Hillman Solutions Corp.

Good morning and welcome to the first quarter 2024 results presentation for Hillman Solutions Corp. My name is Tanya and I will be your conference call operator today. Before we begin, I would like to remind our listeners that today's presentation is being recorded in simultaneously webcast. The company's earning release presentation and 10Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's investor relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Kaler with Hillman. You may begin.

Thank you, Tanya. 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, John Michael Adonalthy, our Chief Operating Officer, and Rocky Kraft, our Chief Financial Officer. Before we begin today's call, I would like to remind our audience that certain statements made 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. In addition, on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, it's my pleasure to turn the call over to our Chairman, President, and CEO, Doug Cahill. Doug?

Thanks, Stretch. Good morning, everyone. I'll kick off today's call going through some of the highlights of our strong first quarter. during which we celebrated Hillman's 60th anniversary. After that, I will provide some additional color on what makes Hillman unique before I turn it over to our COO, John Michael Adanoffi, or JMA as we call him. JMA will provide an update on our operations, the Cook acquisition we closed in January, and the M&A landscape. Rocky will then finish up with our financial results for the quarter before we turn it back to the operator for the question and answer session. During the first quarter of 2024, growth in both our top and bottom line demonstrated the resilient and consistent nature of our business. Our results were in line with our expectations for the quarter, which has resulted in us reiterating our annual guidance across all three metrics, net sales, adjusted EBITDA, and free cash flow. Net sales in the first quarter of 2024 increased slightly to $350.3 million from the year-ago quarter, Driving these results are the contribution of new business wins. The Cook acquisition was closed in January of this year. These were partially offset by the overall market and a 40 basis point headwind from price. Adjusted EBITDA increased 30% to $52.3 million compared to $40.2 million during the first quarter of 2023. Our adjusted EBITDA margins for the quarter improved by 340 basis points to 14.9%. Similar to what we saw during the fourth quarter of 2023, in the first quarter of 2024, we had a relatively flat top line, but generated healthy bottom line expansion. Adjusted gross margins totaled 47.6%, marking a 610 basis point improvement over the 41.5% during the year-ago quarter. Free cash flow came in consistent with our expectations as we used $6.1 million during the quarter. This was driven by our inventory build for our spring and summer busy season, as well as a $5 million use of cash to fund working capital related to the Cook acquisition. Let me frame the macro before we jump into our top line results by segment. The macroeconomic landscape in the home improvement sector continues to show muted signs of improving. As we've all heard, inflation continues to hang around, which has prevented the Fed from cutting rates. The result is that mortgage rates have remained elevated. These higher rates are limiting existing home sales, which does impact our business, as homeowners are unwilling to trade out of a 3% mortgage rate into a 7% mortgage. While pent up demand for existing home sales continues to build, we agree with our customers a strong increase in existing home sales is likely to happen when we start to see rates move downward. In the meantime, the pickup truck pro continues to be busy, albeit with smaller projects, and we did see the DIYers start to get more active as the weather improved throughout the quarter. That said, the overall market and foot traffic at our retailers were both negative compared to last year, which fell in line with our expectations. Our retailers are cautiously optimistic for the second half of this year, and if they're right, we will be ready. But until then, we'll continue to manage our cost structure and business for this environment. On top line results, hardware and protective solutions, or HPS, led the way with a 2.4% increase in net sales. To break that down a bit, hardware, or HS, grew by 4.6%, while protective or PS sales were down 6.9%. For the first quarter, PS net sales were impacted by the timing of our promotional off-shelf activity, which will pick up during the second quarter of 2024. PS had a solid year in 2023, and we expect a healthy 2024 for them as well. Driving the increase in HS were new business wins in rope and chain accessories that we launched during the third quarter last year. We also benefited from nearly a full quarter worth of contribution from the Cook acquisition, which closed on January 11, 2024. Speaking of the Cook acquisition, which JMA will touch on more in a few minutes, our field sales and service team is really excited to be selling the new product line, which will drive additional growth in hardware. We're working on some meaningful opportunities in this new rope and chain category that we and our customers are thrilled about. It fits Hillman perfectly. It's an important product line for our customers, and it's a complex category to ship and keep organized at the shelf. During the quarter, net sales in our robotics and digital solutions, or RDS, were down 9.2% to $55 million. Lighter foot traffic and discretionary spending coupled with existing home sales near a 30-year low weighed in on RDS during the quarter. As the consumer remains under pressure from inflation, our RDS business has been impacted more than our other businesses. Despite the softness in RDS, we remain optimistic about our long-term high-margin growth opportunities, which I'll expand on in a moment. Gross margins and EBITDA margins remain healthy at 71.6% and 30.7% respectively. Last week, we appointed Scott Moore as our new divisional president of RDS. Scott was one of the early founding members of Minikey and joined Hillman following its 2018 acquisition. Most recently, Scott was our chief technology officer and will make a fantastic leader for RDS as we look to its next phase of growth with the rollout of Minikey 3.5. Scott and his team were instrumental in designing the software and technology that powers our Minikey platform and the new technology behind our Minikey 3.5 launch. The platform leverages artificial intelligence via machine learning to identify key types used using a state-of-the-art visual key identification system. Our machines are continuously gathering data in order to read, identify, and execute factory original quality cuts, which ultimately result in a great customer experience. Scott's leadership, discipline, and respect throughout the Hillman organization make him a great fit for this role. Scott takes the reins from Randy Fagundo, who will retire following a long and successful career in the kiosk industry. Randy's been critical to the success of Minikey and RDS since joining Hillman following the 2008 acquisition of Minikey. We are grateful for his meaningful contributions to Hillman. Randy, we're going to miss you, man. Best of luck in your retirement. As we think about RDS, we are working on a number of growth initiatives. Scott was critical in developing our K2 kiosk technology platform. K2 provides software updates event logging, inventory management, pricing and promotions, data analytics, and remote troubleshooting for the entire RDS kiosk fleet. Think of it as the eyes and ears inside the machine. We believe that our proprietary K2 technology can add tremendous value with our vending and kiosk companies, and we are currently in discussions to license that technology. Another growth opportunity I'm excited about involves our RDS field service team. Today, we have a dedicated group of mechanically skilled folks that service our fleet of kiosks, replenish inventories in the machine, and keep the uptime at 98% for our entire fleet of kiosks. Recently, two brand new customers selected Hillman to service their kiosks. For the first time, we will be servicing non-Hillman kiosks. These new accounts did their due diligence, driving along with our service reps, talking to our customers, and analyzing what our K2 technology and our Tempe, Arizona plant could do for their businesses. It's no surprise they picked Hillman. This is another example of Hillman solving complex needs for customers in the store. These accounts will begin to add additional profitability to RDS in the second half of 2024. Lastly, as you all know, the most exciting growth opportunity lies in front of us with Mini-Key 3.5. Currently, we have 101 machines in place in two test markets. These new kiosks offer home and office key duplication like our existing kiosks, but additionally, they have the ability to read and identify smart auto fobs, duplicate transponder and metal car keys, as well as RFID fobs. We are building these machines with updated capability for three of the top customers, and the initial feedback's been excellent. We expect to end 2024 with approximately 800 Minikey 3.5 machines this year in the top retailers in America. Minikey 3.5 will begin to contribute to our performance during the back half of 24 and have a more sizable impact on our 25 results. as the consumer, with support from our retailers, starts to experience what a new Minikey kiosk can do for them. Heading north of the border, our Canadian business net sales were up slightly compared to prior year quarter, but Team Canada had a great first quarter from a bottom line perspective, increasing its adjusted EBITDA by over 70% from the first quarter of 2023. Now I'd like to touch on the mode and the consistency that Hillman delivers. What differentiates Hillman allows us to produce healthy financial results and makes us an embedded partner for our retail customers is our ability to bring value and solve problems for our customers that others can't. Our competitive mode consists of three main pillars. First, we have 1,100 sales and service folks that are in the stores of our customers on a regular basis providing top-notch customer service at the shelf. We've been taking care of our customers for 60 years, and the Hilma service team has been winning at the shelf and adding value to our customers for the past 28 years. Second, we ship direct to store of our retail customers. Said differently, our products typically do not flow through our customers' distribution centers. Our customers love that because they do not have to clutter their DCs with thousands of SKUs, and they know Hillman can ship it directly to the store and service the shelf. We ship to over 46,000 locations across North America in 2023. And lastly, approximately 90% of our revenue comes from brands that we own and control, which allow us to anticipate and meet the evolving needs of our retail customers and our end users. Another key component of Hillman brings to the table is our long-term standing relationship with our customers. From store managers to merchants to VPs and up, we have been forging strategic partnerships with our customers that further strengthen our moat and have been working with our top five customers for over 25 years on average. As one of the largest providers of hardware products and solutions in North America, we offer 114,000 SKUs that serve the pickup truck pro and the DIYer. We provide a wide variety of hardware and related products across multiple product categories. Our products are used for repair, maintenance, and remodel, and these projects cannot be completed without Hillman Type products. It's great to have the critical products that make up just a fraction of the overall project cost. The predictable nature of our end markets, repair and maintenance projects in particular, drive consistent demand for our products in both up and down economic cycles. The perfect example of this is demonstrated by hardware solutions, which makes up 60% of our business. Over the past 20 years, 10 years, and five years, HS has grown at a compounded annual growth rate of 7%, 7.3%, and 8.2% respectively. Historically, we do not see the highs nor the lows of the market like many companies. During 22 and 23, the home improvement industry has been under pressure, yet Hillman continued to perform well like it has for the last 60 years. Despite a tough macro environment, we continue to win new business, deepen our partnerships with our customers, and strengthen our competitive moat. We feel very good about where we are with our customers right now and how Team Hillman is performing. We will continue to execute well during this cycle and control the controllables. That said, I know this team and our customers will be ready to ramp quickly when the market improves. With that, I'll turn it over to JMA to talk about freight costs, the integration of Cook Acquisition, and the M&A landscape. J.M.A.