Good morning, and welcome to the Third Quarter 2022 Results Presentation for Hillman Solutions Corp. My name is Therese, 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 10-Q 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 Koehler with Hillman.

Thank you, operator. Good morning, everyone and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today’s call are Doug Cahill, our Chairman, President, and Chief Executive Officer; and Rocky Kraft, our Chief Financial Officer. We will begin today’s call with a business update and quarterly highlights from Doug followed by a financial review from Rocky. Before we begin, I’d like to remind our audience that certain statements made on today’s call 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 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.hillmangroup.com. In addition, on today’s call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, it’s my pleasure to turn the call over to our Chairman, President, and CEO, Doug Cahill. Doug?

Thanks, Michael, and good morning, everyone. Today, I'm going to provide an overview of our healthy third quarter and discuss the current operating environment before I turn it over to Rocky to give an update on guidance and talk numbers. For those of you who are new to our story, Hillman is one of the largest providers of hardware products and value-added solutions at leading hardware and home improvement retailers across North America. Our unique approach to innovative design, sourcing, direct to store delivery, and in-store merchandising sets us apart from our competition. This strategy has allowed us to win with our customers since our founding in 1964. We are constantly innovating our products, the majority of which are used for repair, remodel, and maintenance projects, which for 58 years has provided insulation against cyclical downturns in new home and commercial construction markets. Our products are in must-have basket building high-margin categories for our retail customers. Therefore, keeping products in stock, also known as fill rates, is critical to the success of our customers and Hillman. Our in-store presence and direct to store delivery not only keep the shelves stocked, but also provide our customers solutions to today's challenging labor markets and certainly the unpredictable supply chains. And finally, we work closely with many of our customers on category management to optimize product mix, allowing them to increase sales and profits, yet another advantage of partnering with Hillman. This differentiated model executed by our hardworking team at Hillman strengthened our competitive moat and drove strong results for the quarter. Our 1,100 members sales and service team is critical to our competitive moat and is one of the driving factors as to why we win. For example, during the quarter, we won new business in several categories including picture hanging, builders hardware, deck screws, and solid wall anchors like our new patented concrete screw that is selling very well. We grew quarterly sales by 3.9%, adjusted EBITDA by 4.3% over the prior year. We were also awarded Vendor of the Year at the largest family-owned Ace chain in the country; Costello's in Long Island, New York, a great retail partner of ours. We also completed the execution of our fourth price increase, enabling us to offset $225 million in total cost increases on a dollar-for-dollar basis since the beginning of 2021. And we saw a $40 million decrease in inventory during the quarter while maintaining fill rates at 96%, with plans to continue to significantly reduce inventory over the coming quarters. Now turning to our financial highlights for the quarter. During the third quarter of 2022, we generated $59 million of adjusted EBITDA, up from $56.5 million in the prior year quarter. Margins were in line with Street expectations as we finalized a $50 million price increase we talked about on last quarter's call. Our dedicated sales and service team finished applying over $80 million new price labels at our traditional local hardware stores near the end of the quarter. Net sales for the quarter grew to $379 million, marking a 3.9% increase over the third quarter of 2021. For the year, net sales grew 5% to $1.14 billion. These improvements were driven by the implementation of price increases over the past year, which more than offset lighter volume. Now let me touch on the performance of each business segment during the quarter. Hardware solutions is our biggest business and makes up over 50% of our overall revenue. For the quarter, hardware saw an 11% increase in revenue compared to the third quarter of 2021. Price increases were the main driver of the top-line increase. Lighter volumes, which partially offset the price benefit, were mainly the result of lighter foot traffic at our retailers when compared to a year ago quarter. We believe hardware solutions is the bellwether segment of our business. Let me share some numbers with you that will illustrate what's happening in this segment. While hardware volumes were down 3.3% for the first six months of 2022, we saw a comparative improvement during the third quarter of 2022, with volumes down just 1.7% for the quarter. Price was up 12.7% for a total revenue growth of 11%. This demonstrates the resiliency and consistency of the repair, remodel, and maintenance end user. Year-to-date fill rates were 96%. This is an improvement from 91% during 2021 and 95% during 2020. Importantly, our retail partners trust Hillman to keep the shelves stocked no matter the environment. Robotics and digital solutions, our RDS business, makes up just shy of 20% of our overall revenue. During the quarter, lighter foot traffic in our retail customers resulted in a 3% decline in RDS revenue. Engraving and auto key duplication were lighter than last year, as pet adoptions slowed and used car sales decreased when compared to the third quarter of 2021. Also, as retailers continue to struggle with in-store labor, we're seeing a shift in home and office key duplication from our manual full-serve machines to our minute key self-serve kiosks. This shift improves Hillman’s and our retailers’ profitability. Overall gross margin and adjusted EBITDA margins for RDS remain healthy and our market share is strong. We had a very productive quarter working with our major key duplication and engraving customers jointly developing our next generation machines for our RDS business. Two new engraving machines and our new smart auto fob duplication machine are being developed for and with our retail partners. The feedback and interest level has been excellent. Our two new engraving machines will be introduced throughout 2023, and our smart auto fob duplication machines will be ready for the market in early 2024 on our next generation minute key self-serve kiosk. Our engineering team has just done an amazing job on this new technology, and our retail partners were able to see it with their own eyes in our Tempe manufacturing and engineering facility this quarter. Regarding our knife sharpening machine, Resharp, we will end the year with around 1,000 machines at select Ace Hardware locations across the country. During Q1 2023, we will test our one-of-a-kind knife sharpening machine in new channels including specialty retailers, food service and restaurant supply, outdoor sporting, and recreation retailers, and a leading Canadian retailer. Our protective solutions business makes up just shy of 20% of our overall revenue. During the third quarter of 2022, protective revenue was down about 15% compared to the year-ago quarter. However, when excluding COVID-related PPE sales from both periods, protective revenues increased just over 5%, which is more in line with the growth expectations of this segment. Lastly, our Canadian segment, which makes up about 10% of our overall revenue, built on strong momentum and is seen throughout the year. Canada posted a 16% top-line increase, which drove strong bottom line results as well. Our Canadian team is just doing a great job, and they've also done an excellent job with the facility consolidation project and realigning their portfolio. Now turning to our business model. We know that consumers are being impacted by inflation and higher interest rates. However, our long track record of growth through up and down cycles gives us confidence that we can achieve strong results no matter the economic environment. This is due to the competitive moat we built and our estimate that over 90% of our product sales are into the relatively recession-resistant repair, remodel, and maintenance market. Let's dig a little deeper on that notion. Housing inventory in the U.S. continues to age with 50% of U.S. homes over 40 years old. Consumers will need to repair and maintain these homes. Additionally, we expect to see the consumer invest in their homes. More trends in nesting, aging in place, working from home, and outdoor living remain prominent. One recent data point on aging in place from United Disability Services states that only 1% of homes in the United States are conducive to aging in place, but more than 75% of Americans want to stay in their homes as long as possible. Our retail partners are proactively preparing to take advantage of this future demand opportunity. As we think about our product sales, pickup truck pros, local contractors, and DIYers make up the vast majority of our end users. Our long history and channel strategy prove that our business is not tied to new home construction. Further driving our confidence is our unique business model, which helps differentiate us amongst the competition. Our moat consists of three main components. Number one, over 80% of our 112,000 SKUs are delivered directly to the retailer's location. In general, this means our customers do not have to worry about managing Hillman inventory in their distribution centers because we ship directly to the stores. Number two, our sales and service team, consisting of 1,100 associates, provides world-class service at the shelf for our retail customers. This team of warriors serve that Hillman's must-have high-margin products are in stock, organized, and optimized for our customers and their consumers. And number three, over 90% of our revenue comes from brands that we own. This is not only important to the consumer and the pro, it allows us to tailor our products to specific retailer strategies. At the end of the quarter, we finalized our fourth price increase since the beginning of 2021. All of these have been dollar-for-dollar increases to cover our costs. In total, we've implemented approximately $225 million in price increases, which breaks down to approximately $120 million in transportation and shipping, $90 million in commodities, and $15 million in labor. During the great financial crisis and other past recessions, we've seen commodity prices fall, which we've begun to see during the recent months. We expect margin expansion once these costs flow through our income statement beginning in the second quarter of 2023 and beyond. Back in 2001, many remember lead times increased as the supply chain tightened. As such, we made the strategic decision to invest in our inventory to protect flow rates. While improved from the end of the second quarter of 2022, we ended the third quarter of 2022 with about $140 million more inventory than we would normally need in this environment. This investment paid off and we were able to deliver a 96% fill rate so far this year. Hillman was built on taking care of our customers, which is core to our moat, and we're proud to say that we have lived up to these expectations through some very challenging times. We know retailers have long memories, and we believe this investment will result in new business wins in the future. Over the past several months, we've seen lead times from Asia settle around 160 days, which is vastly improved from the 250-plus day lead time the industry experienced in January of this year. The result is that we have started to bring down our inventory levels and we're beginning to deleverage our balance sheet as we turn the inventory to cash, with no impact to our industry-leading fill rates. Sequentially, our inventory decreased by $40 million compared to Q2, and we expect to bring inventory down another $25 million to $35 million by year-end. As we look to 2023, we believe that it will further improve our inventory position, which will put us at a more normalized inventory level by the end of 2023. As such, we will bring down working capital and benefit from lower costs, which will result in deleveraging our balance sheet. As we look to the fourth quarter, we continue to expect that our adjusted EBITDA will fall towards the low end of our original guidance range and to pay debt down as we bring inventory down. However, softer volumes and the traffic at retailers during the quarter have impacted our top line and cash flow timing, which Rocky will get into momentarily. That said, our focus remains on successfully navigating this challenging environment and really setting the stage for Hillman to improve our performance during 2023. The $225 million of implemented price increases provide an opportunity for future gross margin and adjusted EBITDA expansion. We expect this will begin to reflect sometime during the second quarter of 2023 as we sell through our higher cost inventory and start to see lower cost flow through our profit and loss statement. It goes without saying that we have a special team of 1,100 loyal, hardworking associates who are in our customers' retail locations every day. The resilience of this team truly shines when a terrible natural disaster like Hurricane Ian hits. Everyone at Hillman is immensely proud that our Florida-based team members have been working tirelessly to ensure our customers have the products in stock so their communities can be safe and begin the rebuilding process. Our thoughts are with those impacted by the hurricane, especially those who have been displaced. We are thankful to be in the position to help Florida rebuild. Looking forward, I'm confident that our talented team and hardworking associates have proven that we can successfully navigate any challenge that comes our way. I believe we're uniquely positioned for success and our focus remains taking care of our customers. Our performance for our customers over the past couple of years has positioned us to drive real value for our shareholders and our employees in 2023 and beyond. With that, let me turn it over to Rocky.

Thanks, Doug, and good morning, everyone. Before I provide a quick summary of our third quarter results, I'll jump into our updated guidance for the remainder of 2022. Since our last earnings call in August, we have executed on additional price increases, maintained our leading fill rates, and controlled costs. As such, we are nearing our full-year adjusted EBITDA guidance range to $207 million to $211 million, which is in line with our previous guidance. Relative to our expectations during the first half of the year, sales to our retail partners have been lower due to slightly lower foot traffic. The effect of destocking for the quarter only impacted us by about $10 million, primarily in our PS business. Altogether, this will impact our net sales and the timing of our free cash flow for the remainder of the year. With this improved visibility, we are providing the following updates. We now anticipate that our full-year 2022 net sales will come in between $1.46 billion and $1.5 billion. Last quarter, we told you that we would come in near the low end of the original range, which was $1.5 billion. We expect full-year 2022 adjusted EBITDA to total between $207 million and $211 million. Last quarter, we told you adjusted EBITDA would come in at the low end of the original guidance, which was $207 million. So we are simply putting some numbers around the directional language we provided in August. And lastly, free cash flow is expected to come in between $75 million and $85 million compared to our original guidance range. This is driven by the timing of the inventory reductions resulting from softer sales. Note that this guidance range excludes any cash settlement relating to the Hy-Ko litigation as the timing of that one-time payment is uncertain. Given the lighter cash flow numbers for the remainder of the year that are primarily due to the timing of inventory reductions moving into the first quarter of next year, we expect to invest less in the working capital during the first quarter of 2023 versus years past. This is noteworthy considering the first quarter is typically when we take on debt in order to buy more inventory for our spring build. For example, over the past three years, we increased working capital about $40 million during the first quarter. During the first quarter of 2023, we are confident that we will need less than half of that figure. Now let me spend a minute on the third quarter charge related to Hy-Ko. After a trial in Marshall, Texas in October, a jury awarded Hy-Ko a $16 million verdict in the form of a one-time royalty payment. We have included the verdict and related legal fees in our GAAP results. We have excluded the verdict from our free cash flow expectations as it is currently unclear the final amount or timing of any settlement. We will continue to defend and protect our intellectual property and patents in our RDS business and across the company. With that, let me turn to our financial results for the quarter and future outlook. Net sales in the third quarter of 2022 increased 3.9% to $378.5 million versus the prior year quarter. Hardware solutions was the main contributor to the increase, which was up 11% to $210.9 million. Overall, the improvement was driven by a 13% price realization, partially offset by a 2% decline in volume. RDS sales decreased by 3% to $65.6 million. Wider foot traffic, less activity in pet engraving, and fewer smart auto fob duplications were the main drivers of the decline. Protective solution sales were down 15% or $10.5 million resulting from lighter volume. Excluding COVID-related PPE sales, protective sales were up 5%. COVID-related sales for the quarter were $1.3 million compared to $15.1 million during Q3 of 2021. For the fourth quarter of 2021, COVID-related PPE sales were $19.2 million, and we do not anticipate meaningful COVID PPE sales for the remainder of 2022. Our Canadian business had terrific performance in the quarter. Sales were up 16% to $41.1 million compared to the prior year, and we significantly improved profitability for the third quarter in a row. As we have seen throughout the year, price, operational improvements, product mix, and exiting unprofitable business have driven nice profit improvement in Canada. On a GAAP basis, net loss for the third quarter of 2022 totaled $9.5 million or $0.05 per diluted share compared to a net loss of $32.5 million or $0.19 per diluted share in the prior year quarter. I would like to point out that our GAAP results include the $16 million settlement and additional related legal expenses from the Hy-Ko litigation. Adjusted earnings per diluted share for the third quarter of 2022 was $0.14 per share compared to $0.13 per diluted share in the prior year quarter. On an adjusted basis, third quarter adjusted gross profit margin declined by 60 basis points to 43.3% versus the prior year quarter. As we have discussed on prior calls, the primary driver of the margin pressure in our hardware and protective businesses was driven by dollar-for-dollar price increases to offset inflation, partially offset by strong margin performance in RDS and Canada. On a sequential basis compared to the second quarter of 2022, adjusted margins compressed by 80 basis points due to the timing of the price increase in our traditional local hardware stores as inflation was not yet fully offset in this portion of the business and a pull forward of promotional activity in our PS business to the third quarter. We anticipate our fourth quarter gross margins to be consistent with the rates we experienced in Q2 of 2022. For the quarter, GAAP SG&A totaled $133.2 million compared to $110.4 million for the prior year quarter, driven by legal expenses related to the Hy-Ko litigation and settlement. Adjusted SG&A was $104.4 million compared to $103.4 million in the prior year quarter. This analysis backs out stock compensation, acquisition and integration expenses, legal fees, and restructuring costs, which we feel gives a better analysis of our base expenses. Adjusted SG&A as a percentage of sales fell to 27.6% from 28.4%. While fixed costs and inflation impacted SG&A as a percentage of sales, we did a nice job managing costs during the quarter. Adjusted EBITDA in the third quarter increased 4.3% to $59 million compared to $56.5 million in the year-ago quarter. This is the first time since the second quarter of 2021 that we have beat prior year EBITDA. Similar to our adjusted gross margins, adjusted EBITDA was driven by a healthy mix of price cost, partially offset by lighter volumes, higher COGS, and the timing of our final piece of our price increase. Further driving the increase was a lift from strong earnings from our Canadian business. Now turning to our cash flow and balance sheet. For the year-to-date in 2022, operating activities generated $63.1 million of cash as compared to using $105.3 million in the prior year quarter. As Doug discussed earlier, we made the strategic decision to invest in our inventory last year, and this investment is now beginning to convert into cash. To recap, we expect to bring inventory down by another $25 million to $35 million by year-end. And for 2023, we will continue to improve our inventory position and expect a more normalized inventory level by the end of 2023. Capital expenditures for the quarter were $17.5 million compared to $14.3 million in the prior year quarter. We continue to invest in our RDS kiosk and merchandising racks, important parts of our high return CapEx initiatives. Maintenance CapEx remained near 1% of sales as expected. Looking forward, we have shifted some priorities within RDS due to chip shortages and market dynamics. We are seeing meaningful demand for our next generation Quick-Tag 3 engraving machines at one of our major retail partners. We expect the Quick-Tag machines will be located in a very attractive in-cap location within the store, which has performed very well during tests. We are also seeing demand for minuteKEY 3.5 self-service kiosk machines, which will be outfitted with our first-ever smart auto fob key duplication technology, which we believe will be a meaningful future growth opportunity. Beginning in 2023, we will begin to bring these machines to market while we continue to gather critical data on our Resharp machines at Ace. Additionally, we will be testing Resharp with other customers in the restaurant and sporting goods sectors. We are very excited about the opportunities for all three of these initiatives, which we believe will fuel high-margin growth as we look into 2023 and beyond. Considering chip shortages continue to hinder our ability to produce robotic kiosks to meet demand, we must be strategic in how we source components and deploy machines. While we believe that chip availability will improve in 2023, we are implementing a strategy to widen new customer testing with a smaller number of machines. We ended the third quarter of 2022 with $922 million of total net debt outstanding, down from $931 million at the end of 2021. At the end of the third quarter, we had approximately $225 million of liquidity, which consists of $195 million of available borrowing under our revolving credit facility and $29 million of cash and cash equivalents. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 4.5x, which was in line with where we ended '21 and an improvement from 4.7x at the end of the last quarter. Our long-term net debt to adjusted EBITDA ratio target remains unchanged at below 3x. Considering our lighter free cash flow guidance, we plan to reduce our leverage to the low 4x level at the end of 2022. As we talked about today, we were successful in implementing our fourth price increase, which was finalized towards the end of the third quarter. Our dollar-for-dollar approach to covering costs has resulted in some margin rate degradation. However, historically, we have not given price back dollar-for-dollar when inflation cools. Today, we are seeing commodities, container, freight, and other costs begin to moderate. We expect to benefit from this dynamic once these lower costs flow through our profit and loss statement, which we believe will begin during the second quarter of 2023. Looking further out, our long-term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact. In an economic environment where we are seeing 2% to 3% GDP growth, we have a high level of confidence in this algorithm, and we may see adjusted EBITDA growth in excess of that with some price cost tailwinds on the horizon. Over the long term, our business continues to benefit from the meaningful macro tailwinds in the home repair, remodel, and maintenance market that Doug spoke to earlier. As we look forward, we believe that our competitive moat will allow us to continue to win new business, drive sales, and allow us to perform at or above our stated growth algorithm over the long term. With that, Doug, back to you.

Thanks, Rocky. Despite the choppy macro environment, Hillman continues to take care of its customers first and foremost. Our competitive moat continues to differentiate our offering and deepen our customer relationships. Considering the challenges in supply chain and inventory environment, we're really pleased with how we have executed and maintained strong performance at the shelf with our customers. Our 1,100 field sales and service folks, combined with our direct to store delivery, bring solutions to our customers' complex needs, really an offering unmatched by our competition. The value we bring our customers is reflected by our customers' willingness to accept our pricing actions, grant us additional shelf space, and award us new business, all of which we've seen this year. As we look forward, we remain confident in our differentiated model and believe we can drive long-term value for all of our shareholders. With that, we'll begin the Q&A portion of the call. Therese, can you open up the call for questions?

Thank you. Our first question today will be from David Manthey from Baird. David?

Yes. Thank you. Good morning, everyone.

Hi, David.

First off, I have a theoretical question here. I know it's a moving target and there's some seasonality to your business. But if your price increases that have already been announced and implemented go through, and assuming that your input costs don't decline from where they are right now, all we do is we just catch up on the pricing side immediately and fully, what type of EBITDA margin would we be looking at annually? Is 14 sort of the representative level, and then you'll try to improve from there as your input costs come down? Help us with that calculus?

Yes. Hi, David. It's Rocky. I think your numbers are directionally right. I think if we stay where we are, and as we have visibility into the fourth quarter, obviously, we're not going to give guidance at this point for 2023. But I think it's 14-ish at current levels. And we would expect to drive that higher over time, particularly as you think about growth in the RDS business, which obviously is a much higher EBITDA rate than the remainder of the business.

Okay. And speaking of the robotics solutions, you've talked a lot about the pricing actions on the hardware side. Have you also adjusted any pricing on any of your robotic kiosks?

We have. David, we've done some, not a lot. But what we also look at is the difference between full serve and self serve and the cost of the machines. So you can see some of that coming in the future as well as the cost of machinery is up. And certainly with us having both self and full serve machines in most of our retailers, there's an opportunity because today the consumer ironically pays more for a key that they have to cut themselves than one that is cut for them by the labor in the store. And when you really think about that map, it doesn't make sense. So we're working on that as well.

Okay. And last question for you, one more here. Could you tell us your contracted versus spot container rates? And when do those container contracts renew? I think you've told us before, but just to update us.

Yes. Everything renews for almost everybody, David, unless they did a two year in May of 2023. As you know, container rates have gotten soft and the spot market has dropped dramatically. We're in a good position because our contract carriers that we've used for many years don't want to lose the volume. So they're doing the right thing on a monthly basis to make sure they don't lose the buy-in because we have a very small exit penalty to get out of the container and go from contract to spot. And so it's kind of a no-brainer. So we're pretty much at the market, if you will, within a few percentage right now, which is great. And who knows where it's going, but man it has definitely softened for everybody.

Yes, sounds good. All right. Thanks, Doug. Thanks, Rocky.

Thanks, Dave.

Thank you, David. Our next question comes from Lee Jagoda from CJS Securities. Lee?

Hi. Good morning.

Hi, Lee.

So just to piggyback on that last question, obviously, you're going to benefit as you go from contract to spot rates or close to spot rates. Can you just remind us of the lag in terms of the stuff that you're getting at spot today, when does that actually hit your P&L in terms of a margin benefit?

Yes. As we approach the new contracts in May and transition through the fourth quarter into the first quarter, we are going to encounter some of the highest cost inventory due to the lag time. This presents a challenge for us, but we have full price measures in place to absorb that. We expect the fourth quarter margin rate to resemble what we experienced in the second quarter. It's a matter of a few months from when we incur the expenses, such as shipping costs, until they impact inventory. On average, this will take about five months. Consequently, we anticipate that by the middle of next year, we'll start seeing benefits from the lower container costs. Additionally, as mentioned in our prepared remarks, we expect to see some of this benefit starting in the second quarter of 2023, considering the timing and the costs we incurred compared to the second quarter of this year.

Got it. And then just as it relates to RDS and Resharp, it sounds like you're making some pretty good progress getting machines out to Ace and then there's some new stuff in the hopper, testing at some other companies or other customers. If the current supply chain related to the chip environment stays where it is, how many machines can you manufacture next year? And where are we in terms of Ace turning on more national advertising for the program?

Yes. So Lee, Ace has been awesome. And we had a great conversation with him and said, hey listen, let's not drip this thing in. Let's get to 1,000. And what we'll do, Lee, is we'll have our service folks move those machines to different stores so that everybody kind of gets a feel while we take the chips we have make machines and do the testing in accounts that we talked about. So we kind of pivoted to say, let's optimize within Ace moving machines around, and let's start to test it at the sporting goods, in the specialty retailers, in the food supply, and restaurant. And let's use those chips for those tasks. Then when chips become available, and let's just say second half of '23, we can rock and roll. And that's the plan.

Got it. So as it relates to more national advertising, are we thinking second half of '23 or sooner than that?

Yes, I think reaching 1,000 is still a challenge for both them and us. We've indicated that we need to be at 1,500, so it seems we are really looking at the latter part of the year to achieve that. What I appreciate about the strategy shift is that Ace has communicated they are open to allowing others to try out the machine now. This way, when we have more chips available, we can execute a better rollout. I believe we are looking at probably the fourth quarter for this because we won’t have enough chips to reach the 1,500 level with our current testing in other locations.

Got it. And then one last one for me. Just any early commentary to the extent the test with service has started at that large retailer?

Yes, it's interesting. They have faced significant challenges with labor in the store. Remember, we performed exceptionally well in 997. Currently, they still have 400 stores that are not set, which is surprising. If there's ever a case where it makes sense, it's in this category and with this retailer. We spoke with them yesterday, and they have indeed struggled with execution, which is tied to a broader labor shortage, as their initial execution rate was only at 60%. They are working on improvements, and we are also testing solutions. I'm optimistic that you'll see progress come together in 2023.

Got it. All sounds great. Thanks very much.

Okay, Lee.

Our next question comes from Brian Butler with Stifel. Brian?

Hi, guys. Thanks for taking my question.

No problem. Brian, do you wear a bowtie when you're pinch hitting for the big guy?

You can imagine me like that if it helps. So I guess on the inventory piece. You gave some good color on kind of how it plays out. So if I understand it correctly, you have about $140 million, $25 million to $30 million is in the fourth quarter. So that leaves you $110 million. And I guess a part of that is in the first quarter of '23, maybe $20 million additional, and then that leaves you another $90 million over the rest of '23 that comes off. Is that the right way to think of it?

Yes. I think, Brian, the one thing you have to remember is we have grown the business. So we're going to need more inventory than we had back in the beginning. So I think as we think about '23, we're not going to give guidance at this point. But we would be very disappointed if we didn't take another $50 million out of inventory in 2023, minimum.

Okay. So you're not going to actually get back that whole $140 million because you've grown the business too much?

Yes. I think, Brian, it's important to remember that we need to maintain our relationships with our long-term partners who have been with us since the beginning. This is part of why we have $140 million in inventory; while sales haven't been as strong as we would like, we are also focused on ensuring our suppliers remain healthy. It's a balancing act—we don't want to harm our key suppliers by cutting them off abruptly. We need them to retain their employees because when our business picks up again, we need them to be ready to support us. So, this balancing act involves collaborating closely with our key suppliers.

Okay, that's helpful. And then I guess one on the extra week in the fourth quarter, can you give some color on the magnitude of that? How big from revenues and EBITDA perspective?

Yes. That's always handy. But if you really think about the retailers, they're so slammed with Christmas, they're not thinking about deck screws. There just isn't that much going on that week for us unfortunately. I wish it was an extra week in the spring, Rocky.

Yes, I agree. Brian, what I would tell you is it's actually only three days when you think about holidays, a. And then b, there's just not a lot of activity. So it's really not that meaningful for us from a top line perspective. The only business that really gets a little bit of benefit is RDS because stores are open, those machines are there, but we're not going to ship very much product that week.

Okay. And then maybe one last one. We talked about I guess the container cost coming down and the benefits. What about lower metal prices? As that comes down, how does that work through the P&L in maybe the fourth quarter or more important in probably 2023?

Yes. We've begun to see some softness. If you look at China steel, we would tell you Taiwanese steel is actually still pretty high relative to historic norms. And the way commodities work in our business is you think about the lead time that we have that's 160 days for when we placed the PO. And then it's got to flow through our inventory. So it really is, I'll call it 160 days plus five or six months before we feel that benefit. And so even some of the POs that we've been placing in the second half of this year, we're not going to feel any benefit into the second half of '23.

Okay, that's awesome. That was my questions. Thank you.

Okay. Thanks, Brian.

Thank you, Brian. Our next question comes from Matthew Bouley from Barclays. Matthew?

Hi. Good morning, everyone. Thanks for taking my questions.

Hi, Matt.

You have clearly maintained your long-term EBITDA guidance of 10% annual growth. Given that input and shipping costs have decreased over the past 90 days, I'm wondering about the volume outlook, which seems to be shifting. What changes do you foresee in your 2023 outlook considering these factors, especially with the potential increase in input cost benefits you mentioned in the second quarter? Can we anticipate EBITDA growth exceeding 10% next year? Thank you.

Yes, we're not providing guidance on this call. However, as you consider the benefits from the tailwinds mentioned, they are expected to start impacting us in the second quarter. You can anticipate a disparity between the first and second halves, with the first half yielding less benefit. In fact, during the first quarter, we will face some of the highest costs we've encountered as we integrate the flow of containers from May and June into our financials. That being said, we do expect some tailwinds in the second half, which should provide benefits that exceed our algorithm's projections. When we look at everything combined, we typically discuss long-term growth of around 10%, although we may experience years slightly below or above that. As we consider the second half of 2023 and into 2024, we're feeling optimistic about the business, especially considering the pricing decisions we've made and the trends we're observing with commodities.

Got it. That's very helpful. Thanks for that, Rocky. My second question is about the lower costs coming through. You mentioned earlier the customers' willingness to accept the price increases that you've implemented. Considering your different categories, do you anticipate that your retail customers might reduce prices in certain areas to attract more foot traffic? And would this lead to any pushback on Hillman from a pricing perspective?

Yes. When considering our category, it's typically a small part of a larger project. We don't have many factors that influence volume based on price, except for some success with selling three pairs of gloves for $9.99. That price point works well, and when we can't achieve it, volume tends to fluctuate. In the hardware solutions business, there isn't much promotional activity or any real volume driven by pricing changes in either direction. Customers require our products as part of their projects, but they are not major expenses. Retailers will ensure we stay competitive globally and against other competitors. That's just a part of the ongoing market dynamics.

Got it. That's helpful, Doug. And then last one for me. I think you mentioned there were some destocking impacts on the protective side. Can you just speak to the hardware side there? Should we expect to see any kind of destocking going on, either in the near term or perhaps in a more recessionary scenario in that category? Thank you.

Yes, not much, Matt, at all. As I said last time, there's somebody that would say, oh, I got some SKUs that are slow movers, I can take them down from 26 weeks to 24 weeks. We haven't really seen much of any impact in HS. And the reason, Matt, that you're seeing it with some of your other companies that you follow and the reason you would see it in PS is that's the one product that we do ship some through the retailer's distribution center. And the big change there other than the obvious Asia time is that they've been able to get things through their distribution centers from what was 28 days to get it from front to back to now about 12 days. So straight math, they just don't need the same amount of product that they had. And the majority of that 10 that we talked about is PS, and I don't anticipate we're going to have much, if any, on the HS side, just because it's direct to store, there's not a whole lot they can do. Also, with what's going on in Florida, there's going to be a few drywall and deck screws sold down that way, so we may reposition some stuff to help the retailers out because there's going to be a lot of demand down there once the insurance folks figure out whether they're in business or not.

All right. Well, thanks, Doug. Thanks, Rocky. Good luck, guys.

Okay. Thanks, Matt.

Operator, do you want to take the next question from Ryan Merkel from Blair? We lost Therese. She went to get coffee.

I apologize for that. I was on mute. Our next question comes from Stephen Volkmann of Raymond James Jefferies. Stephen?

Great. Good morning, guys.

Stephen, I didn't know there was a big merger this morning, Raymond James and Jefferies.

I wasn't aware of it either, but it might be an idea. Thank you for addressing my question. Many of them have been answered. I'm curious about how we should consider SG&A in light of 2023 possibly being a more volatile year for overall demand. Would you typically reduce SG&A, or do you believe it's necessary to continue making the investments that will drive growth into 2024 and beyond?

Yes. Stephen, as you may know from some of the companies you cover, those with significant marketing and advertising budgets usually address those expenditures before tackling SG&A and other expenses. However, we don't operate with that marketing budget. Therefore, we will focus on managing what we can control. While we will be adding personnel to our service network next year, we don’t have a large marketing or promotional spend to adjust, so you will see us take appropriate actions, but there won't be any significant cost savings or increases in either direction. Rocky, do you have anything to add?

No. The only thing I would add and we talked about this on our second quarter call that we did take some actions at the end of the second quarter, early in the third that we think provide more flexibility, I should say, around our SG&A costs and our ability to pull some levers. You can see we had a nice performance in SG&A in the third quarter. We expect that to continue into the fourth. And we're going to continue to make sure that we've got the right cost in the business to drive it forward, not spending in areas that don't provide benefit but spending in areas like Doug said, in the service organization, the sales organization to help fuel the growth that we see in the business.

Okay, super. And then maybe just this might be a new guy question, but how should we think about sort of new business for 2023? And I would define that as I guess sort of SKU expansion with existing customers or adding new customers or any of that, just sort of whatever isn't driven by just end market volume trends, how does that sort of layer in going forward?

Yes. So as we think about the algorithm and the 6% organic top line growth, historically, that's 2% to 3% new business wins every year. And that's principally existing products with existing customers. So it's taking additional shelf space from our competitors. There are a couple of items in play as we sit today like construction, concrete screws, new area for us where we're taking a lot of share that we're really excited about. As we think about 2023 similar to '22 and what we've seen in the last few years, we would expect that to be 2% plus of our revenue, and we've got line of sight to that as we think about '23.

Super. Thank you very much.

Sure. Thanks, Stephen.

Thank you. Our next question comes from Ryan Merkel with William Blair. Ryan?

Hi, guys. Good morning.

Hi, Ryan.

So my first question is on volume trends. Can you just talk about how volume trended through the quarter and into October? And really what I'm curious about is if it's sort of stable or if the trend line is sort of declining?

Yes. When you look, Ryan, at our HS business, which I think is the best bellwether, we actually did see an improvement in Q3 and over the first half, and several of our retailers said the same thing. Now remember, part of their 15% down is as a result of this screwy spring that they had. So that definitely got better. But I'll quote one retailer, it was amazing to them that after the July 4 weekend, they seem to see things pick up a little bit better. So I would say they're slightly better than they've been is what we're seeing right now.

Got it. That was kind of my view as well. And then on gross margin, it sounds like 4Q, the 44%. Can we think about that as the baseline for '23? It sounds like maybe the first half of '23 maybe a little below that due to the high cost inventory. But then in the second half, is it 44 or better? Is that right?

Yes, I think 44 we believe is a good baseline for our business. And so yes, Ryan, as you think about it, the first quarter may be slightly below that. I think as we go into the second, through the rest of the year, we would expect to maintain or grow that rate.

Okay. And then last one for me, I think you put through about $225 million of costs. Just curious, how much of that do you think you can keep as costs deflate over the next 12 to 18 months?

Yes, if anyone figures that out, please let me know. We find ourselves in uncharted territory. In the past, whenever prices increased, retail prices would follow suit, and we've never really given back prices. It would be overly simplistic to assume that there won't be some price adjustments in the future. The area that might require the most attention and collaboration with our retailers is if we notice a downward trend in container costs alongside ongoing price reductions; then it would be reasonable to discuss those changes with our customers. That's where I would engage retailers directly and acknowledge the reality of the situation. We're aware of the recent significant reduction in inventory across North America due to changes in lead times. We're uncertain about what changes will occur as things normalize, nor do we know what will happen with fuel costs. However, long term, we would need to work with our customers on that aspect.

Yes, that makes sense. All right. Thanks, Doug.

Okay. Thanks, Ryan.

Thank you, Ryan. This concludes the Q&A portion of today's call. And I would like to turn the call back over to Mr. Cahill for some closing comments.

Thanks. And thanks everyone for joining us this morning. I really want to thank our customers and suppliers, importantly the folks that do it every day for us at Hillman that contributed to the quarter. We look forward to updating you again in the near future. And again, thanks for joining us today.

This does conclude our program. You may now disconnect. Have a wonderful day.