Q1 2022 Hillman Solutions Corp Earnings Call
Okay.
Good morning, and welcome to the first quarter 2022 results presentation for Hillman Solutions Corp. My name is Latanya and I'll be your conference call. Operator today before we begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast. The company's earnings release presentation.
Patients and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on hilton's Investor Relations website at IR Dot Hillman group Dot Com I would now like to turn the call over to Michael Caylor with Hillman. Please begin.
Thank you operator, good morning, everyone and thank you for joining us I am Michael Taylor, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, Our chairman, President and Chief Executive Officer, and Rocky Kraft, Our Chief Financial Officer.
We will begin today's call with a business update and quarterly highlights from Doug followed by a financial review of the quarter from Rocky before we begin I would like to remind our audience that certain statements made on today's call may be considered forward looking and are subject to the safe Harbor provisions of the applicable securities laws.
These forward looking statements are not guarantees of future performance and are subject to certain risks uncertainties assumptions and other factors many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements. Some of the factors that could influence. Our results are contained in our periodic and annual reports filed with the SEC.
For more information regarding these risks and uncertainties. Please see slide two in our earnings call a slide presentation, which is available on our website IR Dot Hillman group dotcom.
In addition on today's call, we will refer to certain non-GAAP financial measures information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call a slide presentation with that it's my pleasure to turn the call over to our chairman President and CEO , Doug Cahill, Doug. Thanks, Michael Good morning, everyone for those of you who are new to.
The homeless story, we are one of the largest providers of hardware products and solutions in North America. Our team distributed over 112000 skus to over 40000 locations with roughly 80% of our shipments delivered directly to the store. We also stock the shelves in the store for the custom.
<unk>, which are some of America's leading home improvement centers hardware stores Big Big box retailers in pet supply stores importantly, 90% of our revenue comes from brands that Hillman owns our differentiators of our world class supply chain team and our in store sales and service teams.
Our 1100 associates strong.
Every day they team up to provide best in class service and industry, leading fill rates on must have high margin products for our blue chip customer base.
This is our competitive moat and we have stepped been steadily growing by winning at the shelves. Since we were founded in 1964 looking forward I remain encouraged about the future growth opportunities that lie ahead for him and we're off to a strong start in 'twenty, two and I couldnt be more proud of how our team has performed so far this year.
From our warriors in the field to our sourcing and distribution center employees do all of the dedicated support folks we continue to outperform our competition and provide best in class service to our customers.
We win thanks to our people and our deep partnerships, we've built with our customers over the many years remember we've been selling our top five customers on average for 22 years, our competitive mode has never been stronger and we continue to help our customers overcome labor complexity in supply chain chat.
<unk> is in categories that are critical to their businesses today I'm going to provide an overview of our first quarter discuss the current operating environment and finished with a customer update before I turn it over to rocky to talk numbers.
As we announced last month during the first quarter of 'twenty 'twenty. Two overall revenue grew by six 4% to $363 million.
Excluding COVID-19 related PPE sales from both periods. Our revenue grew by about 12% up about 12% over the first quarter of 2021, each of our businesses performed at or above our expectations for the quarter harder.
Hardware solutions is our biggest business it makes up approximately 50% of our overall revenue for the quarter hardware led the way with a 14% increase in revenue compared to last year driving that improvement were fill rates upwards of 94% and price increases that we've implemented over the past 12.
Months.
Robotics and digital solutions. Our Rds makeup just shy of 20% of our overall revenue during the quarter a return to normal foot traffic led to an 11% increase in Rds revenue.
Our Canadian segment, which makes up about 10% of our overall revenue increased 1% compared to a year ago quarter and lastly, our protective solution business makes up about 20% of our business protective was down about 9% for the quarter. However, excluding the unpredictable COVID-19 related revenue.
From both periods protective revenues were up around 10% compared to the prior year quarter.
As we announced last month, we generated $44 million.
Adjusted EBITDA in the first quarter, we saw strong margins and an uptick in sales volume at the end of the quarter as all businesses performed well and particularly hardware was able to offset inflationary pressures with price increases as of mid March we have price in place to fully offset the inflation.
We had experienced over the past 18 months, however, I will discuss more on pricing and cost in just a minute.
Overall, our performance during the first quarter of 2022 was healthy and you have probably already heard April foot traffic at retail has been soft and overall industry credit card transaction activity is also down in discussions with our retailers. They believe the majority of the softness in April as weather related but as we all know.
There are lots of factors influence in the economy right now and we believe hilton's business is well positioned for 2022 and the future.
Now let me spend the next few minutes, giving you my current view on the state of our business operations, our investment in inventory and incredible work from our teams has allowed us to continue to maintain industry, leading fill rates and we believe we have stretched our lead within our industry during Q1.
Our average fill rate increase just above 94%, which has allowed our customers to meet their expectations of in stock rates at the shelf and satisfy their consumers.
We believe the investment made in the inventory fill rates will pay dividends over the long term as we seek to expand our product offerings to adjacent shelves and aisles with our leading customers as customers know they can rely on hillman to get products on their shelves, even during the most challenging times.
Another key factor is our ability to serve our customers comes from our suppliers many of whom we've worked with for over 20 years.
State of the global supply chain environment has required us to work closely with our suppliers and those relationships have never been stronger.
This coupled with our team of 25 on the ground in Asia has allowed us to successfully navigate the global supply constraints and enabled our customers to continue to win with Hillman.
Now turning to price and cost we continue to monitor lead times from Asia, and overall inflation in our business most U S companies, including us negotiate new contracted container rates annually ahead of the new rates, becoming effective in may each year.
Similar to many other companies the contract renewal rates for containers were meaningfully higher than anticipated for May 20 to renewal we are already moving to offset these higher shipping costs and a new round of price increases that are currently in negotiation as we have done in that.
Three previous price increases since mid 2021, we plan to pass these cost on dollar for dollar basis with our customers and we expect our price increase to wholly offset the cost escalations in our P&L for 2022, now let me spend a minute talking about some specific.
Makes about our business.
The majority of our products are driven by repair remodel and maintenance projects. These are your pickup truck pros local contractors and diyer.
Our business is not reliant on new home construction historically demand for our products has been healthy through all economic cycles, considering our products are relatively inexpensive, particularly as it relates to the total cost of a project.
While there are concerns around the current state of the economy Hillman has seen topline growth and 56 out of our 57 year history.
We believe the growth drivers for our business are strong in our hardware and protective business. We are seeing solid consumer demand as trends in nesting aging in place outdoor living and millennials buying homes have been a wind in our sales and we continue to see meaningful opportunities with our high.
Margin Rds business, we believe the longer term macroeconomic growth drivers for our business are really healthy.
I love, our leading position in the market and while we can't control. Some of the short term factors. We are laser focused on controlling everything we can optimize.
Our customer for customer satisfaction and financial results, we continue to win new business and outperform with each of our customers. Let me give you just a few examples.
Our planned faster launch at one of our major retail partners will not only be on time and complete but we've already shipped 79 of the 400 S K use to.
3900 stores early to help fill holes in the shelf caused by their current supplier.
To me that's world class work by our team and very much appreciated by the retailer to quote the retailer Hillman is hardware and we can't wait to combine your expertise in this category with our 140 million consumers, who visit our stores in the U S. Every week.
We continue to gain share in farm and ranch channel with a new fastener win at a bellwether retailer that's regional.
We have won this business for the first time in our country company's history and don't think we did not rub it in with Mick and Rick Hillman when the grandson of the founder landed this account.
Why do we win it after never having it one word service they needed our service model and we serve most major retailers in the farm <unk> Ranch channel today is the clear partner of choice in this channel.
We continue to rollout, new Geos, and our Rds business and we've been successful in securing some chips and boards that while modest in number should allow us to install machines a bit faster than initially planned for 2022. We've also just introduced our new quick tag Dream machine for the.
First time, it's in engraving machine the consumer will have 25 different options for not only pet tags, but also luggage and backpacks versus the current machine, which today gives the customer only six TEG options. It's early for this next generation.
Machine, but the retail or the likes it so much they will display it at their upcoming annual shareholder meeting and Trust me, our engineers and all of US at him on are really excited about that news.
And we were named vendor of the year in 2021 in three categories with our retail partners. We have now one vendor of the year at each of our major hardware customers over the last three years at least once.
The future of the helmet is very bright and I'm encouraged about where we're taking this business and the value. We will continue to build for our shareholders customers and employees.
With that let me turn it over to Rocky.
Thanks, Doug.
I'll provide a quick summary of our first quarter results and then turn to our outlook and guidance for the remainder of 2022.
Net sales in the first quarter of 2022 were $363 million, an increase of six 4% versus the prior year quarter.
The improvement was driven by hardware solutions, which increased sales 13, 6% to $189 3 million.
The improvement was driven by price increases implemented over the past 12 months and strong volume to finish out the quarter.
Rds sales grew by a healthy 10, 6% to $61 $8 million as foot traffic and sales continued to improve from the COVID-19 impacted 2021 levels.
Our Canadian business had terrific performance in the quarter.
While sales were up 1% compared to the prior year, we significantly improved profitability as product margin outperformed and foreign currency exchange was a tailwind.
While we don't anticipate maintaining 13% EBITDA margins for the remainder of 2022 in Canada, we are well on our way to our minimum expected adjusted EBITDA goal of 10% across this business.
Partially offsetting these gains was an eight 6% or $7 2 million dollar decline in protective solutions as we comped against Covid related sales with higher margins than the prior year.
Covid related sales for the quarter were $13 $4 million compared to $28 million in the prior year quarter.
As a better proxy for understanding demand, excluding COVID-19 related sales from both periods protective solutions sales were up about 10%.
On a GAAP basis net loss for the first quarter of 2022 totaled $1 $9 million or one cent per diluted share compared to $9 million or 10 cents per diluted share in the prior year quarter.
Adjusted earnings per diluted share for the first quarter of 2022 was <unk> <unk> per share compared to <unk> 16 per share diluted share in the prior year quarter.
On an adjusted basis first quarter gross profit margin improved by 20 basis points to 41, 2% versus the prior year quarter sequentially.
Sequentially margins improved 40 basis points.
Margin expansion in our Rds business was mostly.
Offset by inflationary pressure in hardware and protective solutions.
<unk> only recently caught price near the middle of March as it was playing catch up for most of the last 12 months.
For the first quarter, GAAP, SG&A totaled $114 $5 million compared to $103 $2 million in the prior year quarter.
Adjusted SG&A was $106 million in the first quarter of 'twenty, two compared to $92 5 million in the prior year quarter.
Adjusted SG&A as a percentage of sales, excluding certain restructuring and other cost increased from 29, 4%.
From 27, 1%.
This increase was primarily driven by the revenue sharing arrangements in Rds due to outsized growth in that business and inflation related to outbound freight and labor.
Adjusted EBITDA in the first quarter was $44 million compared to 47 8 million in the year ago quarter.
Despite an increase in adjusted EPS from our Rds and Canadian businesses, we saw a decline in our hardware and protective solutions segments for reasons I just discussed.
That said, our adjusted EBITDA for the quarter came in better than expected as each business exceeded our original expectations.
Now, let me turn to cash flow and our balance sheet for.
For the first quarter of 2022 operating activities used $3 $6 million of cash as compared to a $45 $4 million used in the prior year quarter.
As Doug discussed earlier, we made the strategic decision to meaningful invest meaningfully invest in our inventory during 2021.
This investment has allowed us to maintain our industry, leading fill rates that we believe can help us win additional new business in the future.
Capital expenditures were $12 $5 million compared to $9 1 million in the prior year quarter.
We continue to invest in our Rds equipment and merchandising racks, both an important part of our high return Capex initiatives.
Our capex spend remains lower than we would like as chip shortages continue to hinder our ability to produce robotic kiosks to meet demand, particularly our re sharp knife sharpening machines.
<unk> Capex remained near 1% of sales as expected.
We ended the first quarter of 2022 with $933 million of total net debt outstanding up from $907 million at the end of 2021.
At the end of the first quarter, we had approximately $116 million of liquidity, which consists of $97 million of available borrowing under our revolving credit facility and $19 million of cash and equivalents.
Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was four seven times up from four five times at the end of 2021 as expected given the normal cycle of our business.
Let me spend the next few minutes talking about our short term outlook and guidance.
Our third price increase over the past 12 months was fully implemented in March which is when we finally caught our increased costs.
Looking at Q2, we will benefit from a full quarter of price increases.
Additionally, due to the seasonality of our business, we typically see an increase in sales during the second and third quarter.
Warmer weather during the spring and summer months resulted in an increase in home repair remodel and maintenance projects.
Altogether sales for the second quarter should see a year over year increase in the high single digits and our EBITDA should see a year over year decrease in the low to mid single digits.
While our Q1 adjusted EBITDA came in a bit higher than the street's expectations, our profit improvement over the prior year remains largely weighted towards the back half of the year.
We are optimistic that we can implement our next upcoming price increase at the same time or even slightly before higher contracted container rates begin to flow through our P&L.
During the second half of the year, we expect to have full price coverage, new business wins in place and relatively lighter comps and therefore, we anticipate adjusted EBITDA to be up in the mid teens on a percentage basis in the second half of 'twenty, two as compared to the second half of 'twenty one.
We have assumed we will have a modest benefit from working capital in 'twenty, two coming off meaningful inventory investments made in 'twenty one.
When lead times normalized and inflation subsides, we anticipate a commensurate reduction in working capital that will generate additional free cash flow.
Our long term target for net leverage remains unchanged at below three times and by the end of 'twenty. Two we believe we can come down to around four times.
As we look toward the remainder of the year, we remain confident we can hit our goals as such we are reiterating our full year guidance, we anticipate our full year 2022 net sales to be in the range of one five to $1 6 billion.
Adjusted EBITDA is expected to be in the range of 207 million to $227 million and free cash flow is projected to be in the range of $120 million to $130 million.
As we look a bit farther out our long term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact.
On the other side of the current headwinds we have a high level of confidence that our business will see adjusted EBITDA grow in excess of our algorithm.
We've discussed the current inflationary pressures.
We are hopeful that commodities containers freight and other costs incurred to maintain our industry, leading fill rates will begin to moderate in the second half of 2022.
Our business continues to have several structural tailwind that Doug discussed earlier.
We believe these shifts are permanent and position Hillman to capitalize on sustained growth in the home repair remodel and maintenance market.
Just to reiterate we are maintaining our guidance for the year and longer term. We continue to believe that our differentiated strategy will allow us to perform at or above our stated algorithm for growth.
With that Doug back to you.
Thanks, Rocky our investment to maintain our fill rates continues to pay off which we believe will be a meaningful benefit over the long term confidence in our team our strategy and our long term business model remains strong our differentiated model with the 1100 field sales and service folks combined with our <unk>.
The store delivery model have created tremendous value for our customers value that I think they recognize at Hillman, we provide simple solutions to complex problems faced by our customers like immense logistical and labor challenges.
The willingness of our customers to allow us in their stores, each and every day and to accept our pricing action.
As additional shelf space and award Us new business wins demonstrates I think 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 employees, we remain well positioned to drive growth over the long term.
Build meaningful value for all shareholders with that we will begin the Q&A portion of the call Latanya can you. Please open the call up for questions.
Certainly 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.
Our first question comes from David Manthey of Baird. Your line is open.
Question is on.
Supply of fasteners, another fastener distributor, we talked to you said <unk>.
And out their supply base I think the triple the number of suppliers that are using.
I'm, just wondering especially in light of this new retail relationship have you made changes in sourcing.
That could help you going forward, particularly at this China shutdown starts to feed through.
Dave Good question I mean, we have.
We've got a great supplier base now and they they have always been able to be ready for growth, but what we've done one really one stayed short of that I think we have qualified new locations and new suppliers. So that if we need to we have not.
Seen the need to I don't think we have any issues as I look over the next two years.
But because we don't control the political landscape and the moving pieces around the world. We have started to get new suppliers qualified with samples and making sure they could do it.
If we need that.
Okay. Thank you and.
Second on the Rds up 11%.
Right.
Can you disaggregate between same unit sales and then sort of the increase in the number of machines out there and then related I'm wondering on the margin side of Rds all else equal does a slower than expected rollout does that hurt or help margins in that segment.
Yes, I think as you think about new placements, Dave it's kind of a mid single digit portion of our growth and so I think that's how you should look about it added so as you think about a 11% call. It about half is related to new placements. The other half is growth in existing.
And then as you think about margin, yes, it actually an incremental sale.
Our incremental placement of a machine while it does take six months to get at full run rate.
Those do incrementally hurt the full business as you think about a plus 30% EBITDA margin in Rds compared to the rest of the business kind of in a mid teens type location.
Okay.
Alright, Thank you guys.
Thanks, David.
And our next question comes from Brian Butler of Stifel. Your line is open.
Good morning, Thanks for taking my question.
Hey, Brian .
Just the first one on the inventory can you remind everybody what kind of the what was the size of that working capital build for the inventory in 'twenty, one and then when you think about the modest.
And a drawdown that you alluded to in your prepared remarks kind of any color on that magnitude.
Yes. So at the end of this is rocky at the end of 'twenty, one we had about $140 million more inventory than we would've expected at the beginning of the year clearly that was to maintain.
Bill rates that we had in our business as we saw lead times double.
And also you know inflation around the commodity component of our products as were split about 50 50. When you think about the component that was inflation.
And the component that was lead time.
We did build inventory in the first quarter of this year, that's our normal seasonal build.
Knowing into the spring as we think about the full year as compared to 2021, we're still confident that we will probably take $20 million to $30 million out of that inventory number.
Based upon where current lead times are.
Okay, that's great.
And then thinking about kind of on the hardware side. When you look at like the point of sale kind of through April .
Are you seeing any trends.
Considering the inflation of the consumer spacing on their purchases resistant packaging, what theyre buying are getting reducing their purchases any color on those trends.
Yes, Brian we haven't seen anything yet in that regard I would say that my gut tells me in some of the hardware stores. The consumer has such a great option to take.
Three or four screws or three or four washers or three or four boats out of a drawer or buy a bag or a box.
Got to believe that at some point people are going to start picking through pieces instead of call. It. The 25 dollar ring for a box, but we have not seen anything change yet we just want to be able to be there in all of our locations. So that the consumer can get what they want for.
For the project or for whatever they may be working on but no we haven't seen anything change yet.
Okay, and then one last one maybe on the M&A pipeline and what Youre seeing there with the current environment is there any opportunity that some sellers are maybe.
Looking to sell sooner rather than later any color on those fronts.
Yeah, I think the only thing that's probably I mean, the benefit would be they their expectations have probably come down a little bit which is a good thing when you think about us over the next couple of years.
But I think the other thing that's interesting Brian as we've talked we don't plan to do anything.
Until we get our balance sheet in a better place and that should happen pretty quickly when things begin to normalize because of the inventory come into cash in our margin expansion that we should enjoy.
But I you know I.
I would just say they have to go back to the market with another price increase.
If they are doing what most people are doing which is bringing stuff from all over Asia. So it gives us some time because if they were trying to look at their model right now they'd say Oh, we gotta go get another price increase so probably buys us some time, but you know if you're an entrepreneur you got a you gotta be nervous that this thing doesn't seem like it.
You know want to end and we've looked at this this container increased pretty unemotional. It's just something we gotta do everybody I mean, you even solve the quotes in the big retailers that that container rates double that means so it's it's not something that's a hillman talent, but it probably buys us a little time, but I think it probably changes the future multiples.
With them being an entrepreneur with not very many options.
Okay, Great. That's great color. Thank you thanks for taking my questions sure.
Thank you. Our next question will be from Lee Jagoda CJS Securities. Your line is open.
Hi, Good morning, guys, Hey, lately.
Can we start in the Canada segment, and just talk about some of the company specific actions, you're taking there and how we should think about EBITDA margins in light of the 13% plus margin you had in Q1, which should be kind of a seasonally weaker period for you.
Yeah, I mean, we have the damn country had snow.
It was crazy.
Yeah, you're right.
I think Scott Wright and his team have done a really nice job.
About 30 little over 30% of our business up there is industrial commercial and the rest are the same retailers basically that we sell here except for Canadian tire Scott.
Scott has done a great job of consolidating operations from seven into one big DC in and are in the Toronto area and we've got more than one in Canada, but we had seven in the Toronto area because of acquisitions. That's one piece, but the other piece is we just decided to stop chasing the silliness of it of the industrial.
Sure.
Commercial margin account. These guys were buying on price on every order and we finally said listen if they want to shop around let them go get it from whoever needs of the business, we're going to take care of our customers that we're going to price it to make a fair profit. So it's really their operations have improved and we decided to stop.
Chasing some of this commercial industrial stuff and say if you want it we're going to make a fair profit and I think those rocky are the two things.
With the exception of we did have a little bear a positive variance in exchange rate. Yes. There is some FX helped there Lee I think as we think about the rest of the year, We think Canada should achieve kind of that low double digit.
EBITDA margin in the second and third quarter and then the fourth quarter again typically like you said, usually first and fourth are seasonally tough, particularly for Canada, so they'll probably be in the low singles and that so I think it will blend out to probably.
Eight 9% this year, which is nice progress towards that 10% minimum EBITDA that we expect out of that business.
Great and then.
Just looking at the large customer where you're selling in.
This year.
Can you talk about the margins on the initial stocking in sell in versus the recurring margins you expect from that business and then the other part of that is I think when you initially.
Negotiated the agreement you did so without the in person sales force in the aisles is there any change or anything new to update there.
Yes, so let's talk about that service, we decided to quote it.
On an apples to apples basis versus their current competition and other folks because their current supplier. Our current competition aircraft supplier and others don't have a service organization and a lot of times Lee would quote a piece of business with service built in and we're quoting against somebody that doesn't have it so what.
Exciting I think about this as we quoted it without and then the.
Late third quarter, we're going to test.
Stores with and that'll be awesome, because we will be able to see how stores do with it how stores do without it it'll be a great I think opportunity for us to prove what we can do with the.
With our folks now we have people in their stores handling key in engraving. Another things today. So we won't ignore about they won't have the full flat service organization on on them and for US the margin side of it we don't talk customer specific margins, but Lee the only thing that would cost us was because.
We were going to nail this launch we had to do some three PL storage to get ready because it's about 75 containers. They get this thing loaded and so we paid a little outside storage. So we didn't over jam, our current dcs, but other than that is that that would be it.
Got it and if I could sneak one more in just on the engraving re sharp side revenues were down year over year, and frankly down sequentially is there any explanation on that and how should we think about that one in the next couple of quarters.
Yes, I think thats.
What you saw there was a little bit of foot traffic Lee and.
We would expect that that will be a nice growth business, particularly as Doug talked about quick tag and as we're able to get the restart machines into the field.
Over the next.
Next quarter is probably not as much growth as we will see over the next year or two.
Okay great.
Yes.
Okay.
And our next question comes from Ryan Merkel of William Blair. Your line is open.
Hey, guys. Thanks for taking my questions sure.
So I'm sorry, if I missed it are you expecting lead times to improve in the second half of 'twenty, two and then any any worry about the Canada situation could that impact lead times at all.
Yes, So first question Ryan.
We've just not baked in any improvement I would tell you that.
I think they will.
Improve a bit you know from the call. It 240 days I think something closer to low two hundreds, but we haven't we haven't been able to witness that yet all we really saw with the Shanghai issue in China is they couldn't get truck drivers, even though the port remained open so we floated.
Containers for probably an extra 10 or 12 days that would have normally been coming our way. So it's a small bubble, but fortunately we had all of that stuff for the new launch year and I you know it may take a point half a point out of our fill rate, but I think that's it I think it's just a little air pocket for us.
Okay, that's good to hear.
And just a follow up on demand, obviously, a lot of worry out there on the consumer and housing and your business has been stable in the past I guess two two part question Doug.
With the low supply of homes out there people can't move is your view that people will just invest in their existing home and then what about pull forward demand any any fear that that could be an issue.
So let's take the first one.
You know.
It's interesting how just as we do our research and as we talk to the pros at these retailer.
Our retailers.
People are filling that an investment in their home is going to pay off.
Whether they plan to sell it or stay in it because of how home pricing and home equity has grown and so I think that's a good thing for us versus you know it used to be the old rule. If you didn't do bathroom or kitchen, you couldnt get any money back, Florida Couldnt get a fair return I think that's actually changed.
Bryan the second question I want to make sure I understand it can you can you come with that again, the pull forward I'm not sure I got it.
I was getting some questions just with people stuck at home, maybe doing a bunch of remodeling projects could demand had been pulled forward in 'twenty one.
I don't know if thats, a fear that you have or I know, it's hard to quantify it.
And yes, Okay got it yeah listen I, you know I think that we saw in deck screws in drywall screws in the second half of 'twenty.
Definitely there was a.
No you just couldn't believe how many we sold and in the first half of 'twenty. One it was still solid so I have to believe some people did some stuff.
That they wouldn't have normally done so, but when we talk about COVID-19 related products, we stick to the protective solution business, but we probably saw some deck screw and dry wall screw volume that was either pull forward or people. So damn board they had to do something.
Okay.
That makes sense.
And lastly for me you probably don't want to talk about 'twenty, three but I'm getting a lot of questions about gross margin what would be the minimum gross margin that you'd be happy with in 'twenty three if that's a fair question.
Yeah, I mean, I think when you look at gross margin Ryan the the thing that you you. Obviously know is that we've been very clear. We're gonna go dollar for dollar. So if you look at the first three increases the impact is probably three points right.
INR hardware margin rate on hardware and protective and again, we got another one common so call it three to three and a half or three to four points.
As things start to normalize you'll see that return to normal more normal and we've never been here Ryan So we've never had a.
200 million dollar cost or price increases.
Over a 15 month period with a market that may not go back to where it was but certainly will normalize. So I got to tell you. We're in we're in uncharted waters, but I'm excited because I think our inventories will come in the line, we will put that to cash and our margins will improve.
<unk> about the same time, which is why rocky and iron ore.
Excited about what we'll be able to do with our leverage but we're in a world we haven't been in on gross margins.
The only thing I would add to what Doug said is we do expect incremental gross margin improvement and EBITDA margin as we go through the quarters. This year from a cadence perspective, and so we would expect to exit the year at a higher level clearly than we are today and obviously as we think about 'twenty three we would expect to maintain that rate and to doug's point at some point when we see.
The headwinds turn we would expect our margins to get back or above in each of our businesses, where they were historically.
That's very helpful I'll pass it on thanks.
Thanks Rod.
And this concludes the Q&A portion of today's call I would now like to turn the call back over to Mr. Cahill for closing comments, there's one more question Oh hang on a second.
Latanya I think maybe there is one more question or at least our guys think there is any.
Excuse me, we do have an existing questions from Matthew Bouley of Barclays. Your line is open.
Hey, Thanks for fitting me in there guys.
So the I wanted to ask about the that fourth price increase in the negotiations to offset the container rate increase.
I was curious what exactly is embedded in the guide there. So it sounds like I think Rocky I heard you say you expect to realize the price kind of inline or ahead of the cost rolling through but I'm. Just curious if that price increase is relatively set in terms of magnitude and just your conviction that that it will be.
At those levels.
Does it sounds like it's not yet final. Thank you.
Yes, we do it is not yet final we're still negotiating with some of our customers, but we do believe as you said, Matt and I had in my prepared remarks, we expect that to be in place before it hits and we expect no impact on our P&L and we haven't put any in our plan or into the guidance. So it's a net neutral it will increase.
Revenue will increase we'll have increased costs commensurate with a commensurate with that and.
Right now we're highly confident that that will be the outcome, yes, I think Matt. The last thing is we've seen this.
When we first saw it I'll be honest I was like wait a minute I can't believe that and now we've seen it quoted by major retailers the same thing and so.
I feel really good about our chances because it's an industry thing everybody sees it it's not a hillman self inflicted wound and we've been successful in the past. So I think we will be on this one as well.
Gotcha and I appreciate that color.
And then secondly on the foot traffic in April , which you said was soft and that the attributed.
Retailers were attributing that to weather.
I'm just again similar question, but curious how that plays into your guidance.
If that April activity sort of holds at these levels would you be sort of towards the midpoint or lower end of the revenue guide or just kind of how that.
If these trends hold kind of how would you expect.
Full year to play out thank you.
Yes, I think.
You think about the revenue guide, we're highly confident that we will be at or above the mid point on on the revenue Guide I think more importantly, as you think about EBITDA.
And the flow through and the profitability in the business from that revenue. The one thing that it does give us a little bit of pause and so obviously, we beat the street in the first quarter.
You would initially think while it's just a beat and raise we're still cautious because to your point and as Doug said in his remarks, while the retailers are.
Consider this to be mostly weather related I mean, theres a lot of structural things going on clearly in the macroeconomic environment and there could be a bit of a slowdown. If there is we're still feel really good about being at or above the midpoint of all of the guidance that we've given in our ranges and Matt I would just say.
No. We're not we're not selling claritin D Zyrtec D, which I wish we were right now, but thank God, we're not sell a lot more as a fertilizer. So you know I think that that that that lawn and garden is the one that you never know if you're going to make it up when you Miss three weeks to weather for us it's not something that changes are.
Our our year, but obviously, we want to make sure that with the gas and grocery impact to the consumer that the consumer's going to hang in there and that's the question Nobody can answer right now.
Got it got it well that's great color. Thank you Doug. Thank you Rocky and good luck guys. Thanks.
Sure I think we've got one more.
Yes, our last question comes from Reuben Garner of benchmark. Your line is open.
Good morning, everybody. Thanks for squeezing me in.
So a quick clarification on the guidance so.
You last gave guidance I think a couple of things have changed it sounds like you've got some new business wins in another price increase is it fair to assume that maybe you're being a little bit more.
<unk> on kind of the core volume side, just in light of everything going on with the consumer and the foot traffic and that's why.
There was no reason to take up the guidance based on the at least for the top line based on the new business wins and the pricing.
<unk>.
Yeah, Ruben I think you know the.
The win that's mid year.
Was in our numbers yeah, we knew that was coming right. So that's not a new one we obviously went a little early with a little more and we continue to I think win.
You know day in day out so, but you know I would just say.
For us it's the the pricing should be neutral. The next one the cost and the pricing should be neutral I feel like that that'll work its way through just just the way we had hoped and that wasn't in our plans, but I don't know how you can't be cautious at some point right now with what's going on.
And we feel really good about this model because we're not tied to new construction, but theres no question that consumer the lack of stimuli the inflation.
Just have to yet that would that would.
That would put rocky and I in a in a more cautious state.
Got it and then.
The quick tag machines, I think you guys were doing a test early any indications yet on kind of what what kind of revenue or profit per machine those have versus the <unk>.
You know the legacy pet tagged machines and then.
Ultimately.
Is the plan or the thought that those machines would replace all the the peptide machines that are out in the marketplace.
Yeah, I mean, it's early.
Because we've only got it at one place we won't give you the numbers, but we're excited anytime you go from a consumer having six options for pet only to twenty-five options then they start thinking about who the hell doesn't need a luggage tag I don't know where mine go so.
There is an opportunity there the biggest opportunity Reuben is not necessarily replacing a machine in the front vestibule that cut fixed tags or engraved <unk> pet tagged today, the biggest opportunity is to put it somewhere else in the store like in the pet aisle or on and then.
In the end cap.
And then it would be very interesting and that's why I was so excited that this thing is going to actually be at an annual shareholder meeting, but it's a little early to tell we were excited about what we did we had a charity event, where we support and sponsor Humane Society, and we put a machine there and people didn't go through the buffet.
They were waiting in line to get a tag and most of them were luggage and backpack tags.
At this event last Friday, which was interesting so it's just too early yet.
Okay, great. Thanks, and congrats guys on the good start to the year good luck going forward.
Thanks Ruben.
Any more questions.
Okay. It looks like we're good Tanya thanks.
With that weird, thanks for joining us today.
We are grateful for our customers and our vendors and our suppliers in a period of time like this.
We look forward to updating you again in the near future. Thanks for joining us today.
Ladies and gentlemen. This concludes today's webcast you may now disconnect.
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