Good morning, and welcome to the First Quarter 2024 Results Presentation for Hillman Solutions Corp. My name is Tonya, 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 Investors Relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman. You may begin.

Thank you, Tonya. 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; Jon Michael Adinolfi, our Chief Operating Officer; and Rocky Kraft, our Chief Financial Officer. Before we begin today's call, I would like to remind our audience that certain statements made may be considered forward-looking and are subject to 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. Good morning, everyone. I'll kick off today's call going through some of the highlights of our strong first quarter, during which we celebrated Hillman's 60th anniversary. After that, I will provide some additional color on what makes Hillman unique before I turn it over to our COO, Jon Michael Adinolfi, or JMA, as we call him. JMA will provide an update on our operations, the Koch acquisition we closed in January, and the M&A landscape. Rocky will then finish up with our financial results for the quarter before we turn it back to the operator for the question-and-answer session. During the first quarter of 2024, growth in both our top and bottom line demonstrated the resilient and consistent nature of our business. Our results were in line with our expectations for the quarter, which has resulted in us reiterating our annual guidance across all three metrics: net sales, adjusted EBITDA, and free cash flow. Net sales in the first quarter of 2024 increased slightly to $350.3 million from the year-ago quarter. Driving these results was the contribution of new business wins; the Koch acquisition was closed in January of this year. These were partially offset by the overall market and a 40 basis point headwind from price. Adjusted EBITDA increased 30% to $52.3 million compared to $40.2 million during the first quarter of 2023. Our adjusted EBITDA margins for the quarter improved by 340 basis points to 14.9%. Similar to what we saw during the fourth quarter of 2023, in the first quarter of 2024, we had a relatively flat top line but generated healthy bottom line expansion. Adjusted gross margins totaled 47.6%, marking a 610 basis point improvement over the 41.5% during the year-ago quarter. Free cash flow came in consistent with our expectations as we used $6.1 million during the quarter. This was driven by our inventory build for our spring and summer busy season, as well as a $5 million use of cash to fund working capital related to the Koch acquisition. Let me frame the macro before we jump into our top line results by segment. The macroeconomic landscape in the home improvement sector continues to show muted signs of improvement. As we've all heard, inflation continues to linger, which has prevented the Fed from cutting rates. The result is that mortgage rates have remained elevated. These higher rates are limiting existing home sales, which does impact our business, as homeowners are unwilling to trade out of a 3% mortgage rate into a 7% mortgage. While pent-up demand for existing home sales continues to build, we agree with our customers that a strong increase in existing home sales is likely to happen when we start to see rates move downward. In the meantime, the pickup truck Pro continues to be busy, albeit with smaller projects, and we did see the DIY start to get more active as the weather improved throughout the quarter. That said, the overall market and foot traffic at our retailers were both negative compared to last year, which fell in line with our expectations. Our retailers are cautiously optimistic for the second half of this year. And if they're right, we will be ready. But until then, we'll continue to manage our cost structure and business for this environment. On top line results, Hardware and Protective Solutions, or HPS, led the way with a 2.4% increase in net sales. To break that down a bit, hardware or HS grew by 4.6%, while protective or PS sales were down 6.9%. For the first quarter, PS net sales were impacted by the timing of our promotional off-shelf activity, which will pick up during the second quarter of 2024. PS had a solid year in 2023, and we expect a healthy 2024 for them as well. Driving the increase in HS were new business wins and open chain accessories that we launched during the third quarter last year. We also benefited from nearly a full quarter's worth of contribution from the Koch acquisition, which closed on January 11, 2024. Speaking of the Koch acquisition, which JMA will touch on more in a few minutes, our field sales and service teams are really excited to be selling the new product line, which will drive additional growth in hardware. We're working on some meaningful opportunities in this new open chain category that we and our customers are thrilled about. It fits Hillman perfectly. It's an important product line for our customers, and it's a complex category to ship and keep organized at the shelf. During the quarter, net sales in our robotics and digital solutions, or RDS, were down 9.2% to $55 million. Lighter foot traffic and discretionary spending, coupled with existing home sales near a 30-year low weighed on RDS during the quarter. As the consumer remains under pressure from inflation, our RDS business has been impacted more than our other businesses. Despite the softness in RDS, we remain optimistic about our long-term high-margin growth opportunities, which I'll expand on in a moment. Gross margin and EBITDA margins remain healthy at 71.6% and 30.7%, respectively. Last week, we appointed Scott Moore as our new Divisional President of RDS. Scott was one of the early founding members of Mineki and joined Hillman following its 2018 acquisition. Most recently, Scott was our Chief Technology Officer and will make a fantastic leader for RDS as we look to its next phase of growth with the rollout of minuteKEY 3.5. Scott and his team were instrumental in designing the software and technology that powers our minuteKEY platform and the new technology behind our minuteKEY 3.5 launch. The platform leverages artificial intelligence via machine learning to identify key types using a state-of-the-art visual key identification system. Our machines are continuously gathering data in order to read, identify, and execute factory original quality cuts, which ultimately result in a great customer experience. Scott's leadership, discipline, and respect throughout the Hillman organization make him a great fit for this role. Scott takes the reins from Randy Fagundo, who will retire following a long and successful career in the kiosk industry. Randy has been critical to the success of minuteKEY and RDS since joining Hillman, following the 2008 acquisition of minuteKEY. We are grateful for his meaningful contribution to Hillman. Randy, we're going to miss you, man; best of luck in your retirement. As we think about RDS, we are working on a number of growth initiatives. Scott was critical in developing our K2 kiosk technology platform. K2 provides software updates, event logging, inventory management, pricing and promotions, data analytics, and remote troubleshooting for the entire RDS kiosk fleet. Think of it as the eyes and ears inside the machine. We believe that our proprietary K2 technology can add tremendous value with our vending and kiosk companies, and we are currently in discussions to license that technology. Another growth opportunity I'm excited about involves our RDS field service team. Today, we have a dedicated group of mechanically skilled folks that service our fleet of kiosks, replenish inventories in the machine, and keep the uptime at 98% for our entire kiosk fleet. Recently, two brand-new customers selected Hillman to service their kiosks. For the first time, we will be servicing non-Hillman kiosks. These new accounts did their due diligence, driving along with our service reps, talking to our customers, and analyzing what our K2 technology and our Tempe, Arizona plant could do for their businesses. It's no surprise they picked Hillman. This is another example of Hillman solving complex needs for customers in the store. These accounts will begin to add additional profitability to RDS in the second half of 2024. Lastly, as you all know, the most exciting growth opportunity lies in front of us with minuteKEY 3.5. Currently, we have 101 machines in place in two test markets. These new kiosks offer home and office key duplication like our existing kiosks, but additionally, they have the ability to read and identify smart auto fobs, duplicate transponder and metal car keys, as well as RFID fobs. We are building these machines with updated capability for three of the top customers, and the initial feedback has been excellent. We expect to end 2024 with approximately 800 minuteKEY 3.5 machines this year in the top retailers in America. minuteKEY 3.5 will begin to contribute to our performance during the back half of '24 and have a more sizable impact on our '25 results as the consumer, with support from our retailers, starts to experience what a new minuteKEY kiosk can do for them. Heading north of the border, our Canadian business net sales were up slightly compared to the prior year quarter, but Team Canada had a great first quarter from a bottom-line perspective, increasing its adjusted EBITDA by over 70% from the first quarter of 2023. Now, I'd like to touch on the moat and the consistency that Hillman delivers. What differentiates Hillman and allows us to produce healthy financial results and makes us an embedded partner for our retail customers is our ability to bring value and solve problems for our customers that others can't. Our competitive moat consists of three main pillars. First, we have 1,100 sales and service folks that are in the stores of our customers on a regular basis, providing top-notch customer service at the shelf. We've been taking care of our customers for 60 years, and the Hillman service team has been winning at the shelf and adding value to our customers for the past 28 years. Second, we ship direct to the store of our retail customers. Said differently, our products typically do not flow through our customers' distribution centers. Our customers love that because they do not have to clutter their distribution centers with thousands of SKUs, and they know Hillman can ship it direct to the store and service the shelf. We shipped to over 46,000 locations across North America in 2023. And lastly, approximately 90% of our revenue comes from brands that we own and control, which allows us to anticipate and meet the evolving needs of our retail customers and our end-users. Another key component of what Hillman brings to the table is our long-term standing relationship with our customers. From store managers to merchants to VPs and up, we have been forging strategic partnerships with our customers that further strengthen our moat, and we have been working with our top five customers for over 25 years on average. As one of the largest providers of hardware products and solutions in North America, we offer 114,000 SKUs that serve the pickup truck Pro and the DIY. We provide a wide variety of hardware and related products across multiple product categories. Our products are used for repair, maintenance, and remodel, and these projects cannot be completed without Hillman-type products. It's great to have the critical products that make up just a fraction of the overall project cost. The predictable nature of our end markets, particularly repair and maintenance projects, drives consistent demand for our products in both up and down economic cycles. The perfect example of this is demonstrated by hardware solutions, which makes up 60% of our business. Over the past 20 years, 10 years and five years, HS has grown at a compounded annual growth rate of 7%, 7.3%, and 8.2%, respectively. Historically, we do not see the highs nor the lows of the market like many companies. During '22 and '23, the home improvement industry has been under pressure, yet Hillman continued to perform well like it has for the last 60 years. Despite a tough macro environment, we continue to win new business, deepen our partnerships with our customers, and strengthen our competitive moat. We feel very good about where we are with our customers right now and how Team Hillman is performing. We will continue to execute well during this cycle to control the controllables. That said, I know this team and our customers will be ready to ramp quickly when the market improves. With that, I'll turn it over to JMA to talk about freight costs, the integration of Koch acquisition, and the M&A landscape. JMA?

Thanks, Doug. Before I get into our operational highlights for the quarter, I first want to give a shout out to our global operations team, who did a fantastic job in 2023, which has carried into 2024. From transferring our hub to Kansas City, working to get our products shipped to our customers, maintaining healthy fill rates and reducing inventory. We have a very experienced team that knows how to take great care of our customers. They are the best in the business. Coming off a successful 2023, we continue that momentum into the first quarter of this year. We maintained our focus on executing our plan while controlling the controllables. Let me start by quickly hitting on inbound freight costs, which we locked in on May 1. Given volatility in the spot market, following turmoil in the Red Sea and delays at the Panama Canal, we are pleased that we have locked in our base contracted container rates that are about 10% higher than what we contracted last year. This is about half of the increase we are planning for. Many of our input costs, like steel from China, India and Taiwan, increased slightly during the first quarter of 2024 versus the 2023 average, but remained below the 2022 averages. During January of this year, we closed on the acquisition of Koch Industries, a Midwestern-based supplier of rope and chain and related hardware products with over 2,000 SKUs in modest customer overlap. We've been courting Koch for several years now, and as our leverage has improved and should continue to come down, the timing was right to acquire Koch. Koch was a great family-owned business and has a rich history. We are excited to welcome Koch to the Hillman family. From an integration standpoint, things have gone smoothly, and my hat's off to the Hillman and Koch teams for doing a great job and doing so ahead of schedule. Importantly, their customers, as well as ours, are on board and very excited to see Hillman enter this space. What we love about this acquisition is our ability to leverage Hillman's moat and resources with Koch's products. Let me walk you through several examples. First, Koch sources most of their products from Asia, and we will leverage our sourcing network to be more efficient on this front. Second, Koch ships its products to distribution centers of its customers; it does not ship store direct like Hillman. We see this as a great opportunity to expand among the traditional hardware customer. Third, Koch previously used a third party to service its products at the shelf, which will now be serviced by the Hillman team. This has allowed us to save on costs and improve the quality of service at the shelf for a very tricky category to keep in stock and looking clean and organized each and every day. Fourth, Koch does not do any business with Home Depot or Lowe's and only has the rope business at ACE. Altogether, approximately 90% of the broken chain market with these customers is white space, which we believe we can grow into. And fifth, Koch does not sell any of its products into Canada. With our market share and relationships north of the border, we believe we will grow in Canada as well. All in all, we are excited about the organic growth opportunities with Koch. Once we apply the Hillman-Koch model, our sales team is thrilled to have this product category to sell and service the shelf. As we think about the M&A landscape, we think there are many companies like Koch out there that would perform exceptionally well with our moat and our relationships. We have a dedicated M&A team. We understand project management and integration and believe that we can execute multiple successful acquisitions per year that are a similar size to Koch. Once the M&A flywheel gets turning, it will drive our long-term growth, including organic growth. We will leverage the Hillman moat as we seek more products to put on the truck and deliver directly to and service for our customers. For example, I would be disappointed if we don't grow Koch's net sales by at least 20% next year.

Thanks, Jon. Let me jump right in. Net sales in the first quarter of 2024 grew $350.3 million, an increase of 0.2% versus the prior year quarter of $349.7 million. First quarter adjusted gross margin increased by 610 basis points to 47.6% versus the prior year quarter of 41.5%. We have worked really hard to get here, and I am proud of our team and how we are performing in a challenging environment. Adjusted SG&A as a percentage of sales increased to 32.7% during the quarter from 30.3% from the year-ago quarter. Excluding the increase in our standard employee bonus expense, which was the result of a very strong bottom line during the first quarter, adjusted SG&A as a percentage of sales would have been up just 50 basis points and should be around 30% for the remainder of the year. Adjusted EBITDA in the first quarter was $52.3 million, which grew 30.2% versus the year-ago quarter. Adjusted EBITDA to net sales during the quarter was 14.9%, which compares favorably to 11.5% in the year-ago quarter. Adjusted EBITDA was driven by a positive mix of price and cost, which drove healthy margins, partially offset by a soft macro environment. Now let me turn to our cash flows. For the 13 weeks ended March 30, 2024, operating activities generated $12 million of cash as compared to $32 million in the year-ago period. Capital expenditures were in line with our expectations, totaling $17.8 million for the quarter. This compared to $18.1 million in the prior year period. Free cash flow for the 13 weeks ended March 30, 2024, totaled a use of $6.1 million, compared to generating $13.4 million in the year-ago period. After taking into consideration the Koch acquisition and our typical seasonal inventory build, this was in line with our expectations. Now, let me turn to the balance sheet. We ended the first quarter of 2024 with $747.5 million of total net debt outstanding, an increase of $25.1 million from the end of 2023. We ended the first quarter of 2024 with approximately $242 million of liquidity, which consists of $212 million of available borrowings under our revolving credit facility and $31 million of cash and equivalents. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 3.2 times compared to 3.3 times at the end of 2023 and a full turn better than 4.2 times a year ago. Looking forward, we maintain our expectation that we will end 2024 around 2.7 times net leverage, assuming we fall near the midpoint of our guidance. During the quarter, we also repriced our term note. In so doing, we lowered the interest rate spread by 36 basis points on our borrowing costs. Additionally, our first lien leverage ratio as defined by the term loan credit agreement has somewhat dropped below 3 times following our Q1 results, which should result in another 25 basis point savings on the term note. All in all, we expect to save about $2 million during 2024 as a result of these two reductions and are pleased with these savings considering the flattening of the forward curve. As Doug mentioned earlier, we are reiterating our full year 2024 guidance across all three metrics. We reiterate our full year net sales to be between $1.475 billion to $1.555 billion with a midpoint of $1.515 billion. This midpoint assumes a 1% headwind from price and a 1% decrease from market volumes, a 2% lift from new business wins, and a 3% lift from the Koch acquisition. All together the net sales midpoint implies a 2.8% increase over 2023. We are reiterating our full year 2024 adjusted EBITDA guidance to be between $230 million and $240 million, with a midpoint of $235 million. This midpoint represents an increase of about 7% versus 2023. We continue to expect our full year adjusted gross margins to come in above 45%, which is where we expect the business to perform over the longer term. Lastly, we are reiterating our full year 2024 free cash flow to be between $100 million to $120 million, with a midpoint of $110 million. This is slightly below our longer-term target, as we over-index on free cash flow during 2023 due to our working capital benefit. Longer term, we expect normalized free cash flow to be around $130 million to $140 million for the next several years starting in 2025, which is mainly driven by increased earnings with a minimal impact from working capital. The assumptions that have driven our guidance remain unchanged at this point, and are available in our earnings call presentation. As we talked about in our last earnings call, if the market remains soft in 2024, our top line could look similar to 2023. If that is the case, we still feel very confident we will grow our EBITDA as we benefit from lower COGS and efficiencies as we continue to run our business well and control the controllables. Looking further out to a more healthy macro environment, we believe our longer-term growth algorithm remains intact. Historically, our business has seen organic growth of 6% per year and high single to low double-digit adjusted EBITDA growth before M&A. And now that the M&A switch has turned on, we think long-term top line growth in the high single to low teens is realistic and adjusted EBITDA growth in the low to mid-teens is achievable. With that, let me turn it back to Doug.

Thanks, Rocky. As we navigate through this dynamic market landscape, I want to thank the Hillman team for their dedication and most importantly, for taking great care of our customers whether it's the seamless operation of our distribution centers, the tireless effort of our sales and service teams, or exceptional service provided by our customer support team. Your commitment to our customer is commendable. Thank you. Our foremost focus and commitment moving forward is to strengthen our competitive moat, execute our growth strategy profitably, and maintain discipline across the business. We firmly believe that this approach will ensure Hillman's success in the years to come. With that, we extend our appreciation to our valued customers, dedicated associates, and supportive shareholders. This concludes our prepared remarks, and we'll begin the Q&A portion of the call. Tonya, please open the call for questions, if you would.

Our first question will be coming from Reuben Garner of Benchmark.

So we've seen or heard big box some destocking or at least maybe not ramping up purchasing seasonally like they normally would in a couple of categories. Can you talk about your markets and what you're kind of seeing and hearing? What's inventory like in the channel, any risks of destock as the year progresses?

I think the destocking makes sense for many companies because they ship according to their plans and it goes through distribution centers. When sales are slower, they find themselves with excess inventory. However, we don't face that issue because we ship directly to stores. There is no real pipeline, and we don't have inventory in distribution centers, so I’m not concerned about that.

Okay, great. And then one of your larger customers made a flash into the pro distribution space since we last spoke. So I guess, can you talk about what your exposure is today to kind of the roofing or lumber yards or any other kind of pro categories and maybe this presents an opportunity longer term for you to kind of play in that market in a bigger way?

I believe this really enhances our offering to serve residential professional customers. The SRS is an impressive platform. They are currently focused on roofing and landscaping, and they cater to pool contractors. While I wouldn't want to be in that business, they are quite strong in it. Their commitment to the professional market is significant, as it allows them to leverage their strengths. We see this as beneficial for us because we have a solid relationship with Depot, and as they expand, we believe we will identify opportunities to support their growth.

Great. Congrats on the strong results guys and good luck going forward.

Our next question will come from Matthew Bouley of Barclays. Your line is open.

You have Elizabeth ringing on for Matt today. I just wanted to ask, could you speak a little bit about your expectations around transport costs? And I know that you said that you locked in your contract base rates. What does that reflect as far as your total freight costs? And would you be able to speak to the implications for gross margins through the rest of the year? Or whether or not that could impact your gross margins into 2025?

Yes, this is Jon Michael Adinolfi. I'll start by addressing the question about contract rates. We have secured our rates and, as we've indicated, we shipped over 95% based on contracts. We are quite confident about our contracted rates for 2024 and believe we are well-positioned to maintain our product flow. I'll let Rocky discuss the effects on margins.

Yes, Elizabeth, we expect to maintain margins above historic levels for the full year, consistent with what we shared last quarter. Historically, these margins were in the range of 44% to 45%, and we anticipate being at or above 45% for the remainder of the year. This expectation is influenced by our product mix and freight trends. However, it's important to note that some of our product costs remain persistently high. For instance, the inbound freight costs from the port to our distribution centers, along with outbound freight, are still elevated and on the rise. Additionally, labor costs are increasing, so it's a careful balance. Overall, we are pleased to confirm that we will stay at or above the 45% margin rate.

Okay. Thank you. And then as you're thinking about your kind of volumes through the second half with rates seeming to be higher for longer, how are you thinking about the trends there into Q2 and through the second half relative to what you were thinking previously?

Yes, towards the end of the year and when we talked about 2024, Elizabeth, we basically shut down four to plus one. And we're certainly hoping that it does better than that. But we set everything up this year with that assumption. And at this point, you might see that get a little better toward the end of the year. But we're planning our cost structure and the way we're going to run our business with it continuing to be in that range.

Yes, I think the only thing I would add is we've been really purposeful about what we've said, which is even in that kind of down four market, we still expect to generate nice profitability above the prior year because of what we see from a cost perspective and our ability to manage our costs below the gross profit line.

Yes, this is a situation where it really does help not to be loaded up with a bunch of manufacturing operations and fixed costs because you can be more agile with volume than a lot of companies can. So, we like our position.

And our next question will be coming from Lee Jagoda of CJS Securities.

So, you had mentioned earlier that your sales associates are not going to be working on other kiosks that are not yours. Can you speak to exactly what kind of kiosks that they're servicing, the leverage in the model related to this? And then maybe just some sense of the addressable market that you're looking at or going after here?

Yes, Lee. We've signed NDAs and contracts with folks, so I can't go into detail other than to say what's exciting about this is it's in retailers that we're already in, and one company has a glide path of very solid kiosk growth. The other company is just getting started and has big ambitions. So, both are exciting, and Rocky's happy because we're going to grow our DS profitability without capital. It's a nice model of flexibility. What I have been really pleasantly surprised with is that they've kicked the tires on us. They can see that we could also refurbish their machines at Tempe. We could certainly use K2 as their platform if they so chose, and then we can make their machine that they wanted us to. So, it's a pretty interesting opportunity for us. You know I've been talking about it for a bit, but we just we've just signed up two and we'll see.

The only thing, Lee, I would add is that the second part to your question, we would expect that it would be at or above incremental the fleet margin in the RDS business. Otherwise, we wouldn't be looking at.

No, I would assume that would have been correct. I guess just what I mean is, can we get a sense for the categories that these kiosks are in and the installed base of the two customers combined today?

You know, Lee, if I give you any piece, you'll be able to figure things out. So I'd probably just, this is an important new partnership. I'm going to stay away from it. I apologize.

Okay. And then just one more on M&A, Doug. It sounds like you guys have started this flywheel now that we've got the leverage back in line. What are the categories you guys are focused on in the short and medium term? And maybe Rocky, just remind us how you think about return metrics when you look at M&A?

Yes, I think if you think about categories, it's really interesting. There are half a dozen that we think make sense. So we've got about seven companies that we're looking at right now. And the funding portion of it is, every time we open up about a bulk or a deck, we just lapped because it's in that same ZIP code of EBITDA, and that just makes total sense for us. And those are kind of the code-type sweet spots. We've got about three that I feel good about. I think, Lee, my sense is you kind of that look in the major leagues if you're all the same. If you've got three, you'll probably get one that you're working on is about 300% in a lot of 1,000. So I feel good about that. And I think Rocky, maybe you can touch on the return the arbitrations there, yes.

Yes. I mean, if you think about these, we as we've said, we expect to pay mid to high single-digit type multiples for these businesses, Lee. And as we run return on investment metrics, they're all well in excess high teens to low 20s at this point. I don't think there's a better way to spend capital, particularly if they fit the moat, not that sizable to where they impact our leverage. And again, as you've heard me say many times, the real exciting piece of these deals, like the Koch acquisition, is in year two because they help us turbocharge the organic growth. You're Jay may commit to a 20% growth for Koch, and he would be very disappointed if we weren't next year. That's a prime example.

From a guy that just took his training wheels off, which was going to.

Well, go big or go home.

And our next question will be coming from Stephen Volkmann of Jefferies.

I'm sorry if I missed this. Are you able to say what you're expecting Koch to contribute on the top line this year?

Yes. Koch, we expect to be, call it, $40 million to $45 million of top-line revenue.

Got it. Okay. And then also since the flywheel seems to be starting up here again, how should we think about these acquisitions? Do they come in at kind of lower margins and then you get a chance to sort of bust them up? Or are these kind of niche high-margin businesses that you don't really have to sort of fix up? How do we think about that?

Yes. Let me start, Steve. I mean the interesting thing is the gross margin can vary depending on structure and how they get to market, just like PS varies from HF, but the EBITDA margin tends to be similar to our fleet on the ones that we're looking at right now.

Okay, great. That's helpful. And then finally I think you mentioned in the outset that the price headwind this quarter was like 40 basis points or something. I think I got that. But just how's that playing out relative to expectations?

I think it's playing out like we thought. We're working with our customers on that. But the great news about this industry and our category is that it's not an elastic category. It's not that you have to be at a price point. And if price reductions, or if the retailer uses that to help their margins, you don't normally see it show up at retail. So that's a really, I think, a structural thing that is helpful. But we're working with our customers. And as we said, I think, Rocky, for the year about 1%?

Yes, that's what inside the gate, Stephen, is 1%, and 40 basis points in the first quarter. And obviously, as you think about different categories, different customers, it's different rates, but that's what it blends out to across the base.

And our next question will be coming from Brian McNamara of Canaccord Genuity.

Hey, good morning, guys. Thanks for taking the questions. First, I'm curious how sustainable the impressive Q1 gross margins are in the context of some of your retail partners being pretty aggressive about asking for a price back. How should we think about the cadence of gross margins for Q2 and the balance of the year?

Again, Brian, as we said, I mean, it's our expectation that the gross margin remains above that 45% for the full year. The back half we would anticipate would be a little lower just because of the timing of some of the price givebacks. But as we think about the whole year, we feel really good about where we are. We feel good about where we are with our customers and that we've been fair and we've done the right thing and that will hang on to most of the price that we have and come in at or slightly better than what our expectations are.

Got it. And then maybe another one on M&A. Is the restart of this M&A flywheel simply a function of just seeing more opportunities in the marketplace, your overall comfort with your current leverage, or a combination of both? And can you remind us of your capital allocation priorities and how you balance M&A opportunities while keeping leverage in check, particularly for investors who might be a little more sensitive to the leverage level?

Yes. I think first part of that, Brian, is the opportunities have been there because there hasn't really been a debt market for the private equity folks. We've just been lucky that we haven't lost any and continue to talk to the folks about it now that we're ready, and that answers your question, is our leverage is at a point and heading in a direction where I'm very comfortable now doing that. The debt markets still haven't really opened up much. So we feel like we're in a really nice spot right now. And I think what the entrepreneurs have learned is that private equity comes and goes with the debt markets, and they would much rather trust us with their business than they would private equity. So I think we've got a real advantage, and I think timing is good for us right now, but it's our leverage that really determines that.

Yes. I mean, and then just add on with capital allocation. Our first priority is always going to be CapEx. If we think there's the right machine builds as an example or racking to do with a new customer, those are always high returns, low risk; spend money there first. Our next is we're either going to pay down debt, but for when there are opportunities around M&A, but you're going to see us be very prudent around that. Koch is a great example. It really didn't move the leverage needle and has provided a great platform for us to grow the business at a reasonable multiple. If we can find a couple more of those over the remainder of this year, you'll see us do those. But I think that doesn't bring us off our goal and the expectation that the street has that we'll get the leverage below 3 even with those acquisitions.

And our next question will be coming from Ryan Merkel of William Blair.

Hey, Doug, can you talk about the start to Q2? Did April come in line with what you were thinking, and should we assume normal seasonality into Q2, up sort of 10 11% from Q1?

Yes, what we've seen so far is about the continuation. I mean, basically for the year, January was tricky for everybody. It improved slightly off of that, but has not jumped from there. It's just kind of what we had expected, and that's kind of how we're planning it. So you'll see some seasonality, as we have historically, but I still think our down four plus one is not a bad peg for the year unless the rates change and the consumer starts to feel more confident than they do right now.

Yes. The only thing I'd add, Ryan, is that, yes, as you think about Q1 to Q2, we do believe we'll see kind of the seasonal jump, and then the same thing from a profitability perspective, right? Our second and third quarters are always our most profitable because we're putting more product through the machine.

Ryan, that's a great question, and we are disappointed with RDS. In response to your question, if you look at engraving patents, ownership was at 70% in 2020, and it has now decreased to 63%. Dog ownership has also fallen by 6%. In observing companies like PetSmart and Petco, they are primarily focusing on selling food rather than managing the reduction in other discretionary items that accompany pet ownership. Additionally, foot traffic plays a role in this situation, affecting services like key cutting. We have noticed foot traffic decline by 11%, 8%, and 8% year-to-date, which certainly has an impact. Another factor is the drop in used car sales. We really value our smart fob business, but with the current state of used car sales, consumers aren't seeking out fobs as they typically would. This isn't an excuse; our primary challenge remains the same. As I mentioned previously, the staff in Bentonville have relocated machines and kiosks from the front of the store to the Auto Center, sporting goods section, and paint department. Consequently, consumers might visit the store several times without realizing that key cutting services are available, whereas they would have previously encountered that service either when entering or exiting the store. I don't disagree with Macmillan's strategy; it may be beneficial for them, but it does hinder our kiosk business. We should be able to acquire keys from our other retailers, but this is our main issue, and we need to allow time for adjustments as they reposition the machines and we adapt to the new situation. It's slightly more challenging than we anticipated, which is why we are emphasizing the 3.5. The features available for consumers with that number of key machines are different, and that's where we currently stand.

Let me add just quick there. When you think about our DSO, which our entire business is impacted either by discretionary, we believe for buying existing homes. When you think about our other businesses, repair, maintenance, and remodel, so repair and maintenance is done pretty much regardless of what is happening with existing home sales, where discretionary spending is the remodel that's going to have the bigger impact. So again to your question about why a bigger impact in RDS; because the entire business is impacted by these macro factors, whereas our hardware, protective, Canadian businesses are parts are but not all.

One moment for our next question which will come from Quinn Fredrickson of Baird.

First, just wanted to ask on SG&A. Rocky, I think you said around 30% of sales the rest of the year. If I got that right, is that where you were in Q1? Maybe some of the one-timers that you called out. Just any color there?

Yes, we were a little bit over that in the first quarter, but that's where we expect the remainder of the year to be.

Okay. Thank you, very helpful. And then secondly, on the Canada margin strength in the quarter, can you maybe unpack just what drove that and kind of sustainability from here you have for them?

Yes, for them, they picked up some new business, and the margin profiles are better than their fleet. They've also started, and that's one of the bright spot for our key business. They've started to install many key machines, which will help their mix. And then, Quinn, I'd love to say they smoked it, but their core, their first quarter in '23 was underwhelming. So it was an easier comp.

I'm showing no further questions. I would now like to turn the call back to Mr. Cahill for closing comments.

Thanks again, everyone, for joining us this morning. We look forward to updating you on our progress this summer. And congrats to Jamie on getting to his first earnings call, good job. Thank you everyone.

You may now disconnect.