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.

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?

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…

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%…

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.

Sure. [Operator Instructions] 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, but close enough. Good morning, guys.

Hey Lee.

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?

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.

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?

That's correct. We would expect the care that would make money next year.

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?

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..

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.

Got it. That's very helpful. Thank you.

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

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.

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.

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?

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.

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.

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

Thanks Reuben.

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.

Hey guys, good morning. Thanks for taking the question.

Hey, Ryan.

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.

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.

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?

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.

Got it. Okay.

Obviously, it will fully lap itself at that point.

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

Yes, that's the way to think about it Ryan.

Okay. Thank you. Best of luck.

Thanks Ryan.

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.

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?

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.

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.

Yeah.

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?

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.

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?

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.

Super. Thank you guys.

Yeah. Thank you.

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.

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?

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.

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?

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.

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.

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.

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?

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.

Perfect. Thank you very much for taking the questions.

Yeah.

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.

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.

This concludes today's conference call. You may now disconnect.