Hillman Solutions Corp. (HLMN) Q1 2021 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to The Hillman Companies Conference Call to discuss First Quarter 2021 Results. At this time, all participants are in a listen-only mode. Hillman will not be fielding any questions on today’s call in light of its recently announced planned merger with Landcadia Holdings III. [Operator Instructions] I would now like to introduce your host for today’s conference, Nick Ruffing. You may begin.

Thank you, Operator. Good morning and thank you for dialing in to the Hillman Group’s conference call to discuss first quarter 2021 results. I am Nick Ruffing, Vice President of Finance and on the line with me today is Doug Cahill, our Chairman, President, and CEO; Rocky Kraft, Chief Financial Officer. Before we begin, we would like to caution you that certain statements made today may include forward-looking statements that are subject to the Safe Harbor provisions of the 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 which could cause actual results to differ materially from those projected in such statements, including with respect to COVID-19. Some of the factors that could influence the company’s results are contained in our periodic and annual reports filed with the Securities and Exchange Commission. The company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, further developments, or otherwise. In addition, in this call, we may refer to certain non-GAAP financial measures. Please refer to our press release furnished on Form 8-K filed on May 11, 2021 for reconciliations of non-GAAP financial measures to GAAP. We will begin the call with a business update from Doug, followed by Rocky providing a financial review of the quarter. Let me now turn the call over to Doug for an update on the business.

Thanks Nick. Good morning, everyone. We had an exceptional start to 2021 with sales and adjusted EBITDA each up 15% in the first quarter, reflecting continued strong demand for our hardware and home improvement products in the U.S. and Canada. This performance demonstrates the strength of Hillman’s operating model and all-around exceptional execution by our in-store sales, service, and supply chain teams that is our competitive moat and truly differentiates us in the marketplace. Today, I am going to cover four themes that underpin our current optimism about Hillman and the exciting opportunity ahead of us to continue growing by helping our retail customers win and when our customers win, we win. First, we are not your everyday distributor. We are a full-service supplier of a complex array of SKUs that are critically important and valuable to our customers. This is our competitive moat and it starts with service, service and service. Second, the exceptional innovation, commitment and delivery of our sales, service and supply chain teams during the pandemic has further strengthened our relationships with our key retail partners and helped us win new business and gain market share. Third, we are seeing a continuation of the favorable tailwinds that began during the pandemic and a normalization of our business mix as vaccines rollout and the pandemic recedes. This is driving better than expected growth in our flagship Hardware Solutions business in both the U.S. and Canada and our Robotics & Digital Solutions business is rebounding faster than expected. On the flipside, working together with our retail partners, we are transitioning away from sales of COVID-related Personal Protective Equipment, or PPE sooner than we expected. And finally, underlying market growth and the performance of our operating model has reinforced our conviction in our long-term expectations for high single-digit sales and double-digit EBITDA growth within our $45 billion market opportunity. Our competitive moat and our success is built on the foundation of fully servicing our customers. The majority of our products, over 90%, are sold under our own proprietary brands. We are constantly innovating these products to keep our customers excited about our categories and their DIY projects ahead of demand. We directly source over 100,000 SKUs from an extensive network of reliable manufacturers. We have an army of personnel in the stores, directly filling shelves, ordering inventory and managing these 100,000 plus SKUs. There is no other competitor that we know of that can do this. Proof of our operating model is found in the fact that even with the demand volatility, global supply chain disruptions and tight labor challenges over the past year, our fill rates remained over 90% throughout last year and into the first quarter of this year. The reward for this performance has been even stronger relationships with our key retail customers as evidenced by the Vendor of the Year awards, new business wins from them and our record-breaking financial success. In the first quarter, underlying demand for home and hardware improvement products remained strong and our fastener and hardware business, was up 11% over prior year. We achieved market share gains in the construction fastener and builders hardware categories at a number of our major customers. We see tailwinds from enduring outdoor living trends and the overall transformation of people doing more activities at home as a powerful driver of our business for some time, and our customers agree. Trends in our Canadian business segment have followed an even stronger pattern and were up 31% over prior year in the first quarter there. While we expected to see our Robotics & Digital Solutions segment rebound to pre-pandemic levels by the end of 2021, we are pleased to see it start to happen sooner than expected, as sales in the segment were roughly flat in Q1. I will note that where stores are open and more accessible, we are seeing a faster ramp in robotics and digital performance. During the quarter, we began shipping our new Resharp knife sharpening machines and our new Instafob RFID duplicating machines to our major customers. The national rollouts are on track and we expect to see the benefit accruing in the coming quarters as our two new innovations in robotics and digital solutions get launched. The rapid rollout of the vaccine has hopefully put the worst of the pandemic behind us and Hillman could not be more excited to look forward. At the onset of the pandemic, our customers ask our protective solutions team to scramble and supply them with much needed PPE, including masks, sprays and wipes. The team rose to the occasion and began shipping COVID PPE in June 2020. In our planning for 2021, we assumed that our COVID-related sales in the first half of 2021 would remain consistent with what we realized in the second half of 2020 and then would be completely fazed out by the end of 2021. Fortunately, the vaccine rolled out quicker than imagined and that’s a good thing. What we saw next was that the Americans stopped buying COVID-related PPE in early March and thus we saw a sooner than expected drop-off in COVID-related PPE sales. We are optimistic that continued outperformance in our hardware solutions, robotics and digital solutions and Canadian businesses will make up for the earlier than expected drop-off in COVID-related PPE sales. Importantly, this will have no impact on our outlook for 2022 as we had already planned for these COVID volumes to end in our forecast before then. And that takes me to my fourth point on the immense opportunity ahead of us. We have terrific organic momentum within our $45 billion market. We are winning everyday and capturing an ever larger share of that. In addition, we remain active on the M&A front. In April, we acquired OZCO Building Products, a leading manufacturer of superior quality outdoor hardware in the U.S. OZCO are master innovators, with over 70% of their product sales covered by patents. We will leverage OZCO’s innovation and creativity across a much larger sales, distribution and service platform to bolster its growth and profitability. Our pipeline of additional bolt-on opportunities like OZCO is extensive in all of our segments. We will continue to invest both organically and through accretive M&A using modest leverage to further propel our business for long-term profitable growth and value creation. I am thrilled with what our folks have been able to accomplish so far in 2021 and with our well-structured setup for the future. When taking into account the competitive moat around our business, our stronger than ever relationships with customers, our accelerating core demand and the significant growth levers at our disposal, we are extremely positive on the direction of our business and excited to continue executing on our long-term growth objectives. With that, let me turn it over to Rocky.

Thanks, Doug. On a GAAP basis, our sales in the first quarter of 2021 were $341 million, an increase of $45 million, or 15.4% versus the prior year quarter. The growth was primarily attributable to strong hardware sales, particularly in our construction fastener category, along with strong sales of protective solutions driven by high demand for gloves and masks. Our Robotics & Digital business was flat for the quarter as it recovered to pre-pandemic levels. Our gross profit increased $11 million over the prior year quarter to $140 million, representing a gross margin of 41% compared to 43.7% in the prior year quarter. The difference in margin was primarily related to product and segment mix, mainly due to flattish performance in our high margin Robotics & Digital Solutions business compared to double-digit growth in other segments in Q1 of 2021. We experienced modest inflation in freight and transportation. Our first quarter SG&A as a percent of sales was flat to the prior year quarter at 30.2%. We saw good operating leverage on higher sales volume, which was offset by higher professional fees associated with items, such as our pending merger with Landcadia III and by inflation in wages and freight costs. Excluding the impact of restructuring and other costs, adjusted EBITDA was $48 million for the first quarter of ‘21 compared to $42 million in the prior year, an increase of 15%, representing a solid start to the year. Please refer to our press release furnished with Form 8-K on May 11, 2021 for reconciliations of net income to adjusted EBITDA. Now, let me now turn to cash flow and the balance sheet. In the first quarter of 2021, operating activities used $45 million of cash as compared to $18 million in the prior year. The primary driver of the change was an increase in inventory to support new business wins and sales growth. As a reminder, the first quarter is seasonally a period of working capital investment for our business. That is followed by a ramp up in positive cash flow in subsequent quarters as we hit our seasonally stronger months. This is consistent with our expectations for full year 2021. Net cash used for investing activities was $9 million as compared to $16 million in the prior year. Cash uses in both years consisted of capital expenditures primarily for our robotics and digital solutions equipment and merchandising racks, an important part of our high-return CapEx initiatives. Maintenance CapEx remained near 1% of sales, as expected. At the end of the first quarter of 2021, we had $1.6 billion of total debt outstanding and $104 million of availability under our revolving credit facility. As previously disclosed, in March, we received pricing and commitments for $1.185 billion of term loans. The term loans and a related $250 million asset based revolving credit facility will be used in connection with, and are contingent on, our merger with Landcadia III. The terms are highly favorable and upon the deal closing will result in approximately $150 million of additional liquidity, a roughly 160 basis point reduction in interest rate and a 3-year extension of our weighted average maturity to early 2028. Overall, we are very pleased with the better-than-expected execution we received on these credit facilities. This accomplished an important milestone on our road to merging with Landcadia III. I would like to wrap up with some considerations for our outlook. As we have discussed today, we are seeing some very positive signs in our business with our core end-market demand growing, with our customers integrating more closely with us, with our innovation efforts providing helpful solutions, with customer traffic continuing to pickup in stores and with our teams executing well to capture the resultant growth opportunities. Across all our segments, we are seeing inflation in almost every area, including commodities, freight, labor and packaging. We will soon be realizing price increases at our retail partners aimed at covering these cost increases. As Doug noted, we are seeing continued strong trends for DIY and hardware projects and our strong top line momentum continued into April. Our hardware solutions and Canadian businesses remain strong and our Robotics & Digital Solutions business has rebounded as the U.S. consumer is out and about and our retailers have started to return to pre-COVID operations. We are optimistic these trends will continue and help drive better than expected performance in these segments offsetting the pressure we see from the sooner than expected falloff in COVID-related PP&E sales that Doug referenced in his remarks. We currently have approximately $15 million of COVID masks, wipes and sprays inventory that we purchased at our customer’s request and we are working together with these retailers to clear these items. Net-net, this could have a modest potential headwind to 2021 EBITDA of up to $10 million, but there will be no impact on our 2022 EBITDA outlook of $260 million. I will reinforce the point that when you look at our performance excluding COVID-related sales, you still see strong double-digit underlying EBITDA growth in our recurring businesses. In summary, we are experiencing strong trends in our core markets that we foresee continuing for quite some time. Beyond market growth, we have meaningful growth to capture in expanding our existing products as well as with new products and new adjacent markets organically and with M&A. We look forward to continuing on our long and proven track record of success. Thank you for taking the time to listen to our story and we look forward to speaking with you again in the near future. At this point, let me turn the call back over to the operator.

Thank you. Ladies and gentleman, this concludes our call today. Thank you all for joining the call and for your continued interest in Hillman.