Q3 2022 Hillman Solutions Corp Earnings Call

November 3, 2022

Yeah.

Good morning, and welcome to the third quarter 2022 results presentation for home installations Corp. My name is Terry and I'll be your conference call operator today.

Before we begin I'd like to remind our listeners that today's presentation is being recorded and simultaneously webcast.

The company's earnings release presentation, and 10 humor issued this morning.

This document and a replay of today's presentation can be accessed on helmets investor Relations website.

I R got Hillman group Dotcom.

I would now like to turn the call over to Michael Caylor with Zelman.

Thank you operator, good morning, everyone and thank you for joining us I'm, 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 from Rocky before we begin I'd like to remind our audience that certain statements made on todays call. Maybe considered forward looking and are subject to the safe Harbor provisions of applicable securities laws.

These forward looking statements are not guarantees of future performance and are subject to certain risks uncertainties assumptions and other factors many of which are beyond the company's control and may cause actual results to differ materially from those projected in such statements.

Some of the factors that could influence our results are contained in our periodic and annual reports filed with the SEC for more information regarding these risks and uncertainties. Please see slide two in our earnings call a slide presentation, which is available on our website at IR Dot Hillman 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 slide presentation with that it's my pleasure to turn the call over to our chairman President and CEO , Doug Doug.

Thanks, Michael and good morning, everyone today, I'm going to provide an overview of our healthy third quarter and discuss the current operating environment before I turn it over to Rocky to give an update on guidance and talk numbers for those of you who are new to our story Hillman as one of the largest providers of hardware products and value added.

Solutions at leading hardware and home improvement retailers across North America.

Our unique approach to innovative design sourcing direct to store delivery and in store merchandising sets us apart from our competition. This strategy has allowed us to win with our customers since our founding in $19 64.

We are constantly innovating our products the majority of which are used for repair remodel and maintenance projects, which for 58 years has provided insulation against cyclical downturns and new home and commercial construction markets.

Our products are in must have basket building high margin categories for our retail customers. Therefore, keeping products in stock also known as fill rates is critical to the success of our customers in Helmand.

Our in store presence and direct store delivery not only keep the shelf stock, but also provides our customers solutions to today's challenging labor markets and certainly the unpredictable supply chains and finally, we worked closely with many of our customers on category management to optimize product mix at <unk>.

Owing them to increase sales and profits.

Yet another advantage of partnering with Hilton.

This differentiated model executed by our hard working team at Hillman strengthened our competitive moat and drove strong results and the results for the quarter or 1100 member sales and service team is critical to our competitive moat and is one of the driving factors.

As to why we win for example, during the quarter, we won new business in several categories, including picture hanging builders' hardware deck screws and solid wall anchors like our new patented concrete screw that are selling very well.

We grew quarterly sales by three 9% adjusted EBIT by $4 three over the prior year. We were also awarded vendor of the year at the largest family owned <unk>.

As Jane in the country Costello's in long Island, New York, a great retail partner of ours.

We are also completed the execution of our fourth price increase enabling us to offset offset $225 million in total cost increases on a dollar for dollar basis since the beginning of 2021, and we saw a $40 million.

Decrease in inventory during the quarter, while maintaining fill rates at 96% with plans to continue to significantly reduce inventory over the coming quarters.

Now turning to our financial highlights for the quarter during the third quarter of 2022, we generated $59 million of adjusted EBITDA up from $56 five in the prior year quarter.

Margins were in line with street expectations, as we finalize $50 million price increase we talked about on last quarter's call. Our dedicated sales and service team finished applying over 80 million new price labels at our traditional local hardware stores near the end of the quarter.

Net sales for the quarter grew to 379 million, marking a three 9% increase over the third quarter of 2021 for the year net sales grew 5% to $1 4 billion. These improvements were driven by the implementation of price increases over the past year, which more than <unk>.

Offset lighter volume.

Now, let me touch on performance of each business segment during the quarter hardware solutions is our biggest business. It makes up over 50% of our overall revenue for the quarter.

2% during 2021 and 95% during 2020 importantly, our retail partners Trust Tillman to keep the shelf stock no matter the environment.

Robotics and digital solutions are Rds business makes up just shy of 20 per cent of our overall revenue during the quarter ladder foot traffic in our retail customers resulted in a 3% decline in Rds revenue engraving and auto key duplication, where lighter than last year.

And as Pat adoptions slowed and used car sales decreased when compared to the third quarter of 2021 <unk>.

Also as retailers continue to struggle within stored labor, we're seeing a shift in home and office key duplication from our manual full serve machines to our <unk> key self serve kiosk this shift improves hillman and our retailers profitability.

Overall gross margin and adjusted EBITDA margins for Rds remain healthy and our market share is strong we had a very productive quarter working with our major key duplication and engraving customers jointly developing our next generation machines for Rds business to new engraving machines and.

Our new Smart auto Fob duplication machine are being developed for and with our retail partners. The feedback and interest level has been excellent are too new and gave the machines will be introduced throughout 2023 and.

And are smart auto Fob duplication machines there'll be ready for the market in early 2024 on our next generation many key self serve kiosk or engineering team.

Just done an amazing job on this new technology in our retail partners were able to see it with their own eyes and are attempting manufacturing and engineering facility this quarter.

Regarding our knife sharpening machinery sharp will end the year with around a thousand machines of select ace hardware locations across the country and during Q1 2023 will test or one of a kind knife sharpening machine and new channels, including specialty retailers foodservice in.

Rand supply.

Outdoor sporting and recreation retailers and a leading Canadian retailer.

Our protective solution business makes up just shy of 20% of our overall revenue during the third quarter of 2022 protective revenue was down about 15% compared to the year ago quarter. However, when excluding COVID-19 related PPE sales from both periods protective revenues increase.

Just over 5%, which is more in line with the growth expectations of this segment Lamb.

Lastly, our Canadian segment, which makes up about 10% of our overall revenue built on strong momentum and is seen throughout the year, Canada posted a 16% top light increase which drove strong bottom line results as well there are Canadian teams is doing a great job and they've also.

Done an excellent job with the facility consolidation project and realigning their portfolio.

Now turning to our business model.

We know the consumers being impacted by inflation and higher interest rates. However are long track record of growth through up and down cycles gives us confidence that we can achieve strong results no matter. The economic environment. This is due to the competitive moat, we built in our estimate that over 90% of our products say.

Sales are into the relative relatively recession resistant repair remodel and maintenance market.

Dig a little deeper on that notion housing inventory in the U S continues to age with 50% of U S homes over 40 years old consumers will need to repair and maintain these homes. Additionally, we expect we expect to see the consumer invest in their homes Morris trends in <unk>.

<unk> aging in place working from home and outdoor living remain prominent one recent data point on aging in place in the United Disability services States that only 1% of homes in the United States are conducive to aging in place, but more than 75% of.

Americans want to stay in their homes as long as possible. Our retail partners are proactively preparing to take advantage of this future demand opportunity.

As we think about our product sales pick up truck pros local contractors and diyer as make up the vast majority of our end users are long history and channel strategy proved that our business is not tied to new home construction.

Further driving our confidence is our unique business model, which helps differentiate us amongst the competition or mode consists of three main components number one over 80% of our 112000 skews are delivered directly to the retailers location.

In general this means our customers do not have to worry about managing hellman inventory and their distribution centers, because we shipped directly to the stores number to our sales and service team consisting of 1100 Associates provides world class service at the shelf or a retail cuss.

<unk>. This team of warriors observe that Hillman must have high margin products are in stock organize an opinon optimize for our customers and their consumers.

A number three over 90% of our revenue comes from brands that we own. This is not only important to the consumer and the pro and allows us to tailor our products to specific retailers strategies.

At the end of the quarter, we finalized our fourth price increase since the beginning of 2021. All of these have been dollar for dollar increases to cover our costs and total we've implemented approximately $225 million in price increases, which breaks down to approximately 120 million.

Dollars and transportation and shipping $90 million in commodities and $15 million in labor.

During the great financial crisis, and other past recessions, we've seen commodity prices fall, which we've begun to see during the recent months, we expect margin expansion. Once these costs flow through our income statement beginning in the second quarter of 2023 and beyond.

Back in 2001, many remember lead tides increased as the supply chain tightened as such we made the strategic decision to invest in our inventory to protect slow rates.

While improved from the end of the second quarter of 2022, we ended the third quarter of 2022 with about $140 million more inventory than we would normally need in this environment. This investment paid off and we were able to delivered 96% fill rate so far this year Hill.

<unk> was built on taking care of our customers, which is quarter emote and we're proud to say that we have lived up to these expectations do some very challenging times, we know retailers have long memories and we believe this investment will result in new business wins in the future.

Over the past several months, we've seen lead time, some Asia settle around 160 days, which is vastly improve from the 250 plus day lead time the industry experienced in January of this year. The result is that we have started to bring down our inventory levels and we're beginning to delever are <unk>.

Balance sheet is return the inventory to cash with no impact to our industry leading fill rates.

Sequentially, our inventory of decreased by 40 million compared to Q too and we expect to bring inventory down another $25 million to $35 million by year end as we look to 23, we believe that will be further improve our inventory position, which will put us at a more normalised inventory level by.

The end of 2023 as such we will bring down working capital and benefit from lower costs, which will result in delevering our balance sheet.

As we look to the fourth quarter, we continued to expect that our adjusted EBITDA will fall towards the low end of our original guidance range and to pay that down as we bring inventory down however, softer volumes and the traffic at retailers during the quarter have impacted our top line and cash flow timing, which.

<unk>, we will get into momentarily.

That said our focus remains on successfully navigating this challenging environment and really setting the stage for Hillman to improve our performance during 2023.

The $225 million have implemented price increases provide an opportunity for future gross margin and adjusted EBITDA expansion.

We expect this will begin to read sometime during the second quarter of 2023, as we sell through our higher cost inventory and start to see lower cost flow through our P&L.

It goes without saying we have a special team of 1100 loyal hard working associates that are in our customers retail locations every day. The resilience of this team truly shines on a terrible natural disaster like Hurricane Ian hits, everyone wanted Hillman is immensely proud that our four to base.

Members have been working tirelessly to be sure our customers have the products in stock so their communities can be safe and begin the rebuilding process.

Our thoughts are with those impacted by the hurricane, especially those who have been displaced we're thankful to be in the position to help Florida rebuild looking.

Looking forward I am confident that are talented team and hard working associates have proven that we can successfully navigate any challenge that comes our way I believe we are uniquely positioned for success and focused and our focus remains taking care of our customers are performance for our customers over the past couple.

All of the years has positioned us to drive real value for our shareholders and our employees in 2023 and beyond.

With that let me turn it over to Rocky.

Thanks, Doug and good morning, everyone before I provide a quick summary of our third quarter results I'll jump into our updated guidance for the remainder of 2022.

Since our last earnings call in August we have executed an additional price increases maintained are leading fill rates and controlled costs as such we are nearing our full year adjusted EBITDA guidance range to $207 million to $211 million, which is in line with our previous guidance.

Relative to our expectations during the first half of the year sales to our retail partners have been lower due to slightly lower foot traffic.

The effect of Destocking for the quarter only impacted us by about $10 million, primarily in Rps business.

Altogether this will impact our net sales and the timing of our free cash flow for the remainder of the year.

With his improved visibility we are providing the following updates.

We know anticipate that our full year 2022, net sales will come in between $1.46 billion in $1.5 billion.

Last quarter, we told you that we would come in near the low end of the original range, which was $1.5 billion.

We expect full year 2022, adjusted EBITDA to total between $207 million and $211 million.

Last quarter, we told you adjusted EBITDA would come in at the low end of the original guidance, which was $207 million. So we are simply putting some numbers around the directional language we provided in August .

And lastly, free cash flow is expected to come in between 75 and $95 million compared to our written original guidance range. This is driven by the timing of inventory reductions, resulting from software sales.

Note that this guidance range excludes any cash settlement relating to the Heiko litigation as the timing of that one time payment is uncertain.

Given the lighter cash flow numbers for the remainder of the year of primarily due to the timing of inventory reductions moving into the first quarter of next year, we expect to invest less in the working capital during the first quarter of 2023 versus years past.

This is noteworthy considering the first quarter is typically when we take on that in order to buy more inventory for our spring Bill.

For example over the past three years, we increased working capital about $40 million during the first quarter.

During the first quarter of 2023, we are confident that we will need less than half of that figure.

Now, let me spend a minute on the third quarter charge related to hike up.

After a trial in Marshall, Texas in October a jury awarded Haikou, a 16 million dollar verdict in the form of a one time royalty payment.

We have included the verdict and related legal fees in our GAAP results.

We have excluded the verdict from our free cash flow expectations at as as it is currently unclear the final amount or timing of any settlement.

We will continue to defend and protect our intellectual property and patents in our Rds business and across the company.

With that let me turn to our financial results for the quarter of future outlook.

Net sales in the third quarter of 2022 increased 3.9% to $378.5 million versus the prior year quarter.

Hardware solutions with the main contributor to the increase which was up 11% to $210 $9 million.

Overall, the improvement was driven by a 13% price realisation, partially offset by a 2% decline in volume.

Rds sales decreased by 3% to $65.6 million lighter foot traffic less activity in pet engraving and fewer smart auto fought duplications, where the main drivers of the decline.

Protective solution sales were down, 15% or 10 $5 million, resulting from wider volume X.

Excluding COVID-19 related PPE sales protect.

Protective sales were up 5%.

Covered related sales for the quarter $1.3 million compared to $15.1 million during Q3 of 2021.

For the fourth quarter of 2021, Covid related PPE sales were $19 $2 million and we do not anticipate meaningful COVID-19 ppe's sales for the remainder of 2022.

Our Canadian business had terrific performance in the quarter sales were up 16% to $41 $1 million compared to the prior year and we significantly improve profitability for the third quarter in a row.

As we have seen throughout the year price operational improvements product mix and exiting unprofitable business have driven nice profit improvement in Canada.

On a gap basis net loss for the third quarter of 2022 totaled nine $5 million or five cents per diluted share compared to a net loss of $32.5 million or 19 per diluted share in the prior year quarter.

I would like to point out that our GAAP results include the $16 million settlement, an additional related legal expenses from the Heiko litigation.

A just that earnings per diluted share for the third quarter of 2022 was 14 per share compared to 13 per diluted share in the prior year quarter.

On an adjusted basis third quarter adjusted gross profit margin declined by 60 basis points to 43.3% versus the prior year quarter.

As we have discussed on primer on prior calls the primary driver of the margin pressure and our hardware and protective businesses was driven by dollar for dollar price increases to offset inflation, partially offset by strong margin performance in <unk> in Canada.

On a sequential basis compared to the second quarter of 2022 adjusted margins compressed by 80 basis points due to the timing of the price increase in our traditional local hardware stores as inflation was not yet fully offset in this portion of the business and a pull forward a promotional activity in rps business to the third quarter.

We anticipate our fourth quarter gross margins to be consistent with the rates we experienced in Q2 of 2022.

For the quarter gap, SG&A totaled $133 $2 million compared to $110 $4 million for the prior year quarter, driven by legal expenses related to the Heiko litigation and settlement.

Justin SG&A was $104 $4 million compared to $103 4 million in the prior year quarter.

This analysis backs out stock compensation acquisition, and integration expenses legal fees and restructuring costs, which we feel gives a better analysis of our basic expenses.

Adjusted SG&A as a percentage of sales fell to 27, 6% from 2008, 4%.

While fixed costs and inflation impacted SG&A as a percentage of sales we did a nice job managing costs during the quarter.

Adjusted EBITDA in the third quarter increased 4.3% to $59 million compared to $56 $5 million in the year ago quarter.

This is the first time since the second quarter of 2021 that we have beat prior year EBITDA.

Similar to our adjusted gross margins adjusted EBITDA was driven by a healthy mix of price cost, partially offset by lighter volumes higher Cogs and the timing of our final piece of our price increase.

Further driving the increase was a lift from strong earnings from our Canadian business.

Now turning to our cash flow and balance sheet for the year to date in 2022 operating activities generated $63 $1 million of cash as compared to using $105 $3 million in the prior year quarter.

As Doug discussed earlier, we made the strategic decision to invest in our inventory last year and this investment is now beginning to convert into cash <unk>.

To recap, we expect to bring inventory down by another $25 million to $35 million by year end and for 2023, we will continue to improve our inventory position and expect a more normalised inventory level by the end of 2023.

Capital expenditures for the quarter was $17.5 million compared to $14.3 million in the prior year quarter, we continued to invest in our Rds kiosk and merchandising racks important parts of our high return Capex initiatives.

Maintenance Capex remained near 1% of sales as expected.

Looking forward, we have shifted some priorities within rds due to chip shortages of market dynamics, we're seeing meaningful demand for our next generation quick tagged three engraving machines at one of our major retail partners.

We expect the quick tag machines will be located in a very attractive encap location within the store, which is performed very well. During tests. We are also seeing demand for <unk> three five self service kiosk machines, which will be outfitted with our first ever smart auto five key duplication technology, which we believe will be.

A meaningful future growth opportunity.

Beginning in 2023, we will begin to bring these machines to market. While we continue to gather critical data on our re sharp machine today's.

Additionally, we will be testing re sharp with other customers in the restaurant and sporting goods sectors. We're very excited about the opportunities for all three of these initiatives, which we believe will fuel high margin growth as we look into 2023 and beyond.

Considering chip shortages continued to hinder our ability to produce robotic kiosk to meet demand we must be strategic in how we source components and deploy machines.

While we believe that chip availability will improve in 2023, we are implementing a strategy to widen new customer testing with a smaller number of machines.

We ended the third quarter of 2022 with $922 million of total net debt outstanding down from 931 at the end of 2021.

At the end of the third quarter, we had approximately $225 million of liquidity, which consists of $195 million of available borrowing under our revolving credit facility and $29 million of cash and cash equivalents.

Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was four five times, which was in line with where we ended 21 and an improvement from four seven times at the end of the last quarter.

Our long term net debt to adjusted EBITDA ratio target remains unchanged at below three times.

Considering our lighter free cash flow guidance, we plan to reduce our leverage to the low four times level at the end of 2022.

As we talked about today, we were successful in implementing our fourth in price increase which was finalized towards the end of the third quarter or dollar for dollar approach to covering cost has resolved resulted in some margin right degradation. However, historically, we have not given price back dollar for dollar when inflation cools.

Today, we are seeing commodities container freight and other costs begin to moderate.

We expect to benefit from this dynamic once these new cost lower costs flow through our P&L, which we believe will begin during the second quarter of 2023.

Looking further out our long term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact, and an economic environment, where we're seeing 2% to 3% GDP growth, we have a high level of confidence in this algorithm and we may see adjusted EBITDA growth in excess of that with some price costs tailwinds.

On the horizon.

Over the long term our business continues.

To benefit from the meaningful macro tailwinds and the home repair remodel and maintenance market that Doug spoke to earlier.

As we look forward, we believe that are competitive mote will allow us to continue to win new business drive sales and allow us to perform at or above are stated gross algorithm over the long term.

With that Doug back to Ya.

Thanks, Rocky despite the choppy Macroenvironment Hillman continues to take care of his customers first and foremost are competitive mode continues to differentiate are offering and deepen our customer relationships considering the challenges supply chain in inventory environment. We're really pleased with how we have executed in Maine.

<unk> strong performance at the shelf with our customers are 1100 field sales and service folks combined with our director store delivery bring solutions to our customers complex needs really an offering unmatched by our competition the value we bring our customers as reflected by our customer's willingness.

To accept our pricing actions grant us additional shelf space and award us new business all of which we've seen this year as we look forward. We remain confident in our differentiated model and believe we can drive long term value for all of our shareholders with that will begin the Q&A portion.

The call <unk> can you open up the call for questions.

Thank you.

As a reminder.

Ask questions you will need to press star one one and your telephone and then wait for your name to be announced.

Please stand by while we compile the Kia.

Our first question today will be from David Nancy Some bad David.

Yes. Thank you good morning, everyone.

First off I have a theoretical question here I know, it's a moving target and there are some seasonality to your business, but if your price increases that have already been announced and implemented goes through and assuming that your input costs Dickey.

Decline from where they are right now all we do is we just catch up on the pricing side immediately and fully.

What type of EBITDA margin would you be looking at annually is 14 sort of the representative level and then you try to improve from there as your input costs come down and help us that calculus.

Yeah, Hey, David It's Rocky I think your numbers are directionally right I think if if we stay where we are and as we have visibility into the fourth quarter. Obviously, we're not going to give guidance at this point for 2023, but I think it's 14 ish at current levels and we would expect to drive that high.

Near over time, particularly as you think about <unk>.

Growth in the Rds business, which obviously is a much higher EBITDA right then the remainder of the business.

Okay.

Speaking of the.

The robotics solutions, you've talked a lot about the pricing actions on the hardware side of you also adjusted any pricing on any of your robotic kiosks.

We have David we've done some not not a not a lot but what we also look at is the difference between full serve and self serve and the cost of the machines. So you can see some of that coming in the future as well as the cost of machinery is up.

And certainly with us having both self and full serve machines and most of our retailers as there is an opportunity because today the consumer Ironically plays more for a key that they have to cut themselves than one that is cut for them by the labor in the store and when you really think about that.

Math that doesn't make sense, so we're working on that as well.

Mmm, Okay and last question for me one more year.

Could you tell us your contracted versus spot container rates and when to those container contracts renew I think you've told us before but just to update us.

Yeah everything renews.

For almost everybody David unless they did a two year.

In may of 2023.

As you know container rates have gotten soft in the spot market has dropped dramatically.

We're in a good position because our contract.

Carriers that we've used for many years don't want to lose the volume so they're doing the right thing on a monthly basis to make sure. They don't lose the volume because we have a very small exit patently to get out of the container and go from contract to spot and so it's kind of a.

No brainer, so we're pretty much at the market if you will within a.

Few percentage right now, which is great and who knows where it's goin', but man. It is it is definitely soften for everybody.

Yeah sounds good.

Thanks, Doug Thanks Rocky.

Thanks.

Thank you Dana.

Our next question comes from the <unk>.

Hi, good morning.

Hello.

So just to piggyback on the on that last question, obviously, you're gonna benefit is you go from contract to spot rates or closest pharmacies can you just remind us of the lag in terms of the stuff that you're getting a spot today when does that actually hit your piano in terms of a market.

Yeah, So we actually Lee as you think about.

Entering into the new contracts and Mary as we go through the fourth quarter and into the first quarter, we're going to see some of the highest cost inventory.

We have just given the lag times no. It's a challenge horse, but we've got full price in place now and so will offset that and as we said we believe fourth quarter margin rate is going to look a lot like what we saw in the second quarter.

It's really as you think about it it's a couple of months when we pay the bill when we float about and then it has to come through the inventory so thank.

Five months on average probably after that and so as we think about current costs right you're thinking about.

Middle of next year, when will begin to see that benefit from containers and as we said in our prepared remarks, we would expect some of that just given the timing and what we've paid versus.

What was happening in the second quarter of this year that will begin to see some of that benefit in the second quarter of 2023.

Got it and then just as it relates to Rds and reshape sounds like you're making some pretty good progress getting machines out the ace and then there's some new stuff in the hopper.

Some other companies or other customers.

If the current supply chain related to the chip environments stays where it is how many machines.

Can you manufacturer next year, and where are we in terms of a turning on more national advertising for the program.

Yeah, <unk> been awesome, and we had a great conversation with him and said Hey, listen, let's not drip. This thing in let's get to a thousand and what we'll do Lee is we'll have our service folks move those machines to different stores. So that everybody kind of gets a field, while we take that <expletive>.

We have.

Meg machines and do the testing and the.

Accounts that we talked about so we kind of pivoted to say, let's optimize within a mover machines around let's start the tests at at the the sporting goods in the specialty retailers in the food supply and restaurant.

And let's use those chips for those tasks than one shifts become available and let's just say second half of twenty-three weaken rock'n'roll.

And that's the plan.

Got it so as it relates to more national advertising or are we thinking second half of 2003 or sooner than that yeah.

Yeah, I don't I think at a thousand it's still tough math for them and US. We've we've said we need to be at 1500. So I think you're really talking about latter part of the year to get to that what I like about the strategy change is that ace was very close and listen you've given us. This machine, we know others wanted to try it.

Why don't you do that now and then one chip to become available we can do a better roll out and get get Goin'. So I think you're really talking about probably fourth quarter for that because we are not going to have enough chips to get to that 1500 level with what we're doing to test in other locations.

Got it and then one last one for me just any early commentary to the extent the the test with service and started.

At that large retailer.

Yeah. It's it's interesting I mean, they have really struggle with labour in the in the in the store.

Their execution remember, we delivered at 99 seven crushed it.

They today still have 400 stores that are not set.

It's just crazy and so.

If there's ever been a story that says it makes sense for that.

This category in this retailer, we actually talked to him yesterday about it but but they have really struggled with some execution.

And it goes back to an overall labor shortage because their initial execution was only at a 60% of the store right. So they're working on it.

We are working the task.

I think you'll see something like that start to come together in 2003, I am hopeful for that.

Got it all sounds great. Thanks very much.

Okay lately.

Next question.

Brian Butler.

Uh-huh.

[laughter].

Hey, guys. Thanks for taking my question.

No problem January you, we're both tired when you're a pinch hitting for the big Guy [laughter] as you can imagine me like that.

[laughter].

I guess on the inventory peace.

Good color on kind of how it plays out so if I understand it correctly you have about $140 million in 2025 to 30 as in the fourth quarter slightly 110, and I guess part of that part of that and the third or the first quarter of 2003, maybe $20 million additional.

And then that's that leaves you another 90 over the rest of the twenty-three that comes out is that the right way to think of it.

Yeah, I think Brian the one thing you have to remember as we have grown the business and so we're going to need more inventory than we had.

Back in the beginning so I I I think as we think about 23, you know we're not going to give guidance at this point, but we'd be very disappointed if we didn't take another $50 million out of inventory in 2023 minimum.

Okay, so you're not going to necessarily get back that whole 140, because you've grown Levin point.

Yeah, and I think Brian the other thing to keep in mind I mentioned, it last quarter, but we haven't seen anything about this quarter is.

We have to balance making sure. We've got these 25 year partners suppliers that we've been doing business with all the way back to MC and Rick Hillman. So part of why we still have 140 Rocky mentioned the sales weren't quite as strong as we had like but the other part is we're managing to make sure our supply.

Sears remain healthy so it's a balancing act of we don't want our heard Archie suppliers by just turn on the spigot off and crushing them, we don't want them to let their employees go because when we start.

Rock and roll again, we can afford it we can have them not be able to keep up so part of this balancing act is working with our key suppliers.

Okay. That's helpful and then I guess, one on the extra week in the fourth quarter can you give some color on on the magnitude of that.

How how big.

From revenues and EBITDA perspective, yeah, I mean that that that's always handy, but if you really think about the.

The retailers, they're so slammed with Christmas.

They're not thinking about deck screws.

There just isn't that much going on that week for us unfortunate I wish it was an extra week in the spring me right.

Agree Brian what I would tell you. It's it's actually only three days when you think about holidays and then.

B, there's just not a lot of activity. So it's really not that meaningful for us from from a top line perspective, you could you know the.

Only business that really.

It gets a little bit of benefit is rds because stores are open and those machines are there, but we're not we're not gonna ship very much product that week.

Okay, and then maybe one last one we talked about I guess, the container cost coming down and the benefits what about lower metal pricing is that comes down to how how does that work through the P&L and and maybe the fourth quarter or more importantly, probably 2023.

Yeah. So we've.

We have begun to see some softness if you look at China's steel we would tell you Taiwan steal is actually still pretty high relative to historic norms and the way commodities work in our businesses you think about the lead time that we have that to 100.

60.

Days for when we place the PLO and then it's got a flow through our inventory. So it really is call. It a 160 days plus five or six months before we feel that benefit and so even some of the <unk> that we've been placing in the second half of this year, we're not going to feel any benefit into the second half of 23.

Okay. That's helpful that was my question. Thank you.

Thanks, Brad.

Thank you Brian .

Our next question comes from Matthew badly some back pain Matthew.

Hey, good morning, everyone. Thanks for automatic questions.

So the.

You guys, obviously stuck to the long term EBITDA guide of you know.

In terms of 10% annual growth.

As we're talking about input costs are.

Shipping costs come down since 90 days ago, I guess, the volume outlook is perhaps more dynamic.

My question is what kind of changed in your in your Crystal Ball 2000 twenty-three outlook in light of these moving pieces.

Given that.

Seemingly larger input costs tailwind that you guys are speaking to.

As of the second quarter could we expect.

<unk> growth greater than 10% next year.

Yes, I think Matt again, we're not going to give guidance on this call, but as you think about how the benefits from the Tailwinds that you speak ever going to flow through rate is we send our prepared remarks, they're going to begin in the second quarter. So I think you're probably gonna have a tale of two halves first task with less.

Benefit from that and quite frankly in the first quarter, we're going to see some of the highest cost that that we've seen as we feel the flow of the may.

May June timeframe containers through our P&L.

That said the second half yet we would expect that there are some tailwinds and we should see some benefit in excess of.

What the algorithm would suggest that you put those together and again, we talk more long term about 10%. We expect that there'll be years that were slightly below that in their years that were slightly above it and.

Again, as we said in our prepared remarks, I think as we think about the second half of 23 and into 24, we feel pretty bullish about where.

Where the businesses given the price that we've taken and what we're seeing with commodities.

Got it that's super helpful. Thanks for that Rocky and then a second one on.

So you got the lower costs coming through.

You spoke earlier about obviously customer willingness to accept these past price actions the four price increases you've taken.

When you think about your kind of different categories.

Would you expect that your retail customers would try to reduce prices in any category to drive foot traffic and would that result on any kind of pushing back on Hillman at all from a price perspective.

Yeah, I think that when you think about our category being <unk>.

Part of normally a project, it's just such a small part of it. We don't we don't really have things that drive volume based on price with the exception of we've seen some nice benefits from being able to sell for example, repair glove for 999 right in that case, Matt.

That is a price point that makes sense and when you can hit it youll see volume go either way.

But in the hardware solutions business, you're really not talking about any promotional activity or driving really any volume through through any kind of pricing either direction. I mean, it's pretty new with the customer they need to have it as part of the project, but it is not an expensive part of the project and.

Retailers will do their job they will make sure that that we remain competitive versus the world and that they remain competitive versus their competition. That's just all part of.

Daily.

Hand to hand combat.

Got it no that's helpful Dog and then last one for me I think you mentioned.

There were some destocking impact on the protective side, yes could you just speak to the hardware side there should.

Should we expect to see any kind of destocking going on.

In the near term or perhaps in a more recessionary scenario in that category. Thank you yeah, not not much mad at all I mean.

As I said last time.

Somebody that would say Oh I got some excuse that are slow movers I can take him down from 26 weeks to 24 weeks, we haven't really seen much of any impact in Hs and the reason Matt that you're seeing it was some of your other companies that you follow and the reason you would see it M. P. S is that.

The one product that we do ship some through the retailer's distribution center and the big change their other than the obvious Asia time is that they have been able to get things through their distribution centers from what was 28 days to get it from front to back.

To know about 12 days, so straight math, they just don't need the same amount of product that they had and the majority of that 10 that we talked about his P. S and I don't anticipate we're going to have much if any on the <unk> side, just because it's direct store, there's not a whole lot. They can do.

Also with what's going on in Florida.

There's going to be a few Dry-wall index grew sold down that way. So we may reposition some stuff to help the retailers out because there's going to be.

A lot of demand down there once the insurance folks figure out whether they're in business or not.

Right Alright, well thanks, Thanks, Rocky good luck us okay.

Okay. Thanks, Matt.

Operator, and you wanted to take the next question from.

Ryan Merkel from Blair.

We lost trees, she wants to get coffee.

I am so sorry Amazon.

[laughter].

Our next question is coming from Steven Bachman rainy.

<unk> Cafe.

And as a reminder, if you would like to ask a question. Please press Darwin line on your telephone.

Tina.

Great Good morning, guys.

True.

I didn't know there was a big merger this morning, Raymond James and Jeffrey.

Yeah. It was going to say I wasn't aware of it either but.

[laughter].

Maybe maybe it would be an idea.

Thanks for taking my question most of them.

Answered actually but I'm just curious.

Sort of Directionally.

How we should think about kind of SG&A, considering in 2023 sort of Ah.

Probably a bit of a choppier year of overall demand.

Do you guys would you typically sort of pull back on this G&A or do you still need to sort of.

Make the investments that you're making to drive growth into 24 and beyond.

Yeah, It's Steven you know from some other companies that you cover.

Historically folks who have a big marketing and AD spend they hit that first before they had SG&A and the other buckets for US we don't have that bucket. So we're going to do everything we can to control what we control we're not gonna actually will be adding people to our service network next year on our server.

Organization, but we're going to do everything we can to control what we can control, but we don't have a bucket of marketing or advertising or big promos to hit so you'll see us do the right thing, but you won't see dramatic cost savings or cost increases either direction Rocky anything I missed the only thing I would add and we talked.

About this on our second quarter call that we did take some actions.

At the end of the second quarter early in the third that we think provide a lot of provide more flexibility I should say around our SG&A costs and our ability to pull some levers.

You could see we had a nice performance and SG&A in the third quarter now we expect that to continue into the fourth and we're going to continue to to make sure that we've got the right costs in the business to drive it forward not spending in areas that don't provide benefit but spending in areas like Doug said and the service organization the sales organization to help fuel the.

Growth that we see in the business.

Okay Super and then maybe just this might be a new guy question, but how should we think about sort of new business for 2023, and I would define that as I guess sort of skew expansion with existing customers or adding new customers or.

Any of that just sort of whatever is driven by just end market.

Volume trends, how does that sort of later and going forward.

Yeah. So as we think about the algorithm NR, the 6% organic top line growth historically, that's 2% to 3% new business wins every year and that's principally existing products with existing customers. So it's taking additional shelf space from our competitors.

There are a couple of items and play as we sit today like construction con.

Concrete screws new area for US were were taken a lot of share that we're really excited about as we think about 2023 similar to 22 and what we've seen the last few years, we would expect that to be 2% plus of our revenue and we got line of sight to that as we think about 23.

So thank you very much.

Sure.

Steven.

Thank you.

As a reminder, and he'd like to ask a question you can press star one line on your account with them.

And our next question comes from.

Brian Mirka with William Black Brian .

Hey, guys good morning erection.

So my first question is on volume trends can you just talk about how volume trend it through the quarter and into October can really what I'm curious about is if it's sort of stable or the trend line is sort of declining.

Yeah, when you look Brian at our Hs business, which I think is the best bellwether.

We actually did see an improvement.

In Q3 and over the first half and several of our retailers said the same thing now remember part of their 15% down as as a result of this screwy spring that the AD.

So that definitely got better, but I'll quote one retailer it was amazing to them that after the July 4th weekend.

They seem to see things get up or pick up a little bit better. So I I would say, they're slightly better than they've been is what we're seeing right now.

Got it and that was kind of my view as well.

And then on gross margin.

Sounds like four Q, the 44% can we think about that as a baseline for twenty-three.

It sounds like maybe the first half of 23 may be a little below that due to the high cost inventory, but then in the second half is at 44, a better is that right.

Yeah, I think 44, we believe is a good baseline for our business and so yeah, Ryan as you think about it.

The first quarter may be slightly below that I think as we go into the second through the rest of the year, we would expect to maintain or grow that right.

Okay, and then last one for me I think you've put through about $225 million of course, just curious how much of that do you think you can keep as costs deep slate in the next 12 18 months.

Yeah, I mean that that's.

If everybody figures that out let me know.

I think the way we look at it as that.

We've never been here before now if you go back to pastimes Ryan <unk>.

Price would go up retails would go up and there's never been a time, where we've given back price I think it would be very naive of us to say that there is not going to be some price given back over time. The one that I would say would be the most us back to that and worthy of.

Working with our retailers is if we see this container momentum downward in pricing. Continuing then there's certainly justification for the fact that that part of it should be worked back with our customers.

That's the one I would say I will look to retailers in the eye and say, let's be honest, we know what's happened we know what we're supposed to happen what we don't know what happened. So we talked about this big inventory reduction that's taken place in North America as a result of the changes and lead times that's <unk>.

Trust those guys, we don't know what's going to happen as it normalizes, nor do we know what's going to happen with fuel, but that's probably the one Ryan that I would say you'd have to say long term that we'd work back with our customers on.

Yeah that makes sense alright.

Okay. Thanks.

Okay.

Okay. It looks like we're Khanate parsnips today's call.

And I would like to turn the call back over to Mr. Can have some closing comments.

Thanks, and thanks, everyone for joining us this morning.

Really want to thank our customers and suppliers importantly folks.

Do it every day for us at Hillman that contributed to the quarter. We look forward to updating you again in the near future and again, thanks for joining us today.

This does conclude our program you may now disconnect have a wonderful day.

Mhm.

[music].

Good morning, and welcome to the third quarter 2022 results presentations for home installations Corp. My name is Terry and I'll be your conference call operator today.

Before we begin I'd like to remind our listeners that today's presentation is being recorded and simultaneously webcast.

The company's earnings release presentation, and 10-Q were issued this morning.

Document and a replay of today's presentation can be accessed on helmets investor Relations website.

<unk> got Hillman group Dotcom.

I would now like to turn the call over to Michael Caylor with helmet.

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 from Rocky before we begin I would like to remind our audience that certain statements made on todays call. Maybe considered forward looking and are subject to the safe Harbor provisions up applicable securities laws.

Solutions at leading hardware and home improvement retailers across North America.

Our unique approach to innovative design sourcing direct store delivery and in store merchandising sets us apart from our competition. This strategy has allowed us to win with our customers since our founding in $19 64.

For our retail customers therefore, keeping products in stock also known as fill rates is critical to the success of our customers and Hilton.

Owing them to increase sales and profits.

Yet another advantage of partnering with Hilton.

Example, during the quarter, we won new business in several categories, including picture hanging builders' hardware deck screws and solid wall anchors like our new patented concrete screw that are selling very well.

We grew quarterly sales by three 9% adjusted EBIT by $4 three over the prior year. We were also awarded vendor of the year at the largest family owned eight is Jane in the country Costello's in long Island, New York, a great retail partner of ours.

While maintaining fill rates at 96% with plans to continue to significantly reduce inventory over the coming quarters.

Now turning to our financial highlights for the quarter during the third quarter of 2022, we generated $59 million of adjusted EBITDA up from $56 five in the prior year quarter margins were in line with street expectations as we finalize $50 million price increase we talked about on last quarter's call.

Our dedicated sales and service team finished applying over 80 million new price labels at our traditional local hardware stores near the end of the quarter.

Net sales for the quarter grew to 379 million, marking a three 9% increase.

Over the third quarter of 2021 for the year net sales grew 5% to $1 4 billion. These improvements were driven by the implementation of price increases over the past year, which more than offset lighter volume.

Now, let me touch on performance of each business segment during the quarter.

Hardware solutions is our biggest business it makes up over 50% of our overall revenue for the quarter.

Hardware saw an 11% increase in revenue compared to the third quarter of 2021.

Price increases were the main driver of the topline increase lighter volumes, which partially offset the price benefit were mainly the result of lighter foot traffic at our retailers when compared to a year ago quarter. We.

We believe hardware solutions as the bellwether segment of our business, let me share some numbers with you that will illustrate what's happening in this segment.

While heartburn volumes were down three 3% for the first six months of 2022, we saw a comparative improvement during the third quarter of 2022 with volumes down just one 7% for the quarter price was up 12, 7% for a total revenue growth of 11 <unk>.

<unk>.

This demonstrates the resiliency and consistency of the repair remodel and maintenance end user.

Year to date fill rates were 96%. This is an improvement from 91% during 2021 and 95% during 2020 importantly, our retail partners Trust Hillman to keep the shelf stock no matter the environment.

Robotics and digital solutions, our Rds business makes up just shy of 20% of our overall revenue during the quarter ladder foot traffic in our retail customers resulted in a 3% decline in Rds revenue engraving and auto key duplication were lighter than last year.

And as Pat adoptions slowed and used car sales decreased when compared to the third quarter of 2021.

So as retailers continue to struggle with in store labor, we're seeing a shift in home and office key duplication from our manual full serve machines to our minute key self serve kiosks this shift improves hillman.

And our retailers' profitability.

Overall gross margin and adjusted EBITDA margins for Rds remained healthy and our market share is strong we had a very productive quarter working with our major key duplication and engraving customers jointly developing our next generation machines for Rds business to new engraving machines and.

Our new Smart auto five duplication machine are being developed for and with our retail partners.

Feedback and interest level has been excellent our two new engraving machines will be introduced throughout 2023 and.

And our smart auto five duplication machines will be ready for the market in early 2024 on our next generation. Many key self serve kiosks, our engineering team they've just done an amazing job on this new technology and our retail partners were able to see it with their own eyes.

And our Tampa manufacturing and engineering facility this quarter.

Regarding our knife sharpening machine re sharp will end the year with around 1000 machines, a select ace hardware locations across the country and during Q1 2023, we will test our one of a kind knife sharpening machine and new channels, including specialty retailers foodservice and.

Rand supply.

Outdoor sporting and recreation retailers and a leading Canadian retailer.

Our protective solution business makes up just shy of 20% of our overall revenue.

During the third quarter of 2022 protective revenue was down about 15% compared to the year ago quarter. However, when excluding COVID-19 related PPE sales from both periods protective revenues increased just over 5%, which is more in line with the growth expectations of this segment.

Lastly, our Canadian segment, which makes up about 10% of our overall revenue built on the strong momentum and is seen throughout the year, Canada posted a 16% top line increase which drove strong bottom line results as well.

Our Canadian team is just doing a great job and they've also done an excellent job with the facility consolidation project and realigning their portfolio now.

Now turning to our business model.

We know the consumers being impacted by inflation and higher interest rates. However, our long track record of growth through up and down cycles gives us confidence that we can achieve strong results no matter. The economic environment. This is due to the competitive moat, we built in our estimate that over 90% of our product.

<unk> or into the relative relatively recession resistant repair remodel and maintenance market.

A little deeper on that notion housing inventory in the U S continues to age with 50% of U S homes over 40 years old consumers will need to repair and maintain these homes. Additionally, we expect we expect to see the consumer invest in their homes more trends in nesting.

Aging in place working from home and outdoor living remain prominent one recent data point on aging in place on the Eni disability services states that only 1% of homes in the United States are conducive to aging in place, but more than 75% of.

<unk> want to stay in their homes as long as possible. Our retail partners are proactively preparing to take advantage of this future demand opportunity as.

As we think about our product sales pickup truck pros local contractors and Diyer make up the vast majority of our end users our long history and channel strategy proved that our business is not tied to new home construction further driving our confidence is our unique business model.

<unk> helps differentiate us amongst the competition. Our moat consists of three main components number one over 80% of our 112000 Skus are delivered directly to the retailers location.

In general this means our customers do not have to worry about managing Hillman inventory in their distribution centers, because we ship directly to the stores number two our sales and service team consisting of 1100 Associates provides world class service at the shelf for a retailer.

Customers. This team of warriors and serve that Hillman as must have high margin products are in stock organized and often are optimized for our customers and their consumers.

And number three over 90% of our revenue comes from brands that we own. This is not only important to the consumer and the pro it allows us to tailor our products to specific retailer strategies.

At the end of the quarter, we finalized our fourth price increase since the beginning of 2021 all of these have been dollar for dollar increases to cover our cost in total we've implemented approximately $225 million in price increases, which breaks down to approximately $120 million.

In transportation and shipping $90 million in commodities and $15 million in labor.

Back in 2001, many remember lead tides increased as the supply chain tightened as such we made the strategic decision to invest in our inventory to protect flow rates.

<unk> was built on taking care of our customers, which is quarter, our moat and we're proud to say that we have lived up to these expectations through some very challenging times, we know retailers have long memories and we believe this investment will result in new business wins in the future.

Over the past several months, we've seen lead times from Asia settle around 160 days, which is vastly improve from the 250 plus day lead time the industry experienced in January of this year. The result is that we have started to bring down our inventory levels and we are beginning to delever our balance.

Once she is we turn the inventory to cash with no impact to our industry leading fill rates.

Sequentially, our inventory decreased by $40 million compared to Q2, and we expect to bring inventory down another $25 million to $35 million by year end as we look to 'twenty. Three we believe there will be further improve our inventory position, which will put us at a more normalized inventory level.

By the end of 2023 as such we will bring down working capital and benefit from lower costs, which will result in delevering our balance sheet.

As we look to the fourth quarter, we continued to expect that our adjusted EBITDA will fall towards the low end of our original guidance range.

And to pay that down as we bring inventory down however, softer volumes in the traffic at retailers during the quarter have impacted our topline and cash flow timing, which rocky will get into momentarily.

That said our focus remains on successfully navigating this challenging environment and really setting the stage for Hillman to improve our performance during 2023.

The $225 million of implemented price increases provide an opportunity for future gross margin and adjusted EBITDA expansion. We expect this will begin to read sometime during the second quarter of 2023, as we sell through our higher cost inventory and start to see lower costs flow through.

Our P&L.

It goes without saying, we have a special team of 1100 loyal and hard working associates that are in our customers retail locations every day. The resilience of this team truly shines when a terrible natural disasters like hurricane Ian hits, everyone. At Hillman is immensely proud that our Florida based <unk>.

Members have been working tirelessly to be sure our customers have the products in stock so their communities.

Be safe and begin the rebuilding process.

Our thoughts are with those impacted by the hurricane, especially those who have been displaced we are thankful to be in the position to help Florida rebuild looking.

Looking forward I'm confident that our talented team and hard working associates have proven that we can successfully navigate any challenge that comes our way I believe we are uniquely positioned for success and focused and our focus remains taking care of our customers our performance for our customers over the past couple.

Over the years has positioned us to drive real value for our shareholders and our employees in 2023 and beyond.

With that let me turn it over to Rocky.

Thanks, Doug and good morning, everyone before I provide a quick summary of our third quarter results I will jump into our updated guidance for the remainder of 2022.

Since our last earnings call in August we have executed on additional price increases.

Maintained our leading fill rates and controlled costs as such we are narrowing our full year adjusted EBITDA guidance range to $207 million to $211 million, which is in line with our previous guidance.

Relative to our expectations during the first half of the year sales to our retail partners have been lower due to slightly lower foot traffic.

The effect of Destocking for the quarter OEM Patted us by about $10 million, primarily in our Pes business.

Altogether this will impact our net sales and the timing of our free cash flow for the remainder of the year.

With this improved visibility we are providing the following updates.

We now anticipate that our full year 2022, net sales will come in between one $4 6 billion and $1 5 billion.

Last quarter, we told you that we would come in near the low end of the original range, which was $1 5 billion.

We expect full year 2022, adjusted EBITDA to total between $207 million and $211 million.

And lastly, free cash flow is expected to come in between $75 million compared to our original guidance range. This is driven by the timing of inventory reductions, resulting from softer sales.

Note that this guidance range excludes any cash settlement relating to the HEICO litigation as the timing of that onetime payment is uncertain.

Given the lighter cash flow numbers for the remainder of the year are primarily due to the timing of inventory reductions moving into the first quarter of next year, we expect to invest less in the working capital during the first quarter of 2023 versus years past.

This is noteworthy considering the first quarter is typically when we take on debt in order to buy more inventory for our spring Bill.

For example over the past three years, we increased working capital about $40 million during the first quarter.

The first quarter of 2023, we are confident that we will need less than half of that figure.

Now, let me spend a minute on the third quarter charge related to HEICO.

After a trial in Marshall, Texas in October a jury awarded HEICO, a $16 million verdict in the form of a one time royalty payment.

We have included the verdict and related legal fees in our GAAP results.

We have excluded the verdict from our free cash flow expectations at <unk> as it is currently unclear the final amount or timing of any settlement.

We will continue to defend and protect our intellectual property and patents in our Rds business and across the company.

With that let me turn to our financial results for the quarter and future outlook.

Net sales in the third quarter of 2022 increased three 9% to $378 $5 million versus the prior year quarter.

Hardware solutions was the main contributor to the increase which was up 11% to $210 9 million.

Overall, the improvement was driven by a 13% price realization, partially offset by a 2% decline in volume.

Rds sales decreased by 3% to $65 $6 million lighter foot traffic less activity and patent graving and fewer smart auto Fob duplications were the main drivers of the decline.

Protective solutions sales were down, 15% or $10 $5 million, resulting from wider volume.

Excluding COVID-19 related PPE sales protective sales were up 5%.

Covid related sales for the quarter $1 3 million compared to $15 1 million during Q3 of 2021.

For the fourth quarter of 2021, Covid related PPE sales were $19 2 million and we do not anticipate meaningful COVID-19 PPE sales for the remainder of 2022.

Our Canadian business had terrific performance in the quarter sales were up 16% to $41 1 million compared to the prior year and we significantly improved profitability for the third quarter in a row.

As we have seen throughout the year price operational improvements product mix and exiting unprofitable business have driven nice profit improvement in Canada.

On a GAAP basis net loss for the third quarter of 2022 totaled $9 5 million or <unk> <unk> per diluted share compared to a net loss of $32 $5 million or <unk> 19 per diluted share in the prior year quarter.

I would like to point out that our GAAP results include the $16 million settlement and additional related legal expenses from the HEICO litigation.

Adjusted earnings per diluted share for the third quarter of 2022 was <unk> 14 per share compared to 13 per diluted share in the prior year quarter.

On an adjusted basis third quarter adjusted gross profit margin declined by 60 basis points to 43, 3% versus the prior year quarter.

As we have discussed on primary on prior calls the primary driver of the margin pressure in our hardware and protective businesses was driven by dollar for dollar price increases to offset inflation, partially offset by strong margin performance in Rds in Canada.

On a sequential basis compared to the second quarter of 2022 adjusted margins compressed by 80 basis points due to the timing of the price increase and our traditional local hardware stores as inflation was not yet fully offset in this portion of the business and a pull forward of promotional activity in our pes business through the third quarter we.

We anticipate our fourth quarter gross margins to be consistent with the rates we experienced in Q2 of 2022.

For the quarter GAAP SG&A totaled $133 2 million compared.

Compared to $110 4 million for the prior year quarter, driven by legal expenses related to the HEICO litigation and settlement adjusted.

Adjusted SG&A was $104 4 million compared to $103 4 million in the prior year quarter.

This analysis backs out stock compensation acquisition, and integration expenses legal fees and restructuring cost, which we feel gives a better analysis of our base expenses.

Adjusted SG&A as a percentage of sales fell to 27, 6% from 28, 4%.

While fixed costs and inflation impacted SG&A as a percentage of sales we did a nice job managing costs during the quarter.

Adjusted EBITDA in the third quarter increased four 3% to $59 million compared to $56 5 million in the year ago quarter.

This is the first time since the second quarter of 2021 that we have beat prior year EBITDA.

Further driving the increase was a lift from strong earnings from our Canadian business.

Now turning to our cash flow and balance sheet for the year to date in 2022 operating activities generated $63 1 million of cash as compared to using $105 3 million in the prior year quarter.

As Doug discussed earlier, we made the strategic decision to invest in our inventory last year and this investment is now beginning to convert into cash to.

To recap, we expect to bring inventory down by another 25% to $35 million by year end and for 2023, we will continue to improve our inventory position and expect a more normalized inventory level by the end of 2023.

Capital expenditures for the quarter were $17 5 million compared to $14 3 million in the prior year quarter, we continue to invest in our Rds kiosks merchandising racks important parts of our high return Capex initiatives.

Maintenance Capex remained near 1% of sales as expected.

Looking forward, we have shifted some priorities within rds due to chip shortages and market dynamics, we are seeing meaningful demand for our next generation quick tag three engraving machines at one of our major retail partners.

We expect the quick TEG machines will be located in a very attractive encap location within the store, which has performed very well. During tests. We are also seeing demand for many key three five self service kiosk machines, which will be outfitted with our first ever smart auto five key duplication technology, which we believe will be.

A meaningful future growth opportunity.

Beginning in 2023, we will begin to bring these machines to market. While we continue to gather critical data on our re sharp machines at Ace.

Additionally, we will be testing re sharp with other customers in the restaurant and sporting goods sectors. We are very excited about the opportunities for all three of these initiatives, which we believe will fuel high margin growth as we look into 2023 and beyond.

Considering chip shortages continue to hinder our ability to produce robotic kiosks to meet demand, we must be strategic in how we source components and deploy machines.

While we believe that chip availability will improve in 2023, we are implementing a strategy to widened new customer testing with a smaller number of machines.

We ended the third quarter of 2022 with $922 million of total net debt outstanding down from 931 at the end of 2021.

Our long term net debt to adjusted EBITDA ratio target remains unchanged at below three times.

Considering our lighter free cash flow guidance, we plan to reduce our leverage to the low four times level at the end of 2022.

As we talked about today, we were successful in implementing our <unk> price increase which was finalized towards the end of the third quarter. Our dollar for dollar approach to covering costs has resulted in some margin rate degradation. However, historically, we have not given price back dollar for dollar when inflation calls today.

Today, we are seeing commodities container freight and other costs begin to moderate.

We expect to benefit from this dynamic once these new cost lower costs flow through our P&L, which we believe will begin during the second quarter of 2023.

Looking further out our long term growth algorithm of 6% organic net sales and 10% organic adjusted EBITDA growth remains intact and in economic environment, where we are seeing 2% to 3% GDP growth, we have a high level of confidence in this algorithm and we may see adjusted EBITDA growth in excess of that with some price cost tailwind.

On the horizon.

Over the long term our business continues.

To benefit from the meaningful macro tailwind and the home repair remodel and maintenance market that Doug spoke to earlier.

As we look forward, we believe that our competitive moat will allow us to continue 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 despite the choppy macro environment homeland continues to take care of its customers first and foremost our competitive moat continues to differentiate our offerings and deepen our customer relationships.

The challenge in supply chain and inventory environment, We're really pleased with how we've executed and maintained strong performance at the shelf with our customers. Our 1100 field sales and service folks combined with our direct store delivery bring solutions to our customers complex needs really in <unk>.

Offering unmatched by our competition the value, we bring our customers as reflected by our customers' willingness to accept our pricing actions grant us additional shelf space and award us new business all of which we've seen this year as we look forward, we remain confident in our differentiated model.

And believe we can drive long term value for all of our shareholders with that we will begin the Q&A portion of the call Teresa can you open up the call for questions.

Thank you.

As a reminder, our key ask questions you will need to press star one one on your telephone and then wait for your name to be announced.

Please standby, while we compile the Q&A.

Our first question today will be from David Manthey from Baird David.

Yes. Thank you good morning, everyone.

Okay.

First off I have a theoretical question here I know, it's a moving target and there is some seasonality to your business but.

Your price increases that have already been announced and implemented go through and assuming that your input costs decline.

The decline from where they are right now all we do is we just catch up on the pricing side immediately and fully.

What type of EBITDA margin would you be looking at annually. It's 14 sort of the representative level and then you try to improve from there as your input costs come down and help us that calculus.

Yeah, Hey, David its Rocky I think your numbers are directionally right I think if we stay where we are and as we have visibility into the fourth quarter. Obviously, we're not going to give guidance at this point for 2023, but I think it's 14 ish at current levels and we would expect to do.

Drive that higher over time, particularly as you think about <unk>.

Growth in the Rds business, which obviously has a much higher EBITDA rate in the remainder of the business.

Okay and speaking of the.

The robotics solutions, you've talked a lot about the pricing actions on the hardware side have you also adjusted any pricing.

Any of your robotic kiosks.

We have David we've done some not not not a lot, but what we also look at is the difference between full serve and self serve and the cost of the machines. So you could see some of that coming in the future as well as the cost of machinery is up.

And certainly with us having both self and full serve machines and most of our retailers as an opportunity because today the consumer Ironically plays more for a key that they have to cut themselves than one that has cut for them by the labor in the store and when you really think about that.

Map it doesn't make sense, so we're working on that as well.

Okay and last question for me one more here.

Could you tell us your contracted versus spot container rates when do those container contracts renew I think you've told us before but just to update us.

Yes, everything renews.

For almost everybody David unless they did a two year.

In may of 2023.

As you know container rates have gotten soft in the spot market has dropped dramatically.

We're in a good position because our contract carriers that we've used for many years don't want to lose the volume so they're doing the right thing on a monthly basis to make sure. They don't lose the volume because we have a very small exit pennant a lead to get out of the container and <unk>.

So from contract to spot and so it's kind of a no brainer. So we're pretty much at the market if you will within.

Few percentage right now, which is great and who knows where it's going but man. It is it is definitely soften for everybody.

Yes sounds good alright, thanks, Doug Thanks Rocky.

Thanks, Dave.

Thank you David.

Our next question comes from Lee <unk> from.

<unk> from CGS Securities.

Hi, good morning.

Okay.

So just to piggyback on that last question.

Obviously youre going to benefit as you go from contract to spot rates or close to spot rates can you just remind us of the lag in terms of the stuff that youre getting a spot today when does that actually hit your P&L in terms of a margin benefit.

Yes, so we actually Lee as you think about.

Entering into the new contracts in May as we go through the fourth quarter and into the first quarter, we're going to see some of the highest cost inventory.

We have just given the lag time, so it's a challenge for us, but we've got full price in place now and so we'll offset that and as we said we believe fourth quarter margin rate is going to look a lot like what we saw in the second quarter.

Really as you think about it it's a couple of months when we pay the bill when we flowed about and then it has to come through the inventory so think.

Five months on average probably after that and so as we think about current costs right you are thinking about.

Middle of next year, we will begin to see that benefit from containers and as we said in our prepared remarks, we would expect some of that just given the timing and what we paid versus.

What was happening in the second quarter of this year that will begin to see some of that benefit in the second quarter of 2023.

Got it and then.

Just as it relates to Rds and reshape it sounds like Youre, making some pretty good progress getting machines out to <unk> and then there is some new stuff in the hopper.

Testing and some other companies or other customers.

If the current supply chain related to the shipment environment stays where it is how many machines can you manufacture next year.

Where are we in terms of turning on more national advertising for the program.

Yes, so <unk> has been awesome, and we had a great conversation with them and said hey, listen, let's not drip this thing in let's get to us.

And what we'll do Lee is we will have our service folks move those machines to different stores. So that everybody kind of gets a feel while we take the chips we have.

Make machines and do the testing in <unk>.

Accounts that we talked about so we kind of pivoted to say, let's optimize within as Rover machines around let's start the test it at.

The sporting goods and the specialty retailers in the food supply and restaurant and what's views those chips for those tests than one chips become available and let's just say second half of 'twenty, three we can rock and roll.

And Thats the plan.

Got it so as it relates to more national advertising or are we thinking second half of 'twenty three or sooner than that.

Yes, I don't I think at 1000, it's still tough math for them and us.

We've said we need to be at 500, So I think youre really talking about latter part of the year to get to that what I like about the strategy change as that Ace was very closely and listen you've given us. This machine. We know others wanted to try it why don't you do that now and then when chips become available we can do a better rollout.

<unk> get going so I think you're really talking about probably fourth quarter for that because we are not going to have enough just to get to that 1500 level with what we're doing to test in other locations.

Got it and then one last one for me just any early commentary to the extent.

Test with service and started.

At that large retailer.

Yes.

It's interesting I mean, they have really struggle with labor and the.

The store.

Their execution and remember we delivered at 99 seven crushed it.

They today still have 400 stores that are not set.

It is just crazy and so.

If there's ever been a story that says it makes sense for that.

It's this category and this retailer, we actually talked to them yesterday about it but but they have really struggled with some execution.

And it goes back to an overall labor shortage because their initial execution was only at a 60% of the store right. So they're working on it.

Work in the test and I think youll see something like that start to come together in 'twenty three I am hopeful for that.

Got it all sounds great. Thanks very much.

Okay.

Our next question comes from Brian Butler with Stifel.

Right.

Hey, guys. Thanks for taking my question.

Yeah.

No problem.

<unk> when you're a pinch hitting for the big Guy.

You can imagine me like that that helps.

[laughter].

Yes.

So just I guess on the inventory piece you gave some good color on kind of how it plays out so if I understand it correctly you have about $140 million in 2025 to 30 in the fourth quarter. So I'll leave you to 110.

Part of that part of that in the third or the first quarter of 'twenty, three maybe $20 million additional.

And then.

That leaves you another 90 over the rest of 'twenty three that comes out is that.

The right way to think of it yes.

Yes, I think Brian the one thing you have to remember is we.

We have grown the business.

And so we're going to need more inventory than we had.

Back in the beginning so I think as we think about 'twenty three.

We're not going to give guidance at this point, but we'd be very disappointed if we didnt take another $50 million out of inventory in 2023 minimum.

Okay, So youre not going to necessarily get back that whole 140, because you've grown the mid point.

Yes, and I think Brian the other thing to keep in mind I mentioned, it last quarter, but we haven't said anything about it. This quarter is we have to balance making sure. We've got these 25 year partner suppliers that we've been doing business with all the way back to Nic and Rick Hellman. So part of why we still have 140.

<unk> Rocky mentioned, the sales werent quite as strong as we'd like but the other part is we are managing to make sure our suppliers remain healthy so it's a balancing act.

I don't want to hurt our key suppliers by just turning the spigot off and crushing them, we don't want them to let their employees go because when we start.

Rock and roll again, we can afford it we can have them not be able to keep up so part of this balancing act is working with our key suppliers.

Okay. That's helpful and then I guess, one on the extra week in the fourth quarter can you give some color on the magnitude of that.

How big from.

From revenues and EBITDA perspective, yes, I mean that that that's always handy, but if you really think about.

The retailers there so slammed with Christmas.

They're not thinking about <unk> crews.

There just isn't that much going on that week for us. Unfortunately, I wish it was an extra week in the spring.

I agree Brian what I would tell you is it's actually only three days when you think about holidays.

And then B, there's just not a lot of activity. So it's really not that meaningful for us from a from a topline perspective, you could only.

Only business that really.

It gets a little bit of benefit us Rds because stores are open and those machines are there, but we're not we're not going to ship very much product that way.

Okay, and then maybe one last one we've talked about I guess, the container cost coming down and the benefits what about lower metal pricing.

Comes down how does that work through the P&L.

Maybe the fourth quarter.

More importantly, probably.

23.

Yes so.

We've begun to see some softness if you look at China's steel, we would tell you Taiwan East steel is actually still pretty high relative to historic norms and the way commodities work in our businesses you think about the lead time that we have that's 100.

60.

Days for when we placed the Po and then it's got to flow through our inventory. So it really is a call. It a 160 days plus five or six months before we feel that benefit and so even some of the <unk> that we've been placing in the second half of this year, we're not going to feel any benefit into the second half of 'twenty three.

Okay. That's helpful.

Questions. Thank you.

Okay. Thanks, Brian .

Thank you Brian .

Our next question comes from Mathieu <unk> from Barclays Matthew.

Hey.

Everyone. Thanks for questions.

So the.

You guys, obviously, Dr. Lu.

The long term EBITDA guidance.

In terms of 10% annual growth.

As we're talking about input costs are.

In shipping costs have come down since 90 days ago, I guess, the volume outlook is perhaps more dynamic.

My question is what's kind of changed in your in your Crystal Ball 2023 outlook in light of these moving pieces.

Given that.

Seemingly larger input cost tailwind that you guys are speaking to.

As of the second quarter could we expect.

EBITDA growth greater than 10% next year.

Yes, I think Matt again, we're not going to give guidance on this call, but as you think about how the benefits from the tailwind that you speak of are going to flow through rate as we said in our prepared remarks, they're going to begin in the second quarter. So I think youre, probably going to have a tale of two halves first half with less benefit.

From that and quite frankly in the first quarter, we're going to see some of the highest cost debt that.

We've seen as we feel the flow of the.

May June timeframe containers through our P&L.

That said the second half, yes, we would expect that there are some tailwind and we should see some benefit in excess of.

What the algorithm would suggest you put those together and again, we talk more long term about 10%, we expect that there'll be years that we're slightly below that and there are years that we're slightly above it and again.

Again, as we said in our prepared remarks, I think as we think about the second half of 2003 and into 'twenty, four we feel pretty bullish about where.

Where the businesses given the price that we've taken and what we're seeing with commodities.

Got it that's super helpful. Thanks for that Rocky and then.

Second one on.

So you got the lower costs coming through.

You spoke earlier about obviously customer willingness to accept these past price actions for price increases you've taken.

When you think about your kind of different categories.

Would you expect that your retail customers would try to reduce prices in any category to drive foot traffic and would that result in any kind of pushing back on Hillman at all from a price perspective.

Yes, I think that when you think about our category being part of a normally a project. It's just such a small part of it. We don't we don't really have things that drive volume based on price with the exception of one.

We've seen some nice benefits from being able to sell for example, <unk> glove for $9 99, right in that case, Matt that is a price point that makes sense and when you can't hit it Youll see volume go either way.

And retailers will do their job they will make sure that that we remain competitive versus the world and that they remain competitive versus their competition. That's just all part of <unk>.

Daily hand.

Hand to hand combat.

Got it no that's helpful. Doug and then last one for me I think you mentioned.

There were some destocking impact on the protective side.

Yes could you just speak to the hardware side there should.

Should we expect to see any kind of destocking going on.

Either in the near term or perhaps in a more recessionary scenario in that category. Thank you yeah, not not much Matt at all I mean, there is as I said last time, there's somebody that would say Oh I've got some skus that are slow movers I can take them down from 26 weeks to 24 weeks, we haven't really seen much of any <unk>.

Packed in the Hs and the reason, Matt that Youre seeing with some of your other companies that you follow and the reason you would see at NPS is thats. The one product that we do ship some through the retailer's distribution center and the big change there other than the obvious Asia time.

Is that they've been able to get things through their distribution centers from what was 28 days to get it from front to back to now about 12 days. So straight math. They just don't need the same amount of product that they had and the majority of that 10 that we talked about.

And I don't anticipate were going to have much if any on the Hs side, just because it's direct store theres not a whole lot they can do.

Also with what's going on in Florida.

There's going to be a few drywall index grew sold down that way. So we may reposition some stuff to help the retailers out because there's going to be.

A lot of demand down there once the insurance folks figure out whether they are in business or not.

Right Alright, well, thanks, Doug Thanks, Rocky Good luck guys.

Thanks, Matt.

Okay.

Operator, you want to take the next question from Ryan Merkel from Blair.

We lost <unk> two months to get coffee.

Hi, Im sorry Amazon.

[laughter].

Our next question is coming from Stephen Volkmann.

Raymond James Jeffrey.

And as a reminder.

We'd like to ask a question. Please press star one on your telephone.

David.

Great Good morning, guys.

Sure.

I don't know Theres, a big merger this morning, Raymond James in Jefferies.

Yes.

I wasn't aware of it either but.

Maybe maybe it would be an idea.

Thanks for taking my question most of them have been answered actually but I'm just curious.

Sort of Directionally.

How we should think about kind of SG&A, considering 2023 sort of.

A bit of a choppy or year of overall demand.

Do you guys would you typically sort of pull back on SG&A or do you still need to sort of.

To make the investments that you're making to drive growth into 'twenty four and beyond.

Yes, it's Steven you know from some other companies that you cover.

Historically folks who have a big marketing and AD spend they hit that first before they hit SG&A and the other buckets for US we don't have that bucket. So we're going to do everything we can to control what we control, we're not going to actually will be adding people to our service network next year in our service.

Organization, but we're going to do everything we can to control what we can control, but we don't have a bucket of marketing or advertising or big promos to hit so youll see us do the right thing, but you won't see dramatic cost savings or cost increases either direction Rocky anything I Miss no. The only thing I would add and we talked.

About this on our second quarter call that we did take some actions.

At the end of the second quarter early in the third that we think provide a lot of provide more flexibility I should say around our SG&A costs and our ability to pull some levers.

You can see we had a nice performance in SG&A in the third quarter and we expect that to continue into the fourth and we're going to continue to make sure that we've got the right costs in the business to drive it forward not spending in areas that don't provide benefit but spending in areas like Doug said in the service organization the sales organization to help fuel.

The growth that we see in the business.

Okay Super and then maybe just this might be a new guy question, but how should we think about sort of new business for 2023, and I would define that as I guess sort of SKU expansion with existing customers or adding new customers or.

Any of that just sort of whatever isn't driven by just end market.

Volume trends.

Does that sort of layer in going forward.

So as we think about the algorithm and the 6% organic top line growth historically, that's 2% to 3% new business wins every year and Thats principally.

Existing products with existing customers. So it's taking additional shelf space from our competitors.

There are a couple of items in play as we sit today like construction.

Concrete screws new area for us, where we're taking a lot of share that we're really excited about as we think about 2023 similar to 'twenty two and what we've seen the last few years, we would expect that to be 2% plus of our revenue and we've got line of sight to that as we think about 'twenty three.

Okay.

Super Thank you very much.

Sure. Thanks Steven.

Thank you.

As a reminder, if you'd like to ask a question you can press star one on your telephone.

And our next question comes from Ryan Merkel with William Blair.

Dan.

Hey, guys good morning, Hey, rich.

So my first question is on volume trends can you just talk about how volumes trended through the quarter and into October and really what Im curious about is if it's sort of stable or the trend line is sort of declining.

Yes, when you look Brian at our Hs business, which I think is the best bellwether.

We actually did see an improvement.

In Q3 and over the first half and several of our retailers said the same thing now remember part of their 15% down is as a result of the screwy spring that they had.

So that definitely got better, but I'll quote one retailer it was amazing to them that after the July 4th weekend, they seem to see things get up or pick up a little bit better. So I would say there is slightly better than they've been is what we're seeing right now.

Got it yes that was kind of my view as well.

And then on gross margin.

It sounds like <unk>, the 44% can we think about that as the baseline for 'twenty three it.

It sounds like maybe the first half of 2003, maybe a little below that due to the high cost inventory, but then in the second half is it 44 or better is that right.

Yes.

Yes, I think 44, we believe is a good baseline for our business and so yeah, Ryan as you think about it the.

The first quarter may be slightly below that I think as we go into the second through the rest of the year, we would expect to maintain or grow that rate.

Okay.

And then last one for me I think you've put through about $225 million of costs.

Curious how much of that do you think you can keep as cost deep slate over the next 12 to 18 months.

Yes, I mean thats.

Thereby figures that out let me know.

I think the way we look at it is that.

We've never been here before now if you go back to past times Ryan.

Rice would go up retails would go up and there's never been a time, where we've given back price.

It would be very naive of us to say that theres not going to be some price given back over time. The one that I would say would be the most suspect to that and worthy of <unk>.

Working with our retailers is if we see this container momentum downward and pricing continuing then theres certainly justification for the fact that that part of it should be worked back with our customers and.

That's the one I would say I will look to retailers in the eye and say, let's be honest. We know what's happened. We know what was supposed to happen. What we don't know is what happens. So we talked about this big inventory reduction that's taken place in North America as a result of the changes in lead times that's cross.

Those guys, we don't know whats going to happen as it normalizes, nor do we know what's going to happen with fuel, but that's probably the one Ryan that I would say you'd have to say long term that we'd work back with our customers on.

Yes that makes sense alright, thanks, Doug.

Okay. Thanks Rod.

Okay Ryan.

It looks like were Q&A portion of today's call.

I would like to turn the call back over to Mr. Ken for some closing comments.

And thanks, everyone for joining us this morning.

I really want to thank our customers and suppliers and importantly, the folks.

Do it every day for us at Hillman that contributed to the quarter. We look forward to updating you again in the near future and again, thanks for joining us today.

Okay.

This does conclude our program you may now disconnect have a wonderful day.

Q3 2022 Hillman Solutions Corp Earnings Call

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