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Operator: Good morning and welcome to the Fourth Quarter 2022 Results and Full-Year 2023 guidance presentation for Hillman Solutions Corporation. My name is Kyle and I’ll be your conference call operator today. Before we begin, I would like to remind our listeners that today’s presentation is being recorded and simultaneously webcast. The company’s earnings release and presentation 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. Please note, that the company expects to file its Form 10-K on Monday, February 27. I would now like to turn the call over to Michael Koehler with Hillman.

Michael Koehler: Thank you, Kyle. Good morning everyone and thank you for joining us. I am Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today’s call are Doug Cahill, our Chairman, President, and Chief Executive Officer; and Rocky Kraft, our Chief Financial Officer. We will begin today’s call with an overview of Hillman’s differentiated strategy, some operational and financial highlights for the year, followed by a quick business update. Then Rocky will give a financial overview of Q4 and 2022 as well as our full-year guidance for 2023. Before we begin, I’d like to remind our audience that certain statements made on today’s call may be considered forward-looking and are subject to the Safe Harbor provisions of applicable securities laws.

These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties, assumptions and other factors, many of which are beyond the company’s control and may cause actual results to differ materially from those projected in such statements. Some of the factors that could influence our results are contained in our periodic and annual reports filed with the SEC. For more information regarding these risks and uncertainties, please see Slide 2 in our earning call slide presentation, which is available on our website at ir.hillmangroup.com. In addition, on today’s call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation.

With that, it’s my pleasure to turn the call over to our Chairman, President and CEO, Doug Cahill. Doug?

Doug Cahill: Thanks, Michael. Good morning everyone and thank you for joining us. Before I get into the call this morning, I want to take this opportunity to thank team Hillman, the 1,100 warriors we have out in the stores, our distribution center employees who keep the product flowing and our entire customer support team, which I am a proud member of. Thanks to everyone’s efforts, we were able to successfully navigate and grow our top and bottom line in a dynamic and challenging 2022 and expect to do it again in 2023. We continue to outperform the competition by doing things the Hillman way. On behalf of the entire management team, we want to say thank you, and keep up the great work. Hillman was founded on the principle of customer service and our legacy of service has been built over the past 59 years.

This company has been successful, because it is always taken care of its customers and found unique ways to do things that our competitors can’t, especially during the past three years. I know, Mick and Rick Hillman who ran the company for 40 years and proud of how this team has performed and I am too. 2022 was no exception, we averaged 96% fill rate, which is up from 91% during 2021 and 95% during 2020. This means that we took great care of our customers and as our products were on their shelves when the pickup truck Pro and the DIYers were at the shelf. When you take care of your customers, good things happen. For example, we delivered full-year adjusted EBITDA at the high end of our guidance range we gave in November and we earned a number of new business wins and awards during the year.

Over the long haul since our founding in 1964, taking care of our customers has allowed Hillman to become one of the largest and most profitable providers of hardware products and value-added solutions at leading hardware and home improvement retailers across North America. Many if not all of you have heard me say that we’ve had only one down year in our 59-year history. This consistent growth in resiliency has been fueled not only by our share for our customers, but by our business model and our competitive moat. Our moat which drove healthy results for the year and differentiates us from our competition consists of three main pillars. Number one, we deliver over 80% of our 112,000 SKUs directly to retail locations of our customers with industry leading fill rates.

This means our customers always have what they need and don’t have to worry about managing Hillman inventory in their distribution centers. Number two, our sales and service team of 1,100 warriors provide world-class service at the shelf and are embedded with our retail customers. This team matures that Hillman’s mission critical, high margin products are in stock, organized and optimized for our retail customers and their consumers. And number three, over 90% of our revenue comes from brands we own. These brands stand for quality and reliability and we’re constantly innovating and rolling out new products. This is not only important to the consumer and pro, but allows us to expand and tailor our products and our brands to specific retailer strategies.

To put the three pillars in perspective in two of our top five accounts, our products make up on average about 22% of their total SKUs in the entire store and are included in over 12% of their transactions. This is exactly why we call our products mission critical and we use determined that and when we talk about how Hillman serves our retail partners. This is why we win with our customers and constantly grow our business. Our performance during the challenging environment in the past years has paid dividends for us. We’ve been successful winning on average $25 million of new business per year in our hardware and protective business from 2021 to 2023 and as we look forward to 2024, we have $27 million of new business already awarded and it’s only in February.

This success proves that our model works and our past performance continues to be rewarded by our retail partners. Now I’d like to frame up our financial highlights for the year. Overall, I’m pleased with how our team successfully navigated the choppy environment resulting from rampant inflation in our cost and massive disruptions in the global supply chain. Since the beginning of 2021, we’ve implemented $225 million of price increases to fully offset cost inflation on a dollar for dollar basis. At the same time, we’ve managed our fill rates sourcing lead times ballooned in 2021 and then shrunk dramatically since early 2022 with a corresponding spike and now finally reduction in our inventory levels. Moving to our topline for 2022. Net sales grew 4.2% to $1.486 billion.

The increase was driven by the implementation of price increases over the past year, partially offset by the volume declines. Excluding the 53rd week of our sales in 2022, net sales grew 3.1%. For 2022, we generated $210.2 million of adjusted EBITDA, an increase of 1.4% from 2021. Now let’s touch on the performance of each of our businesses during the year. Hardware solutions is our biggest business, it makes up over 55% of our overall revenue. For the year, hardware sales saw 13% revenue growth compared to 2021 or 12%, excluding the 53rd week. Price increases were the main driver of the topline increase offset by decline in volume and just under 3%. Hardware solutions is the bellwether of our business and we’re encouraged by the trends we’re seeing so far in 2023.

Robotics and digital solutions or RDS makes up about 15% of our overall revenue, RDS gross margins were 70.2% and our adjusted EBITDA margins were 32.2% respectively. And our market share is strong. For the year, RDS revenue was roughly flat or down 1% when excluding the 53rd week, as discretionary items like key accessories and pet tag engraving were down roughly 15% from peak volumes in 2021. Additionally, smart auto fob duplication decline as used car sales decreased 11% from 2021 to their lowest number since 2013. Offsetting these declines was a 17% increase in revenue from our self-serve key duplication kiosks business Minute Key. RDS is a key driver of highly profitable long-term growth. As we talked about last quarter, we’ve been working with our major key duplication and engraving customers and jointly developing our next generation digital kiosks for both technologies, which we expect to reignite our long-term growth in this business.

Our top-three Minute Key customers have been to our manufacturing facility in Tempe, Arizona, where they were able to see our new technology with their own eyes. The feedback and interest is excellent and we are encouraged about the growth opportunities these kiosks present in 2024 and beyond. Minute Key 3.5 is our new self-serve key duplication kiosk was smart auto fob duplication technology, which will be ready for the market late this year and into early 2024. Quick Tag 3.0 is our new engraving machines that will be introduced throughout 2023. We plan to place over 800 new machines this year and by the end of the year, we’ll have around the thousand Quick Tag 3.0 machines in service. We’re really excited about this new machine, because it gives the pet owner 26 differ tag options to choose from, up from only 6 options in our existing machine and we’re relocating the new machines inside the pet department of one of our top-five retailers for the first time.

We’ve also placed this machine in Disney World, Disneyland, SeaWorld and Universal Studios with excellent feedback and performance over the first 90 days. Regarding our knife sharpening machine Resharp, we ended 2022 with approximately 1,000 machines at select Ace Hardware as across the country. This machine is truly one of a kind and we have over 100 stores sharpening close to 4 knife a day, creating excitement for the store owner and the consumer with the leading marketing concept being word of mouth from one consumer to the other. While challenges sourcing chips and boards continue to throttle our production of these machines. We see that abating during the second half of 2023. Meanwhile, we’re testing this one of a kind of knife sharpening machine in new channels, including especially specialty retailers, foodservice and restaurant supply, outdoors 40 new recreational retailers and a leading Canadian retailer.

We believe that we can garner interest outside of the traditional hardware channel and likely be in the position to ramp up production as the chip and board shortage ends and consumers and retailers embrace this new technology. Our Protective Solutions business makes up 15% of our overall revenue and for the year Protective revenues decreased about 15%. However, if COVID related PPE sales are excluded from both periods and the 53rd week is excluded, Protective revenues increased about 1%. Our Firm Grip brand which is exclusive to the Home Depot is their top selling work glove brand. Promotional execution in this category is critical, we had an excellent 2022 in that area. For 2023, we already have a robust promotional plan in place with Depot, specifically for the Firm Grip brand that we’re really excited about.

As we tell the sales guys stack and high and watch it fly. Lastly, our Canadian segment, which makes up about 10% of our overall revenue, build on momentum and has seen throughout the year. Canada posted a 5% top line increase for the year with its bottom line nearly doubling versus 2021. We’re pleased to achieve this double-digit adjusted EBITDA margins out of our Canadian business. The long lasting relationship and deep partnerships we have with our customers along with the end markets we serve, give us confidence as we look to the future. We provide our customers merchandising solutions for the most complex categories. These are the things they don’t get from the competition like direct store shipments and in-store service at the shelf from our team.

As I mentioned earlier, we have implemented a total of approximately $225 million in price increases since the beginning of 2021. These cost break down to approximately $120 million of transportation and shipping, $90 million of commodities and $15 million of labor. Over the past several months, we’ve seen some of these costs come down like ocean container costs, which will be a tailwind for us in the second half of the year. While some costs remain high like labor and outbound freight, we expect our margins to expand once these container cost reductions flow into our income statement beginning in the second half of 2023 and into 2024. As I touched on earlier, we saw lead times increased dramatically as the supply chain tighten during 2021.

We made the strategic decision to invest in our inventory to protect fill rates. This resulted in a continuing to take care of our customers, but also in us carrying more inventory than we have in normal supply chain environments. This investment has and will continue to yield new business wins and is another example of why we have long standing relationships with our customers from the board level to the store level. Lead times from Asia have improved to around 160 days over the past six months or so, which is vastly better than the 250 plus day lead times the industry experienced in January of 2022. As such, we have started to bring down our inventory levels and delever our balance sheet as we turn that inventory to cash with no adverse impact to our customers and our fill rates.

We ended 2022 with the almost $100 million more inventory than we would have in normal supply chain environment. This is an improvement of approximately $85 million from our peak this past summer. Our inventory decreased by approximately $45 million during the fourth quarter of 2022 and we believe that we will further reduce our inventory by at least another $50 million during 2023. The great news about this is that our fill rates will still lead the industry and this inventory will turn to cash and we will delever during 2023. As we look at 2023, it’s important to remember that we have a diverse resilient business with a 112,000 SKUs, serving 40,000 customer locations across our coast to coast footprint, spanning North America. The vast majority of our products are used by pickup truck pros and DIYers to repair, remodel and maintain homes.

Our business performs well throughout economic cycles and not dependent on new home construction and never has been. Remember, we started this business serving a small — the small independent hardware stores. This segment makes up today about 20% of our business and remains a critical component to our growth, as we have seen 9% sales CAGAR over the past five years in this segment. We believe our repair and remodeling end-markets are well positioned for the following reasons. Number one, the North American housing industry continues to be in short supply,as housing starts are below historical averages and fewer home owners are willing to sell today with over 90% of mortgages having fixed interest rates. This means the buyers can’t buy and the sellers that won’t sell, we’ll be spending on their existing homes.

Number two, the US home continue to age with now over 50% of US homes over 40 years old. Number three, trends nesting, aging in place, working from home and outdoor living remain prominent and consumers will continue to invest in their homes. And finally, since our founding 59 years ago, our consistent growth through economic cycles has proven that repair, remodel and maintenance projects happen no matter the economic environment. In fact, there’s only been one year where our top-line did not grow in our 59 year history and that was during the great financial crisis of 2009. This gives us a great deal confidence heading into 2023. We’re pleased with the progress we’ve made as a company and navigating in and out of COVID during the past three years and we remain focused on capitalizing on the unique opportunities ahead.

Some of our larger customers are predicting unit volumes to increase, albeit modestly during 2023 in our main product categories. However, with some of the economic uncertainty around the health of the consumer and a possible economic slowdown, we’re taking a more conservative approach and our planning for total volumes to be flat to slightly down. Fortunately, we project our implemented price increases and new business wins will more than offset any potential market volume decline and we’re off to a strong start so far in 2023. With that, let me turn it over to Rocky who looks better than he sounds today. He is fighting a bit of a cold and that’s what happens when the temperature goes from 70 to 35, very the weak in Cincinnati. So Rocky good luck.

Rocky Kraft: Thanks, Doug. It sounds like I’m going through puberty. I apologize. Before I get into our guidance for 2023, I’ll provide a quick summary for our fourth quarter and our year-end results. I’d also like to point out that our top-line for the quarter and year was impacted by the 53rd week of sales during 2022, but that did not have a meaningful impact on our bottom line. Net sales in the fourth quarter of 2022 increased 1.8% to $350.7 million versus the prior year quarter. Excluding the 53rd week, net sales decreased by 2.8%. The fourth quarter results were driven by price, offset by a decrease in volumes. 2022 full-year net sales increased 4.2% to $1.49 billion. The top end of our revised guidance range of $1.46 billion to $1.5 billion.

Excluding the 53rd week, net sales increased. Hardware solutions increased 12% and Canada, increased 5%, contributing to the overall increase. This was offset by a 16% decline in Protective Solutions, while RDS was down 1% for the year. The significant decline in PS was driven by COVID related sales in 2021 that did not recur at the same levels in 2022. Note that, all of the aforementioned numbers all exclude the 53rd week. Adjusted earnings per diluted share for the fourth quarter of 2022 was $0.05 per share compared to $0.06 per diluted share in the prior year quarter. For the full-year 2022, adjusted earnings per diluted share was $0.43 per share compared to $0.51 per diluted share during 2021. Fourth quarter adjusted gross profit margin increased over 260 basis points to 43.4% versus the prior year quarter.

Sequentially, margins improved by 10 basis points compared to the third quarter of 2022. For the full-year of 2022, adjusted gross profit margin increased over 60 basis points to 43% from 42.4% during 2021. Q4 2022 adjusted SG&A as a percentage of sales increased to 31% from 30% during the year ago quarter. For 2022, adjusted SG&A as a percentage of sales increased to 29% from 28%. This analysis backs out stock-based comp, acquisition and integration expenses, legal fees and restructuring costs, which we feel gives a better analysis of our based expenses. At a high level, increases in SG&A was driven by increased shipping and labor cost prior to price increases going into effect with our customers. Adjusted EBITDA in the fourth quarter increased 16.5% to $45 million compared to $38.6 million in the year ago quarter.

This is the second consecutive quarter that adjusted EBITDA has exceeded the comparable year ago quarter and it was at the high end of our expectations. Adjusted EBITDA for the quarter was driven by a healthy mix of price cost, partially offset by higher cost of goods sold. Adjusted EBITDA for the 2022 full-year increased 1.4% to $210.2 million compared to $207.4 million in the year ago quarter. For the full-year, adjusted EBITDA was driven by a healthy mix of price cost, partially offset by higher COGS and the timing of price increases. Further driving the increased during the year with a lift from strong earnings from our Canadian business. Now let me turn to our cash flow and balance sheet. During 2022, operating activities generated $119 million of cash as compared to using $110.3 million in 2021.

As discussed during 2021, we invested into inventory to protect fill rates and that investment began to turn into cash in 2022 as we saw lead times moderate. Capital expenditures for the year were $70 million compared to $52 million in 2021. We continue to invest in our RDS kiosks and merchandising racks for new business wins. These are important parts of our high return CapEx initiatives. Free cash flow for the year totaled $49.4 million versus negative $161.8 million in 2021. Impacting our cash flow results for 2022 with the settlement and additional related legal expenses from the Hy-Ko litigation, which totaled $33 million during the year. At year-end, net debt improved by $43 million to $888 million versus $931 million at the end of 2021.

We ended the year with approximately $229 million of liquidity, which consists of $198 million of available borrowing under our revolving credit facility and $31 million of cash and cash equivalents. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the quarter was 4.2 times, which improved from 4.5 times at the end of Q3 and 4.7 times at the end of the second quarter. Our long-term net debt to adjusted EBITDA ratio target remains unchanged at below 3 times and we think that we will end 2023 around 3.5 times, assuming we come in around the midpoint of our guidance. Speaking on guidance, let me spend a few minutes talking about our outlook for 2023 and how the price cost dynamics will impact our income statement and results for the year.

For 2023, we anticipate full-year net sales to be between $1.45 billion to $1.55 billion. Our net sales midpoint of $1.5 billion, represents an increase of about 1% from 2022. Our long-term algorithm demonstrates 6% annual top-line growth. This consists of approximately 1% price and 5% volume growth. The 5% volume growth is made up of 2% to 3% market growth which looks a lot like GDP and 2% to 3% growth from new business wins. To unpack our top-line guidance for 2023 a bit further, our midpoint takes an approximately 2% growth from price that will roll from 2022 and assumes volume growth is down 1%. This includes new business wins, offset by modest market pressure in us lapping remaining PPE sales during 2022. As we would expect, our top-line is going to be dependent upon sales volume at customers, which is predominantly driven by the POS.

Our ability to win new business, coupled with the strength of the consumer, the health of the economy and housing market will impact our results. For our bottom line, we expect full-year 2023 adjusted EBITDA will total between $215 million to $235 million. The midpoint of $225 million represents an increase of about 7% versus 2022. We expect to see some leverage this year with our bottom line results beginning in 20 — in Q3 as begun on the right side of the power curve when it comes to price cost. Specifically, we anticipate gross margins in the first quarter 2023 to declined sequentially versus Q4 of 2022, as our highest priced inventory begins to flow through the income statement. We will then be modest sequential margin improvements during Q2, then during the second half of 2023, we anticipate margins in excess of our normalized rate of 44% to 45%.

Lastly, free cash flow for full-year 2023 is expected to come in between $125 million to $145 million with a midpoint of $135 million. Please keep in mind, the guidance figures are made with the full — following full-year assumptions. We anticipate cash interest expense will be in the $55 million to $65 million range. Cash taxes will be between $5 million and $10 million. CapEx will be between $65 million and $75 million. Restructuring related and other cash expenses will total approximately $10 million. We will have approximately 198 million shares outstanding and we will see a working capital benefit of between $50 million and $70 million driven by $50 million reduction in inventory. Given the timing of inventory reduction, moving into the first quarter of this year, we expect to invest less into working capital during the first quarter of 2023 versus prior years.

To be specific, over the past three years, we increased working capital about $40 million during the first quarter of the year as we built inventory levels going into the spring. During the first quarter of 2023, we are confident, we will need less than half of that figure, but do expect that our leverage ratio will increase modestly at the end of the first quarter. As we’ve said in the past, we expect 2023 to be the tale of two very different halves. During the first half of 2023, we expect to see adjusted EBITDA down compared to 2022 in the high-single digit percentage range with a steeper decline during the first quarter of 2023 compared to 2002. This is substantially the result of highest cost goods sold, perhaps in the history of Hillman flowing out of inventory and into our income statement during the first half of the year, peaking in February, March and April.

Further impacting our first quarter results will be the relocation of one of our distribution centers from Rialto, California to Kansas City. By making this move, we will avoid significant increase in operating costs as our ramp is going to quadruple. By the second quarter of this year, we believe we will be fully integrated with this new hub and spoke distribution center and our costs will actually improve on a go forward basis when compared to our previous operating cost at the Rialto DC. We will maintain our distribution center near Bakersfield, California that has been in service since 1990. During the second half of 2023, we expect to see adjusted EBITDA up compared to 2022 in the low 20% range, as our COGS reflect the new lower cost we are seeing today.

This is mainly due to us finally being on the right side of the price cost equation. One of our main areas of focus over the past two years was covering our costs through the execution of four major price increases. While we recognize that we have never been in an environment like the one we’re in today. Historically, we have not given price back dollar for dollar when inflation accruals, nor we seen our retailers lower priced at the shelf. Over the past few months, we have seen some costs begin to moderate such as containers, while others remain stubbornly high like labor, drayage and outbound shipping. That said, we do expect to benefit from this decline in container prices we are paying for today once these lower cost flow through our P&L, which we expect will begin during the second half of 2023 and continue into 2024 as I discussed.

Our expected cash flows and earnings for 2023 will put us in a position where we can start to play offense and use our strengthened balance sheet to execute low risk, sweet spot tuck-in acquisitions or capitalize on other accretive opportunities that may present themselves. Looking further out, our long-term growth algorithm remains intact. We think 6% organic net sales and high-single to low-double digit EBITDA growth is achievable in an economic environment for 2% to 3% GDP growth. As we look forward, we believe that our competitive moat and long standing relationships with customers will allow us to continue to win and to perform at or above our stated growth algorithm over the longer term. Doug, back to you.

Doug Cahill: Good job man. Thanks Rocky. Hillman, it’s a good business when things are good, but in 2023, we have the opportunity to show you that Hillman is a surprisingly good business when the economy is lesser. We’re excited about the normalization of global supply chain, as we will no longer need the excess inventory we invested in over the past few years to provide the industry leading fill rates for our customers. Even if we had a model, again, we would invest again, because it helped widen Hillman’s moat versus the rest of our competitors and will pay dividends for Hillman and our investors for years to come. I’ve been with Hillman since 2014 and I’ve never seen us in a better position with our customers and suppliers.

The Hillman moat is strong, our end markets are healthy and resilient. We believe we’re the best partner for fasteners and hardware products in North America. As we look forward, and I know we have the right team to get things done and we’re committed to drive long-term value for our customers, shareholders and employees. With that, we’ll begin the Q&A portion of the call. Kyle, can you please open the call up for questions.

Operator: Sure. Your first question comes from the line of Lee Jagoda from CJS Securities. Lee. Your line is now open. Please ask your question.

Lee Jagoda: Lee Jagoda, but close enough. Good morning, guys.

Doug Cahill: Hey Lee.

Lee Jagoda: Just can we start with the Canadian segment in Q4. It looks like margin had a little bit of a step back in the quarter. Can you speak to whether that’s a one quarter issue, what caused it and how should we think about 2023 as it relates to the fourth quarter numbers?

Rocky Kraft: Yeah Lee, I think as we’ve said, historically, and I’ve said it for a couple of quarters and kind of became a broken record that we didn’t expect that, that business would have 17% EBITDA margins, given the mix of industrial business, but we do expect, as you think about 2023 and forward that should be a 10% to 12% EBITDA margin type business. The important thing to remember about Canada, even compared to our US retail business, it is much more cyclical just given the weather and seasonal — yeah, sorry, given the weather. And so as you think about the first and fourth quarter, always seasonably weaker in Canada, stronger in the second and third. And then the only final comment I would make, when we talked about the 53rd week, when we did, you didn’t hear us talk about Canada, because they were closed for that last week, but we still have expenses relative to what happens in that business in that 53rd week.

That’s a little bit of pressure in the fourth quarter.

Lee Jagoda: Got it. So then I guess just looking at the quarter on a year-over-year basis next year. We shouldn’t see a loss in Q4 next year, because you don’t have the 53rd week dynamic. Is that fair?

Rocky Kraft: That’s correct. We would expect the care that would make money next year.

Lee Jagoda: Okay. And then just one more from me and I’ll let others ask. Just Doug, I know you touched a little bit about sort of the growth that you’re going to see in robotics starting in 2024, based on a whole bunch of these new products and refreshed products coming online. Can you get a little more specific about, I guess one, the timing of some of these product launches? And then if you take a three-year look and look at the next three years, how should we think about all of this new stuff that’s coming into the market, translating into growth and margin expansion for that segment?

Doug Cahill: Lee, good question. I mean, we’re super excited. First of all that the Quick-Tag 3 is in the places you want to be. Right? It’s coming out of the blocks strong, it provides something for the consumer. We’re going to have 800 machines rolled out this year and 1,000 in that one retailer, plus those Disney Universal Studios and places like that. So that’s a big part of our capital plan this year and I think we’ll start to see that as we get those machines out. When you think about 3.5, which is our ability to take our Minute Key self-serve kiosks and let it do what it does today, but we’ll also be able to duplicate technology for smart fob, which never been able to do. That’s an early 2024 rollout. And it’s just hard to say how that will ramp. At the same time, you’re going to have re-sharp, I think, growing nicely and so Rocky we’ve historically said we look for..

Rocky Kraft: Yeah, low-double digit growth in RDS. I think in the current year baked into our guidance would be high-single digits. But again, we’ll look for them to do double-digits as we think about them outperforming what we have in our existing guidance.

Lee Jagoda: Got it. That’s very helpful. Thank you.

Operator: Your next question. It comes from the line of Reuben Garner from Benchmark. Reuben, please proceed your question

Reuben Garner: Thanks, good morning everybody and Rocky, you do look better than you sound, so hopefully Doug can help with these questions. Pricing up 2% in the outlook this year. Can you maybe give us a little bit more detail or context there, is that assuming any of the pricing actions over the last few years have to go backwards at some point. So meaning, you may be up more than that in the first half and down year-over-year in the second. Any color there would be helpful.

Doug Cahill: So Reuben, we’ve got a few little pieces of business that are so tied to steel prices and the steelworks. So large shapes that are on a quarterly adjustment. It’s less than 5% of our business. So that would adjust every quarter both directions, regardless over the years. But taking that out, we essentially have 2% come across from this year. And to answer your question, we don’t have any assumptions in there on prices come down, because if you really think about it, take steel for example, steel decline, particularly China’s steel throughout 2022. But since November 15, steel is up 15% and it’s — half of its exchange rate and half of steel, you also saw probably this week steel prices up a bit in the US announced by two players outbound. So there’s some stubbornly high stuff and things like steel and nickel have actually started to go back up. So I think we’re going to be fine in that regard. But no, our assumption is that 2% is from what has been done.

Reuben Garner: Understood. And then on the volume side. If — I think you said down — you guys down 1% and that includes share gains and it sounds like RDS is still going to have a potentially good year growing high-single digits. Does that imply that you’re assuming the market is down closer to mid-single digits? And if so, I’m just curious, it sounds like at least listen into the retailers hardware has been outperforming the company average and I think one of your big customers, the other day suggested a flattish market, would there be any reason why hardware would underperform kind of the home improvement this year? Is there still some difficult comps within hardware, specifically are you guys just taken a very conservative approach given the uncertainty?

Rocky Kraft: Yeah. So what I would say that Reuben, is yet to start with. We are going lose 2% relative to COVID when you talk about year-over-year. And so our — midpoint of our guidance assumes that, overall, our markets are down 1%, the range of guidance is kind of down 4% to up 1%. We would tell you, we’ve not seen that year-to-date, we’re actually up, call it, low-to-mid single digits from a units perspective. And so we’re just being cautious because of where the economy is and everything you read in the press, but so far to date, we’re planning down 1% with a range of down 4%, up 2%. And I would tell you, we’re at the high end of that through 45 days.

Doug Cahill: Yeah, Reuben, I’d say two things to that. When you look at footsteps not hardware, but you look at home improvement by retailers last year, footsteps down 14%. Obviously, we didn’t see that. And then your favorite new product lumber is interesting, because when you look at lumber prices, and you know they fallen out of the sky, that’s not good for a retailers comp, but holy smokes is that good for deck screws. So we’re kind of the ones that route for lumber prices to be where they are versus where they were. But it’s funny how that becomes a headwind for a retailer, because if you’re selling 400 versus 1,400, you got to sell a bunch more lumber, but for deck screws that makes a big difference. So I think we’re being conservative would be the answer.

Reuben Garner: Great. Thanks. Good luck, guys and Rocky, you feel better.

Rocky Kraft: Thanks Reuben.

Operator: One moment for your next question. Our next question comes from the line of Ryan Merkel from William Blair. Ryan, your line is now open. Please ask your question.

Ryan Merkel: Hey guys, good morning. Thanks for taking the question.

Doug Cahill: Hey, Ryan.

Ryan Merkel: I wanted to ask about volumes up. I think you said low-single digits to mid-single digits so far. I get it, we’re not quite unlike the season yet. But anything that’s driving that, is it the market holding up better, is it share gains kicking in? Just a little help there.

Doug Cahill: Yeah, I would say two things. One, I would say, everybody knows what happened in the fourth quarter when retailers could start to take inventories down both at the store level and that their distribution center level Ryan, because of all the supply chain, things have started to normalize. So that had an impact on every one, not as much for us, but if you look at our PS business, our glove business, obviously, we sell that through distribution center, there was inventory taken out there. So that would be one thing. The other thing is, the weather has been. I mean, we’ve had more of a spring this year, so far that, if at all of last year and that does help us not to mention lumber prices. So I would say, those are probably the three things.

Ryan Merkel: Okay. Got it. And then I think price 2% for the year. How does that flow, is it higher in the first half and then something more flat in the second half?

Rocky Kraft: Yeah, that’s right, Ryan, as you think about it, the fourth quarter of next year will have virtually no price in our outlook, because we have taken all of our price kind of at the end of the third quarter from 2022.

Ryan Merkel: Got it. Okay.

Doug Cahill: Obviously, it will fully lap itself at that point.

Ryan Merkel: Okay. Perfect. And then just lastly, I just want to make sure I’ve got the gross margin commentary correct. So in the first quarter of 2023, Should we be thinking like 41.5% to 42% range for gross margin, is that sort of the peak head of price cost?

Rocky Kraft: Yes, that’s the way to think about it Ryan.

Ryan Merkel: Okay. Thank you. Best of luck.

Doug Cahill: Thanks Ryan.

Operator: Thanks. One moment for your next question. Your next question comes from the line of Stephen Volkmann from Jefferies. Stephen, your line is now open. Please ask your question.

Stephen Volkmann: Thank you very much. Good morning. First thing I wanted to go back to RDS. It just sounds like 2024 is going to be a pretty big year, there will be a lot of kind of redesigned equipment. And I’m just curious if any of the economics have changed as you have kind of redesigned these machines, do they get more expensive, is there more CapEx is, are the margins any different, just anything else that might have changed with all these redesigns?

Doug Cahill: That’s a good question. Yeah, two things. I talk about Quick-Tag 3, it is definitely a more expensive machine than the historical one. But with the uptick we’re seeing and what you can sell through that machines, Stephen I think it’s a no brainer. So that would be a case where — yes, more expensive, but certainly it will pay for itself from what we’ve seen so far in the first 90 days. As far as the 3.5, this is really a fun one for us, because we’re going to take this machine and we’re going to be able to bring new technology to the consumer by being able to copy and the smart fob which has not been done before by us and we’re going to be able to do your home and office RFID on that machine and then ultimately that machine will be an endless aisle, because it will essentially be able to copy anything now.

One of the things that — I’m not trying to evade the question, but it’s very difficult to really predict is, how fast will this ramp, what we know is that the consumer is not happy with the current experience at the dealer. What we know is, that the retailers are extremely excited. And I just think when you think about the foot traffic at a Depot, Lowes and Walmart who will be the three big users of this new technology. It should be a really good one, but we’re not going to get out in front of it, because we’re afraid a little bit that we won’t be able to keep up. So in a real quick way to visualize, the consumer puts their smart fob. And then we can program it for them at their office, at their home, at their car. We’re super excited about that, we can work with the two of our three retailers at the store for the Pro as an example, when they are shopping, but there’s a lot of things that have to be done to get that done.

So I would say, it will ramp slowly in the first half and I think we feel pretty bullish about this for the second half of 2024 and again the $27 million that we’ve been awarded of new stuff has nothing to do with RDS.

Rocky Kraft: Yeah, Stephen, the only thing — this is Rocky. The only thing I would add is. As you think about the last couple of years, clearly PS become more expensive to build, just with all the inflation that we’ve seen across all categories, but we’re working with and we’ll continue to work with our retailers to make sure that our returns on those machines are appropriate and there’s a lot of different ways we can work with our retailers. But we look at a — we strive for a two-year payback. I think early on some of these machines will probably be in the two and two and half years. But we’re going work with our retailers to make sure both the economics for them and for Hillman are appropriate for us to go build and right now we feel really good about it.

Doug Cahill: Yeah.

Stephen Volkmann: Okay. Great. That’s helpful. Thanks. And then, I’m curious, it also sounds like sort of the second half run rate into 2024 is going to be pretty impressive. But what happens to things sort of normalize again in 24 to gross margins kind of go back to — back down again at some point into the more normal range. And is there any price maybe decline that you might expect a couple of points in 2024, just how does that normalize?

Doug Cahill: Yeah, I mean I think as we have been extremely transparent on the way up. We will work with our customers on the way down to do the right thing. I mean the fortunate thing Stephen is, they’ve been able to move their retail prices. And again, we don’t start to see this until mid-year, but I think the answer your question. Over time, we’ll see them certainly back to what we think is acceptable. I would think we’ll exceed that on RDS historical. But that would say that over time we will work with our customers to make sure that we’re competitive in that. If you think about having $225 million. I’ll call out a couple of $100 million of increase, it wouldn’t be right for us to think we’re going to hold on to all that.

Stephen Volkmann: Got it. Understood. And then my final kind of longer-term question is, should we think about free cash flow, sort of 100% of net income as a more normal run rate or is the CapEx that you’re going to need to do with the growth sort of going to keep that under 100?

Rocky Kraft: I think, you can think of it that way Stephen. I don’t believe unless we catch fire and a model, which everyone is going to be happy that we’re investing in the kiosk. We’ve been able to run in that general range. Just given the production capacity and quite frankly our ability to install machines at our retail customers. I don’t think you’d see us go much above that, call it, $65 million to $75 million of CapEx anytime soon.

Stephen Volkmann: Super. Thank you guys.

Doug Cahill: Yeah. Thank you.

Operator: One moment for your next question your next question. Your next question is comes from the line of Brian Butler from Stifel, Brian, your line is now open. Please proceed with your question.

Brian Butler: Great, thank you for taking my questions. I guess just kind of — I apologize, I missed a little bit the first part of this call overlapping. But if you think about the kind of the pace over the year. It sounds like the hardware in Canada is kind of — the revenues are going to be beneficial in the early — in first and second slow down, or at least the growth slows down in the back half, but the margins are the opposite. Right? You’re going to have more of the pressure on the first half and then benefiting in the second. One, is that true? And then how does it work for, I guess, the RDS piece, as well as PPE, is PPE just going to be down the whole all of 2023?

Rocky Kraft: Yeah. So PPE, we’re going — we’re not going to talk about in 2023 is my goal. And I’m not trying to be funny, but I don’t think we’re going to sell any what we would call COVID-related PPE products in 2023, that will be the only products we’re still in products that we were in pre-COVID and we’ll continue to sell those at normal levels. When you think about HPS, the only thing I would — in PS what I would tell you is, while we will see less price in the back half. On the top line, we do anticipate that some of the new business wins that we have, as they roll in. We’ll see some benefit in the back half of the year. And so I think you’re going to see relatively consistent kind of top-line growth in that HPS segment. As you think about the full-year, it’s not going to be kind of front-end loaded or back-end loaded.

Brian Butler: Okay. And then RDS, is it kind of a little back-end loaded, right, as all these projects begin to ramp and you have an exit rate that’s much higher going into 2024, that’s the right way to look?

Doug Cahill: Yeah, I would say, RDS will be ramping 2024 and Quick-tag 3 will ramp throughout the year. But I think that’s Rocky pointed out, we’re going to have a solid year in RDS and then we’re really excited about what we think we can put together in 2024 and 2025.

Brian Butler: Okay. And then maybe one on M&A. Just kind of go into more detail, what are your thoughts here looking at what may be slower 2023 overall in the market. Is there opportunities there? What are your thoughts in 2023 and maybe the 2024 beyond.

Doug Cahill: Yeah, I mean we’re super excited, because I think we got a bit lucky. There’s just no –there has not been much of a credit market out there and they’ve been very few deals as you guys know, we still continue to talk to folks and the people we talked to most of our acquisitions are our customers, because they’ll tell us where to go, they’ll tell us what they want, they’ll tell us what they’d like us to do and that’s just a great way to grow is when your customers saying, hey, think about this and think about that. And so we probably are in four, five, six discussions right now with nothing imminent, because we want to focus really on getting this leverage down, but — I’m excited about it, because it’s a pretty easy thing to sit down with an entrepreneur or even a private equity owned business and show them, why joining Hillman will be significantly different for them and how we can do things that they couldn’t do.

And then immediately, we think we have an open door with all of our customers at the right level. So pretty excited about that and we actually, as I said, I think we got lucky that a lot of deals have not taken place, because it just has been very little market, particularly for the private equity folks who want to lever things.

Brian Butler: Okay. Great. And then last one for me, just on kind of the inventory coming down. Can we talk about the benefit, I mean, that seems like you’re going to see it in 2023, but is there a 2024 piece of it that kind of has a tail that isn’t large enough that it’s worth talking about?

Rocky Kraft: It’s a good question. I don’t think so, because as we think about the business, we probably — we’ve historically said, we need about $10 million of growth cap — to build working capital about $10 million a year in order to keep up with the growth in the business. I think that’s relatively still the case except for 2023. I think you’re going to see it come down, bring inventory down pretty dramatically in 2023. And then I think as we go into 2024 and 2025, you are going to see those numbers become more static and will be kind of flat to slightly up to fuel growth of the business.

Brian Butler: Perfect. Thank you very much for taking the questions.

Rocky Kraft: Yeah.

Operator: All right. So presenters, I not seeing any questions at that time. All right. So this concludes the Q&A portion of today’s call. I would like to turn the call back over to Mr. Cahill for some closing comments.

Doug Cahill: Thanks Kyle and thanks everyone for joining us this morning. We’d like to thank our customers, our vendors and importantly our hard working team for their contributions during 2022 and we look forward to updating you again in the near future. So with that, Kyle you may now disconnect.

Operator: This concludes today’s conference call. You may now disconnect.