Will filter in as the time goes by. So, I'm Sam Darkatsh. Good afternoon. Welcome. On behalf of Raymond James, welcome to the Hillman Solutions presentation for today. We've got an army of folks from Hillman representing. So we have Doug Cahill, Chief Executive Officer, Rocky Kraft, Chief Financial Officer, Jon Michael Adinolfi, Divisional President. Wanna make sure I'm getting this right, JMA. And then Michael Koehler, Vice President of Investor Relations and Treasury. Doug, your prepared remarks, I don't know, 15, 20 minutes or so, which probably leaves us a couple of minutes for Q&A, but really, there is a breakout session immediately following downstairs, where the majority of the Q&A, especially on a granular level, will occur. With that, gentlemen, welcome back as always, and the floor is yours.
Thank you. Good afternoon, we are between you guys and cocktails, so we'll try to keep this alive for you. Let's start off with a lot of folks are. I know many know, I know he knows about us, but there are quite a few that don't. So let's talk about who is Hillman, and we have really three groups: Hardware and Home Improvement, and then we have Protective, which is job site, storage, and safety gloves. And then we have Robotics and Digital, which we call RDS. And our differentiation is really our service model, which where we have direct store delivery. When you think about the products that we service going direct to the store, we have 1,100 people full-time in the store taking care of that complexity.
And then we obviously know the category extremely well and the categories we play in, and we category manage for our retailers. We have the best customers. Our top five are Home Depot, Lowe's, Walmart, Tractor Supply, and Ace, and we've been selling those five for on average, 25 years. And when you think about Hillman, and you've heard about, "Oh, Depot is so tough," or, "Lowe's is so tough," or, "We hate Walmart." What's different about Hillman, not only are we a 60-year-old company that been doing this for a long time, but with the 1,100 people, we have absolute trust at the store level because they manage the category. They're in the stores every day, and we know all of the executives all the way through merchants and VPs. So there's a difference between our relationship and relationships where you're calling on a merchant.
very difficult to grow your partnership with a retailer when you're just calling on the trained killer merchant because they're tough, and they're trained to be tough. But when they know you have a relationship at the store level, at the CEO level, it makes a big difference. That's an advantage for us. We started in Cincinnati 60 years ago, and we're still there today. A few facts, fun facts, 20 billion fasteners a year, 245 million pairs of gloves, and 115 million keys are duplicated by our machines in retail. We have 46,000 locations that we ship direct, and when you think about that going directly to the store, you look at a Lowe's where we'll do $200 million with them. They don't have a single product of ours in any of their distribution centers.
It goes from our DCs directly to the store, and we can do that because we have folks in the store that manage the 114,000 SKUs and also take care of those 31,000 kiosks. So when you think about key duplication or pet engraving or knife sharpening, we have manufactured every one of those machines. We service every one of those machines, and we own every one of those machines still today, even though they're in all the retail stores throughout North America. 8% CAGR for 10 years on top line and a 9.4% CAGR on EBITDA over the last five years. If we think about why we win, it's really three things. I mentioned the direct store capability, our service team, and our brands that we own.
And let's go deeper on all three of those for a minute. If we look at the direct store, we have 22 distribution centers, and again, our products flow from there to the store for 75% of our business. And we can do that because people are there in the store making sure when it comes to the store, it gets in the drawer or on the pegboard. I think the 360 view we have is very unique because we get every day, every SKU POS. So first, we know how much they sell every day. There's no buffer between us and the store because we don't ship it through the DC. And then we obviously have the people in the stores that know exactly what's going on. So we're able to see the entire picture.
A lot of times people get blinded because the retailer may be having problems in their own distribution center and can't get products out. We don't have to worry about that because we bypass all of that. When you think about the 1,100 people, I don't know how you would do that today. We have been doing the service group for 28 years. We spend $90 million a year on that group. They're full-time. They have an average tenure with us of 11 years each, and we just virtually have no turnover in that group. It's they are absolute warriors. They do an amazing job for us, and when we win Vendor of the Year, it's because of the folks in the store that really differentiate.
It's just funny, if next time you go into a Lowe's or an Ace, just ask them in the fastener aisle, "Who does all the work?" And they'll say, "Hillman." And if you see one of their employees walk by the fastener aisle, they'll walk by like this because they do not wanna look at it because it's a mess. It's a very difficult, tricky category. And there's 100,000 SKUs in total that we sell, and they, they just don't wanna have to see that aisle after a Saturday afternoon, with the DIYers or the pros there. So our folks do a great job for us. And then when we talk about brands, we have 90% of the products we sell are our brands. You're not gonna see us on a Super Bowl commercial. These are not those kind of brands.
But Hillman's is the largest fastener brand. Paulin's the largest pro brand in Canada, and we, it's 102 years old. Everybody in Canada, if you're a pro, you know Paulin, you probably use it. Minute Key is the largest-selling self-serve key business in North America. And then, obviously, Firm Grip we own. It's the number one selling work glove in America, and it's only available at Home Depot. So there's an example of why we have brands and what we do with the brands. When you sell Lowe's and Depot, and you sell them the same thing, that can be tricky. So we sell Firm Grip to Depot only. We'll sell Power Pro to Lowe's and not to Depot. So you use the brands to differentiate inside the landscape of the different retailers, and, and that's how we do it.
For example, Digz is the fastest-growing female gardening brand. We started with gloves, and now we're doing all kinds of things for gardening because that brand is starting to take off, and we've done a great job with Home Depot on social media. Quick-Tag is our pet engraving. When you go to the airport in Orlando, check the machine out in the Disney store. It's an awesome brand-new machine. It's doing really well. We have a great track record of history of growing top line, and when you think about our customers, it's the DIYer, do-it-yourselfer, and the pickup truck pro. We do not sell into new homes. We never have. That's not our market. We're into the DIYer and the pickup truck pro, and we have a great market, I think, what's really good.
Now, today, everybody knows that existing home sales have dropped off with a 7.1% 30-year, but we do see existing home sales drive our business. Think about getting your house ready. You're gonna use our products. When you buy a new house, you're gonna use our products. And, but in general, when you think about the aging inventory, the millennials and aging in place, there are strong tailwinds. Our business mix is 75 DIYer, 25 professional, and again, we're very proud of our 60th anniversary this year. This is how we sell by customer. You can see that Lowe's and Home Depot are our biggest, but Ace, Walmart, Tractor Supply, great customers. True Value and Do it Best are very good customers. And again, we sell 12,000 independent little hardware stores, and that's about 25% of our business.
So we can go toe to toe with Home Depot or Lowe's, but we also do a really nice job in the small hardware store. And, and to think about what do we do at a hardware store, we order the product for them, we stock the product for them, we train their associates. So essentially, we do everything for them in that category. When you think about by product type, for those that aren't familiar, about 70% would be what we would call hardware and fastener. You got about 12% in the keys, 10% in the gloves, but you can see you've got construction fasteners, traditional, specialty, and then different anchors and different types. But it's about 70% of ours, our products sold would be in that fastener category. And then when you sell what we sell, these are the people you wanna sell.
We're really proud of that list. When we think about competition, we obviously have 29. Number two is 17. What's interesting about this is there are seven categories inside of hardware products when you look at that business, and we obviously have all seven. Number two only has nails and screws, one category. Three and four have three categories, and then it drops from there. Even though number six has five categories, they're under $100 million in total sales. So we don't really have another Hillman. And as I like to say to Bob, "It's because nobody'd be dumb enough to do what we do." But, but it really is a unique business after 60 years of taking care of the complexity at these major retailers in a category that's critical for them.
They have to have it, or they don't sell the lumber or the drywall, and they make 70 points in our category. So they love the margin in the category. Products, for those that aren't familiar, you've got construction fasteners, all kinds of nuts and bolts and screws. Obviously, we own the OOK brand. We're big in picture hanging. For mechanical picture hanging, we would have about 55% of the market. When you think about rope and chain, that's brand new for us for their acquisition of Koch. And then letters, numbers, and signs, any mailbox or home or office, we do. And then this is called SteelWorks, where any DIY project, you're gonna grab something that we make. And again, think about that all these rods, shapes, and sheets, nasty, sharp products. Stores don't wanna mess with them.
We manage that for them. So we put it in the rack, we make sure the rack's full, and our people do a great job in that category. When you think about protective solution, it's gloves, accessories. You think about job site storage and then all kinds of work gear. You might say, "Why readers and umbrellas?" We said the same thing until our retailers said, "Can you guys do readers and umbrellas? Because we know if you do it, when it rains, we'll have umbrellas." So we do probably $16 million-$20 million of readers and umbrellas because they know our people will make sure that they have those in stock. They can buy them cheaper than we can... but they let us do it because they know when we do it, it'll be in stock, and we've been doing it for about eight years now.
And that's essentially how our partnership grows. When you think about robotics and digital, it's a kiosk or it's a self-serve. The machine does it for you, or you hand your key to somebody at Home Depot, and they cut it for you. It's RFID and smart auto fobs. That KeyStart program is exclusive to ACE, so you can go into any ACE, grab your smart fob, they'll program it in 11 minutes, and they'll guarantee you that you'll pay 50% less than you paid at the dealer. And they're doing a great job with it in store. Pet tags, it's a great product for us. We have a new machine in Orlando. We have the Quick-Tag 3, which is going into every new Walmart, not in the front vestibule, but in the pet department.
And so that's gonna be an interesting one, to put a brand-new machine that does 26 different kinds of tags in the pet aisle at Walmart, which is massive. With that, let me turn it to Rocky.
Thanks, Doug. I'm gonna go back one slide real quick, just for fun, because our head of IR, Michael Koehler, you can see there's an Ohio State tag up here. Last year, that was an Alabama tag, and he finally figured out who Cahill and I like. I'm gonna spend just a minute on the financials, and then I'll talk for 2023, and then I'll talk about our guidance for 2024. We did release results two weeks ago, and so if there's more interest, you can go to our website, to our IR site, and look up the transcript and the presentation that are included thereon. Net sales, $1.476 billion in 2023. Interestingly, there was a 53rd week in 2022.
If you exclude that 53rd week in 2022, sales were up about 0.5% in a pretty tough economic environment, in our categories. Adjusted gross margin, you can see, increased by 120 basis points. Importantly, increased sequentially each quarter in 2023 and was above 48% in the fourth quarter. Structurally, this business historically has been between 44%-45% gross margin. We believe we can maintain the business above that, not only in 2024, but in the future, structurally. Finally, $219 million in adjusted EBITDA, about a 4.5% increase over the prior year. We're really proud of what we did with cash flow in 2023. We generated about $173 million in free cash flow.
That allowed us to pay down about $160 million in debt. We ended the year at 3.3 times levered. That was better than we anticipated. We thought we'd be at about 3.5, but brought down from 4.2 times in the prior year. I'm gonna spend a second on the next slide talking about why. One of the big drivers, in addition to the earnings of the business, is we were able to bring down about $100 million of inventory in 2023. We're today at about the right level of inventory across our network in the right places.
There is still a bit of benefit that we expect that we'll see in 2024, as the cost of commodities have come down, and we're buying better today than we did a year ago. But that quantity level is kinda where it needs to be after being elevated for a period of time because of global supply chain challenges. Early in the year, again, because we were able to bring the debt down, get down to 3.3, and actually have clear visibility as we think about 2024 to a two handle on the debt, we got back into the M&A game. So one of the strengths we believe for Hillman is to do tuck-in acquisitions. Think about new products that we put on the same truck that we're already shipping to our retail partners, serviced at the shelf by our folks.
We believe it's a very powerful model, not only allows us to grow through M&A, but in future years, turbocharge our new business sales. So we bought Koch Industries. During 2023, we actually entered a new category organically, rope and chain accessories, things like pulleys, things that you use with rope and chain. Big win at Tractor Supply. We now have the opportunity to roll that out to our other customers, but importantly, it also allowed us to get into rope and chain. Very attractive acquisition, about $45 million top line. We paid about 6x for this business, about $4 million of EBITDA. So as we think about 2019, again, we provided guidance a couple weeks ago. Midpoint of our revenue guidance, $1.515 billion. That's about a 2.5% growth on the top line.
Again, we're anticipating challenging market conditions in 2024. If market conditions get more favorable, we'd expect to beat that number. EBITDA of $235 million, really driven by that improvement in gross margin that I talked about. That's about a 7% increase over 2023, and we expect to generate about $110 million of free cash flow. With that, I'll throw it back to DJ.
Thanks, Rocky. So if you think about growth from here, it's expand categories with existing. So, for example, builders hardware, we weren't in until 2017. We're now in it and have big customer market shares because our customers said: "We would like you to get into this category." I can find no better way to grow than your customers telling you they'd like you to get into a category. We can also expand as they expand. So Tractor has reported 80 stores a year new. It's gonna be, I think, $125 this year. They're gonna get aggressive. ACE is gonna do 125 new stores. Home Depot is gonna actually get back in the game of adding some stores, which I think is great, and they've got 80 planned for the next five years.
As we think about existing, for example, we only have 350 stores of a major retailer in a category in the West Coast. We're not gonna be happy until we have all those stores, so we can expand in regions and then adjacent aisles. So the way we got into rope and chain is our customers said, "Hey, at the end of the aisle where your people are every day is all this rope and chain. It's a mess. We hate it. Can you guys get in it so it can be managed by your folks and shipped to us, not through our distribution center, but straight to our store?" And that's an example. I think plumbing and electrical are great fits for us. We're not talking toilets and sinks. We're talking things to fix toilets and sinks.
Lots of small value SKUs that we manage very well, just like fasteners that would fit, I think, real nice with what we do, and I think our retailers would like it. And then again, from our standpoint, we're proud of this 60 years. We are repair, remodel, and maintenance. We're benefiting from finally being on the other side of the, the cost curve. And as Rocky said, we feel good about our cash flow and the ability to continue to pay down debt, and then we'll look for those bolt-on acquisitions. This business should be a six top line, 10 bottom line business. I think with acquisitions, you could put us down for 10 top line and 15 bottom line, and that's what we hope to get going again as we start to see things normalize.
Again, Depot and Lowe's were down 11% in foot traffic in 2022, 8% in foot traffic in 2023. We certainly didn't see that impact. But existing home sales being 4 million instead of 5.5 million, there has been some impact. So that's why we're predicting flat this year. We're gonna do well on EBITDA because we've got our margins where we want them, and then we'll start to see—I think when we see a five handle on a mortgage, that's when you're gonna hopefully see existing home sales, Sam and I both hope, perk back up. But we feel great about this business, and with that, we got a time, Sam, for a question or two?
About five minutes. Anybody have questions here in the room? Doug, talk about how the service model may differ between the retailers. Home Depot versus Lowe's needs versus an Ace, or a Tractor or a Walmart. I'm guessing it's not monolithic.
No, it is different. Sam, it's different from the standpoint of what they do. So, for example, in an Ace Hardware, our people actually order the product. They also stock the shelves. They also change the price tags. So if you think about a price change, we change every sticker. Now, we don't have to do that at Lowe's and Home Depot, and then also inside of service, if you think about our robotics and digital team, it's an exclusive special team for our kiosk because that's more of a mechanical, fixing a machine, taking cash out of a machine, putting keys into the machine. So it's a little different.
And then at Lowe's and Depot and Tractor, it would be very similar, folks taking care of the shelf each and every day, so that when you walk up to the pegboard or the drawer, it's where it needs to be. So it does vary by retailer.
Other questions? Yep, right here.
Can you talk a little about container rates, what you're seeing, how far in advance you kind of lock into contracts?
Yeah. So the question-
The question-
Is container rates and, and what do you see and how long you lock in. Everybody is essentially on a May 1 negotiation, whether it's Amazon or Walmart or Hillman. Obviously, last year, the May 1 was a fun May 1 for everybody 'cause we finally came back to Earth and saw something that was a semblance of normal. When I say normal, I'm talking about pre, you know, like 2019. Everything was fine until the Red Sea and the Panama Canal and the Suez Canal. And it has gone a little crazy in the spot market. But to give you an example, throughout the fourth quarter, 97% of everything we shipped from Asia or around the world was at contract price. So we were only in the spot market for 3%.
Those that had to go to the spot market got their heads handed to them. It was ugly. And so the spot market has spiked, but contract hasn't moved, and I don't think May 1's gonna be a big deal. I hope I'm right, but I think supply-demand over time will take care of the noise that's happening right now. I don't think you're gonna see a big change because even the big carriers are saying to us, "Well, if you could do 10% more next year, we could probably do something before May 1." And I think they know that fundamentally, long-term supply-demand will drive it, but there is noise, and if you're in a spot market right now, there's an impact. Where we're impacted is on our glove business. We ship that through Jacksonville and Savannah, so you're talking a couple more weeks.
So it's just a simple lead time issue, but for the West Coast, not, not much of an issue.
I guess just one addition for building.
The extent there is a change on May first around contract rates, positive or negative, we won't even feel that until the middle of the fourth quarter, just given the time, the lead times from Asia, plus the time to get through our inventory. So we're not worried about it for this year.
The number of containers gives folks a sense of scale.
Probably about 15,000 containers a year.
Yeah, $15,000 a year.
Anything else in the room here? Talk about your optimal capital structure. You're talking about how debt came down, but not really where you think the balance sheet should optimally shake out and/or when M&A really starts to play a role?
Yeah, we believe that this business should probably live in the mid-twos from a leverage perspective, and we'll accrete in from there. We never expect to get up past, you know, a mid-threes, and we hopefully will keep it in the twos, but that would be through doing M&A. And then look, as we think over time, I do believe the longer we're a public company, the more debt we're gonna pay down, and we're gonna naturally bring that number. So right now, the target is mid-twos with tuck-in acquisitions that we believe are low risk, highly accretive, and then over time, we'll bring that down even further, Sam.
How much did the category get affected by destock last year? And might there be a restock or just we're now at steady state in the channel, whereby now it's just a POS game?
Yeah, on the destock side, because we're store direct, we didn't see it go up or down because there's no inventory. Now, there were definite categories that people had trouble last year. We didn't have any impact. Sam, I think spring, not necessarily for our business, but I really think for retailers, spring's gonna be a big confidence boost or not. They're really-- they need a good spring. And I think that if it happens for us, I think you'll see them start to-- We're already seeing people say, "Let's get ready." Doesn't change our math all that much, but if a good spring comes, I think good things will happen for our retailer.
If we have a bad spring, I think we're still gonna be fine with our numbers, but I think a good spring would really help the retailers feel a bit more bullish 'cause they're not swinging. They're kinda taking hits, not swinging, and I think a good spring would be great. You've seen some companies today that would really like a good spring, and I think it would be good for retail.
A little too early on March fifth to call when March, per, when spring breaks here in March.
Yeah.
Yeah. Any final questions here before we move to breakout? Okay, well, gentlemen, thank you very much-
Thank you.
We'll see you downstairs.
Thanks.
Thanks for coming.