Hillman Solutions Corp. (NASDAQ:HLMN) is a leading provider of hardware-related products and merchandising services to retail markets in North America. The company has demonstrated its resilience and consistency, delivering solid financial results in the face of a challenging macroeconomic landscape.

Financials

For the full year 2023, Hillman reported annual revenue of $1,476,477,000, a slight increase from the prior year. Despite the muted top-line performance, the company's annual net income came in at -$9,589,000, reflecting the impact of the broader economic conditions. However, Hillman's annual operating cash flow remained strong at $238,035,000, and its annual free cash flow reached $172,266,000, showcasing the company's ability to generate healthy cash flows.

In the first quarter of 2024, Hillman continued to navigate the dynamic market environment. Net sales for the quarter increased slightly to $350.3 million, up from $349.7 million in the same period of the prior year. The company's adjusted EBITDA for the quarter grew 30.2% to $52.3 million, with adjusted EBITDA margins expanding by 340 basis points to 14.9%. This margin expansion was driven by a positive mix of price and cost, partially offset by the soft macroeconomic conditions.

Segment Performance

Hillman's performance during the quarter was led by its Hardware and Protective Solutions (HPS) segment, which saw a 2.4% increase in net sales. The Hardware Solutions business within HPS grew by 4.6%, driven by new business wins and the contribution from the recent acquisition of Koch Industries. The Protective Solutions business, however, experienced a 6.9% decline in net sales due to the timing of promotional activities, which are expected to pick up in the second quarter of 2024.

The company's Robotics and Digital Solutions (RDS) segment, which includes the key duplication and engraving business, saw a 9.2% decrease in net sales during the quarter. This was primarily due to lower foot traffic and discretionary spending, as well as the continued weakness in the existing home sales market, which has a direct impact on the RDS business.

Hillman's Canadian segment reported a slight increase in net sales compared to the prior year quarter, but the team delivered a strong bottom-line performance, with adjusted EBITDA increasing by over 70%.

Outlook

Looking ahead, Hillman has reiterated its full-year 2024 guidance across all three key metrics: net sales, adjusted EBITDA, and free cash flow. The company expects net sales to be between $1.475 billion and $1.555 billion, with a midpoint of $1.515 billion. This guidance assumes a 1% headwind from price, a 1% decrease in market volumes, a 2% lift from new business wins, and a 3% contribution from the Koch acquisition.

Hillman's adjusted EBITDA guidance for the full year 2024 is between $230 million and $240 million, with a midpoint of $235 million. This represents an increase of approximately 7% compared to 2023. The company also reiterated its free cash flow guidance of $100 million to $120 million for the full year 2024, with a midpoint of $110 million.

Business Overview

One of the key factors that sets Hillman apart is its competitive moat, which consists of three main pillars: a strong sales and service team embedded in its customers' stores, a direct-to-store distribution model, and a portfolio of owned brands that allow the company to anticipate and meet the evolving needs of its retail customers and end-users.

Hillman's long-standing relationships with its top customers, which average over 25 years, further strengthen its position as a strategic partner. The company's diverse product offering of 114,000 SKUs serves both the professional and do-it-yourself (DIY) markets, providing critical hardware and related products for repair, maintenance, and remodel projects.

The predictable nature of Hillman's end markets, particularly the repair and maintenance segment, has historically driven consistent demand for its products, even during economic downturns. This is evidenced by the Hardware Solutions business, which has delivered compounded annual growth rates of 7%, 7.3%, and 8.2% over the past 20, 10, and 5 years, respectively.

While the broader home improvement industry has faced challenges in recent years, Hillman has continued to perform well, winning new business, deepening its partnerships with customers, and strengthening its competitive moat. The company's management team remains focused on executing its plan, controlling the controllables, and positioning the business to capitalize on the eventual market recovery.

Recent Developments

Hillman's recent acquisition of Koch Industries, a Midwestern-based supplier of rope, chain, and related hardware products, is expected to contribute approximately $40 million to $45 million in net sales in 2024. The integration of Koch has progressed smoothly, and the company sees significant opportunities to leverage Hillman's resources and relationships to drive growth in this new product category.

Conclusion

Looking ahead, Hillman's management team is optimistic about the company's long-term growth prospects, both organically and through strategic acquisitions. The company's M&A strategy is focused on finding complementary businesses that can benefit from Hillman's competitive moat and customer relationships. With its improved leverage position, Hillman is well-positioned to execute on multiple acquisitions per year, similar in size to the Koch transaction.

In conclusion, Hillman Solutions Corp. has demonstrated its resilience and consistency in navigating the challenging macroeconomic environment. The company's diverse product portfolio, strong customer relationships, and strategic initiatives, including the integration of the Koch acquisition and the continued development of its Robotics and Digital Solutions segment, position Hillman for long-term success. As the market environment eventually improves, Hillman's management team is confident in the company's ability to deliver robust organic growth and capitalize on strategic acquisition opportunities.