Good morning and welcome to the Fourth Quarter 2022 Results and Full-Year 2023 guidance presentation for Hillman Solutions Corporation. My name is Kyle 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 and presentation 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. Please note, that the company expects to file its Form 10-K on Monday, February 27. I would now like to turn the call over to Michael Koehler with Hillman.

Thank you, Kyle. 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 an overview of Hillman's differentiated strategy, some operational and financial highlights for the year, followed by a quick business update. Then Rocky will give a financial overview of Q4 and 2022 as well as our full-year guidance for 2023. 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 earning 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. Good morning everyone and thank you for joining us. Before I get into the call this morning, I want to take this opportunity to thank team Hillman, the 1,100 warriors we have out in the stores, our distribution center employees who keep the product flowing and our entire customer support team, of which I am a proud member. Thanks to everyone's efforts, we were able to successfully navigate and grow our top and bottom line in a dynamic and challenging 2022 and expect to do it again in 2023. We continue to outperform the competition by doing things the Hillman way. On behalf of the entire management team, we want to say thank you, and keep up the great work. Hillman was founded on the principle of customer service and our legacy of service has been built over the past 59 years. This company has been successful because it has always taken care of its customers and found unique ways to do things that our competitors can't, especially during the past three years. I know, Mick and Rick Hillman who ran the company for 40 years are proud of how this team has performed, and I am too. 2022 was no exception; we averaged a 96% fill rate, which is up from 91% during 2021 and 95% during 2020. This means that we took great care of our customers, and our products were on their shelves when the pickup truck pros and the DIYers were at the shelf. When you take care of your customers, good things happen. For example, we delivered full-year adjusted EBITDA at the high end of our guidance range we provided in November, and we earned a number of new business wins and awards during the year. Over the long haul since our founding in 1964, taking care of our customers has allowed Hillman to become one of the largest and most profitable providers of hardware products and value-added solutions at leading hardware and home improvement retailers across North America. Many, if not all, of you have heard me say that we've had only one down year in our 59-year history. This consistent growth and resiliency has been fueled not only by our share of the customers, but by our business model and our competitive moat. Our moat, which drove healthy results for the year and differentiates us from our competition, consists of three main pillars. Number one, we deliver over 80% of our 112,000 SKUs directly to the retail locations of our customers with industry-leading fill rates. This means our customers always have what they need and don't have to worry about managing Hillman inventory in their distribution centers. Number two, our sales and service team of 1,100 warriors provide world-class service at the shelf and are embedded with our retail customers. This team ensures that Hillman's mission-critical, high-margin products are in stock, organized, and optimized for our retail customers and their consumers. And number three, over 90% of our revenue comes from brands we own. These brands stand for quality and reliability and we're constantly innovating and rolling out new products. This is not only important to the consumer and pro but allows us to expand and tailor our products and our brands to specific retailer strategies. To put the three pillars in perspective, in two of our top five accounts, our products make up on average about 22% of their total SKUs in the entire store and are included in over 12% of their transactions. This is exactly why we call our products mission-critical and we use that term when we talk about how Hillman serves our retail partners. This is why we win with our customers and constantly grow our business. Our performance during the challenging environment of the past years has paid dividends for us. We've been successful in winning on average $25 million of new business per year in our hardware and protective business from 2021 to 2023, and as we look forward to 2024, we have $27 million of new business already awarded and it's only February. This success proves that our model works and our past performance continues to be rewarded by our retail partners. Now I'd like to frame up our financial highlights for the year. Overall, I'm pleased with how our team successfully navigated the choppy environment resulting from rampant inflation in our cost and massive disruptions in the global supply chain. Since the beginning of 2021, we've implemented $225 million of price increases to fully offset cost inflation on a dollar-for-dollar basis. At the same time, we've managed our fill rates as sourcing lead times ballooned in 2021 and then shrunk dramatically since early 2022, with a corresponding spike and now finally reduction in our inventory levels. Moving to our top line for 2022: net sales grew 4.2% to $1.486 billion. The increase was driven by the implementation of price increases over the past year, partially offset by volume declines. Excluding the 53rd week of our sales in 2022, net sales grew 3.1%. For 2022, we generated $210.2 million of adjusted EBITDA, an increase of 1.4% from 2021. Now let's touch on the performance of each of our businesses during the year. Hardware solutions is our biggest business; it makes up over 55% of our overall revenue. For the year, hardware sales saw 13% revenue growth compared to 2021 or 12%, excluding the 53rd week. Price increases were the main driver of the top-line increase, offset by volume declines of just under 3%. Hardware solutions is the bellwether of our business and we're encouraged by the trends we're seeing so far in 2023. Robotics and digital solutions (RDS) make up about 15% of our overall revenue; RDS gross margins were 70.2% and our adjusted EBITDA margins were 32.2% respectively. Our market share is strong. For the year, RDS revenue was roughly flat or down 1% when excluding the 53rd week, as discretionary items like key accessories and pet tag engraving were down roughly 15% from peak volumes in 2021. Additionally, smart auto fob duplication declined as used car sales decreased 11% from 2021 to their lowest number since 2013. Offsetting these declines was a 17% increase in revenue from our self-serve key duplication kiosks business, Minute Key. RDS is a key driver of highly profitable long-term growth. As we talked about last quarter, we've been working with our major key duplication and engraving customers and jointly developing our next generation digital kiosks for both technologies, which we expect to reignite our long-term growth in this business. Our top-three Minute Key customers have visited our manufacturing facility in Tempe, Arizona, where they were able to see our new technology with their own eyes. The feedback and interest is excellent, and we are encouraged about the growth opportunities these kiosks present in 2024 and beyond. Minute Key 3.5 is our new self-serve key duplication kiosk with smart auto fob duplication technology, which will be ready for the market late this year and into early 2024. Quick Tag 3.0 is our new engraving machines that will be introduced throughout 2023. We plan to place over 800 new machines this year, and by the end of the year, we'll have around 1,000 Quick Tag 3.0 machines in service. We're really excited about this new machine because it gives the pet owner 26 different tag options to choose from, up from only 6 options in our existing machine, and we're relocating the new machines inside the pet department of one of our top-five retailers for the first time. We've also placed this machine in Disney World, Disneyland, SeaWorld, and Universal Studios with excellent feedback and performance over the first 90 days. Regarding our knife sharpening machine, Resharp, we ended 2022 with approximately 1,000 machines at select Ace Hardware stores across the country. This machine is truly one of a kind, and we have over 100 stores sharpening close to 4 knives a day, creating excitement for the store owner and the consumer, with the leading marketing concept being word of mouth from one consumer to another. While challenges sourcing chips and boards continue to throttle our production of these machines, we see that abating during the second half of 2023. Meanwhile, we're testing this one-of-a-kind knife sharpening machine in new channels, including specialty retailers, food service and restaurant supply, and outdoors at 40 new recreational retailers and a leading Canadian retailer. We believe we can garner interest outside of the traditional hardware channel and likely be in the position to ramp up production as the chip and board shortage ends and consumers and retailers embrace this new technology. Our Protective Solutions business makes up 15% of our overall revenue and for the year Protective revenues decreased about 15%. However, if COVID-related PPE sales are excluded from both periods and the 53rd week is excluded, Protective revenues increased about 1%. Our Firm Grip brand, which is exclusive to Home Depot, is their top-selling work glove brand. Promotional execution in this category is critical, and we had an excellent 2022 in that area. For 2023, we already have a robust promotional plan in place with Depot, specifically for the Firm Grip brand that we're really excited about. As we tell the sales guys: stack it high and watch it fly. Lastly, our Canadian segment, which makes up about 10% of our overall revenue, built on momentum seen throughout the year. Canada posted a 5% top line increase for the year, with its bottom line nearly doubling versus 2021. We're pleased to achieve double-digit adjusted EBITDA margins out of our Canadian business. The long-lasting relationships and deep partnerships we have with our customers, along with the end markets we serve, give us confidence as we look to the future. We provide our customers merchandising solutions for the most complex categories; these are the things they don't get from the competition, like direct store shipments and in-store service at the shelf from our team. As I mentioned earlier, we have implemented a total of approximately $225 million in price increases since the beginning of 2021. These costs break down to approximately $120 million of transportation and shipping, $90 million of commodities and $15 million of labor. Over the past several months, we've seen some of these costs come down, like ocean container costs, which will be a tailwind for us in the second half of the year. While some costs remain high, like labor and outbound freight, we expect our margins to expand once these container cost reductions flow into our income statement beginning in the second half of 2023 and into 2024. As I touched on earlier, we saw lead times increase dramatically as the supply chain tightened during 2021. We made the strategic decision to invest in our inventory to protect fill rates. This resulted in continuing to take care of our customers, but also in us carrying more inventory than we would have in normal supply chain environments. This investment has and will continue to yield new business wins and is another example of why we have long-standing relationships with our customers, from the board level to the store level. Lead times from Asia have improved to around 160 days over the past six months or so, which is vastly better than the 250-plus day lead times the industry experienced in January of 2022. As such, we have started to bring down our inventory levels and deleverage our balance sheet as we turn that inventory to cash with no adverse impact on our customers and our fill rates. We ended 2022 with almost $100 million more inventory than we would have in a normal supply chain environment. This is an improvement of approximately $85 million from our peak this past summer. Our inventory decreased by approximately $45 million during the fourth quarter of 2022, and we believe that we will further reduce our inventory by at least another $50 million during 2023. The great news about this is that our fill rates will still lead the industry and this inventory will turn to cash, and we will deleverage during 2023. As we look at 2023, it's important to remember that we have a diverse resilient business with a 112,000 SKUs serving 40,000 customer locations across our coast-to-coast footprint, spanning North America. The vast majority of our products are used by pickup truck pros and DIYers to repair, remodel and maintain homes. Our business performs well throughout economic cycles and is not dependent on new home construction and never has been. Remember, we started this business serving small independent hardware stores. This segment makes up today about 20% of our business and remains a critical component to our growth, as we have seen a 9% sales CAGR over the past five years in this segment. We believe our repair and remodeling end-markets are well positioned for the following reasons. Number one, the North American housing industry continues to be in short supply, as housing starts are below historical averages and fewer homeowners are willing to sell today with over 90% of mortgages having fixed interest rates. This means the buyers can't buy and sellers that won't sell will be spending on their existing homes. Number two, the US home continues to age, with now over 50% of US homes over 40 years old. Number three, trends like nesting, aging in place, working from home, and outdoor living remain prominent, and consumers will continue to invest in their homes. And finally, since our founding 59 years ago, our consistent growth through economic cycles has proven that repair, remodel and maintenance projects happen no matter the economic environment. In fact, there's only been one year where our top-line did not grow in our 59-year history, and that was during the great financial crisis of 2009. This gives us a great deal of confidence heading into 2023. We're pleased with the progress we've made as a company in navigating in and out of COVID during the past three years, and we remain focused on capitalizing on the unique opportunities ahead. Some of our larger customers are predicting unit volumes to increase, albeit modestly during 2023 in our main product categories. However, with some of the economic uncertainty around the health of the consumer and a possible economic slowdown, we're taking a more conservative approach in our planning for total volumes to be flat to slightly down. Fortunately, we project our implemented price increases and new business wins will more than offset any potential market volume decline, and we're off to a strong start so far in 2023. With that, let me turn it over to Rocky, who looks better than he sounds today. He is fighting a bit of a cold, and that's what happens when the temperature goes from 70 to 35 very quickly in Cincinnati. So Rocky, good luck.

Thanks, Doug. It sounds like I'm going through puberty. I apologize. Before I get into our guidance for 2023, I'll provide a quick summary for our fourth quarter and year-end results. I'd also like to point out that our top line for the quarter and year was impacted by the 53rd week of sales during 2022, but that did not have a meaningful impact on our bottom line. Net sales in the fourth quarter of 2022 increased 1.8% to $350.7 million versus the prior year quarter. Excluding the 53rd week, net sales decreased by 2.8%. The fourth quarter results were driven by price, offset by a decrease in volumes. 2022 full-year net sales increased 4.2% to $1.49 billion, hitting the top end of our revised guidance range of $1.46 billion to $1.5 billion. Excluding the 53rd week, net sales increased. Hardware solutions increased 12% and Canada increased 5%, contributing to the overall increase. This was offset by a 16% decline in Protective Solutions while RDS was down 1% for the year. The significant decline in PS was driven by COVID-related sales in 2021 that did not recur at the same levels in 2022. Note that all of the aforementioned numbers all exclude the 53rd week. Adjusted earnings per diluted share for the fourth quarter of 2022 was $0.05 per share compared to $0.06 per diluted share in the prior year quarter. For the full year 2022, adjusted earnings per diluted share was $0.43 per share compared to $0.51 per diluted share during 2021. Fourth quarter adjusted gross profit margin increased over 260 basis points to 43.4% versus the prior year quarter. Sequentially, margins improved by 10 basis points compared to the third quarter of 2022. For the full year of 2022, adjusted gross profit margin increased over 60 basis points to 43% from 42.4% during 2021. Q4 2022 adjusted SG&A as a percentage of sales increased to 31% from 30% during the year-ago quarter. For 2022, adjusted SG&A as a percentage of sales increased to 29% from 28%. This analysis backs out stock-based compensation, acquisition and integration expenses, legal fees, and restructuring costs, which we feel provides a better analysis of our base expenses. At a high level, the increases in SG&A were driven by increased shipping and labor costs prior to price increases going into effect with our customers. Adjusted EBITDA in the fourth quarter increased 16.5% to $45 million compared to $38.6 million in the year-ago quarter. This is the second consecutive quarter that adjusted EBITDA has exceeded the comparable year ago quarter, and it was at the high end of our expectations. Adjusted EBITDA for the quarter was driven by a healthy mix of price cost, partially offset by higher cost of goods sold. Adjusted EBITDA for the full year increased 1.4% to $210.2 million compared to $207.4 million in the year-ago quarter. For the full year, adjusted EBITDA was driven by a healthy mix of price cost, partially offset by higher COGS and the timing of price increases. Further driving the increase during the year was a lift from strong earnings from our Canadian business. Now let me turn to our cash flow and balance sheet. During 2022, operating activities generated $119 million of cash as compared to using $110.3 million in 2021. As discussed during 2021, we invested into inventory to protect fill rates and that investment began to turn into cash in 2022 as we saw lead times moderate. Capital expenditures for the year were $70 million compared to $52 million in 2021. We continue to invest in our RDS kiosks and merchandising racks for new business wins. These are important parts of our high-return CapEx initiatives. Free cash flow for the year totaled $49.4 million versus negative $161.8 million in 2021. Impacting our cash flow results for 2022 were the settlement and additional related legal expenses from the Hy-Ko litigation, which totaled $33 million during the year. At year-end, net debt improved by $43 million to $888 million versus $931 million at the end of 2021. We ended the year with approximately $229 million of liquidity, which consists of $198 million of available borrowing under our revolving credit facility and $31 million of cash and cash equivalents. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 4.2 times, which improved from 4.5 times at the end of Q3 and 4.7 times at the end of the second quarter. Our long-term net debt to adjusted EBITDA ratio target remains unchanged at below 3 times, and we think that we will end 2023 around 3.5 times, assuming we come in around the midpoint of our guidance. Speaking on guidance, let me spend a few minutes talking about our outlook for 2023 and how the price cost dynamics will impact our income statement and results for the year. For 2023, we anticipate full-year net sales to be between $1.45 billion to $1.55 billion. Our net sales midpoint of $1.5 billion represents an increase of about 1% from 2022. Our long-term algorithm demonstrates 6% annual top-line growth. This consists of approximately 1% price and 5% volume growth. The 5% volume growth is made up of 2% to 3% market growth, which looks a lot like GDP, and 2% to 3% growth from new business wins. To unpack our top-line guidance for 2023 a bit further, our midpoint takes an approximately 2% growth from price that will roll from 2022 and assumes volume growth is down 1%. This includes new business wins, offset by modest market pressure and us lapping remaining PPE sales during 2022. As we would expect, our top line is going to be dependent upon sales volume at customers, which is predominantly driven by the point of sale. Our ability to win new business, coupled with the strength of the consumer, the health of the economy, and the housing market will impact our results. For our bottom line, we expect full-year 2023 adjusted EBITDA to total between $215 million to $235 million. The midpoint of $225 million represents an increase of about 7% versus 2022. We expect to see some leverage this year with our bottom line results beginning in Q3, as we begin to get on the right side of the power curve regarding price cost. Specifically, we anticipate gross margins in the first quarter of 2023 will decline sequentially versus Q4 of 2022, as our highest-priced inventory begins to flow through the income statement. We will then have modest sequential margin improvements during Q2; then during the second half of 2023, we anticipate margins in excess of our normalized rate of 44% to 45%. Lastly, free cash flow for full-year 2023 is expected to come in between $125 million to $145 million with a midpoint of $135 million. Please keep in mind, the guidance figures are made with the following full-year assumptions: we anticipate cash interest expense will be in the $55 million to $65 million range, cash taxes will be between $5 million and $10 million, CapEx will be between $65 million and $75 million, and restructuring related and other cash expenses will total approximately $10 million. We will have approximately 198 million shares outstanding, and we will see a working capital benefit of between $50 million and $70 million, driven by a $50 million reduction in inventory. Given the timing of inventory reduction, moving into the first quarter of this year, we expect to invest less into working capital during the first quarter of 2023 versus prior years. To be specific, over the past three years, we increased working capital about $40 million during the first quarter of the year as we built inventory levels going into the spring. During the first quarter of 2023, we are confident we will need less than half of that figure, but do expect our leverage ratio will increase modestly at the end of the first quarter. As we've said in the past, we expect 2023 to be the tale of two very different halves. During the first half of 2023, we expect to see adjusted EBITDA down compared to 2022 in the high-single-digit percentage range, with a steeper decline during the first quarter of 2023 compared to 2022. This is substantially the result of the highest cost of goods sold perhaps in the history of Hillman flowing out of inventory and into our income statement during the first half of the year, peaking in February, March, and April. Further impacting our first-quarter results will be the relocation of one of our distribution centers from Rialto, California to Kansas City. By making this move, we will avoid significant increases in operating costs, as our ramp is going to quadruple. By the second quarter of this year, we believe we will be fully integrated with this new hub and spoke distribution center, and our costs will actually improve on a going-forward basis when compared to our previous operating costs at the Rialto DC. We will maintain our distribution center near Bakersfield, California, that has been in service since 1990. During the second half of 2023, we expect to see adjusted EBITDA up compared to 2022 in the low 20% range, as our COGS reflect the new lower costs we are seeing today. This is mainly due to us finally being on the right side of the price cost equation. One of our main areas of focus over the past two years has been covering our costs through the execution of four major price increases. While we recognize that we have never been in an environment like the one we're in today, historically, we have not given prices back dollar-for-dollar when inflation occurs, nor have we seen our retailers lower prices at the shelf. Over the past few months, we have seen some costs begin to moderate, such as containers; while others remain stubbornly high like labor, drayage, and outbound shipping. That said, we do expect to benefit from this decline in container prices we are paying for today once these lower costs flow through our P&L, which we expect will begin during the second half of 2023 and continue into 2024 as I discussed. Our expected cash flows and earnings for 2023 will put us in a position where we can start to play offense and use our strengthened balance sheet to execute low-risk, sweet spot tuck-in acquisitions or capitalize on other accretive opportunities that may present themselves. Looking further out, our long-term growth algorithm remains intact. We think 6% organic net sales and high-single to low-double-digit EBITDA growth is achievable in an economic environment of 2% to 3% GDP growth. As we look forward, we believe that our competitive moat and long-standing relationships with customers will allow us to continue to win and perform at or above our stated growth algorithm over the longer term. Doug, back to you.

Good job, man. Thanks, Rocky. Hillman, it's a good business when things are good, but in 2023, we have the opportunity to show you that Hillman is a surprisingly good business even when the economy is not as strong. We're excited about the normalization of the global supply chain, as we will no longer need the excess inventory we invested in over the past few years to provide industry-leading fill rates for our customers. Even if we had a model, again, we would invest again because it helped widen Hillman's moat versus the rest of our competitors and will pay dividends for Hillman and our investors for years to come. I've been with Hillman since 2014, and I've never seen us in a better position with our customers and suppliers. The Hillman moat is strong, our end markets are healthy and resilient. We believe we're the best partner for fasteners and hardware products in North America. As we look forward, I know we have the right team to get things done, and we're committed to driving long-term value for our customers, shareholders, and employees. With that, we'll begin the Q&A portion of the call. Kyle, can you please open the call up for questions?

Your first question comes from Lee Jagoda from CJS Securities. Lee, your line is now open. Please ask your question.

Lee Jagoda, but close enough. Good morning, guys.

Hey, Lee.

Just can we start with the Canadian segment in Q4? It looks like margin had a little bit of a step back in the quarter. Can you speak to whether that's a one-quarter issue, what caused it, and how should we think about 2023 as it relates to the fourth-quarter numbers?

Yeah, Lee, I think as we've said historically, and I've said it for a couple of quarters and kind of became a broken record that we didn't expect that, that business would have 17% EBITDA margins, given the mix of industrial business, but we do expect, as you think about 2023 and forward that should be a 10% to 12% EBITDA margin type business. The important thing to remember about Canada, even compared to our US retail business, it is much more cyclical just given the weather. So, as you think about the first and fourth quarter, always seasonally weaker in Canada and stronger in the second and third. And then the only final comment I would make, when we talked about the 53rd week, when we did, you didn't hear us talk about Canada, because they were closed for that last week, but we still have expenses relative to what happens in that business in that 53rd week. That's a little bit of pressure in the fourth quarter.

Got it. So then I guess just looking at the quarter on a year-over-year basis next year. We shouldn't see a loss in Q4 next year, because you don't have the 53rd-week dynamic. Is that fair?

That's correct. We would expect the Canada business would make money next year.

Okay. And then just one more from me and I'll let others ask. Just Doug, I know you touched a little bit about sort of the growth that you're going to see in robotics starting in 2024, based on a whole bunch of these new products and refreshed products coming online. Can you get a little more specific about, I guess, one, the timing of some of these product launches? And then if you take a three-year look and look at the next three years, how should we think about all of this new stuff that's coming into the market translating into growth and margin expansion for that segment?

Lee, good question. I mean, we're super excited. First of all, that the Quick-Tag 3 is in the places you want to be. Right? It's coming out of the blocks strong, it provides something for the consumer. We're going to have 800 machines rolled out this year and 1,000 in that one retailer, plus those at Disney, Universal Studios, and places like that. So that's a big part of our capital plan this year, and I think we'll start to see that as we get those machines out. When you think about 3.5, which is our ability to take our Minute Key self-serve kiosks and let it do what it does today, but we will also be able to duplicate technology for smart fobs, which we have never been able to do. That's an early 2024 rollout. And it's just hard to say how that will ramp. At the same time, you're going to have re-sharp, I think, growing nicely and so Rocky we've historically said we look for..

Yeah, low-double digit growth in RDS. I think in the current year baked into our guidance would be high-single digits. But again, we'll look for them to do double digits as we think about them outperforming what we have in our existing guidance.

Got it. That's very helpful. Thank you.

Your next question comes from the line of Reuben Garner from Benchmark. Reuben, please proceed with your question.

Thanks, good morning everybody, and Rocky, you do look better than you sound, so hopefully Doug can help with these questions. Pricing up 2% in the outlook this year. Can you maybe give us a little bit more detail or context there? Is that assuming any of the pricing actions over the last few years have to go backwards at some point? So, meaning, you may be up more than that in the first half and down year-over-year in the second. Any color there would be helpful.

We have a few small business segments linked to steel prices and the steelworks. These large shapes are adjusted quarterly, representing less than 5% of our business, and will fluctuate in either direction over time. Excluding that, we've seen a 2% increase this year. To address your question, we don't assume that prices will decrease. For instance, steel prices, especially in China, dropped significantly during 2022, but since mid-November, they've risen by 15%. This increase is partly due to exchange rates and partly due to steel itself. Recently, we've also seen an uptick in U.S. steel prices announced by a couple of players. Certain materials like steel and nickel are starting to rise again, so I believe we're in a good position. Our expectation is that the 2% increase reflects what has already occurred.

Understood. On the volume side, I believe you mentioned it was down 1%, which factors in share gains. It seems RDS might have a strong year with potential growth in the high-single digits. Does this suggest that you're estimating the market decline to be closer to mid-single digits? I'm interested to know, as I've heard from retailers that hardware has been performing better than the company average, and one of your major customers recently indicated a stable market. Is there any particular reason hardware might lag behind home improvement this year? Is it that you're facing tough comparisons in hardware, or are you simply adopting a very cautious strategy due to the uncertainties?

Yeah. So what I would say that Reuben, is yet to start with. We are going to lose 2% relative to COVID when you talk about year-over-year. And so our midpoint of our guidance assumes that overall, our markets are down 1%, the range of guidance is kind of down 4% to up 1%. We would tell you, we've not seen that year-to-date; we're actually up, call it low-to-mid single digits from a units perspective. And so we're just being cautious because of where the economy is and everything you read in the press, but so far to date, we're planning down 1% with a range of down 4%, up 2%. And I would tell you, we're at the high end of that through 45 days.

Yeah, Reuben, I'd say two things to that. When you look at footsteps, not hardware, but you look at home improvement by retailers last year, footsteps down 14%. Obviously, we didn't see that. And then your favorite new product, lumber is interesting, because when you look at lumber prices, and you know they've fallen a lot, that's not good for a retailer's comp, but holy smokes, is that good for deck screws. So we're kind of the ones that hope for lumber prices to be where they are versus where they were. But it's funny how that becomes a headwind for a retailer because if you're selling 400 versus 1,400, you have to sell a bunch more lumber, but for deck screws that makes a big difference. So I think we're being conservative would be the answer.

Great. Thanks. Good luck, guys and Rocky, feel better.

Thanks, Reuben.

One moment for your next question. Our next question comes from the line of Ryan Merkel from William Blair. Ryan, your line is now open. Please ask your question.

Hey guys, good morning. Thanks for taking the question.

Hey, Ryan.

I wanted to ask about volumes up. I think you said low-single digits to mid-single digits so far. I get it, we're not quite unlike the season yet. But anything that's driving that, is it the market holding up better, is it share gains kicking in? Just a little help there.

Yeah, I would say two things. One, I would say, everybody knows what happened in the fourth quarter when retailers could start to take inventories down both at the store level and at their distribution center level Ryan, because of all the supply chain, things have started to normalize. So that had an impact on everyone, not as much for us, but if you look at our PS business, our glove business, obviously, we sell that through a distribution center, there was inventory taken out there. So that would be one thing. The other thing is, the weather has been, I mean, we've had more of a spring this year so far than at all last year, and that does help us, not to mention lumber prices. So I would say those are probably the three things.

Okay. Got it. And then I think price 2% for the year. How does that flow, is it higher in the first half and then something more flat in the second half?

Yeah, that's right, Ryan, as you think about it, the fourth quarter of next year will have virtually no price in our outlook, because we have taken all of our price kind of at the end of the third quarter from 2022.

Got it. Okay.

Obviously, it will fully lap itself at that point.

Okay. Perfect. And then just lastly, I just want to make sure I've got the gross margin commentary correct. So in the first quarter of 2023, should we be thinking like 41.5% to 42% range for gross margin, is that sort of the peak head of price cost?

Yes, that's the way to think about it, Ryan.

Okay. Thank you. Best of luck.

Thanks, Ryan.

Thanks. One moment for your next question. Your next question comes from the line of Stephen Volkmann from Jefferies. Stephen, your line is now open. Please ask your question.

Thank you very much. Good morning. First thing I wanted to go back to RDS. It just sounds like 2024 is going to be a pretty big year; there will be a lot of kind of redesigned equipment. And I'm just curious if any of the economics have changed as you have kind of redesigned these machines, do they get more expensive, are there more CapEx expenses, are the margins any different, just anything else that might have changed with all these redesigns?

That's a good question. Regarding Quick-Tag 3, it is indeed a more expensive machine than previous models. However, given the increase in sales potential with these machines, I believe it's a sound investment. It will likely pay for itself based on our observations from the first 90 days. As for the 3.5, this is particularly exciting for us because we are introducing new technology that allows customers to copy smart fobs, which we haven't done before. We'll also be able to perform home and office RFID operations with this machine, turning it into an endless aisle capable of copying various items. It's challenging to predict how quickly this will grow. We know that consumers are dissatisfied with their current experiences at dealers and that retailers are thrilled about this development. With the expected foot traffic from major retailers like Home Depot, Lowes, and Walmart, this could be very beneficial. However, we're being cautious about overpromising our capabilities. To summarize, consumers will be able to use their smart fobs, and we can program them at home, work, or in their vehicles. We're excited to collaborate with two out of our three retailers in stores during Pro shopping, but many elements need to be addressed before this happens. I anticipate a slow ramp-up in the first half of the year, but we feel optimistic about the second half of 2024. Additionally, the $27 million in new contracts we've received is unrelated to RDS.

Yeah, Stephen, this is Rocky. The only thing I would add is that over the last couple of years, building PS has become more expensive due to inflation across various categories. However, we are collaborating with our retailers to ensure that the returns on these machines are suitable. There are several ways we can engage with our retailers, and we aim for a two-year payback. Initially, some of these machines might take around two to two and a half years to pay back. We will work closely with our retailers to ensure that the economics work well for both them and for Hillman before we proceed with building. Right now, we feel very positive about it.

Yeah.

Okay, great. That's helpful. Thanks. And then I'm curious, it also sounds like sort of the second half run rate into 2024 is going to be pretty impressive. But what happens to things sort of normalize again in 2024? Do gross margins then kind of go back down again to the more normal range? And is there any price maybe decline that you might expect a couple of points in 2024, just how does that normalize?

Yeah, I mean I think as we have been extremely transparent on the way up, we will work with our customers on the way down to do the right thing. I mean the fortunate thing, Stephen, is they've been able to move their retail prices. And again, we don't start to see this until mid-year, but I think the answer to your question is over time, we'll see them certainly back to what we think is acceptable. I would think we'll exceed that on RDS historically. But that would say that over time we will work with our customers to make sure that we're competitive in that. If you think about having $225 million, I'll call out a couple of $100 million increase, it wouldn't be right for us to think we're going to hold on to all that.

Got it. Understood. And then my final kind of longer-term question is, should we think about free cash flow sort of 100% of net income as a more normal run rate, or is the CapEx that you're going to need to do with the growth sort of going to keep that under 100?

I think you can think of it that way, Stephen. I don't believe unless we catch fire in a model, which everyone is going to be happy that we're investing in the kiosk. We've been able to run in that general range. Just given the production capacity and quite frankly our ability to install machines at our retail customers, I don't think you'd see us go much above that, call it $65 million to $75 million of CapEx anytime soon.

Super. Thank you, guys.

Yeah. Thank you.

One moment for your next question. Your next question comes from the line of Brian Butler from Stifel. Brian, your line is now open. Please proceed with your question.

Thank you for taking my questions. I apologize for missing part of the beginning of this call. Considering the pace throughout the year, it appears that the hardware in Canada will provide revenue benefits in the first and second quarters, even as growth slows in the latter half. However, the margins appear to be the opposite, with more pressure in the first half and benefits in the second. Is that accurate? Also, how does this apply to the RDS segment and PPE? Will PPE be down throughout all of 2023?

We plan to avoid discussing PPE in 2023. I'm being serious when I say I don't anticipate selling any COVID-related PPE products this year. We'll only focus on the products we offered before COVID, which we will continue to sell at regular levels. Regarding HPS, while we expect a decline in pricing in the second half, we do foresee some benefits from new business wins rolling in. As a result, we anticipate consistent growth in the top line for the HPS segment throughout the year, without being heavily weighted towards the beginning or the end.

Yeah, I mean we're super excited, because I think we got a bit lucky. There's just not been much of a credit market out there, and they've been very few deals as you guys know. We still continue to talk to folks, and the people we talked to, most of our acquisitions are our customers because they'll tell us where to go, they'll tell us what they want, they'll tell us what they'd like us to do, and that's just a great way to grow, is when your customers say, hey, think about this and think about that. And so we probably are in four, five, six discussions right now with nothing imminent because we want to focus really on getting this leverage down, but I'm excited about it because it's a pretty easy thing to sit down with an entrepreneur or even a private equity owned business and show them why joining Hillman will be significantly different for them and how we can do things that they couldn't do. And immediately, we think we have an open door with all of our customers at the right level. So pretty excited about that, and we actually, as I said, I think we got lucky that a lot of deals have not taken place because it just has been a very little market, particularly for the private equity folks who want to lever things.

Okay, great. And then last one for me, just on kind of the inventory coming down. Can we talk about the benefit? I mean, that seems like you're going to see it in 2023, but is there a 2024 piece of it that kind of has a tail that isn't large enough that it's worth talking about?

It's a good question. I don't think so, because as we consider the business, we've historically said we need about $10 million in growth capital expenditures to build working capital each year in order to keep pace with the business's growth. This still applies, except for 2023. You will see inventory decrease significantly in 2023. Then, as we move into 2024 and 2025, those numbers will stabilize and will remain relatively flat to slightly increase to support the business's growth.

Perfect. Thank you very much for taking the questions.

Yeah.

All right. So presenters, I'm not seeing any questions at that time. All right. So this concludes the Q&A portion of today's call. I would like to turn the call back over to Mr. Cahill for some closing comments.

Thanks Kyle and thanks everyone for joining us this morning. We'd like to thank our customers, our vendors and importantly our hard working team for their contributions during 2022 and we look forward to updating you again in the near future. So with that, Kyle you may now disconnect.

This concludes today's conference call. You may now disconnect.