Hillman (HLMN) Q2 2025 Earnings Call Transcript

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DATE
Aug. 5, 2025 at 8:30 a.m. ET
CALL PARTICIPANTS
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President & Chief Executive Officer — Jon Michael Adinolfi
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Chief Financial Officer — Robert O. Kraft
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Vice President, Investor Relations and Treasury — Michael Koehler
Full Conference Call Transcript
Michael Koehler: Thank you, Towanda. Good morning, everyone, and thank you for joining us. I'm Michael Koehler, Vice President of Investor Relations and Treasury. Joining me on today's call are Hillman's President and Chief Executive Officer, Jon Michael Adinolfi, or JMA, as we call him; and Hillman's Chief Financial Officer, Rocky Kraft. 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 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 those 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, 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. JMA will begin today's call by providing some commentary on our strong second quarter results and then give an update on our guidance. Following JMA's comments, Rocky will give a more detailed walk through our financials and guidance before turning the call back over to JMA for some closing comments. Then we will open the call up for your questions. It's now my pleasure to turn the call over to our President and CEO, Jon Michael Adinolfi. JMA?
Jon Michael Adinolfi: Thanks, Michael. Good morning, everyone, and thank you for joining us. We executed well and took great care of our customers during the second quarter of 2025, driving strong results on both the top and bottom line. We are pleased with our results for the first half of the year and are positioned well for continued top and bottom line growth in the second half of the year. Let me take a moment to provide an update on some topics we discussed last quarter. We told you that our business is well positioned to operate in any environment, and we delivered solid results during both quarters this year.
We told you that we would cover tariff- related cost increases, and we have. We told you that the resilience of Hillman's business should prove volumes to be better than our guide and they were. We told you that we would optimize the country of origin where we source our products with our dual faucet strategy, and we have. The Hillman team did a fantastic job during the quarter. I am proud of how we work together to navigate this dynamic environment while not losing sight of our long-term goals.
Based on our performance so far this year, the excellent job this team has done, we are raising the midpoint of both of our full year 2025 net sales and our full year 2025 adjusted EBITDA guidance. We now expect our full year 2025 net sales to be between $1.535 billion to $1.575 billion, with a midpoint of $1.555 billion. The low end of our net sales guidance represents 4% growth over 2024, and the high end of our guidance represents 7% growth over 2024. As for our bottom line, we now expect our full year 2025 adjusted EBITDA to be between $265 million to $275 million with a midpoint of $270 million.
The low end of our 2025 adjusted EBITDA guidance represents 10% growth over 2024 and the high end of our guidance represents 14% growth over last year. Let me spend 1 minute on how we're thinking about 2026 based on what we know today. We expect full year 2026 net sales to grow in the high single to low double digits and adjusted EBITDA to grow in the low to mid-single digits, both in an environment where we are assuming market volumes are flat. Rollover price in our typical new business wins will drive our top line in 2026. Considering the tariff comp next year, we will remain focused on managing margins, operating efficiently and controlling costs.
Rocky will share more details on our guidance and outlook for the remainder of the year in a bit. Hillman has a long track record of performing through all kinds of economic environment since we were founded over 60 years ago. Historically, our consistent growth and solid performance has been driven by our competitive moat, steady demand for our products tied to everyday repair and maintenance projects and great long-term relationships with our customers. Hillman's value-added moat, which consists of over 1,200 sales and service reps in our customer stores, direct-to-store delivery capability, category management and deeply integrated retail partnerships unlike any company in our space.
Today, we are successfully managing the current tariff environment while not losing sight of taking great care of our customers, winning new business and consistently striving to make our operations more efficient. We continue to deliver orders on time and in full to our customers, which has been demonstrated by our excellent fill rates for the first half of the year. From a supply chain and operations standpoint, we continue to execute our dual faucet strategy. We've made progress reducing our exposure to suppliers based in China, where we are confident that we can end 2025 with the ability to source approximately 20% of our products from China.
This compares to 2018 when we sourced nearly 50% of our products from China. The dual faucet strategy is the concept of buying product not only from multiple suppliers, which has always been our strategy, but from multiple suppliers in multiple countries. We know tariffs can change the market quickly. We are prepared for this and have built a flexible supply chain that allows us to deliver quality products at the best overall value for our customers. We are confidently navigating the tariff situation and executing our plan to set Hillman up for long-term success with our customers and long-term growth. Now let's turn our results -- to our results for the second quarter.
Net sales in the second quarter of 2025 totaled $402.8 million, which increased 6.2% versus the second quarter of last year. Driving our top line growth was a 4-point increase from Intex, which we acquired in 2024, 2 points from new business wins and 2 points from price. These were partially offset by a 2-point headwind from market volumes. For the quarter, adjusted EBITDA increased 10.1% to $75.2 million compared to $68.4 million last year. Adjusted EBITDA margins improved by 70 basis points to 18.7%. Adjusted gross margins for the quarter totaled 48.3%, which were down slightly from 48.7% during the year ago quarter, but improved sequentially from 46.9% for the first quarter of 2025.
Driving our sequential margin performance for the quarter was improved margins in RDS and a modest amount of tariff-related price. Our biggest segment, Hardware and Protective Solutions, or HPS, had a great quarter with 8.7% growth versus the comparable period. Adjusted EBITDA increased by 14.7% to $51.5 million. Our results were driven by contributions from Intex acquisition, new business wins and price, offset by just 1% decline in HPS market volume. Net sales in Robotics and Digital Solutions, or RDS, were up 2.3% versus the year ago quarter. This is our second consecutive quarter of growth for RDS, which confirms our MinuteKey 3.5 strategy is working.
Adjusted gross margins and adjusted EBITDA margins both improved sequentially, totaling 73.1% and 32%, respectively. As of today, we have over 2,200 MinuteKey 3.5 machines in the field. We remain on track to finalize the rollout of these kiosks to our 2 largest customers by the end of 2026. Now turning to Canada. Net sales in our Canadian business were down 5.6% compared to the prior year quarter. Sales volumes and adjusted EBITDA improved sequentially as we moved from winter into the spring selling season. Market volumes improved, but remained soft and FX headwinds weighed on our Canada's results. For the second half of the year, we expect Canada to return to top line growth.
And for the full year, we continue to expect that adjusted EBITDA margins will remain above 10% in Canada. Overall, Hillman is in a great position with our customers, and we'll continue to successfully execute in this environment. With that, let me turn it over to Rocky to talk financials and guidance. Rocky?
Robert O. Kraft: Thanks, JMA. Let me dive right into our results, and then I'll get to our guidance. Net sales in the second quarter of 2025 totaled $402.8 million, an increase of 6.2% versus the prior year quarter. Second quarter adjusted gross margins decreased by 40 basis points to 48.3% versus the prior year quarter, but improved 140 basis points sequentially. The Intex acquisition we made in August of 2024 has gross margins below our fleet. This drove the step down in margins versus last year. Additionally, we saw a modest amount of tariff-related price during the quarter, which helped our margins improve sequentially while entering into our busier spring selling season where we leverage more of our fixed costs.
Adjusted SG&A as a percentage of sales decreased to 29.7% during the quarter from 30.7% from the year ago quarter. Adjusted EBITDA in the second quarter totaled $75.2 million, improving 10% versus the year ago quarter. Our adjusted EBITDA to net sales margin during the quarter improved by 70 basis points to 18.7% from a year ago. Let me now turn to cash flows. For the quarter, net cash provided by operating activities was $48.7 million, and we generated $31.2 million of free cash flow even with a $32.5 million cash headwind from tariffs. Turning to leverage and liquidity.
We ended the second quarter of 2025 with $674.7 million of total net debt outstanding, which decreased by $29 million from the end of the first quarter. Liquidity available totaled $246.9 million, consisting of $212.7 million of availability on our credit facility and $34.2 million of cash and equivalents. At quarter end, our net debt to trailing 12-month adjusted EBITDA ratio improved to 2.7x versus 2.9x a quarter ago and 2.8x at the end of 2024. We maintain that our long-term adjusted EBITDA to net debt leverage ratio target remains at or below 2.5x. This will give us the flexibility to grow via M&A and use our improved financial strength to play offense.
Last week, our Board approved a $100 million share repurchase program. This is the first time Hillman has had an SRP in place since coming public in 2021. We are comfortable with our leverage ratio and feel it prudent to have an active plan in place. We intend to buy stock back to offset dilution resulting from employee stock awards. Doing so will have a minimal impact on our leverage. We will also seek to buy stock back when we believe there is a disconnect between the value of our company and the value of where the stock is trading. We anticipate deploying between $20 million and $25 million annually depending on the market.
We believe these repurchases will be accretive to earnings per share, drive shareholder value and will be an attractive place to invest capital. Similar to the SRP, our Board also approved a shelf registration statement. Similar to the SRP, we felt it good public company governance to have a shelf on file. To be clear, we do not intend to use the shelf to raise capital of any kind in the foreseeable future. We are simply putting the mechanism in place now. Now let me turn to our guidance.
While Hillman's business is generally resilient because of the demand for our products used for repair and maintenance projects around the home, we are not immune to declining foot traffic at our retail partners and a consumer watching their spending. Our top and bottom line guide contemplate a volume decline, which we believe is a prudent outlook for the year, considering existing home sales are projected to remain flat. On our last call, we told you that our guidance was conservative and our volumes will be better than our guide. So far, that has proven to be the case.
Now we have more clarity on how tariffs will impact our business, and there's less uncertainty around our expectations for the year. As such, we have increased the low end of our net sales guidance by $40 million. This raises the midpoint as the top end remains unchanged. Our updated net sales guidance is now between $1.535 billion to $1.575 billion, with a midpoint of $1.555 billion, reflecting 5.6% growth over last year and a $20 million increase from our previous guide. We are also increasing the low end of our adjusted EBITDA guidance by $10 million. This raises the midpoint as the top end remains unchanged.
Our updated adjusted EBITDA guidance is now between $265 million and $275 million, with a midpoint of $270 million, reflecting 11.7% growth over last year and a $5 million increase from our previous guide. In addition, we calculate the annualized run rate for tariffs to be approximately $150 million. The team has done a great job working with our customers to get price. We are confident we will end the year around 2.4x leverage, assuming we hit the midpoint of our guidance even after deploying some cash to execute a modest share repurchase.
Before I turn it back to JMA, I wanted to thank the Hillman team who has worked extremely hard to deliver such a strong quarter with healthy growth on both the top and bottom line. As we look ahead, we are confident in our ability to carry this momentum forward with disciplined execution and a focus on our strategic priorities. We are well positioned to build on this foundation and expect to see sustained growth throughout the remainder of the year while we focus on growing with our customers and driving shareholder value. JMA, back to you.
Jon Michael Adinolfi: Thanks, Rocky. As Rocky said, the team has done a great job this year. I am confident Hillman is positioned for long-term success and long-term growth. To our 1,200-plus frontline sales and service folks, our operations team, product team and all the support functions across the organization, I am so proud of how the entire Hillman team continues to execute and win. I'd also like to extend my appreciation to our customers, vendors, partners and shareholders for their ongoing trust and support. We're proud of the growth we delivered this quarter and remain confident in our ability to execute and build on the momentum throughout the year and beyond.
With that, I'll turn it back to T