Good morning, and welcome to the Second Quarter 2023 Results Presentation for Hillman Solutions Corp. My name is Amy, and I will 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 10-Q were issued this morning. These documents and replay of today's presentation can be accessed on Hillman's Investors Relations website at ir.hillmangroup.com. I would now like to turn the call over to Michael Koehler with Hillman.

Thank you, Amy. 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; Rocky Kraft, our Chief Financial Officer, and John Michael Adinolfi, our Chief Operating Officer. We will begin today's call with a business update and highlights from Doug followed by a financial review of the quarter from Rocky. Before we begin, I would 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 earnings call slide presentation, which is available on our website. 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. I will begin today's call going through a few highlights for the quarter where our results were in line with our expectations and then give an update on our full-year guidance which we're maintaining at our previous levels. After that, I'll give a quick overview of Hillman, touch on our traditional hardware channel, and then provide some additional color on the quarter before I turn it over to Rocky to provide more details on our business. Net sales in the second quarter of 2023 declined 3.6% to $380 million from a year ago quarter. Total volumes were off about 6% and we saw 1% headwind from unfavorable FX in our Canadian business. These were partially offset by 3% lift from price. Top line was below our expectations due to volume softness across the board and [indiscernible] in particular but we expect a stronger second half, particularly as less challenging prior year comps, new business wins, and we are confident we'll see top line growth to 2023, which I will get to in a moment. Adjusted EBITDA in the quarter totaled $58 million which came in line with our expectations. Despite the latter top line for the quarter, we did a nice job controlling cost and maximizing operational efficiencies. This was a strong accomplishment given the high cost of goods still flowing through our income statement during April and May as we work down inventories dating back to the record high container cost from the summer of 2022. We are now sitting on the right side of the power curve and maintain our belief that adjusted EBITDA generated during the second half of 2023 will grow 20% over the second half of 2022. Free cash flow in the quarter totaled $65 million bringing the year-to-date total…

Thanks, Doug. As Doug mentioned, net sales for the second quarter of 2023 were $380 million a decrease of 3.6% versus the prior year quarter. Despite the decrease, we are confident about our revenue guidance considering the new business wins and other initiatives Doug mentioned earlier. The midpoint of our net sales guide assumes market volumes for existing products declined 1%. We benefit 2% from price that will roll from 2022 and new business wins offset last year's COVID related sales. Now let me provide some more detail on our top line by business. Hardware solutions is ou biggest business and makes up over 50% of our overall revenue. For the quarter, net sales were approximately flat at $225 million as compared to last year. This breaks out to approximately 3% of price, offset by a 3% decline in volumes. Robotics and Digital Solutions or RDS makes up about 15% of our overall revenue. During the quarter, RDS net sales were down 2% to $62.5 million driven by a decrease in engraving, auto key and file duplication and manual key duplication, partially offset by a 19.2% increase in sales from our self-service key duplication machine, minuteKEY. Our Canadian segment, which makes up about 15% of our overall revenue, was down nearly 8% compared to the prior year. This was driven by approximately a 3% decline in volumes and 5 points of negative FX headwinds during the quarter. Lastly, our Protective Solutions business makes up just under 20% of our business. Protective revenues were down nearly $9 million or 17% compared to last year. This was due to lighter foot traffic and the timing of promotional activity in early 2022, compared to a more back half loaded promotional calendar this year. As Doug mentioned, we have all of our promo activity…

Thanks, Rocky. I want to emphasize my belief that we can capitalize on the opportunities that lie ahead of us throughout 2023 and 2024. We remain humble and committed to providing exceptional service to our valued customers. With a unique business model that includes 1100 dedicated field sales and service professionals, along with our efficient direct to store delivery approach. We consistently deliver value to our customers, a value that they genuinely appreciate and recognize. We executed well during the second quarter and believe we've got the right people and strategy in place to have a great second half of 2023 which will lead to sustainable long-term growth and create significant value for our customers, associates and stockholders. With that, we'll begin the Q&A portion of the call. Amy, can you please open the call up for questions?

Our first question comes from David Manthey with Baird. Your line open.

Yeah. Hi, Dave Manthey here. Good morning, everyone. My first question.

Hi, Dave.

Yes, can you hear me?

Yes.

Yes. Good. First question is on the visibility that you have into the back half of the year. When you think about the factors you mentioned, the new business wins, RDS placements, promotions, and you're declining COGS versus shelf pricing. As you look at that and you compare that to your guidance, should we think about it as that if foot traffic is worse than expected, will be on the low end, if it's better than expected or in the high end? Or is the bell curve of potential outcomes wider than that? I'm just trying to understand those specific items that you've listed, how much visibility do those give you relative to the overall business?

Hey, Dave. It's Rocky. We've said all year and nothing's changed really the only variable to our guidance for the year is that traffic aspect and what our volumes are because of the traffic aspect. And so, our current guide would suggest down 1, our guide, if you put it completely together, is down 4 in volumes to up 2. And as we think about the back half of the year, we're pretty locked as we talked about on the call in our remarks on not only volumes, but are on promos, but new business wins. And so really, again, the only big variable is foot traffic and how that relates to volumes inside the stores. And to the extent you think about COGS, it's really just math. We know the cost of the inventory we're going to sell and we're in pretty good shape where we stand today around our cost structure. So again, just to make it real simple, it's really around volumes and what we see from a foot traffic perspective.

That's helpful. Thank you. And then on the ransomware situation, can you give us additional details on that, just what happened? And how the issue was resolved. Doug, I think you said it was completely wrapped up, but then later, I think you might have mentioned there was some lingering effect. I just wanted to make sure that that was behind us.

Yeah. We basically had the incident, we immediately took the system down, worked very closely with our customers and our people did a great job. The average down that folks have had with this type of thing; can range 15 to 19 days and we were down 4.5 days. We were very cautious about it, Dave, because, obviously, we wanted to protect that and our customer's information and all. But when I talked about the lingering, the only thing that when you have a direct store model, the great news is at the shelf, our fill rates have been extremely high as have our fill rates to the shelf. And so, we didn't see any significant mess, but 4 days we’re chasing some stuff that we would have shipped in the second quarter that'll come in the third quarter. And our team did a great job, and our customers were awesome because they basically said it's not a matter of if it's when. And what we really look for is how did you handle it? and we felt great about the way we went in and got out of this thing. But, yeah, it probably cost us some sales in the second quarter, and we'll just be making those up. Our fill rates will tick down a couple points, and we'll be back to the races by October 1.

Okay. Thanks very much.

One moment for our next question. Our next question comes from Lee Jagoda with CJS Securities.

Hey, good morning, guys.

Hey, Lee.

So, I guess starting with the self-service key sales increasing 19%. Just given that we saw some softness in volume across the board, is there anything going on there related to price or what do you think is driving the increase there?

You know, Lee, my sense is that people have got in much more comfortable with making a key at a self-serve. And when you combine that with the struggles that retailers have had with labor, it's probably tougher than it used to be to get a key made. I think it's really those two things. Our team's done a great job of making that gooey screen and that experience so much easier. There is a bit of -- a slight bit of price in there, but it's really, I think the consumer accepting that they can get in and get out and get what they want at that machine. And that's probably the reason that we've leaned into that machine and the consumer's comfort to now having that existing home and office and padlock availability now become as we get into 2024 automotive RFID 5. So, the good news is that the consumers like it, and the great news for us is we're going to now be able to do even more from that machine. But it's a bit of price, but it's really just a consumer acceptance and our retailers know that they're not where they want to be on labor. So that machine is even more important. We've got retailers that thought they would want 65%, 70% coverage of minuteKEY now going to a 100% because of the trend of the consumer and the fact that they don't see labor getting better anytime soon in the store.

So, other than a little bit of price, it's just some cannibalization of the full service going to the self-service?

Right now, it is. And then if you think about the two options, I think it'll be incremental growth because we're only doing auto keys for the most part in one retailer right now, and we'll extend that to four over time.

Lee, it's Rocky. The only thing I'd remind is, as that shift occurs from manual to self-service, that's good from an economic perspective, not only for us, but also for the retailers. So, we actually like that shift.

Sure. No, understood. And then, in terms of the promotional activity in personal protective, I fully appreciate the sort of flattish for the full-year ex-COVID sales on a year-over-year basis. Can you give us some more color on the cadence of promotional activity in the back half of the year in personal protective?

Yes, I think the way we would think about it, Lee, is we'll be up year in the second half and promotional activity should be up double digits compared to the prior year. We don't give out that exact number and needless to say there's a little bit of art, it's not all science around what's promotion versus what's in line versus maybe it's a new sale, but in general, we'll be up 10% in the back half or over 10% in the back half on promotions in that business.

More specifically, is it going to be more Q4 weighted or more Q3 weighted?

Slightly more Q3 weighted.

Got it. I will hop back in queue. Thanks.

Our next question comes from Michael Hoffman with Stifel. Your line is open.

Good morning. Thank you so much. Point of sales data, what are you interpreting as you think read your and evaluate the point-of-sale data at each of your major vendors or customers, I mean?

You know, Michael, when we went into the year, you remember that our big retailers were thinking that they would be up to on units. And we felt like that was a bit aggressive based on what we had seen. And so, we had them in kind of flattish to down to in our minds on units. and I think you're seeing with the big home improvement centers kind of saying down 2% to down 5%, down 2% to down 4% on units in total. So, we're a little better than that. And you look at the HS in general being up 4% to 5% for the year. Rocky, how much price is in that up 4% to 5% for the year. A couple points for HR?

Between 2% and 3%. Yes. So, that's what we thought would happen, and it turns out to be that. Now you can't -- the good news, Michael, we don't think there can -- we can't get anybody else on a plane. So, we think we're getting wrong now. We're going to be a little better off on footsteps, but it's about what we had thought. And I think our numbers are playing out the way we thought on the HS side.

Okay. And then taking that a step further, when you look at hardware and protective, you may have said this in your comments. And if you did, I apologize that I missed it, but protectives down on volume, but hardware is flat. But inside hardware is the remodeling repair things like deck screws, things like that actually up. How do I think about inside the line of business?

Yeah. If you look at the products that we sell inside HS, you're definitely seeing deck screws and drywall screws as leading the pack. If you look at PS, what you're seeing is the -- and it kind of makes sense, the consumer is leaning into a 3 pack or a value pack versus a glove for $14.99. And that would be the two things that we're seeing on PS and in HS.

Okay. Great. Thanks.

Sure.

Our next question comes from Reuben Garner with The Benchmark Company LLC. Your line is open.

Thank you. Good morning, everybody.

Hey, Reuben.

Rocky, can you talk about seasonality in margins and the point of the question, I think is kind of take a first look at next year. I know you're not providing guidance, but with the second half kind exiting at such a high rate. How do we think about that fourth quarter margin number and how that plays out into next year?

Yes, I think we're in a little bit different world Reuben today than we've been historically. And what I mean by that is we do typically see our second and third quarters are larger, particularly EBITDA margin quarters than the first and fourth. because of the volumes that we see obviously in the spring build and then through the summer. As we think about 2024, we're going to continue to benefit particularly in the early half of the year from the nice expansion we've seen in March, we don't expect that to drop very significantly. What we have said is over time, we deal with some of the biggest retailers in the world. So, we would expect that we move back to our historic margin rate of $44 million to $45 million. I think we'll do a little better than that in the first half of 2024. And then the one thing that we are seeing now is some benefit from steel, as Doug said, in his prepared remarks that it flowed through 9 to 12 months from the time that we see that. And so, we would expect to see some of that should continue to be a tailwind in the back half of 2024. But I think 2024 is going to be a nice margin year. And then again, as you think a couple of years out, we'll probably move back to that normal historic level of 44% to 45%, which we think is a fair margin for our business.

Got it. And then, business wins were mentioned a couple of times are the ones that you're starting to benefit from in the second half, are those things that have been announced on previous quarters, or were there new wins the past few months that you're talking about on today's call?

Those are ones that we've announced that are just I mean, one's in PS and one's in HS.

Okay. Got it. Thanks guys. Congrats on the results and outlook. Good luck.

Thanks, Reuben.

[Operator Instructions] 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 everyone for joining us this morning. I'd like to thank our customers and vendors as well as suppliers. And importantly, our hardworking team for the contributions to the quarter. And we look forward to updating you again in the near future. Thank you.

You may now disconnect.