Good morning, and welcome to the Second Quarter 2022 Results Presentation for Hillman Solutions Corp. My name is Shannon, 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 presentation and 10Q were issued this morning. These documents and a replay of today’s presentation can be accessed on Hillman’s investor relations website at https://ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman.

Thank you, Shannon. 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 a business update and quarterly highlights from Doug followed by a financial review of the quarter and a guidance update from Rocky. Before we begin, I would like to remind our audience that certain statements made in 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 that 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 SCC. For more information regarding these risks and uncertainties, please see slide 2 in our earning call slide presentation, which is available on our website, https://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 is my pleasure to turn the call over to our Chairman, President and CEO, Doug Cahill. Doug.

Thanks, Michael. Good morning, everyone. Today I’m going to provide an overview of our strong second quarter results, give an update on our position moving forward and discuss the current operating environment before I turn it to Rocky to talk numbers. Before we dive in, I’d like to give you a quick overview of Hillman and our differentiated service model, especially for those of you who are new to our story. We’re the largest provider of hardware products and solutions in our categories in North America. Our unique approach to sourcing, distribution and service sets us apart from our competition. We win with our customers because we design source innovative products, and execute inventory and merchandising solutions for complex categories. Not only are these must-have high margin categories for our customers, but we help solve difficult problems with them like labor shortages and logistical challenges. We had a strong quarter driven by the hard working team in Hillman and our differentiated service model. Our 1,100 member sales and service team is an important part of our competitive moat and I’ll discuss it in a moment. During the second quarter of 2022 we generated $62.3 million of adjusted EBITDA. Margins were healthy during the quarter. We benefited from having fully caught price at the end of March, resulting in 3 full months with the appropriate price cost mix. Net sales grew to $394 million. This 4.9% increase over the second quarter of 2021 was driven by the implementation of price increases over the past year despite lighter volume. Now let’s dive into our how each of our business segments perform during the quarter. Hardware Solutions is our biggest business and makes up approximately 50% of our overall revenue. For the quarter, Hardware led the way with a 12% increase in revenue…

Thanks, Doug. This morning, I’m going to provide a quick summary of our second quarter results and then turn to our outlook and guidance for the remainder of 2022. Net sales in the second quarter of 2022 increased 4.9% to $394.1 million versus the prior year quarter. Hardware Solutions was the main contributor to the increase, which was up 12% to $225.4 million. Overall, the improvement was driven by a 16% price realization, partially offset by a 4% decline in volume. As our retail partners have discussed publicly, April was a very light month in terms of foot traffic and volume. We saw May and June return towards the norm, but not enough to make up for April. Further, we saw softer volumes in July, which I will talk about in a few minutes. RDS sales decreased by 2% to $64.8 million. Lighter foot traffic, less activity in pet engraving and a difficult comparable quarter with the main drivers of the decline. Our Canadian business had terrific performance in the quarter. Sales were up 7% compared to the prior year, and we significantly improved profitability for the second quarter in a row. Price, product mix and exiting unprofitable business have driven nice profit improvement in Canada. And while we don’t anticipate maintaining 17% EBITDA margins for the remainder of 2022 in Canada, we are well on our way to our minimum expected adjusted EBITDA goal of 10% across this business. Protective Solutions sales were down 12% or $7.5 million resulting from lighter volume and fewer promotional sales. Looking at our year-to-date numbers for Protective, we are down only 1%, excluding COVID-related PPE sales. COVID-related sales for the quarter were $2.1 million compared to $1.6 million during Q2 of ‘21. However, for third and fourth quarters of 2021, COVID-related PPE sales…

Thanks, Rocky. Our competitive moat has more than proven itself in today’s environment and now serves as an even more appealing solution for our customers. The Hillman model with our 1,100 field sales and service folks combined with our direct-to-store delivery brings solutions to our customers’ complex needs, especially in today’s challenging environment. The value we bring our customers is reflected by our customers’ willingness to accept our pricing actions, grants additional shelf space and award us new business, all 3 of which we’ve seen in the first half of this year. While the current environment is uncertain, we’ll stay focused on controlling the controllables and taking great care of our customers. As we look forward, we remain confident in our moat, and we believe we can drive long-term growth and build meaningful value for all of our shareholders. With that, we’ll begin the Q&A portion of the call. Shannon, can you open the call up for questions?

[Operator Instructions] Our first question comes from Reuben Garner with Benchmark.

So Doug, I missed the $50 million and I think was the number in incremental inflation. Can you talk about what that was and the timing of the price increase that you’re implement -- timing and amount of the pricing increase that you’re implementing to offset it?

Yes. Reuben, it’s Rocky. So that $50 million was all related to contracted container rates. And so we spent a lot of time talking about that on our first quarter call. Basically, the world renegotiates contracted container rates on May 1 of each year. And so beginning on May 1, we saw our contracted container rates quite frankly, go up dramatically as did the entire industry. And that will end up flowing through our P&L starting in late Q3, but hits us more in the fourth quarter. And then as we just said, the price increase to offset that is going in place kind of as we speak and will come in throughout the third quarter. So the timing of when we begin filling the cost and when we get -- begin filling the price benefit are at about the same time. And again, that $50 million, just to be clear, is an annualized full year number, not what the impact in ‘22 will be.

Okay. Got it. So this is the one from May. This is not incremental since then. So the -- I guess, since May, I think it’s been pretty clear, at least the spot rates for container freights have been falling. I think material cost pressure should be declining. Can you kind of tell us where we -- where those items stand today and what kind of benefit they could bring in 2023 at these levels? Just trying to see how much further we need to see the freight rates fall and the steel prices fall for it to be, I guess, for you to fully get back the price cost headwinds that you dealt with over the last 1.5 years?

Yes. I think Reuben, we have seen as our customers have things like lumber. Last year, they peaked at 1,400 and dropped to 500. This year, they peaked at $1,200 per 1,000 board foot they’re at 527. We’ve seen China steel come down. The last 3 weeks, it perked up a little bit. It was slightly up. But China steel has softened a bit. We have not seen Taiwan steel, which we buy and most of the world buys most of the deck and drive drywall screws, that steel price -- those steel prices haven’t come down, but they had plenty of demand, and they also had some -- but traditionally, if you go back in history, Taiwan steel prices will follow China steel prices over time. On the ocean container, all of us were shocked even our customers when the container folks jacked the rates and almost doubled them for contract May 1. What we were seeing at that time was spot prices for a 40-foot equivalent around $15,000 to $17,000. Contract prices had gone up to close to $9,000 on, again, a 40-foot equivalent. We do mostly 20s. But since then, spot prices have dropped and that’s putting pressure on the contract pricing and you would think these guys would have to flinch at some point because as people -- I mean if we can take 150 -- if we have $150 million more inventory because of lead times and they’re changing, you can only imagine, Reuben, what’s going to happen when all the big retailers can do the same kind of thing and take inventory out of things that they directly import from overseas. So we kind of see the commodity bubble starting to come down. Now as you know, it takes 5 months to come through our inventory. You also know it takes right now 160 days to get it but we like the trends where they’re beginning, and we’ll just have to see how it goes. So far, so good there. And I think us and our customers are both excited that it’s been 15 months of craziness.

Okay. And then a clarification on the inventory side. So you’re kind of -- you had to go to the low end of the range for EBITDA, but it sounds like the free cash flow is reiterated. That $50 million reduction, is that more than you anticipated in the guidance previously? And then it sounds like, Doug, if you’ve got $150 million excess that means there’s another $100 million to go in -- potentially in ‘23 if we see more normalization in the supply chain?

Yes, everything you said is correct, Reuben. So we -- the -- our original guide had a working capital benefit of, call it, $20 million to $30 million. We think we’re going to do better than that and we’ll be able to offset the pressure that is inside the guide around EBITDA plus. We’ll pay about $7 million in cash interest more this year than we originally anticipated because of raising -- rising rates.

Our next question comes from Lee Jagoda with CJS.

Just, I guess, starting with just foot traffic at retail. Can you talk to the foot traffic trends that you saw during the quarter at your retail partners and how that translated into volumes, particularly in fastening and hardware in Q2? And then maybe talk to how that follow through in July and the first few days of August?

Yes. I think, Lee, if you -- April was just a horrible month for everybody and the coldest, wettest in 20 years. So that really scared our retail partners, particularly because of their seasonal business put a lot of pressure when you’ve got 4 months to sell something and you basically lose a month. So we’re impacted by footsteps, people swing by and pick things up. They see things, they cut a key, whatever. And so we saw that and had -- as we reported a tough April. We saw May and June about where we thought. And I think our retailers made up a bit of the seasonal miss that they had. And then July kind of the same thing as April, it was just kind of a whole hummer foot traffic was down. But there’s a couple of things -- there’s one other thing going on, Lee, that I’m sure you know, the last quarter of our retail partners second quarter, the last month is July, and they’ve got work to do on their inventory levels and every merchant has a goal. So I think the -- you did see traffic down a bit, and you also saw retailers trying to do everything they can to control their inventories. And I’m sure you’ve read that in some of their reports. So I think that was the combo there. But again, we could see August and September be very similar to May and June. We just don’t know. And we’re not going to swing dramatically, but we do see some impact when footsteps are slower.

Got it. And then just one more for me. I know you had mentioned customer reductions on the inventory side, just on the slower-moving SKUs. If I look at the revenue guide, can you quantify the impact in the second half that you expect to see from those slower moving SKUs just being reduced at retail?

Yes. And Lee, that’s a hard one. We don’t know because, again, we’re fortunate that we don’t have a bunch of drills and sales and distribution centers. Our stuff goes direct to store, but I’ll give you an example. If they have 25 weeks in total on our product, they could do 2 or 3 weeks. And with our direct store and our people in the store, their fill rates would be okay. Now they would go back to 25 weeks if they went down to 23 when things normalize because we see it right now, for example, Lee, with lumber coming down, deck screws and drywall screws, you’re starting to see particularly deck screws jump. So they -- retail -- my experience is retailers traditionally go ditch to ditch on this. They take inventories down then they, Oh my God, it’s taken off again. But that’s the kind of swing you would see. And that’s part of the reason that you see our range on EBITDA and sales to the lower end. We’re just trying to be prudent with the things that we think are going to happen. And we understand our retailers have cash flow objectives they want to make. We’ll do our part. We’re not a big part of that. But that’s part of why we took the range to the lower end.

Our next question comes from Brian Butler with Stifel.

First one, just on the headwind from 2Q into -- on EBITDA from 2021 second quarter to about 140 basis points. Can you give some color around the puts and takes? I mean, obviously, inflation was a big chunk of that, but if you could break down maybe how the items offset for that 140 basis points of headwind.

Yes. I think the 2 biggest areas that we saw a headwind were in hardware and RDS, Brian. And so we talked about in RDS. It was a really tough compare when you think about coming out of COVID and the number of adoptions of dogs and cats and our engraving business performed really well. And quite frankly, this year, comparatively did not perform well on a unit basis. As Doug said in his prepared remarks, the kennels and the places where they keep animals, now the shelters are full. And it’s unfortunate, but that does impact our engraving business. And as you know, it’s a very profitable business for us. When you think about hardware, while we were able to catch price/cost, that softness in the period, which, quite frankly, we didn’t fully expect. We aren’t able to leverage as quickly in that business -- it’s not like you can delever the business fully over the course of a month. And so we have taken some actions as we think about the back half, as I talked about in my prepared remarks. But in the quarter, we actually performed a little better than we expected in HS from a rate perspective on the gross margin line, but SG&A aid a lot of that up because we were expecting to ship more product.

Okay. That’s helpful. And when you think about that, I guess, the prices and the cost kind of offsetting each other as you roll into 2023. What is kind of the -- I mean it’s a 0 margin pass-through. So what is the kind of headwind just from those -- the price increases and the cost that you’ve seen as it rolls through 2023? I mean there’s -- what is that -- is there a way to quantify that 0 margin headwind on margins?

Yes. So Brian, we’ve said publicly that we believe that it would be about a 300 basis point headwind. We would tell you, in the second quarter, we actually did a little better than that in the hardware business, probably closer to 200 basis points of headwind from the dollar-for-dollar pass-through. That’s one of the reasons that, as we’ve said, we expect margin rate to kind of remain constant through the rest of the year is we performed a little better than we expected in the second quarter from a rate perspective and hardware, and we think we’ll hold on to that as we hold on to price cost for the rest of the year.

Okay, great. And on the cash flow side, going from a negative $14 million in the first half to the guidance of the $120 million to $130 million, can you kind of break that down into some buckets on where that comes from in the second half?

Yes. I mean the simplest way to think about it is we’re a user of working capital typically in the first half of the year. And in the second half of this year because lead times have come down. Not only will we seasonably be a -- will working capital be a benefit, but we’ll also have the benefit of those reduced lead times. And so the big driver is that change in working capital plus the profitability that we’ll have in the back half of the year.

Okay, great. And last one for me. Just any more color on the chip shortage and kind of your thoughts on how that plays into 2023 or what you’re hearing on that easing up?

Yes. It’s -- we have enough to be 1,000 machines end of the year. We’ve got 200 more chips I heard last night. One of the crazy things, Brian, is the Molex connectors, which is basic wiring connectors that we use on all of our machines. They’re tight now because the auto guys have absolutely bought every single one of them. So it’s just silly stuff that you’d say over time is not going to be a problem. I believe after the first quarter of ‘23, we’re not going to have any problem on chips. But until then, we’re just still kind of nursing our way. But the Molex connector as an example, is just your basic wiring connector. And all of a sudden, the auto guys, I think they bought everyone on eBay plus everyone in stock and silly stuff like that. Doesn’t cost very much, kind of a basic thing. But we’re still kind of hand to mouth. And so a little better, but not open gates. I just -- I’m not overly concerned about it in ‘23, though.

Our next question comes from Ryan Merkel with William Blair.

My first question is on the EBITDA outlook for the second half. Can you just clarify what changed? Is it just the retail foot traffic and the destock? Or is there something else?

Ryan, it’s all volume.

Okay. Got it. And then should we think about the destock impact in 3Q more than 4Q? Or how do we think about those quarters.

I think so. I mean that’s a good question, Ryan. I think the current -- I mean, kind of when you saw those guys in Arkansas come out with the early release, everybody knew that inventory was going to be a problem. Target was one of the early canaries. And just think about it. I mean, they import so much stuff from Asia they had the rent extra distribution centers to hold more inventory because of the lead times. And with lead times coming down, I mean, Ryan, one of the interesting things going on right now is we’ve all seen situations where retailers needed to reduce inventories because of the business pressure. But I don’t think we’ve seen a combination of that and lead times going from 250 call it, days to 160 in such a short period of time. So what we’re doing in that regard is really balancing, making sure that our long-term supplier partners don’t get in trouble because there could be some suppliers on the other end of some other categories that just get whipsawed so bad, and we’ve got long-term 20-plus-year relationships. So I think it’s probably a second half deal. We -- I think some of that was going on in July, and we’re just fortunate that we don’t have a bunch of products sitting in distribution centers that our retailers can take out when you go direct stores, just not that much they can do. So I would say for the most part, it would be third quarter.

Okay. That makes sense. And then a longer-term question here. As we think about 2023, what is the potential range of benefit to EBITDA with container rates down and raw down? I know it’s a moving target, but is there anything you can provide?

There really isn’t. I mean, we’re playing with the numbers, too. Think about this. It’s really directionally, things are coming down. But if you just think about the math, if we don’t buy $50 million and we take inventories down, that’s a good thing. But by the time we do buy more and float it and get it through our inventory, you’re really talking about midyear ‘23 and it doesn’t mean that we won’t have benefit before that because there should be. But for the most part, if you just think about the math, when you take your inventories down and it takes, call it, 150, 60 days to get it and takes 4 or 5 months to get through your inventory. It should be pretty interesting in the second half of ‘23. We’ll feel things get a little better here and there until then, but that’s the kind of timing of it.

Yes, I hear you. So I said, well, I’ll put it in my words, 43% plus gross margin is still in the car, you probably start to see more of that second half ‘23, the impact starting to help you?

That’s right. That’s a good way to think about it.

Okay. All right. Last one for me. So the macro could be rough in ‘23, depending on who you listen to. I think in 2009, sales were down 5%, EBITDA was up 10%. Could that be the same sort of range of outcomes in ‘23? Or has anything changed?

Yes. I think the only thing that’s changed there, Ryan, I’ve gone back and spent some time with Nick and Rick Hillman who were running it at the time. We had a little bit higher percent local hardware business as a percent of our total then, as we do now, even though it’s a big part of our business, and they do extremely well in that kind of environment have historically. So I would say the 5 that Mick and Rick saw, maybe 8, 9, something like that because the mix is a little different. But directionally, I think it’s pretty similar and then commodities are bigger now than they certainly were in ‘09 as far as the run up. So, it should be better on that side as well. So it’s probably a little more on the sales side, but I think under $10 and then likely better on the EBITDA side, if you think about the math.

Our next question comes from Matthew Bouley with Barclays.

You have Elizabeth on for Matt today. I was just wondering, you’ve been able to successfully implement various price increases in the past, and we’ve seen that benefit in your margin this quarter. But as the macro unfolds, do you expect that there will be any risk to implementation of that price increase into Q3? And do you think people will push back on that at all?

So right now, we feel very good about the fact, Elizabeth that we have it done. Let’s be honest, retailers are very smart people. They’re looking at cost as well. They know that we’re going to be fair with them. And will there be pushback over time? Absolutely, there should be because that’s them doing their job. But as we’ve said, we’ve only gone dollar for dollar, and we’ve hurt our margin percentage, and we’ll get that back. And then we’ll see some benefits on the other side. But we’ll work with our retail partners to make sure. I mean, it’s our job when you have the share we have to make sure they’re competitive. We’re going to do that, and we’re going to be fair, and I know they will as well. So this fourth increase, we’ve been successful. We’re just getting everything implemented now. And then our retail partners have been great, but they’re not happy with all this inflation nor are we, and we’ll work together on the other side, but that will be a good side to be on.

Okay. And also, it would be helpful if you could talk a little bit about what you’re seeing in R&R like particularly, if there are any differences between what you’re seeing in DIY versus Pro.

It’s interesting the Pro continues to have backlog. But I -- in the Pros that we’ve talked to, we got about 1,000 in our network that we kind of ping and just kind of stay in touch with and give them product and get feedback. They’re not -- they’re still -- they still have a nice book of work in front of them. But their answering calls and trying to book days. So I think they see it out there 6 months from now, it’s not going to be like it’s been. So number one, they still are strong, but they’re worried as everybody is with what’s going on with the consumer on gas and groceries and the inflation pressures. The other thing -- it’s interesting, Elizabeth, when we look at things, when lumber jumps to $1,200 or $1,400, we really see that with our retail partners on projects and deck screw sales and some of the connectors we sell. And then when it drops as it has to $527 right now from $1,200, it takes back off. So there are things like that, that influence demand. But for the most part, our stuff is pretty boring and kind of chugs along, and we like that.

This concludes the Q&A portion of today’s call. I would like to turn the call back over to Mr. Cahill for closing comments.

Thank you, everyone, for joining us. We look forward to updating you as we move through the second half of this year. And again, I appreciate you joining us today. Thank you.