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

Thank you, Cherie. 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 Jon Michael Adinolfi, our Chief Operating Officer. 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 and good morning, everyone. I will kick off today's call by going through some of the highlights of our strong third quarter. Our results were healthy as we grew both our top and bottom lines compared to the year-ago quarter. I will then give an update on our full year guidance, highlight Hillman's competitive moat, and provide some additional color on the quarter before I turn it over to Rocky. Our team did a great job during the quarter, and I'm proud of them for successfully navigating this environment. Our results demonstrate the resilience and consistency of our business and we're in line with our expectations heading into the quarter. Net sales in the third quarter increased 5.4% to $398.9 million from the year-ago quarter, driven by a 4% increase in total volumes, which included new business wins, plus a 2% lift from price, offset slightly by FX headwinds in our Canadian business. Hardware and protective solutions led the way as hardware sales grew by 8% and protective solutions sales grew by a robust 14% over Q3 of 2022. This increase in hardware was driven by the launch of rope and chain accessories at one of our top five customers, marking another meaningful new business win for Hillman. This win was the direct result of taking care of our customers during the challenging logistics and supply chain environment over the past few years. This is a new category for Hillman and our service team did an amazing job resetting over 2,000 stores flawlessly. The increase in protective solutions was supported by a boost in our national promotional off-shelf activity with another one of our top five customers. When we talk about promotional off-shelf, we mean we load in products and display quarter pallets near the entrance, near the checkout, and on end caps. These offerings have been very successful and are frequently planned 10 to 12 months in advance with our retail partners. Together, new business wins and increased promotional off-shelf drove healthy growth during the quarter, which more than offset lighter volumes in other categories. For the year-to-date period, our net sales were down less than 1%, demonstrating the resilience of the business amidst an otherwise soft market. Third-party data shows that foot traffic at home improvement centers declined 8% year-to-date, compared to the year-ago period. Our results illustrate that demand for our small-ticket items essential for repair and maintenance projects is consistent and resilient in nearly any market environment. In terms of our bottom line for the quarter, adjusted EBITDA increased to $66.8 million, up 13.3% over the year-ago quarter, which produced a 110 basis point improvement in adjusted EBITDA margin to 16.7%. This increase was driven by a lower cost of goods sold as our margins began to return to historical averages. Remember, we spent most of '21 and '22 tackling inflation-related costs with price increases. We aligned costs with our price increase in the fall of 2022, and the benefits are finally flowing through our income statement now. Similar to last quarter, we did a great job controlling costs and improving operational efficiencies. Turning to free cash flow, it came in ahead of our expectations, totaling $41.3 million for the quarter and $119.3 million for the year-to-date period. This is an improvement over the $31 million in the year-ago quarter and $16.8 million for the year-to-date period last year. We used our free cash flow to pay down over $40 million in debt during the quarter and have reduced our net debt to adjusted EBITDA leverage ratio to 3.7 times. I would like to provide an update regarding our 2023 full year guidance. As a result of our performance for the first three quarters of the year, coupled with the expectations for the overall market, we are providing the following updates to our full year '23 guidance: we are narrowing our net sales guidance within our original range to between $1.455 billion to $1.485 billion, which sets a new midpoint at $1.47 billion; we are narrowing our adjusted EBITDA guidance within our original range to between $215 million to $220 million, which sets our new midpoint at $217.5 million; and we are increasing our free cash flow guidance to between $135 million to $155 million, which sets our new midpoint at $145 million, $10 million above our original guidance. As we've talked about, our results for the first nine months have been strong despite slow foot traffic at our retailers. We made the decision to narrow our guidance within our original range but below the midpoint. This was mainly due to the market volumes being slightly softer than we planned for the year and sales being light over the past month, illustrated by the industry-reported foot traffic being down 13% in October compared to a decline of 8% in the first nine months of the year. I'll now take a moment to share what makes us the indispensable strategic partner to our retail customers, which allows us to perform well across various economic environments. We are one of the largest providers of hardware product solutions in North America. We offer an extensive range of products that cater to the needs of both the pickup truck professional and the DIYer. The vast majority of our products are used for repair, remodeling, and maintenance projects. Because of the predictable nature of our end markets, we are experiencing consistent demand for our products in both strong and weak economic cycles since our founding in 1964. In essence, we don't see the highs nor the lows of the market like many companies in our sector. Importantly, we help our customers overcome labor, complexity, and supply chain challenges in the critical, highly profitable, and traffic-generating product categories we offer. Our competitive moat, which provides added value for our customers that they do not get from other companies, consists of three main components. One, we have 1,100 sales and service personnel who are in stores with our customers regularly, providing top-notch customer service at the shelf. Two, we ship directly to our retail customers' stores, meaning our products typically do not flow through our customer's distribution centers, saving them time and money. A great example of this advantage has been happening live over the past week or so. As one of our top five customers experienced a cybersecurity event, we are one of only a handful of suppliers who could still ship due to our direct-store delivery model and the fact that our service teams are in the store writing orders. I’m pleased to report they're back up and running, which is beneficial for everyone. We get the right products to the right place at the right time at scale. We source over 112,000 SKUs and distribute them to over 40,000 individual locations. Approximately 90% of our revenue comes from brands we own and control. This enables us to anticipate and meet the evolving needs of our customers and end users. These factors are why we're embedded with our customers, and why they view us as a critical partner to the success of their business. In fact, during the quarter, we were thrilled to be named Vendor of the Year by two of our customers: Tractor Supply, one of our top five customers, and Mid-States Hardware, a great farm, ranch, and home retail cooperative serving the Central and Northwest states, as well as Canada. We take great pride in being recognized by our customers, and let's face it, it's the Hillman team and the stores that ultimately win these awards for us. With that, let's move on to our balance sheet. At Hillman, we've always believed nothing happens until you sell something, and we always try to prioritize our customers. During '21 and '22, we put our money where our mouths are when we invested heavily in inventory to ensure we kept product in our distribution centers and on the shelves of our customers during a challenging supply chain environment. This strategic move, working closely with our long-term supply partners, set us apart from our competition and allowed us to gain market share then, now, and we believe in the future. At the peak during the summer of '22, we carried approximately $180 million more inventory than normal. Since that peak, our supply chain has normalized, and inventories have been reduced by $178 million, including $92 million this year. We anticipate we'll take another $5 million to $10 million off before the end of the year to bring us near our normalized inventory run rate. With our inventory reduction, we've seen a significant cash flow benefit and a subsequent reduction in our net leverage ratio, which we expect to continue throughout the year. I'm extremely proud of our entire global supply chain team for their ability to ramp inventories up and then back down while maintaining healthy fill rates throughout the process. Managing over 100,000 SKUs is one of the finest examples of teamwork I have witnessed in my career. Now, turning to pricing and costs. The peak cost inflation in our business was approximately $225 million. We passed on these higher costs to our customers through multiple price increases. These costs peaked at approximately $120 million for transportation and shipping, which includes inbound transportation of ocean containers, $80 million for commodities, and $25 million for labor. Over the past several quarters, we've seen ocean container costs come down from the historical highs of 2022, while other inbound costs have remained elevated. We correctly priced for these more expensive transportation and shipping costs last year, and we are now beginning to see our gross margin return to our historical range of 44% to 45%, with lower cost of goods sold reflecting in our income statement. We expect these margins to expand again in the fourth quarter of this year to exceed 45%. Commodities such as raw materials should serve as a tailwind for us in the second half of 2024. Typically, costs related to raw materials can take between nine and 12 months to flow through our income statement, which includes a 150-day lead time to source the material, manufacture the product, and ship it to our distribution centers. From there, our inventory typically turns in about four to six months. As we are aware, many of these higher costs do not seem to be dissipating. In fact, many continue to rise, such as labor and transportation costs within the United States. That said, we'll focus on what we can control, which is something we know our customers are doing as well. Hillman's in-store service team and direct-store delivery model continue to assist our customers in mitigating these two pressure points: labor and logistics. Now, as we consider our markets, before I turn it to Rocky, even though interest rate increases have certainly slowed existing home sales, we remain optimistic about the customers and end markets we serve, as well as the trends for the future of our business for two key reasons. First, home equity values continue to be robust. Home values are near all-time highs, and the average homeowner in the U.S. has nearly $200,000 of untapped equity. Home equity loan activity has remained steady since the beginning of the year, keeping pace with pre-pandemic levels. Remodeling, renovation, or home repairs are the leading reason homeowners tap into the equity in their home. The second reason pertains to the condition of existing homes in the U.S. The average owner-occupied home is over 40 years old. The older the house, the more repair and maintenance projects are necessary. Additionally, there are over 2 million more homes entering their primary remodeling age than there were during the Great Recession. These homes, which are between 25 and 39 years old, are projected to increase over the next few years as the U.S. housing stock continues to age. Next year, Hillman will proudly celebrate our 60th anniversary. Our service organization will turn 28 years old and the average tenure of our top five customers will be 25 years. Prioritizing our customers first has driven our success over many years. Our focus today and commitment going forward is to defend our moat, profitably execute our growth strategy, and remain disciplined. We believe this positions Hillman for continued long-term success. With that, let me turn it to Rocky.

Thanks, Doug. Net sales in the third quarter of 2023 grew to $399 million, an increase of 5.4% compared to the prior year quarter. As Doug mentioned, we narrowed our full year net sales guidance within our original range, below the midpoint. To elaborate, we still believe that our full year net sales results will benefit 2% from prices that will roll from 2022 and new business wins offsetting last year's COVID-related sales. The midpoint of our revised net sales guidance assumes unit volumes for the year decline by about 3%, compared to our original estimate of down 1%, as we extrapolate current volume trends into Q4. Let me provide more detail on our top line by business segment. Hardware solutions is our largest business and accounts for over 50% of our total revenue. For the quarter, net sales increased by 8% to $229 million compared to last year. This breaks down to just under 2% from price plus 4% from new business wins and a 2% increase in our market volumes, compared to the softer year-ago quarter. Robotics and Digital Solutions, or RDS, makes up about 16% of our overall revenue. During the quarter, RDS net sales were down 1% to $63.5 million, driven by lighter foot traffic, ongoing softness in discretionary spending on items such as pet tags and accessories, and a decrease in existing home sales, which is a key driver of key duplication. The exception was a 9.5% increase in sales at our MinuteKey self-service machines. Since 2020, MinuteKey has experienced a 19% compound annual growth rate, as customers prefer the convenience and simplicity of these self-service kiosks. For these reasons, we are excited about the future of our MinuteKey platform. As we've discussed in previous calls, we're in the process of testing our new and improved MinuteKey 3.5 self-service key machine. These kiosks feature smart auto and RFID key duplication capabilities, an enhanced key identification system, and a more robust guided user interface compared to our version 3.0. We currently have two MinuteKey 3.5 machines live in the Phoenix market for about six weeks, and performance so far is encouraging. We remain on track for a soft launch in the first quarter of next year and plan to slowly and prudently roll out these machines throughout 2024. Hillman Associates will provide VIP support for our retailers' customers, and this unique experience is a significant opportunity for both Hillman and our retail partners. Our Canadian segment, which represents about 10% of our total revenue, was down 9% compared to the previous year. This decline was driven by roughly a 6% decrease in volumes and three points of FX headwinds during the quarter. Lastly, Protective Solutions comprises just under 20% of our business. Protective solutions had a strong quarter due to the promotional off-shelf activity Doug discussed earlier. Revenues increased by $8 million or 14% compared to last year. Third quarter adjusted gross profit margin increased by 90 basis points to 44.2% versus the prior year quarter. Sequentially, adjusted gross profit margin improved by 120 basis points, outpacing the 100 basis point improvement we anticipated during our last earnings call. As Doug indicated, we aligned price increases in the fall of 2022 and are now beginning to see margins return to normal. Looking ahead, we expect margins to expand again during the fourth quarter, exceeding our historical rate of 44% to 45% and to hold into 2024. Adjusted SG&A as a percentage of sales decreased to 27.5% during the quarter from 27.6% in the year-ago quarter. The slight improvement resulted from efficiencies in our operations and logistics, as well as our cost control measures. Adjusted EBITDA in the second quarter was $66.8 million, which grew 13.3% compared to $59 million in the year-ago quarter. Adjusted EBITDA was driven by the increase in net sales alongside a higher gross margin compared to last year. Let me now turn to our cash flow and balance sheet. For the 39 weeks ended September 30, 2023, operating activities provided $171 million of cash, compared to $63 million in the prior year period. Capital expenditures were $52.1 million, compared to $46.4 million in the same period last year. We continue to invest in our RDS MinuteKey 3.5 and QuickTag 3.0 machines, which are important parts of our high-margin long-term growth opportunities. Our customers are very enthusiastic about these new markets, as they represent game-changing technology for us. Now back to the balance sheet. Net inventories were $397.1 million, down $92.2 million from the end of 2022, and down $138 million from the previous year quarter. We ended the third quarter of 2023 with $771.8 million of total net debt outstanding, a reduction of $115.9 million from the end of 2022. Free cash flow for the 39 weeks ending September 30, 2023 totaled $119.3 million, compared to $16.8 million in the prior year period. The increase in free cash flow is mainly driven by the working capital benefit of converting our excess inventory into cash and controlling costs. Consequently, we are raising our free cash flow guidance. We concluded the third quarter of 2023 with approximately $291 million of liquidity, which consists of $252 million available for borrowing under a revolving credit facility and $39 million in cash and equivalents. Our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 3.7 times, compared to 4.2 times at the end of 2022, and a full turn better than our recent leverage peak of 4.7 times at the end of the second quarter of 2022. Looking ahead, we still maintain our expectation that we will end 2023 under a 3.5 times leverage ratio, assuming our results fall within the range of our revised guidance. In contemplating 2024, if the market remains soft, our top line could resemble that of 2023. We are confident we can grow our EBITDA even in a down market, as we will benefit from lower costs of goods sold. We look forward to providing our formal 2024 guidance when we report our full year 2023 results in February. Looking further out, we believe our long-term growth model remains intact. Historically, our business has seen organic growth of 6% a year and adjusted EBITDA growth in the high single to low double-digit range, excluding mergers and acquisitions. Using hardware solutions as a proxy, our largest business segment, if you look back 20 years, for 10 years, five years, four years, or three years, the top line CAGR has been between 6.7% and 8.6% over those time periods. Our long-term outlook on the strength and resilience of this business remains unchanged.

Thanks, Rocky. As we navigate this market, I want to thank the Hillman team for remaining steadfast in our top priority of taking care of our customers. From the individuals maintaining our product flow through our distribution centers to our teams in the field managing store shelves, to our customer care teams, I could not be more proud of your resilient and dedicated commitment to our customers and Hillman. Looking ahead, I'm filled with optimism about the future as our competitive moat and the determination of our team position us to capitalize on opportunities ahead. We will continue making this company more efficient, agile, and resourceful, which we believe will enable us to grow profitably and succeed in the long term. We have executed well during this market and believe that when the tide turns and the market picks up, great things lie ahead for us. Hillman will celebrate its 60th anniversary next year, and we remain committed to continuing this fantastic legacy into the future. We are grateful for our customers, associates, shareholders, and partners, and I want to reiterate our commitment to you all, as trust is our most valuable asset. We look forward to updating you on our progress along the way. With that, we'll begin the Q&A portion of the call. Cherie, can you please open the line for questions?

Thank you. Our first question will come from Matthew Bouley with Barclays. Your line is open.

Good morning, everyone. Thank you for taking the questions.

Hi, Matt.

Good morning. I wanted to pick up on the comments that you made at the end there regarding 2024. I think you mentioned that you could grow EBITDA if the top line remains flat. So, my question pertains to the top line. Here we are in November. What are you all planning for regarding R&R activity? I understand you've mentioned that foot traffic is decelerating a bit here, but how are you seeing the early part of 2024 shaping up from an R&R market perspective?

Yes, Matt, for us, we're looking at '24 and saying let's plan for flat and even slightly down, so that we ensure our costs are under control and that we can still grow our EBITDA in that scenario. Our retailers have gone through a year that hasn't been very enjoyable. Their comparables will obviously get easier, but I think they are anticipating a slight decline next year. We've spent time with all of them, and my guess would be flat to down a couple of percent at this point. Again, this could change. You never know with an 8% decline in foot traffic year-to-date and then down 12 or 13% in October. It is difficult to determine if that trend will continue or if it is just a blip. That uncertainty complicates our market analysis.

Got it. That's great color; I appreciate that, Doug. The second question is about the solid progress on inventory reduction and lifting the free cash flow guidance. As you move toward your year-end leverage target of below 3.5, can you provide an update on your thoughts regarding re-engaging with the M&A market? Where do you see yourselves from a leverage perspective to make that move, and how has the pipeline shaped up? Are you looking to expand within existing categories or pursue adjacent categories, based on the initial roadshow discussions?

Yes, the good news for us is that there hasn’t been much of a debt market or a private equity interest lately. Entrepreneurs have certainly changed their tone, as they no longer have multiple parties expressing interest in buying their businesses. This is advantageous for us because they are more available for us to talk to them. Essentially, we're focusing right around the corner, proceeding to the next aisle and exploring options that make strategic sense. We believe these will be quite accretive for us. The M&A discussions are anticipated to resume in '24. I will add that, as an entrepreneur, it is safe to position your business with us because we prioritize customer trust. Our moat is recognized, and it’s reassuring for entrepreneurs who have built their businesses.

Great! Thank you, Doug. Best of luck to everyone.

Thank you. One moment for our next question. That will come from the line of Lee Jagoda with CJS Securities. Your line is open.

Hi, good morning.

Hi, Lee.

So again, focusing on your outlook for '24, Doug, could you discuss the new business wins you have secured and how you anticipate these will flow through the P&L over the quarters?

Yes, Lee, previously, we indicated we had about $25 million to $27 million in business inked for '24. Nothing has changed there, except we've expedited about $10 million of that into this year. This was largely due to a previous supplier severely underperforming and our customer requesting that we accelerate the process. Thus, the $27 million figure has adjusted down to about $17 million currently. We continue to see progress with customers, though, as Rocky noted, we are expecting a more muted contribution as we project volumes based on current trends. Historically, we’ve anticipated 2% to 3% growth from new business wins, but the expectation could be more moderated given today's climate. If the retailers are optimistic and see increased foot traffic compared to what we observe today, we will be well-positioned for growth. However, if foot traffic does not improve, we will prepare accordingly.

Yes, as I mentioned in my remarks, Lee, we were up by four percent this year. As we consider next year, we would still expect to achieve 2% to 3% growth from new business with our business, although we will remain cautious due to current volume outlooks.

Of course, if you’re a merchant, you’re inclined to offer new business in exchange for lower prices. I think you’ll support us being available for them, yet we won’t do anything reckless regarding pricing. This aligns with our strategy going forward. Our focus is to maintain the gross margin, which we have worked hard to restore.

Sure. Lastly, could you provide clarity on whether the soft outlook for next year refers to total business or just hardware?

Good question, Lee. We meant to refer to our total business and, again, this is merely a starting point for our projections.

Thank you. One moment for our next question. That will come from the line of Ryan Merkel with William Blair. Your line is open.

Hi, Ryan, we can't hear you.

Ryan, if your line is muted, please unmute it or rejoin using the call me feature.

I know Ryan intended to ask about my golf game, so would you like me to answer that, Seth? No, thank you.

Okay. We'll move to the next question. Thank you. Our next question will come from Brian McNamara with Canaccord Genuity. Your line is open.

Good morning, this is Madison Callinan standing in for Brian. Thank you for taking our questions. First, could you provide any additional insight on new business wins? I know you mentioned rope and chain, but any other product categories or retailers you can discuss would be helpful? Thanks.

Yes, we have secured three new wins: one in the rope and chain accessory category, one in gloves, and one in the deck screw area. Two of these three initiatives began in the second half of this year, so you will see the benefits carry into 2024. The deck screw initiative will be a rollout as well. Additionally, Jon, perhaps you could elaborate on how we engage with hardware and what typically happens each year with store openings.

Absolutely, yes. We're looking forward to 2024 and believe there's significant growth potential in our traditional hardware channel, where we serve nearly 15,000 outlets. We have many opportunities ahead of us. The three wins Doug mentioned will help propel our growth beginning in the latter half of this year, which will carry over into next year. We have a chain of stores in Florida, some in the Midwest, and a considerable target in the Northeast that we are enthusiastic about. This momentum will support all of our categories throughout these stores.

Madison, we also have, which is not included in the number we provided, the new Quick Tag 3 pet engraving machine that is going into one of our major customers with every new remodel, and there are 400 or 500 of those being implemented. We also have the new 3.5 MinuteKey, designed for office and home self-service key duplication, granting consumers the opportunity to use Smart Fob and Transponder as well as RFID technology. That will present growth opportunities, and I believe the 3.5 MinuteKey will come prominently in the second half of '24, as we aim to ensure an excellent customer experience and quality service.

Great! Thank you so much, and regarding how you're maintaining or gaining market share amid market fluctuations, can you elaborate on that based on your dedication to retailers during supply chain challenges, which resulted in strong fill rates?

For us, we are capitalizing on the performance Hillman has delivered over the last several years. Our momentum in hardware is a direct reflection of that commitment. For example, the rope and chain win Doug mentioned symbolizes our successful expansion into a category we previously did not cover. We are also continuing to build momentum and tap into strengths within our existing categories. This will apply as we expand into additional categories where we have not traditionally participated. We are genuinely excited about our outlook for 2024 in this area.

Great, thanks again, guys.

Thank you. One moment for our next question. That comes from the line of Brian Butler with Stifel. Your line is open.

Hi, good morning. Thanks for taking my questions.

Hi, how are you doing, Brian?

Very good, very good. I was hoping to follow up on your 2024 guidance and the benefits associated with inventory reductions in 2023. How do you expect this to play out? And in terms of 2024, do you anticipate any headwinds and how do you plan to address them?

Yes, Brian, I don't believe we view inventory reductions as a headwind for '24. The reason being, we are placing purchase orders today for commodities that are priced lower than they were roughly 90 days ago. If you review our remarks, we mentioned that the benefit will start flowing through the back half of next year, leading to a lower inventory price on our end. So, to consider '23, we have observed some value reductions in inventory due to container prices. We also optimized our inventory, and we think there will be minor benefits in '24 from these commodities dropping in value. Overall, we feel working capital will be neutral for us, and our free cash flow will increase alongside our EBITDA growth.

Okay, that’s helpful. Moving on to margin benefits, when predicting EBITDA in 2024, how much benefit do you expect from lowered inventory costs? Is that around 50 basis points, 100 basis points? Can you provide color on that?

Yes, we won't quantify that at this stage, Brian, because we're still refining our plans for next year and what we ultimately intend to guide. I will say, as we consider this year's full EBITDA rate, we expect next year's performance to be at or above that figure.

Okay, and lastly, regarding the 3.5 MinuteKey rollout, could you share estimates on unit placement and whether they will replace existing units?

The good news is that you will not have much disruption for the retailer. They dislike it when all of a sudden a lot of new equipment comes in requiring additional floor space. We won’t ask them to make significant changes. Most of the time, for the retrofit, we will update the existing 3.0 MinuteKey machines with new capabilities. Jon, do you have any numbers for how many machines we expect next year?

Yes, we aim to place over 500 units.

We emphasize that we are being cautious in our rollout timing because when consumers get enthusiastic about the offering, we need to ensure a great experience. This rollout will enhance both home and office offerings, alongside providing other options that will be new to the market. Again, we're thrilled about this prospect.

Okay, great. Thank you so much for answering all the questions.

Sure.

Thank you. One moment for our next question. That will come from the line of Sharad Patel with Jefferies. Your line is open.

Hi, good morning, everyone. It’s actually Steve Volkmann here. I hope you are all doing well?

Hi, how are you?

I am doing fine; thank you. Most of my questions have been answered, so maybe Doug, I should inquire about your golf game.

I'll tell you what, I always hate it when I peek in the fall and I'm peeking right now. My driver is absurdly good. So that's my update, but I wish it were spring right now.

On that note, I actually have a couple of quick follow-ups. Could we discuss the cadence of margins in 2024? Specifically regarding price and cost dynamics, is there an anticipated pass-through of the lower transportation costs, or will margins gradually grow each quarter?

Yes, Steve, we won’t be offering detailed guidance just yet, but it would be naive to assume we won’t be giving some pricing back to retailers next year. You will clearly see that benefit from the lower cost of goods sold. As we exit the fourth quarter, we’ve said we’ll be at or above that historical 45% level, and we anticipate maintaining that for most of the next year.

Great, and is it too early to discuss what the mature MinuteKey 3.5 economics might look like? How much revenue and margin do you anticipate once it reaches a steady-state?

It is premature to discuss that, as we’ll need to see how the consumer responds. The major question lies in the willingness of consumers to engage, especially with the new features on the machine. For example, now we can duplicate a transponder key—these are keys that must plug into the car to start it, unlike traditional keys. We can perform that duplication at the machine and ship it directly to the customer’s home. However, we don’t yet know if consumers will embrace this, and we need to ensure a five-star experience for them when they do. So I think it's a promising opportunity, but it remains to be seen how consumers will respond. The retailers are very enthusiastic about this initiative because they don’t have to do anything. We are taking the lead on this, and the potential is tremendous.

Thank you, and we appear to have no further questions in the queue at this time. I would now like to turn the call back over to Mr. Doug Cahill for any closing remarks.

Thanks, Cherie. And Ryan, we’ll connect with you later; no worries. Thanks to everyone for joining us this morning. I’d like to thank our customers, our vendors, suppliers, and importantly, our hardworking team for their contributions to the quarter. We look forward to updating you again in the near future. Thank you for joining us.

This concludes today's program. Thank you all for participating. You may now disconnect.