Q2 2024 Hillman Solutions Corp Earnings Call

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

Speaker Change: The company's earnings release, presentation, and 10-Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's Investor Relations website at ir.hillmangroup.com.

Michael Koehler: Thank you, Operator. Good morning, everyone, and thank you for joining us.

Gigi: I would now like to turn the call over to Michael Koehler with Hillman.

Michael Koehler: I am Michael Koehler, Vice President of Investor Relations and Treasurer. Joining me on today's call are Doug Cahill, our Chairman, President, and Chief Executive Officer; John Michael Adinolfi, our Chief Operating Officer; and Rocky Kraft, our Chief Financial Officer. Before we begin today's call, I would like to remind our audience that certain statements made today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities laws. Such 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 other factors that could influence our results are contained in our periodic and annual reports filed with the NCC.

Gigi: Thank you, operator. Good morning, everyone, and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations and Treasury.

Speaker Change: Joining me on today's call are Doug Cahill, our Chairman, President, and Chief Executive Officer, John Michael Adinolfi, our Chief Operating Officer, and Rocky Kraft, our Chief Financial Officer.

Michael Koehler: For more information regarding these risks and uncertainties, please see slide 2 in our earnings call slide presentation, which is available on our website, ir.hillmangroup.com. In addition, on today's call, we will refer to certain on-gap financial measures. Information regarding our use of and reconciliations of these measures to our gap results are available in our Earnings Call Slides. With that said, Doug will begin today's call by highlighting our healthy second quarter financial results, touching on our guidance, and providing some commentary on the macro environment before turning the call over to J.M.A., who will discuss the Hillman moat and our operations.

Speaker Change: Before we begin today's call, I would like to remind our audience that certain statements made today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities laws.

Speaker Change: 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.

Speaker Change: Some of the other 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 2 in our earnings call slide presentation, which is available on our website, ir.hillmangroup.com.

Speaker Change: In addition, on today's call, we will refer to certain on- GAAP financial measures. Information regarding our use of, and reconciliations of, these measures to our gap results are available in our earnings call slide presentation.

Speaker Change: With that, Doug will begin today's call by highlighting our healthy second quarter financial results, touching on our guidance, and providing some commentary on the macro environment before turning the call over to JMA, who will hit on the Hillman moat and our operations.

Speaker Change: Rocky will go through the financials and our updated guidance before turning the call back to Doug for commentary on the executive succession plan we have separately announced this morning, and providing some closing comments before we open up the call to your questions.

Michael Koehler: Rocky will go through the financials and our updated guidance before turning the call back to Doug for commentary on the executive succession plan we have separately announced this morning and providing some closing comments before we open up the call to your questions. It's now my pleasure to turn the call over to our chairman, president, and CEO, Douglas Koehler.

Douglas Cahill: Thanks, Michael. Good morning, everyone.

Speaker Change: It's now my pleasure to turn the call over to our chairman, president, and CEO , Doug Cahill.

Speaker Change: y'all.

Doug Cahill: Thanks, Michael. Good morning, everyone.

Rocky Kraft: During the second quarter of 2024, we saw our adjusted EBITDA results increase 18% over the year-ago quarter, which outperformed our expectations. Our team did a great job controlling our costs and managing our margins, which led to a strong bottom-line performance for the quarter.

Rocky Kraft: We're highly confident in our ability to continue to control cost, manage our margins, and manage our product mix for the remainder of the year. Because of this, we are increasing our four-year adjusted EBITDA guidance.

Douglas Cahill: During the second quarter of 2024, we saw our adjusted EBITDA results increase 18% over the year-ago quarter, which outperformed our expectations. Our team did a great job controlling our costs and managing our margins, which led to a strong bottom-line performance. We're highly confident in our ability to continue to control costs, manage our margins, and manage our product mix for the remainder of the year. Because of this, we are increasing our four-year adjusted EBITDA guidance. Our new range of 240 to 250 million has a midpoint of 245 million, which reflects a 12% increase over our 2023 four-year results.

Rocky Kraft: Our new range of 240 to 250 million has a midpoint of 245 million, which reflects a 12% increase over our 2023 four-year results.

Douglas Cahill: We're thrilled with how the Hillman team is effectively managing margins and operating efficiently this year. The entire organization is pitching in, trimming costs where they are able to and maximizing productivity above and beyond our expectations, all while fill rates remain strong at 95%. Well, we've done a good job controlling what we can control.

Rocky Kraft: We're thrilled with how the Hillman team is effectively managing margins and operating efficiently this year. The entire organization is pitched in.

Rocky Kraft: Trimming costs where they are able to and maximizing productivity above and beyond our expectations, all while fill rates remain strong at 95%.

Douglas Cahill: The macro environment is soft, which is weighing in on our net sales expectations for the year. Because of this, we're revising our four-year net sales forecast to $1.44 to $1.48 billion with a midpoint of $1.46 billion, reflecting a 1% decrease over our 2023 net sales. So far this year, our results feel a lot like 2009.

Speaker Change: Well, we've done a good job controlling what we can control. The macro environment is soft.

Rocky Kraft: which has weighed in on our net sales expectations for the year because of this.

Rocky Kraft: We're revising our full-year net sales to $1.44 to $1.48 billion with a midpoint of $1.46 billion, reflecting a 1% decrease over our 2023 net sales.

Douglas Cahill: That year, our top line was down about 5% due to the macro environment. However, our bottom line benefited from deflation, tightening cost control, which resulted in a 10% increase in EBITDA. In the years following, we saw a return to our historical mid-single-digit growth rate, and we believe we're in the midst of a very similar situation today as we are optimistic about our future top-line growth. Hillman is a very good company when the economy is growing and markets are healthy, and our results have proven that Hillman is strong as things slow down. Back to the quarter.

Rocky Kraft: So far this year, our results feel a lot like 2009. That year, our top line was down about 5% due to the macro environment.

Rocky Kraft: However, our bottom line benefited from deflation.

Rocky Kraft: tightening cost control which resulted in 10% increase in EBITDA.

Rocky Kraft: Hillman is a very good company when the economy is growing and markets are healthy and our results are proven that Hillman is strong as things slow down.

Douglas Cahill: Our 2024 free cash flow expectations remain unchanged after our solid year-to-date results on cash. The strength of our bottom line performance gives us the confidence to reiterate our free cash flow guidance of $100 to $120 million with a midpoint of $110 million. Rocky will provide more detail on our guidance in just a few minutes.

Rocky Kraft: The strength of our bottom line performance gives us the confidence to reiterate our free cash flow guidance of $100 to $120 million with a midpoint of $110 million. Rocky will provide more detail on our guide in just a few minutes.

Douglas Cahill: Another highlight for Hillman is that we ended the quarter with a net debt to trailing 12 months adjusted EBITDA ratio of 2.9 times, and we will continue to delever throughout the year. During this quarter, Hillman has not been below three times leverage. Since 2009 and since the beginning of 2021, we have paid down over 900 million in debt. Our financial strength and operational efficiency allow us to pay it off. Let me tell you what that looks like to us.

Rocky Kraft: and we will continue to de-lever throughout the year. Hillman has not been below three times leverage.

Rocky Kraft: Our financial strength and operational efficiency allows us to play offense.

Douglas Cahill: We believe we can continue our strategy of executing creative, low-risk tuck-in acquisitions in adjacent aisles. There are numerous opportunities out there, and we believe we will close on an acquisition that looks a lot like Cook by the end of the third quarter. We will not only have EBITDA growth due to the natural synergies but also see additional top-line growth opportunities by leveraging the Hillman moat as we are well-positioned with our in-store service team, direct-store delivery model, and Hillman-owned brand.

Rocky Kraft: Let me tell you what that looks like to us.

Rocky Kraft: We believe we can continue our strategy of executing accretive, low-risk, tuck-in acquisitions in adjacent aisles. There are numerous opportunities out there, and we believe we will close on an acquisition that looks a lot like Cook by the end of the third quarter.

Douglas Cahill: Outside of growing via M&A, we see sizable opportunities ahead. Our team of product managers and engineers have done a great job with innovation by developing patented and proprietary products. We believe this product innovation will lead to new business wins in the next couple of years, which will allow us to grow in excess of our historical new business growth. We're in a great position to stay on offense, which will build the foundation for our continued future growth.

Rocky Kraft: Outside of growing via M&A, we see sizable opportunities ahead. Our team of product managers and engineers have done a great job with innovation by developing patented and proprietary products.

Rocky Kraft: We're in a great position to stay on offense, which will build the foundation for our continued future growth.

Douglas Cahill: Net sales in the second quarter of 2024 totaled $379.4 million, which was essentially flat from the year-ago quarter. There were several drivers for our performance during the quarter. Number one was the sales from the Cook Acquisition, which added three percentage points to the top line. Number two was new business wins, which added about two percent to the top line. However, there were offsets by two main factors.

Speaker Change: Net sales in the second quarter of 2024 totaled $379.4 million, which was essentially flat from the year-ago quarter.

Douglas Cahill: Number one was a 90 point headwind from price, which was in line with our expectations. And number two was overall market volume, which excludes the impact of new business wins in M&A. Overall market volumes were down about 4% for the quarter.

Speaker Change: There were offsets by two main factors. Number one was a 90-point basis headwind from price, which was in line with our expectations.

Douglas Cahill: These were all in line with our expectations, with the exception of market volume, which is being impacted, obviously, by the Max. We have seen soft foot traffic, which we believe is driven by existing home sales in the U.S. It decreased from 6 million in 2021 to 4 million in 2023, the lowest level since 1995.

Speaker Change: These were all in line with our expectations with the exception of market volume, which we are being impacted, obviously, by the macro. We have seen soft foot traffic, which we believe is driven by existing home sales in the U.S.

Douglas Cahill: This headwind has continued throughout 2024 with existing home sales at a similar level to 2023. Despite the soft macro, new wins continue for Hillman, this time with our newly acquired rope and chain product line, Cooke. We were successful in winning a $10 million piece of new business that one of our top five accounts will begin to ship and recognize volume from this wind in the second half of the year and into 2025.

Speaker Change: Despite the soft macro, the new wins continue for Hillman, this time with our newly acquired rope and chain product line, Cooke.

Speaker Change: We were successful in winning a $10 million piece of new business at one of our top five accounts.

Douglas Cahill: This wind's a great example of leveraging our deep relationships and in-source service capabilities to drive organic growth via M&A. For the quarter, Adjusted EBITDA increased 18% to $68.4 million, compared to $58 million during the second quarter of 2023. Our Adjusted EBITDA margins improved to 18%, and adjusted gross margins totaled 48.7%, marking a 570 basis point improvement over 43% during the year-ago quarter.

Speaker Change: Adjusted gross margins totaled 48.7% marking a 570 basis point improvement over 43% during the year ago quarter.

Douglas Cahill: For the fourth consecutive quarter, we generated healthy adjusted EBITDA growth and adjusted gross margin improvements. We have managed this by improving efficiencies, managing margins, and selling a better mix of products. During the quarter, we generated $42.5 million of free cash flow following a use of $6 million of cash last quarter.

Speaker Change: For the fourth consecutive quarter, we generated healthy adjusted EBITDA growth and adjusted gross margin improvements. We have managed this by improving efficiencies, managing margins, and selling a better mix of products.

Speaker Change: During the quarter, we generated $42.5 million of free cash flow following a use of $6 million of cash last quarter. Our healthy free cash flow was driven by the cyclical nature of our business.

Douglas Cahill: Our healthy free cash flow was driven by the cyclical nature of our business. We use cash to build inventory early in the year for our spring and summer busy season, which starts to turn into positive free cash flow in Q2 and continues for the remainder of the year. For our top-line results, hardware and protective solutions, or HPS, led the way with a 3.5% increase in net sales. To break that down a bit, hardware, or HS, grew by 2.7%, while protective, or PS, sales grew by 7.7%.

Speaker Change: We use cash to build inventory early in the year for our spring and summer busy season, which starts to turn to positive free cash flow in Q2 and continues for the remainder of the year.

Douglas Cahill: Driving the increase in HS were new business wins and contributions from Cook, partially offset by the market and price. PS had a nice quarter with new business wins and an active promotional off-shelf quarter driving its growth more than wholly offsetting a soft market. However, net sales for Robotics and Digital Solutions, or RDS, were down 8% versus the year-ago quarter.

Speaker Change: For our top-line results, Hardware and Protective Solutions, or HPS, led the way with a 3.5% increase in net sales. To break that down a bit, Hardware, or HS, grew by 2.7%, while Protective, or PS, sales grew by 7.7%.

Speaker Change: Driving the increase in HS were new business wins, the contributions from Cook partially offset by the market and price.

Speaker Change: PS had a nice quarter with new business wins and an active promotional off-shelf quarter Driving its growth more than wholly offsetting a soft market

Speaker Change: Net sales for robotics and digital solutions or RDS were down 8% versus the year ago quarter. Adjusted gross margins and adjusted EBITDA margins remain healthy at 70.6.

Douglas Cahill: Adjusted gross margins and adjusted EBITDA margins remain healthy at 70.6 percent and 31.8 percent, respectively. However, the trend of the past few quarters continues to impact RDS, lighter foot traffic and discretionary spending, softness in existing home sales, and our machines being moved around inside stores at a top customer weight on RDS results. We remain optimistic about our long-term high-growth, high-margin growth opportunities in RDS, including the new Medi-Key 3.5 offer. Our RDS business is a very solid business, and we are the clear leader in market share in North America.

Speaker Change: percent and 31.8 percent respectively.

Speaker Change: The trend of the past few quarters continues to impact RDS, lighter foot traffic and discretionary spending, softness in existing home sales, and our machines being moved around inside stores at a top customer weight on RDS results.

Speaker Change: Our RDS business is a very solid business and we are the clear leader in market share in North America.

Douglas Cahill: We believe we'll see R&D back to positive growth in 2025, and there are two main reasons why we believe this. Our new Minikey 3.5 machine opens up the Auto Key, Auto Fob, and Endless Aisle on our self-serve machines for the first time ever, and the weekly footsteps that our top three RDS retailers take are staggering, near 180 million footsteps per week in the U.S. We now have over 400 machines in the field with this new technology, and we plan to have three times our current number in stores by year end.

Speaker Change: We believe we'll see RDS back to positive growth in 2025, and there are two main reasons why we believe this. First,

Speaker Change: Our new Minikey 3.5 machine opens up the Auto Key, Auto Fob, and Endless Aisle on our self-serve machines for the first time ever.

Douglas Cahill: Consumers love the ease of this new machine. Our retailers love the new features and revenue growth opportunities. And in July, we successfully introduced the endless aisle on our self-service MinuteKey 3.5 machine. The Endless Isle is really a great name because it's truly endless.

Speaker Change: Consumers love the ease of this new machine, our retailers love the new features and revenue growth opportunities, and in July we successfully introduced the Endless Aisle on our self-service MinuteKey 3.5 machines.

Douglas Cahill: It allows the consumer to duplicate virtually any key at the kiosk and have it shipped to their house. Let me give you a quick example of our Endless Isle. If you live in Arizona and want to copy your house key, but you want it on a Cincinnati Bengals key blank, you can now order the key through our kiosk. The machine scans your key. The data goes to our plant in Tempe, Arizona, where the Bengals key is held in inventory. The Bengals key is then cut and promptly mailed to you, and after a few business days, you can show off your new Bengals key to your friends.

Speaker Change: The Endless Isle is really a great name because it's truly endless. It allows the consumer to duplicate virtually any key at the kiosk and have it shipped to your house. Let me give you a quick example of our Endless Isle. If you live in Arizona,

Douglas Cahill: The second are the opportunities that our RDS service team can capitalize on. Redbox's recent liquidation provides new business opportunities for Hillman's RDS service team with two new accounts already inked. The accounts add both top and bottom line results similar to our RDS mix today, but with no capital required.

Speaker Change: The second are the opportunities that our RDS service team can capitalize on.

Speaker Change: Redbox's recent liquidation provides new business opportunity for Hillman's RDS service team with two new accounts already inked. The accounts add both top and bottom line results similar to our RDS mix today, but with no capital required.

Douglas Cahill: Additionally, we have strengthened our team with the successful hiring of experienced people from Redbox to help us scale and grow this opportunity further. It's good for these folks and great for Hillman to add experienced team members with kiosk backgrounds on day one. We have a great game plan in place with our top three RDS customers. The feedback on our recent kiosk enhancements has been strong, and the early incremental growth statistics are encouraging as well. For these reasons, we're confident that this high-margin business will be back to growth in 2025. Turning to Canada, net sales in our Canadian business were down 10.1% compared to the prior year quarter.

Speaker Change: It's good for these folks and great for Hillman to add experienced team members with kiosk background on day one.

Speaker Change: We have a great game plan in place with our top three RDS customers. The feedback on our recent kiosk enhancements has been strong, and the early incremental growth statistics are encouraging as well.

Douglas Cahill: The market and the economy are softer than in the U.S., but our team did a nice job with margins, mix, and operations during the quarter. We also had some new business wins during the quarter in Canada, which partially offset the market price and FX. While the macro environment isn't helping, we continue to win new business, strengthen our relationships with our customers, and reinforce our competitive mode, which JMA will touch on in a moment.

Speaker Change: Turning to Canada, net sales in our Canadian business was down 10.1% compared to the prior year quarter. The market and the economy are softer than in the U.S., but our team's done a nice job with margins, mix, and operations during the quarter.

JMA: While the macro environment isn't helping, we continue to win new business, strengthen our relationship with our customers, and reinforce our competitive mode, which JMA will touch on in a moment. We feel great about where we are with our customers right now, and how Team Hillman is performing.

Douglas Cahill: We feel great about where we are with our customers right now and how Team Hillman is performing. We'll continue to execute well during this cycle. We've done an excellent job controlling what we can while managing our margin. That said, I know this team and our customers are ready to ramp up when the market improves. It's fun to be on offense again. For the first half of the year, we generated $120.7 million of adjusted EBITDA, which is a record for the first half of a Hillman year of any Hillman year.

Speaker Change: We'll continue to execute well during this cycle. We've done an excellent job controlling what we can while managing our margin. That said, I know this team and our customers are ready to ramp when the market improves.

JMA: It's fun to be on offense again for the first half of the year we generated a hundred and twenty point seven million of adjusted EBITDA Which is a record for the first half of a Hillman year of any Hillman year

Douglas Cahill: I love how Hillman's performing and where we're headed, and I'm excited to turn it over to JMA. He will take the reins for me in January as the sixth CEO in the 60-year history of Hillman Industries. Thank you, Doug.

Speaker Change: He will take the reins for me in January as the sixth CEO in the 60-year history of Hillman.

John Adinolfi: Thank you, Doug. I joined Hillman five years ago, and I've gotten to see firsthand what makes Hillman's people, its commitment to taking care of its customers, and its moat. I look forward to building on these strengths and carrying on Hillman's legacy as its next CEO. First, I'll start with the moat.

Speaker Change: J.M.A. Thank you, Doug. I joined Hillman five years ago, and I've gotten to see firsthand what makes this company so unique.

Speaker Change: Hillman's people, Hillman's commitment taking care of its customers, and Hillman's moat. I look forward to building on these strengths and carrying on Hillman's legacy as Hillman's next CEO .

John Adinolfi: The Hillman moat makes us a strategic partner for our retail, as we're able to add value and solve problems in ways that our competition doesn't. We believe our vote is the main driver for our long history.

Speaker Change: First, I'll start with the moat. The Hillman moat makes us a strategic partner for our retail customers, as we're able to add value and solve problems in ways that our competition doesn't. We believe our moat is the main driver for our long history of consistent growth.

John Adinolfi: First, we have our 1,100 plus sales and service warriors that are out in the field each and every day. These men and women are in the stores of our customers providing top-notch customer service at the shelf. This Hillman team in the storage has been adding value for our customers for close to 30 years. Second, our distribution centers, where we pick, pack, and ship product orders directly to the stores of our retail customers.

Speaker Change: The Hillman moat consists of three main pillars. First, we have our 1,100 plus sales and service warriors that are out in the field each and every day. These men and women are in the stores of our customers providing top-notch customer service at the shelves.

Speaker Change: This Hillman team in the stores has been adding value for our customers for close to 30 years. Second, our distribution centers, where we pick, pack, and ship product orders direct to the stores of our retail customers.

John Adinolfi: Generally, our products do not flow through our customers' distribution network, which eases the logistical burden for our customers. This means that for Hillman products, our customers do not have to worry about the complexity required to get products to the shelves. And third, we typically have said this is our third pillar, the brand that we own, but let me expand on that.

Speaker Change: Generally, our products do not flow through our customers' distribution network, which eases the logistical burden for our customers.

Speaker Change: This means that for Hillman products, our customers do not have to worry about the complexity required to get products to the shelves.

Speaker Change: And third, we typically have said this is our third pillar is the brand that we own, but let me expand on that. As you know, Hillman's been around for 60 years and we've been working with our top five customers for over 25 years on average.

John Adinolfi: As you know, Hillman's been around for 60 years, and we've been working with our top five customers for over 25 years on average. This long history has allowed us to create strong partnerships with our customers, from the associates in the store, to the store manager, to the merchants, to the leadership team. Hillman is a unique, broad retail relationship and is connected at all levels.

Speaker Change: This long history has allowed us to create strong partnerships with our customers, from the associates in the store, to the store manager, to the merchants, to the leadership team. Hillman is unique, broad retail relationships and is connected at all levels.

John Adinolfi: These long-standing relationships allow us to approach the business creatively and strategically with our customers rather than the short-sighted approach of meeting a near-term goal. Secondly, when you combine our service teams in the stores. Skew-level POS reporting and our direct-to-store shipping puts us at the forefront of product trends, consumer insights, and research. Given that we're a market leader in many of our product categories, we can leverage this data to work with our customers and better manage the category.

Speaker Change: These long-standing relationships allow us to approach the business creatively and strategically with our customers, rather than a short-sighted approach of meeting a near-term goal. Secondly, when you combine our service teams in the stores.

Speaker Change: SKU-level POS reporting, and our direct-to-store shipping, it puts us at the forefront of product trends, consumer insights, and research.

Speaker Change: Given that we're a market leader in many of our product categories, we can leverage this data to work with our customers and better manage the category. This enables us to become the partner of choice for our customers as we help them meet their goals while putting the best products on the shelves for the end user.

John Adinolfi: This enables us to become the partner of choice for our customers as we help them meet their goals while putting the best products on the shelves for the end user. Another thing I'd like to touch on is product innovation. We have talented product management and engineering teams, as well as state-of-the-art test laboratories in Toronto, Cincinnati, and Tempe. Combining this group with customer insights that only Hillman has allows us to put innovative, high-performance products on the shelf.

Speaker Change: Another thing I'd like to touch on is product innovation. We have talented product management and engineering teams, as well as state-of-the-art test labs in Toronto, Cincinnati, and Tempe.

Speaker Change: Combining this group with customer insights that only Hillman has allows us to put innovative, high-performing products on the shelf.

John Adinolfi: Plus, about 90% of our revenue comes from brands that we own and control, which allows us to anticipate and meet the evolving needs of our retail customers and end users. To summarize the third pillar of remote, it comes from our 60 plus years of experience that consists of our customer relationships, category management, and Hillman-owned brands.

Speaker Change: Plus, about 90% of our revenue comes from brands that we own and control, which allows us to anticipate and meet the evolving needs of retail customers and end users.

Speaker Change: To summarize the third pillar of remote, it comes from our 60 plus years of experience that consists of our customer relationships, category management, and Hillman-owned brands.

John Adinolfi: Now we'll turn to M&A. Our method is critical to how we take care of our customers and how we grow. Over the past 60 years, M&A has been a key part of how Hillman has grown into $1.5 billion. When we talk to potential M&A targets and they learn about Hillman, they quickly understand how their businesses can grow by leveraging the three pillars of our moat. At Hillman, our experienced M&A team believes that we can execute multiple acquisitions per year that are of a similar size to Koch, the acquisition we closed in January of this year.

Speaker Change: Now we'll turn to M&A. Our mode is critical to how we take care of our customer and how we grow. Over the past 60 years M&A has been a key part of how Hillman has grown into a 1.5 billion dollar company.

Speaker Change: When we talk to potential M&A targets and they learn about Hillman, they quickly understand how their businesses can grow by leveraging the three pillars of our moat.

Speaker Change: At Hillman, our experienced M&A team believes that we can execute multiple acquisitions per year that are of a similar size to Cook, the acquisition we closed in January of this year.

John Adinolfi: We remain very excited about Cook, and as I told you last quarter, we expect to increase Cook's net sales by at least 20% this year, driven by our first win as the new owners with more to come. Like Doug said in his opening remarks, we're close to acquiring another company, the M&A pipeline is healthy, and we continue to see companies like Cook that would be a great addition to the Hillman family.

Speaker Change: We remain very excited about Cooke, and as I told you last quarter, we expect to increase Cooke's net sales by at least 20%.

Speaker Change: This year driven by our first win as the new owners with more to come.

Speaker Change: Like Doug said in his opening remarks, we are close to acquiring another company, the M&A pipeline is healthy, and we continue to see companies like Koch that would be a great addition to the Hillman family.

John Adinolfi: Now we'll turn to operations. Our global operation team continues to do a fantastic job. The five folks on our operations team have averaged over 30 years of experience in the industry. Furthermore, half of our supply chain leadership team have worked together for almost 20 years, and it shows in the performance of this team. They continue to execute our plan while controlling the controls. Here's a few examples: the team is operating efficiently and effectively, fill rates continue to be strong at 95% per year, which our customers love.

Speaker Change: Now I'll turn to operations.

Speaker Change: Our global operation team continues to do a fantastic job.

Speaker Change: The five folks on our operations team have averaged over 30 years of experience in the industry. Further, half of our supply chain leadership team have worked together for almost 20 years, and it shows with the performance of this team. They continue to execute our plan while controlling the controllables. Here's a few examples.

Speaker Change: The team is operating efficiently and effectively.

Speaker Change: Fill rates continue to be strong at 95% per year, which our customers love.

John Adinolfi: Taking great care of our customers remains a top priority. I'm proud to say that our network of 23 distribution centers across North America is running well as well as it has since I joined Hillman. We have the right products in stock, and we are getting them out quickly to our customers thanks to our long-term supplier partners around the globe. The efficiencies we're seeing in our DC network are driving our bottom line growth, which is critical given the market.

Speaker Change: Taking great care of our customers remains a top priority.

Speaker Change: I'm proud to say that our network of 23 distribution centers across North America is running well, as well as it has since I joined Hillman.

Speaker Change: We have the right products in stock. We are getting them out quickly to our customers thanks to our long-term supplier partners around the globe.

Speaker Change: The efficiencies we're seeing in our DC network are driving our bottom line growth, which is critical given the market.

John Adinolfi: Turning to freight, recently there's been another jump in spot rates for inbound containers coming from Asia, given the turmoil in the Red Sea and Panama Canal. However, because our team locked in our contracted rates on May 1st, as we do every year, much of this volatility in spot rates will not impact us as we ship over 90% of our containers on contract. And finally, our input costs. Many of our input costs, like steel from China and India and Taiwan, increased slightly during the second quarter of 2024 versus the 2023 average, but remain below their highs during 2021 and 2022.

Speaker Change: Turning to freight.

Speaker Change: Recently, there's been another jump in spot rates for inbound containers coming from Asia given the turmoil in the Red Sea and Panama Canal.

Speaker Change: However, because our team locked in our contracted rates on May 1st, as we do every year, much of this volatility in spot rates will not impact us, as we ship over 90% of our containers on contract.

Speaker Change: And finally, our input costs. Many of our input costs, like steel from China and India and Taiwan, increased slightly during the second quarter of 2024 versus the 2023 average, but remained below their highs during 2021 and 2022.

John Adinolfi: As I said, we've got a great operations team in place, and we continue to execute efficiently while taking great care of our customers. Between our operations team, our moat, and our M&A opportunities, I believe the future is very bright for Hillman. With that, let me turn it over to Rocky to talk about the financials. Rocky? Thanks, James.

Speaker Change: As I said, we've got a great operations team in place and we continue to execute efficiently while taking great care of our customer.

Rocky Kraft: Between our operations team, our moat, and our M&A opportunities, I believe the future is very bright for Hillman. With that, let me turn it over to Rocky to talk financials. Rocky?

Rocky Kraft: Thanks, JMA. Let's jump right in.

Rocky Kraft: Thanks, JMA. Let's jump right in. Net sales for the second quarter of 2024 totaled $379.4 million, a decrease of 0.2% versus the prior year quarter.

Rocky Kraft: Net sales for the second quarter of 2024 totaled $379.4 million, a decrease of 0.2% versus the prior year quarter. Second quarter adjusted gross margin increased by 570 basis points to 48.7% versus the prior year quarter of 43%. Sequentially, adjusted growth margins were up 110 basis points from 47.6% last quarter. Margins were exceptionally healthy during the quarter.

Rocky Kraft: Second quarter adjusted gross margin increased by 570 basis points to 48.7 percent versus the prior year quarter of 43 percent.

Rocky Kraft: Sequentially, adjusted growth margins were up 110 basis points from 47.6% last quarter.

Rocky Kraft: We believe our adjusted gross margins will come down slightly in the second half of the year but remain above 47%. Adjusted SG&A as a percentage of sales increased to 30.7% during the quarter from 27.9% in the year-ago quarter, which was in line with our expectations. Driving SG&A was our standard employee bonus expense, which was the result of a strong bottom line during the first half of the year when compared to 2023

Rocky Kraft: Margins were exceptionally healthy during the quarter.

Rocky Kraft: We believe our adjusted gross margins will come down slightly in the second half of the year, but remain above 47%.

Rocky Kraft: Adjusted SG&A as a percentage of sales increased to 30.7% during the quarter from 27.9% from the year-ago quarter, which was in line with our expectations.

Rocky Kraft: Driving SG&A was our standard employee bonus expense, which was the result of a strong bottom line during the first half of the year when compared to 2023.

Rocky Kraft: We expect our adjusted SG&A rate for the remainder of the year to be relatively consistent with Q2.

Rocky Kraft: We expect our adjusted SG&A rate for the remainder of the year to be relatively consistent with Q2. Adjusted EBITDA in the second quarter was $68.4 million, which grew 18% versus the year-ago quarter. Our adjusted EBITDA to net sales ratio during the quarter was 18%, which compares favorably to 15.3% a year ago. Adjusted EBITDA was driven by a positive mix of price-cost.

Rocky Kraft: Adjusted EBITDA in the second quarter with $68.4 million, which grew 18% versus the year-ago quarter.

Rocky Kraft: Our adjusted EBITDA to net sales ratio during the quarter was 18%, which compares favorably to 15.3% a year ago.

Rocky Kraft: Adjusted EBITDA was driven by a positive mix of price-cost.

Rocky Kraft: Product Mixed in HPS, and efficient operations with stroke, healthy margins, as low COGS flow through our income. Now, let me turn to cash flow. For the 26 weeks ended June 29, 2024, operating activities generated $76.5 million of cash, as compared to $115 million in the year-ago period. Remember, during 2023, we were able to reduce our net inventory by over $100 million throughout the year as we return to normal inventory levels. Capital expenditures totaled $40.1 million for the first half of the year.

Rocky Kraft: product mix in HPS, and efficient operations with stroke healthy margins as low COGS flow through our income statement.

Rocky Kraft: Now let me turn to cash flow. For the 26 weeks ended June 29, 2024, operating activities generated $76.5 million of cash as compared to $115 million in the year-ago period.

Rocky Kraft: Remember, during 2023, we were able to reduce our net inventory by over $100 million throughout the year as we return to normal inventory levels.

Rocky Kraft: That's compared to $37 million in the prior year period. We continue to invest in high-margin R&D and have also partnered with one of our top five customers to share in the cost of a four-year plan to reset the entire hardware set across the country. This includes all new racking and displays for Hillman products in their hardware department. Our team has already completed 140 resets, and the new aisle looks awesome.

Rocky Kraft: Capital expenditures total $40.1 million for the first half of the year. That's compared to $37 million in the prior year period.

Rocky Kraft: We continue to invest in high-margin RDS business and also have partnered with one of our top five customers to share in the cost of a four-year plan to reset the entire hardware set across the country. This includes all new racking and displays for Hillman products in their hardware department.

Speaker Change: Our team has already completed 140 resets, and the new aisle looks awesome.

Rocky Kraft: Free cash flow for the first half of 2024 totaled $36.4 million, compared to $78 million in the prior year period. For the quarter, free cash flow was $42.5 million, an increase from a use of $6 million in the first quarter. Now to the balance sheet. We ended the second quarter of 2024 with $705.3 million of total net debt outstanding. This is a $17 million improvement versus the end of 2023 and a $108 million improvement from the year-ago quarter. And importantly, this included $22 million of debt that we paid off relating to the Cook acquisition that we completed in January of this year.

Rocky Kraft: Free cash flow for the first half of 2024 totaled $36.4 million, compared to $78 million in the prior year period.

Rocky Kraft: For the quarter, free cash flow was $42.5 million, an increase from a use of $6 million in the first quarter.

Rocky Kraft: Now to the balance sheet. We ended the second quarter of 2024 with $705.3 million of total net debt outstanding.

Rocky Kraft: This is a $17 million improvement versus the end of 2023, and a $108 million improvement from the year-ago quarter. Importantly, this included $22 million of debt that we paid off relating to the Cook acquisition that we completed in January of this year.

Rocky Kraft: As Doug mentioned earlier, our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 2.9 times, compared to 3.3 times at the end of 2023 and 4 times just a year ago. Driving the improvement was the aforementioned improvement in net debt and a $40 million or 20% increase in our trailing 12-month adjusted EBITDA. Looking forward, we still maintain our expectation that we will end 2024 around 2.7 times net leverage.

Speaker Change: As Doug mentioned earlier, our net debt to trailing 12 month adjusted EBITDA ratio at the end of the quarter was 2.9 times compared to 3.3 times at the end of 2023 and 4 times just a year ago.

Speaker Change: Driving the improvement was the aforementioned improvement in net debt and a $40 million or 20% increase in our trailing 12-month adjusted EBITDA.

Speaker Change: Looking forward, we still maintain our expectation that we end 2024 around 2.7 times net leverage.

Rocky Kraft: As Doug mentioned earlier, we have made a few changes to our full-year 2024 guidance. We are reducing our full-year net sales to be between $1.44 to $1.48 billion, with a midpoint of $1.46 billion. This midpoint assumes a 1% headwind from price, a 2% lift from new business wins, and a 3% lift from the Cook Acquisition. These are not changed from our original guide. However, we are guiding for the market to be down about 5% versus our original expectation of down 1%. We define the market as excluding new business.

Speaker Change: As Doug mentioned earlier, we have a few changes to our full year 2024 guidance.

Doug Cahill: We are reducing our full-year net sales to be between $1.44 to $1.48 billion, with a midpoint of $1.46 billion.

Doug Cahill: This midpoint assumes a 1% headwind from price.

Doug Cahill: A 2% lift from new business wins.

Doug Cahill: and a 3% lift from the Cook Acquisition.

Speaker Change: These are not changed from our original guide.

Speaker Change: However, we are guiding for the market being down about 5% versus our original expectation of down 1%.

Rocky Kraft: As you know, we do not control the market, and this is the driver of our updated Net Sales Guide. Altogether, our new net sales midpoint guide implies a 1% decrease versus 2020. Despite the top line pressure, we are increasing our full year 2024 adjusted EBITDA guidance to be between $240 million and $250 million, with a midpoint of $245 million. This midpoint represents an increase of about 12% versus 2023. We expect the operational efficiencies, margin management, and mixed improvements that Doug and JMA mentioned to continue throughout the year, which will deliver strong margins and a strong bottom line.

Speaker Change: We define the market as excluding new business wins.

Speaker Change: As you know, we do not control the market and this is the driver of our updated net sales guidance.

Speaker Change: Altogether, our new net sales midpoint guide implies a 1% decrease versus 2023.

Speaker Change: Despite the top-line pressure, we are increasing our full-year 2024 adjusted EBITDA guidance to be between $240 million to $250 million, with a midpoint of $245 million.

Speaker Change: This midpoint represents an increase of about 12% versus 2023.

Speaker Change: We expect the operational efficiencies, margin management, and mixed improvements that Doug and JMA mentioned to continue throughout the year, which will deliver strong margins and a strong bottom line.

Rocky Kraft: Lastly, we are maintaining our full-year 2024 free cash flow of $100 to $120 million with a midpoint of $110 million. Our increased expectations for adjusted EBITDA offset our revised top-line expectations, resulting in the reiteration of the Guide. More information on the assumptions that have driven our guidance is available in our earnings call presentation. For the last few quarters, we have been saying that even in the down market, our 2024 adjusted EBITDA will increase.

Speaker Change: Lastly, we are maintaining our full year 2024 free cash flow of $100 to $120 million with a midpoint of $110 million.

Speaker Change: Our increased expectations for adjusted EBITDA offset our revised top-line expectations, resulting in the reiteration of the guide.

Speaker Change: More information on the assumptions that have driven our guidance is available in our earnings call presentation.

Speaker Change: Over the last few quarters, we have been saying that even in a down market, our 2024 adjusted EBITDA will increase.

Rocky Kraft: As Doug mentioned, this happened in 2009 when our top line was down 5% and our bottom line was up 10%. So far this year, this seems to be playing out as we have benefited from lower COGS inefficiencies, and we control the cost. Looking further out to a healthier macro environment, we believe our long-term growth algorithm remains intact. Historically, our business has seen organic growth of 6% per year and high single to low double-digit organic adjusted EBITDA growth before M&A.

Speaker Change: As Doug mentioned, this happened in 2009 when our top line was down 5% and our bottom line was up 10%.

Doug Cahill: So far this year, this seems to be playing out as we have benefited from lower COGS inefficiencies and we control the controls.

Doug Cahill: Looking further out to a healthier macro environment, we believe our long-term growth algorithm remains intact.

Speaker Change: Historically, our business has seen organic growth of 6% per year and high single to low double-digit organic adjusted EBITDA growth before M&A.

Rocky Kraft: And now that the M&A switch is turned on, we think long-term top-line growth of high single-digits to low teens is realistic, and adjusted EBITDA growth in the low to mid teens is achievable in a healthy macro environment.

Speaker Change: And now that the M&A switch is turned on, we think long-term top-line growth of high single to low teens is realistic, and adjusted EBITDA growth in the low to mid teens is achievable in a healthy macro environment.

Douglas Cahill: With that, I'll turn it back to Doug. Thanks, Rocky.

Douglas Cahill: Before we get to the Q&A session, I want to give some color on the succession planning we announced in a press release just before our earnings this morning. Effective January 2025, JMA will step into the CEO role, becoming the sixth CEO in Hillman's 60-year history. When we hired J.M.A.

Speaker Change: With that, I'll turn it back to Doug.

Doug Cahill: Thanks, Rocky. Before we get to the Q&A session, I want to give some color on the succession planning we announced in a press release just before our earnings this morning. Effective January 2025, JMA will step into the CEO role, becoming the sixth CEO in Hillman's 60-year history.

Douglas Cahill: five years ago, it was our expectation that he would step into the CEO role in due course, considering his work ethic, strong leadership background, and industry experience. Having worked closely with him almost daily, JMA, since then, I can confidently say that we will, he will do a great job keeping Hillman's strong legacy of service and Customer First Alive. With the support of the board of directors and the entire executive leadership team, this transition has been in the works for the past few years.

Speaker Change: When we hired J.M.A. five years ago, it was our expectations that he would step into the CEO role in due course, considering his work ethic, strong leadership background, and industry experience.

Speaker Change: and Customer First Alive.

Speaker Change: With the support of the board of directors, the entire executive leadership team, this transition has been in the works.

Douglas Cahill: It was important to me, Rocky, and JMA that we went about this succession plan carefully and in the right way, maintaining leadership continuity, minimizing disruption, and keeping Hillman's long-term goals intact. With JMA's promotion, I will step into the executive chairman role, where I will continue to be active with Hillman but have more time for Goff and Grant. I will continue to be involved in M&A, maintaining relationships with investors and key customers, and presiding over board meetings.

Speaker Change: for the past few years.

Speaker Change: It was important to me, Rocky, and JMA that we went about this succession plan carefully.

Speaker Change: and, in the right way, maintaining leadership continuity, minimizing disruptive and keeping Hillman's long-term goals intact.

Speaker Change: With JMA's promotion, I will step into the executive chairman role where I will continue to be active with Hillman but have more time for golf and grandchildren

Speaker Change: I will continue to be involved in M&A, maintaining relationships with the investors and key customers, and presiding over board meetings.

Douglas Cahill: I've been with Hillman for 10 years, and I love this company. I will continue to help it in any way that I can. JMA will take over with a great team around him, and the business in good shape and positioned to grow into a $2 billion company over the next few years. As always, our people are the ones that truly make Hillman the great company it is. I want to thank the Hillman Warriors for working together to take great care of our customers and for their loyalty.

Speaker Change: I've been with Hillman for 10 years and I love this company. I will continue to help Hillman any way that I can. JMA will take over with a great team around him, with a business in good shape and positioned to grow into a $2 billion company over the next few years.

Speaker Change: As always, our people are the ones that truly make Hillman the great company it is.

Speaker Change: I want to thank the Hillman Warriors for working together to take great care of our customers and for their loyalty.

Douglas Cahill: Looking forward, we will continue to widen and deepen our competitive moat, focus on executing our growth strategy profitably while we maintain discipline across all of our business sectors. We firmly believe that this approach will ensure Hillman's success in the years to come. And we're very excited about what is on the horizon.

JMA: Looking forward, we will continue to widen and deepen our competitive moat, focus on executing our growth strategy profitably, while we maintain discipline across all of our business segments.

JMA: We firmly believe that this approach will ensure Hillman's success in the years to come. And we're very excited about what is on the horizon.

Speaker Change: This concludes our prepared remarks and we'll begin the Q&A portion of the call. Gigi, can you open the call up for questions?

Operator: Thank you. As a reminder, to ask a question, please press star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question with one follow-up and hop back in the queue. Our first question comes from the line of Matthew Bouley from Barclays.

Gigi: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.

Gigi: To withdraw your question, please press star 11 again. Please limit yourself to one question with one follow-up and hop back in the queue. Please stand by while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of Matthew Bouley from Barclays.

Operator: Matt, we're having trouble. We're not here.

JMA: [inaudible]

Speaker Change: Matt, we're having trouble, we're not hearing you.

Operator: Hi, good morning. This is Elaine Ku Han. On M&A, you spoke to a lot of new prospects, one especially new prospect, markets, or areas you're looking to expand into, particularly any more color on that?

Matthew Booley: Matthew Bouley from Barclays?

Speaker Change: Hi, good morning. This is Ling Ku An. On M&A, you spoke to a lot of new, one especially new prospect.

Speaker Change: markets or areas you're looking to expand into particularly or any more color on that?

Douglas Cahill: Yeah, obviously, we can't talk about the one we think will close by the end of the third quarter. But we're excited about it. It's very much like Cook. But I think the best way to think about it is just go to either end of Hillman's aisle today and walk about 20 feet, and you'll find out where we're going next. And again, if you just think about it. It would come on the same truck, potentially, obviously, serviced by the same folks with the same customers.

Speaker Change: Yeah, obviously we can't talk about the one we think will close by the end of the third quarter. We're excited about it. It's very much like Cook.

Speaker Change: But I think the best way to think about it is just go to either end of Hillman's Isle today and walk about 20 feet.

Speaker Change: and you're going to find where we're going next. And again, if you just think about it...

Speaker Change: It would come on the same truck, potentially, obviously serviced by the same folks with the same customers.

Douglas Cahill: And our relationships with those customers go way back. So it's just a fun thing to have these conversations because it's not really a competition when we get into a process. Because when the management team from the company sees what we can do together and how we roll, it's pretty easy to convince them to join us. And we're really excited about the potential. But obviously, you've got categories like we did rope and chain.

Speaker Change: and our relationships with those customers go way back. So it's just a fun thing to have these conversations because it's not really a competition when we get into a process.

Speaker Change: Because when the management team from the company sees what we could do together and how we roll, it's pretty easy to convince them to join us. And we're really excited about the potential. But obviously, you've got...

Douglas Cahill: You know, as we've talked, plumbing, electrical, all kinds of things that are just around the corner that would make sense. Again, when we talk about that, think about lots of SKUs, tons of complexity, fairly low cost, but they require the Hillman mode to really supercharge.

Speaker Change: Categories like we did rope and chain, you know, you have, as we've talked, plumbing, electrical, all kinds of things that are just around the corner that would make sense. Again, when we talk about that, think about lots of SKUs.

Speaker Change: Tons of complexity, fairly low cost, but they require the Hillman mode to really supercharge.

Douglas Cahill: Got it. Thank you. You kind of mentioned a little bit of softness on the foot traffic or discretionary front. So what exactly is your visibility on, you know, home center foot traffic and R&R in general? And what kind of trends have you seen thus far into July and August?

Speaker Change: Got it, thank you. You kind of mentioned a little bit of softness on the foot traffic or discretionary front, so what exactly is your visibility on home center foot traffic and R&R in general and what kind of trends have you seen thus far into July and August ? Thank you.

Douglas Cahill: Thank you. Yeah, I'll take that one. So, uh,

Douglas Cahill: Yeah, I'll take that one. So, good morning. From a foot traffic perspective, we use some of the same technology, research, and insights that some of the big retailers use. For example, we use Placer AI to get a feel for foot traffic. We monitor, you know, I'll say footsteps in the store. Foot traffic has been challenging. It's slightly less negative recently, but overall, we see those same concerns, you know, facing us and our retail partners. But we feel good about where the business is positioned, and we're gonna use this time to focus on growing new categories and taking on new.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Ryan Merkel from William Blair.

Speaker Change: Yeah, I'll take that one. So good morning. For foot traffic perspective, we use some of the same technology and research and insights that some of the big retailers use. We use Placer AI to get a feel on foot traffic. We monitor

Speaker Change: I'll say footsteps in the store, foot traffic has been challenging.

Speaker Change: Slightly less negative recently, but overall we see those same concerns, you know, facing us and our retail partners But we feel good about where the business is positioned and we're going to use this time to focus on you know Growing new categories and taking new business

Speaker Change: Got it. Thank you.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Our next question comes from the line of Ryan Merkel from William Blair.

Operator: Hey everyone, congrats Doug and JMA. Thank you. Thanks, Ryan. Doug, you mentioned that the market feels like 2009 and, you know, you lowered the market outlook now to a down five. So what is surprising you this year? And is the solution lower rates, or is there anything else that you're looking for?

Speaker Change: Hey everyone, congrats Doug and JMA. Thank you. Thanks Ryan.

Ryan Merkle: Doug you mentioned that the market feels like 2009 and you know you lowered the market outlook now to down five so what is surprising you this year and is the solution lower rates or is there anything else that you're looking at?

Douglas Cahill: You know, I think what really surprised me this year, Ryan, was everybody kind of got it in January and February, and then March was kind of like, whoa, you know, put your seatbelt on. Here we go.

Doug Cahill: You know, I think it's what's really surprised me this year, Brian , was

Speaker Change: Everybody kind of got it in January and February , and then March was kind of like, whoa.

Douglas Cahill: And then it's just, you know, kind of a dead cat bounce at that point. It was just that, which was probably the surprising thing. I think the retailers really felt like April, May, here we go. And it just kind of stayed the same.

Speaker Change: you know, put your seatbelt on, here we go. And then it just, you know, kind of a dead cat bounce at that point. It was just a that's probably the surprising thing. I think the retailers really felt like.

Douglas Cahill: You know, from our standpoint, if you break it down, the professional, the pickup truck pros, are hanging tough, smaller projects, but still busy. And the DIYer is the one that's really fallen off, I think, from an activity standpoint. That has to be, if you just think about the logic, existing home sales impacted for sure. And we're seeing that in pet tags and in keys.

Speaker Change: April , May, here we go. And it just kind of stayed the same. You know, from our standpoint, if you break it down.

Speaker Change: The professional, the pickup truck pros hanging tough.

Speaker Change: Smaller projects, but still busy.

Speaker Change: And the DIYer is the one that's really fallen off, I think, from a...

Speaker Change: From an activity standpoint, that has to be, if you just think about the logic, existing home sales impacted for sure, and we're seeing that in pet tags.

Douglas Cahill: But, you know, our retailers feel kind of good about where we go from here. And as we've been saying, we're going to keep our heads down and perform either way. But it will be nice to see some tailwind. My guess right now is we're not going to see that until we get into the fall.

Speaker Change: and then Keys. But you know our retailers feel kind of good about where we go from here and as we've been saying we're going to keep our heads down and perform either way but it will be nice to see some tailwind. My guess right now is we're not going to see that until we get into the fall.

Douglas Cahill: Yeah, I agree. Okay. And then how about the outlook for RDS? You know, I know things are a bit challenged, but what are you assuming for the second half? And I think you said you're gonna return to growth in 25. Just unpack why you think that's the case.

Speaker Change: Yeah, I agree. Okay.

Speaker Change: And then how about the outlook for RDS? You know, I know things are a bit challenged, but what are you assuming for the second half? And I think you said you're going to return to growth in 2025. Just unpack why you think that's the case.

Douglas Cahill: Yeah, I mean, I'll tell you this. The great news is we don't have hope as our strategy anymore. We are absolutely in the slot on RDS because RDS's new machine on Minikey with the capabilities is exactly what the retailers want, and the great thing for retailers is we don't change any space. They don't have to do anything, and we're going to bring them revenue and happy customers. And so that's one.

Speaker Change: Yeah, I mean, I'll tell you this. The great news is we don't have hope as our strategy anymore. We are absolutely in the slot on RDS because...

Speaker Change: RDS's new machine on Minikey with the capabilities is exactly what the retailers want and the great thing for retailers is we don't change any space.

Speaker Change: They don't have to do anything, and we're going to bring them revenue and happy customers.

Douglas Cahill: Two, that movement at that big customer that we had seen that was really impacting us has worked itself out and is working itself through. We feel good about what we've been able to do together with them because it hurt their sales as well. And then three, you know, when you really think about the service organization, you know, Redbox Liquidation was huge because we were picking up new accounts with no capital, which is Rocky's favorite.

Speaker Change: That's one. Two, that movement at that big customer that we had seen that was really impacting us has worked itself and is working itself through. We feel good about what we've been able to do together with them because it hurt their sales as well.

Speaker Change: And then three, you know, when you really think about...

Ryan Merkle: The service organization, you know, Redbox liquidation was huge because we're picking up new accounts with no capital, which is Rocky's favorite. But my concern, Ryan, and we talked a little about this last time, is can we get the people

Douglas Cahill: But my concern, Ryan, and we talked a little about this last time, is can we get the people? And we've just been able to hire Redbox folks really quickly, and they've been hitting the ground running. So that's why, you know, we feel very good about where RDS is heading. And again, we struggled for a bit there, but I feel great about 25 when I think about what that business can do.

Speaker Change: And we've just been able to hire Redbox folks really quick, and they've been hitting the ground running.

Speaker Change: That's why, you know, we feel very good about where RDS is heading, and again, you know, we struggled for a bit there, but I feel great about 25 when I think that business can do.

Douglas Cahill: That's a great color. Thank you. Pass it on.

Speaker Change: That's great, Koehler. Thank you for passing on. Yep.

Operator: Our next question comes from the line of Brian Butler from Stiefel.

Koehler: Thank you.

Speaker Change: Our next question comes from the line of Brian Butler from Stiefel.

Operator: Hey, good morning. Thanks for taking the time to answer the question. Hey Brad, This morning, Just to, I guess, follow up on that R&D, I think your original goal was 800 machines by 2024, and it sounded like you were going to be much higher than that if you were at 400, and you thought it was going to triple. So, maybe a little detail on expectations for what that goes to on 24, the total rollout, and where that ends up in 25, as well as any initial color on how the higher-priced kind of auto keys and other items that you can kind of push through the 3.5 are going with the 400 machines that are out there.

Brian Butler: Hey, good morning. Thanks for taking the question.

Speaker Change: Good morning.

Speaker Change: Just to, I guess, follow up on that RDS, I think your original goal was 800 machines by 2024 and it sounded like you were going to be much higher than that if you're at 400 and you thought it was going to triple, so maybe a little detail on expectations on what that goes to on 24, the total rollout, and where that ends up in 25.

Speaker Change: As well as, is there any initial color on how the higher priced kind of auto keys and other items that you can kind of push through the 3.5 are going with the 400 machines that are out there?

John Adinolfi: Brian, good morning. It's JMA here. Yeah, let me hit the machines first. So we're really encouraged and excited. Our Tempe team that's manufacturing machines has been able to continue to ramp and get machines out. So we are taking up your point. We thought we'd be 800 by year end. We'll now be closer to 1200.

JMA: Brian , good morning. It's JMA here. Yeah, let me hit the machines first. So we're really encouraged and excited our Tempe team that's manufacturing machines has been able to continue to ramp.

Speaker Change: and Get Machines Out. So we are taking up to your point. We thought we'd be 800 by year end. We'll now be closer to 1,200.

John Adinolfi: We feel good about the machine. The team has made some nice and continued improvements to the GUI. We just rolled out Endless Isle.

Speaker Change: We feel good about the machine. The team has made some nice and continued improvements to the GUI. We just rolled out Endless Isle, so we're going to keep moving that forward with our three, five customers that are out there. We feel excited. We're excited about it. We're seeing some nice improvements. We're excited about it.

John Adinolfi: So we're gonna keep moving that forward with our three, five customers that are out there. So we feel excited. We're excited about it. We're seeing some nice, I'll say improvement to the technology and a couple of things. One, you mentioned the auto keys.

John Adinolfi: We are starting to see some traction, but that will be limited or, I'll say, throttled by our ability to put key text on and service those markets, which we're gonna be doing in 25 and beyond. But I would say the other piece of it is the Endless Isle we just turned on. Interesting, we're starting to get some traction, but it's also the fact that our keys being cut, even home and office is performing better in the new machine than the old.

Speaker Change: I'll say improvement to the technology and a couple of things one, you know, I mean you mentioned the auto keys We are starting to see some traction That will be limited or I'll say be throttled by our ability to put key text and service those markets which we're going to be doing in 25

Speaker Change: and beyond.

Speaker Change: But I would say the other piece of it is the endless aisle we just turned on. It's interesting we're starting to get some traction, but it's also been the fact that our keys being cut, even home and office, is performing better in the new machine than the old, and we're really excited about that. So those three things are really helping us feel very excited and bullish, and we're putting a little more capital to work this year, because the customers want them and the end users want their machines.

John Adinolfi: So we're really excited about that. So those three things are really helping us feel very excited and bullish. And we're putting a little more capital into the business this year because the customers want them and the end users want the machines.

Rocky Kraft: Hey Brian, it's Rocky. The only thing I would add to what J.M.A. said is to remember that many of these that we're doing this year are conversions from 3.0 to 3.5. It's not a full machine build, so that's much less expensive, and obviously, we can throttle that a lot quicker than you can throttle the build of a new machine.

Rocky Kraft: Yeah, hey Brian , it's Rocky. The only thing I would add to what J.M.A. said is remember many of these that we're doing this year are conversions from 3.0 to 3.5. It's not a full machine built, so that's much less expensive and obviously we can throttle that.

Douglas Cahill: Well, and we played offense there, Brian, because Rocky ordered all of the retrofits and said, hey, for the money for the retrofit, let's not make that be the governor, and we're glad that we did. The plant went ahead and ordered them all, and so we don't have this issue of can we carry. It's a matter of when our people can, our customers are saying go, and that's always a good sign. I do think the fun news about what's happening right now is we have stores that have the 3.0 in the same zip code right now. And again, as J.M.A.

Rocky Kraft: a lot quicker than you can throttle to build a new machine. Well, and we played offense there, Brian , because Rocky ordered all of the retrofits.

Speaker Change: and said, hey, for the money for the retrofit, let's not make that be the governor. And we're glad that we did. The plant went ahead and ordered them all. So we don't have this issue of can we carry. It's a matter of when our people can. Our customers are saying go.

Rocky Kraft: And that's always a good sign. I do think the fun news about what's happening right now is we have them in stores.

J.M.A.: that have the 3.0 in the same zip code right now. And again, as J.M.A. said, the GUI screen's much improved with consumer.

Douglas Cahill: said, the GUI screen's much improved with the consumer. Time at the screen has improved. And while we're not yet rolling out the smart fob because of the key tech, we wanna make sure we, as we've always said, we're gonna go slow there. The transponder is pretty interesting.

J.M.A.: Time at the screen has improved and while we're not yet rolling, you know, the the smart fob

Speaker Change: Because of the key tech, we want to make sure we, as we've always said, we're going to go slow there. The transponder...

Douglas Cahill: The consumer gets a 38 to $74 key. We ship it to their house. They're happy. We're happy. And the retailer's like, wow, I didn't have to do anything. So it's a win-win.

Rocky Kraft: is a pretty interesting.

Speaker Change: Consumer gets a $38 to $74 key, we ship it to their house, they're happy, we're happy, and the retailer's like, wow, I didn't have to do anything. So it's a win-win.

Operator: Okay, great. And then on a follow-up, just going back to the kind of price cost spread, I mean, in a normal environment, I completely understand how that kind of margins bounce back, and you get to a more normalized kind of growth in revenue and EBITDA. But if we remain in a weak, kind of a weaker environment, how should we think about price costs, you know, rolling into 2025 if the macro is not a tailwind?

Speaker Change: Okay, great. And then on a follow-up, just going back to the kind of the price-cost spread, I mean, in a normal environment, I completely understand how that kind of

Speaker Change: You know the margins bounce back and you get to a more normalized kind of growth on on revenue and EBITDA But if we remain in a weak kind of a weaker environment, how should we think about price cost, you know rolling into 2025? If the macro is not not not a tailwind

Rocky Kraft: Look, I think we feel really good, it's Rocky again, about our margins, and here's the reason. One, I think we've reset the baseline around what this business should do. Historically, 44 to 45; I think we're going to live above 46 for the foreseeable future just because structurally in the business. The other thing that'll make sense to you, Brian, is that our R&D business has really been more challenged than the rest of the business. And it commands a much higher gross and EBITDA rate.

Rocky Kraft: Look, I think we feel really good, it's Rocky again, about our margins, and here's the reason. One, I think we've reset the baseline around what this business should do. Historically, 44 to 45, I think we're going to live above 46 for the foreseeable future, just because structurally in the business.

Speaker Change: The other thing that'll make sense to you, Brian , is you think about our RDS business has really been more challenged than the rest of the business.

Rocky Kraft: And so as we see that business, you know, not only getting back to kind of parity but also growing again, that's going to help support the margins as we think about the future. And so we feel really good again about where we are. We sit on the call. We think we will stay above 47 for the remainder of the year. And I truly believe we will stay in the ballpark for the foreseeable future in that kind of range. All right, great.

Speaker Change: And it commands a much higher gross and EBITDA rate. And so as we see that business, you know, not only getting back to kind of parity, but also growing again, that's gonna help support the margins as we think about the future. And so we feel really good, again, about where we are. We said on the call, we think we stay above 47 for the remainder of the year. And I truly believe we stay in the ballpark of the foreseeable future in that kind of range.

Operator: All right, great. Thanks for taking the questions. Sure.

Speaker Change: All right. Great. Thanks for taking the questions. Sure.

Operator: Our next question comes from the line of Lee Jagoda from C-9-1.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Lee Jagoda from CJS.

Operator: Good morning. Hey, Lee. Morning, Lee. Morning, Lee. So I guess I'll say my congratulations to Doug till he's almost out the door. Dude, I never thought JMA was going to help my golf game so much. Well, you know, stay out of the woods if you can.

Lee Jagoda: Hi, good morning.

Speaker Change: So I guess I'll say my congrats for Doug till he's almost out the door.

Doug Cahill: Dude, I never thought JMA was going to help my golf game so much. Well, you know, stay out of the woods if you can.

Douglas Cahill: Just starting with the Coke New Business wins, can you give us a sense of what type of customer that was with, and if it wasn't one of the sort of big two, is that an opportunity, and how large an opportunity could that be for Coke and for you?

Speaker Change: Just starting with the Koch new business wins, can you give us a sense for what type of customer that was with and if it wasn't one of those sort of the big two, is that an opportunity and how large an opportunity could that be for Koch and for you?

Douglas Cahill: Yeah, so it sounds like Coke, but it's Cook. But we'll be selling three of our top five accounts in that category, Lee, I believe, in the 12-month period coming up. So it'll be three of the top five, and it could be more, but I'm confident three of the top five will be sold.

Speaker Change: Yeah, so it does sound like Coke, but it's Cook. But we'll be selling three of our top five accounts.

Lee Jagoda: in that category. Lee, I believe, in the, you know, the 12-month period coming up. So it'll be three of the top five, and it could be more, but I'm confident three of the top five will see growth.

Douglas Cahill: And is the $10 million one of those three, or is that all of those three? Just one. Okay.

Speaker Change: And is the 10 million one of those three, or is that all of those three? Just one. Just one.

Douglas Cahill: And I guess at that one customer, what, what share are you getting? Look, what does that represent in terms of the share you're getting? Yeah, I think, you know, we don't give out shares, but the funny part of that one, though, to me...

Speaker Change: Okay and and I guess at that one customer what what share are you getting?

Douglas Cahill: Yeah, I think, you know, we don't, we don't give this year, but the funny part of that one to me, I mean, the day we announced it was the week that the line review was coming due, and when they saw the announcement, they held the line review. And I don't think I can say anything other than that that says.

Speaker Change: Look, what does that represent in terms of the share you're getting? Yeah, I think, you know, we don't give the share, but the funny part of that one, though, to me, I mean, the day we announced it...

Lee Jagoda: was the week that the line review was was coming due and when they saw the announcement they held the line review up.

Douglas Cahill: When Hillman comes into a category, it makes it easier for customers to make a change because, and in this case, this is such a complicated category, you do not want to make a change if you don't have the service organization that's going to clean up the store and make sure you can reset stores. The reset ability, Lee, of our troops, in this example, was the whole thing. Can we reset those shelves with a new set, with new thinking? And without that, nobody's going to. Jim is just not going to take that risk.

Lee Jagoda: And I don't think I can say anything other than that, that says,

Speaker Change: When Hillman comes into a category,

Speaker Change: It makes it easier for customers to make a change because, and in this case, this is such a complicated category.

Lee Jagoda: You do not want to make a change if you don't have the service organization that's going to clean up the store and make sure you can reset stores. The reset ability, Lee, of our troops in this example was the whole thing.

Lee Jagoda: Can we reset that, those shelves, with a new set, with new thinking? Yes. And without that, nobody's going to... JMA is just not going to take that risk. No way, I agree.

Lee Jagoda: It's powerful.

Operator: One moment for our next question. Our next question comes from the line of Brian McNamara from Canaccord Genuity.

Lee Jagoda: Thank you.

Speaker Change: One moment for our next question.

Lee Jagoda: Our next question comes from the line of Brian McNamara from Canaccord Genuity.

Operator: Hey, good morning, guys. Thanks for taking our questions. Congratulations to JMA on the promotion and Doug for some more time for golf and the grandkids. Thanks. I guess first off, apart from different leadership styles, obviously, does anything fundamentally change within the company with this handoff? If anything, JMA, how will your approach be different?

Brian McNamara: Hey, good morning, guys. Thanks for taking our questions. Congrats to JMA and the promotion, Doug, for some more time for golf and the grandkids. Thanks. Thanks. I guess first off, apart from different leadership styles, obviously, does anything fundamentally change within the company with this handoff? If anything, JMA, how will your approach be different?

Rocky Kraft: Well, I mean, the guy with the best seat for that is Rocky. Why don't you comment on that?

Speaker Change: Well, I mean, the guy with the best seat for that is Rocky, why don't you comment on that?

Rocky Kraft: Yeah, it's a good question. But what I would tell you is we've been running this business together for the last four or five years. And so, you know, while there'll be a different person in the chair, and Doug will be doing a little more cheerleading than he does day-to-day, we don't see anything changing strategically. We don't see anything changing, you know, in how we run this business day-to-day. The other thing I would say is that we were very thoughtful in how we structured the organization below JMA.

Rocky Kraft: Yeah, it's a good question, but what I would tell you is, we've been running this business together for the last four or five years, and so, you know, while there'll be a different person in the chair, and Doug will be doing a little more cheerleading than doing day-to-day...

Doug Cahill: We don't see anything changing strategically. We don't see anything changing in how we run this business day to day. The other thing I would say is

Rocky Kraft: Coming into this year, we made some changes so that we're ready for the next run. And we're all highly confident, you know, not only in JMA and Doug as executive chairman but also in the team that we put in place below JMA.

Doug Cahill: We were very thoughtful in how we structured the organization below JMA coming into this year. We made some changes so that we're ready for the next run. And we're all highly confident, you know, not only in JMA and Doug as executive chairman, but also the team that we put in place below JMA.

Operator: Got it. That's helpful. And then secondly, I guess, on M&A with a transaction, I guess, expecting to close by the end of Q3, are there others in the pipeline that you're considering that are, you know, that we can expect over the next several months. And Rocky, how should this transaction, and maybe the other ones contemplated in the pipeline, impact your business?

Speaker Change: Got it. That's helpful. And then secondly, I guess, on M&A, with a transaction, I guess, expecting to close by the end of Q3, are there others in the pipeline that you're considering that are, you know?

Rocky Kraft: that we can expect over the next several months. And Rocky, how should this transaction, and maybe the other ones contemplated in the pipeline, impact your leverage ratio targets?

Rocky Kraft: Yeah, let me start with the leverage. I mean, you know, they're going to look a lot like Cook. And so I think Cook, you know, moved leverage up like two tenths of a percent or something like that. And so that's what you would expect.

Rocky Kraft: Yeah, let me start with the leverage. I mean, you know, they're going to look a lot like Cook. And so I think Cook, you know, moved leverage up like

Rocky Kraft: two tenths of a percent or something like that. And so that's what you would expect. But these businesses are all going to come also come with EBITDA.

Douglas Cahill: But these businesses are all going to come with EBITDA and, as Doug said, natural synergies. And so, you know, on a pro forma basis, I think they're going to be close to leverage-neutral and will quickly, if we do put any leverage on, even if it's small amounts, we intend to pay it down. Like Cook, right? You see, we borrowed money to buy Cook early in the year. We've already paid that debt off.

Doug Cahill: and as Doug said, natural synergies. And so, you know, on a pro forma basis, I think they're gonna be close to leverage neutral.

Speaker Change: And quickly, if we do put any leverage on, even if it's in small amounts, we intend to pay it down, like Cook, right? You saw we borrowed money to buy Cook early in the year. We've already paid that debt off. I think we still would plan to be around 2.7 times at the end of the year, even if we do this acquisition. Could it mean we go to 2.8? Sure, but it isn't something that's gonna put any amount of leverage of any significance on the business.

Douglas Cahill: You know, I think we still would plan to be around 2.7 times earnings at the end of the year, even if we do this acquisition. But could it mean we go to 2.8? Sure, but it isn't something that's going to, you know, put any amount of leverage of any significance on the And to your question about the pipeline, yeah, I mean, again, there are a lot of opportunities when you think about what we do, what could be put on the truck, what could be serviced on the shelf that are out there.

Speaker Change: And to your question about pipeline, yeah,

Speaker Change: what we do, what could be put on the truck, what could be serviced at the shelf.

Douglas Cahill: And again, it's very interesting that in this sweet spot of, call it, $4 to $8 million of EBITDA, there seems to be a lot of businesses with a lot of entrepreneurs who are seemingly at the end of the road and want to think about family estate planning. And so I think we're going to be very successful in doing two or three of these a year.

Speaker Change: that are out there. And again, it's very interesting, you know, that it seems like in this sweet spot of

Speaker Change: You know, call it four to eight million dollars of EBITDA. There seems to be a lot of businesses with a lot of entrepreneurs who seemingly are, you know, at kind of the end of the road and want to think about family estate planning. And so I think we're going to be very successful in doing two or three of these a year. Yeah, and I think, Brian , the thing Rocky just said.

Douglas Cahill: Yeah, and I think, Brian, the thing Rocky just said, that pipeline looks good, and that's before private equity starts selling the stuff, right? Because they haven't been active on either side, which is an advantage to us. But there'll be quite a few things coming as well. But no, it's really solid right now, and we're in a nice position to take advantage of it. And again, it doesn't take long for them to see why maybe Hillman would be the best choice.

Brian: That pipeline looks good, and that's before private equity starts selling the stuff, right? Because they haven't been active on either side, which is an advantage to us.

Brian: But there'll be quite a few things coming.

Brian: as well. But no, it's really solid right now and we're in a nice position to take advantage of. And again, it doesn't take long for them to see why maybe Hillman would be the choice.

Operator: And if I could just squeeze in one last one on your guidance adjustment, obviously, it's all market related, a minus one to a minus five feels like a huge delta, but I don't want to put words in your mouth, doesn't feel like just from talking to you guys over the last, you know, six months, it doesn't feel like a huge surprise to you. Is that fair?

Speaker Change: If I could just squeeze in one last one on your guidance adjustment, obviously it's all market-related. A minus one to a minus five feels like a huge delta, but it...

Speaker Change: I don't want to put words in your mouth, it doesn't feel like a, just from talking to you guys over the last, you know, six months, it doesn't feel like a huge surprise to you. Is that fair? And like, what's kind of changed compared to 90 days ago?

Rocky Kraft: And like, what's kind of changed compared to 90 days ago?

Rocky Kraft: Yeah, I know, you know, if you go back 90 days ago, I guess what I would say is, you know, we looked at our major customers and what they had said about the back half, and you all heard us say we hoped they were right, and we were going to be more cautious than they were. It just has remained soft, as I think JMA commented on a minute ago, and we're projecting that the market will remain soft the rest of the year.

Speaker Change: Yeah, I know, you know, if you go back 90 days ago, I guess what I would say is, you know, we looked at our major customers and what they had said about the back half, and you all heard us say, we hoped they were right, and we were going to be

J.M.A.: more cautious than they were. It just has remained soft, as I think JMA commented on a minute ago.

J.M.A.: We're projecting that the market remains soft the rest of the year. Again, I'm hopeful that, you know, that we do get some tailwind and, you know, maybe the Fed does a couple rate cuts and that gives us some relief on housing. If that happens, that's obviously going to be upside to what we've guided to, but at this point, there's...

Rocky Kraft: Again, I'm hopeful that we do get some tailwind and, you know, maybe the Fed does a couple rate cuts, and that gives us some relief on housing. If that happens, that's obviously going to be upside to what we've guided to. But at this point, we just don't see any benefit in guiding to anything but what we're seeing now in the markets.

J.M.A.: We just don't see any benefit in guiding to anything but what we're seeing now in the markets.

Operator: Thanks a lot, guys. I appreciate it. Thanks, Bret.

Operator: Thanks, Brian. Thank you. Thank you. One moment for our next question. Our next question comes from the line of Lee Jagoda from CJS.

Speaker Change: Thanks a lot guys, appreciate it.

Brett: Thanks, Brett. Thank you.

Speaker Change: Thank you. One moment for our next question.

Operator: Lee, you got pancaked. I'm glad you're back.

Speaker Change: Our next question comes from the line of Lee Jagoda from CJS.

Operator: I'm back. I'm back. So can you just speak to where we are in the evolution of the large customer that's repositioning your RDS machines and how many quarters of headwind do we have left before it turns into a neutral and potentially a positive?

Lee Chagoda: Lee, you got pancaked. I'm glad you're back. I'm back. I'm back. So can you just speak to where we are in the in like the evolution of the large customer that's repositioning your RDS machines and how many quarters of headwind do we have left before it turns into a neutral and potentially a positive?

Douglas Cahill: Yeah, I would say that based on where we are right now, it's probably neutral for one quarter, and then I think we will start to see it tick up.

Lee: Yeah, I would say that based on where we are right now, it's probably neutral for one quarter and then I think we start to see it tick up.

Rocky Kraft: Okay, and then on the new 3.5 machines. Given that a lot of the stuff in there has higher ASPs, how should we think about incremental margins on the newer stuff versus sort of the 40 to 60% incremental margins that we've been kind of used to on the self-service key business?

Rocky Kraft: They're going to be really close to the same, Lee. We've said everything that we've done in this business, we've set up to be at or above the existing fleet when you think about EBITDA. So different products are going to have a little bit different gross margin profile, but everything is set up to be at the same EBITDA rate. And again, as Doug said, some of the service offerings that the team is now working on or entering into, you know, those have basically no cost, and they basically have no capital. And so it's really, you know, it's a service-related opportunity that again is going to generate a really, really nice EBITDA rate for the business.

Douglas Cahill: Yeah, Lee, one thing, just to be clear, the service would be, for example, the red box type. The one thing we're not planning on is when we start to see smart fobs being programmed, and we are doing it, but when we, if that starts to ramp, we will make sure that the experience for the consumer is there, but we will not make, we're not attempting to make great margins on that side of the service.

Douglas Cahill: We're planning on taking care of the customer and not losing any money, making margins on the actual sale. That's the only thing when we talk about it, Lee, that's the only thing, the math that I just don't see it as a, if we do it right, we will make a little money on that side of it, but we're not looking to make margins on that piece of the service. That's the only thing.

Operator: Got it, understood. And then one last one for me, just on the Canadian business, obviously, you highlighted the market being weak there and some FX headwinds. Were there any other timing issues on a year-over-year basis? And as we look out to Q3 sequentially versus Q2, how should we think about revenue trends and margin trends there?

Yeah, I would say there's nothing unusual there, Lee. I mean, the Canadian market is just softer than the U.S. There are a lot more, I would say, European-type mortgages, and there's a lot more debt on the typical consumer in Canada than there is in the U.S. And so they've taken this, you know, kind of the downdraft worse than here. And so, you know, we like our Canadian business. We think it's going to be

Speaker Change: Yeah, I would I would say there's nothing unusual there Lee. I mean that the Canadian market is just softer than the US You know, there's a lot more

Speaker Change: I would say European type mortgages and there's a lot more debt on the typical consumer in Canada than there is in the US and so they've taken this