Hillman Solutions Corp. Q1 FY2023 Earnings Call

Good morning and welcome to the First Quarter 2023 Results Presentation for Hillman Solutions Corp. My name is Amber and I will be your conference call operator today. Before we begin, I'd 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'd now like to turn the call over to Michael Koehler with Hillman.

Thank you, Amber. 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 of the quarter from Rocky. Before we begin, I would 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 on our earnings call slide presentation, which is available on our website 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. Today, I'll highlight a few key points from the quarter, give a brief overview of Hillman, and discuss the current environment before handing it over to Rocky for the numbers. First, I want to express my satisfaction with our Hillman team’s performance this year in a challenging operating environment. Our quarterly results reflect our strong performance. Net sales for the first quarter of 2023 reached $349.7 million. Adjusting for COVID-related sales from last year, our first quarter sales were roughly flat compared to the same period in 2022. Adjusted EBITDA for the quarter was $40.2 million. We are pleased with these results, especially considering the high costs still reflected in our income statement due to last summer's record-high container costs. Our free cash flow was $13.4 million for the quarter, enabling us to reduce debt, which is noteworthy since we typically see an increase in debt during the first quarter as we borrow for spring build. Now, regarding our results for the quarter: the top line was in line with our expectations despite the weather challenges. We are pleased with our adjusted EBITDA results, even with inventory costs at an all-time high. Lastly, our free cash flow exceeded expectations. Therefore, we are reiterating our full-year guidance across all three metrics. We expect net sales to fall between $1.45 billion and $1.55 billion, adjusted EBITDA to be between $215 million and $235 million, and free cash flow to range from $125 million to $145 million. We anticipate 2023 to be characterized by two distinct halves. Our outlook remains unchanged from the previous earnings call. We expect first half adjusted EBITDA to decline in high single-digits compared to last year, while the second-half adjusted EBITDA is expected to increase by just over 20% compared to last year. We are well-positioned with our customers and suppliers, and our competitive advantages are deepening. The end markets we serve, specifically repair, remodel, and maintenance, are strong and resilient. The Hillman team is performing exceptionally well. We believe we are the leading partner for fasteners and other hardware solutions in North America. For those unfamiliar with Hillman, we are among the largest providers of hardware products and solutions in North America for hardware stores, home improvement centers, and large retailers. Our products assist both professional and DIY customers in their repair, remodel, and maintenance endeavors. Established in 1964, we have an impressive track record of growth over 58 of the last 59 years. This success is primarily due to the resilience of the markets we serve and the strength of our competitive advantages. Our competitive edge has three main components: first, our in-store sales and service team, consisting of 1,100 associates who provide exceptional service and industry-leading fill rates; second, we ship our products directly to customers' retail locations, distributing over 112,000 SKUs to over 40,000 locations, with about 80% of shipments sent directly to stores; third, 90% of our revenue comes from brands we own, enabling us to control innovation, marketing, and distribution, allowing us to quickly adapt to our customers' and end-users' needs. We help our customers navigate challenges related to labor, complexity, and supply chains in high-margin product categories, ensuring a superior experience when customers encounter our products in stores. Let me give you an example illustrating the strength of our relationships with customers. Recently, a tornado struck Shawnee, Oklahoma, causing significant damage. A local Lowe's store suffered roof damage, preventing access to the fastener aisle during a crucial time. Our Hillman team acted swiftly, collaborating with Lowe's to set up a temporary fastener section, managing to get products ordered, selected, shipped, and delivered within 12 hours. This allowed the Lowe's store to support its customers in Shawnee as they began repairs. Such service is pivotal to our long-standing relationships with our top customers, lasting over 20 years. Consistently delivering what clients need, especially when competitors can't, fosters enduring partnerships. Now, let’s review our quarterly results. As noted, our total net sales in Q1 2023 were flat compared to 2022, reflecting a 4% decline in volumes along with a 1% negative impact from unfavorable exchange rates in Canada. This was balanced by a 5% increase from price hikes implemented in 2022. The volume decline stemmed from a 13% drop in foot traffic at home improvement centers compared to 2022, coupled with challenging weather conditions. Despite reduced foot traffic, our top line results highlight resilient demand driven by the repair, remodel, and maintenance sectors. Now, let's break down net sales by business segment. Our hardware solutions segment is our largest, representing over 50% of our total revenue. For the quarter, hardware solutions experienced an 8% increase in revenue versus last year, attributed to approximately 6% from price increases and nearly 2% from volume growth due to new business wins in the past year. While volumes saw low to mid-single-digit growth in the first half of the quarter, the latter half slowed due to significant rainfall, especially on the West Coast. However, we anticipate some pent-up demand in that region, consistent with recent sales trends. Robotics and digital solutions comprise about 20% of our total revenue. During the quarter, their revenues slightly increased compared to Q1 of 2022, driven by sales from our self-service key duplication machines, MinuteKey, while other categories saw decreased sales. RDS remains a critical component for long-term profitable growth. As mentioned during previous calls, 2023 is a transitional year for our RDS segment as we invest for future growth, expecting year-over-year sales growth in the mid-single digits and an attractive adjusted EBITDA margin of about 32%. Looking ahead, we believe 2023 will pave the way for accelerated profitable growth in RDS in 2024, driven by investments in upgraded machines and products. Our Canadian segment, accounting for roughly 10% of total revenue, saw a 5.1% decrease from the previous year, with volumes slightly up but largely impacted by negative exchange rates. Lastly, our protective solutions business, making up just under 20% of our total business, experienced a 21.1% decline in revenues compared to prior year quarters, driven by lower foot traffic, adverse weather on the West Coast, and timing of promotional activities. Despite a slow start, all promotional activities for the year are aligned, and we expect to launch our AWP brand in Q2 and a new business with a top customer in Q4, making us optimistic about low-single-digit growth for the protective segment in 2023. Our protective product offerings continue to innovate and perform well, as demonstrated by our firm grip gardening gloves winning a recent comparison test. A common topic among investors has been our inventory. When lead times began increasing in 2021, we strategically invested in inventory to protect fill rates, resulting in high fill rates averaging above 90% during 2021, 96% in 2022, and 97% in the first quarter of 2023. However, our inventory on hand peaked in mid-2022, exceeding typical levels by $180 million. Since then, we've reduced inventory by $124 million, including a $38 million reduction in the first quarter. At the end of the quarter, we still had nearly $60 million more inventory than normal, but we aim to reduce an additional $35 million this year, totaling about $75 million for 2023. This is above our original forecast of $50 million, positioning us closer to our normalized inventory levels by year-end. I commend our global supply chain team for managing inventories effectively, resulting in solid fill rates. The inventory reduction enhances our free cash flow, which we will use to continue paying down debt, and we expect to generate free cash flow throughout the year. Now, regarding pricing and costs. Since inflation became a significant issue in 2020, we’ve faced $225 million in cost inflation, which we have passed on to our customers through various price increases, the latest of which took effect in fall 2022. These costs break down into $120 million for transportation and shipping, $90 million for commodities, and $15 million for labor. Recently, some costs have decreased, and starting May 1, 2023, we secured favorable annual ocean container contracts, which will advantage us in 2024. While we appreciate this development, many costs, such as steel, labor, and outbound freight, continue to be impacted by inflation. Our cost of goods sold for the quarter was among the highest in our company's history, with a significant impact on our gross margin due to inventory flow through our income statement. February and March's cost of goods sold reflect high container costs from the previous summer. Although these costs have decreased considerably, we need them to work through our inventory before we can fully realize the benefits. For costs within our control, I am satisfied with our team's execution, particularly with the opening of our new Kansas City distribution hub, which will completely replace our Rialto, California facility by the end of Q2. This relocation avoids substantial cost increases and leads to long-term efficiencies in our network. Over recent years, we’ve invested in upgrading our North American distribution network, opening new facilities in Pennsylvania, Georgia, and Greater Toronto. This infrastructure enhances our ability to serve customers efficiently, illustrated by our 97% fill rates in Q1, and improves our direct store delivery capabilities. As I’ve indicated, starting in the latter half of the year, our business is set to benefit from several favorable trends, combined with our organic growth strategies and market share expansions, improvements in inventory management, leverage, and our consistent performance across economic cycles point to an exciting future for Hillman. With that, I will now turn it over to Rocky.

Thanks, Doug, and good morning everyone. Net sales in the first quarter of 2023 were $349.7 million, a decrease of 3.7% versus the prior year quarter. When backing out COVID-related sales from the first quarter of 2022, sales were essentially flat. Considering pent-up demand in the West due to weather, our back-half loaded calendar for PS and some new business in PS and HS coming online in the second half of the year, we feel very comfortable reiterating our original top line guidance. The midpoint of our net sales guide assumes volume on existing products declined 1%. We benefit 2% from price that will roll from 2022 and new business wins offset last year's COVID-related sales. Now let me provide some more detail on our top line by business. Hardware Solutions was our best-performing business during the quarter. Net sales increased 8% to $205 million. The improvement was driven by 6% of realized price increases that were implemented over the past 12 months and a volume increase of just under 2%. RDS net sales were up slightly to $61.1 million as foot traffic and discretionary spending offset a strong lift in sales at our MinuteKey self-service key duplication machines. We believe 2023 is a transition year for RDS, as we have some exciting opportunities for 2024 and beyond that we are working on. We continue to work with our major key duplication and engraving customers to perfect our MinuteKey 3.5 next-generation digital kiosk. This new self-service kiosk will duplicate not only home and office keys, but also auto keys and smart auto costs, as well as RFID key cards and fobs. We believe this will be ready for the market late this year and into early 2024. Quick Tag 3.0 is our new engraving machine that is being introduced throughout 2023. We plan to place around 700 new machines this year, which is down slightly from our original expectations of 800. These placements will match the pace of our mass retail partners' renovation plans. We remain very excited about this new machine and expect to see a lift in both units and revenue per day on Quick Tag 3.0 versus the legacy Quick Tag machine. Regarding our one-of-a-kind knife sharpening machine Resharp, we have approximately 1,000 machines placed at select hardware stores across the country and have been working to optimize the marketing economics and location of each machine. Outside of hardware, we're testing Resharp in new channels like specialty retailers, food service and restaurant supply stores and outdoor and recreational retailers. We are currently having ongoing dialogue with multiple stores about Resharp and remain very optimistic about its potential. Our Canadian business saw net sales down 5.1% compared to the prior year. However, volumes were up and considering the weather in Canada so far this year, we are pleased with those results. FX dragged down our top line and profitability. For the year, we continue to think that we will get our adjusted EBITDA margin goal of 10% for Canada. For the quarter, Protective Solutions revenues were up $26.4 million, of which $13.4 million related to 2022 COVID PPE sales. Doug mentioned some of the other headwinds PS had during the quarter earlier, but we are expecting a solid second half for PS and that the business will grow low single digits over 2022 when excluding COVID-related sales. Adjusted earnings per diluted share for the first quarter of 2023 was $0.06 per share compared to $0.09 per diluted share in the prior year quarter. First quarter adjusted gross profit margin improved by 30 basis points to 41.5% versus the prior year quarter as we were still chasing costs last year. Sequentially, margins were 190 basis points lower than last quarter due to the higher cost of goods sold now flowing through our income statement. That said, we expect to see margins expand sequentially by more than 100 basis points next quarter, then during the second half of 2023, we anticipate margins in excess of our historical rate of 44% to 45%. The result will be a 20% plus increase in adjusted EBITDA during the second half of 2023 versus the second half of 2022. Q1 2023 adjusted SG&A as a percentage of sales increased to 30.3% from 29.4% from the year-ago quarter. This analysis backs out stock compensation, acquisition and integration expenses, certain legal fees and restructuring costs, which we feel gives us a better analysis of our base expenses. At a high level, increases were driven by revenue sharing arrangements in RDS due to outsized growth in our kiosk business and inflation related to outbound freight and labor. Adjusted EBITDA in the first quarter was $40.2 million compared to $44 million in the year-ago quarter. Adjusted EBITDA reflected higher cost of goods sold coupled with the decline in net sales. As we think about the opportunities that lie ahead for the remainder of the year, we feel very comfortable reiterating our original adjusted EBITDA guidance. Now turning to our cash flow and balance sheet. For the first quarter of 2023, operating activities provided $32 million of cash as compared to a $4 million used in the prior year quarter. Capital expenditures were $18.1 million compared to $12.5 million in the prior year quarter. We continue to invest in our RDS equipment and merchandising racks, which are important parts of our high-return CapEx initiatives. Net inventories were $450.9 million, down $38 million sequentially from $489.3 million last quarter. We ended the first quarter of 2023 with $876.9 million of total net debt outstanding, down $11 million from $887.7 million at the end of 2022. Free cash flow for the quarter totaled $13.4 million compared to a cash burn of $16.1 million in the prior year quarter. Further, over the last three years, our net debt has increased by an average of $35 million during the first quarter and for Q1 of this year, it decreased by $11 million. This positive swing was driven by converting our prior investments in inventory to cash. Similar to our net sales and adjusted EBITDA, we feel very comfortable reiterating our original free cash flow guidance. We ended the first quarter of 2023 with approximately $244 million of liquidity, which consists of $209 million availability to borrow under our revolving credit facility and $35 million of cash and cash equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 4.2 times, consistent with the end of 2022, which was a strong achievement for the first quarter, given typically experiences a seasonal uptick in leverage in the first quarter. Looking forward, we expect to end 2023 under 3.5 times and that assumes we come in near the midpoint of our guidance. The majority of the de-levering will occur in the second half of the year as margins expand and we use our free cash flow to pay down our ABL revolver and term note. As we look further out, our long-term growth target of 6% organic net sales and high single to low double-digit organic adjusted EBITDA growth before M&A remains intact. From a leverage standpoint, our goal is to run the business below 3 times. With that, I'll turn it back to Doug.

Thanks, Rocky. As I've expressed today, I'm very confident about our business heading into the remainder of 2023 and 2024. We continue to stay humble and take great care of our customers. Our differentiated business model with 1,100 field sales and service folks combined with our direct-to-store delivery model creates tremendous value for our customers, value that we think they recognize. We know the opportunity that is ahead of us and we've got a great team excited to capitalize on that, which we believe will drive long-term growth and meaningful value for all of our stakeholders. With that, we'll begin the Q&A portion of the call. Amber, can you please open up the call for questions?

Certainly. Our first question comes from Lee Jagoda from CJS Securities. Please go ahead with your question, Lee.

Hi, good morning. Rocky, could you start by discussing the impact of the promotional activities in Q1 for personal protective, specifically in terms of year-over-year comparison? Additionally, how should we anticipate revenue trends in personal protective on a sequential basis in the upcoming quarters? You mentioned a high single-digit growth excluding COVID; can you provide the total revenue for personal protective in 2022, excluding COVID, so we have a basis for our calculations?

Yes, let me respond to that, Lee. Last year, the impact of COVID on our overall results was between $16 million and $17 million, with the first quarter contributing just over $13 million, specifically $13.4 million. You can exclude that from the overall figures to get to the results. Regarding promotional activity, the first quarter's impact was mainly due to timing, and as Doug mentioned earlier, we view the upcoming year positively in terms of promotional activities. Most importantly, we have secured these activities for the remainder of the year, which gives us confidence. In fact, our team is already strategizing promotional activities for 2024.

Got it. Switching to Canada, I recall that the Canadian business inventory turns differently than in the U.S., leading to variations in when items impact the profit and loss statement. Can you explain how that process works and what we should anticipate regarding the flow of higher-cost inventory in Canada compared to what is currently flowing through the U.S. profit and loss statement?

Yes, you're correct, Lee and remember, the Canadian business is about a third commercial and industrial. And so we're required in that space to hold more inventory and it does turn quite slower. As you think about the U.S., and as we've said, kind of that February, March, April, May timeframe is when we'll experience the highest cost inventory in the U.S. As we think about Canada, it kind of comes almost right after that. So I think late Q2 flowing through Q3 and maybe even a little bit into Q4, it's more about nine months of inventory in Canada that we maintain versus the 5 or 6 in the U.S.

So I guess extrapolating that, the 10%-ish EBITDA margins you're targeting for this year, all else equal should have growth in 2024?

When considering Canada, it's important to look at the new container rates we contracted for in the U.S. in May, as those will impact us sooner. The benefits we've experienced from those container rates in the fall of last year won't be realized in Canada until late 2023 or early 2024. Therefore, we anticipate facing some pressure in Canada this year due to the timing of higher costs, while the benefits from reduced container costs will arrive later in Canada compared to the U.S.

Got it. That’s very helpful. I’ll hop back in the queue. Thanks.

Thank you. Our next question comes from the line of Michael Hoffman from Stifel. Please ask your question, Michael.

Thank you very much, good morning, Doug and Rocky. Can we discuss the revenue progression? You've provided insight into the EBITDA progression, but I'm interested in the revenue progression hitting the midpoint, especially since we experienced a slight decline in the first quarter. I'm assuming we'll see a slight decrease followed by a slight increase in the second quarter and so on. How do we achieve the midpoint in terms of progression?

Yes, I mean, the first thing I think we would comment there, Michael, as you know, there's seasonality in the business. And so from a seasonal perspective, our first and fourth quarters are always the softest compared to second and third. So I would start with that comment as you think about modeling. I think as we look at the second quarter, we would say we'll probably be pretty consistent, slightly up to slightly down compared to the prior year. And then Q3 and Q4, we're going to see a pretty nice benefit for a couple of reasons, the biggest of which is the launching of new products, promotional calendar in PS.

Yes, I think the other thing to add, Michael, is, remember last year, we did have in our PS business inventory brought down because we went through distribution centers and we did see some destocking, not a whole bunch, but our comp in the second half is going to be easier.

And so one of the things I wanted to tease out, you have talked about new business wins a lot over the time since you went public and you've had some great successes. How do we think about the impact of new business wins as we go into the second half and into 2024, believe it or not, we're already talking about 2024?

Yes, I mean we've said many times, as you think about new business wins, they should add 2% to 3% to our top line in the business. And so as you model, it's 2% to 3% each year that we believe we could grow through those new business wins in categories we're already in, particularly as existing customers. This year I would say they're a little more back half loaded than they've been over the last couple of years. As we think about 2024, I think, at least as we see visibility right now, it's probably going to be more consistent throughout the year.

Okay. When considering the business outlook, Doug, what do you observe beyond new business growth across the data and customer base despite lower foot traffic? What is the key factor providing you with that added confidence?

Yes, Michael, I usually don't like to use weather as an excuse, but the reality is that spring in North America has been quite delayed. It appears to be improving now, especially on the West Coast where we are seeing some pent-up demand. As for us, the Pro segment remains solidly booked, and that’s a positive sign. One key factor that keeps our business thriving is the favorable price of lumber, which couldn’t be better at the moment. This will benefit our nail and power screw segments. While we have noticed a decline in overall foot traffic and some discretionary items like pet engraving and key accessories are feeling the impact of consumers becoming more cautious with spending, our core business remains unaffected in the repair and remodeling categories. Overall, our customers are optimistic, largely because of the attractive lumber prices, and we’re beginning to see conditions improving as the weather, which has been quite poor, starts to change.

The move-up market is essentially non-existent. Are you experiencing any positive effects from this? Instead of moving to a larger home, homeowners are opting to enhance their existing spaces by adding a rec room, renovating kitchens, or updating bathrooms.

I believe that when considering our repair and maintenance, we don't see much movement in the move-up market. However, our major customers have indicated that if people choose not to relocate, they are opting to undertake renovations instead. This presents a slight challenge on the remodel side, but when someone decides against moving, that often leads them to proceed with their renovation projects as well. So, it doesn't significantly impact us.

I understand I am revisiting the same points, but regarding your long-term targets of 6% sales growth and high single-digit EBITDA to low double-digit, I assume we will see a strong performance in the second half of 2023 and possibly a significant first half of 2024. Will we return to normal in the second half of 2024?

Yes, I would say that's probably directionally right and normal to us would be a 6% to 10% like you said outsized during that period. But I would say you might be through three quarters next year maybe not.

Thank you. Our next question comes from the line of Dave Manthey from Baird. Please ask your question, Dave.

Hi, Rocky, good morning. I wonder if you could talk to us about the availability of semiconductors and your ability to shift your robotic solutions today, any shortages that are lingering now?

Yes, I'm pleased to share that we are not currently experiencing any significant issues in that area, which is great news. Initially, we faced challenges with chips, then boards, but now we don't foresee any problems. We're really optimistic about what Resharp can achieve. As a result, we've seized this opportunity to engage with several new channels regarding Resharp and its capabilities. We have a customer considering around 500 machines to replace a lot of their existing labor, and we are currently in the testing phase with them. We have about four to five different prospects, and the positive news is that when we ramp up again, we won’t encounter any excuses or issues related to semiconductor chips and boards.

And second on the CapEx run rate in the first quarter was right on plan for this year. How should we think about 2024? Are there any other facilities or big buckets we should know about? Or should we just see a similar percentage of revenues in 2024?

Yes, as you consider 2024, I would maintain our current capital estimates. The only factor that could alter this is if one of our products performs exceptionally well, leading us to increase production, or conversely, if something doesn't meet expectations, in which case we might reduce it. I believe that the $65 million to $75 million range is a solid target for the future.

Yes, Dave, the only thing I would add is, we probably sped up or spent a bit earlier our capital in our distribution network expansion with what we needed to do in Kansas City, what we did in Toronto, what we did in Shannon with the inventory and all the moving pieces. So we might have a little bit of grace there because we've probably put more money quicker than I thought we'd need to there. So that might help us a little bit.

Got it. Appreciate it guys. Thank you.

Thank you. Our next question comes from the line of Stephen Volkmann from Jefferies. Please proceed with your question, Stephen.

Good morning guys, thank you. Doug, I think you mentioned that you had renegotiated your transportation costs for 2024 now and that it was a $120 million increase last time you did it. So I guess I'm curious, did you get the $120 million back? It seems like most of the things we see around overseas transportation that we're kind of back to 2019 levels.

Hey, Steve, it's Rocky, here's what we would tell you there. The $120 million is not only inbound but also outbound freight. And so two things, on the inbound when you think about containers, we're pretty close to where we were at 2019 levels. And so nice benefit there, although as you think about container costs, I would say back at 2019 levels, but some of still the inbound things around dray and getting it into our distribution network are still elevated. So a little tempered there when you think about the total number. And on the outbound side, which we said is about 20% of that number, we've not seen much benefit there at all to date from a costing perspective.

I think the one other thing, Stephen; it is crazy what the container costs have done versus where they were. The other advantage we have with Kansas City that we actually didn't see coming, we hoped, but we didn't know is we're now able to bring containers from Asia all the way to Kansas City without touching them, and the shipping companies are taking that responsibility whereas before you would have had to unload, put in a different container and bring them across. So that is another benefit we'll see with the way we're looking at our network and we've got that going into Dallas and we've got that now pouring into Cincinnati. So I think with the availability and them being more aggressive in having container shortage issues no longer, that's going to help us as well with our entire network.

Maybe just a same question and I think you said, Doug, $90 million on commodities. Is that probably not back down to 2019 levels?

It's funny because if you take steel and we look obviously at Taiwanese and Chinese steel, if you look at that, it was looking pretty good until about Thanksgiving, right? And then China steel is up 10% since November, pretty flat year-to-date. Taiwan steel is up 7% in Q2 and then you know what's going on in U.S. Steel, I mean, it went up 33% from February to March and another 6% March to April. So that's been rearing its ugly head. Now that increase in China that I talked about up 10% from November, that is up from a down. So it had gone down, let's call it, 24%, 25% and then back up 10%. So it's kind of being stubborn right now, but it isn't back to 2019 levels, but it is better than the high that we saw.

And the final sort of piece of this, there is just as we look out to '24, are we still thinking there's no real reason to think about any price deflation on your part on any of your product?

Yes, I think as we look at this year, that's a good assumption based on where the net of all this is and the fact that we've been on the wrong side of the power curve for a good bit.

Thank you guys.

Good morning. You have Elizabeth Langan on for Matt today and I had a follow-up on Resharp. Would you mind talking a little bit about the timeline of the rollout that you're kind of looking at right now and what you're kind of expecting through 2023 and 2024? And I know you'd mentioned that you're working on footprint optimization. What does that usually mean for margins or sales? If you could give us an idea of how meaningful that could be?

Yes, Elizabeth, we currently have 1,000 machines with ACE Hardware, and we're focusing on optimizing that. Some ACE Hardwares are performing exceptionally well with the machines, while others love them but aren't sharpening as many knives as we'd like. When we try to move machines to different locations, some stores feel like we're taking something special from them. So, we've collaborated with ACE to ensure that stores must sharpen knives to keep their machines, which is the strategy we're implementing now. Since we only have 1,000 machines installed and there are over 4,000 ACE Hardware stores, there's still significant room for optimization. Regarding the Resharp rollout, we are assessing the best options for expansion. I expect this product to gain traction and start growing around the middle of 2024, as we plan to manufacture machines, provide training, and ramp up operations by then.

Yes, I mean, we don't plan to build a lot of machines this year. We have about 300 to 350 that are available and we've not decided exactly where those are going to go yet. And we probably will not re-ramp production of Resharp machines until later this year, as we focus on Quick Tag 3 and then keep 3.5.

And Elizabeth, we obviously are looking at our capital spend in total, that's important as part of our debt. The other thing is not that we haven't used any of the machines of the 300, 350, but we are giving this person five to test, this person three to test, this person seven to test. So we're doing the testing to make sure that we understand who really is the right place to go next.

Okay, thank you. That’s really helpful. I have another question regarding the Force Labor Protection Act that has gone into effect. Does that have any implications for your operations related to steel or chips, particularly concerning your material chain of custody?

No, it doesn't, and I'm very familiar with being cautious about what and where. As an example, we have four team members in Asia for the next three weeks, and we are very focused on ensuring that we avoid any issues related to that. We’re fortunate because, in my experience, this tends to be more relevant on the textile side, particularly in the cut. Therefore, we pay close attention to our gloves. The mills that manufacture many of the carriage bolts and other items are located in key areas, and we've been collaborating with them for over 20 years. However, it's a significant issue globally, and it is part of our audit process for all our suppliers.

Okay, thank you very much. That’s all from me.

Thank you. Our next question comes from the line of Reuben Garner from Benchmark. Please ask your question, Reuben.

Thank you, good morning everyone. Most of my questions have been answered, but I have one remaining. Can you provide an update on the current status of inventory in the channel? You had some destocking towards the end of last year, and I'm curious if you've seen any signs of restocking from other building products, or if your customers have mentioned anything about it. Is there a possibility of restocking as we progress through the year, assuming the economy and consumer behavior improve more than anticipated?

Yes, regarding our hardware solutions, we sell directly to stores, which limits our inventory storage options. Our distribution centers do not have stock for our retailers. Recently on the West Coast, we've seen significant disruptions, with local hardware stores closing for several days due to severe weather. This could lead to increased demand for items like gloves and fasteners. However, aside from that, we do not anticipate a situation where we have overstocked or understocked because our direct store model does not allow for excess inventory in our partners' distribution centers.

Yes, the only thing I would add there, Ruben, if you think about the Protective Solutions, which is where we did see some destock last year because we do go through our big customers' distribution, they're kind of back at normal levels historic. And so while we don't see a bounce-back restock, what we do see is that we'll have, as we said in our earlier comments, much lighter comps in the back half because of the destock that they did.

Got it. And I said I only had one, but I want to sneak one more in. The last five or six weeks or the first five or six weeks of this quarter, can you kind of compare the run rate? I think you were flattish in Hardware and Protective year-over-year in Q1 kind of ex COVID-related stuff. Have you seen a bump-up because of some catch-up out West? Or is it kind of in that same range?

Yes, nothing's really changed in the majority of the country, it's kind of been what it has been. We do see a change in the West. There's no question we're seeing some pent-up out there. Personally, I'm hoping that people get out of their house and get out in the yard and get to doing things, so we should see some tailwind there. But so far, it's about the same with the exception of the West because it was down for 28 straight days. They really didn't have a chance to do much of anything, that's the only place we're really seeing a change.

Got it. Thanks guys, good luck going forward.

Thank you. This concludes the Q&A portion of today's call. Thank you very much for all your questions. I would like to turn the call back to Mr. Cahill for some closing comments.

Thanks, Amber. Thanks everyone for joining us this morning and also I'd like to thank our suppliers and our vendors and our customers and importantly, our hard-working team at Hillman for their contributions throughout the quarter. We look forward to updating you again in the near future and thanks a lot for joining us this morning.

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