• Net Sales: Increased slightly to $350.3 million in Q1 2024 from $349.7 million in Q1 2023.

• Adjusted EBITDA: Rose 30% to $52.3 million in Q1 2024 from $40.2 million in Q1 2023.

• Adjusted EBITDA Margin: Improved by 340 basis points to 14.9%.

• Adjusted Gross Margin: Increased by 610 basis points to 47.6%.

• Free Cash Flow: Reported a use of $6.1 million in Q1 2024 due to inventory build and acquisition-related expenses.

• Hardware Net Sales: Grew by 4.6%.

• Protective Solutions Net Sales: Decreased by 6.9%.

• Robotics and Digital Solutions Net Sales: Decreased by 9.2% to $55 million.

• Total Net Debt: Stood at $747.5 million at the end of Q1 2024.

• Liquidity: Approximately $242 million, including available borrowings and cash.

• Net Debt to Adjusted EBITDA Ratio: 3.2 times at the end of Q1 2024.

• Full Year 2024 Guidance: Net sales expected between $1.475 to $1.555 billion; Adjusted EBITDA between $230 to $240 million; Free cash flow between $100 to $120 million.

• Warning! GuruFocus has detected 5 Warning Sign with HLMN.

Release Date: May 07, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Hillman Solutions Corp reported a 30% increase in adjusted EBITDA to $52.3 million compared to $40.2 million in the first quarter of 2023.

• Net sales in the first quarter of 2024 increased slightly to $350.3 million, driven by new business wins and the Cook acquisition.

• Adjusted gross margins improved significantly, totaling 47.6%, a 610 basis point increase over the previous year.

• The company successfully integrated the Cook acquisition ahead of schedule, enhancing its product offerings and market reach.

• Hillman Solutions Corp maintained healthy liquidity with approximately $242 million available, including cash and credit facilities.

Negative Points

• The overall market and foot traffic at retailers were both negative compared to last year, impacting top line results.

• Higher mortgage rates are suppressing existing home sales, which indirectly affects Hillman's business as homeowners delay upgrades and renovations.

• Net sales in the Robotics and Digital Solutions (RDS) segment were down 9.2% due to lighter foot traffic and discretionary spending.

• Freight costs and input costs, although locked in for 2024, remain a concern due to volatility in global markets.

• Despite strong financial performance, the macroeconomic environment continues to pose challenges, with inflation and high interest rates impacting consumer spending.

Q & A Highlights

Q: Can you discuss the inventory levels in your market and any risks from destocking as the year progresses? A: Douglas Cahill, CEO of Hillman Solutions Corp, explained that destocking is common for companies that ship to plan through distribution centers, which can lead to excess inventory when sales are slow. However, Hillman ships directly to stores, avoiding this issue, so Cahill is not concerned about destocking impacting their business.

Q: With one of your larger customers moving into the pro distribution space, how does this affect your exposure to professional categories like roofing or lumber yards? A: CEO Douglas Cahill sees this as a strength for the customer's offering to residential pro customers and believes it will benefit Hillman due to their strong relationship with this customer, potentially leading to new opportunities as the customer grows.

Q: Could you provide insights on your expectations around transport costs and their implications for gross margins through the rest of the year and into 2025? A: Jon Adinolfi, COO, and Robert Kraft, CFO, noted that contracted rates for transport are locked in and favorable, which should support continued healthy gross margins. They anticipate maintaining margins above historical levels due to a positive mix of product costs and freight efficiencies.

Q: How are you managing the potential impact of higher interest rates on your business, especially considering your projections for the second half of the year? A: CEO Douglas Cahill mentioned that they have planned their cost structure and business operations assuming that interest rates will remain high, which aligns with their conservative forecast for the year.

Q: Can you discuss the types of kiosks your sales associates are servicing and the addressable market for these services? A: CEO Douglas Cahill explained that they are servicing kiosks in existing retail locations, which presents a significant growth opportunity without additional capital expenditure. However, specific details about the types of kiosks or the exact market size were not disclosed due to confidentiality agreements.

Q: What is your strategy and outlook regarding mergers and acquisitions, and how do you balance these opportunities with maintaining a healthy leverage ratio? A: CEO Douglas Cahill and CFO Robert Kraft discussed that the M&A strategy is focused on acquiring companies that fit into Hillmans business model at reasonable multiples. They are cautious about maintaining leverage, aiming to keep it below three times, and are selective in pursuing acquisitions that offer significant growth potential without substantially altering their debt levels.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.