Hillman Solutions Corp.

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

Thank you, Operator. Good morning, everyone, and thank you for joining us. I am Michael Kaler, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, our Chairman, President, and Chief Executive Officer, John Michael Adonofi, 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 today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities laws. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions, and other factors, many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements. Some of the other factors that could influence our results are contained in our periodic and annual reports filed with the NCC. For more information regarding these risks and uncertainties, please see slide two in our earnings call slide presentation, which is available on our website, ir.hillinggroup.com. In addition, on today's call, we will refer to certain on-gap 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, Doug will begin today's call by highlighting our healthy second quarter financial results, touching on our guidance, and providing some commentary on the macro environment before turning the call over to JMA, who will hit on the Hillman boat and our operations. Rocky will go through the financials and our updated guidance before turning the call back to Doug for commentary on the executive succession plan we have separately announced this morning and providing some closing comments before we open up the call to your questions. It's now my pleasure to turn the call over to our Chairman, President, and CEO, Doug Cahill. Doug?

Thanks, Michael. Good morning, everyone. During the second quarter of 2024, we saw our adjusted EBITDA results increase 18% over the year-ago quarter, which outperformed our expectations. Our team did a great job controlling our costs and managing our margins, which led to a strong bottom-line performance for the quarter. We're highly confident in our ability to continue to control costs, manage our margins, and manage our product mix for the remainder of the year. Because of this, we are increasing our four-year adjusted EBITDA guidance. Our new range of $240 to $250 million has a midpoint of $245 million, which reflects a 12% increase over our 2023 four-year results. We're thrilled with how Hillman team is effectively managing margins and operating efficiently this year, the entire organization is pitched in, trimming costs where they are able to and maximizing productivity above and beyond our expectations, all while fill rates remain strong at 95%. While we've done a good job controlling what we can control, the macro environment is soft, which has weighed in on our net sales expectations for the year because of this We're revising our four-year net sales to 1.44 to 1.48 billion with a midpoint of 1.46 billion, reflecting a 1% decrease over our 2023 net sales. So far this year, our results feel a lot like 2009. That year, our top line was down about 5% due to the macro environment. However, our bottom line benefited from deflation, tightening cost control, which resulted in 10% increase in EBITDA. In the years following, we saw a return to our historical mid-single-digit growth rates, and we believe we're in the midst of a very similar situation today as we are optimistic about our future top-line growth prospects. Hillman's a very good company when the economy is growing and markets are healthy, and our results have proven that Hillman is strong as things slow down. Back to the quarter, our 2024 free cash flow expectations remain unchanged after our solid year-to-date results on cash. The strength of our bottom line performance gives us the confidence to reiterate our free cash flow guidance of $100 to $120 million with a midpoint of $110 million. Rocky will provide more detail on our guide in just a few minutes. Another highlight for Hillman is that we ended the quarter with net debt and trailing 12-month adjusted EBITDA ratio of 2.9 times, and we will continue to delever throughout the year. Hillman has not been below three times leverage since 2009, and since the beginning of 2021, we have paid down over $900 million of debt. Our financial strength and operational efficiency allows us to play offense. Let me tell you what that looks like to us. We believe we can continue our strategy of executing accretive, low-risk tuck-in acquisitions in adjacent aisles. There are numerous opportunities out there, and we believe we will close on an acquisition that looks a lot like Cook by the end of the third quarter. We will not only have EBITDA growth due to the natural synergies, but also see additional top-line growth opportunities by leveraging the Hillman moat as we are well positioned with our in-store service team, direct store delivery model, and Hillman-owned brands. Outside of growing via M&A, we see sizable opportunities ahead. Our team of product managers and engineers have done a great job with innovation by developing patented and proprietary products. We believe this product innovation will lead to new business wins, in the next couple of years, which will allow us to grow in excess of our historical new business growth rate. We're in a great position to stay on offense, which will build the foundation for our continued future growth. Net sales in the second quarter of 2024 totaled $379.4 million, which was essentially flat from the year ago quarter. There are several drivers for our performance during the quarter. Number one, was the sales from Cook acquisition, which added 3 percentage points to the top line. Number two was new business wins, which added about 2% to the top line. There were offsets by two main factors. Number one was a 90-point basis headwind from price, which was in line with our expectations. And number two was the overall market volume, which excludes the impact of new business wins in M&A, Overall market volumes were down about 4% for the quarter. These were all in line with our expectations with the exception of market volume, which we are being impacted, obviously, by the macro. We have seen soft foot traffic, which we believe is driven by existing home sales in the U.S. It decreased from 6 million in 2021 to 4 million in 2023, the lowest level since 1995. This headwind has continued throughout 2024 with existing home sales at a similar level to 2023. Despite the soft macro, the new wins continue for Hillman, this time with our newly acquired rope and chain product line, Cook. We were successful in winning a $10 million piece of new business at one of our top five accounts. We'll begin to shift and recognize volume from this wind in the second half of the year and into 2025. This wins a great example of leveraging our deep relationships and in-source service capabilities to drive organic growth via M&A. For the quarter, adjusted EBITDA increased 18% to $68.4 million compared to $58 million during the second quarter of 2023. Our adjusted EBITDA margins improved to 18% Adjusted gross margins totaled 48.7%, marking a 570 basis point improvement over 43% during the year-ago quarter. For the fourth consecutive quarter, we generated healthy adjusted EBITDA growth and adjusted gross margin improvements. We have managed this by improving efficiencies, managing margins, and selling a better mix of products. During the quarter, we generated $42.5 million of free cash flow following a use of $6 million of cash last quarter. Our healthy free cash flow was driven by the cyclical nature of our business. We used cash to build inventory early in the year for our spring and summer busy season, which starts to turn to positive free cash flow in Q2 and continues for the remainder of the year. For our top line results, Hardware and protective solutions, or HPS, led the way with a 3.5% increase in net sales. To break that down a bit, hardware, or HS, grew by 2.7%, while protective, or PS, sales grew by 7.7%. Driving the increase in HS were new business wins, the contributions from Cook, partially offset by the market and price. PS had a nice quarter with new business wins and an active promotional off-shelf quarter driving its growth more than wholly offsetting a soft market. Net sales for robotics and digital solutions, or RDS, were down 8% versus the year-ago quarter. Adjusted gross margins and adjusted EBITDA margins remained healthy at 70.6% and 31.8% respectively. The trend of the past few quarters continues to impact RDS. Lighter foot traffic and discretionary spending, softness in existing home sales, and our machines being moved around inside stores at a top customer weight on RDS results. We remain optimistic about our long-term high margin growth opportunities in RDS, including the new Minikey 3.5 offering. Our RDS business is a very solid business, and we are the clear leader in market share in North America. We believe we'll see RDS back to positive growth in 2025, and there are two main reasons why we believe this. First, our new Minikey 3.5 machine opens up the auto key, auto fob, and endless aisle on our self-serve machines for the first time ever. And the weekly footsteps that our top three RDS retailers have are staggering, near 180 million footsteps per week in the US. We now have over 400 machines in the field with this new technology, and we plan to have three times our current number in stores by year end. Consumers love the ease of this new machine. Our retailers love the new features and revenue growth opportunities. And in July, we successfully introduced the endless aisle on our self-service Minikey 3.5 machines. The Endless Isle is really a great name because it's truly endless. It allows the consumer to duplicate virtually any key at the kiosk and have it shipped to your house. Let me give you a quick example of our Endless Isle. If you live in Arizona and want to copy your house key, but you want it on a Cincinnati Bengals key blank, you now can order the key through our kiosk. The machine scans your key. The data goes to our plant in Tempe, Arizona, where the Bengals key is held in inventory. The Bengals key is then cut and promptly mailed to you. And after a few business days, you can show off your new Bengals key to your friends. The second are the opportunities that our RDS service team can capitalize on. Redbox's recent liquidation provides a new business opportunity for Hillman's RDS service team. with two new accounts already inked. The accounts add both top and bottom line results similar to our RDS mix today, but with no capital required. Additionally, we have strengthened our team with the successful hiring of experienced people from Redbox to help us scale and grow this opportunity further. It's good for these folks and great for Hillman to add experienced team members with kiosk background on day one. We have a great game plan in place with our top three RDS customers. The feedback on our recent kiosk enhancements has been strong and the early incremental growth statistics are encouraging as well. For these reasons, we're confident that this high margin business will be back to growth in 2025. Turning to Canada, net sales in our Canadian business was down 10.1% compared to the prior year quarter. The market and the economy are softer than in the U.S., but our team's done a nice job with margins, mix, and operations during the quarter. We also had some new business wins during the quarter in Canada, which partially offset the market price and FX. While the macro environment isn't helping, we continue to win new business, strengthen our relationship with our customers, and reinforce our competitive moat, which JMA will touch on in a moment. We feel great about where we are with our customers right now and how Team Hillman is performing. We'll continue to execute well during this cycle. We've done an excellent job controlling what we can while managing our margin. That said, I know this team and our customers are ready to ramp when the market improves. It's fun to be on offense again. For the first half of the year, we generated $120.7 million of adjusted EBITDA, which is a record for the first half of a Hillman year, of any Hillman year. I love how Hillman's performing and where we're headed, and I'm excited to turn it over to JMA. He will take the reins for me in January as the sixth CEO in the 60-year history of Hillman. JMA.