Hillman Solutions Corp

NASDAQ:HLMN

Earnings Call Transcript 2021-Q4

[Operator]

Good morning and thank you for standing by. Welcome to the Hillman 2021 Fourth Quarter and Year-End Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations there will be a question-and-answer session. [Operator Instructions] Today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Jennifer Hills, Vice President of Investor Relations. Ms. Hills, please go ahead.

[Jennifer Hills, VP Investor Relations]

Thank you, Chris. Good morning. This is Jennifer Hills, Vice President of Investor Relations at Hillman. Thank you for joining us this morning to review and discuss Hillman's four quarter and year end 2021 earnings results. Joining me today are Doug Cahill, Chairman, President and Chief Executive Officer and Rocky Kraft, Chief Financial Officer. A copy of our earnings release and slide presentation can be found under the Investor Relations section of our website at ir.hillmangroup.com. Before we begin, we would like to caution you that certain statements made today may include forward-looking statements that are subject to the Safe Harbor provisions of the 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 which could cause actual results to differ materially from those projected in such statements. Some of the factors that could influence the company's results are contained in our periodic and annual filings filed with the Securities and Exchange Commission. Please see Slide 2 in our earnings call deck for more information regarding these risks and uncertainties. We will begin the call with a business update from Doug followed by Rocky who will be providing a financial review of the quarter and year. Now let me turn the call over to Doug.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Thanks, Jen. Good morning everyone. What a year 2021 was for Hillman. We accomplished a ton in a difficult operating environment, may be the toughest our business has seen in 57 years. And as difficult as 2021 was we more than held our own and clearly strengthened our company and I'm excited about 2022 and the future. Before I get too far in my remarks, I want to thank all of our employees at Hillman. From our warriors in the field that help our customers win every day at the show, to our distribution center employees that keep the products flowing and to all the support folks, we continue to outperform our competition and provide the best service model in the markets we compete, thanks to our people. Our moats never been stronger as we continue to help our customers overcome labor, complexity and supply chain challenges in categories that are critical to their businesses and to ours. Today, I'll start with some of our accomplishments for 2021, then talk a bit about the current environment, then give my thoughts on our outlook for 2022 and the future before I turn it over to Rocky to talk numbers and our outlook in more detail. So let's do a quick run through on some highlights from what we accomplished in 2021 along with why these accomplishments create that foundation for our future growth. First, we became publicly traded in July. This was a huge step in the evolution of our company providing access to the public markets, and importantly significantly reducing our debt. This provided flexibility to our business when lead times nearly doubled in 2021 and inflation took off. Our new balance sheet allowed us to invest in inventory and additional storage to maintain industry leading fill rates north of 90% compared to our industry estimated to be in the high 70s. That was an amazing accomplishment by our folks. This increased our moat and widened our lead as the clear partner of choice for our retail partners. Speaking of partner of choice, our performance in both 2020 and 2021 continued to generate new business wins as our customers allowed us to manage more of their shelf space. We won the entire fasteners set at one of our top five retailers for a midyear 2022 launch and that is on plan. We continued to expand our construction fastener business. Remember those are deck screws and drywall screws, with all of our major customers and we're very excited to be introducing a new line of gloves and work gear and job site storage under our AWP program. Our tool bags, pouches and rigs, all have our new patented [indiscernible] technologies. We continued our market share gains in builder's hardware with a flawless execution in late August with a major retailer, and we successfully expanded our Firm Grip branded core line and the new winner gobline [ph] set for 2022. We won this business at the same time we also took two rounds of price increases, totaling approximately 15% in the aggregate to offset cost inflation, more to come on pricing in just a minute. Finally, we launched Resharp knife sharpening and Instafab [ph] at scale and saw our Robotics and Digital business more than rebound from a tough COVID year in 2020. RDS had a great year in 2021 with 19.2% top line growth and a 38% increase in adjusted EBITDA, and would have performed even better if we weren't held back by chip shortages that are integral to our RDS business and as you all know impacting many industries today. All the great work in 2021 resulted in our Q4 being in line with our latest guidance. And despite headwinds from COVID comps, and significant inflation in excess of our enacted price increases, we increased our revenue on a year-over-year basis 4% and our adjusted EBITDA was down 6%. It's important I think, for me to put that into perspective. During 2021, even though we saw an annualized increase in inflation of $175 million, and a COVID related adjusted EBITDA drop of $15 million, we were still able to limit our adjusted EBITDA decline to $14 million year-over-year. Let me spend a few minutes giving you my current view on the state of our business and how I see 2022 playing out at a high level. We continue to monitor lead times for our products from Asia and the situation at the ports in U.S. as well as Canada. Today, from an order placement to our North American distribution network our lead times are north of 200 days compared to that historical average in the 120s. However, unlike many of our competitors, we've maintained our industry-leading fill rates with customers and turned a difficult short-term environment into a very big long-term strategic advantage for Hillman. To that I give credit to our daily pulse at the shelf with our over 1100 sales and service folks, combined with our long standing supplier relationships and the investment we made in additional inventory. We averaged 90.3% fill rate for 2021 and our year-to-date 2022 fill rate has improved to 93.4%. Hardware Solutions, our largest business has really performed well over the past 24 months. Their top line rebounded nicely in Q4 with an 11.8% growth over prior year and that puts top line for the year of 4.7 with adjusted EBITDA coming in just above 2020. Our two-year CAGR for HS is 10.4% growth on top line, and 18.3% growth in adjusted EBITDA. This is a big reason why I'm so excited about the future. Our customers love us because we do things for them every day that others don't. We have also been able to get through the largest inflation and global supply chain imbalance most of us have ever seen, standing stronger today than we were 24 months ago. As I think about 2022, I really don't believe we'll see relief in lead times during the first half, but that should moderate in the second half of 2022. When we see lead times and inflation moderate, we believe we see outsized profitability, and reduced working capital needs leading to outsized cash flow performance as well. Speaking of inflation, we have recently implemented a third round of price increases, our third increase in less than 12 months. Overall, we have increased prices in our Hardware Solutions business just over 20% and our retailers have increased prices at the shelf as well. March will be the first month that we will have price caught up to cost inflation assuming container costs stay at current levels. We have passed price on dollar for dollar to our customers, which maintains our dollar gross profit, but as we've mentioned in the past, hurts our margin rates. We've done the same and more at Protective Solutions where returning the business to profit growth is critical to our success. Another big effort at Protective Solutions includes an even greater integration with Hardware Solutions, which will drive efficiencies and make it easier to sell products across both platforms for all of our channels. During the first quarter, price will have caught up with cost and this will provide a nice tailwind to produce growth in sales and adjusted EBITDA in 2022 particularly in the second half. Now, let me spend a minute on trends with our customers. As a reminder, our business is driven by repair, remodel and not new construction. In general, our products are recession resistant and are relatively inexpensive, particularly as it relates to the total cost of a project. In our Hardware Solutions business, we have seen robust customer demand as trends in nesting, aging in place, outdoor living, and millennials buying homes has been a wind in our sails. While many factors such as store traffic and lumber prices and weather impact our business in the short-term, the long-term trends are a tailwind to our business and I love our position in the market. Looking beyond 2022, I continue to believe our differentiated model allows us to grow the top line of the business at least mid single digits, leveraging the sales growth to 10% plus on an adjusted EBITDA line. Let me finish my remarks by telling you why. One, our unrivaled field sales and service teams continue to give us the largest competitive advantage in our space. They help retailers with labor shortages, and we manage the aisle and long standing category and merchandising expertise. The need for these value added services has really only increased over the past 18 months, as retailers struggle with labor and in-stock levels throughout their store. We are currently in discussions with two of our top five customers about increasing our service force numbers for both of them. Two, we have long standing relationships with our suppliers, plus our volumes allow us to source better than the majority of our competition. This becomes even more important in these difficult times. Three, the sourcing capabilities, plus our distribution capabilities enable us to maintain flow rates north of 90% in a very tough supply chain environment. We ship 80% plus of our Hardware Solution accounts directly to the store. We make logistics for our products easy and we don't gum up our customers' Distribution Center. Four, innovation is a core strength and we continue to invest behind our brands, which makes up over 90% of our sales. For example, we designed, developed, and patented a new concrete screw in the anchor category under our power program that we rolled out for the first time in January. We have about 25% of the anchor category market today and we have historically resold only to the other companies products and brands in this categories, not our own. Our engineering investment and the new state-of-the-art ISO 17025 accredited lab, which opened in late 2020 in Toronto, allows us to create and validate anchor products at industry recognized certifications like ICC, and introduce them under our own respective brands like PowerPro. This gives us instant credibility and better margins in the category. So the anchor category is next up for us to focus on market share growth, just like we've done in construction fasteners and builder's hardware. Five, another great example is our PS business. They are great innovators, and in 2021 launched the Dura-Knit glove under our market leading Firm Grip brand. The material in this glove is equipped equivalent to a Nike Flyknit shoe. It won the GDUSA Innovation Award in 2021 and last week we were awarded a Ragan Award, our first, which puts Firm Grip in shared company of many Fortune 500 mega brands. All in, Hillman won six GDUSA Innovation Awards in 2021. In our RDS business, we continued to roll out highly proprietary, digitally driven, [indiscernible] product offerings that are traffic drivers, and flat out moneymakers for our customers. Although some of our rollouts have been slowed by chip shortages, these are not demand issues, they're timing issues. This business is an annuity with great margins, and we'll continue to work with our customers to grow the installed base, and product offerings that provide outstanding returns for our customers and Hillman. The combination of our unmatched service, logistics and innovation has deepened our moat with our customers. And finally, the M&A pipeline is strong and we are evaluating several opportunities. As we improve our leverage in the back half of 2022, and certainly into 2023, we expect to accelerate acquisitions in categories that are low risk and at attractive multiples. Think about the Hillman value proposition for companies joining Team Hillman through acquisitions. We know all of the top retailers from the store level to the boardroom. And our 1100 service and sales folks in the stores are unmatched as we ship products directly to the stores every day, bypassing their distribution centers. It's not hard to show a business how they get better on day one when they join Team Hillman. The future of Hillman is very bright. I'm excited about where we're taking this business and the value we will build for all of our shareholders. With that, let me turn it over to Rocky.

[Robert Kraft, Chief Financial Officer]

Thanks, Doug. This morning, I'm going to provide a quick summary of our fourth quarter and year end results and then turn to our outlook for 2022. On a GAAP basis, our net sales in the fourth quarter of 2021 was $344.5 million, an increase of 5.3% versus the prior year. Hardware Solutions sales increased 11.8%, driven by strong customer POS, new business wins and the pricing actions taken to date. In our RDS segment, sales grew by a strong 15.9% as robust foot traffic at our retailers continued to improve from the COVID troughs. Canada contributed 3.4% growth in the quarter. Offsetting the gains in these three businesses was a 14.4% decline in Protective Solutions in the fourth quarter, as we comped against still robust COVID related sales in the prior year. For the full year revenue grew 4.2% to $1.4 billion led by RDS of 19.2%. Hardware Solutions sales of $740.1 million grew 4.7%, primarily driven by price increases. Excluding price, hardware volumes were up 1% for the year against really tough 2020 comps. The 19.2% increase in RDS to $249.5 million resulted primarily from a return to a more normal environment in 2021 compared to COVID depressed sales in 2020, along with an increase in the installed base that drove approximately 20% of the increase. Canadian sales increased 12.5% in 2021 to $151.5 million due to reduced COVID restrictions in retail stores in 2021 compared to 2020 and the strengthening of the Canadian dollar. The 10.3% decline in protective solutions to $284.9 million was driven by a reduction in COVID PPE sales. In the fourth quarter on an adjusted basis gross profit increased by $4 million, or 2.9% to $140.6 million as the margin on higher sales was partially offset by a reduction of 100 basis points in gross margin rate due to low margin sales of our main PPE products and inflationary pressures in Hardware and Protective Solutions. Growth in our high margin RDS business and a strong performance in Canada, were able to offset a portion of the fourth quarter 2021 pressure. For the full year adjusted gross profit increased by $14.3 million to $604 million, while gross margin contracted by 80 basis points driven by similar trends to those we experienced into the fourth quarter. For the year SG&A as a percentage of sales, excluding certain restructuring and other costs increased to 27.9% from 27.1%. Higher selling expenses drove this increase, particularly our revenue sharing arrangements with our customers as RDS achieved outsized growth. Other SG&A factors included inflation and wages and higher outbound freight and storage costs. Adjusted EBITDA in the fourth quarter was $38.6 million, a 10.4% decreased from $43.1 million in the prior year and in line with our revised expectations. For the year adjusted EBITDA decreased 6.2% to $207.4 million from $221.2 million. The decrease in adjusted EBITDA for the year for the entire company, and the Hardware and Protective segments are attributable to Protective Solutions as lower PS adjusted EBITDA resulting from the 2020 COVID spike and related disruption to operations could not be fully offset by the strong performance in RDS in Canada, and modest full year adjusted EBITDA growth in Hardware Solutions. Please refer to our investor deck for reconciliations of net income to adjusted EBITDA. Now let me turn to cash flow and the balance sheet. For the full year 2021 operating activities used $110 million of cash as compared to a $92 million source of cash in the prior year. We increased inventories almost $140 million in 2021. While inflation to new business wins are partial drivers of this increase, we also made strategic decisions to increase our inventory levels to allow us to maintain our industry leading fill rates as the supply chain from Asia has stretched to historic highs of over 225 days. Capital expenditures were $52 million as we continued to invest in our Robotic and Digital Solutions equipment and merchandising racks, important parts of our high return CapEx initiatives. We had planned to spend around $65 million on CapEx in 2021, but ship shortages reduced our ability to produce machines at our planned pace. Maintenance CapEx remained near 1% of sales as expected. In connection with our going public transaction in mid July, we recapitalized our balance sheet, and at the end of the fourth quarter of 2021, we had $931 million of total net debt outstanding, down from $1.6 billion of total net debt outstanding at the end of the second quarter. At the end of the year, we had approximately $124 million of available borrowing under our revolving credit facility. Our net debt to trailing 12 months adjusted EBITDA ratio at the end of the year was 4.5 times, down from 7.1 times at the end of the second quarter. Now, let me spend a few minutes talking about our outlook. To start, our long-term growth algorithm is intact. As we move past near term headwinds, we have a high level of confidence in our business model that will allow us to grow organically mid to high single digits on the revenue line, and 10% adjusted EBITDA annually. Let's talk headwinds and tailwinds. Inflation, in the form of commodities that go into our products, container costs, outbound freight and labor were significant challenges in 2021, and will continue to be challenges in at least the first half of 2022. While labor inflation appears to be here to stay, it is manageable, and we have and will price for the high level of service we provide to our customers. Unlike labor, we believe that inflation in commodities, containers, freight and other costs we have incurred to maintain industry leading fill rates will begin to moderate in the second half of 2022. Keep in mind the benefit of that moderation will flow through our P&L until 2023 as it takes several months for inventory to be realized in our results. To offset these inflationary pressures, we have increased prices on our products on a dollar for dollar basis. While this approach will result in some margin rate degradation in 2022, historically, we have not given price back dollar for dollar when inflation moderates resulting in a recovery in margins over time. We are also modernizing and automating facilities to help mitigate the long-term labor pressure every company is facing. Our business continues to have several structural tailwinds that we don’t see going away for the foreseeable future. We are very well positioned in the repair and remodel space. The repurposing of the home fueled by COVID should provide tailwinds in that end market for many years to come. Our ability to out-service competition over the last several years has led to new business wins that Doug spoke about earlier and we believe allow us to continue growing above market. In RDS, while some of our newer programs are rolling out slower than anticipated due to chip shortages, this is a delay in timing, not demand and we are as optimistic about these opportunities as we have ever been. So what does this all mean for 2022? For the full year, we expect revenue to be $1.5 billion to $1.6 billion and adjusted EBITDA to be in the range of $207 million dollars to $227 million. The range for 2022 reflects the uncontrollable nature and timing around commodity inflation and freight costs, both inbound and outbound. We expect revenue growth in the high single digits throughout the year. On the other hand, adjusted EBITDA will be a year of two halves with our profits improvement largely weighted towards the back half. Our first half will be tough as we anticipate inflation continues. Price does not catch up to cost until March and we are comping high margin COVID related sales from the first quarter of 2021. Accordingly, we anticipate adjusted EBITDA down mid teen percent in Q1 year-over-year followed by a more modest decline in Q2. Based on this cadence, our first half adjusted EBITDA will be down mid single digit percent on a year-over-year basis. When we get to the second half, we are poised to have full price coverage, new business wins in place, and relatively lighter comps. We anticipate adjusted EBITDA to be up in the mid teens in the second half of 2022. From a cash flow perspective, we anticipate generating $120 million to $130 million of free cash flow. This number assumes $60 million to $70 million of capital expenditures for both maintenance and growth and approximately $35 million to $45 million of interest payments. We anticipate modest cash tax payments in 2022. We have also assumed we have a modest benefit from working capital in 2022 coming off the big use in 2021 and this assumes very little if any improvement in lead times from Asia. When lead times normalize and inflation moderates, we anticipate a commensurate reduction in working capital that will generate additional free cash flow. Our long term target for net leverage remains unchanged below three times. As I said earlier, longer term we continue to believe that our unique model will allow us to organically grow our revenue 6% and our adjusted EBITDA 10% consistent with our history. Doug, back to you.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Thanks, Rocky. While we're still adapting to the impacts from inflation and supply chain dynamics, our confidence in the long-term remains strong. Our investments to maintain our fill rates continue to pay off. While supply chain pressures haven't improved, they seemed to have stabilized. Finally, we'll continue to work with our retail customers and have them able to achieve a third round of pricing that I mentioned earlier. This is testament to our 1100 field sales and service folks, combined with our direct to store delivery model, which have created tremendous value for our customers, as they have faced immense logistical and labor challenges. The willingness of our customers to accept our pricing action, as well as awarding us additional shelf space shows how they value our partnership. While the current environment is still uncertain, we will continue to control what we can and focus as we always have on our customers and our own people. We remain well positioned to drive 6% revenue and 10% adjusted EBITDA growth over the long-term and to building meaningful value for all of our shareholders. Chris, can you open up the call for questions?

[Operator]

Yes, sir. [Operator Instructions] Our first question comes from David Manthey of Baird. Your line is open.

[David Manthey, Robert W. Baird & Co.]

Thank you. Good morning, everyone. Oh, then Rocky, the assumptions for future inflation trends and pricing in your new guidance, it sounded like you were implying those were static relative to the current situation. Is that a true statement?

[Robert Kraft, Chief Financial Officer]

Yes, David. For 2022 we're anticipating that the costs around the inflation that we've seen remain consistent throughout the year.

[David Manthey, Robert W. Baird & Co.]

And then assuming that inflation continues to run hot like it appears it might, what are the mechanisms that you have in place with your retail partners to affect additional price increases and are there triggers or trick points that would make those in effect?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

You know, David, it's amazing. Two weeks ago, I wouldn’t even have thought about that, but obviously, the world’s moving around. So when we talked to you last, we talked about our third price increase, I thought we could get it done by the end of January. We actually will have it completed everywhere as we hoped by middle of March. And that’s because, again, merchants have to cover their, you know what, with their boss. They’ve got to go to finance. They've got to run through the numbers and all, but no big pushback. I’ll tell you, historically, when we talked about the second price increase, David, you remember me saying we might do it on a temporary basis. Well, we’ve done three price increases on a permanent basis right now. Retails have been adjusted up several times and if it goes again, we’ll raise price. I can tell you they’re ready for it if it happens. I don’t think we’ll have to, but if it goes again, we’ll raise the price and everybody is conditioned for it. We’ve got all the processes in place, and that’s one of the reasons, going into the assumptions for 2022, you would assume we would say things would settle down a bit and normalize back toward history. But Rocky and I just said let’s leave them where they are, because nobody knows.

[David Manthey, Robert W. Baird & Co.]

So, thanks Doug. To be clear on that statement, previously you were saying that if and when inflation calmed down and maybe prices went down as well, you would be rolling back those price increases. But what you said just now is these are no longer sort of temporary price increases. These are permanent and if pricing does settle down a bit, you don’t plan on just going back to the retail partners with that give back on price. Is that what you’re saying?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, that’s correct. So, think about the past, there have been price increases since I've been here in seven years, retails have gone up. We’ve not seen ever, retails come down. We’ve not had to give back pricing that we’ve gotten. But if you think about this time, we basically -- we had $60 million costs, David, in 2021 that hit our P&L. We priced for 40 of it. So, we lost about 20 during the year as it came through our P&L. That $40 million that we priced in 2021 was the equivalent of $115 million of annualized price and our inflation guess, as we got toward the latter part was $175 million, as I mentioned. So, the price action that we took in this latest round was $60 million, that gets our 115 up to 175, and we finally caught this damn thing. And, retails have adjusted. We’ve never seen retailers take pricing down. This is a bit of a different time, but as I’ve said over time, if it normalizes back to where traditionally it’s been, we’ll probably hang on to half of it because we’re going to do the right thing for our customer. We’re going to do the right thing for our shareholder, but we’re not obligated to give any of it back.

[David Manthey, Robert W. Baird & Co.]

Got it. All right, thanks a lot Doug, I appreciate it.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Sure.

[Robert Kraft, Chief Financial Officer]

Thanks David.

[Operator]

Thank you. Our question comes from the line of Brian Butler of Stifel. Your line is open.

[Brian Butler, Stifel Nicolaus & Company]

Hi, good morning, guys. Can you hear me?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, hey Brian.

[Robert Kraft, Chief Financial Officer]

Hi, Brian.

[Brian Butler, Stifel Nicolaus & Company]

Hi. I just wanted to ask on the RDS chip shortage that you talked about and you saw this kind of limit some of the growth. What’s built into the 2022 guidance for this coming back, is it expectation that the chip shortage improves, or I mean, gets better here, or is expectations in 2022 that this remains the big headwind?

[Robert Kraft, Chief Financial Officer]

Yes. So, this is Rocky, David. I mean, our expectation…

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Brian.

[Robert Kraft, Chief Financial Officer]

Brian, sorry, our expectation is that it does remain a headwind. We’ve got, in our plan, what we believe the machines we can build will be RDS we think still can grow top line around 10% or we think is the normal growth level in that business. But it is unfortunately, that it is, from the timing perspective slowing down some of the -- what we think are really terrific opportunities for the company. Again, as Doug and I both said in our remarks, it's not a demand problem. It’s really about timing and as soon as we can get the chips and the boards that we need, those machines will be installed. They’ll begin to generate revenue and cash for the business.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, and Brian, I would just add that we've decided to play to win there, and we’ve got all the rest of the pieces we need to make the machines and take it, for example, Resharp that ace would want or could handle over a period of time. So, we’re only waiting on one thing. We’re not sitting back saying, well, we’ll just order the other stuff that we see the chip availability. But to answer your question, we don’t have any chip availability, additional chips coming our way in Randy’s numbers. And so, we’re hoping that changes, but right now, we just don't know. And what's going on in the world right now, the one thing I'm worried a little bit about is that Russia and China are the two big rare earth mineral miners. Not because it's not other places, but it's really tough environmentally to get that stuff out of the ground. And I'm a little concerned because who knows what happens there and those are important to the chip manufacturer. So, we've just decided to say we're not going to budget that we're going to get more.

[Brian Butler, Stifel Nicolaus & Company]

Okay, that's helpful. Just out of curiosity, can you give colour on what that magnitude of pent-up demand might be, whether that's 2023 or even beyond?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, I would just say just one example is we're at about 1000 Resharp machines, and we've got an order for 3000, that's with one customer before we go anyplace else, so it's pretty good.

[Brian Butler, Stifel Nicolaus & Company]

Okay, that's helpful. And then just kind of bookkeeping, can you kind of run through the capital structure now after all the kind of moving pieces with the warrants, what's the right share count for 2022? And is there any remaining items out there to be converted that can dilute it?

[Robert Kraft, Chief Financial Officer]

So, the warrants were all taken out before year end. And so right now, including like on a fully diluted basis, including management options as an example, it's about 196 million shares is what we would use. And really the only things that exist now are our management options and restricted stock that are typical and not very significant, they are less than 2% of the capital structure.

[Brian Butler, Stifel Nicolaus & Company]

Okay, great. Thank you.

[Operator]

Thank you. Our next question comes from Reuben Garner of Benchmark. Your line is open.

[Reuben Garner, The Benchmark Company]

Thanks. Good morning, everybody.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Hey, Reuben.

[Reuben Garner, The Benchmark Company]

Let’s see, so, I wanted to pick at the guidance a little bit or try to break it down. Can you walk through some of your assumptions on both the top and bottom line? I guess specifically looking at volume and price and then maybe Rocky on the EBITDA side, it seems like you're being pretty conservative, but maybe I'm missing some components. Can you kind of walk through what the bridge looks like to get you from ‘21 to your full year, ’22 outlook.

[Robert Kraft, Chief Financial Officer]

If you want to start on revenue Doug and then I'll hit the...

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes I think, Reuben, we obviously have if you think about Hardware Solutions as an example, we essentially have in our assumptions the price that will flow through, the new business that is going to happen, or will flow from what happened in 2021 and be annualized and essentially 1%-unit market growth. So, we're being pretty conservative from a volume standpoint and Rocky, you can fill in the blanks on the cost side and what we've assumed.

[Robert Kraft, Chief Financial Officer]

Yes. So, Reuben, I mean, I think the way to reconcile it is to think through the way we talked about the quarters, in the first quarter because of price costs, because of inflation, because of difficult comps, with COVID particularly in the PS business, we do expect that our EBITDA will be down, and down kind of mid teens. As you flow into the second quarter, we perform much better. You begin to see -- we've caught price cost, we have the nice benefit from some of the new business wins, but those are really towards the end of the quarter, and so that's how you see the second half be up kind of mid teens. Again, we've assumed in our modelling that there's no benefit around inflation coming back or us realizing any benefit from that in 2023. So, as you think about that and we're not going to guess that that's going to happen, if it does happen we do think it could moderate in 2022, we would feel that in 2023, which provides some growth outside of our normal algorithm. But, at this point, as we sit in March and start thinking about the second half, we're just not going to put any of that into our P&L. And so, when you do that it's really, the comps of the prior year and the new business wins that allow you to have nice growth again, kind of mid teens on the EBITDA side in that back half. But again, we're not going to predict if that gets better than that at this point.

[Reuben Garner, The Benchmark Company]

Okay. Thanks for that guys. And two quick, follow-ups on that. So on 1% market growth, you're looking for high single digit revenue growth this year. So 1% market growth, your business wins that you already have in hand, maybe add another couple of points and then the remaining 5 points or so are price for the business overall, is that the right way to think about it?

[Robert Kraft, Chief Financial Officer]

I think the way you need to think about it Reuben is, the COVID sales going away are an offset to the numbers you're looking at. So price is higher than you're thinking about and as we think about the total company for 2022, right price is going to be call it high single digits across the entire company. And you're going to have COVID come out, which is probably going to be in the range of $55 million to $60 million of COVID sales and then you're going to see nice growth in the business through those new business wins and market I call it, 5% mid single digits. That's how we're thinking about the year on the top line.

[Reuben Garner, The Benchmark Company]

Okay. And on the second follow up is on the inflation side. So just to be clear what -- maybe this is an impossible question to answer, but can you tell us, like roughly what kind of steel and freight level you're assuming? In other words, steel has, if you just look at the futures market it's been cut in half the last couple of months, are you guys still baking in your guidance steel from two months ago when it was closer to 2000 or have you already assumed some of the recent pullback will hit you? I know it's not a perfect metric, but just can you give us any color on what numbers to look for where there might be upside to your outlook or downside for that matter?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes. So two things, talk about steel. Obviously we've seen the pull back particularly in the U.S. China and Taiwan have not pulled back quite as much because I don't think they're impacted with the auto side is quite as much back. To answer your question, we've assumed that steel prices stay where they were in the fourth quarter and as we saw them in the second half of the year, we've not assumed that they're coming down. On the freight side, container side, Reuben this is the interesting part, that as you really think about it, historically, we would be 90% contract on our 45 containers a day from Asia and 10% spot. And the only reason we did spot is sometimes that was lower than contract. If you look at the math last year and why it was so hard to predict is that we were roughly only got 60% of our stuff on contract and 40% of our stuff was spot and that varied every month and you couldn't predict it because if they sold first class tickets, then they cut your contract rate back. And so we had months where we were at 39% contract, and we had a month where we were at 68% contract, so 60 contract, 40 spot. And obviously we think that should improve and we would not get back to 90/10, but we should be at 80/20 when this thing settles down. And there's a significant difference between spot and contract, but the way they did it last year, was just impossible to predict. We've assumed that the blend of 60/40 and the prices stayed constant through 2022 from where they were.

[Reuben Garner, The Benchmark Company]

Okay, perfect and I'm going to...

[Robert Kraft, Chief Financial Officer]

Reuben, just one thing to add to what Doug said, and remember in our hardware business, that is the most impacted by both the commodities and the inbound freight, we have five months of inventory. And so when those -- that's part of the reason you don't see us putting that into the 2022 guidance. While we do believe a lot of these costs, again, who knows what -- where it is today, but we believe that as those costs begin to moderate we don't begin to really feel it in our P&L until about five, six months later.

[Reuben Garner, The Benchmark Company]

Got it. And I'm, I hate to be greedy, but I'm going to sneak one more in. The Robotics segment or your assumptions within this guidance, are you assuming any of these kind of initiatives you have going kind of start to take off in the second half? In other words, the locksmith community, anything like that, or is this, just blocking and tackling type stuff, and there would be upside if you get those up and running faster than you expected?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, and Reuben, no, we're not assuming we catch firing a bottle anywhere, we're going to set this thing up and be loaded for bear for 2023. But for example, we've got five new machines and what's called Quick-Tag3 at a major retailer for our PET engraving, and so far it's doing great. It's an example of going from giving the consumer six pet engraving tag options to 26 options. We've also talked to this major retailer about putting it actually in the PET aisle. But we're doing a lot of that. We're doing a lot of groundwork. We're still working really hard on the lockout strategy. We're working really hard on the smart auto, but we're not assuming any of these take off, but trust me, we're working like hell to see if we can get a couple to take off. We just haven't assumed that for 2022.

[Reuben Garner, The Benchmark Company]

Great, thanks guys. Good luck this year.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Thanks, Reuben.

[Operator]

Thank you. Next question comes from Hamzah Mazari of Jefferies. Your line is open.

[Hamzah Mazari, Jefferies]

Hey, good morning, thank you. My first question is just on Robotics. Maybe if you could just talk about, you mentioned a thousand ReSharp machines, maybe talk about overall your installed base today. How to think about penetration and where that could go and have competitive dynamics at all changed in this business just given the high returns?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

So yes, let's -- Rocky can talk about the numbers. Let's talk about knife sharpening. Again, let's say it will get to a thousand this year with the chips we have. Our first order from Ace is to get to 3000 machines. We've not gone to Bass Pro Cabela's, Williams-Sonoma, and the others, as you know, because we don't want to get out in front of ourselves there. The one trend that is changing a little bit, is that our full serve machines and then -- and if you think about it, we've got at as example being Walmart and Home Depot, and Lowe's both full served machines and self-served machines. One in the back that does 140 keys, one in the front that does 25 keys. What we're seeing is with the labor issues that are everywhere at retail, we've got one of our retailers saying, Hey, let's do more self-serve in both sides of the store because we're just not able to man or woman this to get cut keys when the consumer wants them. And if we do that, we'll be open longer periods of time. So we're seeing a little trend, in labor leaning into more self-serve. But no changes Rocky, that based on the question of no dynamic changes and obviously the retailers love this business, because it's a destination purchase and it's something that brings consumers back and they do really well as we do. I think the, the last thing I would just add is, our vision and our whole attempt here is to make sure that in the future you can go into a store, go to a mini key machine, type in your car auto make and get a smart fob programed at your house or at your office or wherever you'd like. The key stumbling block for that is really the locksmith community that was decimated in 2020 that has not yet come back full. So what we're testing right now is really our people and we've got 1,150 of them programming for retailers for the consumer. We've got tests going with locksmith, but again, none of that is catching fire in a bottle in 2022, but we're working really hard on that. And we think that's a great opportunity, because up until now, Ace does the smart fob auto, but for the most part the other retailers have yet to have that as an offer, they'll do the older car, typical boring transponder, but not the smart auto key.

[Hamzah Mazari, Jefferies]

Got it, very helpful and then my follow up and I'll turn it over is just around the 2022 guidance, you gave a lot of color on revenue and EBITDA, but just on free cash flow conversion. How do you think about free cash flow through the quarters? I know you mentioned working capital gets better as supply chain does, but is it going to follow EBITDA or is there sort of any other dynamics to be aware of?

[Robert Kraft, Chief Financial Officer]

Yes. In general it will, Hamzah again, as you think about the cash cycle in our business in the first quarter, we are typically a user of cash because we're buying inventory, for the spring build, obviously because of where we exited the year end, we believe that spring build, inventory build will be less than it's been historically, but we'll still build inventory and be a user of cash. We'll go through this second and third quarter. And we think, generate decent amount amounts of cash in both quarters. And quite frankly, we would anticipate, sometime in the fourth quarter we would be fully out of our line of credit assuming all things stay constant.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

And Hamzah, I think the thing that is, when your EBITDA goes down and your need for working capital goes up because of inventory, that's a bad combination and direction which we've been dealing with. If you think about the future and you obviously have this massive price that we will see our margins improve and expand as things normalize. And we've got $140 million of inventory that we're holding that we don't need long-term of which half is inflation based and half is units. We'll get both those going in the right direction when these things really settle down. And that's, I'm looking forward to the other end of that.

[Hamzah Mazari, Jefferies]

Right. Got you. Thank you so much.

[Robert Kraft, Chief Financial Officer]

Thanks.

[Operator]

Thank you. And next we have a question from Lee Jagoda of CJS Securities. Your line is open.

[Lee Jagoda, CJS Securities]

Hi, Lee.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Good morning.

[Lee Jagoda, CJS Securities]

So just starting with Rocky, a comment you made earlier on the RDS business growing 10%, I assume that's sort of 2022 just given the headwinds we're seeing with the chip shortage. Is that right?

[Robert Kraft, Chief Financial Officer]

Yes, correct. So, yes, we believe that business grows, like we've said low -- in the low teens in 2022 consistent with what we've said historically.

[Lee Jagoda, CJS Securities]

Okay. And then other than the chip shortage, limiting your ability to kind of ship those 3000 machines, assuming that chip shortage got better at some point, what are the other gating factors to kind of getting those out into the market with Ace pretty quickly? And then beyond that, what do you think the TAM is for those re-sharp machines? Obviously, you talked about a bunch of the other players that you're not ready to go into just yet.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

I'll tell you what Lee, I don't know that anybody knows what the TAM is. And I say that because if you think about Ace and we did this in two markets, because we don't have enough machines, Ace is not going to turn on their national advertising and tell the consumer, hey get your dull knife sharpened at Ace in this cool machine and cool experience. What we've done is, we've taken a couple markets and we've jacked them with some digital and some advertising to let the consumer know. And what we know is when we get to, I think probably 1500 machines, the CEO of Ace is going to support that move. And I think that's going to be very interesting. So the TAM, the reason it's so difficult to say it is today, it's so fragmented. It's not a good consumer experience, and this is the absolute opposite that TAM really depends on when the consumer figures out, they can get a really easy, fun experience at their Ace Hardware for their knives to be as sharp as they've ever seen it, their scissors, whatever they tend, to want to sharp overtime, sharpen overtime. So there have been reports that this is a billion dollar market. I honestly don't think we have any idea. I would say no one is solving this at retail with the consumer in an eloquent way, the way we are. And we're super excited about it. I'm frustrated as hell because this thing's ready to go. Ace is ready to go. And I didn't really think it'd be this hard to get chips. As I've said, I thought we could buy them on eBay, but it is really, really shut down right now and tough to get. You can see that with, cars and everything else, but it will open up. We won't meet a lot of them, we'll get them and we'll get it going. We will train the stores. We will then drive digital and other advertising. We will have this on TV when we get the right thing, the right mixture of machines and Ace support. But that probably doesn't start until you get at least the 1500, 1600.

[Lee Jagoda, CJS Securities]

Got it. And then just switching over to the pricing discussion, and I know we've had a lot of discussion about that. I assume that the 20% price in total is predominantly on the Hardware side. And I guess my question is, does all of that price get realized that all of the customers, or is that sort of the headline price increase and then less gets realized on average? And if that's the case, what have you seen in terms of the average realized price increase versus the headline number?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, Lee, this has been one that has been driven by the math. We have to justify these increases. And if you think about that, $175 million that I mentioned that we now, as of the middle of March will have caught, that's about $160 million of in basically commodities are about 80, container and freights about 80. So 160 of the 175 are those two buckets and the rest is kind of labor, I don't see labor coming back, but it's pretty much across the board. Now if a customer buys more say threaded rod and steel sheet, then the increased percent will be slightly higher than it would be for a different material. But Rocky, I think it's pretty close across the board that the, 21%, 22% is almost across the board pretty close because the mix isn't all that different. There's a few customers with a little different mix Lee, and that would cause maybe a little higher, but I think in general, that numbers across the board and retails have moved a couple of times across the board as well. It's just something, you just cannot not move retails when you see this kind of increase. So we feel pretty good about the way it's structured right now.

[Lee Jagoda, CJS Securities]

Well, I guess the easy follow up to that is, in a distribution model, if you were more of an industrial distributor price increases are good things, or are you seeing because the retailers able to raise price that the retailers margins on your products are also expanding and is that sort of a reason for the retailers to push back less in this process?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Super excited about that one, because the margins for our retailers in our category have all always been good. They're even better now. So we do not have a food fight. We do not have a, between retailers. We do not have an egg, bread, milk, kind of thing where people are using it to get in. I mean, again, when you think about the project of a deck or a pergola [ph] or some kind of project, our products you can't do without, but they're not really driving the elasticity of the cost of that project. So we're in great shape. I feel really good about it. I would say that this pricing environment will not be good for us, it will be great for us long-term.

[Lee Jagoda, CJS Securities]

Okay. One more from me, if I can. You had mentioned earlier, you were in discussions with two of your top five customers about increasing your service levels. I assume this means just kind of adding more labor and increasing the number of times that your people go to the stores. On the surface it would seem that that would increase your cost. So how do you view that sort of from a return perspective?

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes, no, it does. I mean, it's real. And again, we know what the temporary pool of labor looks like. Nobody would want to send that into the store right now and have a Hillman shirt on. So we won't do a test. So for example, we're doing a 55 store test at one retailer to see if the math works. We were paid for that test before we did it on the people we hired, because we basically said, we're not going to hire part time. We never do. We, it's just not our stick and we're not going to do this unless you're willing to participate on the cost. And we laid out the exact cost and they know it, it should pay for itself. Hopefully we'll expand it, but no, there's no, hey, we'll both make it up on volume. You just can't do that when you're hiring full-time people today, with cars, with benefits. And again, if you were -- if we wanted college kids looking for beer money, that's a different story, but that's not what we're going to do in the store at Hillman.

[Lee Jagoda, CJS Securities]

Got it. Thanks very much.

[Douglas Cahill, Chairman, President and Chief Executive Officer]

Yes. Thanks, Lee.

[Operator]

Thank you. And I see no further questions in the queue. I will turn the call back to Jennifer Hills for closing comments.

[Jennifer Hills, VP Investor Relations]

As a reminder, a replay of this call will be available on our website. Thank you for joining us this morning.

[Operator]

This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a pleasant day.