Hillman Solutions Corp. (NASDAQ:HLMN) Q4 2023 Earnings Call Transcript
Hillman Solutions Corp. (NASDAQ:HLMN) Q4 2023 Earnings Call Transcript February 22, 2024
Hillman Solutions Corp. beats earnings expectations. Reported EPS is $0.1, expectations were $0.08. Hillman Solutions Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Fourth Quarter 2023 Results and Full Year 2024 Guidance Presentation for Hillman Solutions Corp. My name is Tawanda, 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, earnings presentation, and 10-k were issued this morning. These documents and a 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 conference over to Michael Koehler with Hillman. Sir, you may begin.
Michael Koehler: Thank you, Tawanda. 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 Jon Michael Adinolfi, our Chief Operating Officer. 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 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 at ir.hillmangroup.com. In addition on today's call, we will refer to certain non-GAAP financial measures. Information regarding our use of and reconciliations of these measures to our GAAP results are available in our earnings call slide presentation. With that, it's my pleasure to turn the call over to our Chairman, President and CEO, Doug Cahill. Doug?
Doug Cahill: Thanks Michael. Good morning, everyone and thank you for joining us. Before we get into our healthy 2023 results and our 2024 guidance, I want to take a moment to recognize the rich legacy that this company was built on as we celebrate our 60th anniversary this year. In 1964, The Hillman Bolt & Screw Corporation was founded by Max Hillman in Cincinnati. Back then the company got its start by distributing fasteners to independent hardware stores in Southern Ohio and Northern Kentucky. Max grew his business every year due to his relentless commitment to taking care of its customers, a commitment that's ingrained in how we do business today. As Max neared retirement his sons Mick and Rick took the reins of the company during the 80s.
The business continued to grow every year and it was during the 90s that the two brothers doubled down on their dad's commitment to customer service and started Hillman's field sales and service team. Today this team consists of 1,100 members and it is the key component of our competitive moat. Building an organization like this from scratch today would be nearly impossible. This field sales and service team enables us to build another key part of the Hillman moat, shipping our products directly to our customers' retail locations, bypassing their distribution networks all together. These two differentiators have allowed Hillman to become one of the largest value-added partners for hardware and home improvement retailers throughout North America.
It also enabled Hillman to grow its sales every year but one over the last 60 years. Mick and Rick ran the company for over 30 years until they retired in 2013 and 2012 respectively. From there we have continued to do things the Hillman way by remaining committed to building on the legacy of service that Max Hillman began 60 years ago. This is our true north. I'd like to thank the Hillman team both past and present for building on this rich legacy including our 1,100 amazing folks in the field, our hard-working employees in our distribution centers throughout North America and the entire customer support team which I'm grateful to be part of. After 60 years, we sometimes forget just how solid our business is. Over time, we have earned our customers' trust because of the high level of service and quality we provide, the unique perspective we bring and our commitment to long-term relationships.
We win with our customers because of our competitive moat and the unique advantages we bring to the table. Our customers continue to give us new opportunities and simply put we grow where our customers encourage us to grow. For example, a top five customer of ours challenged us to enter rope and chain accessories business. Our team worked together with our customer in order to come up with a winning game plan. We flawlessly launched this new business win across our customers' national footprint of stores on a compressed timeline during the second half of 2023. As a result of the exceptional implementation, we were awarded Vendor of the Year from this customer. Our successful launch in the rope and chain accessory category, sparked interest from other customers, while reinforced our decision to acquire Koch Industries, which is in the adjacent rope and chain category.
Now, we can take care of the entire rope and chain aisle for our customers. We have the unique ability to help manage the complex skew intensive categories that we're in today. Our data driven approach helps optimize the product mix for our customers. In other words, we know what products the DIYer and pickup truck pro want and Hillman team ensures these products are on our customers' shelves. This type of partnership is unparalleled, particularly in the traditional hardware channel, where we continue to convert stores to the Hillman platform and pick up new shelf space with existing customers. Our traditional hardware business makes up about 12,000 hardware stores and is about 27% of our entire business. It grew 4% last year versus 2022. This is demonstrated by our Hardware Solutions performance over the past 20 years, 10 years and five years, where the hardware's top line CAGR has increased 7%, 7.3% and 8.2% respectively.
This consistent growth has been fueled organically by new business wins and price, coupled with the acquisitions that supplement organic growth after year one. More recently, over the past three years, we have won an average of $25 million of new business per year in HS alone. We believe, we'll exceed that number during 2024 and into the future as we continue to grow with our customers. Combining that with our ability to do accretive acquisitions that leverage our moat gives us great confidence that we will continue to win with our partners. We believe that our runway for growth is meaningful. We build on the 60-year Hillman legacy again in 2023. Operationally, no matter the challenges this team continues to execute. During the year, we maintained healthy fill rates of over 94% while reducing inventory by over $100 million across our business.
We flawlessly launched multiple new business wins ahead of schedule with some of our biggest customers. On their own, these are three sizable accomplishments, however, we did so while moving our distribution hub from Rialto, California to Kansas City in the midst of our busy season, all while overcoming a cyber incident midyear. And importantly, we grew our adjusted EBITDA in our hardware and protective solutions segments by 13.4% over 2022. Now I'd like to hit our financial highlights for the year before turning it to Rocky for details. I'm pleased with how our team successfully navigated the year. At Hillman, repair, maintenance and remodel projects done by the DIYer and pickup truck pro drive our business. U.S. existing home sales totaled just $4.09 million in 2023, which was nearly a 19% decrease from 2022 and a 33% decrease from 2021.
Existing home sales drive all three of our businesses hardware protective and robotics and digital, as home sellers fix up their homes to prepare to sell and home buyers take on projects to turn their new house into their dream home. We nearly offset the soft macro environment by launching a number of new business wins and help with a bit of price early in the year. Net sales for 2023 totaled $1.476 billion, which was just shy of our full year 2022 results that included a 53rd week of sales. However, excluding the extra week from 2022, net sales increased by 0.4% and grew for the 59th time in our 60-year history. For 2023, we generated $219.4 million of adjusted EBITDA, an increase of 4.3% from 2022. With our relatively flat top line, our bottom line increased as adjusted gross margins improved over 120 basis points to 44.2% from 43% during 2022.
Further, our adjusted gross margins improved each quarter throughout the year, ending at 48.2% during the fourth quarter a 400 basis point sequential improvement over the third quarter. We believe we can maintain healthy adjusted gross margin throughout 2024, which Rocky will touch on in his guidance section later on. Now let's touch on the performance of each business for 2023. Hardware Solutions is our biggest business and it makes up 59% of our overall revenue. This business is the heart and soul of our company the same way Max, Mick and Rick were for 40 years. For the year, hardware sold 3.7% growth compared to 2022, or 4.7% when you exclude the 53rd week. New business wins drove the majority of the increase as we organically grew our share with our customers.
Our Protective Solutions business makes up about 14% of our overall revenue. For the year, protective revenues decreased 10.7%. However, excluding COVID-related PPE sales and 2022-53rdweek, Protective revenue decreased just 2.5%. The second half of 2023 was up nearly 10% versus the comparable period, and we finished the year strong in Protective Solutions. Thankfully, this should be the last time we talk about COVID. Robotics and Digital Solutions, or RDS, makes up 17% of our overall revenue. RDS revenue was essentially flat for the year or up 2% excluding the 53rd week, a 10% increase in revenue from our self-serve key duplication kiosk MinuteKey offset a relatively soft market. Looking forward, we remain very encouraged about our high-margin RDS business, especially our new MinuteKey 3.5 kiosks.
We are leveraging MinotKey the number one self-serve home and office machine to now include RFID 5 duplication and technology that enables transponder and smart auto capability. We currently have 40 MinuteKey 3.5 machines in the field and the initial results are encouraging. Our top customers are very excited about this machine and are anxious for the rollout during 2024. We believe that these capabilities and services for our new MinuteKey 3.5 machine are great not only for our retailer, but for their consumers. Additionally, we expect to roll-out endless aisle capabilities on our MinuteKey 3.5 self-serve machines during the middle of this year. This means that our user can get effectively any key duplicated. Our machines will scan the key.
We will cut the key in our plant in Tempe, Arizona and mail that key directly to the customer in just a few days. This solves the problem for customers seeking to duplicate unique keys like boat, writing normal and unique lock keys. Further, the endless aisle allows a customer to get an out-of-market key. For example, someone living in Los Angeles will now be able to get a Cincinnati Red key. Our RDS field service team, which is part of our 1,100 is in our customer store on a regular basis. There, they replenish inventory, collect cash and perform routine and service-related maintenance on our machines. We have several new opportunities to leverage this team of skilled technicians for other companies in the kiosk space, which will drive revenue and profitability for RDS in the second half of 2024.
Lastly, our Canadian segment, which makes up about 11% of our revenue, saw a 9% top-line decrease versus 2022. Following, a strong year in 2022, market volumes and foreign exchange were a drag on the 2023 results. It's no secret that since mid-2023, the Canadian economy has been sluggish, which has been a drag on our business. Our Canadian retail business, which makes up about 70% of their sales has roughly 60% market share and continues to provide strong service for the major retailers like they have in Canada for now well over 100 years. You all have heard us talk about this before, but I think it's important to touch on again. We have implemented a cumulative total of approximately $225 million in price increases since the beginning of 2021 to cover a like amount of inflation.
These costs break down to approximately $120 million of transportation and shipping, which includes the inbound cost of ocean containers, $80 million of commodities and $25 million of labor. As lower cost product flowed out of our inventory and through our income statement during 2023, we experienced sequential improvement in gross margin. We are now getting at the right side of the power curve with margins at or above our historical rates and we expect to stay there. Having said that, we continue to see some costs remain stubbornly high like labor, outbound freight and drayage, which includes the local port service charges. Additionally, there is uncertainty in the cost of ocean containers as we have seen disruption in the Red Sea at the Suez Canal as well as at the Panama Canal.
Since the majority of our products come from Asia to the West Coast, the impact has been minimal to our global product flows but we're keeping a close eye on the situation. Let's change gears and turn to the balance sheet. Back in 2021, we invested in our inventory to protect our fill rates as we saw supply chain tighten and lead times increased dramatically. I'm proud to report that we have worked through all of the inventory with no negative impact on our fill rates or excess and obsolete inventory. This strategic move is yet another example of doing things the Hillman way, taking care of our customers first. This is why our long-standing relationship with our customers is so strong from the Board level to each store level. We believe this decision has and will continue to yield new business wins.
With that inventory out of our network, we've benefited from a meaningful working capital tailwind during the year, generated $172 million of free cash flow, which we used to pay down debt. The resulting year end leverage ratio of 3.29 times meant that we could once again take advantage of M&A market by making a small tuck-in acquisition subsequent to the end of the year. As we discussed, during January, we acquired Koch industries, a Midwestern based supplier of rope and chain and related hardware products. This acquisition marks our expansion into a new product category for us. Having recently won the rope and chain accessories with one of our top five customers, our expansion into our open channel is a logical place to grow. We can bring these products to our existing customers, while realizing synergies in shipping, sourcing and service.
And we have new products for our team to go sell and service. Customer reaction has been outstanding. Since closing Koch during the second week of January, we've had great feedback on the news and real growth opportunity. Discussions are already on their way. The opportunities to grow via M&A are out there. Our customers are encouraging us to get into certain product categories because of our long track record and the value-added services we provide each and every day. Now with the balance sheet on its way to below three times we're ready to play offense. We're confident about 2024 because of the resilient end markets we serve, our diverse business, with 114,000 SKUs shipping to 46,000 locations across North America and 60 years of believing that nothing happens until you sell something at Hillman.
We are an embedded partner for our customers and our moat provides value added differentiation versus our competition. With that let me turn it to Rocky to talk numbers.
Rocky Kraft: Thanks, Doug and good morning, everyone. Before I get into our guidance for 2024, I'm going to provide a quick summary of our fourth quarter and year end results. I would like to remind everyone that the 2022 fourth quarter and full year included an extra week. Net sales in the fourth quarter of 2023 decreased 0.8% to $347.8 million versus the prior year quarter. 2023 full year net sales totaled $1.476 billion, which is down slightly versus 2022 full year, but up slightly when excluding the 53rd week from 2022. Net sales came in toward the top end of our revised guidance range. Remember, because of the resilient nature of our products that are a critical part of repair and maintenance projects, demand for our products is relatively consistent.
We don't experience the highs nor the lows that our customers often do. And during 2023, our top line outpaced some of our biggest customers. Fourth quarter adjusted gross profit margin increased over 480 basis points to 48.2% versus the prior year quarter. Sequentially, these margins improved by 400 basis points compared to the third quarter of 2023. For the full year 2023, adjusted gross profit margin increased over 120 basis points to 44.2% from 43% during 2022. As Doug likes to say, the pig is through the python, in the second half of 2023, we finally returned to normal historic margin rates. Q4 2023 adjusted SG&A, as a percentage of sales, increased to 32.5% from 30.6% during the year-ago quarter. For the full year 2023, adjusted SG&A, as a percentage of sales, increased to 29.5% from 28.9%.
Adjusted SG&A increases during both periods were driven by an increased investment in IT and a $6 million increase in our standard employee bonus expense during 2023, coming off a disappointing 2022 bonus payout. Adjusted EBITDA in the fourth quarter increased 20.8% to $54.4 million, exceeding the comparable year-ago quarter for the second quarter in a row. Adjusted EBITDA for the 2023 full year increased 4.3% to $219.4 million and came in ahead of the midpoint of our revised guidance range, which was $217.5 million. Adjusted EBITDA was driven by a positive mix of price cost, partially offset by a soft macro environment, which had outsized impacts on our RDS and Canadian businesses. Let's talk cash flow and balance sheet. During 2023, operating activities generated $238 million of cash versus $119 million in 2022.
Driving the improvement was a $104 million reduction in net inventories, improving cash management. Capital expenditures for the year were $66 million compared to $70 million in 2022. We continue to invest in our minuteKEY 3.5 and Quick Tag 3.0 machines, which are important parts of our CapEx initiatives. Free cash flow for the year totaled $172.3 million versus $49.4 million in 2022. Driven by a meaningful and accelerated working capital benefit, free cash flow exceeded the high end of our guidance and surpassed our initial internal expectations. During the year, we used free cash flow to pay down $160 million of debt. We ended 2023 with $722 million of net debt versus $888 million at the end of 2022. Towards the end of Q4, we took advantage of the swap market and the inverted yield curve by entering into a new set of swaps.
Currently, we have $360 million of existing swaps that expire on July 31, 2024. These swaps are fixed at 74 basis points plus our 270-basis point spread for an all-in borrowing cost of about 3.5%. In December, we entered in the new swap agreements for the same $360 million that go into effect on the day our existing swaps expire. These swaps are fixed at 3.69% plus our 270-basis point spread for an all-in borrowing costs of about 6.4%. These new swaps will expire on January 31, 2027. Our net debt to trailing 12-month adjusted EBITDA ratio at the end of the quarter was 3.29x which improved from 3.7x at the end of the third quarter and 4x at the end of Q2. Our long-term net debt to adjusted EBITDA ratio target remains unchanged at below 3x and we expect we will end 2024 around 2.7x assuming we fall near the midpoint of our guidance and we do not make any sizable acquisitions during the remainder of 2024.
Speaking of, let me spend a few minutes talking about our outlook and guidance for 2024. We anticipate full year net sales to be between $1.475 billion to $1.555 billion with a midpoint of $1.515 billion. Historically, our top line has grown about 6% annually. This consists of approximately 1% price and 5% volume growth. The 5% volume growth is made up of 2% to 3% market growth which looks a lot like GDP and 2% to 3% growth from new business wins. As it relates to our 2024 top line guide, our midpoint assumes a 1% headwind from price, a 1% decrease from market volumes, a 2% lift from new business wins and a 3% lift from the Koch acquisition. As you would expect our top line is going to be dependent upon sales volume at our customers which is predominantly driven by their POS.
Our ability to win new business, the strength of the consumer and the health of the economy and housing market will impact our results. For our bottom line, we expect full year 2024 adjusted EBITDA will total between $230 million and $240 million. The midpoint of $235 million represents an increase of about 7% versus 2023. During 2024, we expect our full year adjusted gross margin to come in above 45% for the year, which is where we expect the business to perform over the long term. Lastly, free cash flow for the full year of 2024 is expected to come in between $100 million to $120 million with a midpoint of $110 million. There was some pull forward of cash flow from 2024 into 2023 and we anticipate our normalized level of free cash flow to be in the $130 million to $140 million range for the next several years following 2024.
During 2024, we expect to be able to purchase products from our vendors, a bit less expensively than we did in 2023 because of lower raw material commodity prices. But expect this to be partially offset by a return to more normal purchasing patterns, which will provide a modest working capital benefit in the range of $5 million to $15 million. Keep in mind that these guidance figures are made with the following full year assumptions. Interest expense will be between $55 million and $65 million. Cash interest will be between $50 million and $60 million. We expect to pay cash taxes between $10 million and $20 million. CapEx will remain between $65 million and $75 million. We anticipate restructuring related or other expenses of approximately $20 million -- $10 million excuse me.
And our adjusted diluted weighted average share count for 2024, will be approximately $199 million. Our success reducing inventory and paying down debt during 2023, has put us in a position to play offense and use our improved balance sheet to execute low risk acquisitions like Koch. As we look forward, we believe our competitive moat and long-standing relationships with customers will allow us to continue to win and to perform at or above our historic growth rate over the long term. With that, back to you Doug.
Doug Cahill: Thanks, Rocky. We've made excellent progress during 2023, from reducing inventory and paying down debt, to winning new business and transitioning one of our main distribution hubs from Rialto California to Kansas City and I'm truly impressed with our team's results during the year. Looking forward we fired up the M&A machine and believe that by leveraging the Hillman moat, we can add tremendous value via M&A. We started with Koch and are excited about bringing in additional categories to our customers, either organically or through M&A. As we think about 2024, we're ready to capitalize on the progress we made during 2023. While we can't control the macro, we believe we're very well positioned to drive share gain and a healthy profit increase during 2024.
Our true north continues to be the guiding principle of Hillman. We live by the model that nothing happens until you sell something, and once you do, don't disappoint. We know that in today's environment service matters as much as it ever has in our 60-year history. Our commitment to all of our stakeholders remains steadfast. This includes not only our customers, but our suppliers, team members and our investors. We look forward to updating you during the year with our progress. With that, we'll begin the Q&A portion of the call. Let's see Towanda, can you please open up the call?
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