Q4 2021 Hillman Solutions Corp Earnings Call

March 2, 2022

Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Good morning, and thank you for standing by welcome to the Hilton 2008 fourth.

<unk> fourth quarter and year end results conference call at this time, all participants are in a listen only mode.

Speakers presentation there'll be a question and answer session.

Last quick question joined that session, you will need to press star one on your telephone.

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I would now like to handle the conference over to Jennifer Hills, Vice President of Investor Relations MS Hills. Please go ahead.

Thank you Chris Good morning. This is Jennifer Hills, Vice President of Investor Relations at Herman. Thank you for joining US. This morning to review and discuss <unk> fourth quarter and year end 2021 earnings results. Joining me today are <unk>, Chairman, President and Chief Executive Officer, and Rocky Kraft Chief Financial Officer.

Sure.

B of our earnings release and slide presentation can be found under the Investor Relations section of our website at IR Dot 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 the factors that can influence the company's results are contained in our periodic.

Annual filings 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.

Followed by Rocky who will be providing a financial review of the quarter and year now let me turn the call over to Doug.

Thanks, Jay and good morning, everyone.

What a year 2021 was for Hilton, we accomplished a ton in a difficult operating environment, maybe the tougher the star business has seen in 57 years and as difficult as 2021 was we more than held our own and clearly strengthened our company and I'm excited about 2010.

Two in the future before I get too far into my remarks, I want to thank all of our employees at Hilton.

From our warriors in the field that help our customers win everyday at the shell to our distribution center employees to keep the product flowing into all of the support folks we continue to outperform our competition and provide the best service model in the markets. We compete thanks to our people our moats.

Never been stronger as we continue to help our customers overcome labor complexity in supply chain challenges in categories that are critical to their businesses and ours.

Today I'll start with some of our accomplishments for 2021, and then talk a bit about the current environment, then give my thoughts on our outlook for 2022 in the future before I turn it over to Rocky to talk numbers and our outlook in more detail.

So, let's do a quick run through some highlights from what we accomplished in 2021.

Along with why these accomplishments create that foundation for future growth.

First we became publicly traded in July this was a huge step in the evolution of our company, providing access to the public markets and importantly significantly reducing our debt. This provided flexibility to our business when lead times nearly doubled in 2021 and inflation.

Golf, our new balance sheet allowed us to invest in inventory and additional storage to maintain industry, leading fill rates north of 90% compared to our industry estimated to be in the high seventy's.

An amazing accomplishment by our folks.

This increase is increased our mode and widen our lead as the clear partner of choice for our retail partners.

Speaking of the partner of choice our performance in both 2020, and 2021 continue to generate new business wins as our customers allowed us to manage more of their shelf space.

We won the entire fasteners set.

One of our top five retailers for a mid year 'twenty two launch and that is on plan, we continued to expand our construction fastener business.

Remember those are deck screws in drywall screws with all of our major customers. We're very excited to be introducing a new line of gloves work gear and job site storage under our AWP program.

Our tool bags pouches and rigs all have our new patented track gel technology, we continue our market share gains and builders hardware with a flawless execution in late August with a major retailer and we successfully expanded our firm grip branded core line.

And the new winter Gov lines set for 2022.

We won this business at the same time, we also took two rounds of price increases totaling approximately 15% in the aggregate to offset cost inflation more to come on pricing in just a minute.

Finally, we launched re sharp knife, sharpening and insofar that scale and so our robotics and digital business more than rebound from a tough COVID-19 year in 2020, Rds had a great year in 2021, with 19, 2% topline growth and a 38%.

Increase in adjusted EBITDA.

And would have performed even better if we werent held back by chip shortages that are integral to our Rds business and as you all know impacting many industries today.

All the great work in 2021 resulted in our Q4 being in line with our latest guidance and despite headwinds from Covid comps and significant inflation in excess of our enacted price increases we increased our revenue on a year over year basis, 4% and our adjusted EBITDA was down.

6%.

It's important I think for me to put that into perspective during 2021, even though we saw an annualized increase in inflation of $175 million and a COVID-19 related adjusted EBITDA drop of $15 million, we were still able to limit our adjusted EBITDA.

Klein to $14 million year over year.

Let me spend a few minutes, giving you my current view on the state of our business and how I see 22, playing out at a high level.

We continue to monitor lead times for our products from Asia and the situation at the ports in U S as well as Canada today from an order placement to our North American distribution network. Our lead times are north of 200 days compared to that historical average in the 100 Twenty's. However.

However, like unlike many of our competitors, we've maintained our industry, leading fill rates with customers and turned a difficult short term environment into a very big long term strategic advantage for homeland.

To that I give credit to our daily pulse at the shelf with our over 1100 sales and service folks combined with our long standing supplier relationships and the investment we made in.

Additional inventory.

We averaged 93% fill rate for 2021, and our year to date 2022 pro rate has improved to 93 four.

Hardware solutions, our largest business has really performed well over the past 24 months.

Their topline rebounded nicely in Q4, with an 11, 8% growth over prior year and that puts topline for the year up four 7% with adjusted EBITDA coming in just above 2020.

Our two year CAGR for Hs is 10, 4% growth on topline and 18, 3% growth in adjusted EBITDA. This is a big reason why I'm. So excited about the future our customers love us because we do things for them every day that others don't we have also been able.

Get through the largest inflation and global supply chain imbalance most of us have ever seen standing stronger today than we were 24 months ago.

As I think about 2022.

I really don't believe we will see relief in lead times during the first half, but that should moderate in the second half of 2022.

When we see lead times and inflation moderate we believe we see outsized profitability and reduced working capital needs leading to outside outsized cash flow performance as well.

Speaking of inflation.

We have recently implemented a third round of price increases.

Third increase in less than 12 months overall, we have increased prices in our hardware solutions business just over 20%.

And our retailers have increased prices at the shelf as well.

March will be the first month that we will have price caught up to cost inflation assuming.

Container cost stay at current levels, we have passed price on dollar for dollar to our customers, which maintains our dollar gross profit, but as we've mentioned in the past hurts our margin rates. We have done the same in more at protective solutions.

We're returning the business to profit.

Growth is critical to our success another big effort at protective solution includes an even greater integration with hardware solutions, which will drive efficiencies and make it easier to sell products across both platforms for all of our channels. During the first quarter price will have caught up with cost.

And this will provide a nice tailwind to produce growth in sales and adjusted EBITDA in 2022, particularly in the second half.

Now, let me spend a minute on trends with our customers.

As a reminder, our business is driven by repair and remodel and not new construction.

In general our products are recession resistant and a relatively inexpensive, particularly as it relates to the total cost of a project.

And our hardware solutions business, we have seen robust customer demand as trends in nesting aging in place outdoor living and millennials buying homes has been a wind in our sails.

While many factors such as store traffic in lumber prices and weather impact our business in the short term. The long term trends are a tailwind to our business and I love our position in the market looking beyond 2022, I continue to believe our differentiated model allows us to grow the top line of.

The business at least mid single digits, leveraging the sales growth to 10% plus on an adjusted EBITDA line.

Let me finish my remarks by telling you why.

One our unrivaled field sales and service teams continue to give us the largest competitive advantage in our space. They help retailers with labor shortages, and we manage the aisle and long standing category and merchandising expertise.

The need for these value added services has really only increased over the past 18 months as retailers struggle with labor and in stock levels throughout their store.

We are currently in discussions with two of our top five customers about increasing our service force numbers for both of them too.

Two we have long standing relationships with our suppliers plus our volumes allow us to source better than the majority of our competition. This becomes even more important in these difficult times three the sourcing capabilities plus our distribution capabilities enable us to maintain fill.

Rates north of 90% and a very tough supply chain environment, We ship 80, plus percent of our hardware solution accounts directly to the store, we make logistics for our products easy and we don't come up our customers distribution center.

Innovation is a core strength and we continue to invest behind our brands, which makes up over 90% of our sales.

For example, we designed developed and patented new concrete screw in the anchor category under our powerful brands that we rolled out for the first time in January .

We have about 25% of the anchor category market today, and we have historically resold only excuse me other companies products and brands in this category not our own our engineering investment in the new state of the art ISO one seven O two five accredited lab, which one.

And in late 2020 in Toronto.

Laos us to create and validate anchor products at industry recognized certifications like ICC.

And introduce them under our own respective brands like power pro.

This gives us instant credibility and better margins in the category. So the anchor category is next up for us to focus on market share growth just like we've done in construction fasteners.

And builders hardware.

Another Great example is our <unk> business. They are great innovators and in 2021 launched the Dura net glove under our market leading firm grip brand.

The material in this club is equipped equivalent to a Nike fly knit shoe at one a gd USA Innovation award in 2021 and last week, we were awarded a Reagan award, our first which puts firm grip and shared company of many fortune 500 Mega brand.

Thats all in Helmand, one six Gd USA innovation awards in 2021.

In our Rds business, we continue to rollout highly proprietary digitally driven GFS product offerings that our traffic drivers and flat out moneymakers for our customers. Although some of our rollouts have been slowed by chip shortages. These are not these are not demand issues there.

<unk> issues there.

This business is an annuity with great margins and we will continue to work with our customers to grow the installed base and product offerings that provide outstanding returns for our customers and Hillman the combination of our unmatched service logistics and innovation has deepened our moat with our customers.

And finally, the M&A pipeline is strong and we are evaluating several opportunities.

As we improve our leverage in the back half of 2022.

Certainly into 2023.

We expect to accelerate acquisitions in categories that are low risk and at attractive multiples I think about the hillman value proposition for companies joining team element through acquisitions.

No all of the top retailers from the store level to the boardroom and our 1100 service and sales folks in the stores are unmatched as we ship products directly to the stores everyday bypassing their distribution centers, it's not hard to show a business how they get better.

On day, one when they joined team Hillman.

The future at element is very bright I'm excited about where we're taking this business and the value we will build for all of our shareholders with that let me turn it over to rocky. Thanks.

Thanks, Doug.

This morning, I'm going to provide a quick summary of our fourth quarter and year end results and then turn to our outlook for 2022.

On a GAAP basis, our net sales in the fourth quarter of 2021 with $344 5 million, an increase of five 3% versus the prior year.

Hardware solutions sales increased 11, 8% driven by strong customer Pos new business wins, and the pricing actions taken to date.

In our Rds segment sales grew by a strong 15, 9% as robust foot traffic at our retailers continue to improve from the Covid troughs.

Canada contributed three 4% growth in the quarter.

Offsetting the gains in these three businesses was up 14, 4% decline in protective solutions in the fourth quarter as we comp against still robust COVID-19 related sales in the prior year.

For the full year revenue grew four 2% to $1 4 billion led by Rds up 19, 2%.

Hardware solutions sales of $741 million grew four 7%, primarily driven by price increases exclude.

Excluding price hardware volumes were up 1% for the year against really tough 2020 comps.

The 19, 2% increase in Rds to $249 5 million resulted primarily from a return to a more normal environment in 'twenty, one compared to Covid depressed sales in 2020, along with an increase in the installed base that drove approximately 20% of the increase.

Canadian sales increased 12, 5% in 2021% to $151 $5 million due to.

<unk> COVID-19 restrictions in retail stores in 2021, compared to 2020 and the strengthening of the Canadian dollar.

The 10, 3% decline in protective solutions to $284 $9 million was driven by a reduction in Covid PPE sales.

In the fourth quarter on an adjusted basis gross profit increased by $4 million or two 9% to $140 6 million as the margin on higher sales was partially offset by a reduction of 100 basis points in gross margin rate due to low margin sales of remaining PPE products.

And inflationary pressures in hardware and protective solutions.

Growth in our high margin Rds business and a strong performance in Canada, we're only able to offset a portion of the fourth quarter 2021 pressure.

For the full year adjusted gross profit increased by $14 3 million to $604 million, while gross margin contracted by 80 basis points driven by similar trends to those we experienced in the fourth quarter.

For the year SG&A as a percentage of sales, excluding certain restructuring and other costs increased to 27, 9% from 27, 1%.

Higher selling expenses drove this increase particularly our revenue sharing arrangements with our customers as Rds achieved outsized growth.

Other SG&A factors included inflation in wages and higher outbound freight and storage costs.

Adjusted EBITDA in the fourth quarter was $38 6 million or 10, 4% decrease from $43 1 million in the prior year and in line with our revised expectations.

For the year adjusted EBITDA decreased six 2% to $207 $4 million from $221 2 million.

The decrease in adjusted EBITDA for the year for the entire company and the hardware and protective segment are attributable to protective solutions as lower PFS adjusted EBITDA, resulting from the 2020, COVID-19 spike and related disruption to operations could not be fully offset by the strong performance in <unk>.

<unk> in Canada, and modest full year adjusted EBITDA growth in hardware solutions.

Please refer to our investor deck for reconciliations of net income to adjusted EBITDA.

Now, let me turn to cash flow and the balance sheet.

For the full year 2021 operating activities used $110 million of cash as compared to $92 million source of cash in the prior year.

We increased inventories almost $140 million in 2021.

While inflation and new business wins are partial drivers of this increase we also made strategic decisions to increase our inventory levels to allow us to maintain our industry, leading fill rates as the supply chain from Asia has stretched historic highs of over 225 days.

Capital expenditures were $52 million as we continued to invest in our robotics and digital solutions equipment in merchandising racks important parts of our high return Capex initiatives.

We had planned to spend around $65 million on Capex in 2021, but chip shortages reduced our ability to produce machines at our planned pace.

Maintenance Capex remained near 1% of sales as expected.

In connection with our going public transaction in mid July we recapitalized, our balance sheet and at the end of the fourth quarter of 2021, we had $931 million of total net debt outstanding down from one 6 billion of total net debt outstanding at the end of the second quarter.

At the end of the year, we had approximately $124 million of available borrowing under our revolving credit facility.

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

Now, let me spend a few minutes talking about our outlook.

To start our long term growth algorithm is intact as.

As we move past near term headwinds, we have a high level of confidence in our business model that will allow us to grow organically mid to high single digits on the revenue line and 10% adjusted EBITDA annually.

Let's talk headwinds in tailwind.

Inflation in the form of commodities that go into our products container cost outbound freight and labor where significant challenges in 2021 and will continue to be challenges in at least the first half of 'twenty two.

While labor inflation appears to be here to stay it is manageable and we have and we will price for the high level of service, we provide to our customers.

Unlike labor, we believe that inflation in commodities containers freight and other costs, we have incurred to maintain industry, leading fill rates will begin to moderate in the second half of 2022.

Keep in mind, the benefit of that moderation will flow through our P&L until 2023 is it takes several months for inventory to be realized in our results.

To offset these inflationary pressures we have increased prices on our products on a dollar for dollar basis.

While this approach will result in some margin rate degradation in 2022, historically, we have not given price back dollar for dollar with inflation moderates, resulting in a recovery in margins over time.

We are also modernizing and automating facilities to help mitigate the long term labor pressure every company is facing.

Our business continues to have several structural tailwind and we don't that we don't see going away for the foreseeable future.

We are very well positioned in the repair and remodel space.

The repurposing of the home fueled by code that should provide tailwind in that end market for many years to come.

Our ability to out service our competition over the last several years has led to new business wins that Doug spoke about earlier and we believe allow us to continue growing above market.

In Rds, while some of our newer programs are rolling out slower than anticipated due to chip shortages. This is a delay in timing not demand and we are as optimistic about these opportunities as we have ever been.

So what does this all mean for 'twenty two for the full year, we expect revenue to be one five to $1 6 billion and adjusted EBITDA to be in the range of $207 million to $227 million.

The range for 22 reflects the uncontrollable nature and timing around commodity inflation and freight costs, both inbound and outbound.

We expect revenue growth in the high single digits throughout the year on the other hand, adjusted EBITDA will be a year or two has with our profit improvement largely weighted towards the back half.

Our first half will be tough as we anticipate inflation continues.

Price does not catch up to cost until March and we are Comping high margin Covid related sales from the first quarter of 2021.

Accordingly, we anticipate adjusted EBITDA down mid teen percent and Q1 year over year, followed by a more modest decline in Q2.

Based on this cadence or first half adjusted EBITDA will be down mid single digit percent on a year over year basis.

When we get to the second half we are poised to have full price coverage new business wins in place and relatively lighter comps, we anticipate adjusted EBITDA to be up in the mid teens in the second half of 2022.

From a cash flow perspective, we anticipate generating $120 million to $130 million of free cash flow.

This number assumes $60 million to $70 million of capital expenditures for both maintenance and growth.

And approximately 35% to $45 million of interest payments.

We anticipate modest cash tax payments in 2022.

We are also assume we have a modest benefit from working capital in 2022 coming off the big used in 2021, and this assumes very little if any improvement in lead times from Asia.

When lead times normalized inflation moderates, we anticipate a commensurate reduction in working capital that will generate additional free cash flow.

Our long term target for net leverage remains unchanged below three times.

As I said earlier longer term, we continue to believe that our unique model will allow us to organically grow our revenue, 6% and our adjusted EBITDA, 10% consistent with our history.

John back to you.

Thanks, actually while we're still adapting to the impacts from inflation and supply chain dynamics, our confidence in the long term remains strong our investments to maintain our fill rates continue to pay off while our supply chain pressures haven't improved they seem to have stabilized. Finally, we will continue to work with our retail customers.

And have been.

To achieve a third round of pricing that I mentioned earlier. This is testament to our 1100 field sales and service folks combined with our direct store delivery model, which have created tremendous value for our customers as they are faced immense logistical and labor challenges the willingness of our customers to us.

Except our pricing actions as well as awarding us additional shelf space shows how they value our partnership while the current environment is still uncertain. We will continue to control what we can and focus as we always have on our customers and our own people, we remain well positioned to drive six.

Net revenue and 10% adjusted EBITDA growth over the long term and to building meaningful value for all of our shareholders Chris.

Chris can you open up the call for questions.

Yes, Sir.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key standby.

Standby as a compile the Q&A roster.

Okay.

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

Thank you and good morning, everyone.

David Rocky.

The assumptions for future inflation trends and pricing in your new guidance. It sounded like you were implying those were static relative to the current situation is that a true statement.

Yes, David for 2022, we are anticipating that the costs around the inflation that we've seen remain consistent throughout the year.

And then.

Assuming that inflation continues to run hot leg. It appears my.

What are the mechanisms that you have in place with your retail partners to effect additional price increases in other.

Triggers or points that would that would make those in effect.

David.

It's amazing two weeks ago.

Don't even have thought about that but obviously the world is moving around so.

We were so when we talked to you last we talked about our third price increase I thought we could get it done by the end of January we actually will have it completed everywhere as we hoped by the middle of March.

And that's because again merchants have to cover there.

Their boss they've Gotta go to finance they got to run through the numbers at all but no no big pushback I will tell you.

Historically, when we've talked about the second price increase David you Remember me, saying, we might do it on a temporary basis, what we have done three price increases on a permanent basis right now retails have been adjusted up several times.

And if it goes again, we will raise price.

I can tell you they are ready for it if it happens I don't think we will have to but if it goes again will raise the price.

Everybody's condition for we've got all the processes in place and that's one of the reasons going into the assumptions for 2022, you would assume we would say things would settle down a bit and normalize back toward history, but rocky and I've just said most labor.

More they are because nobody knows.

Mhm.

So thanks, Doug to be clear on that statement previously you were saying that if and when inflation come down and maybe prices.

Down as well you would be rolling back those price increases, but what you said just now is these are these are no longer sort of temporary price increases these are permanent.

If pricing does settle down a bit you don't plan on just going back to the to the retail partners with debt.

Give back on price, though would you say.

That's correct. So think about the past there is there has been price increases since I've been here seven years.

Sales have gone up.

Not seen ever retails come down we've not had to give back pricing that we've gotten but if you think about this time, we basically did.

We had $60 million cost David in the FERC in 2021 that hit our P&L.

Rice for 40 of it so we lost about <unk> during the year as it came through our P&L that $40 million that we priced in 2021 was the equivalent of $115 million of annualized price.

And our inflation guests by as we got toward the latter part was $175 million as I mentioned, so the price action that we took.

In this latest round was $60 million that gets our $1 15 up to 175, when we finally caught this damn thing.

And retails have adjusted.

Never seen retailers take pricing down this is a bit of a different time, but as I've said over time.

It normalizes back to where traditionally it's been.

We will probably hang on to half of it because we're going to do the right thing for our customer we're going to do the right thing for our shareholders, but we're not obligated to give any of it back.

Got it alright, thanks, a lot I appreciate it sure.

Thanks, Dave.

Thank you.

Our question comes from the line of Brian Butler of Stifel. Your line is open.

Hi, Good morning, guys can you hear me.

Yeah, Hey, Brian Brian Hi, I, just wanted to ask on the on the Rds chip shortage that you talked about.

And you saw this kind of limit some of the growth is what's built into the 2022 guidance for this coming back is the expectation that the chip shortage improves.

It's better here or is expectations in 2022 that this remains a big headwind.

Yeah. So so this is rocky David I mean, our expectation Bryan sorry. This our expectation is that it does remain a headwind we've got in our plan. What we believe the machines. We can build will be Rds, we think still can grow top line around 10% or what we think is the normal growth level in that business, but.

It is unfortunate that it is from a timing perspective slowing down some of the what we think are really terrific opportunities for the company again as Doug and I. Both said in our remarks, it's not a demand problem, it's really about timing and as soon as we can get the chips and the boards that we need those machines will be installed.

Again to generate revenue and cash for the business, Yes, Brian I would just add that we've decided to play to win there and we've got all the rest of the pieces, we need to make the machine take it for example, really sharp.

That ace would want.

Or could handle over a period of time. So we are only waiting on one thing we're not sitting back saying well, we'll just sort of the other stuff that we see the chip availability, but to answer. Your question. We don't have any chip availability coming additional chips coming our way in randy's numbers.

So we're hoping that changes, but right now we just we just don't know and what's what.

What's going on in the World right now the one thing I'm worried a little bit about is that Russia, and China are the two big rare Earth minerals miners not because it's not other places.

But it's really tough environmental you get that stuff out of the ground and I'm, a little concerned because who knows what happens there and those are important to the chip manufacturers. So we just decided to say, we're not going to budget that we're going to get more.

Okay. That's helpful. Just just out of curiosity can you can you give color on what that magnitude of pent up demand might be whether that's 2023 or even beyond.

Yes, I would just say just one example is worried about 1000 reshape machines that we've got an order for 3000, that's with one customer before we go any place else. So it's pretty it's pretty good.

Okay. That's helpful and then just kind of bookkeeping.

Can you can you kind of run through the capital structure now after all the kind of moving pieces with the warrants whats the right share count for 2022 and is there any remaining items out there to be converted that could dilute it.

Yes, so the warrants were all taken out before year end and so right now including.

On a fully diluted basis, including management options. As an example, it's about 196 million shares is what we would use and really the only things that exist in our.

Our management options and restricted stock that our tip.

Typical and not very significantly less than 2% of the capital structure.

Okay, great. Thank you.

Thank you.

Our next question comes from Reuben Garner of benchmark. Your line is open.

Thanks, Good morning, everybody.

Hey, Ruben.

Let's see so I wanted to take the guidance a little bit or trying to break it down can you can you walk through some of your assumptions on both the top and bottom line.

I guess, specifically looking at volume and price and then maybe.

Rocky on the EBITDA side, it seems like you're being pretty conservative, but maybe maybe I'm missing. Some components can you kind of walk through what the bridge looks like to get you from <unk>.

<unk> 21 to your full year <unk> outlook.

If you want to start on revenue, Doug and then I'll hit the.

Yes, I think Ruben.

We obviously have.

If you think about hardware solutions as an example.

We essentially have.

Our assumptions the price that will flow through.

The new business that is going to happen or will flow from what happened in 2021 and be annualized and essentially 1%.

Unit market growth, so we're being pretty conservative from a volume standpoint.

And Rocky you can make the that you can fill in the blanks on the cost side and what we've assumed so Reuben I mean, I think the way to reconcile that to think through the way we talked about the quarters.

In the first quarter because of price cost because of inflation because of difficult comps.

With Covid.

Particularly in the Pes business, we do expect that our EBITDA will be down.

And down kind of mid teens as you flow into the second quarter, we performed much better.

You begin to see.

Caught price cost we have the nice benefit from some of the new business wins, but those are really towards the end of the quarter.

So that's how you see the second half be up kind of mid teens.

Again, we've assumed in our modeling that there is no benefit around.

Inflation coming back or us realizing any benefit from that in 2023. So.

As you think about that and we're not going to guess that that's going to happen. If it does happen. We do think it could moderate in 'twenty. Two we would feel that in 'twenty, three which provides some growth outside of our normal algorithm, but.

At this point as we sit in March.

Start thinking about in the second half, we're just not going to put any of that into our P&L and so when you do that.

Really the comps to the prior year and the new business wins that allow you to have nice growth.

Again kind of mid teens on the EBITDA side in that back half.

But again, we're not we're not going to predict that that gets better than that at this point.

Okay. Thanks for that guys and two quick follow ups on that so on.

Hmm.

1% market growth.

You are looking for high single digit revenue growth. This year, so a 1% market growth your business wins that you already have in hand, maybe add another couple of points and then the remaining five points or so or price.

For the business overall is that the right way to think.

Sure.

I think the way you need to think about it Reuben is.

Covid sales going away or an offset to the numbers you are looking at so price is higher than.

When youre thinking about and as we think about the total company for 2022, right price is going to be call. It high single digits across the entire company.

And youre going to have Covid come out, which is probably going to be in the range of $55 million to $60 million of Covid sales.

And then youre going to see nice growth in the business through those new business wins and market of call it 5% mid single digits.

That's how we're thinking about the year on the topline.

Okay and.

On the.

The second part is on the inflation side, so just to be clear what it. Maybe this is an impossible question to answer but can you tell us like roughly what kind of deal and.

Great.

Level, you're assuming in other words steel has if you just look at the futures market has been cut in half. The last couple of months are you guys still baking in the in your guidance deal from two months ago. When it was closer to 2000 or have you already assumed.

Some of the recent pullback will will hit your I know, it's not a perfect metric, but just can you give us any color on.

What numbers to look for where there might be upside to your outlook or downside for them that yes. So two things talk about steel.

Obviously, we've seen the pullback, particularly in the U S, China, and Taiwan have not pulled back quite as much because I don't think they are impacted with the auto side is quite as much but to answer your question we've assumed.

That steel prices stay where they were in the fourth quarter and as we saw them in the second half of the year, we've not assumed that they are coming down on the freight side container side. Reuben. This is the interesting part that that as you really think about it historically, we would be 90%.

Contract on our 45 containers, a day from Asia, and 10% spot and the only reason we did spot is sometimes that was lower than contract.

If you look at the math last year.

And why it was so hard to predict is that we were roughly only got 60% of our stuff on contract and 40% of our stuff was spot and that varied every month and you couldn't predict it because if they sold first class tickets when they cut your contract right back.

And so we had months, where we were at 39% Contra.

Contract.

And we had a month, where we were at 68% contract. So 60 contract 40 spot and obviously, we think that should improve and we would not get back. The 90 10, but we should be at $80 20, when this thing settles down and Theres a significant difference between.

Spot and contract, but the way they did it last year was just impossible to predict we've assumed that the blend of 60 40 and the prices stayed constant through 2022 from where they work.

Okay and her group in just a minute.

Just driven just one thing to add to what Doug said and remember in our hardware business that is the most impacted by both the commodities and the inbound freight.

We have five months of inventory and so so windows. That's part of the reason you don't see us putting that into the 'twenty two guidance, while we do believe a lot of these costs again, who knows what the world where it is today, but we believe that those costs begin to moderate we don't begin to really feel it in our P&L until about five six months later.

Got it I hate to be greedy, but I'm a sneak one more in the robotics.

Segment or your assumptions within this guidance are you assuming any of these kind of initiatives you have going kind of start to take off in the second half in other words the.

The locksmith community anything like that or is this just blocking and tackling type stuff in there would be upside if you get those up and running faster than you expected.

Yes, Reuben no we're not we're not assuming we catch fire in a bottle anywhere we're going to set this thing up and be loaded for bear for 'twenty three but for example, we've got five new machines.

What's called quick TEG <unk> III at a major retailer for a pad engraving and so far it's doing great. It's an example of going from giving the consumer six pet engraving tag options to 'twenty six options. We've also talked to this major retailer about putting it at.

Actually in the pet aisle.

We're doing a lot of that we're doing a lot of ground. What we're still working really hard on the lockout strategy working really hard on the smart auto, but we're not assuming any of the take off but trust me, we're working like Hell to see if we can get a couple to take up we just havent assumed that for 'twenty two.

Great. Thanks, guys. Good luck this year.

Thanks Reuben.

Thank you.

Our next question comes from.

<unk> of Jefferies.

Your line is open.

Hey, good morning, Thank you.

My first question is just on robotics, maybe.

Maybe if you could just talk about.

You mentioned.

1000, <unk> sharp machines, maybe just talk about overall your installed base today.

How to think about penetration.

That could go and have competitive dynamics at all changed in this business just given the higher high returns.

So yes.

You can talk about the numbers, let's talk about knife sharpening again, let's say it will get to a 1000. This year with the chips. We have our first order from Ace is to get to 3000 machines, we've not gone to bass Pro Cabela's Williams Sonoma and the others as you know because we don't want to get out in front of ourselves there.

The one trend that is changing a little bit is that our full serve machine.

And if you think about it we've got as example, being Walmart and home depot and Lowe's, both full serve machines and self serve machines. One in the back that does 140 <unk> wanted to front that does 25 keys.

What we're seeing is what the labor issues that are everywhere at retail.

Got one of our retailers, saying, hey, let's do more self serve in both sides of the store because were just not able to man or a woman this to get cut keys when the consumer wants them and if we do that we'll be open longer periods of time, So we're seeing a little trend.

And labor leaning into more self serve.

But no no no changes.

<unk>.

Based on the question of the dynamic changes and obviously.

The retailers love this business, because it's a destination purchase and it's.

It's something that brings consumers back and they do really well.

As we do I think the last thing I would just add is.

Our vision and our whole attempt here is to make sure that in the future you can go into a store Goto Medicaid machine type in your car auto make and get a smart Fob program. That's your house or at your office or wherever you'd like to.

<unk>.

Stumbling block for that is really the locksmith community that was decimated in 2020 that has not yet come back full so what we're testing right now is really our people and we've got 1100 50 of them programming for retailers for the consumer we've got test goes.

With locksmith, but again, none of that is catching fire in a bottle in 'twenty two but we're working really hard on that and we think thats a great opportunity because up until now.

Does the smart Bob Otto.

But for the most part the other retailers have yet to have that as an offer they will do the older car typical boring transponder, but not the smart auto Keith.

Got it very helpful and my follow up and I'll turn it over is just.

Around the 2022 guidance give a lot of color on revenue and EBITDA, but just on free cash flow conversion or do you think about free cash flow through the quarters. I know you mentioned working capital gets better our supply chain does.

Is it going to follow EBITDA or is there sort of.

Any other dynamics to be aware of.

Yes in general it will Hamzah again, as you think about the cash cycle in our business in the first quarter.

We're typically a user of cash because we are buying inventory for the spring build obviously because of where we exited the year and we believe that spring build inventory build will be less than it's been historically, but we'll still build inventory and be a user of cash will go through the second and third quarter.

And we think generate decent amount of cash in both quarters and quite frankly, we would anticipate.

Sometime in the fourth quarter, we would be fully out of our line of credit assuming all things stay constant.

I think the thing.

As you know when your EBITDA goes down and your and your need for working capital goes up because the inventory that's a bad combination and direction, which we've been dealing with if you think about the future. You. Obviously have this massive price that we will see our margins improve and expand as things normalize and we.

Got $140 million of inventory that we're holding that we don't need long term of which half is inflation based and half is units.

We will get both of those go in the right direction when when these things really settled down and.

That's I'm looking forward to the other end of that.

Right Gotcha. Thank you so much.

Thanks.

Thank you.

And next we have a question from.

Okay.

CJ Securities Your line is open.

Hi, good morning.

Hey, good morning.

So just starting with Rocky a comment you made earlier on the Rds business growing 10% I assume that's sort of 2022, just given the headwinds we are seeing with the chip shortage is that right.

Yes, correct. So yes, we believe that business grows like we've said low.

In the low teens in 2022, consistent with what we've said historically.

Okay and then.

Other than the chip shortage limiting your ability to kind of ship those 3000 machines, assuming the chip shortage got better.

At some point.

What are the other gating factors to kind of getting those out into the market with a.

Pretty quickly and then beyond that what do you what do you think the Tam is for those re sharp machines. Obviously, you talked about a bunch of the other players that youre not ready to go into just yet.

I'll tell you what I don't know that anybody knows what the Tam is and I say that because if you think about ace and we did this in two markets because we don't have enough machines to ace is not going to turn on their national advertising until the consumer Hey get your get your dollar knives sharpened at Ace.

And this cold machine and co experienced what we've done is we've taken a couple of markets and we've Jack them with some digital and some advertising to let the consumer know.

And what we know is when we get to I think probably 1500 machines. The CEO of Ace is going to support that move and I think that's going to be very interesting. So the Tam. The reason, it's so difficult to say that today, it's so fragmented it's not a good consumer experience.

And this is the absolute opposite the Tam really depends on when the consumer figures out they can get a really easy fun experience at their ace hardware for their nice to be as sharp as they've ever seen it.

Scissors, whatever they tend to want a sharp overtime sharpen over time so.

There have been reports that this is a $1 billion market.

Honestly don't think we have any idea.

I would say no one is solving this at retail with the consumer in an elegant way the way we are and we're super excited about I'm frustrated as Hell. Because this thing is ready to go as ready to go.

And I didn't really think it would be this hard to get chips.

I have said I thought we could buy them on ebay, but it is really really shut down right now and tough to get you can see that.

Cars and everything else, but it will open up we won't need a lot of them will get them and we'll get it going we will train the stores. We will then drive digital and other advertising we will have this.

On television when we get the right thing the right mixture of of machines and a support.

That's probably doesn't start until you get at least a 15 1600.

Got it and then just switching over to the pricing discussion.

We've had a lot of discussion about that.

Assume the 20% price in total is predominantly on the hardware side and I guess my question is does all of that price get realize that all of the customers or is that sort of the headline price increase and then less gets realized on average and if thats. The case what have you seen in terms of the average realized price increase.

Versus the headline number.

Yes, no Lee this has been one that has been driven by the math.

We have to justify these increases and if you think about that $175 million that I've mentioned that we know as of the middle of March was caught.

That's about $160 million of.

Basically commodities are about 80.

Container and freights about 80, or so $1 60 of the 175 of those two buckets and the rest is kind of labor I don't see labor coming back, but it's pretty much across the board now if a customer.

Buys more say.

<unk> Rod and steel sheet.

And then the increase per share will be slightly higher than it would be for a different material, but lucky I think it's pretty close across the board.

The 21, 22% is almost across the board pretty close because the mix isn't all that different there's a few customers with a little different mix Lee and that will cause maybe a little higher but I think in general that's that numbers across the board and retails have moved a couple of times.

Across the board as well, it's just something you <unk> you.

Just cannot not move retails when you see this kind of increase so we feel pretty good about the way its structured right now.

Well I guess the easy follow up to that is as a distribution model.

If you were if you were more of an industrial distributor.

Price increases are good things are you seeing because of the retailers able to raise price that the retailers margins on your products are also expanding and is that sort of a reason for the retailers to pushback less in this process.

Super excited about that one because the margins for our retailers in our category of all always been good they're even better now so we do not have a food fight.

We do not have a between retailers we do not have.

On AG bread and milk.

Kind of thing where people are using it to get it I mean again when you think about the project of a deck or.

Our per below or some kind of project or products, you can't do without but theyre not really driving the elasticity of the cost of that project. So we're in great shape feel really good about it I would say that this pricing environment, we will not be good for us it will be great for us long term.

Okay, one more for me if I can.

You had mentioned earlier you were in discussions with two of your top five customers about increasing your service levels I assume this means just kind of adding more labor and increasing the number of times that your people go to the stores.

On the surface it would seem that that would increase your cost so.

How do you view that sort of from a return perspective.

Yes, no. It does I mean, it's real and again.

We know what the temporary pool of labor looks like nobody would want to send that into the store right now and have a helm insured on so we won't do a test. So for example, we're doing a 55 store test at one retailer to see if the math works.

We were paid for that test before we did it on the people we hired because we basically said, we're not going to hire part time, we never do we that's just not our stick and were not going to do this unless you are willing to participate on the cost and we laid out the exact cost and they know it should pay.

For itself.

Hopefully, we will expand it but no there is no hey, we'll both make it up on volume you just can't do that when you're hiring full time people today.

With cars with benefits and again, if you will.

Wanted College kids looking for beer money, that's a different story, but that's not what we're going to do in the store at Hilton.

Got it thanks very much.

Yep. Thanks Lee.

Thank you.

And I see no further questions in the queue I will turn the call back to Jennifer Hills for closing comments.

As a reminder, a replay of this call will be available on our website. Thank you for joining us this morning.

Right.

This concludes today's conference call. Thank you all for participating you may now disconnect a pleasant day.

[music].

Okay.

[music].

Good morning, and thank you for standing by and welcome to the Hilton 2008.

Fourth quarter and year end results conference call at this time, all participants are in a listen only mode.

Speakers presentation there'll be a question and answer session.

Last quick question joined that session, you will need to press star one on your telephone.

Today's conference is being recorded and if you require any assistance during the call. Please.

Zero.

I would now like to hand, the conference over to Jennifer Hills, Vice President of Investor Relations MS Hills. Please go ahead.

Thank you Chris Good morning. This is Jennifer Hills, Vice President of Investor Relations at home and thank you for joining US. This morning to review and discuss <unk> fourth quarter and year end 2021 earnings results. Joining me today are Joe Cahill, Chairman, President and Chief Executive Officer, and Rocky Crap Chief Financial office.

Sure.

Copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at IR Dot 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.

Some of the factors that could influence the company's results are contained in our periodic and annual filings 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.

<unk>, followed by Rocky who will be providing a financial overview of the quarter and year now let me turn the call over to Doug.

Thanks, Jen and good morning, everyone.

Two in the future before I get too far into my remarks, I want to thank all of our employees at Hilton.

Ever been stronger as we continue to help our customers overcome labor complexity in supply chain challenges in categories that are critical to their businesses and ours today I'll start with some of our accomplishments for 2021, then talk a bit about the current environment then give my thoughts.

So on our outlook for 2022 in the future before I turn it over to Rocky to talk numbers and our outlook in more detail.

So let's do a quick run through on some highlights from what we accomplished in 2021, along with why these accomplishments create that foundation for our future growth.

First we became publicly traded in July this was a huge step in the evolution of our company providing access to the public markets.

And importantly significantly reducing our debt this provided flexibility to our business when lead times nearly doubled in 2021 and inflation took off our new balance sheet allowed us to invest in inventory and additional storage to maintain industry, leading fill rates north of.

90% compared to our industry estimated to be in the high Seventy's that was an amazing accomplishment by our folks.

This increase is increased our mode and widen our lead as the clear partner of choice for our retail partners.

Speaking of the partner of choice our performance in both 2020, and 2021 continue to generate new business wins as our customers allowed us to manage more of their shelf space. We won the entire fasteners set.

At one of our top five retailers for a mid year 'twenty two launch and that is on plan, we continue to expand our construction fastener business.

Remember those are deck screws in drywall screws with all of our major customers. We're very excited to be introducing a new line of gloves work gear and job site storage under our AWP program, our tool bags pouches and rigs all have our new patented track Joel <unk>.

<unk>, we continue our market share gains and builders hardware with a flawless execution in late August with a major retailer and we successfully expanded our firm grip branded core line.

And the new winter Gov lines set for 2022.

We won this business at the same time, we also took two rounds of price increases totaling approximately 15% in the aggregate to offset cost inflation more to come on pricing in just a minute.

Finally, we launched re sharp knife, sharpening and intensify that scale and so our robotics and digital business more than rebound from a tough COVID-19 year in 2020, Rds had a great year in 2021, with 19, 2% topline growth and a 38%.

Increase in adjusted EBITDA.

And water performed even better if we werent held back by chip shortages that are integral to our Rds business and as you all know impacting many industries today.

6%.

Klein to $14 million year over year.

Let me spend a few minutes, giving you my current view on the state of our business and how I see 22, playing out at a high level.

We continue to monitor their lead times for our products from Asia and the situation at the ports in U S as well as Canada today from an order placement to our North American distribution network. Our lead times are north of 200 days compared to that historical average in the 100 Twenty's. However.

To that I give credit to our daily pulse at the shelf with our over 1100 sales and service folks combined with our long standing supplier relationships and the investment we made in.

Additional inventory.

We averaged 93% fill rate for 2021, and our year to date 2020 to fill rate has improved to 93 four.

Hardware solutions, our largest business has really performed well over the past 24 months.

Their topline rebounded nicely in Q4, with an 11, 8% growth over prior year and that puts topline for the year up four 7% with adjusted EBITDA coming in just above 2020.

Our two year CAGR for Hs is 10, 4% growth on top line and 18, 3% growth in adjusted EBITDA. This is a big reason why I'm. So excited about the future our customers love us because we do things for them every day that others don't and we have also been able.

Get through the largest inflation and global supply chain imbalance most of us have ever seen.

<unk> stronger today than we were 24 months ago as.

As I think about 2022, I really don't believe we will see relief in lead times during the first half, but that should moderate in the second half of 2022.

When we see lead times and inflation moderate we believe we see outsized profitability and reduced working capital needs leading to outside outsized cash flow performance as well.

Speaking of inflation.

We have recently implemented a third round of price increases our third increase in less than 12 months overall, we have increased prices in our hardware solutions business just over 20%.

And our retailers have increased prices at the shelf as well.

March will be the first month that we will have price caught up to cost inflation assuming.

Container costs stay at current levels, we have passed price on dollar for dollar to our customers, which maintains our dollar gross profit, but absolutely as we've mentioned in the past hurts our margin rates, we have done the same in more at protective solutions.

We're returning the business to profit.

And this will provide a nice tailwind to produce growth in sales and adjusted EBITDA in 2022, particularly in the second half.

Now, let me spend a minute on trends with our customers.

As a reminder, our business is driven by repair and remodel and not new construction.

In general our products are recession resistant and a relatively inexpensive, particularly as it relates to the total cost of a project.

And our hardware solutions business, we have seen robust customer demand as trends in nesting aging in place outdoor living and millennials buying homes has been a wind in our sails.

The business at least mid single digits, leveraging the sales growth to 10% plus on an adjusted EBITDA line.

Let me finish my remarks by telling you why.

The need for these value added services has really only increased over the past 18 months as retailers struggle with labor and in stock levels throughout their store.

We are currently in discussions with two of our top five customers about increasing our service force numbers for both of them too.

Innovation is a core strength and we continue to invest behind our brands, which makes up over 90% of our sales.

For example, we designed developed and patent and a new concrete screw in the anchor category under our power program that we rolled out for the first time in January .

And in late 2020 in Toronto.

Laos us to create and validate anchor products at industry recognized certifications like ICC.

And introduce them under our own respective brands like power pill.

This gives us instant credibility and better margins in the category. So the anchor category is next up for us to focus on market share growth just like we've done in construction fasteners.

And builders hardware.

Another Great example, as Rps business. They are great innovators, and then 2021 launched the Dura net glove under our market leading firm grip brand.

The material in this club is equipped equivalent to a Nike fly net shoe at one a Judy USA Innovation Award in 2021 and last week, we were awarded a Reagan award, our first which puts firm grip and shared company of many fortune 500 Mega brand.

Thats all in <unk>, six Gd USA innovation awards in 2021.

<unk> issues. This business is an annuity with great margins and we will continue to work with our customers to grow the installed base and product offerings that provide outstanding returns for our customers and Hillman the combination of our unmatched service logistics and innovation has deepened our Mo.

With our customers and finally, the M&A pipeline is strong and we are evaluating several opportunities.

As we improve our leverage in the back half of 2022.

Certainly into 2023.

We expect to accelerated acquisitions and categories that are low risk and at attractive multiples. Thank about the hillman value proposition for companies joining team element through acquisitions.

On day, one when they joined team Hillman.

The future elements very Brian I'm excited about where we're taking this business and the value we will build for all of our shareholders with that let me turn it over to rocky. Thanks.

Thanks, Doug.

This morning, I am going to provide a quick summary of our fourth quarter and year end results and then turn to our outlook for 2022.

On a GAAP basis, our net sales in the fourth quarter of 2021 with $344 5 million, an increase of five 3% versus the prior year.

Hardware solutions sales increased 11, 8% driven by strong customer Pos new business wins, and the pricing actions taken to date.

In our Rds segment sales grew by a strong 15, 9% as robust foot traffic at our retailers continue to improve from the Covid troughs.

Canada contributed three 4% growth in the quarter.

Offsetting the gains in these three businesses was up 14, 4% decline in protective solutions in the fourth quarter as we comped against still robust COVID-19 related sales in the prior year.

For the full year revenue grew four 2% to $1 4 billion led by Rds up 19, 2%.

Hardware solutions sales of $741 million grew four 7%, primarily driven by price increases exclude.

Excluding price hardware volumes were up 1% for the year against really tough 2020 comps.

The 19, 2% increase in Rds to $249 5 million resulted.

Primarily from a return to a more normal environment in 'twenty, one compared to Covid depressed sales in 2020.

Along with an increase in the installed base that drove approximately 20% of the increase.

Canadian sales increased 12, 5% in 2021% to $151 $5 million due to reduced COVID-19 restrictions in retail stores in 2021 compared to 2020 and the strengthening of the Canadian dollar.

The 10, 3% decline in protective solutions to $284 $9 million was driven by a reduction in Covid PPE sales.

<unk> pressures and hardware and protective solutions.

Growth in our high margin Rds business and a strong performance in Canada, we're only able to offset a portion of the fourth quarter 2021 pressure.

For the year SG&A as a percentage of sales, excluding certain restructuring and other costs increased to 27, 9% from 27, 1%.

Higher selling expenses drove this increase particularly our revenue sharing arrangements with our customers at Rds achieved outsized growth.

Other SG&A factors included inflation in wages and higher outbound freight and storage costs.

Adjusted EBITDA in the fourth quarter was $38 6 million or 10, 4% decrease from $43 1 million in the prior year and in line with our revised expectations.

For the year adjusted EBITDA decreased six 2% to $207 4 million from $221 2 million.

In Canada, and modest full year adjusted EBITDA growth in hardware solutions.

Please refer to our investor deck for reconciliations of net income to adjusted EBITDA.

Now, let me turn to cash flow and the balance sheet for.

For the full year 2021 operating activities used $110 million of cash as compared to $92 million source of cash in the prior year.

We increased inventories almost $140 million in 2021.

Capital expenditures were $52 million as we continued to invest in our robotic and digital solutions equipment in merchandising racks important parts of our high return Capex initiatives.

We had planned to spend around $65 million on Capex in 2021, but chip shortages reduced our ability to produce machines at our planned pace.

Maintenance Capex remained near 1% of sales as expected.

In connection with our going public transaction in mid July we recapitalized, our balance sheet and at the end of the fourth quarter of 2021, we had $931 million of total net debt outstanding down from $1 6 billion of total net debt outstanding at the end of the second quarter.

At the end of the year, we had approximately $124 million of available borrowing under our revolving credit facility.

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

Now, let me spend a few minutes talking about our outlook.

To start our long term growth algorithm is intact as.

Let's talk headwinds and tailwind.

Inflation in the form of commodities that go into our products.

Taner costs outbound freight and labor where significant challenges in 2021 and will continue to be challenges in at least the first half of 'twenty two.

While labor inflation appears to be here to stay it is manageable and we have and we will price for the high level of service, we provide to our customers.

Unlike labor, we believe that inflation in commodities containers freight and other costs, we have incurred to maintain industry, leading fill rates will begin to moderate in the second half of 2022.

Keep in mind, the benefit of that moderation won't flow through our P&L until 2023 is it takes several months for inventory to be realized in our results.

To offset these inflationary pressures we have increased prices on our products on a dollar for dollar basis.

While this approach will result in some margin rate degradation in 2022, historically, we have not given price back dollar for dollar with inflation moderates.

And a recovery in margins over time.