Q4 2022 Hillman Solutions Corp Earnings Call
The conference will begin shortly to raise and lower your hand during Q&A you can dial 911.
[music].
Good morning, and welcome to the fourth quarter of 20th 22 results in full your 20th twenty-three guidance presentation for Human Solutions Corporation.
My name is Kyle and I'll be your conference call operator today.
Before we begin I would like to remind our listeners that today's presentation is being recorded and simultaneously webcast.
The company's earnings release and presentation, where you should this morning.
Documents and a replay of today's presentation can be accessed on humans Investor relations website at I R Dot human grip dot com.
Please note that the company expects to file its Form 10-K on Monday February 27th.
I would like to turn the call over to Michael Taylor via the Hillman.
Thank you good morning, everyone and thank you for joining us and Michael Taylor, Vice President of Investor Relations in Treasury, joining me on today's call our <unk>, our chairman President and Chief Executive Officer, Iraqi fast, our Chief Financial Officer will begin in baseball with an overview.
Graduated strategy, some operational and financial highlights for the year, followed by a quick business Sunday.
Then Rockies will give up financial overview of Q4, and 2022 as well as our full year guidance for 2023.
Before we begin I would like to remind our audience that certain statements made on today's call maybe considered forward looking at our subject to the safe Harbor provision.
Securities laws.
These forward looking statements are not guarantee future performance that are subject to certain risks uncertainties Sanchez and other factors many of which are beyond the company's control and may cause actual results to differ materially from those projected date of such statements.
Some of the factors that could influence our results are contained in our variadic an annual report filed with the SEC for more information regarding these risks and uncertainties. Please see slide you in our earliest thaws slide presentation, which is available on our web site.
In addition on today's call, we will reverse or non-GAAP financial measures information regarding our user and reconciliation of these measures to our App results are available in our earnings call slide presentation with that it's my pleasure to turn it off Oliver So our chairman President and CEO Jacob.
Michael Good morning, everyone. Thank you for joining us before I get into that cause I wanted to take this opportunity to thank Jim Hillman. The 1100 Warriors, we have out in the stores are distribution center employees, who keep the product swelling and our entire customer support team, which I am a proud member of.
Thanks to everyone's efforts, we were able to successfully navigate and grow our top and bottom line and a dynamic and challenging 2022 and expect to do it again in 2023, we continue to outperform the competition by doing things the Helmand way on behalf of the entire manage.
<unk>, we want to say, thank you and keep up the great work here.
Tillman was founded on the principle of customer service and our legacy of service has been built over the past 59 years. This company has been successful because it has always taken care of its customers and find unique ways to do things that our competitors can especially during the past three years.
I know Mckenrick Hillman, who ran the company for 40 years or crowd of how this team has performed and I am too.
2022 is no exception, we averaged 96% bill right, which is up from 91% during 2021 and 95%. During 2020. This means that we took great care of our customers and as our products were on their shelves when the pickup truck pro and the Diyer. We're after.
Shell when.
When you take care of your customers. Good things happen. For example, we delivered four year adjusted EBITDA at the high end of our guidance range. We gave in November and we earned a number of new business wins an award during the year.
Over the long haul since our founding in 1964, taking care of our customers is allowed him to become one of the largest and most profitable providers hardware products in value added solutions at leading hardware and home improvement retailers across North America.
Many if not all of you have heard me say that we've had only one day of the year and are 59 year history.
This consistent growth and resiliency has been fueled not only by our share for our customers, but by our business model in our competitive mode.
Which drove healthy results for the year and differentiates us from our competition consists of three main pillars number one we deliver over 80% of 112000 excuse directly to retail locations of our customers with industry, leading feel rates. This means our customers.
Always have what they need and don't have to worry about managing Hillman inventory in their distribution centers number to our sales and service team <unk>.
1100 Warriors provides world-class service at the shell and are embedded with our retail customers. This team ensures that helm was mission critical high margin products are in stock organized and optimize for a retail customers and their consumers and number three over 90%.
Set of our revenue comes from brands, we own these brand stand for quality and reliability and we're constantly innovating in rolling out new products. This is not only important to the consumer and pro but allows us to expand and tailor our products and our brands to specific retailers strategies.
To put the three pillars in perspective, and two of our top five accounts.
Our products make up on average about 22% of their total skews in the entire store and are included in over 12% of their transactions. This is exactly why we call our products mission critical and we used to determine that and when we talk about how Hillman serves our reach.
Male partners. This is why we win with our customers and constantly grow our business.
Our performance during the challenging environment in the past three years has paid dividends for us we've been successful wanting on average $25 million, a new business per year, and our hardware and protected business from 2021 to 2023 and as we look forward to 2024.
Four we have $27 million, a new business already awarded and it's only February the success proves that our amount of works in our past performance continues to be rewarded by our retail partners.
Now I'd like to frame up our financial highlights for the year overall I'm pleased with how our team successfully navigate the choppy environment, resulting from rapid inflation in our cost and massive disruption in the global supply chain since.
Since the beginning of 2021, we've implemented in $225 million a price increases to fully offset cost inflation on a dollar for dollar basis at the same time, we manage our fill rates are sourcing lead times ballooned in 2021, and then shrunk dramatically since early two.
2022, with a corresponding spike in now finally reduction in our inventory levels.
Moving to our top line for 2022 net sales grew 4.2% to $1.486 billion. The increase was driven by the implementation of price increases over the past year, partially offset by the volume declines excluding the 53rd week our sales.
2022, net sales grew 3.1%.
For 2022, regenerated 210.2 million of adjusted EBITDA, an increase of 1.4% from 2021.
Now, let's touch on the performance of each of our businesses during the year.
Hardware solutions is our biggest business and makes up over 55% of our overall revenue for the year hardware sales soar, 13% revenue growth compared to 2021 or 12%, excluding the 53rd week pricing.
Price increases what are the main driver of the top line increase offset by the decline in volume of just under 3%.
Hardware solutions as the bellwether of our business and we are encouraged by the trends we're seeing so far in 2023, robotics and digital solutions or Rds makes up about 15% of our overall revenue.
Rds gross margins were 72.
And our adjusted EBITDA margins were $32, 2%, respectively, and our market share is strong.
For the year already S revenue was roughly flat or down 1% when excluding the 53rd week as discretionary items like key accessories, and pet tagging gravy and we're down roughly 15% from peak volumes in 2021.
Additionally, smart Arafat duplication declined is used car sales decreased 11% from 2021 to their lowest numbers since 2013.
<unk> setting these declines with a 17% increase in revenue from our self serve key duplication kiosk business <unk>.
<unk> is a key driver of highly profitable longterm growth as we talked about last quarter, we've been working with our major changes location, an engraving customers and jointly developing our next generation digital kiosks are both technologies, which we expect to reunite our long term growth in this business.
Our top three minute key customers have been through our manufacturing facility in Tempe, Arizona, where they were able to see our new technology with their own eyes.
Laidback and interest is excellent and we are encouraged about the growth opportunities. These kiosks reset.
In 2024 and beyond.
<unk> 3.5 is our new saucer key duplication Gis was smart auto.
Duplication technology, which will be ready for the market Lake this year and into early 2024 <unk>.
<unk> $3, Oh is our new engraving machine that will be introduced throughout 2023, we plan to place over 800, new machines. This year.
By the end of the year, we will have around a thousand new quick tagged three point O machines in service.
We're really excited about this new machine because it gives the pad on her 26 differ.
Options to choose from up from only six options in our existing machine and we're relocating the new machines inside the pet department of one of our top five retailers for the first time.
We've also placed this machine and Disneyworld Disneyland Seaworld and Universal Studios with excellent feedback and performance over the first 90 days.
Regarding our next sharpening machinery sharp we ended 2022 with approximately a thousand machines at select Ace hardware is across the country.
This machine is truly one of a kind and we have over 100 stores sharpening close to $4 a day, creating excitement for the store owner and the consumer with the leading marketing concept been word of mouth from one consumer to the other.
While challenges sourcing chips and boards continued to throttle our production of these machines, we see that abating during the second half of 2023.
Meanwhile, we're testing this one of a kind Mac sharpening machine and new channels, including specialty retailers.
Good service and restaurant supply outdoor sporting a recreational retailers and a leading Canadian retailer. We believe that we can garner interest outside of the traditional Harvard channel and likely be in the position to ramp up production as the chip in board shortage ends in consumer.
Errors and retailers embrace this new check balance sheet.
Our protective solution business makes up 15% of our overall revenue for the year protective revenues decreased about 15%. However, if COVID-19 related P. P sales are excluded from both periods and the 53rd week is excluded protective revenues increase the <unk>.
Put 1%.
Our firm grip brand, which is exclusive to the home depot is their top selling work Graham.
Work gloves brand promotional execution in this category is critical we had an excellent 2022 and that area for 2023, we already have a robust promotional plan in place with depot, specifically for the firm grip brand that we're really excited about it.
As we tell the sales guys stack it high and watch it fly.
Lastly, our Canadian segment, which makes up about 10% of our overall revenue bill on momentum. It has seemed throughout the year, Canada posted a 5% top line increase for the year with its bottom line doubling versus 2021.
Replace to achieve this double digit adjusted EBITDA margins out of our Canadian business.
The long lasting relationship and deep partnership we have with our customers along with the end markets. We serve give us confidence as we look to the future we provide our customers merchandising solutions for the most complex categories. These are the things they don't get from the competition like direct store shipments.
And in store service at the shop from our team as I mentioned earlier, we have implemented a total of approximately 225 million in price increases since the beginning of 2021. These.
These cost breakdown to approximately $120 million of transportation and shipping.
$90 million of commodities and $15 million of labor.
Over the past several months, we've seen some of these costs come down like ocean container costs, which will be a tailwind for us in the second half of the year.
Some costs remain high like labor and out bound freight we expect our margins to expand once these container cost reductions flow into our income statement beginning in the second half of 23, and then to 2024.
As I touched on earlier, we saw lead times increased dramatically as the supply chain tightened during 2021.
We made the strategic decision to invest in our inventory to protect still rates. This resulted in a continuing to take care of our customers, but also.
And I was carrying more inventory then we have a normal supply chain environments. This investment has and will continue to yield new business wins and is another example, why we have long standing relationships with our customers from the board level to the store level later.
Lead times from Asia have improved to around 160 days over the past six months or so which is vastly better than the 250, plus they lead times the industry experienced in January 2022.
Such we have started to bring down our inventory levels and delever, our balance sheet as we turn that inventory the cash with no adverse impact to our customers and our feel rates.
We ended 2022 with him almost 100 million more inventory than we would have enormous supply chain environment. This is an improvement of approximately $85 million from our peak. This past summer alright inventory decreased by approximately $45 million during the fourth quarter of 2022 and we've.
Believe that we will further reduce our inventory by at least another 50 million. During 2023, the great news about this is that our fill rates will still lead the industry and this inventory will turn to cash and we will delevered during 2023.
As we look at 2023, it's important to remember that we have a diverse resilient business with 112000, skews, serving 40000 customer locations across our coast to coast footprint spanning North America.
Vast majority of our products you use by pickup truck froze in D. I wires to repair remodel and maintain homes are business performs well throughout economic cycles and not dependent on new home construction and never has been remember we started this business serving a.
Small the small independent hardware stores. This segment makes up today about 20% of our business and remains a critical component to our growth as we have seen 9% sales <unk> over the past five years in this segment.
We believe our repair and remodeling and Marcus are well positioned for the following reasons number one.
The North American housing and industry continues to be in short supply as housing starts are below historical averages and fewer homeowners are willing to sell today with over 90% of mortgages, having fixed interest rates.
This means the buyers can't buy in the cellars that wall, so we'll be spending on their existing homes.
Number two or the U S home continued age with now over 50% of your songs over 40 years old.
Number three trends and napping aging in place working from home and outdoor living remain prominent and consumers will continue to invest in their homes and finally since our founding 59 years ago are consistent growth through economic cycles has proven that repair remodel and maintenance.
This projects happen no matter the economic environment in fact, there's only been one year our top line did not grow in our 59 year history and that was during the great financial crisis of 2009. This gives us a great deal of confidence heading confidence heading into 2023.
We're pleased with the progress we've made as a company navigating in N out of Covid during the past three years and we remain focused on capitalizing on the unique opportunities ahead.
Some of our larger customers are predicting unit volumes to increase, albeit modestly during 2023 in our main product categories. However, with some of the economic uncertainty around the health of the consumer and a possible economic slowdown were taken a more <unk>.
Servat of approach and are planning for <unk>, the flat to slightly down.
Fortunately, we project are implemented price increases and new business wins will more than offset any potential market volume decline and we're off to a strong start so far in 2023.
With that let me turn it over to Iraqi you looks better than he sounds today, he's fighting a bit of a cold and that's what happens when the temperature goes from 70 to 35 during the week in Cincinnati, So rocky good luck.
<unk> <unk> <unk>, it sounds like I'm going through puberty I apologize before.
Before I get into our guidance for 2023, I'll provide a quick summary for fourth quarter of our year end results.
I'd also like to point out that our topic for the quarter and year was impacted by the 53rd week of <unk> 2022, but that did not have a meaningful impact on her bottom line.
Net sales in the fourth quarter of 2022 increased 1.8% to $357 million versus the prior year quarter, excluding the 53rd week net sales decreased by 2.8%.
The fourth quarter results were driven by price offset by a decrease in volumes.
2022 full year net sales increased 4.2% to 1.49 billion. The top end of a revised guidance range of 146 to 1.5 billion X.
Excluding the 53rd week net sales increased 3.1%.
Hardware solutions increased 12% in Canada increased 5% contribute to the overall increase this was offset by 68% decline protective solutions, while already us was down 1% for the year.
The significant decline in P. S was driven by Covid related sales in 2021, but did not recur at the same levels in 2022.
Note that all of the aforementioned numbers all exclude the 53rd week.
Adjusted earnings per diluted share for the fourth quarter of 2022 was five cents per share compared to 60 cents per diluted share in the prior year quarter.
For the full year 2022 adjusted earnings per diluted share was 43 cents per share compared to.
51 cents per diluted share during 2021.
Fourth quarter adjusted gross profit margin increased over 260 basis points to 43.4% versus the prior year quarter. So.
<unk> margins improve my 10 basis points compared to the third quarter of 2022.
For the full year 2022, adjusted adjusted gross profit margin increased over 60 basis points to 43% from 42.4% during 2021.
Q4, 2022, adjusted SG&A as a percentage of sales increased to 31% from 30 per cent during the year ago quarter.
For 2022, adjusted SG&A as a percentage of sales increased to 29% from 28%.
This analysis maxed out stock based on <unk>.
Acquisition integration expenses legal fees and restructuring costs, which we feel it gives a better analysis of our basic expenses.
And a high level increases in SG&A were driven by increased shipping and labor costs prior to price increases going into effect with our customers.
Justin EBITDA in the fourth quarter increased 16.5% to $45 million compared to $38.6 million in the year ago quarter.
This is the second consecutive quarter that adjusted EBITDA has exceeded the comparable year ago quarter and it was at the high end of our expectations.
Adjusted EBITDA for the quarter was driven by a healthy mix of price cost, partially offset by higher cost of goods sold.
Adjusted EBITDA for the 20th 22 full year increased 1.4%.
$210.2 million compared to $274 million in the year ago quarter.
For the full year adjusted EBITDA was driven by a healthy mix of price cost, partially offset by higher cost and the timing of price increases.
Further driving the increase during the year with a lift some strong earnings from our Canadian business.
Now, let me turn to orchestral and balance sheet.
During 2022 operating activities generated $119 million of cash as compared to using $110.3 million in 2021.
After Scott during 2021, we invested into inventory to protect still rates and that investment began to turn into cash in 22, as we saw lead times moderate.
Capital expenditures for the year were $70 million compared to $52 million in 2021.
We continue to invest in Rds kiosks, and merchandising racks for new business wins. These are important parts of our high return capex initiatives.
Free cash flow for the year totaled $49.4 million.
Versus negative $161.8 million in 2021.
And texting our cash flow results for 2022 with the settlement and additional related legal expenses from Hydro litigation, which totaled $33 billion during the year.
At year end net debt and approved by $43 billion to 880 $888 million versus $931 million at the end of 2021.
We ended the year with approximately $229 million of liquidity, which consists of $198 million of available borrowing under over call me credit facility and $31 billion in cash and cash with us.
Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 4.2 times, which improved from 4.5 times at the end of Q3 and four seven times at the end of the second quarter.
Our long term net debt to adjusted EBITDA ratio target remains unchanged <unk> three times and we think that we will end 2023 around 3.5 times, assuming we come in around the mid point of archives.
Speaking of guidance, let me spell a few minutes talking about our outlook for 2023, and how the price cost dynamics will impact our income statement of results for the year.
For 2023, we anticipate full year net sales to be between $1.45 billion to $1.55 billion.
Net sales.
Sales mid point of $1.5 billion represents an increase of about 1% from 2022.
Our long term algorithm demonstrates 6% annual top line growth. This consists of approximately 1% price is 5% volume growth.
5% volume growth is made up of two to three per cent market growth.
Which looks a lot like GDP in 2% to 3% growth from new business wins.
To unpack our top line guidance for 2023, a bit further our mid point thinks in approximately two per cent growth from price that will roll from 2022 and assumes volume growth is down 1%.
This includes new business wins, offset by modest market pressure and us laughing remaining ppe's sales during 2022.
As you would expect our top line is going to be dependent upon sales volume at our customers, which is predominantly driven by the pass.
Our ability to new with new business, coupled with the strength of the consumer the health of the economy and housing market will impact our results.
For our bottom line, we expect a full year 2023, adjusted EBITDA will total between $215 million to $235 million.
The lift weight of $225 million represents an increase of about 7% versus 2022.
We expect to see some leverage this year with our bottom line results beginning in 2000 Q3, as we get on the right side of the power curve when it comes to price cost.
Specifically, we anticipate gross margins in the first quarter of 2023 to decline sequentially versus Q4, 2022 is our highest price inventory begins to float through the income statement.
We will then see modest sequential margin improvements during Q too.
Then during the second half of 2023, we anticipate margins in excess of our normalised rate of 44% to 45%.
Lastly, free cash flow for full year 2023 is expected to come in between $125 million to $145 million with the mid point of $135 million.
Please keep in mind the guidance figures are made with the full following full year assumptions.
We anticipate cash interest expense will be in the 50 $565 million range.
Cash taxes will be between five and $10 million.
Capex will be between 65 and $75 million.
Restructuring related another cash expenses will total approximately $10 million.
We will have approximately 198 million shares outstanding and we will see a working capital benefit of between 50 and $70 million driven by $50 million reduction in inventory.
Given the timing of inventory reduction moving into the first quarter of this year, we expect to invest less into working capital during the first quarter of 2023 versus prior years to.
To be specific over the past three years, we increased working capital about $40 million during the first quarter of the year as we built inventory levels going into the spring.
Whoever during the first quarter of 2023, we are confident we will need less than half of that failure.
But do expect that our leverage ratio will increase modestly at the end of the first quarter.
As we have done in the past, we expect 2023 to be the tale of two very different has.
During the first half of 23, we expect to see adjusted EBITDA down compared to 2022 and the iced tea.
Percentage range with a steeper decline during the first quarter of twenty-three compared to 22.
This is substantially the result of highest cost goods are sold perhaps in the history of Hillman flowing out of inventory and Ah into our income statements. During the first half of the year Peeking in February March and April .
Further impacting our first quarter results will be the relocation of one of our distribution centres from Rialto, California to Kansas City <unk>.
By making this move we will avoid a significant increase in operating costs as our rent is going to quadruple.
By the second quarter of this year, we believe we will be fully integrated with this new hub-and-spoke distribution center and our costs will actually improve on a go forward basis, when compared to our previous operating costs at the Rialto D C.
We will maintain our distribution center near Bakersfield, California, and that has been in service since 1990.
During the second half of 2023, we expect to see adjusted EBITDA compared to 2022 in the low 20 percentage range as our cocks reflect the new lower costs, we are seeing today.
This is mainly due to is finally being on the right side of the price cost equation.
One of our main areas of focus over the past two years was covering our costs through the execution of four major price increases.
While we recognize that we have never been to an environment like the one we are in today historically, we have not given price back dollar for dollar when inflation cools, nor do we seen a retailers lower prices at Michelle.
Over the past few months, we have seen some cost to begin the moderates such as containers, while others remained stubbornly high like labor dredge in Allentown shipping.
That said, we do expect to benefit from this declining container prices, we are paying for today, what the lower cost flows through our P&L, which we expect will begin during the second half of twenty-three continuing to 24 as I've discussed.
Are expected cash flows and earnings for 2023 will put us in a position where we can start to play offense and use our strike the balance sheet to execute low risk sweet spot tuck in acquisitions or capitalize on other creative opportunities that may present themselves.
Looking further out our long term growth algorithm remains intact, we think 6% organic net sales and high single to low double digit EBITDA broke is achievable in an economic environment, where we're seeing two to three per cent G. D P growth.
As we look forward, we believe that are competitive mode and longstanding relationship with customers will allow us to continue to win and to perform at or above are stated growth algorithm over the longer term.
Doug Matthew.
Good job man, Thanks, Rocky Hillman as a as a good business when things are good but in 23, we have the opportunity to show you. The helmet is a surprisingly good business when the economy is less certain.
We're excited about the normalization of global supply chain.
As we will no longer need the excess inventory we invested in over the past few years to provide the industry, leading feel rates for our customers. Even if we had them all again, we would invest again.
Because it helped widen hilmes mode versus the rest of our competitors and we will pay dividends for Hillman and our investors for you to come.
I've been with Hillman since 2014, and I've never seen us in a better position with our customers and suppliers. The home in moat is strong our end markets are healthy resilient. We believe we're the best partner professors and hardware products in North America as.
As we look forward I know, we have the right team to get things done and we're committed to drive long term value for our customers shareholders and employees with that will will begin the Q&A portion of the call. Kyle can you. Please open the call up for questions.
Sure. So as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to.
To redraw your question. Please press star one one again.
Please stand by while we compile the Q&A roster.
It's your first question concerned a line of <unk> from T. G. A securities lead your lines you know open please ask a question.
<unk>, but close enough.
Hey, just can we start with the Canadian pregnant in queue for it looks like margin had a little bit of a step back in the quarter can you speak to whether that's a one quarter issue what caused it and how should we think about 2023.
The fourth quarter numbers.
Lee I think as we said.
Historically and I set it for a couple of quarters and kind of became a broken record that we didn't expect it that business would have 17% EBITDA margins given the mix of industrial business, but we do expect as you think about 23% forward that that should be a 10% to 12% EBIT margin.
Margin type business, the important thing to remember about Canada, even compared to our U S. Retail business. It is much more cyclical just given the weather is.
Seasonal yes, sorry, given the weather and so as you think about the first and fourth quarter always seasonably weaker in Canada stronger in the second and third and then the only final comment I would make when we talked about the 53rd week. When we did you didn't hear us talk about Canada, because they were closed for that last week, but we still have expenses relative to what.
As in that business is at 57 weeks that for a little bit of pressure the fourth quarter.
[noise] got it. So then I guess just looking at the corner on a year over year basis next year, we shouldn't see a loss in queue for next year. Because you don't have that 50 February dynamic is that fair.
That's correct, we would we would expect the care that would make money.
Next year.
And then just one more from me and I'll I'll, let others ask just talk I know you touched a little bit about sort of the growth.
That you're gonna see in robotics, starting in 2024 based on a whole bunch of these new products and refresh products coming online can you get a little more specific about I guess, one the timing of some of these product launches and then if you take a a three year look and look at the next three years, how should we think.
[noise] about all of this new stuff that's coming into the market.
Translating into growth and margin expansion for that segment.
Good question I mean <unk>.
For Saturday, but first of all that it's the the quick tag three is in the places you want to be right. It's it's coming out of the blocks strong as it provides something for the consumer <unk>, we're gonna have.
800 machines rolled out this year and and a thousand in that one retailer plus those Disney Universal Studios and places like that so that that's a big part of our capital plan. This year and I think it will start to see that as we get those machines out.
When when you think about 3.5, which is our ability to take our <unk>.
And let it do what it does today, but will also be able to duplicate technology for smart, Bob, which which never been able to do.
That's an early 24 rollout and it's just hard to say how that will ramp at.
At the same time, you're gonna have reached sharp I think growing nicely and so rocky we've historically said we look for.
Yeah, low double digit growth in Rds I think in the current year baked into our guidance would be high single digits, but again, we will look for them to do double digits thinks about them outperforming what we have in our existing guidance.
Got it that's that's very helpful. Thank you.
For next question. It comes from the line of <unk> Garner from Benchmark Bank. Please procedure question.
Thanks, Good morning, everybody in Rocky you do look better than you sound. So hopefully that can help with these questions.
[laughter].
Pricing up two per cent in the outlook. This year can we can maybe give us a little bit more detail or contacts there is that assuming any of the pricing actions over the last few years have to go backwards at some point, so meaning you may be up more than that but first happened and down year over year.
The second any color there'll be helpful.
So we've got a few little pieces of business that are so tied to steal prices in the steelworks, so rod shapes and sheets that are on a quarterly adjustment, it's less than 5% of our business. So that that would adjust every quarter both directions irregardless.
You know over the years, but but taking that out we essentially have 2% coming across from from this year and to answer. Your question. We don't have any assumptions in there on prices coming down because if you really think about it.
Steel for example, steelhead declined, particularly China's steel throughout 20th 22, but since November 15th steal his up 15%.
And it's half of its exchange rate and half of its feel you also saw probably this week steel prices.
Up a bit in the U S announced by two players outbound.
So that there is some stubbornly high stuff and things like steel and Nicole have actually started to go back up. So I think we're gonna be fine in that regard, but no. Our assumption is the 2% is from what has been done.
Understood and then on the volume side.
I think he said down you guys down 1% and that includes.
Sure James and it sounds like our D. S is still gonna have a potentially good year growing high single digits does that imply that you're.
Assuming the market is down closer to mid single digits and if so I'm just curious it sounds like at least listening to the retailers hardware has been outperforming the company average and you know I think one of your big customers. The other day suggested a flattish market would would.
There be any reason why hardware would underperform kind of the home improvement. This year is there still some difficult comps within hardware.
Typically are you guys just taken a very conservative approach given the uncertainty.
Yeah, So what I would say there Ruben is you have to start with.
We're gonna lose 2% relative to Covid, when you talk about year over year and so our mid point of our guidance assumes that overall our markets are down 1%. The range of guidance is kind of down for to up one.
We would tell you we have not seen that year to date, we're actually up call at low to mid single digits from a unique perspective, and so we're just being cautious because of you know where where the economy is and everything you read in the press, but so far to date.
We're planning down one with a range of down for to up to and I would tell you were at the high end of that through 45 days, Yeah, Reuben I I'd say two things to that you know when you look at footsteps not hardware, but you look at home improvement by retailers last year footsteps down 14%, obviously, we didn't see.
That and then your favorite new product lumber is interesting because when you look at lumber prices and you know they've they've fallen out of the sky that's not good for a retailer's huh.
But holy Smokes is that good for <unk>. So we're kind of ones that that root for lumber prices to be where they are versus where they were but it's funny, how that becomes a headwind for a retailer because of yourself.
400 versus 1400, you gotta sell a bunch more lumber, but for <unk> that makes a big difference. So I think we're we're being conservative would be the answer.
Great. Thanks, Good luck guys been Lucky if you feel better.
Rivers.
One moment for your next question.
For our next question comes from the <unk> from Wheeling Blair Fry on your line is now open. Please ask your question.
Hey, guys. Good morning, Thanks for taking the question.
I wanted to ask about volumes up I think he said low single digits to mid single digits. So far you know like get it we're not quite in like the season, yet, but any anything that's driving that is it is it the market holding up better has its share gains kicking in just the that'll help there.
Yeah, I would say two things one I would say everybody knows what happened in the fourth quarter when retailers.
Could start to take inventories down both at the store level and that their distribution center level, Ryan because of all the supply chain things that started to normalize so that had an impact on everyone not as much for us, but if you look at our <unk> business, our beloved business obviously.
We sell that through distribution center. There was there was inventory taken out there near so that would be one thing the other thing is.
The weather's been then I mean, we've had more of a spring. This year. So far that we've had all of last year and that does help us not dimension lumber prices. So I I would say those are probably the three things.
Okay got it and then I think I think price, 2% for the year, how does that flow is it higher in the first half and then something more flat in the second half.
Yeah, that's right Ryan as you think about it that you know in the fourth quarter of next year will have virtually no price and in our in our outlook because we have taken all of our price kind of at the end of the third quarter.
Of 2022.
Got it okay, obviously, it'll avoid lap itself at that point.
Okay Perfect and then just lastly, I just want to make sure I've got the gross margin commentary correct. So in the first quarter of 23.
Should we be thinking like 41, and a half 42 per cent range for gross margin.
That sort of at the peak.
At a price cost.
Yes, that's.
That's the way to think about it Ryan.
Okay. Thank you that's what I'm.
X Ray.
One moment screen next question.
For your next question comes from the line of Stephen Volkmann from Jeffrey Steven Your line is now open. Please ask your questions.
Thank you very much good morning, and what's the first thing I wanted to go back to our D. S. Just sounds like 24 is going to be a pretty big year, there with a lot of kind of redesigned equipment and I'm. Just curious if any of the economics have changed as you have just kind of redesigning these machines do they get.
More expensive as or more capex is what are the margins any different just anything else that might've changed with all these redesigns.
That's a good question you had two things that could talk about quick tagged three it is definitely a more expensive machine than the historical one but with the the uptick we're seeing and what you can sell through that machines. David I think it's a it's a no brainer so that would be a case, where yes March.
But but certainly it will pay for itself and what we have.
Seen so far in the first 90 days.
Far as the $3 five this is really a a fun one for us because we're gonna take this machine and we're gonna be able to.
Bring new technology to to the consumer by being able to copy and the smart five which has not been done before by us and we're going to be able to do your home and office or if idea on that machine and then ultimately that machine.
Will be an endless I'll, because it will essentially be able to copy anything now.
One of the things that I'm not trying to evade the question, but it's very difficult to really predict is how fast will this ramp what we know is that the consumer.
It is not happy with the current experience at the dealer what we know is that the retailers are extremely excited and I. Just think when you. When you think about the foot traffic at a depot lowes and Walmart.
Who will be the three big users of this new technology.
It should be a really good one, but we're not going to get out in front of it because we're afraid of little bit that we won't be able to keep up so in a real quick way to visualize the consumer puts their Spotify, then and then we can <unk>.
Program it for them after office after home at their car. We're Super excited about that we can work with the two of our three retailers at the store for the pro as an example, when they're shopping but there's a lot of things that have to be done to get that done. So I would say it will ramp.
Slowly in the first half and I think.
We felt pretty bullish about this for the second half of 24 and again the 27 million that we've been awarded of new stuff has nothing to do with our D. S.
Stephen the only thing disrupt the only thing I would add is if you think about the last coupla years clearly.
To become more expensive the bill just with all the information that we've seen across all categories.
But we are working with and will continue to work with our retailers to make sure that our returns on those machines are appropriate and there's a lot of different ways. We can work with our retailers, but we look at a.
We strive for a two year payback I think early on some of these machines will probably be in the two the two and a half years, but we're gonna work with our retailers to make sure both the economics for them and for helmet or appropriate for us to build these machines and right now we feel really good about it yeah.
Okay, Great. That's helpful. Thanks, and then I'm curious it also sounds like sort of the second half run right into 24 is going to be.
Pretty impressive, but what happens to things and sort of normalize again in 24 to gross margins kind of go back to back down again at some point into the more normal range and is there any price may be declined that you might expect a couple of points in 24, just how does that normal lives.
Yeah, I mean, I think as as we have been extremely transparent on the way up.
Work with our customers on the way down.
To do the right thing I mean, the fortunate thanks, David they've been able to move their retail prices and again, we don't start to see this until mid year, but I I think the answer your question over time, we'll see them certainly back to what we think is acceptable I would think will exceed that on our D. S.
Storable, but that would say that over time, we we work with our customers to make sure that we're competitive and that if you think about having $225 million a call out a couple of hundred million dollars of increase it wouldn't be right for us to think we're going to hold onto all of that.
Understood and then my final kind of longer term question is should we think about free cash flow sort of 100 per cent of net income as a more normal run right or is the capex that you're going to need to do with the gross sort of going to keep that under 100.
I think you can think of it that way, Steve because I don't I don't believe unless we catch fire in a model, which everyone's gonna be happy that we're investing in the kiosk we've been able to run in that general range, just given the production capacity and quite frankly, our ability to install machines at at a retail customers I don't think so much about that.
Call. It you know $65 million to $75 million a capex anytime soon.
Super Thank you guys.
Yep. Thank you.
One moment for your next question.
For your next question comes from the life, Brian Butler from Stifel Prion. Your lines now open please procedure where the question.
Great. Thank you for taking my questions.
I guess, just kind of I apologize I missed a little bit of the first part of this call overlapping but if you think about the kind of the case over the year. It sounds like the hardware in Canada, It's kind of a revenues are gonna be beneficial in their early you know.
And the first and second.
Slow down or at least the growth slows down in the back half, but the margins are the opposite right you're going to have more of the pressure on that first half men benefiting in a second.
One is that true and then how does it work for for I guess, you already asked peace as well as P. P. DS TBE, there's gonna be down the hole.
2023.
Yes O P. T E. We're gonna, we're not gonna talk about and twenty-three is Michael Brian and I'm not trying to be funny, but I don't think we're gonna sell any what we would call COVID-19 related PBE products in 2023 that will all be the only products were still at our products that we were in pre Covid and will continue to sell those at normal levels. When you think about H.
The only thing I would NPS, what I would tell you is while we will see less price in the back half on the top line, we do anticipate that some of the new business wins that we have as they roll and we will see some benefit in the back half of the year and so I think you're gonna see relatively consistent kind of top line growth in there.
HTS segment as you think about the full year, it's not gonna be kind of front end loaded or packing loaded.
Okay, and then <unk> really kind of a little back end loaded right.
All these projects begin the ramp and do you have an exit right. That's much higher going into 24, that's that's the right way to look.
Yeah, I I would say I already asked we'll we'll be ramping 24.
And the quick tagged three will ramp throughout the year, but you know it.
I think that's rocky points out we're going to have a solid year on our D. S. And then we're really excited about what we think we can put together 24 25.
Okay, and then maybe one on on on M&A, just kind of made me go into more detail. What are your thoughts here looking at what may be a slower 2000 twenty-three overall on the market is there are opportunities there well what are your thoughts and 2023 and maybe going into 24 beyond.
Yeah, I mean, we're super excited because I think we got a bit lucky.
Yeah, there's just no there's not been much of a credit market out there and they've been very few deals as you guys know.
We still continue to talk to folks and the people that we talk to most about acquisitions our customers.
Because they'll tell us where to go they'll tell us what they want they'll tell us what they would like us to do and that's just a great way to grow as when your customers, saying, Hey think about this and think about that.
And so yeah, we probably are in 456 discussions right now with nothing to emanate because we want.
To focus really on getting this this leverage down, but well I'm excited about it because it's a pretty easy thing to sit down with an entrepreneur or even a private equity owned business and show them why joining hillman will be significantly different for them and how we can do things.
That they couldn't do and then immediately we think we have an open door with all of our customers at the right level, So pretty excited about that and where he actually as I said I think we got lucky that a lot of deals have not taken place because it just has been very little market, particularly for the private equity folks who want to level things.
Okay, Great and then last one for me just on on kind of the inventory coming down can we can we talk about the benefit I mean that seems like.
You're going to see it in 2023, but it is there are 2024 piece of it that you know kind of has a tail that.
Large enough that it's worth talking about.
Alright, that's a good question I don't think so because you know as we think about the business, we probably we've historically said, we'd about $10 million <unk>.
Build working capital about $10 million a year in order to keep up with the growth in the business I think thats relatively still the case, except for 2023, So I think you're gonna see it come down we are bringing batori down pretty dramatically at 23, and then I think as we go into 24 and 25 years to see those numbers become more static and will be kind of flat.
Slightly off the seal broken the business.
Perfect. Thank you very much for taking the questions.
Yep.
Alright Super centers I'm, not seeing any questions.
Time.
Alright, so just to conclude the Q&A portion of today's call I would like to turn to call back over to Mister Cahill for some closing comments.
Call and thanks, everyone for joining us this morning, we'd like to thank our customers or vendors.
And importantly are hard working team for their contributions during 2022, and we look forward updating you again in the near future. So would that call you may now disconnect.
Mmm.
This concludes today's conference call you may now disconnect.
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