Q2 2022 Hillman Solutions Corp Earnings Call
Okay.
Yeah.
Good morning, and welcome to the second quarter 2022 results presentation for him and solutions Corp.
My name is Shannon and I will be your conference call operator today.
Before we begin I would like to remind our listeners that today's presentation is recorded and simultaneously webcast.
The company's earnings release presentation, and 10-Q were issued this morning.
This document and a replay of today's presentation can be accessed on helmets investor relations website at IR Dot Hillman group Dot com.
I would now like to turn the call over to Michael with.
With Hillman.
Thank you Shannon 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 and our guidance update 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 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.
Got it.
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 at IR Dot group Dot com.
In addition on today's call, we will refer to certain non-GAAP financial measures information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call a slide presentation with that it's my pleasure to turn the call over to our chairman President and CEO , Doug Hill. Thanks.
Michael Good morning, everyone today, I'm going to provide an overview of our strong second quarter results give an update on our position moving forward and discuss the current operating environment before I turn it to rocky to talk numbers before we dive in I'd like to give you a quick overview of Hillman and our differentiated service model.
Especially for those of you who are new to our story, we're the largest provider of hardware products and solutions in our categories in North America.
Our unique approach to sourcing distribution and service sets us apart from our competition, we win with our customers because we designed and sourced innovative products and execute inventory and merchandising solutions for complex categories. Not only are the these must have high margin categories for our customers.
But we help solve difficult problems for them like labor shortages and logistical challenges.
We had a strong quarter driven by the hard working team and Helman and our differentiated service model or 1100 member sales and service team is an important part of our competitive moat and I'll discuss in a moment.
During the second quarter of 2022, we generated $62 $3 million of adjusted EBITDA margins were healthy during the quarter, we benefited from having fully caught priced at the end of March resulting in three full months with the appropriate price cost mix.
Net sales grew to $394 million. This four 9% increase over the second quarter of 2021 was driven by the implementation of price increases over the past year. Despite lighter volume now, let's dive into how each of our business segments performed during the quarter.
Hardware solutions is our biggest business makes up approximately 50% of our overall revenue for the quarter hard word led the way with a 12% increase in revenue compared to the second quarter of 2021.
Price increases were the main driver of the topline increase also contributing to the improvements were fill rates upwards of 97% up from 90% a year ago.
This is why retailer part retail partners Trust Hillman, 97% fill rate during one of the worst supply chains any of us can ever remember.
Robotics and digital solutions, our Rds makes up just shy of 20% of our overall revenue during the quarter ladder foot traffic, coupled with a difficult comp quarter in 2021 resulted in a 2% decline in Rds revenue.
So this was on top of last year's 57% increase in the second quarter in particular, and gravy and Warsaw as pet adoptions decline.
And unfortunately shelter populations are growing which means there are less new pet owners and their word during 'twenty one when it seemed everyone was adopting a dog or cat.
Our Canadian segment, which makes up about 10% of our overall revenue performed very well during the quarter, Canada posted a 7% top line increase compared to the year ago quarter and ran their business very well driving strong bottomline results.
Lastly, our protective solutions business makes up about 20% of our overall revenue.
In the second quarter of 2022 protective revenues were down about 12% driven by retail softness including fewer promotional sales COVID-19.
Covid related PPE sales contributed approximately $2 million of revenue for both periods and therefore did not have a meaningful impact on the comparison now on a year to date basis protective sales were down 10%, but when backing out COVID-19 related PPE sales protective is down.
Less than 1% on a year to date basis.
As we all know we've now seen two consecutive quarters of negative GDP growth and there are a lot of factors influence in the economy right now many aspects of our business make us resilient and position us well as we navigate these uncertain economic times. They include number one our heavy rich.
Fair and remodel exposure to our competitive moat three our successful pricing initiatives and four with lead time improvements out of Asia, We can now lower inventories, while protecting our industry leading fill rates.
To start it is important to remember our business is focused on repair.
Model and maintenance, we're not tied to new housing and we've grown our top line organically and 56 of the 57 years since our founding with an average top line organic growth of 6% annually since the year 2000.
The only year that our top line didn't grow was 2009, which was the bottom of the market during the great financial crisis, while our topline decreased by 5% and O nine our bottom line increased by 10%, which was the result of our cost coming down.
That crisis and other past inflations without fail, we've seen commodity prices softening, which we're starting to see now.
Currently you can't read Wall Street without reading about the challenges companies have regarding labor supply chain and inventory management in today's environment. Our competitive mode is more critical than ever and is helping solve these issues for our customers. This competitive moat consist of three components number one.
One.
Over 80% of our 112000 Skus are delivered directly to the retail locations of our customers. We utilize our distribution network, which consists of 22 distribution centers to send our products to over 42 locations across North America for our customers in general.
Our customers do not have to worry about managing Hillman inventory in their distribution centers supply chain logistics or shipping and labor costs.
Number two our sales and service team, which consists of 1100 associates provides world class service at the shelf for our retail customers. This team of warriors and shares that Hillman must have Hillman must have high margin products are in stock organized an optimized for our blue Blue chip.
Customer base.
Making Rick Hellman introduced this unique in store service model over 27 years ago, which has allowed us to serve our five biggest customers on average for over 22 years each.
And number $3, 90% of our revenue comes from our brands that we own. This is not only important to the consumer and the pro but allows us to differentiate our offerings based on specific retailer strategies. Additionally, we can implement customer feedback to improve our product.
To meet the evolving needs of our pro and DIY consumers.
These three pillars are the backbone of our retailer partnerships, we allow our customers to overcome complex labor supply chain and inventory challenges, while delivering industry, leading fill rates in our categories. For example, many of our customers continue to struggle finding quality employees to stock.
Shells and many Giles our sales and service team do this for them. So our customers don't have to.
Another example is managing inventory today.
Today, we're seeing many retailers working to reduce inventory as their distribution centers are full of product. Some retailers have rented additional warehouse space to house in inventory and other categories and have been working around the clock to move products through their distribution networks at hellmann.
We ship over 80% of our products directly to the store. So our customers don't have to worry about managing the inventory of our products.
And lastly, not having products on the shelf. We all know is the quickest way for our customers to lose revenue and market share. So in today's economic environment. Our moat has proven to be increasingly indispensable part of our relationship with our customers who know they can rely on hillman to get products on their shelves.
Even during the most challenging times.
Let me give you an example of how our moat can also drive new business by providing some detail of our recent new customer win.
As we've talked about briefly last quarter on the call. We wanted in the fastener business at one of our major retail partners. The <unk> Covenant and cabinet had a difficult time keeping products on the shelves, which gave us the opportunity to get our foot in the door after securing the new business, we shipped a 150 truck.
Those with store specific pallets for approximately 4000 retail locations.
This rollout has gone extremely well with fill rates of 99, 7%.
And we're already receiving orders for more fasteners from this customer our customers thrilled with how this rollout has gone and we believe this has the potential to drive additional business wins I've run a bunch of businesses and I've never seen one like this we have a strong team great customers and a bunch of hard work.
And folks at Hellmann, they ensure we win at the shelf and help nurture the longstanding partnership we have built with our customers over many years now.
Now turning to pricing and cost as we talked about on our last earnings call. Most U S companies, including US negotiated new contract Ocean container rates that became effective may one 2022. These rates were dramatically higher than last year and are expected to increase.
Our costs by about $50 million on an annualized basis.
These increases hit all companies that import products from overseas, including all of our major customers and so we have recently initiated yet another price increase to cover these additional costs. We expect our price increased our wholly offset these increased shipping costs in our P&L for 'twenty two and beyond.
Another quarter another price increase.
Recap, what we've done from a price cost perspective.
The latest price initiative marks our fourth increase since the beginning of 2021, and we expect to have taken approximately $225 million in price. Since then again all of these have been dollar for dollar price increases to cover our costs. This breaks down to approximately.
$90 million of commodity cost <unk>.
$15 million of labor and $120 million of transportation and shipping costs.
Going into the past 24 months, our relationships with our customers, we're strong and remarkably even after these four price increases our relationships with our customers I think are even stronger.
We believe this is because we have shown our customers that we're only taking price to cover cost not increasing our profits we truly respect.
And are grateful for the healthy partnership we have with our customers we remain in a strong position with them because of the mutual respect our long standing relationships and our competitive moat and short we bring something to our customers that our competitors do not.
Thankfully, we do not foresee a need for additional price increases in the near future based on what we're seeing today now let me spend a minute.
In about some specifics about our business, we've all read about retailers looking to reduce inventories while maintaining their in stock levels and we'll work together with our customers to help them reach their goals.
Because of our direct to store model most of our customers don't have inventory of our product in their distribution center.
However, we may see some of our customers consider reducing inventories at the shelf by two or three weeks on slower turning items during the second half of this year.
Can tell you with our direct ship network in the in store Helmand team, we will make sure either way our customers in stocks continue to be high.
We will be reducing our own inventories as well as we think about lead times from Asia. We saw them peak during January of 2022 at 255 days. This means that when we place an order from our suppliers in Asia. It takes 255 days for that order.
To arrive in our distribution centers here in the states today, we're seeing lead times.
Around 160 days.
In normal times like 2018, or 19 lead times were approximately 130 days so they've come down significantly since the end of January we believe that this dynamic will allow us to reduce our inventories by $50 million before the end of the year, while protecting our fill rates.
Which averaged 97% in the second quarter.
Rocky will get into more detail on how inventory will impact our second half expectations shortly.
As we discussed earlier the majority of our product sales are driven by repair remodel and maintenance projects.
These are your pickup truck pros your local contractors and DIY hours to be clear, we believe that our business is not reliant on new home construction for that reason demand for our products has historically been steady through all economic cycles, considering our products are relatively inexpensive.
As it relates to the total cost of the project.
We believe that the balance sheet in the U S. Homeowner remains healthy while interest rates may slow new housing transactions, we believe the increase in home prices and therefore homeowners' equity over the past few years will be a meaningful driver of home improvement projects for years to <unk>.
Come.
We expect to see the continuing investment in the home as trends in nesting aging in place and outdoor living remains prominent.
At the same time, we're laser focused on successfully negotiating this environment. We are also working on our growth initiatives, which include the expansion of quick tags machines, Smart Fob auto and our knife sharpening Chios re sharp we are also continuing to focus on new wins and share gain.
In categories like builders' hardware.
That can dry wall screws or anchors.
And what's the last one rocky.
Barn door accessories, I knew I know youre waiting for it and we strongly believe that we're well situated for the second half of 'twenty to 'twenty, two and into the future I am encouraged about the opportunities that lie ahead and the value. We will continue to bring for all of our shareholders customers and employees with that.
Let me turn it over to Rocky.
Thanks, Doug.
This morning, I'm going to provide a quick summary of our second quarter results and then turn to our outlook and guidance for the remainder of 2022.
Net sales in the second quarter of 2022 increased four 9% to $394 $1 million versus the prior year quarter.
Hardware solutions was the main contributor to the increase which was up 12% to $225 4 million.
Overall, the improvement was driven by a 16% price realization, partially offset by a 4% decline in volume.
As our retail partners have discussed publicly April was a very light month in terms of foot traffic and volume.
We saw May and June returned towards the norm, but not enough to make up for April .
Further we saw softer volumes in July , which I will talk about a few minutes.
Rds sales decreased by 2% to $64 8 million lighter foot traffic less activity in pet engraving and a difficult comparable quarter with the main drivers of the decline.
Our Canadian business had terrific performance in the quarter sales were up 7% compared to the prior year and we significantly improved profitability for the second quarter in a row.
Price product mix and exiting unprofitable business have driven nice profit improvement in Canada, and while we don't anticipate maintaining 17% EBITDA margins for the remainder of 2022 in Canada, we are well on our way to a minimum expected adjusted EBITDA goal of 10% across this business.
Protective solutions sales were down, 12% or $7 $5 million, resulting from light lighter volume and fewer promotional sales.
Looking at our year to date numbers for protective were down only 1%, excluding COVID-19 related PPE sales.
Covid related sales for the quarter were $2 1 million compared to $1 6 million during Q2 of 'twenty one.
However for third and fourth quarters of 2021, Covid related PPE sales were $15 1 million and $19 2 million, respectively, as we liquidated our COVID-19 inventory.
As a reminder, we worked with our retail partners to sell and donate these products in the second half of 'twenty, one at zero or very little profit.
We do not anticipate meaningful COVID-19 sales for the remainder of 2022.
On a GAAP basis net income for the second quarter of 2022 totaled $8 8 million or <unk> <unk> per diluted share.
Impaired to a net loss of $3 4 million or four cent loss per diluted share in the prior year quarter.
Adjusted earnings per diluted share for the second quarter of 2022 was <unk> 14 per share compared to <unk> 24 per diluted share in the prior year quarter.
On an adjusted basis second quarter gross profit margin improved by 50 basis points to 44, 1% versus the prior year quarter.
Sequentially margins improved by 290 basis points.
The improvements in both periods were the result of catching price cost in March fully benefiting in the second quarter of 2022.
For the quarter, GAAP, SG&A totaled $118 $2 million compared to $111 7 million for the prior year quarter, driven by higher selling and warehouse and delivery expenses.
Adjusted SG&A was $111 3 million compared to $100 2 million in the prior year quarter.
This analysis backs out stock compensation acquisition and integration expenses, certain legal fees and restructuring costs, which we feel gives us a better analysis of our base expenses.
Adjusted SG&A as a percentage of sales increased to 28, 2% from 26, 7% driven by the higher SG&A.
While our business is variable costs the softness in quarterly sales resulted in adjusted SG&A as a percentage of sales coming in a bit on the higher side.
Subsequent to quarter end, we have implemented several cost saving actions, including some reductions in head count to better position the business for financial flexibility in the second half of the year.
Adjusted EBITDA in the second quarter was $62 3 million compared to $64 $5 million a year ago quarter.
Our results were driven by having cut price costs before the start of the quarter and a lift from strong earnings from protective and our Canadian businesses.
The decrease in EBITDA from the comparable quarter was anticipated and baked into our guidance and expectations.
Now turning to our cash flow and balance sheet for.
For the year to date in 2022 operating activities generated $14 $7 million of cash as compared to operating activities using $59 8 million in the prior year quarter.
The main driver for the improvement was that last year during the period of global supply chain shortages, we made the strategic decision to meaningfully invest in our inventory.
This investment has allowed us to maintain our healthy fill rates, which we believe has helped us win new business.
Capital expenditures were $28 9 million compared to $22 7 million in the prior year quarter.
We continued to invest in our Rds kiosks, and merchandising racks, which are important parts of our high return capex initiatives.
Chip shortages continued to hinder our ability to produce robotic kiosks to meet demand, particularly our re sharp knife sharpening machines, which has kept our capex lower than we would like.
Maintenance Capex remained near 1% of sales as expected.
We ended the second quarter of 2022 with $949 million of total net debt outstanding up from 931 million at the end of 2021.
At the end of the second quarter, we had approximately $118 million of liquidity, which consists of $100 million of available borrowings under our revolving credit facility and $18 million of cash and cash equivalents.
Subsequent to the quarter end, we expanded our revolving credit facility by $125 million to $375 million and extended the maturity by a year.
This provides us with financial flexibility on attractive terms.
We don't have an immediate need for the increased line and importantly, we still expect to fully pay down our revolving credit facility by year end.
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 and equal to where we were last quarter.
Our leverage at quarter end was expected given the normal operating cycle of our business.
Our long term target for net debt to adjusted EBITDA ratio remains unchanged at below three times by the end of 2022, we believe we can do our leverage to just below four times.
Let me spend a few minutes talking about our short term outlook.
As Doug said, we were successful in securing our fourth price increase to cover the increase in contracted ocean container rates.
The price increase offset an increase in cost on a dollar for dollar basis, just like the previous three.
The price increase will be implemented throughout the third quarter.
As we look forward to the back half of the year, we will be fully caught up on price cost as we were in Q2.
Additionally, we typically see an increase in sales and EBITDA during the second and third quarters as we talked about last quarter.
Summer weather during the spring and summer typically result in more trips to the hardware store driven by an increase in home repair remodel and maintenance products projects as.
As we think about our guidance for the remainder of the year. There are two important aspects to consider.
Number one is the consumer as we all know there is some uncertainty in the economy right now and that consumer is being impacted by inflation.
After gas and groceries homeowners may be waiting to start that home improvement project. They were previously planning to do.
Number two as inventory as Doug mentioned, we will likely see some of our customers, reducing their inventory levels, which translate into less order volume than we would see typically.
As lead times have come down in commodity costs are starting to soften. We believe we can reduce our own inventory by approximately $50 million between now and the end of the year.
With that it will be important to balance the long term relationships, we have with our suppliers to ensure they remain viable partners into the future.
That said so long as sales at our customers are generally healthy and the consumer isn't greatly impacted by a potential economic slowdown we believe our full year 'twenty two results will fall within our original guidance range given back in March.
While we have benefited from taking price sales volumes were soft during April and have again been soft in July .
With this visibility we are providing the following updates.
We now anticipate our full year 2022, net sales will come in towards the low end of our original guidance, which was $1 5 billion to $1 6 billion.
This implies that our second half net sales will see a percentage increase in the mid single digit range versus the second half of 2021.
We also anticipate our full year 2022, adjusted EBITDA will come in at the low end of our original guidance, which was $207 million to $227 million.
This implies that our second half adjusted EBITDA will see a percentage increase in the high single digit range versus the second half of 'twenty one.
Our guide also implies that adjusted gross margins during the second half will remain fairly consistent with what we saw during the second quarter of 'twenty two.
Lastly, we still feel comfortable that our original free cash flow guidance range of $120 million to $130 million is intact.
As we look a bit further out our long term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact on.
On the other side of the current macroeconomic environment, we have a high level of confidence that our business will see adjusted EBITDA growth in excess of our algorithm.
We believe this as we are beginning to see commodities containers freight and other costs begin to moderate in the second half of 2022, which should benefit us in 'twenty three and beyond.
While our approach to implement dollar for dollar price increases has resulted in some margin rate degradation, we have not given price back dollar for dollar when inflation moderates historically.
This gives us potential margin expansion over time, which we believe we will begin to see flow through our P&L in 'twenty three.
Our begin our business continues to have several structural tailwind that Doug discussed earlier, we expect these trends will continue and position Hillman to capitalize on sustained growth in the home repair remodel and maintenance market.
As we look forward, we continue to believe that our competitive moat will allow us to win new business drive sales and allow us to perform at or above our stated growth algorithm over the long term.
With that Doug back to you.
Thanks, Rocky our competitive moat has more than proven itself in today's environment and now serves as an even more appealing solution for our customers.
Helmand model with our 1100 field sales and service folks combined with our direct to store delivery bring solutions to our customers complex needs, especially in today's challenging environment. The value, we bring our customers as reflected by our customers' willingness to accept our pricing actions granting grant us.
Additional shelf space and award Us New business, all three of which we've seen in the first half of this year.
While the current environment is uncertain, we will stay focused on controlling the controllable.
And taking great care of our customers as we look forward, we remain confident in our mode and we believe we can drive long term growth and build meaningful value for all of our shareholders.
With that we'll begin the Q&A portion of the call Shannon can you open the call up for questions.
Thank you.
Question, you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Reuben Garner with benchmark. Your line is now open.
Thank you good morning, everybody.
Alright.
Maybe to start so Doug I missed the $50 million I think was the number in incremental inflation can you can you talk about what that was and the timing of the price increase that you're implementing timing and amount of the pricing increase that you're implementing to offset it.
Yeah, Hey, Reuben, it's rocky so that $50 million was all related to contracted container rates and so we spent a lot of time talking about that in our first quarter call basically the world renegotiate contracted container rates on may <unk> of each year and so beginning on may 1st we saw our contracted container rates quite frankly go up dramatically as did.
The entire industry.
And that will end up flowing through our P&L starting in late Q3, but hits us more in the fourth quarter and then as we just said the price increase to offset that is going in place kind of as we speak and will come in throughout the third quarter. So the timing of when we began feeling the cost and when we can get began.
Feeling the price benefit or at about the same time.
And again that $50 million just to be clear is an annualized full year number not what the impact in 'twenty two will be.
Okay got it.
This is the one for maintenance does not incremental since then so I guess since May I think it's been pretty clear that at least the spot rates for container freighters have been falling I think material.
Cost pressure should be declining can you kind of tell us where were those items stand today, and what kind of benefit they could bring in in 2023 at these levels.
Just trying to see.
See how much further we need to see the freight rates fall in the steel prices fall for it to be.
I guess for you to fully get back the price cost headwinds that you dealt with over the last year and a half.
Yes, I think Reuben we have seen is our customers have things like lumber.
Last year. They peaked at 1400 dropped to 500. This year. They peaked at 1200 per thousand board foot or $5 27, we've seen China's steel come down the last three weeks it perked up a little bit it was slightly up but China steel has softened a bit we have not seen Taiwan steel which were.
By most of the world buys most of the deck and drywall screws.
That that steel probably those steel prices havent come down, but they had plenty of demand and they also had some higher cost inventory, but traditionally if you go back in history, Taiwan steel prices will fall China's steel prices over time on the Ocean container you know all of us for sure.
Even our customers when the container folks Jack the rates and almost doubled them for contract May one what we were seeing at that time was spot prices for a 40 foot equivalent around 15% to 17000 contract prices had gone.
To close to 9000 on again, a 40 foot equivalent we do mostly twenties, but but since then spot prices have dropped and that's putting pressure on the contract pricing and you would think these guys would have to <unk> at some point because as people if we can take.
150, if we have a 150 more million dollars more inventory because of lead times and they are changing you can only imagine ruble and what's going to happen when all the big retailers can do the same kind of thing and take inventory out of things that they directly import from overseas. So we kind of see the.
The commodity bubble.
<unk> to come down now as you know it takes five months.
Come through our inventory you also know it takes right now of 160 days to get it.
But we like the trends where they are beginning.
And we'll just have to see how it goes so far so good there and I think us and our customers or both.
Excited that it's been 15 months of craziness.
Okay, and then a clarification on the inventory side, so you're kind of.
You had to go to the low end of the range for EBITDA, but it sounds like the free cash flow has reiterated that $50 million reduction is that more than you anticipated in the guidance previously and then it sounds like Doug if you've got $150 million excess that means theres. Another 100 million to go in.
Potentially in 'twenty, three if we see more normalization in the supply chain.
Yes that everything you said is correct Reuben so we the our original guide had a working capital benefit of call it $20 million to $30 million. We think we're going to do better than that and we will be able to offset the pressure.
That is inside the guide around EBITDA plus.
Pay about $7 million in cash interest more this year than we originally anticipated because of raising rising rates.
Great. Thanks, guys I'll pass it on.
Okay.
Okay.
Thank you.
Our next question comes from Lee Jagoda with CJS. Your line is open.
Hey, good morning, how are you.
Just so.
Starting with just foot traffic at retail can you talk to the foot traffic trends that you saw during the quarter at your retail partners and how that translated into volumes.
Particularly in passing a hardware in Q2, and then maybe talk to how that followed through in July and the first few days of August .
Yes, I think Lee if April was just a horrible month for everybody in the coldest wettest in 20 years, so that really scared our retail partners, particularly because of their seasonal business put a lot of pressure when you've got four months to sell something and you basically lose a month.
So we're impacted by footsteps people swing by and pick things up they see things that kind of key whatever and so we saw that they had as we reported a tough April we saw may and June about where we thought.
And I think our retailers made up a bit of the seasonal miss.
That they had.
And then July kind of the same thing as April was just kind of a ho.
Hummer.
Foot traffic was down but theres a couple of things.
One other thing going on Lee that I am sure you know the last quarter of our retail partners second quarter over the last month is July and they've got work to do on their inventory levels and every merchant has a goal. So I think the you did see traffic down a bit and you also saw a reach.
Trying to do everything they can to control their inventories and I am sure you read that in some of their their report. So I think that was the combo there, but again, we could see August and September will be very similar to May and June we just don't know and we're not going to swing dramatically, but we do see some impact when footsteps.
Slower.
Got it and then just one more for me I know you had mentioned customer reductions on the inventory side just on the slower moving Skus. If I look at the revenue guide can you quantify the impact in the second half that you expect to see from those slower moving skus.
Being reduced at retail.
And Lee that's a hard one we don't know because again, we're fortunate that we don't have.
A bunch of drills and solids and distribution centers are stuff goes direct to store, but I'll give you. An example, if they have 25 weeks in total on our product they could do two or three weeks and with our direct store and our people in the store their fill rates would be okay. Now they would go back to 25.
Weeks, if they went down to 23 when things normalize because.
We see it right now for example, Lee with lumber coming down that screws in drywall screws, you're starting to see particularly deck screws jumped so they.
<unk> reached at my experiences retailers traditionally go ditch to ditch on this.
Take it they take inventory down then they all my God, it's taken off again, but thats the kind of swing you would see in and Thats part of the reason that you see our range on on EBITDA and sales to the lower end, we're just trying to be prudent with the things that that we think are going to happen and we understand our retailers have.
Our cash flow objectives, they want to make we will do our part we're not a big part of that but that's that's part of why we took the range to the lower end.
Okay. Thanks, very much sure.
Thank you.
Our next question comes from Brian Butler with Stifel. Your line is now open.
Good morning, Thanks for taking my question.
Hi, Brian .
First one just on the headwind from <unk>.
EBITDA from 2021 second quarter. Two there was about 140 basis points can you give some color around the puts and takes I mean, obviously inflation was a big chunk of that but if you could breakdown just maybe how the items offset for that 140 basis points of headwind.
Yes, I think the two the two biggest areas that we saw headwinds in hardware in Rds, Brian and so we talked about in Rds. It was a really tough.
Compare when you think about coming out of Covid and.
The number of <unk>.
The options of dogs and cats in our engraving business performed really well and quite frankly, this year compared comparatively did not perform well on a unit basis as.
As Doug said in his prepared remarks.
The kennels and the places where they keep animals now the shelters are full and it's unfortunate but that does impact our engraving business and as you know, it's a very profitable business for us when you think about hardware, while we were able to catch price cost that softness in.
In the period.
Which quite frankly, we didn't fully expect.
We aren't able to leverage as quickly in that business.
It's not like you can delever the business fully over the course of a month and so we have taken some actions as we think about the back half as I talked about in my prepared remarks, but in the quarter, we actually performed a little better than we expected NHS from a rate perspective.
On the gross margin line, but SG&A eight a lot of that up because we were expecting to ship more product.
Okay. That's helpful. And then when you think about that I guess, the pricing the prices and the cost kind of offsetting each other as you roll into 2023.
What is kind of I mean, it's a.
Zero zero margin pass through so what is the kind of headwind just from those.
The price the price increases and the cost that you've seen as it rolls through 2023.
What does that is there a way to quantify that.
Zero margin headwind on yet or not.
Margins, yes, so Brian we've said publicly that we believe that it would be about a 300 basis point headwind. We would tell you in the second quarter, we actually did a little better than that.
In the hardware business, probably closer to 200 basis points of headwind from the dollar for dollar pass through that's one of the reasons that as we've said, we expect margin rate to kind of remain constant through the rest of the year is.
We performed a little better than we expected in the second quarter from a rate perspective, and hardware and we think will hold onto that as we hold onto price cost for the rest of the year.
Okay, great and on the cash flow side.
Going from negative $14 million in the first half to the guidance of the <unk> pointing to $1 30 can you kind of break that down into some buckets on where that comes from in the second half.
Yes, I mean, the simplest way to think about it is we're a user of working capital typically in the first half of the year and in the second half of this year because lead times have come down not only will we seasonably.
The agenda.
Our working capital be a benefit but will also have the benefit of those reduced lead times and so the big driver is that change in working capital plus the profitability that we'll have in the back half of the year.
Okay, Great and last one for me just.
Any more color on the chip shortage in kind of your thoughts on how that plays.
Into 2023 are what you are hearing on.
On that easing up.
Yes.
We have enough to be a thousand machines ended the year. We've got 200 more chips I heard last night, one of the Crazy things Brian is the model X connectors, which is basic wiring connectors that we use on all of our machines. There tight now because the auto guys have absolutely bought every single one of them.
So it's just silly stuff that you'd say over time is not going to be a problem.
I believe after the first quarter.
'twenty three we're not going to have any problem on chips, but until then we're just still kind of a nurse in our way, but the <unk> connector is an example is just your basic wiring connector and all of a sudden the auto guys I think they bought everyone on ebay plus everyone in stock.
Yes.
Silly stuff like that doesn't cost very much kind of a basic thing, but we are still kind of hand to mouth, and so a little better but not not open gates I, just I'm not overly concerned about it in 'twenty three though.
Okay, great. Thanks for taking my questions sure.
Thank you.
Our next question comes from Ryan Merkel with William Blair. Your line is now open.
Hey, guys. My first question is on the EBITDA outlook for the second half can you just clarify what changed is it just the retail foot traffic and the destock or is there something else.
Ryan It's all volume.
Okay.
Got it.
And then should we think about the destock and tackling <unk> more than <unk> or how do we think about those quarters.
I think so I mean.
That's a good question, Brian I think that.
The current I mean.
Kind of when you saw those guys in Arkansas come out with the early release everybody knew that inventory is going to be a problem target was one of the early canaries and just think about it I mean, they imports so much stuff from Asia.
Had the rat.
Extra distribution centers to hold more inventory because the lead times and with lead times coming down I mean, Ryan one of the interesting things going on right now as we've all seen situations where retailers needed to reduce inventories.
The business pressure, but I don't think we've seen a combination of that and lead times gone from 250 call. It days to 160 in such a short period of time. So what we're doing in that regard is really balancing making sure that our long term supplier.
<unk>.
Don't get in trouble because there could be some suppliers on the other end of some other categories that just get whipsawed, So bad and we've got long term 20 plus year relationship. So.
I think it's probably a.
Our second half deal.
Some of that was going on in July and we're just fortunate that we don't have a bunch of product sitting in distribution centers that are retailers can take out.
When you go direct stores, just not that much. They can do so I would say for the most part it would be third quarter.
Okay.
That makes sense and then a longer term question here as we think about 2023, what is the potential range of benefit to EBITDA with container rates down in raws down I know, it's a moving target but is there anything you can provide there really isn't I mean.
We are playing with the numbers too.
Think about this it's really.
Directionally things are coming down, but if you just think about the math, if we don't buy $50 million and we take inventories down Thats a good thing.
But by the time, we do buy more in Florida.
And get it through our inventory Youre really talking about mid year 'twenty three.
And that doesn't mean that we won't have benefit before that because there should be.
But for the most part if you just think about the math when you take your inventories down and it takes call. It 150 60 days to get it and takes four or five months to get through your inventory.
It should be pretty interesting in the second half of 'twenty, three we will feel things get a little better here and there until then but that's the kind of timing of it.
Yeah, Hi, here, yet so Ted ill put it my words, a 43% plus gross margin is still in the cards.
We start to see more of that second half 'twenty three.
The impact starting to help you.
That's right that's a good way to think about it okay.
Alright last one for me so the macro could be rough in 'twenty three depending on who you listen to I think in 2009 sales were down 5% EBITDA was up 10%.
Could that be the same sort of range of outcomes in 'twenty three or has anything changed yes, I think the only thing Thats changed there Ryan I've gone back and spent some time with MC and <unk>, who were who were running it at the time.
We had a little bit higher percent local hardware business as a percent of our total then as we do now even though it's a big part of our business and they do extremely well in that kind of environment and have historically, so I would say the five that Mick and Rick saw may may be.
Eight nine something like that because the mix is a little different but directionally I think it's pretty similar and then commodities.
Our bigger now than they certainly were no nine as far as the run up so.
It should be better on that side as well so it's probably a little more on the sales side, but I think under 10 and then.
Likely.
Better on the EBITDA side, if you think about the math.
Very helpful. Thank you.
At.
Thank you.
Our next question comes from Matthew Bouley with Barclays. Your line is open.
Okay.
Good morning, Elizabeth on for Matt today.
I was just wondering you've been able to successfully implement various price increases in the past we've seen that benefit in your margins this quarter, but as background.
Do you expect that there will be any risks to the implementation of that price increase into Q3.
And do you think people push back on that at all.
So right now we feel very good about the fact Elizabeth that we haven't done.
Let's be honest retailers are very smart people, they're looking at cost as well they know that we're going to be fair with them and whether it be pushed back over time, absolutely there should be because thats them doing their job, but as we've said we've only gone dollar for dollar and we've heard our margin percent.
And we will get that back and then we will see some benefits on the other side, but we will work with our retail partners to make sure I mean, it's our job when you have the share we have to make sure they're competitive we're going to do that and we're going to be fair and I know they will as well. So this this fourth.
Kris.
Been successful, we're just getting everything implemented now.
And then our retail partners have been great, but they're not happy with all of this inflation, Norway and we will work together on the other side, but that'll be a good side to be on.
Okay. Thank you and that will be helpful. If you could talk a little bit about what youre seeing in R&R like that particularly if there are any differences between what you're seeing in DIY versus pro.
It's actually in the pro continues to have backlog, but in the <unk>.
Pros that we've talked to we got about 1000 in our network that we kind of.
Paying and just kind of stay in touch with them give them product and get feedback they're not they're still they still have a nice book of work in front of them.
But their answer calls and trying to book days, So I think they see it out there six months from now it's not going to be like it's been.
So number one they still are strong, but they're worried as everybody is with what's going on with the consumer on gas and groceries in the inflation pressures.
The other thing it's interesting Elizabeth when we look at things when lumber jumps the 12 or 1400 box, we really see that with our retail partners on projects index grew sales.
And some of the connectors, we sell and then when it drops as it has the $527 right now from 12 Hunter. It takes back off so there are things like that that influence.
Demand, but for the most part our stuff's pretty boring.
Chugs, along and we like that.
Okay, great. Thank you very much.
Sure.
Thank you. This concludes the Q&A portion of today's call I would like to turn the call back over to Mr. Cahill for closing comments.
Thank you everyone for joining us we look forward to updating you as we move through the second half of this year and again I. Appreciate you joining us today. Thank you.
Okay.
You may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Okay.
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