Hillman Solutions Corp.

the third quarter 2024 results presentation for Hillman Solutions Corporation. My name is Jonathan, 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 presentation and 10Q were issued this morning. These documents and a replay of today's presentation can be accessed on Hillman's investor relations website, at ir.hillmangroup.com. I would now like to turn the call over to Michael Kaler with Hillman.

Thank you, Jonathan. Good morning, everyone, and thank you for joining us. I am Michael Kaler, Vice President of Investor Relations and Treasury. Joining me on today's call are Doug Cahill, our Chairman, President, and Chief Executive Officer, John Michael Adinolfi, our Chief Operating Officer, and Rocky Kraft, our Chief Financial Officer. As a reminder, we announced in August that effective January 1, 2025, Doug will step into the executive chairman role and John Michael, or JMA as we call him, will step into the CEO role. Before we get into today's call, I would like to remind our audience that certain statements made today may be considered forward-looking and are subject to the safe harbor provisions of applicable securities law. 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 two in our earnings call slide presentation, which is available on our website. 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, Doug will begin today's call with some recent highlights. Then he will provide some market commentary, touch on our updated guidance, and hit on our third quarter results. JMA will then hit on the value of our note, our acquisition of Intex, and our operations. Rocky will then give a more detailed walk through our financials and updated guidance before turning the call back over to Doug for some closing comments. We will then open up the call for your questions. It's now my pleasure to turn the call over to our Chairman, President, and CEO, Doug Cahill.

Doug? Thanks, Michael. Good morning, everyone. Before we get too far into the call today, I wanted to take a moment and recognize the Hillman team for actually accomplishing something that we've never done before in our history. On October 1st, we won the 2024 Divisional Vendor Partner of the Year in Hardlines at Lowe's. And eight days later, we won the 2024 Partner of the Year in Hardware at Home Depot. Our Lowe's team, led by Justin Fox, and our Home Depot team, led by Brad Helbing, do an outstanding job taking care of our two biggest customers. You guys and your teams have been doing and continue to do a fantastic job working with these two world-class retailers. For 60 years, the mindset at Hillman has always been, nothing happens until you sell something. And I'm happy to report it's alive and well today. Being recognized by our two biggest customers in the same year is not possible without this mindset. There are a lot of folks to thank, like our customer service and back office support teams, as well as our logistics and operations teams moving product across the global network. But I think I can speak for Justin, Brad, and the entire team and say the most valuable players at Hillman are the dedicated warriors in the field taking care of the shelves at Home Depot, Lowe's, and all of our customers each and every day. We're humbled by the recognition, and we strive to ensure all of our customers are well taken care of by our team. Again, my hats off to the Hillman team. You guys are amazing. As we look at 2025 and beyond, this company is in a great position. We believe we're approaching an actual inflection point where the macro will start to benefit both Hillman and our retail partners. Our retailers aren't predicting when existing home sales start to turn positive, but they're convinced that when it happens, it's going to be a historic run. Not for a year or two, but closer to three to five years. Driving this confidence are a few factors. Let's break it down. Number one, lower rates are likely on their way, and it will make it cheaper for existing homeowners to tap their home equity to fund home improvement projects. Homeowners in the US are sitting on a record $35 trillion of home equity, a number that has increased 81% since the end of 2019. Additionally, lower rates should drive an increase in existing home sales. Down from over 6 million homes sold in the U.S. in 2021, 2024 is projected to be at a 30-year low of 3.8 million homes sold. We believe lower rates will start to relieve this pent-up demand and existing home sales will improve next year. Number two, the age of existing homes in the U.S. 48% of homes are at least 45 years old, which includes over 24 million homes that are expected to reach their prime remodeling age in the next three years. We believe this will drive consistent demand for remodeling and renovation projects for years to come. Number three, the lack of housing supply in the U.S. With roughly 4.5 million homes shortage in the U.S. and no near-term solution, With roughly a million five homes being built a year, home values are expected to remain strong, and homeowners will continue to invest in their homes. Meanwhile, we know the macro has not been a tailwind the last few years, but what I love about this business model of ours is that even with unit volume being a headwind for our industry, our trailing 12-month adjusted EBITDA is up 18% versus the year-ago period. Because of the great position we're in with our customers, we believe we will grow both top line and bottom line in 2025. But for now, let's go back to 2024. During the quarter, we acquired Intex, a leading provider of cleaning rags, cloths, and textiles. Most every home improvement job again ends with cleaning, so this is another great product category that fits perfectly in our portfolio and one that we're excited to be in. Because of the additional contributions from Intex and our October results, we're increasing our 2024 full-year top line and adjusted EBITDA guidance. Our new net sales guidance range is $1.455 to $1.485 billion and has a midpoint of $1.47 billion. The new midpoint is an increase of $1.47 billion. Our new free cash flow guide is $100,000 to $115,000. This is $5 million lower than our previous guide with no change to the bottom end. Rocky will provide more details on our 2024 guidance. and our CapEx investments shortly. Turning to the quarter, net sales in the third quarter of 24 totaled 393.3 million, which were down 1.4 compared to the prior year quarter. Driving our top line were sales from Cook and Intex acquisitions, which added about four points, which were offset by two main factors. Number one is the overall market volumes, which were down about 4% for the quarter. Number two was a one-point headwind from price, which was in line with our expectations, coupled with a small headwind from FX. For the quarter, our adjusted EBITDA increased 9% to $72.6 million, compared to $66.8 million during the third quarter of 2023. Our adjusted EBITDA margins improved to a healthy 18.4%. Adjusted gross margins for the quarter totaled 48.2%, marking a 400 basis point improvement over 44.2% during the year-ago quarter, and declined sequentially from 48.7 during the second quarter of 2024. We believe we've structurally improved our gross margin profile, and we expect it to be above 47 for the foreseeable future. We have managed to maintain these healthy margins by improving efficiencies, selling a better mix of products similar to what we've seen over the past few quarters. For our top line results, hardware and protective solutions are HPS, which is our biggest segment, net sales increased 0.1 over the comparable period. While our adjusted EBITDA increased 19.8%, our results were driven by contributions from Cook and Intex partially offset by softer market volumes and price. Net sales in robotics and digital, or RDS, were down 5.3 versus a year-ago quarter. This compares sequentially to 8% decline between Q2 of 2024 and Q2 of 2023. The trend has improved because the green shoots in Minikey 3.5 and our new kiosk service contracts. Adjusted gross margins and adjusted EBITDA margins remain healthy at 72.3% and 32.2% respectively. Both improved sequentially. As of today, we have 900-minute Keen 3.5 machines in the field, and we believe that we will have over 1,200 in stores by year-end. The deployment plan has accelerated throughout 24 years. and we expect to continue to ramp in 2025. We know RDS is a great business and we're laser focused on getting RDS back to growth beginning in 2025. Now turning to Canada. Net sales in our Canadian business were down 6.5% compared to the prior year quarter. The quarter and the rest of the year are helped by contributions from new business rollouts as we continue to gain market share north of the border These wins were offset by a very sluggish economy in Canada. For the year, we expect to maintain 10% adjusted EBITDA margins in Canada. And like our business in the US, we have this business in a strong position for when the economy turns and a great team in Canada. Before I turn it over to JMA, let me sum up 2024. As we told you in November last year, even if volumes were down in 2024, our EBITDA would be up, and this year has played out as we anticipated. We also told you that we expect to turn the tuck-in acquisition machine on, and we've added Cook and Intex this year. The contributions from these businesses have moved our four-year top-line expectations to be roughly flat versus last year, and our four-year EBITDA will grow about 14% versus 2023. We've improved our gross margin rate to 48 and our EBITDA rate to 17%, and we believe we've structurally improved the profitability of our business. We continue to strengthen relationships with our customers and reinforce our competitive moat illustrated by our Vendor of the Year wins at Depot and Lowe's. We feel great about where we are with our customers right now, and it's fun to be back on offense. We're ready to grow alongside our customers when the macro starts to shift, and we'll be ready for what our retailers believe will be a historic run over the next several years. With that, I'll turn it over to JMA. As we announced in August, JMA will take the reins from me in January of 2025 as only the sixth CEO in the 60-year history of Hillman. I love this company because of the people we get to work with and the customers we get to take care of, and I'm very proud of this transition. JMA, Rocky, and I have worked together every day for the past five years. It's been an honor and an absolute blast. JMA is doing a great job, and as executive chairman, I will support JMA, Rocky, and all of Hillman in every way that I can.