Good day and thank you for joining us. Welcome to the Hillman 2021 Third Quarter Results Conference Call. I will now turn it over to Jennifer Hills, Vice President of Investor Relations. Please proceed.

Thank you, Abigail. Good morning. This is Jennifer Hills, Vice President of Investor Relations at Hillman. Thank you for joining us this morning to review and discuss Hillman's Third Quarter 2021 Earnings Results. Joining me today are Doug Cahill, Chairman, President and Chief Executive Officer, and Rocky Kraft, Chief Financial Officer. A copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at www.ir.HillmanGroup.com. Before we begin, we would like to caution you that certain statements made today may include forward-looking statements that are subject to the Safe Harbor provisions of the 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 which could cause actual results to differ materially from those projected in such statements. Some of those factors that could influence the company's results are contained in our periodic and annual reports filed with the Securities and Exchange Commission. Please see slide 2 in our earnings call deck for more information regarding these risks and uncertainties. We will begin the call with a business update from Doug followed by Rocky who will be providing a financial review of the quarter. Now let me turn the call over to Doug.

Thanks, Jennifer. Let me start by breaking down our business by segment and review performance during the third quarter and year-to-date. Our hardware solutions, robotics and digital solutions, and Canadian businesses all performed well in the quarter in spite of the historic supply chain challenges and a very strong third quarter last year. However, the unwinding of our COVID-related products and protective solutions negatively impacted our earnings. Our HS business net sales were down 6% during the third quarter versus 2020 and were up 2.6% year-to-date. The third quarter was a bit slower for HS business than we anticipated for two reasons. First, Americans were getting out of the house in July and August, and they did. Second, higher lumber prices slowed projects down during the quarter, but since mid-September lumber has become more affordable. Kids are back to school, retailer's point-of-sale volume has rebounded at the shelf, and people are back to their home projects. You will remember the very strong third quarter HS experienced last year, up 22.7% at the height of the stay-home and DIY projects timeframe. If you look at HS over a longer time frame you will see a healthy, growing business. On a two-year stack, it's up 59% in the third quarter versus 2019 and year-to-date; it's up 19.8% versus 2019. I'll talk much more about HS and hope you'll agree that this business is executing and well positioned. Our RDS business saw net sales up 14% in the third quarter versus 2020 and year-to-date, they're up 20.3%. So, continued great performance by the RDS team. Canada's third quarter was very similar to HS, comping a strong Q3 last year and net sales were up 15.6% year-to-date and a very healthy 17.1% ahead of 2019. Our PS, or Protective Solutions, net sales were down 26.6% in the quarter and were down 8.9% year-to-date, facing tough comparisons against COVID. However, PS's net sales were up 21% in the quarter versus 2019, and year-to-date; their top line was up 17.4% versus 2019. I will explain in detail what it took to unwind COVID for the PS business in just a few minutes. What we did during COVID was help our retailers satisfy the needs of their consumers and protect our employees, allowing them to continue operating during these unprecedented times. Winning five Vendor of the Year awards in 2020 was evidence that we were there for them. I'm probably going to spend less than one minute discussing supply chain and inflation issues because, first of all, you pay us to figure this stuff out, and second, in a strange way, all this craziness is enabling us to separate ourselves from the performance of our competitors. So, it will end up being a good thing for Hillman, and here's why. All retailers have three big concerns right now: number one, labor; two, shipping issues and cost; and three, share loss to their competitors due to stockouts. Plain and simple, these are the top three, and we help them in all three, I think, better than anybody. We have 1,100 people in the stores every day; that's our in-store labor, so the retailer doesn't have to worry about it. We ship to over 42,000 locations, with 80% of our hardware products shipped directly to the stores, bypassing the retailer's distribution centers. That's us solving the shipping and distribution center problem so the retailer doesn't have to. Their DCs are short-staffed and stuffed right now with items like lawnmowers that just arrived last month. Bad timing? Yes, but they took them to ensure they have them next spring. And third, if you're a retailer of Hillman, you're not losing share due to stockouts; chances are you're gaining share. Our year-to-date fill rate for HS is 91%, and more importantly, Hillman's in-stock service level at the shelves for our top five customers reported from their systems is 95% over the past 30 days, which has been the toughest 30 days for fill rates probably ever. So how are we doing that? First, we have invested in additional inventory and working capital, which you have to do when your lead times moved from historically 120 days to over 200 days. Without that investment our fill rates would be closer to the industry average of 70%. As a result, we're paying for lots of extra inventory as well as outside third-party warehouse space to store this additional inventory needed to service customers in the current lead-time world. Secondly, our 1,100 folks in the store and our direct-to-store shipping model give us the fastest port-to-shelf hardware model in North America. Finally, our 57 years of experience and long-term supplier relationships have enabled us to separate Hillman from our competitors during this global supply chain mess we're all experiencing. Of course, there is a cost to maintaining these service levels, and you see it on our balance sheet, but I believe it's more than worth it, as our differentiated model and our ability to outperform the competition during this period of supply chain disruptions has and will continue to lead to additional market share gains and outsized growth for our hardware solutions business. I can't wait to tell you about current wins in a minute, but before I do, let me address the historic inflation and supply chain issues we're facing. I've seen many things during my career, but I've never seen anything like what we're currently experiencing with supply chain disruptions and inflation, and I've never seen it as a top story in all outlets. Pre-COVID it took Hillman on average 120 days from the time we would order product from Asia until it would arrive on the West Coast. Today, it is in excess of 200 days. We are experiencing inflation and commodity cost increases, inbound and outbound freight as well as labor. To put it in perspective, a 20-foot container that averaged us $1,500 in 2019 and $2,000 in 2020 has averaged $5,600 since July in the US and much higher in Canada. Obviously, spot prices are well above these, but the increases are really staggering. The ships can't get into the ports, and when our container does get on land, we can't pick them up as quickly as we would like due to the congestion and appointment delays. To add insult to injury, after four days they are charging us $250 per container per day in demurrage on our product; many times they won't let us pick up, and we hear it's going higher effective November 15 of this year. Okay, let me focus on what we're doing about it. Through all the challenges, I'm so proud of our 1,100 field service employees who work closely with our customers helping to solve logistics and labor issues in the store and at the shelf. These unprecedented cost increases are being passed on to our retail customers and end consumers, and thankfully our product categories are not seasonal nor are they overly price-sensitive, and our customers are experiencing these types of increases across the board. Our issue is timing. As we discussed in our last earnings call, we successfully implemented our first price increase of roughly 7% to 8% effective in June. Working together with our retail partners, we've been successful across the board with our second increase of roughly the same percentage, 7% to 8% that will go into effect in October and November of this year. That puts us up around 15% after the first two increases, and when we complete our planned third increase, which should go into effect January or February 2022, we will be above a 20% price increase when you add the three together, and that's what we think we will need based on what we know today to cover our cost increases. Let me touch on a few highlights and new business wins. During the third quarter, we were busy continuing to execute on recent business wins. They are great examples of our competitive mode and the secret sauce of Hillman. In late July we finished the 150 store reset of 32 linear feet of shelf space at a major retailer for construction fasteners at 97% on time and complete. In September, we began to implement our latest win in builders' hardware; what a beautiful set. It's four 8-foot days in over 1500 stores, and we will be done next Wednesday. We also sent our hurricane recovery teams, which is a subset of our 1100 team, to the most impacted areas and helped our retail partners get stores and hardware aisles back up and running in record time. We also built out one of our retail partners in the New Orleans area by providing cap nails that our competitor was unable to service for one of the top five retailers in the area after the hurricane. Cap nails are the number one needed fasteners to keep tarps on and the elements out. We shipped and they sold 18 million cap nails in 40 days. We were there for them, and last night, we got an order for 6 million more cap nails; the great thing about our network is they will ship today. The next one may be my favorite win, and it's one that I've personally been working on with our almost 40-year veteran sales leader for over five years, so it's near and dear to my heart. We've won the fastener business at one of our top five retailers for the first time ever. This is an exciting win that will change the hardware category for this important retailer with a completely new set. We, along with the retailer, will recreate the fastener aisle in every store during the last week of 2022. One last tidbit about this story: we created a 20-foot modular with over 400 new SKUs and all new packaging, but we're so worried our shipping carrier would miss the ship, when we actually loaded suburban in Cincinnati, and our folks drove 11 hours to make sure it made it to the corporate layout room for a 10:00 AM Senior Management walkthrough. They unanimously approved this set and awarded us the business. The quote from senior management was, 'This looks nothing like our current aisle and it's about time we give our consumers what they want in this category.' Stay tuned because I think it's times like these when my five years of work are paying off for Hillman. This win will generate $17 million in sales for 2022, and we're really looking forward to seeing what we can do in 2023 and beyond with our people in the store managing this new fastener setup. Our Robotics & Digital Solutions business, where we're the leader in key duplication, padding, engraving, and knife sharpening, is having a great year. Remember, we've designed, developed, and manufactured now 35,000 machines located in retail stores throughout North America and we continue to own and service every machine out there. These robotic and digital machines help drive in-store traffic, provide great margins, and are destination purchase items for our retailers. The RDS business grew net sales 14% in Q3 over the prior year, and our EBITDA grew 30.5%. Year-to-date their net sales are up 20.3% with EBITDA growth of 34.7% over 2020. We have significant runway to continue to roll out RFID fobs, smart auto fobs, and knife sharpening machines and further expand our product offering to take both share organically as well as through M&A. This is a great business for Hillman and our retailers, and we're really fired up about what's ahead. Now let's talk about Protective Solutions. Let's discuss the PS business pre- and post-COVID and let me explain why we did what we did. Pre-COVID, disposable gloves were not a core retail category for PS, but a part of our offering to several of our major customers, and in 2019 it was approximately 10% of PS's sales and of those, 80% of the volume were nitrile gloves. We sold every disposable glove we had when COVID hit, and our customers worked closely with our team to secure more as soon as possible. It really went from a buying frenzy to a global panic. First, globally both the medical community and governments consumed the nitrile gloves supply, driving costs up 3X in a matter of weeks. This extended lead times from 90 days to 250 days at its peak. Second, in parallel to the explosive demand growth, overseas manufacturers were shut down or running at a fraction of their capacity due to increases in COVID cases. Third, retailers were struggling to get enough to meet the needs of their store associates on a daily basis to keep their stores open and operating. Hillman and our retail partners didn't want to take nitrile gloves from the medical community, so clear thin vinyl gloves became the only option and quickly sold out. Prices, as you can imagine, skyrocketed. Delivery times were consistently pushed, and when the music stopped on March 1, 2021, we had more disposable gloves, not to mention masks, sprays, and wipes than we needed due to delayed shipments of products in Asia, with some still on the water heading our way. Given our customer support during COVID and the strength of our relationships, our retailers have partnered with us to alleviate any inventory issues on masks, sprays, and wipes, which were all three new products for Hillman. We synced up with our customers and successfully sold excess inventory in these three product categories to our customers who have and will donate them to various charities. We will get our money back on these three by the end of the year and are happy with how our retail partners supported us throughout this period. On disposable gloves, we hope to sell them over time since they have a very long shelf life, but the current global supply glut has caused the price of vinyl gloves to drop from $6 for a 100-count box to below $2 per 100-count box with recent sales being quoted as low as $0.30 per 100-count box. Fortunately, the costs and retail prices for nitrile gloves have remained strong throughout. Even though this product has a long shelf life and our plan was to sell these over time, there is a surplus of inventory at both retail and wholesale, the cost of outside warehouse storage continues to rise, and our landed average cost is well above the market. Therefore, we were right to inventory out and donate the product. The outcome on disposable gloves did not work out as we had planned during these unprecedented times; we are disappointed with the write-off and the negative impact on our 2021 sales and profit performance. Different day, same old strategy is not our go-forward game plan on disposable gloves. With the overseas capacity that's been added and the ongoing supply chain issues out there, we've been working with two of our major customers and have been successful in securing the first Made in the USA nitrile disposable glove exclusive supply agreement for retail. The Made in the USA factory will ship the first products towards the end of the year, and they are adding additional capacity scheduled to come online in mid-2022. Our retail partners are excited about the Made in the USA offering, as well as the ability to source nitrile gloves from the United States for the first time. This will reduce lead times from over 200 days out of Asia to 30 days out of the United States. This gives us true differentiation and good margins and helps our customers with Made in the USA, on-trend goods, not to mention bypassing all the container and port craziness we're seeing every day. Our attempt to take care of our customers and the American consumers in need during COVID in the PS side just had a negative impact on our entire operation and our cost structure. We were forced to rent three outside warehouses to handle the volume and unprecedented, unpredictable arrival times from overseas. Our single warehouse for PS North of Atlanta just got slammed as we tried to deal with this unprecedented volume and complexity. The base business for Protective Solutions, which includes the number one selling work glove brand, Firm Grip, continues to perform well with a three-year top line CAGR of 7%. Our bottom line has suffered and impacted the profitability of the entire business due to COVID turmoil and inefficiencies in PS mentioned above. Our plan forward in PS is to continue to drive growth in our core product categories with continued innovation, new business wins, and new accounts, moving into a new distribution center just after mid-year 2022 and improve execution by consolidating several supply chain and other business functions with our US hardware solutions group. We believe these actions, along with the shift in the management team, will allow this business to grow top line in the mid-single digits and bottom line 10% organically, matching the rest of the business going forward. To summarize, our hardware, RDS, and Canadian businesses continue to perform while managing crazy complexity and incurring much of our costs. We've made the working capital commitments to continue to service our customers at the same high level we always have and will use this opportunity to strengthen our relationship and take share from our competitors. In 57 years, Hillman has never had to raise prices three times in a 12-month period, so unprecedented is not an understatement. One quick comment on leverage in M&A before I turn it over to Rocky. Leverage at the end of the quarter was 4.3. This was much higher than Rocky and I had planned for all the reasons I previously discussed. We remain committed to over time reducing our leverage to below 3X. On the M&A front, the pipeline still remains robust, and we're seeing more active maneuvers looking to sell with all the press surrounding changes in tax laws. We continue to see an opportunity for two to three bolt-on acquisitions a year. With that, Rocky, why don't you take it over and provide more details on the quarter and outlook.

Thanks, Doug. On a GAAP basis, our net sales for the third quarter of 2021 were $364.5 million, a decrease of $34.2 million or 8.6% versus the prior year. As we discussed on prior calls, the third quarter of 2021 was our toughest comparison with the prior year, as our retailers bought any and all COVID-related personal protective products we could ship them in Q3 2020. Our hardware businesses in the US and Canada experienced significant growth as consumers repurposed their homes for COVID quarantine. The much faster than expected reduction in sales of COVID-related items drove an approximately $26 million reduction in our PS business, a decrease of 26.6%, and an even bigger reduction to profitability due to the profit on PPE products in the prior year. In addition to having an extremely difficult comp, the reduction in foot traffic in our retailers in July and August led to a year-over-year sales decline of $12.9 million or 6.4%. The first round of pricing increases and a rebound in foot traffic and demand in September were not enough to offset the headwinds early in the quarter. Similar to US hardware, our Canadian business was up against extremely difficult comps and declined by $3.7 million or 9.3%. Our RDS business was the star of the quarter as we continue to see a rebound in this business post-COVID. RDS revenue was up $8.3 million or 14%. Year-to-date revenues have grown 3.9% to nearly $1.1 billion with hardware sales up 2.6%, RDS up 20.3%, and Canada up 15.6%, partially offset by the 8.9% decline in PS. With easier comparisons in the fourth quarter and an improvement in traffic at retail hardware solutions should finish the year strong, and we should achieve our long-term mid-single-digit revenue growth target for the year. In the third quarter, on an unadjusted basis, gross profit declined by $43.7 million, including a $32 million write-off of PPE inventory that has a market value well below our cost as demand for the product declined and the market became flooded with product. Excluding the inventory write-down, our gross profit decreased by $11.7 million over the prior year quarter to $159.5 million, driven by lower net revenues. Gross margin rate excluding the inventory write-down expanded 90 basis points to 43.8% from 42.9% as the growth and margin expansion in our higher-margin RDS categories, coupled with moderate margin expansion in HS, was partially offset by rate pressure in Protective Solutions from the loss of high-margin PPE sales. Year-to-date on an unadjusted basis, gross profit decreased $23.7 million to $427 million. Excluding the inventory write-down, gross profit was $459.2 million, an increase of $8.3 million. Gross margin excluding the inventory write-down contracted 80 basis points to 42.5% from 43.3% due to the significant decline in PS margins only being partially offset by margin expansion in RDS. Year-to-date, margins in HS were essentially flat with the prior year. SG&A expense on a GAAP basis in the third quarter increased slightly to $110 million from $107 million, and as a percentage of sales was 30.3% versus 26.9% in the prior year. Excluding certain restructuring and other costs, SG&A increased 1.9% to $103 million and as a percentage of sales increased to 28.3% from 25.3%. The primary drivers of the increase were higher outbound freight costs and reduced leverage of our selling costs, which include our field service teams in our customer stores, the revenue-sharing arrangements we have with our customers in RDS, and an increase in travel compared to 2020 when most of our teams were grounded due to COVID. Year-to-date, SG&A, excluding certain restructuring and other costs, increased by 7.3% to $296 million and as a percentage of sales increased to 27.3% from 26.5%. Higher selling expenses, inflation, and warehouse and delivery costs were the primary drivers of the increase. Excluding the inventory write-down, certain restructuring and other costs, adjusted EBITDA was $56.5 million in the third quarter, a 24.6% decrease from $75 million in the prior year. PS accounted for this reduction, with minor decreases in HS and Canada wholly offset by an increase in RDS. Year-to-date adjusted EBITDA decreased 5% to $168.8 million from $178.1 million. Please refer to our 10-Q and investor deck for reconciliations of net income to adjusted EBITDA. Now let me turn to cash flow and the balance sheet. Year-to-date in 2021, operating activities used $105 million of cash, as compared to a $68 million source of cash in the prior year. An increase in inventory to maintain fill rates as the supply chain is stretched from approximately 100 days to over 200, inflation, and inventory investments to support new business wins and anticipated sales growth have driven our use of operating cash flow in 2021. Year-to-date net cash used for investing activities was $76 million as compared to $30 million in the prior year, and included the acquisition of OZCO Building Products in the second quarter. Capital expenditures were $37 million and approximately $8 million higher year-over-year as we continued to invest in robotics and digital solutions equipment and merchandising racks, important parts of our high-return CapEx initiatives. As a reminder, we reduced our growth CapEx quite significantly for a period of time in 2020 because of the uncertainty caused by COVID. Maintenance CapEx remained near 1% of sales as expected. Post the transaction with Landcadia in mid-July, we have recapitalized our balance sheet, and at the end of the third quarter of 2021, we had $925 million of total debt outstanding, down from $1.7 billion of total debt outstanding at the end of the second quarter. At the end of the quarter, we had approximately $150 million of available borrowing under our revolving credit facility. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 4.3 times, down from 7.1 times at the end of the second quarter. COVID had both positive and negative impacts on our business over the past seven quarters. It has often been difficult to separate COVID impact from base business trends. To cut through this COVID noise, we, like many of our peers and retail customers, believe that comparisons of 2021 to the pre-COVID 2019 data is helpful. It also better reflects the strength in our underlying business. We have provided a two-year growth comparison of our results for the third quarter in our slide presentation, which shows that overall sales in the third quarter increased 14.9% from 2019. We also showed strong revenue growth across each of our segments, with Hardware and Protective Solutions up 17.3%, robotics and digital solutions up 9.2%, and Canada up 9.2%. Similarly, we experienced growth of 11.2% in adjusted EBITDA. At the segment level, adjusted EBITDA from 2019 grew 2.6% in hardware and protective, 18.3% in robotics and digital solutions, and over 115% in Canada. Importantly, adjusted EBITDA in our hardware business is up high teens compared to 2019. As Doug highlighted in his opening remarks, cost pressures have not abated and have intensified over the past quarter. Working with our retail customers, we increased prices in the high single digits in the second quarter based on what we saw in April. As we discussed in our second-quarter call, the cost pressures continued, so we have gone back and are currently implementing another round of increases in the fourth quarter. Over the past several months, we have seen a significant increase in both inbound and outbound freight. We are now paying approximately three times what we paid for a year ago for a container, but still well below spot prices. Additionally, due to the backlog at the ports, we have incurred unplanned third-party warehouse storage costs when we haven't been able to pick up products and move them out of the port, which have added an additional cost pressure to the business. We anticipate these costs will continue into 2022. Commodity costs have also risen and will have an incremental expense in 2021, but due to the lead time and supply chain, most of the higher commodity costs will hit us in 2022. We plan to take additional pricing action in early 2022 as Doug discussed earlier. As we think about the cost pressure across our businesses, we now expect 2021 adjusted EBITDA to be in the range of $205 million to $210 million. About 40% of the step-down is due to the third quarter results, and the remainder is split between higher freight, third-party warehouse costs, and other supply chain-related costs across all of our businesses. In addition, we now anticipate that we will use approximately $100 million of working capital in 2021 to maintain our fill rates at industry-leading levels of above 90%. We plan to reduce leverage during Q4, but at a lower level than previously expected and anticipate that we will end the year with only a modest reduction in leverage from current levels. As Doug stated earlier, we are committed to reducing leverage below 3 times, but given the inventory and supply chain challenges in 2021, it will take us a little longer than originally planned to get there. As we think about 2022, it is very difficult to predict when we will see a return to normalcy around commodity costs, both inbound and outbound freight, and the supply chain challenges we are currently experiencing, along with all industries. As such, we won't be providing formal guidance for 2022 in this call. That said, we are very comfortable that our revenue for 2022 will be consistent with our 6% organic growth algorithm and exceed $1.5 billion, as we have visibility into our markets, new business wins, and pricing actions to date. Similar to revenue, we believe our growth algorithm is intact, both in the near and longer term for EBITDA, so we expect that we will grow EBITDA at our organic target of 10%, although off a revised 2021 base. Longer term, we continue to believe that our unique model will allow us to organically grow our revenue by 6% and our EBITDA by 10%, consistent with our history, and the M&A pipeline should allow us to expand those numbers to 10% revenue and 15% EBITDA. With that, let me turn the call back over to Doug.

Thanks, Rocky. Let me just wrap up. While near term we're definitely feeling the sales and profit impact of the sudden falloff in demand for COVID-related PPE, together with the historical supply chain cost pressures. Our confidence in the long term is strong; we have a really good company. Thanks to our 3,800 associates. In our category, you don't win or lose business just on price. Fill rates are critically important to all retailers, especially now that it is the quickest way for a retailer to lose market share. Our 1,100 folks in the field, combined with our direct-to-store delivery model and our investment in additional inventory enable us to keep industry-leading fill rates above 90. This puts us in a great position to gain additional shelf space with our retailers and achieve our long-term targets of 6% organic revenue growth and 10% EBITDA. A lot is going on with that; let's turn to the operator and open it up for questions.

And our first question comes from Reuben Garner with Benchmark Company.

Thank you. Good morning, everybody. First off, Doug, congrats on your Vanderbilt Party Win in the World Series last night. Jumping into it here, I just want to get clarity on the 2022 outlook; apologies, I got kicked off the call a couple of technical difficulties. If you spoke to this, I'm sorry, but you pulled the outlook. I think I heard Rocky say 10% growth off the lower base; that's your standard algorithm. Is there any reason why we wouldn't expect to grow substantially faster than your typical 10% next year, or is the reason you pulled it just because it's too early? What are the factors that you're looking at that led you to make those comments for next year?

Yes. So Reuben, this is Rocky. I mean, as we think about next year as we sit today, there's obviously a lot of uncertainty with the ongoing issues at the ports. I mean, on November 15 there are even expectations that costs around things like demurrage and detention could be increasing significantly. So, we're committed to that 10% growth algorithm and feel really good about doing that next year, but at this point in time, we just don't believe it's prudent to go out with a number higher than that, especially when you think about a business like hardware that is a normal steady growth type business on an annual basis. So, we feel good about the 10%. Our going-forward plan will be in our year-end call; we will give more specific guidance with a range, but just at this point in time, saying anything other than we are going to grow at our standard algorithm we think wouldn't be prudent.

Yes, Reuben, the only other thing I’d add is, September, October, November, and December we will still see these demurrage and detention charges, and while those won't be with us forever, we're just not sure when they go away, and we just need to allow ourselves some room here to see how this plays out. Again, on November 15 the extra $100 is going up each day. Nobody's ever heard anything like that. So, that's why we're trying to proceed cautiously as we sit today.

Understood. I have a quick follow-up regarding the new pricing actions. I believe you're transitioning to a 90-day model to assess costs, which would take into account some of those pressures, right? However, are these increases part of a negotiation, or are they simply adjustments in the costs that you're informing your customers they need to cover?

Yes. So, it's all part of it. If we assume Reuben that we get that third price increase when I think, and let's say it's effective February 1, 2022, that's essentially three price increases over 20% in about 290 days. So, that's pretty significant. The way that breaks down is we need about 25 or so days to get all the math together because we have to go by product, by SKU, by steel, by freight, by demurrage, all of that, and while it isn't hard to do, it takes some time. So it's averaging just around 95 days right now for the rollout of these three increases.

Got it. And then on the Protective Solutions impact this year, and again if you said this, I apologize, but can you just talk to us about what the one-time hit was this year from the actions you've had to take, altogether the math, gloves, everything? What's the drag that had on the business this year that we won't see going forward?

Yes. So as you think about the business, Reuben, obviously we had the charge in the period, but even when you look at the actual results, our PS business in the third quarter was down, and year-to-date down from an EBITDA perspective, it was about cut in half. So we're going to baseline off that. We do believe the core business is solid. If you look over the last three years, the organic growth in the core is about 7%, and so again we'll baseline off kind of that new EBITDA number, and then we expect that business to grow with our algorithm at mid-single digit top line and kind of call it 10% bottom line into 2022 and into the future.

Our next question comes from the line of Hamzah Mazari with Jefferies.

Hey, good morning. It's actually Ryan Gunning filling in for Hamzah. On my first question can you guys just talk about how we should think about the penetration opportunity in robotics, maybe where you're at today and what the addressable market looks like, and as part of that what the competitive dynamics look like?

Sure. Yes, Ryan, I think if you break it down, first of all, Minute Key continues to roll out, but we probably have another thousand machines, Rocky would be my guess.

Yes.

The reason I say that is this whole labor situation is making Minute Key even more popular and in more demand because of the store labor shortage. So let's just say a thousand machines unless the labor situation continues to get worse. That's first. On knife sharpening, we will end up with about 500 machines at the end of the year; we have orders for 3,000. That's another opportunity. We haven't gone day by day, but obviously, the chip shortages are limiting that. We did get 500 more chips last night. So I was happy about that. I don't know if we bought them on eBay or what, but we got them, and so we'll be rolling those out, and I assume that the chip shortage will work its way through. On Instafob, we're rolling those machines out. On the smart auto fob or auto key, we've had great success there in-store. We've just started our second account there, and we're shipping the fobs. Then we're working on the future where you can buy that fob you're used to paying for at Minute Key kiosks, and then our locksmith community will program it for you at your home or office or wherever you like. So, I think there are a lot of good things that can happen there. On Pet, we're seeing great progress there on the padding and engraving front. We've got a new machine that is looking to do more than padding and engraving, such as luggage tags in pharmacies. There's a huge opportunity for us with the consumers we have and the great customers we have like Walmart, PetSmart, Pep Boys, and Pet Supplies Plus to take this AirTag from Apple, embed it into our Pet Tag, engrave the number and name, and literally, like you can find your phone, I think in the fairly near future you'll be able to find your pet just like that. So, lots of things going on from a competitive set. We're not seeing a whole lot. We do 132 million keys a year that we duplicated, and our closest competitor is under 10 million, and on pet tags, we're going to do about 11.1 million this year with our close competitor doing about 1.3 million. So, not a whole lot there, but a lot going on with our customers and our team is doing a great job.

Great, that's super helpful. And then for my follow-up, I know you talked about labor in your prepared remarks, but could you maybe walk us through how to think about SG&A leverage going forward and just hiring plans given where labor issues are?

Yes. So as you think about, we're spending a lot of time around how we make sure that we keep the 1,100 folks motivated in the field. We'll think about how we compensate them and do some creative things so when they perform well they do better over time. The interesting thing is we're not going to take folks out of the stores; in fact, just given the competitive advantage, we would see, if anything, we would increase the number of associates we have in the stores, and we've got our retailers asking for that. And so as we thought about the quarter, one of the areas that we don't deleverage well is there, and we're not ever going to because we're going to make sure we take care of our customers. The other big item in the quarter really was around RDS as we see that outsized growth in RDS and we pay a revenue share anywhere between 25% and 30% to the retailers on our kiosks. Obviously, you get some outsized growth in SG&A when the RDS business grows. Overall in the EBITDA line, we love the leverage; it's north of 30% from an EBITDA rate. So again, over time, I think you're going to see inflation in the wages that we're paying to our employees, not only in the field, but also in our DCs, but that's part of our price algorithm that will include as we start to think about price over time.

Our next question comes from the line of David Manthey with Baird.

Thank you and good morning. Yes, good morning. First off, on the 7% to 8% price increase in the fourth quarter. When did you say that went into effect specifically?

So that second 7% to 8% increase is effective in the last month and this month; everything will be implemented by the end of November. So really the past two months, this month and last.

Okay. When you're referring to that 7% to 8% number, is that just on the hardware solutions or is that across the board of the company? I'm trying to understand what that number means relative to the numbers you report.

Yes. When I talk about the 7.5% plus 7.5% and eventually getting over 20%, that's in the tank for the hardware business. We're also raising prices on things like keys and everyday work gloves, but not as significantly. If you think about it, when you've got a 3-inch bolt, there aren't a lot of other costs from steel and freight. That is what I referred to when I said 7.5%, 7.5%, and eventually getting over 20%. Other businesses are rising, but not at that level.

Okay. As it relates to the price increases, I know some of this is real-time, but the ones that you have implemented and are implementing this year, is that to catch up on where inventories are now? And then the one you're expecting in February of next year, is that trying to get ahead of inflationary pressures that you see in your supply chain pipeline? I'm trying to understand your current level of inventory versus these price increases and essentially does the fourth quarter look incrementally better because you sort of have a glide path from your prior price increases plus a new one, which is catching up to the current level of inventory, which in itself is moving higher?

Yes, let me take the first part because it's a good question and complicated. Here's how we do it with retailers: we sit down and justify what we call entitlement. I don't like the word, but that's the term they use to describe everything that's happening or that has happened to justify the increase. Again, we've been really happy with what we've been able to do. So, what's happened, not what we think is going to happen, and a lot more is projected in the second half of the year with these additional surcharges on the front end. You only get ten days to bring the container back, or your detention starts accruing. That's a new element that's part of this model, and Rocky, maybe you can talk about the way the inventory flows because I wish we were ahead of it, but we're not.

Yes, so importantly, given the nature of our business, we carry about six months of inventory, and we've talked about lead times going up, which means we're carrying a little more inventory today than a year ago to deal with our fill rates. As I mentioned, David, a lot of that inflation is still hung up in inventory and will come through in 2022. We're starting to see some higher-cost containers in inventory hit in the fourth quarter, and that does put pressure on the fourth quarter. We do believe once we get that third price increase in place, we will have kind of fixed that price-cost differential and will be whole on a dollar-for-dollar basis, but again that, as Doug just said, we're talking to our retailers today about the justification for these costs. So it's as of today; if costs continue to go up, we'll be chasing it a bit.

Our next question comes from the line of Ryan Merkel with William Blair.

Hey guys, good morning. So yes, Doug, a lot going on here. I was hoping we could focus on the change in guidance. You were at $240 million for EBITDA, now we're lower by $30-$35 million. Can you break out the impact of slower hardware, PPE fall-off, and supply chain so we can bucket it?

Yes, here’s how I would characterize it at a high level, Ryan. As you think about what we said in the second quarter call, there was, call it $20 million to $25 million of pressure in our PS business around COVID going away sooner than expected along with cost pressure in that business. That was offset by our RDS business performing better than expected, so call that a plus $5 to $10 million relative to what we had expected for the year in that business. What we've seen now coming into the third quarter is I would put it into kind of two buckets: the first would be around our HS business, and as you think about that July-August time frame, that probably cost us a little over $5 million in profitability with those sales going away. We've seen a return of the foot traffic in POS in September and into the fourth quarter, but it isn’t like that return is catching up to those lost sales in July and August; it's really just back to what our expectations were. So you got to call it just over $5 million there. Then I think there is another $10 to $15 million across all of the businesses, both PS, HS, and Canada, primarily a little bit in RDS around all of the craziness that's going on in the fourth quarter from a cost perspective; both supply chain, freight costs, and some of the outside storage that we talked about in the prepared remarks. That is how we would bucket it, and we feel like we've captured pretty much all of the costs as we go into the fourth quarter. Obviously disappointed, but it's a lot of uncontrolled costs and a lot of craziness going on.

Got it. That's helpful. And then just back on hardware and what you saw this summer and the pickup; anyway you can sort of give us a sense of the cadence for sales? I mean, could you go significantly negative, and now we're slightly positive, or what's the trend line look like?

Yes. If you think about HS, our hardware, Ryan, we were up 13% in the first quarter, down 5% in the second quarter off of a strong last year. Our retailers, as we said, continued to say, guys, don't take your foot off the gas. We thought we'd see about a 5% decline in the third quarter, and it was down about 5%. That gives you a sense for the difference. As one retailer said, we should have been selling plane tickets and parking tickets at the airport in July and August because they really did slow down, and I think it was a bit of lumber for sure, but I think people just said forget it; we're getting out of the house. So, footsteps did decline, but we thought HS would be up about 5% over a 22.7% increase last year, and it was down about 5% versus expectations. Rough math, Rocky?

No, that's right. And Ryan, the only thing that I would point to when you think about taking all the COVID noise out is a 16% increase in the quarter versus 19% and when you look year-to-date, up almost 19% over 2019. So in line or quite frankly slightly above how we think about HS being in the kind of mid-single-digit top line growth on an annual basis.

Got it. Okay, that's helpful. And then one more if I could just ask about the outlook for price cost in 2022. Right, based on what you know today. I know things can move around. But is the goal to be neutral, or should we think about you lagging a little bit in the first half and maybe recovering in the second half?

I would say recovering in the second half. The first half is hard to predict; I would say flat, but honestly, it could get a little worse. With everything going on right now, with the November 15 situation regarding the $100 per day after day 10, and when you have seasonal goods and you miss the season, you're just going to say, 'Take it.' I'm genuinely worried that the intent behind this latest move could actually slow things down further. So I would say flat net in the first half, and we should see some improvement in the second half. Honestly, we are definitely going to have inventory adjustments back to normality when we see the ability to do that. However, Rocky and I are not planning on that in the first half just because when you're at 70, you can't catch up right now. When you're at 90 and 95 at the shelf, you just have to keep your foot on the gas, and we've got the foot on the gas right now for that one.

Our next question comes from the line of Brendan Popson with CJS Securities.

Hi, good morning. I wanted to ask for clarification on pricing. You mentioned a 20% increase following the third price hike, and you also indicated that you've implemented a 7.5% increase twice now. Looking at the third quarter results, what was the year-over-year pricing impact? Was it just that initial 7.5%? I'm trying to understand the balance between pricing and volume.

Yes. That first 7.5% went into effect at the end of June, so that would be what we really saw in the third quarter. The second one will be all in basically in October and November. So yes, that's exactly right.

Okay, great. Thank you. Diving into that retailer win that you had, you mentioned $17 million for next year; is that a normalized full year, or do you think that can go if it performs like you think it can?

Yes. So think about it; the shelf is going to be empty, and the great news is that they're going to pay for the old stuff. So we're really super excited; we don't want to pay for slotting for this one. So we'll fill the shelf in the pipeline and then sell for half the year. You'll see that grow, but not double due to the load-in. What I'm most excited about is we've never had this account, and I thought it was a good sale per se; it took us five years to get this one with our 40-year veteran. So we must not be as good as we think, but honestly, it's going to be really interesting when their consumers see that they are actually in the fastener business; what was a $21 million to $22 million piece of business annually could be a lot better. That's what I'm most excited about because with our people in the store and the selection that we're giving them, it's not even going to be close. So I feel really good about it, but to answer your question, the $17 million is probably a $21 or $22 million annual until we start to rock and roll off the shelf due to the load-in.

Our next question comes from the line of Brian Butler with Stifel.

Hey, good morning. Thanks for squeezing me in here. I'll try to be quick. Just I guess we talked a lot about the supply noise that's out there. Can you give maybe some color on demand? Is that now back at some normalized level? Now that you're looking at kind of that two-year stack? Can we talk about where that is and how that maybe you could remind us how that looked out across your algorithm of the 6% revenue and 10% EBITDA growth for the segments?

Yes, Brian, it is. As you think about that, two-year stack that we talked about in HS, you know, in the quarter up 16%, year-to-date up 19%, and as we're looking today, our algorithm assumes we do 2% market. We've said the macro environment that we're in today, we believe that's actually higher than that, it's more around 4%. Over the next several years, just given the trends in the age of housing and people aging in place, millennials buying their first homes, etc. We believe that trend is intact today as we think about coming through at the end of the year and going into 2022. We'll keep 2%, but we think there is a little bit of upside as you think about what's happening in the market now. However, one item we will tell you is that when you push north of 20% prices, there is always some pressure on the market, so you think about a local hardware store, they've got a limited amount of money to buy, and that doesn't mean they buy 20% less, it might mean they buy a couple percent less. We feel as though, when you think of only 1% price in our normal algorithm, we feel real confident that our top-line can be at or above that mid-single digits as we think about 2022 and 2023 with all the price increases we are implementing.

Okay, great. And then on a follow-up, when you think about free cash flow, how should we think about near-term and maybe long-term kind of that conversion of EBITDA to cash, especially considering the supply chain issues and the working capital requirements? Obviously, you're not going to have another $100 million use of cash for inventory build, but I'm guessing it's also not going to flow out. So what's the right way to think of cash kind of near-term as well as kind of longer term?

Yes. So, we still believe $125 million for 2022 is a good free cash flow number, even off the rebased EBITDA level, and we won't likely be a cash taxpayer in 2022. That's an important component; obviously, you guys have the math around interest, which will be in the $30 million to $35 million range from an interest perspective versus what we paid historically. We're not today, and it's probably unlikely even in our year-end call, that we'll anticipate bringing those inventories down in 2022. At some point, when lead times go back to normal, even if it's not back to 120 days but call it back in the mid-100s, that's going to allow us to free up inventory. Obviously, inflation in any period where we've seen significant commodity inflation periods, after that we've seen nice working capital pickup. There will be a pent-up nice working capital benefit at some point in the next year or two. We're probably not going to predict it happens in 2022; if it does, that would be a nice windfall, probably more likely we would tell you that that's a 2023-type item as our inventory unwinds.

Okay, great. And maybe one last quick one; you talked about leverage kind of the target of three times and maybe that slipping a little bit. When do you think you can hit that target, like that three times?

Yes. So if we just took our free cash flow and pay down debt over the next couple of years, by the end of 2023 we would be kind of in that mid-2 times range, and I think that will still be our target. I think inside 2023, we can do some moderate M&A, buy at good multiples with nice synergy, and I think you could see us hit that kind of end of 2023 timeframe to be at, call it, 2.7-ish.

Thank you. I'm showing no further questions at this time, I would like to turn the conference back to Jennifer Hills.

Thank you for joining us this morning. A replay of this call will be available on our website. Thank you.

Thanks. Thanks for joining us.

This concludes today's conference call. Thank you for participating. You may now disconnect.