Hillman Solutions Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Awards and Team: Won 2024 Divisional Vendor Partner of the Year in Hardlines at Lowe's and 2024 Partner of the Year in hardware at Home Depot. The Hillman team, especially field warriors, did an outstanding job.
• Market Outlook: Believes the macro will start to benefit both Hillman and retail partners. Factors include lower rates likely to make it cheaper for homeowners to fund home improvement projects, a large amount of home equity, aging existing homes driving remodeling demand, and lack of housing supply keeping home values strong.
• Acquisitions: Acquired Intex, a leading provider of cleaning rags, cloths, and textiles, which fits well in the portfolio. Contributions from acquisitions like Koch and Intex have led to increased top line and adjusted EBITDA guidance.
• Operations: Global operations team ships products on time with high fill rates. North American distribution network runs efficiently. About one-third of products sourced from North America, one-third from Taiwan and rest of world, and one-third from China (down from less than five years ago). Ocean freight spot market volatile but mostly covered by 12-month contracts.

Segment Performance

• Hardware and Protective Solutions (HPS): Third quarter net sales were up 0.1% compared to the comparable period. Adjusted EBITDA increased 19.8%, driven by contributions from Koch and Intex but offset by softer market volumes and price. It is the biggest segment.
• Robotics and Digital Solutions (RDS): Net sales were down 5.3% versus a year ago quarter. Adjusted gross margins and adjusted EBITDA margins remained healthy at 72.3% and 32.2% respectively, and improved sequentially. There are green shoots with MinuteKey 3.5 and new kiosk service contracts, and it is expected to return to growth in 2025.
• Canadian business: Net sales were down 6.5% compared to the prior year quarter. For the year, it is expected to maintain 10% adjusted EBITDA margins, and is in a strong position for when the economy turns.

Guidance

• Net Sales: New net sales guidance range is $1.455 billion to $1.485 billion with a midpoint of $1.47 billion, a 4% increase over the previous year midpoint.
• Adjusted EBITDA: 2024 full year adjusted EBITDA is now approximately $250 million, a 14% increase from 2023.
• Free Cash Flow: 2024 free cash flow range is $100 to $115 million with a midpoint of $107.5 million, adjusted down due to anticipated CapEx.

Risks

• True Value Bankruptcy: About $8.8 million of receivables at risk from True Value net of discounts and allowances, with no material recovery expected.
• Ocean Freight: Spot market for ocean containers volatile, and negotiations for 2025 contracts may lead to higher rates which could impact cost structure.

Question and Answer

Q: On foot traffic and demand trends, parse out how this trended in October relative to September and R&R growth expectations for 2025.

A: Doug Cahill said volume is soft, margin strong, mix good. Market stayed same, retailers bullish on pent-up demand but no prediction on when. Interest rates declining will help, but macro uncertain.

Q: On Intex, who it's carried by and gross margin limitations.

A: Jon Michael Adinolfi said Intex sells to Depo, Lowe's, Walmart, etc., no limitations in selling products. Rocky Kraft said gross margins are structurally lower but will improve over time with more volume.

Q: On RDS growth in 2025, what might move the needle.

A: Doug Cahill said MinuteKey 3.5 is just starting, with 900 machines out, will have conversions of existing 3.0 machines and new placements in 2025, and potential pricing opportunities.

Q: On Intex revenue added and Q4 expectations.

A: Rocky Kraft said Intex is about $55 million annualized revenue, Jon Michael Adinolfi said excited about growth opportunities with existing and new customers for Intex.

Q: On $7.8 million charge and SG&A in Q4 and 2025.

A: Rocky Kraft said fourth quarter SG&A will be a bit above 31%, full year expected around 30% adjusted.

Q: On renegotiating container rates and gross margin in 2025.

A: Jon Michael Adinolfi said container rates will go into effect May 1, 2025, and RDS returning to growth creates a natural floor for gross margin, expecting to maintain 47% plus rate.

Q: On RDS asset and M&A pipeline.

A: Doug Cahill said RDS is a business that can be turned with new investment, has options to sell or keep, and Intex integration is going well with good alignment. M&A pipeline healthy with potential for more acquisitions.

Q: On price trend and RDS post red box liquidation.

A: Jon Michael Adinolfi said price will be a slight headwind, RDS has secured two contracts servicing machines for other kiosk operators, good for 2025.