Q3 2021 Hillman Solutions Corp Earnings Call

Thank you for standing by your Hillman 2021 third quarter results conference call will begin momentarily.

[music].

Good day, and thank you for standing by welcome to the Hillman 2021 third quarter results conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. Please be.

Advised that today's conference is being recorded.

You require assistance during the conference. Please press Star Zero I would now like to hand, the conference over to Jennifer Hills, Vice President of Investor Relations. Please go ahead.

Thank you Abigail Good morning. This is Jennifer Hills, Vice President of Investor Relations and Helman. Thank you for joining US. This morning to review and discuss Hillman third quarter 2021 earnings results. Joining me today are <unk>, Chairman, President and Chief Executive Officer, and Rocky Kraft Chief financial.

Officer, a copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at Ww Dot IR Dot Hill main group Dot Com before we begin we would like to caution you that certain statements made today may include forward looking statements that are subject to the safe Harbor.

Provisions of the 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 which could cause actual results to differ materially from those projected in such statements some of those.

Factors that could influence the company's results are contained in our periodic and annual reports filed with the Securities and Exchange Commission.

Please see slide two in our earnings call deck for more information regarding these risks and uncertainties.

We will begin the call with a business update from Doug followed by Ron <unk>, who will be providing a financial review of the quarter now let me turn the call over to Doug. Thanks, Jennifer Let me start by breaking down our business by segment and review performance during the third quarter and year to date.

To cut to the chase, our hardware solutions robotics, and digital solutions and Canadian businesses, all performed well in the quarter in spite of the historic supply chain challenges and a very strong third quarter last year, but the unwinding of our COVID-19 related products and protective solutions negatively.

<unk>, our earnings going deeper or Hs business net sales were down six 4% during the third quarter versus 2020 and were up two 6% year to date.

Third quarter was a bit slower for Hs business than we anticipated for two reasons first America said, we're getting out of the house in July and August and they did.

Second higher lumber prices slowed projects down during the quarter, but since mid September lumber is more affordable kids are back to school retailers point of sale volume has rebounded at the shelf and people are back to their home projects Youll remember the very strong third quarter.

<unk> experienced last year up 22, 7% at the height of the stay home and DIY projects timeframe.

If you look at Hs over a longer timeframe youll see a healthy growing business.

Two year stack, it's up 15, 9% in the third quarter versus 2019 and year to date its up 19, 8% versus 2019 I'll talk much more about Hs and hope you will agree that this business is executing and well positioned.

Our Rds business net sales were up 14% in the third quarter versus 2020 and year to date, they're up 23. So continued great performance by the Rds team.

Canada third quarter was very similar to Hs comprehend a strong Q3 last year and net sales were up $15 six year to date and a very healthy 17, one ahead of 2019.

Rps or protective solutions net sales were down $26 six in the quarter and were down eight nine year to date with Covid comp that they were up against.

Net sales were up 21% in the quarter versus 2019 and year to date, our topline was up $17 four versus 2019 I.

I will explain in detail what it took to unwind COVID-19.

For the Pes business in just a few minutes what we did during Covid was help our retailers satisfy the needs of their consumers and protect our employees. So they could continue operating during these unprecedented times.

<unk> ended the year awards in 2020 was evidence we were there for them.

I'm, probably going to spend less than one minute whining about supply chain and inflation issues because first of all you pay us to figure this stuff out.

And second in a strange way all of this craziness is enabling us to separate ourselves with our performance from our competitors. So it will end up being a good thing for Hillman and here's why all retailers have three big concerns right now number one labor to shipping issues.

Cost and three share loss to their competitors due to stock outs plain and simple.

These are the top three and we help them in all three I think better than anybody we have 1100 people in the stores every day, that's our in store labor. So the retailer doesn't have to.

We shipped to over 42000 locations with 80% of our hardware products shipped directly to the stores bypassing the retailers distribution centers, that's us solving the shipping and distribution center problem. So the retailer doesn't have to their Dcs are short staffed and stuffed right now with things like.

Lamar's that just arrived last month.

Timing, yes, but they took them.

So they for sure would have them next spring and third if youre a retailer Hillman as youre not losing share just stock outs.

Answers are youre, gaining share our year to date fill rate for Hs is 91% and more importantly, Hillman in stock service level at the shelf for our top five customers reported from their systems is 95% over the past 30 days, which.

He has been the toughest 30 days for fill rates probably ever. So how are we doing that first we have invested in additional inventory and working capital, which you have to do when your lead times move from historically 120 days to over 200 without that investment our fill rates would be closer to the IND.

History average of 70%.

As a result, we're paying for lots of extra inventory as well as outside third party warehouse space to store. This additional inventory needed to service customers in the current lead time World Secondly, our 1100 folks in the store and our direct to store shipping model gives us the fastest port to shelf hardware.

Model in North America, and finally, our 57 years of experience and long term supplier relationships have enabled us to separate Hillman from our competitors. During this global supply mass we're all experiencing.

There are of course of course, there is of course, the cost of maintaining the service levels and you see it on our balance sheet, but I believe it's more than worth it as our differentiated model and our ability out serve the competition. During this period of supply chain disruptions has and will continue to lead to additional market share.

<unk> and outsized growth for our hardware solutions business I can't wait to tell you about current wins in a minute, but before I do let me address the historic inflation and supply chain issues. We're facing then I'll talk about what we're doing about it I've.

I've seen many things during my career, but I've never seen anything like what we're currently experiencing with supply chain disruptions and inflation and I've never seen it as a top story in all outlets pre COVID-19. It took hillman on average of 120 days from the time, we would order product from Asia until it would arrive.

On the West coast today. It is in excess of 200 days, we are experiencing inflation and commodity cost inbound and outbound freight as well as labor.

To put in perspective, 20 foot container costs that averaged us $500 in 2019.

$2000 in 2020 have been averaging $5600 since July in the U S and much higher in Canada.

Obviously spot prices are well above these but the increases are really staggering the shifts can't get into the ports.

And when our container does get on land, we can't pick them up as quickly as we'd like due to the congestion and appointment delays to add insult to injury. After four days, they're charging all of US 250 per container per day demurrage on our product many times they won't let us.

Pick up.

And we hear it's going higher effective November 15th of this year. Okay. Let me focus on what we're doing about it through all the challenges I am so proud of our 1100 field service employees, who work closely with our customers, helping to solve logistics and labor issues in the store and at the shelf. These unprecedented.

The cost increases are being passed on to our retail customers and end consumers and thankfully our product categories are not seasonal nor are they overly price sensitive and our customers are experiencing these type of increases across the board.

Our issue is timing.

As we discussed in our last earnings call. We successfully implemented our first price increase of roughly 7% to 8% effective in June working together with our retail partners. We have been successful across the board with our second increase of roughly the same percentage, 7% to 8% that will go.

Go into effect in October November of this year that puts us up around 15%. After the first two increases and when we complete our planned third increase which should go into effect January February 2022.

We will be above 20% price increase when you add the three together and Thats, what we think we will need with what we know today to cover our cost increases let.

Let me touch on a few highlights and new business wins during the third quarter, we were busy continuing to execute on recent business wins. They are great. Examples of our competitive moat and the secret sauce of Hillman in late July. We finished the 150 store reset of 32 linear feet shelf space at a major REIT.

Taylor for construction fasteners at 97% on time and complete.

In September we began to implement our latest win and builders hardware, what a beautiful set it's four eight foot bays and over 500 stores and we will be done next Wednesday, we also set our hurricane recovery teams, which is a subset of our 1100 team.

The most impacted areas and helped our retail partners get stores and hardware aisles back up and running in record time. We also build out one of our retail partners in New Orleans area by providing cap nails that our competitor was unable to service for one of the top five retailers in the area post hurricane.

GAAP nails are the number one needed fasteners to keep tarps on and the elements out we shipped and they sold $18 million cap nails in 40 days, we were there for them and last night, we got an order for $6 million more cap nails, the great thing about our network as they will ship today.

The next one may be my favorite win and it's one that I've personally been working on with our almost 40 year veteran sales leader for over five years.

So it's near and Dear to my Heart, we've won the fastener business at one of our top five retailers for the first time ever.

This is an exciting win that will change the hardware category for this important retail retailer with a completely new set we along with the retailer will recreate the fastener aisle in every store during the last week of June 2022.

One last pivot about the story, we created a 20 foot modular with over 400, new Skus and all new packaging, but were so worried our shipping carrier would miss the ship window, we actually loaded suburbans in Cincinnati and our folks drove 11 hours to make sure. It made it to the corporate layout room.

For <unk> senior management walked through they unanimously approved this set and awarded US the business in the quote from senior management was this looks nothing like our current aisle and it's about time, we give our consumers what they want in this category stay tuned because I think it's times like these when five.

Years of work are paying off for enrollment this win will generate $17 million in sales for 2022, and we're really looking forward to seeing what it will do in 2023 and beyond with our people in the store manage in this new fastener aisle.

Our robotics and digital solutions business, where we're the leader in key Fob duplication, Pat engraving and knife sharpening is having a great year remember we've designed developed and manufactured now 35000 machines located in retail stores throughout North America, and we continue to own and service every machine.

Seen out there.

These robotic and digital machines helped drive in store traffic provide great margins in our destination purchase items for our retailers.

<unk> business grew net sales, 14% in Q3 over prior year and our EBIT grew 35% year to date that puts their net sales up 23 with EBIT growth of $34 seven over 2020, we have significant runway to continue to rollout.

RFID Fobs smart auto Fabs knife, sharpening machines, and further expand our product offering to take both share organically as well as through M&A.

This is a great business for <unk> and our retailers are really fired up about what's ahead now.

Now, let's talk protective solutions.

Let's discuss PFS business pre and post Covid and let me explain why we did what we did pre.

Pre COVID-19 disposable gloves were not our core retail category for PFS, but part of our offering to several of our major customers and in 2019 was approximately 10% of PFS is sales and of those 80% of the volume was nitrile gloves those of the heavier gray.

<unk> Blue and Black gloves, we've all seen.

We sold every disposable gloves, we had when COVID-19 hit and our customers work closely with our team to secure more Asap. It really went from a buying frenzy to a global panic first globally, both medical community and governments consumed the nitrile gloves supply.

Driving cost up three acts in a matter of weeks. This extended lead times from 90 days to 250 days at its peak second in parallel to the explosive demand growth overseas manufacturers were shutdown are running at a fraction of their capacity due to <unk>.

Increase in Covid cases, and third retailers were struggling to get enough to even supply store associate needs on a daily basis to keep their stores open and operating Hillman at our retail partners didn't want to take nitrile gloves from the medical community. So the clear.

Thin vinyl gloves became the only option and were.

Quickly sold out.

Prices as you can imagine skyrocketed delivery times were consistently pushed and when the music stopped March one 2021, we had more disposable gloves not.

Not to mention mass sprays and wipes than we needed with the delayed shipment of product in Asia, and some still on the water heading our way.

Given our customer support during COVID-19 and the strength of our relationships, our retailers or partner with us to alleviate any inventory issues on mask sprays and wipes, which were all three new products for Hillman, we synced up with our customers and have successfully sold excess inventory and <unk>.

<unk> III product caddies categories to our customers, who have and will donate them to various charities.

We will get our money back on these three by the end of the year and are happy with how our retail partners supported us throughout this period on.

Disposable gloves, we hope to sell them over time since they have a very long shelf life, but the current global supply glut.

Glad has collapsed the price of vinyl gloves from $6 four 100 count box to below $2 per Hunter count in a recent sales being quoted as low as 30 per 100 count box, Fortunately Nitro glove cost and retail prices have remained strong.

[laughter] throughout even though this product has a long shelf life and our plan was to sell these over time, there is a glut of inventory at both retail and wholesale the cost of outside warehouse stores continues to rise and our landed average cost is well above market. Therefore, we were right.

This inventory off and donate the product the outcome on disposable gloves did not work as we had planned during the unprecedented times, we are disappointed with the write off and the negative impact on our 21 sales and profit performance different days same OS strategy is not our go forward game plan on disposable gloves.

With the overseas capacity, that's been added and the ongoing supply chain issues out there we've been working with two of our major customers and have been successful in securing the first made in the USA Nitro disposable glove exclusive supply agreement for retail.

The made in USA factory will ship the first product towards the end of the year and they are adding additional capacity scheduled to come online in mid 2020 to our retail partners are excited about the made in USA as well as the bill the ability to onshore nitrile gloves for the first time.

This will reduce lead times from over 200 days out of Asia to 30 days out of the United States. This gives us true differentiation at differentiation and good margin and helps our customers with made in USA on trend goods not dimension, bypassing all the container and port Crazy.

And as we're seeing every day.

<unk> to take care of our customers and the Americans consumers in need during COVID-19 on the PFS side.

Just had a negative impact on our entire operation and our cost structure, we were forced to rent three outside warehouses to handle the volume and unprecedented unpredictable arrival times from overseas.

And our single warehouse for PFS North of Atlanta, just got slammed as we tried to deal with this unprecedented volume and complexity.

The base business for protective solution, which includes the number one selling work glove brand firm grip continues to perform well with a three year top line CAGR of 7%.

Our bottom line has suffered an impact the profitability of the entire business due to COVID-19 turmoil and inefficiencies at PFS mentioned above.

Our plan forward in PFS is to continue to drive growth in our core product categories with continued innovation, new business wins and new accounts move into a new distribution center just after mid year 2022, and improve execution by consolidated several supply chain.

And other business functions with our U S hardware solutions group. We believe these actions along with a shift in the management team will allow this business to grow top line in the mid single digit range in bottom line, 10% organically.

<unk> the rest of the business going forward.

To summarize our hardware Rds and Canadian businesses have continued to perform while managing crazy complexity and incurring much higher costs. We've made the working capital commitments to continue to service our customers at the same high level, we always have and we will use this opportunity to strengthen our.

Relationship and take share from our competitors and 57 years Helman has never had to raise prices three times in a 12 month period. So unprecedented is not an understatement.

One quick comment on leverage and M&A before I turn it to Rockies.

Leverage at the end of the quarter was four three this was much higher than rocky than I had planned for all the reasons I previously discussed we remain committed to over time, reducing our leverage to below three X on.

On the M&A front, the pipeline still remains robust and we're seeing more entrepreneurs looking to sell with all the press surrounding changes in tax laws. We continue to see an opportunity for two to three bolt on acquisitions a year.

With that Rocky why don't you take it over and provide more details on the quarter and outlook.

Doug on.

On a GAAP basis, our net sales for the third quarter of 2021 were $364 5 million.

A decrease of $34 2 million or eight 6% versus the prior year.

As we discussed on prior calls the third quarter of 2021 was our toughest comparison with the prior year as our retailers bought any and all COVID-19 related personal protection products, we could ship them in <unk> 2020, and our hardware businesses in the U S and Canada experienced significant growth as consumers repurpose their homes for.

<unk> <unk>.

The much faster than expected reduction in sales of Covid related items drove an approximately $26 million reduction in our pes business, a decrease of 26, 6% and an even bigger reduction to profitability because of the profit on PPE products in the prior year.

In addition to having an extremely difficult comp and hardware solutions that reduction in foot traffic at our retailers in July and August led to a year over year sales decline of $12 9 million or six 4%.

The first round of price and a rebound in foot traffic and demand in September were not enough to offset the headwinds early in the quarter.

Similar to U S hardware, our Canadian business was up against extremely difficult comps and declined by $3 7 million or nine 3%.

Our Rds business was the star of the quarter as we continued to see a rebound in this business post COVID-19.

<unk> revenue was up $8 3 million or 14%.

Year to date revenues have grown three 9% to nearly $1 1 billion with hardware sales up two 6% Rds up 23%.

And Canada up 15, 6%, partially offset by the eight 9% decline in PFS.

With easier comparisons in the fourth quarter and an improvement in traffic at retail hardware solutions should finish the year strong and we should achieve our long term mid single digit revenue growth target for the year.

In the third quarter on an unadjusted basis gross profit declined by $43 $7 million, including a $32 million write off of PPE inventory that has a market value well below our cost as demand for the product declined and the market became flooded with product.

Excluding the inventory write down our gross profit decreased by $11 $7 million over the prior year quarter to $159 5 million driven by lower net revenues.

Gross margin rate, excluding the inventory write down expanded 90 basis points to 43, 8% from 42, 9% as the growth and margin expansion in our higher margin Rds categories, coupled with moderate margin expansion in Hs was partially offset by rate pressure in protective solutions.

<unk> from the loss of high margin PPE sales.

Year to date on an unadjusted basis gross profit decreased $23 7 million to $427 million.

And reduced leverage of our selling costs, which include our field service teams and our customer stores. The revenue sharing arrangements, we have with our customers in Rds and an increase in travel compared to 2020, when most of our teams were grounded due to COVID-19.

Year to date, SG&A, excluding certain restructuring and other costs increased by seven 3% to $296 million and as a percentage of sales increased to 27, 3% from 26, 5%.

200.

Inflation and inventory investments to support new business wins and anticipated sales growth have driven our use of operating cash flow in 2021.

Year to date net cash used for investing activities was $76 million as compared to $30 million in the prior year and included the acquisition of <unk> building products in the second quarter.

Capital expenditures were $37 million and approximately 8 million higher year over year as we continued to invest in robotics and digital solutions equipment and merchandising racks important parts of our high return Capex initiatives.

As a reminder, we reduced our growth capex quite significantly for a period of time in 2020 because of the uncertainty caused by Covid.

Maintenance Capex remains near 1% of sales as expected.

Post the transaction with located land <unk> in mid July we have recapitalized, our balance sheet and at the end of the third quarter of 2021, we had $925 million of total debt outstanding down from $1 7 billion of total debt outstanding at the end of the second quarter.

At the end of the quarter, we had approximately $150 million of our barrels available borrowing under our revolving credit facility.

Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was four three times down from seven one times at the end of the second quarter.

Covid had both positive and negative impacts on our business over the past seven quarters.

It has often been difficult to separate COVID-19 impact from base business trends.

To cut through this COVID-19 noise, we like many of our peers and retail customers believe comparisons of 2021 to the pre Covid 2019 is helpful.

It also better reflects the strength in our underlying businesses.

We have provided a two year growth comparison of our results for the third quarter in our slide presentation, which shows that overall sales in the third quarter increased 14, 9% from 2019.

We also showed strong revenue growth across each of our segments with hardware and protective solutions up 17, 3% robotics and digital solutions up nine, 2% and Canada up nine 2%.

Similarly, we experienced growth of 11, 2% and adjusted EBITDA.

At the segment level adjusted EBITDA from 2019 grew two 6% and hardware and protective.

18, 3% in robotics and digital solutions.

And over 115% in Canada.

Importantly, adjusted EBITDA in our hardware business is up high teens compared to 2019.

As Doug highlighted in his opening remarks cost pressures have not abated and a dense intensified over the past quarter.

Working with our retail customers, we increased price in the high single digits in the second quarter based on what we saw in April.

As we discussed in our second quarter call. The cost pressures continued so we've gone back and are currently implementing another round of increases in the fourth quarter.

Over the past several months, we have seen a significant increase in both inbound and outbound freight.

We are now paying approximately three times, what we paid for a year ago for a container.

But still well below spot prices.

Additionally, due to the backup at the ports, we have incurred unplanned third party warehouse storage cost when we haven't been able to pick up product and move it out of the port which have added an additional cost pressure to the business we.

We anticipate these costs will continue into 2022.

Commodity costs have also risen and have added an incremental expense in 2021, but due to the lead time and supply chain most of the higher commodity costs will hit us in 2022.

We plan to take additional pricing action in early 2022, as Doug discussed earlier.

As we think about the cost pressure across our businesses. We now expect 2021, adjusted EBITDA to be in the range of $205 million to $210 million.

About 40% of the step down is due to the third quarter results and the remaining is split between higher freight third party warehouse costs and other supply chain related costs across all of our businesses.

In addition, we now anticipate that we will use approximately $100 million of working capital in 2021 to maintain our fill rates at industry, leading levels of above 90%.

We plan to reduce leverage during Q4, but at a lower level than previously expected and anticipate that we will end the year with only a modest reduction in leverage from current levels.

As Doug stated earlier, we are committed to reducing leverage to below three times, but given the inventory and supply chain challenges in 2021, it will take us a little longer than originally planned to get there.

As we think about 2022, it is very difficult to predict when we will see a return to normalcy around commodity cost.

Both inbound and outbound freight and the supply chain Craziness. We are currently experiencing along with all industries.

As such we won't be providing formal guidance for 'twenty two in this call.

That said, we are very comfortable that our revenue for 2022 will be consistent with our 6% organic growth algorithm and exceed $1 $5 billion as we have visibility into our markets new business wins and pricing actions to date.

Similar to revenue, we believe our growth algorithm is intact, both in the near and longer term for EBITDA. So we expect that we will grow EBITDA at our organic target of 10%, although off a revised 2021 base.

Longer term, we continue to believe that our unique model will allow us to organically grow our revenue, 6% and our EBITDA up 10% consistent with our history and the M&A pipe should allow us to expand those numbers to 10% revenue and 15% EBITDA.

With that let me turn the call back over to Doug.

Thanks Rocky.

I'll just wrap up while near term, we're definitely feeling the sales and profit impact of the sudden falloff in demand for Covid related PPA together with the historical supply chain cost pressures our confidence in the long term is strong and we have a really good company. Thanks to our 3800 associates.

In our category you don't win or lose business just on price fill rates are critically important to all retailers, especially now that its the quickest way for a retailer to lose market share or 1100 folks in the field combined with our direct to store delivery model and our investment in additional inventory.

Enable us to keep the industry, leading fill rates above 90%. This puts us in a great position to gain additional shelf space with our retailers and achieve our long term targets of 6% organic revenue growth and 10% EBITDA locked.

A lot going on with that let's turn it over to the operator and open it up for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the Q&A roster.

And our first question comes from the line of Reuben Garner with Benchmark Company. Your line is open.

Thank you and good morning, everybody.

Hey, Reuben.

First of all Doug Congrats on your Vanderbilt Buddy winning the World series last night.

Thanks.

Jump in jumping into it here so just.

Just wanted to get clarity on the 2022 and apologies I got kicked off the call a couple of times technical difficulties. So if you spoke to this.

I'm sorry, but.

So you pulled the outlook.

Think I heard Rocky say, 10% growth off the lower base.

Standard algorithm is there any reason why.

We would have a lot of the issues this year or sort of onetime or seem to be onetime you've got new pricing actions in place is there any reason why you kind of wouldn't grow substantially faster than your typical 10% next year or is it.

Is the reason you pulled it just because it's too early what are the factors that you're.

Looking at the lead you to make those comments for next year.

Yes, Reuben this rocky I mean, as we think about next year and as we sit today, obviously, there's a lot of craziness going on in the ports I mean November 15th.

Expectations of the costs around things like demurrage, and detention going up higher and going up potentially exponentially and so we're committed to that 10% growth algorithm and feel really good about doing that next year, but at this point in time, we just don't believe it's prudent to go out with a number higher than that especially when you think about a business like hardware that is.

A normal steady growth type business on an annual basis. So we feel good about the 10, our going forward plan will be in our year end call, we'll give more specific guidance with a range.

But just at this point in time, saying anything other than we're going to grow at our standard algorithm, we think wouldn't be prudent yes, Ruben the only other thing I'd add is September October November and December.

We will see these demurrage.

Detention charges for again in many cases, we're trying to get in and can't and while those aren't going to be with US forever. We're just not sure when they go away and we just need to let some rollout here and just see because.

Again, this November 15th extra $100 going up 100 everyday.

Nobody's ever heard anything like that so that's why we're trying to do the right thing as we sit today on where we are.

Understood.

Just a quick follow up on that.

<unk>.

New pricing actions that you have and I think your move into kind of a 90 day model checking the costs I mean.

That would incorporate some of those pressures right, but youre still youre still having to I mean is that a negotiation or when you're when you're a seamless.

Ocean freight rates go up are those sort of in that basket.

You're telling your customers.

<unk> got to pay for so they need to pay for yeah.

Yes, yes, so it's all part of it.

And if you think about it let's just assume movement that we get that third price increase one I think and let's say it's effective February one 2022.

It's essentially three price increases over 20% in 290 days. So that's about 97 days per and the way that breaks down is it's about <unk>.

We need about 25, or so days to get all of the math because we have to go byproduct by SKU by steel by freight by de merge all of that and it's not hard to do but it takes a while for about for us to put it together. So it's about averaging just around 95 days right now for the three.

The third one coming.

Got it and then on the on the protective solutions.

<unk> this year can you.

And again, if you said this I apologize, but can you.

Just talk to us about what the one time hit was.

This year from from the actions you've had to take altogether the masks gloves everything what what's the drag that that had on the business. This year that we won't see going forward.

Yes, so as you think about the business Reuben obviously, we had the charge in the period, but even when you look at the actual results Rps business in the third quarter.

Was down even year to date down from an EBITDA perspective, it was about cut in half and so we're going to baseline off that we do believe the core business is solid if you look over the last three years the organic growth in the core it's about 7% and so again, we will baseline off kind of that new EBITDA number and then <unk>.

We expect that business to grow with our algorithm. So mid single digits top line and kind of call it 10% bottom line.

Into 'twenty, two and into the future.

Great. Thanks, guys I know this is a challenging period good luck.

Thanks.

Thank you. Our next question comes from the line of Hamzah <unk> with Jefferies. Your line is open.

Hey, good morning, it's actually Ryan <unk> filling in for Hamzah.

On my first question can you guys just talk about how we should think about the penetration opportunity in robotics, maybe where youre at today and what the addressable market looks like and as part of that what the competitive dynamics look like.

Sure Yeah, Ryan I think if you break it down first of all many key continues to rollout but.

But we probably have another thousand machines raki would be my guess on many key that we're going to roll through of visibility that we kind of see maybe a few more and Ryan. The reason I say that is this whole labor thing is making minute key even more popular than in more demand.

Because of the store labor, so, let's just say a thousand unless the labor thing continues to get worse that's first.

On knife sharpening, we wound up at about 500 at the end of the year, we have orders for 3000 that's.

First customer, we havent gone to anybody else, but obviously the chip shortages is limiting that we did get 500 more chips last night.

I was happy about that I don't know, if we bought them on ebay or what but we got them and so we'll be rolling those out and I assume that chip shortage will work its way through.

On <unk>, we're rolling those machines out.

On the smart auto Fob, our auto key we've had great lock their in store. We've just started our second account there and are shipping the <unk> and then we're working on the future where you can buy that five of yours that you are used to paying $3 50 for a minute.

Key kiosk and then our locksmith community will program that for you at your home or office or wherever you'd like so I think theres a lot of good things that can happen there on pet.

We're seeing great great progress there on the pad engraving, we've got a new machine that is looking to do more than pad engraving like luggage tags in pharmacy, and then I just think there's a huge opportunity for us.

With the consumers, we have and the great customers, we have like Walmart and Petsmart and Petco.

<unk> pet supplies plus to take this air tag from Apple embedded into our.

Our pet TEG in grave the number of name in and literally like you can find your phone I think in the fairly near future you'll be able to find your pet just like that so lots of things going on from a competitive set.

We're not seeing a whole lot.

We do a 132 million keys, a year, we duplicate than our closest competitor is under $10 million on pet tagged, we're going to do about $11 $1 million this year and our close competitor going to do about $1. Three so not a whole lot there, but a lot going on with our customers and our team is doing a great job.

Great. That's super helpful and then for my follow up.

I know you've talked about.

Labor in your prepared remarks, but could you maybe walk us through how to think about SG&A SG&A leverage going forward and just hiring plans, given where labor rates labor issues are to that.

Yes, so as you think about we're spending a lot of time around how do we make sure that we keep the 1100 folks motivated in the field.

We'll think about how we compensate them and do some creative things that when they perform well they do better over time.

The interesting thing is we're not going to take out folks in the stores in a matter of fact, just given the competitive advantage. We would see if anything we would increase the number of associates, we have in the stores and we've got our retailers asking for that and so as you thought of as we thought about the quarter one of the areas that we don't deleverage well is there and we're not ever going to because we're going.

Make sure we take care of our customers.

The other big item in the quarter really was around Rds as we see that outsized growth in Rds and we pay a rev share to anywhere between 25 and 30%.

To the retailers on our kiosks, obviously, you get some outsized growth in SG&A when the Rds business grows well, but overall on the EBITDA line.

The leverage is it's north of 30% from an EBITDA rate. So again over time I think you are going to see us.

See inflation in the wages that we're paying to our employees not only in the field, but also in our Dcs, but thats part of our price algorithm that will include as we start to think about price over time.

Great Thats it from me. Thank you so much.

Thank you. Our next question comes from the line of David Manthey with Baird. Your line is open.

Thank you and good morning.

Sure.

Yes, good morning first off.

The 7% to 8% price increase in the fourth quarter.

When did you say that went into effect, specifically, so that second 7% to eight Dave is effective last month and this month, we'll be that'll be all implemented by the end of November so really the past two months this month and last.

Okay, and when you're referring to that 7% to 8% type number is that just on the hardware solutions is that across the board at the company I'm trying to understand how that what that number means relative to the.

The numbers you report, yes, when I talk about the seven day, let's call. It seven five plus seven five and then eventually getting over 20 by February Dave Thats in the tank the hardware business. We're also raising price on things like keys, we're raising price on things like every.

They work gloves, but not as significant and if you really just think about the math when you've got a three inch screw I mean, our <unk> bolt.

Theres, just not a whole lot of other costs other than steel and freight so that one is what I was referring to when I said 7575, and eventually getting over 20 other businesses are raising but not at that level.

Okay.

And then as it relates to the price increases.

I know some of this is real time, but.

The ones that you have implemented and are implementing this year.

Is that could catch up to where inventories are now and then the one you are expecting in February of next year is that trying to get ahead of <unk>.

Inflationary pressures that you see in your supply chain pipeline I'm trying to understand your current level of inventory versus these price increases.

Essentially does the fourth quarter look incrementally better because you sort of have a glide path from your prior price increases plus the new one which is catching up to the current level of inventory, which itself is moving higher.

Me balance those issues in the supply chain, if you would yeah.

Yes, let me take the first part Dave because it's a good question, it's complicated, but let me just.

Here's how we do it with retailers.

We sit down and justify what we call entitlement I don't like the word but that's the word they use on everything that's happening or that has happened to justify the increase in again.

We've been really happy with what we've been able to do so.

What's happened not what we think's going to happen in this last one.

As we know Theres a lot more happening in the second half of the year with these additional surcharges on the front end and then you only get 10 days to bring the container back or Youre detention starts clicking there. So so that's a new element that's part of this model and rocky.

Maybe you can talk about the way the inventory flows because I.

Wish we were ahead of it but we're not yes. So importantly.

Given the nature of our business, we carry about six months of inventory and we've talked about the lead times going up which means we're carrying a little more inventory today than we did a year ago.

To deal with the fill rates and so.

As I kind of said in my prepared remarks, Dave a lot of that inflation is still hung up in inventory and will come through in 'twenty. Two we start beginning to see some of the I'll call it higher cost containers and inventory begin to hit in the fourth quarter and that has some pressure on the fourth quarter. We do believe once we get that third <unk>.

This increase in place we will have kind of got the price cost differential fixed and we'll be hole on a dollar for dollar basis.

But again that as Doug just said, we're talking to our retailers today about the cost justification. So its as of today if costs continue to go up.

Then, we'll still be chasing it a bit.

Got it okay. Thanks, guys.

Sure.

Thank you. Our next question comes from the line of Ryan Merkel with William Blair. Your line is open.

Hey, guys good morning, Hey, Rod.

So Doug lock going on here I was hoping we could focus on the change in guidance. So you were at 244, EBITDA now or lower by $30 million to $35 million can you break out the impact of slower hardware.

PPE falloff and supply chain, just so we can bucket.

Yeah, Here's how I would I would characterize it at a high level Ryan as you think about what we said in the second quarter call. There was 20 call it $20 to $25 million of pressure in our pes business around COVID-19 going away sooner than expected and cost pressure in that business that was offset.

Set by our Rds business performing better than expected and so call that a plus five to 10 relative to what we had expected for the year in that business, what we've seen now coming into the third quarter.

I would put it in kind of two buckets. The first would be around our Hs business and as you think about that July.

August timeframe that probably cost us a little over $5 million in profitability with those sales going away.

Again, we've seen return.

<unk> of the foot traffic in Pos in September and into the fourth quarter, but it isn't like that return is catching up those lost sales in July and August. It is really just back to what our expectation was.

And so you've got call. It just over five there and then I think there is another 10% to <unk>.