buying stock in hillman during that time and I just think that We got to know them they got to know us and we were very honest about when we wanted to buy And for two brothers who have run a company and build a company Honestly, we're a great fit for them. We've already integrated the team We just had 31 people in minnesota this week They love what's happening and um You know, they know the two brothers know that they can you know retire and this will be very well taken care of so We've got half a dozen of those michael and again, not all will come together But the fact that the private equity guys Stopped chirping in their ear because there was no debt market has really helped us Got it.
spk13: Thank you
spk21: Thank you, please stand by for our next question Our next question comes from the line of ruben gardner with benchmark your line is open
spk14: Um, so Hardware Has been fairly resilient for you guys. You talked about the issues with walmart at rds Can you talk about protective solutions? Maybe what's changed in the last couple of quarters and kind of what's embedded in your outlook in that category for 24?
spk03: Ruben yeah, I mean we we look at the back half of 23 really proud of what that team has done the last two weeks Last couple of years we've i'll say rebuilt that business a bit. We've focused on remixing our glove mix We've introduced some new products and we've rebalanced it. We've gotten some nice Off-shelf opportunities incremental shelf space, which we've been able to maximize And that led to a really good back half of the year We feel good about where the business is positioned in in 24 and we're excited about what that team's got on the plate It's part of the new group opportunities that doug referenced earlier So we feel really good about our you know, go forward that being a category we can continue to grow I
spk09: think the other thing ruben is we've got like a digs line Really is a great positioning for the female in the gardening side And now our retail partner wants us to expand that name Into other products because it's it's really starting to take hold. So we've got some interesting things there we also are introducing a Higher end if you will tool bag That a lot of the pros want and and it's the first time and the price points up there pretty high But the quality is fantastic. So we're trying to think differently in that work gear and and you know Knee pads because the pro the more we interview them and get to know them They don't like buying four or five of these a year They like buying one and bragging about the fact that it lasts three years And historically these retailers don't want to hit that price point. They now know they can hit that price point if they have the right goods
spk02: Yeah, I think ruben the only thing I would add just You know as people are modeling is I we think ps will look a lot like the overall guide for the year probably without the price pressure
spk14: And then you know, it's been a little while since M&A has been part of the story. Can you kind of maybe remind us of Are there other areas like rope and chain that are left? You know from a bolt-on perspective in the hardware aisle or you know, are you starting to get to the point where you've got to go outside of hardware to kind of Grow the business
spk09: Yeah, no, I think that's a good point I would say there's probably an equal amount inside hardware. I would say that zip code like a cook And then obviously we we always are looking and thinking through plumbing and electrical which we would consider More than just around the corner that we consider that outside But we're we're looking at both and again nothing crazy But when you think about buying something at call it six times Pre-synergy and then you add what we're able to do with the business not just From a cost standpoint, but what we with our relationship and with our service capability The top line in that business is not going to look anything like it has historically
spk14: Okay, congrats on the strong close last to last year and good luck this year guys. Thanks.
spk23: Thanks
spk21: Thank you, please stand by for our next question Our next question comes from the line of brian mcmurray with canna court your line is open
spk10: Good morning guys. Thanks for taking the questions I'm pricing doug. I know you have foreshadowed this for some time But price minus one percent in 2024 is probably a little bit better than I would have expected as we've heard Some of your retail customers particularly the home centers haven't been shy to ask for price back What could make that minus one materially better or worse as the year goes on or is that a pretty good place to lock in?
spk09: Yeah, brian. I think it's a little so Here's the the way to think about it that one percent Is a little bigger than one percent as you think about the timing for those decreases And let's just use an example, let's say something goes into effect in june It may be impacting our 24 as such But it it then rolls into 25 in the first half So the one percent is accurate but it's a little bigger than that to answer your question as how things roll
spk02: The only thing I would add brian shraki is you know when you think about cost We've seen a nice benefit on containers and we've talked about that Virtually every other category that we look at there's inflation and I mean and and we're all seeing it. I mean labor Isn't getting cheaper once you get we get product into the united states. It's not getting cheaper And while we did see a bit last year and continue to see a bit of commodity benefit You know as we sit today, we've seen You know the cost of steel in taiwan and china go up pretty dramatically now that typically happens going into chinese new year We'll see what happens after chinese new year, but You know as we think about our business And think about the future there's there's a lot of prices going a lot of different direction that helps us To explain why our prices need to be what they need to be so we get a fair profit
spk11: That's fair,
spk10: um, I guess with home depot expecting You know another year of consumers taking on smaller projects deferring larger product Projects does this materially impact your ability to plan and guide the business?
spk09: I don't think so. I you know, I think we play In the pickup truck and the diy or the the thing we're looking for is the people to get off cruise ships and And out of concert halls Uh, so they get back into the backyard. I mean that probably the diy or the pickup truck pros About where they've been the diy Ryan is the one that's off and and we're hoping that we'll see that start to pick up And uh and normalize a little bit I I don't know how they're going to do what they want to do when you look at the price of Of airline tickets right now. So that's the part we'd like to see improve
spk10: Got it and i'm just going to squeeze in one last one a quick one after a really nice year of free cash flow generation Last year, how should investors think about sustainable cash flow generation the business given the last few years haven't been particularly normal
spk02: Yeah, I think I said my prepared remarks for i'm we you know, we think this is 130 to 140 million of free cash flow kind of normal benefit If you look over the last two years, you know, we did 172 last year We're guiding to about 110 this year You know if you average those out that's just north of that probably 140 142 million dollars And so that's what we think kind of the normal generation in the business should be we'll grow That cash flow over time as we grow evita You know the the one challenge that we will have as we think about the future a bit Is around taxes because we're not a full cash taxpayer in the u.s Today we will be eventually and then the flip side is we expect to continue to pay down debt and as we do we'll obviously bring The interest line down as well. So You know 130 to 140 feels like a good number. We've guided to 110 this year and and You know, obviously we would be disappointed if we don't do better than that as we go through the year
spk11: Got it. Thanks a lot guys. Best of luck Thanks, Brian. Thanks, Jen
spk21: Thank you Ladies and gentlemen that concludes the q a portion of today's call I would now like to turn the call back over to mr k here for closing remarks
spk09: Thank you Thanks everyone for joining us this morning Again, we're lucky to have the customers we do we got great vendor partners and and importantly most importantly this team at hillman continues to To do things for us each and every day particularly in the store for our customers that that allows us to to grow and allows us to continue to be find ways to to do more so We look forward to updating you again in the near future and thank you for joining us this morning
spk21: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect
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