Good morning, and welcome to the Second Quarter 2023 Results Presentation for Hillman Solutions Corp. My name is Amy, and I will 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 replay of today's presentation can be accessed on Hillman's Investors Relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman.

Thank you, Amy. 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; Rocky Kraft, our Chief Financial Officer, and John Michael Adinolfi, our Chief Operating Officer. We will begin today's call with a business update and 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 in our earnings call slide presentation, which is available on our website. 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. I will begin today's call going through a few highlights for the quarter where our results were in line with our expectations and then give an update on our full-year guidance which we're maintaining at our previous levels. After that, I'll give a quick overview of Hillman, touch on our traditional hardware channel, and then provide some additional color on the quarter before I turn it over to Rocky to provide more details on our business. Net sales in the second quarter of 2023 declined 3.6% to $380 million from a year ago quarter. Total volumes were off about 6% and we saw a 1% headwind from unfavorable foreign exchange in our Canadian business. These were partially offset by a 3% lift from price. The top line was below our expectations due to volume softness across the board and an inconsistency in particular, but we expect a stronger second half, particularly due to less challenging prior year comparisons, new business wins, and we are confident we'll see top line growth in 2023, which I will discuss further in a moment. Adjusted EBITDA in the quarter totaled $58 million, which came in line with our expectations. Despite the lower top line for the quarter, we did an excellent job controlling costs and maximizing operational efficiencies. This was a strong accomplishment given the high cost of goods still reflected in our income statement during April and May as we worked down inventories that dated back to the record high container costs from the summer of 2022. We are now sitting on the right side of the power curve and maintain our belief that adjusted EBITDA generated during the second half of 2023 will grow 20% over the second half of 2022. Free cash flow in the quarter totaled $65 million, bringing the year-to-date total to $78 million ahead of our expectations. Our supply chain team did an excellent job managing down our inventory, which combined with our tight cash management resulted in a meaningful working capital benefit. We have used our free cash flow to pay down debt, which has reduced our leverage profile, which we will address more in a moment. As a result of our healthy results during the second quarter and our sightline to new business coming online in the second half, we are reiterating our full-year guidance expectations across all three metrics. This includes net sales to be between $1.45 billion to $1.55 billion, adjusted EBITDA to be between $215 million to $235 million and free cash flow to be between $125 million to $145 million. I would now like to give a little background on Hillman to reiterate what makes us a world-class partner for our customers. As one of the largest providers of hardware products and solutions in North America, our extensive range of products cater to the needs of the professional, as well as the DIYers. Our offerings are ideal for repair, remodel, and maintenance projects, which make up the vast majority of our sales demand. Since our founding in 1964, we have achieved remarkable success, experiencing top line growth in 58 out of 59 years. This record is due in large part to the consistent demand in both up and down economic cycles in the repair, remodel, and maintenance markets that we serve. This track record is also due to our competitive advantages, which set us above our competitors and consist of three main differentiators. First, our 1,100 member in-store sales and service team delivers best-in-class service to our customers. Second, we excel at getting the right products to the right place at the right time at scale with our store direct model. Our team cost-effectively sources over 112,000 SKUs and distributes them to over 40,000 individual locations. In total, approximately 75% of our shipments are delivered store direct. Third, 90% of our revenue comes from brands that we own, which allows us to maintain control over innovation, marketing, production, and distribution, enabling us to quickly adapt to meet the needs of our customers and end users. We are deeply embedded with our customers, who view us as partners critical to their success. We assist them in overcoming labor complexities and supply chain challenges while providing important, high margin, traffic-generating product categories. Our customers encompass mass retailers, big box home improvement centers, and both national and locally independently owned hardware stores. I'd like to illustrate how our advantages secure our position and embed us with our customers, particularly in our traditional hardware channel, which constitutes 23% of our business and has a total market size of nearly $700 million per year. Today, Ace, True Value, Do-It-Best, and the independent hardware stores comprise the 12,000 stores in this channel that we service. We provide multiple hardware categories for these customers, including nails and screws, core and specialty fastener products, solid and hollow wall anchors, picture hanging hardware, letters, numbers, and signs, threaded rods, tapes, metal sheets, key duplication services, knife sharpening services, and protective gloves, just to name a few. Our faster installations suit these customers, typically stretching 72 to 96 feet long, with some stores extending as long as 200 feet. These hardware stores generally carry 15,000 Hillman SKUs, accounting for more than 15% of the items purchased at those stores. Our sales and service team covers these hardware stores across the country. Our representatives work closely with the store owners and management, writing orders, managing inventory and promotions, organizing and cleaning displays, managing Hillman products in the aisle, and servicing kiosks. You can see how Hillman is entwined with these hardware store customers, and we continue to take great care of them during a time when other suppliers struggle to meet their customers' expectations. For instance, we converted about 150 stores from our competition last year. Independent hardware stores thrive by differentiating themselves through high levels of customer service and expert advice for various home maintenance and remodeling products at conveniently located stores. Our commitment to customer service mirrors that of these small business owners. As the independent hardware stores gain market share and expand their footprints, we have grown alongside them and eagerly anticipate continued growth in the future. Now let’s discuss our top line results for the quarter. Net sales for Q2 2023 were impacted by lighter volumes resulting from an 8% decline in foot traffic at home improvement centers compared to the previous year. Despite this decline in foot traffic, our top line results continue to illustrate the resilient demand driven by our diverse product offerings that serve repair, remodel, and maintenance projects. This is evidenced by our hardware solutions being up nearly 4% in the first half of the year, while we anticipate full-year top line growth in HS to range between 4% and 5%. Our results were also impacted by four days of shipping delays in June across our business, following a ransomware attack that affected our IT systems. Over the following week, we restored production and shipping at all of our facilities, and normal operational activities resumed. As a reminder, we've been in the process of moving our distribution hub from Rialto, California, to Kansas City over the last several months, and the cyber incident added some disruption to the move. While some of our short-term service levels are being affected, we believe these will not impede our second half results, and we anticipate the issue will be cleared up by the end of September. Furthermore, we believe the move to Kansas City will yield efficiencies and cost savings as early as Q4 this year. Let me frame up the second half of the year in terms of the tailwinds we expect to encounter and how those will help us achieve our sales goal. First, we foresee significant new business wins coming online in the second half of the year with two of our top five customers. Second, we will launch numerous small wins and rollouts across our expansive customer base. Third, some sales that were scheduled for the second quarter will shift to later in the year due to the shipping delays mentioned earlier. Fourth, the promotional calendar for the second half of the year is established and ready to support our protective solutions business. We expect sales to increase as a result. Excluding COVID-related sales, we anticipate our full-year PS results to closely mirror those of 2022. Finally, the comparison period during the second half of the year will be more favorable since last year our customers focused on destocking, particularly in the PS business, which impacted our sales. With that, let's move to our balance sheet. A recurring topic of discussion with investors has been our strategic investment in inventory during 2021-2022 as lead times from Asia increased from 120 days to 250 days. We made the difficult choice to increase leverage to ensure we could continue meeting customer needs, rather than allow our fill rates to decline. This investment in inventory ensured that we could provide for our customers during challenging supply chain conditions while others could not. Our fill rates averaged more than 90% during 2021, 96% during 2022, and approximately 96% for the first six months of 2023, which separates us from competitors and has led to numerous new business wins. As a result of this strategy, our inventory levels increased through 2021 and into the first half of 2022, peaking at about $180 million more than usual during the summer of 2022. Since that peak, our supply chain has normalized, and our inventories have been reduced by $145 million, including $38 million during Q1 and $21 million during Q2 this year. The outcomes have been a meaningful working capital benefit, healthy free cash flow, and ongoing debt reduction, a trend we expect to continue throughout the year. At the end of the quarter, we were still carrying nearly $40 million more inventory than normal. Therefore, we still have further working capital benefits to realize. We believe it is realistic that we can reduce inventory by at least an additional $15 million, totaling approximately $75 million by the end of 2023. This would leave us near our normalized inventory run rate by the end of this year. Now, turning to price and cost. Since 2020, we've encountered $225 million in cost inflation, which we have passed on to our customers on a dollar-for-dollar basis through multiple price increases, the last of which took effect in the fall of 2022. These costs pertain to approximately $120 million in transportation and shipping, $90 million in commodities, and $15 million in labor. Of the $120 million in transportation and shipping, about $80 million pertains to ocean containers. In recent quarters, we have seen ocean container costs decline, which will serve as a tailwind for us in the second half of the year and into 2024. Additionally, we continue to experience volatility in the steel market, but recent trends show steel prices coming down. Typically, costs related to raw materials like steel take between 9 and 12 months to affect our income statements. This involves a 150-day lead time to source the material, manufacture the product, and ship it to the U.S., with inventory typically turning in about four to six months. While some costs remain persistent, such as labor, others like outbound freight, including less-than-truckload delivery costs, remain stubbornly elevated. We will focus on productivity gains to help offset these costs, just as our customers are doing. Hillman's in-store service team and direct store delivery model remain on trend, aiding our customers in minimizing these two challenges. Our cost of goods sold for the quarter improved compared to prior peaks, yet remained high on a historical basis, indicating further room for improvement. The sequential 150 basis point improvement in gross margin percentage during Q2 reflects the benefit of lower container costs we incurred last fall after the historical peaks of last summer. Now, moving on to market conditions before I turn it over to Rocky. Our volumes have held up well given the sluggish pace of U.S. home spending this year. Our business is over 90% repair, remodel, and maintenance, a less cyclical segment of home spending. Even within that category, our products are typically more insulated from fluctuations than other categories because they are low-cost, easy-to-use items with broad applications for multiple projects at home. This, coupled with the macro benefits of an aging housing stock and accessibility of our products, leads us to believe there is a solid long-term outlook for our business. Based on data on construction completed in the early to mid-1990s, we expect over 1.5 million homes to turn 20 years old next year, with another 1.6 million expected in 2025. As these homes age, homeowners will invest in repairs, remodeling, and maintenance, which positively impacts our business. As I've mentioned, starting in the second half of this year, our business is poised to benefit from several strong tailwinds. These, in conjunction with our organic growth initiatives and improvements in our inventory and leverage, along with our consistent performance throughout all cycles, will lead us to an even more promising future for Hillman. We are successfully and profitably executing our growth strategy, generating strong cash flow, and remaining disciplined in capital allocation to create shareholder value. We expect this trend to continue as we move through the rest of the year. With that, let me turn it over to Rocky.

Thanks, Doug. As Doug mentioned, net sales for the second quarter of 2023 were $380 million, a decrease of 3.6% compared to the prior year quarter. Despite this decrease, we are still confident about our revenue guidance considering the new business wins and other initiatives Doug mentioned earlier. The midpoint of our net sales guidance assumes market volumes for existing products will decrease by 1%. We anticipate benefiting by 2% from price adjustments that will roll over from 2022, with new business wins offsetting last year's COVID-related sales. Now, let me provide some more detail on our top line by business. Hardware solutions represents our largest segment, making up over 50% of our overall revenue. For the quarter, net sales were approximately flat at $225 million in comparison to last year. This essentially breaks down to a 3% increase in price being offset by a 3% decline in volumes. Robotics and Digital Solutions (RDS), which constitute about 15% of our overall revenue, saw net sales decrease by 2% to $62.5 million. This decline stemmed from reductions in engraving, auto key duplication, and manual key duplication, partially mitigated by a 19.2% increase in sales from our self-service key duplication machine, minuteKEY. Our Canadian segment, which contributes about 15% of our total revenue, witnessed a nearly 8% decline compared to the prior year. This drop was primarily due to a 3% decline in volumes and a 5% negative foreign exchange headwind during the quarter. Lastly, our Protective Solutions business, accounting for just under 20% of our business, experienced a revenue decline of nearly $9 million or 17% compared to last year's figures. This downturn was due to lighter foot traffic and timing discrepancies in promotional activities between early 2022 and the more back-loaded calendar this year. As Doug noted, we have all of our promotional activities established for the remainder of the year, which is expected to be busy in the second half. Furthermore, we will benefit from newly launched business initiatives during this period. For these reasons, we maintain our confidence that PS will align with 2022's figures when adjusting for COVID-related product sales from the prior year. Adjusted earnings per diluted share in Q2 2023 were $0.13 per share, a slight decrease from $0.14 per diluted share in the previous year. The adjusted gross profit margin for the second quarter decreased by 110 basis points to 43% compared to the same quarter last year, as the elevated costs of goods sold continued to flow through our income statement for April and May during our inventory clearance of high-cost products from last year. However, we did see sequential margin improvement of 150 basis points. We are forecasting to see margins expand sequentially by over 100 basis points next quarter, potentially exceeding our historical range of 44% to 45% during Q4. Adjusted SG&A as a percentage of sales in Q2 2023 decreased to 27.9% from the 28.2% recorded in the prior year quarter. This improvement was driven by operational efficiencies and cost-controlling measures. Adjusted EBITDA for the second quarter stood at $58 million, compared to $62.3 million in the year-ago quarter. The adjusted EBITDA figure was influenced by higher costs of goods sold alongside the year-over-year decrease in net sales. The year 2023 is shaping up to be a tale of two halves; adjusted EBITDA for the first half is down 7.6% versus last year, which aligns with our expectations, and we anticipate that the second half's adjusted EBITDA will increase by approximately 20% compared to last year. When breaking this down by quarter, we foresee our Q4 2023 growth surpassing that of Q3 2023. As we contemplate the opportunities that lie ahead for the remainder of the year that we discussed on this call, we are confident in reiterating our original adjusted EBITDA guidance. Now, turning to cash flow and balance sheet. For the 26-week period ending July 1, 2023, operating activities produced $115 million in cash compared to $15 million in the year-ago period. Capital expenditures reached $37 million, compared to $28.9 million in the prior year quarter. We continue to invest in our RDS minuteKEY 3.5 and Quick-Tag 3.0 machines, which are essential components of our high margin future growth opportunities. In terms of an update on the new minuteKEY 3.5 machine, it is set for a Q1 2024 launch. We will be incorporating automotive and RFID capabilities into our new minuteKEY machine. We had an exciting demonstration of the machine at our board meeting last week. The design validation phase will conclude this month, and we aim to complete our production validation phase in October. Following that, we will have test machines available in stores during the fourth quarter of this year, with full production at our Tempe, Arizona facility commencing around the middle of the first quarter of 2024. Our engineering, supply chain, and manufacturing teams are executing exceptionally well and our customers are eagerly anticipating the new markets that this exciting technology will enable us to explore. Now, looking back at our balance sheet. Net inventories were recorded at $430 million, down $59.3 million compared to the end of 2022. We concluded the second quarter of 2023 with $813.8 million in total net debt outstanding, a significant reduction of $73.9 million from the $887.7 million recorded at the close of 2022. Free cash flow for the 26 weeks ending July 1, 2023, totaled $78 million, reversing a cash burn of $14.1 million in the prior year period. This positive shift was driven by the conversion of our previous investment in inventory to cash. Similar to our net sales and adjusted EBITDA, we feel reassured in reiterating our free cash flow guidance based on increased back-half profitability and improvements in our working capital position. At the end of Q2 2023, we had approximately $321 million of liquidity, comprising $283 million available under our revolving credit facility and $38 million in cash equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio at the quarter's end was four times, compared to 4.2 times at the end of 2022. Looking ahead, we maintain our expectation to conclude 2023 under 3.5 times leverage assuming we come in near the midpoint of our guidance. As we enter the second half of the year, we remain committed to leveraging our free cash flow to decrease debt. On July 31, we drew $80 million on our ABL credit facility to reduce the principal on our term loan by the same amount. Owing to the favorable interest rate spread between the ABL and term loan, we anticipate saving at least $400,000 in cash interest this year. While this amount isn't substantial, the visibility and confidence in cash flows during the second half of the year enable us to prudently manage our balance sheet. Our focus will remain on deleveraging in the latter half of the year as margins improve and we utilize our free cash flow to pay down debt alongside increased adjusted EBITDA. Our long-term growth targets, set at 6% organic net sales and high single to low double-digit organic adjusted EBITDA growth prior to M&A, remain intact. From a leverage perspective, our goal for the business is to maintain a target around 2.5 times. With that, let me turn it back over to Doug.

Thanks, Rocky. I want to emphasize my belief that we can capitalize on the opportunities ahead in 2023 and 2024. We remain humble and committed to delivering exceptional service to our valued customers. With a unique business model that includes 1,100 dedicated field sales and service professionals, along with our efficient direct-to-store delivery approach, we consistently provide value to our customers, a value they genuinely appreciate and recognize. We executed well during the second quarter and believe we have the right personnel and strategy in place for a successful second half of 2023, which will lead to sustainable long-term growth and generate significant value for our customers, associates, and stockholders. With that, we'll begin the Q&A portion of the call. Amy, can you please open the call for questions?

Our first question comes from David Manthey with Baird. Your line is open.

Yeah. Hi, Dave Manthey here. Good morning, everyone. My first question.

Hi, Dave.

Yes, can you hear me?

Yes.

Good. First question is on the visibility that you have into the back half of the year. When you think about the factors you mentioned, the new business wins, RDS placements, promotions, and your declining cost of goods sold versus shelf pricing. As you contemplate that and compare it to your guidance, should we interpret it as, if foot traffic declines more than expected, you'll be at the low end, but if it improves, you'll be at the high end? Or is the distribution of potential outcomes wider than that? I'm just trying to grasp how much visibility the specific factors you've listed provide relative to overall business performance.

Hey, Dave. It's Rocky. We've indicated all year, and nothing has changed, really, the only variable in our guidance for the year is that traffic aspect and its impact on our volumes. Our current guidance suggests a volume decrease of 1%. If you summarize all our projections, we're looking at a range of down 4% on volumes to up 2%. As we consider the second half of the year, we remain firm in our outlook on both volumes and our promotional activities, as well as the new business wins mentioned earlier. Therefore, the main variable to observe is foot traffic and its effect on volumes inside the stores. In terms of COGS, that's primarily mathematical; we know the costs of the inventory we'll sell, and we are in good shape with our current cost structure. So, simplifying it, the focus needs to remain on volumes and foot traffic trends.

That's helpful. Thank you. And regarding the ransomware situation, can you provide further details about that? Specifically, what occurred and how it was resolved? Doug, I believe you mentioned it was fully resolved, but later noted there were lingering effects, and I want to clarify that situation.

Yes. We experienced an incident that required us to immediately take our systems offline. We worked closely with our clients, and our team performed excellently. Environmentally, the average downtime for such incidents typically ranges from 15 to 19 days; however, we were only down for 4.5 days. We exercised considerable caution because we wanted to secure our customer information. In reference to the lingering effects, when utilizing a direct store model, we did not encounter any significant operational disruption in filling rates due to our swift recovery. However, we chased some shipments that were supposed to go out in the second quarter that will now be delivered in the third quarter. Overall, we feel satisfied with our management of the situation, and our clients were understanding, as they recognize such events are inevitable. The impact did likely cause some lost sales in Q2, but we anticipate making up for those. By October 1, our fill rates will return to full capacity.

Okay. Thank you very much.

One moment for our next question. Our next question comes from Lee Jagoda with CJS Securities.

Hey, good morning, guys.

Hey, Lee.

To start, the increase in self-service key sales of 19%. Given the noted volume softening, is there any price-related factor influencing that, or do you attribute it purely to another catalyst?

You know, Lee, I believe consumers have become much more confident in using self-service key duplication. Combined with the staffing issues that retailers are facing, making a key is likely harder than it previously was. I think those are the two primary factors. Our team has made the interface on those machines very user-friendly. There is a small price component embedded in there, but primarily it’s the growing comfort consumers have with accessing those services via self-service. As we approach 2024, we will also expand into automotive RFID 5 capabilities with the self-service machines. Overall, the positive reception from consumers is encouraging, as well as the retailers' acknowledgment of the need for lower staffing levels in their stores.

Other than a modest price increase, do you see any cannibalization of full-service key duplication to self-service key duplication?

At present, yes. If we consider the two options, I believe it will ultimately lead to incremental growth, allowed by the fact that we’re exclusively doing automotive keys with one retailer right now. In the future, we expect to extend that to four retailers.

Lee, it's Rocky. The only point I want to emphasize is that as the shift occurs from manual to self-service, it's advantageous from an economic perspective both for us and the retailers. Thus, we welcome this transition.

Understood. Regarding the cadence of promotional activity in the personal protective segment, I comprehend the intent to have ex-COVID sales at a similar level year-over-year. Could you elaborate on the cadence of promotional activity for the back half of the year in that segment?

Certainly, Lee. We expect our promotional activity to increase in the second half of the year, with an estimated rise exceeding 10% compared to the previous year. We won't disclose the exact numbers, but generally, the growth will surpass 10% in promotional activities.

Will this activity trend be more weighted towards Q4 or Q3?

Slightly more weighted towards Q3.

Understood. I will hop back in the queue. Thanks.

Our next question comes from Michael Hoffman with Stifel. Your line is open.

Good morning. Thank you so much. What insights are you gaining from the point-of-sale data as you analyze and assess your major vendors or customers?

You know, Michael, looking back to earlier this year, our large retailers anticipated unit growth, but we viewed that outlook as overly optimistic based on actual data we had observed. We predicted it to be flat to down on units, and now we see those large home improvement centers reporting declines of 2% to 5% in unit sales overall, thus validating our earlier assessment. We anticipate our own hardware sales to grow between 4% and 5% for the year. Rocky, could you clarify how much of that growth is price-driven?

That would be between 2% and 3%. Yes. We've been accurately projecting trends, and it seems that they are materializing as expected. Fortunately, our sales can't rely on factors such as having enough flight capacities. Moreover, we believe we are navigating increasing trends effectively.

Excellent. Also, in the hardware and protective segments, you've noted that while protective has seen volume declines, hardware has remained flat. Can you break down how the remodeling and repair categories, like deck screws, are performing?

Within hardware solutions, we observe that deck screws and drywall screws are leading the growth. Conversely, in the protective solutions sector, consumers tend to favor purchasing value packs over individual items like gloves at $14.99, which is a current trend.

Great, thank you.

Sure.

Our next question comes from Reuben Garner with The Benchmark Company LLC. Your line is open.

Thank you. Good morning, everyone.

Hey, Reuben.

Rocky, can you talk about seasonality in margins? I understand you're not providing guidance, but given the second half expectations, which come in at a robust rate, how do we forecast that fourth-quarter margin number relative to next year?

Historically, we're witnessing a slightly different scenario than we've seen before. Typically, our second and third quarters yield higher EBITDA margins, in contrast to first and fourth quarters due to the volumes we observe in spring and summer. As we consider 2024, we should continue benefiting from expansion early in the year and expect the margins to be stable. Regarding conversations associated with the largest retailers globally, we foresee a return to our historical margin rate of 44% to 45%. We believe we may outpace those figures in the first half of 2024 and anticipate some assistance from steel prices that should remain positive through the latter half of 2024.

Got it. Regarding the newly mentioned business wins, do they include announcements from previous quarters or were there fresh wins recently that you referenced today?

The business wins we're referring to have been previously announced; one is in PS and the other in HS.

Okay. Understood. Thanks, guys. Congrats on the results and outlook. Best of luck.

Thanks, Reuben.

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 everyone for joining us this morning. I'd like to thank our customers, vendors, and suppliers. Importantly, I extend my gratitude to our hardworking team for their contributions to the quarter. We look forward to updating you again in the near future. Thank you.

You may now disconnect.