Hillman Solutions Corp

NASDAQ:HLMN

Earnings Call Analysis

Hillman Solutions Reports Stability and Growth Amid Market Challenges

In its Q3 2024 earnings call, Hillman Solutions reported net sales of $393.3 million, down 1.4% year-over-year, but adjusted EBITDA rose 9% to $72.6 million, reflecting an 18.4% margin. Improved gross margins of 48.2% continue to support profitability despite lower market volumes. For 2024, the company raised sales guidance to $1.455 billion-$1.485 billion and EBITDA expectations to approximately $250 million, marking a 14% increase from 2023. The firm remains positive about future growth, anticipating structural improvements and strong demand from home improvement projects supported by rising home equity and housing shortages.

Navigating a Challenging Environment

In the third quarter of 2024, Hillman Solutions Corporation reported net sales of $393.3 million, marking a slight decline of 1.4% compared to the same quarter last year. This drop is attributed to a combination of market volume decreases—down about 4%—and a pricing headwind of 1%, which aligned with the company's earlier expectations. However, the company's recent acquisitions, Koch and Intex, contributed a substantial 4% increase, highlighting the positive impact of strategic growth initiatives.

Impressive Growth in EBITDA and Margins

Despite the decrease in net sales, Hillman achieved a notable 9% increase in adjusted EBITDA, totaling $72.6 million for the quarter. This is encouraging, as adjusted EBITDA margins improved to 18.4%, rising significantly from 16.7% the previous year. A key contributor to these strong margins was a 400 basis point improvement in adjusted gross margins, now at 48.2%, reflecting the company's efforts to enhance operational efficiencies and optimize product mix.

Future Expectations and Guidance

Looking ahead, Hillman is optimistic about its growth trajectory. For 2024, the company has raised its revenue guidance to a range of $1.455 billion to $1.485 billion, with a midpoint of $1.47 billion. This represents a minimal decrease of less than 0.5% compared to 2023, buoyed by the contributions from acquisitions and ongoing business initiatives. Furthermore, the adjusted EBITDA guidance for the year has been raised to approximately $250 million, indicating a robust 14% growth over the previous year's figures.

Strategic Acquisitions Fueling Growth

The acquisition of Intex is a critical part of Hillman's growth strategy, adding about $55 million in annualized revenue. Hillman is particularly enthusiastic about leveraging Intex's offerings in conjunction with its established market presence. Management anticipates low double-digit growth from Intex in 2025, which aligns with the overall company goal of expanding market share across its various business segments. The integration of Intex is reportedly progressing well, echoing the successful previous acquisition of Koch.

Impact of Customer Relationships and Market Position

Hillman has maintained strong customer relationships, with key recognitions as the Vendor of the Year from major retailers Home Depot and Lowe's. This recognition underscores the value Hillman delivers through its service-oriented approach and product offerings. The company emphasizes a unique competitive advantage through its distribution method, allowing 75% of products to ship directly to stores, enhancing customer satisfaction and operational efficiency.

Challenges on the Horizon Amid Restructuring

A notable challenge emerged when True Value filed for Chapter 11, potentially impacting $8.8 million in receivables. However, management believes this incident is unlikely to materially affect Hillman's long-term business model, as they continue to support the independent hardware stores under the True Value banner. The company's strategy focuses on maintaining relationships and adapting to market conditions, reassuring investors about its resilience.

Managing Cost Structures and Profitability

Hillman's adjusted selling, general, and administrative expenses (SG&A) rose to 29.9% of sales, up from 27.5% year-over-year due to increased employee bonus expenses. The company anticipates SG&A will average around 30% for 2024, with potential leverage benefits expected in 2025 as integration of acquisitions unfolds. Additionally, the firm has focused on managing costs effectively across its supply chain, engaging in strategic sourcing to mitigate potential tariff impacts.

Resilience and Future Growth Opportunities

Hillman expressed confidence in returning to organic growth rates historically noted at about 6% annually by 2025. With macroeconomic indicators hinting at potential recovery—such as lower interest rates and strong home equity levels—the company looks poised to benefit from increased demand for home improvement products and services. Management maintains a hopeful outlook for 2025, reinforced by strong customer ties and strategic market positioning.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to 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 10-Q 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 Koehler with Hillman.

[Michael Koehler, executive]

Thank you, Jonathan. Good morning, everyone, and thank you for joining us. I am Michael Koehler, 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 them, 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 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 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 2 in our earnings call slide presentation, which is available on our website.



In addition to 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 moat, our acquisition of Intact, 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?

[Douglas Cahill, executive]

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 8 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 3 to 5 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 U.S. 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 3 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 1.5 million 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 for 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 regs, cloth, 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 top line -- full year top line and adjusted EBITDA guidance. Our new net sales guidance range is $1.455 billion to $1.485 billion and has a midpoint of $1.47 billion. The new midpoint is an increase of adjusted EBITDA [Technical Difficulty] for the year, marking a 2% and 4% increase over 2023.



Our new free cash flow guide of $100 million to $150 million are [indiscernible] 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 Koch and Intex acquisitions, which added about 4 points, which were offset by 2 main factors. Number one is the overall market volumes, which were down about 4% for the quarter. Number two was a 1-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, or 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 Koch and Intex partially offset by softer market volumes and price. Net sales in Robotics and Digital or RDS, were down 5.3% versus the year-ago quarter.



This compares sequentially to 8% decline between Q2 of 2024 and Q2 of 2023. The trend has improved because of the green shoots in MinuteKEY 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 MinuteKEY 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, 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 U.S., 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 Koch and Intex this year.



The contributions from these businesses have moved our full-year top-line expectations to be roughly flat versus last year, and our full-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 is 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 5 years. It's been an honor and an absolute blast. JMA is doing a great job as Executive Chairman, I support Rocky in every way I can. [indiscernible]

[John Michael Adinolfi, executive]

Will hit on how we win with our moat, the M&A landscape, and operations before turning the call over to Rocky. Let me give you a quick refresher on the 3 differentiators of our moat. Number one, pick, pack, and ship directly to our customers; number two, 1,100 field sales and service warriors; and number three, our 60 years of experience.



Next, I will share a few real-life examples of how each part of our moat creates value for our customers. First, by shipping 75% of our products direct to store, we take care of our customer when they need it most. For example, during the recent hurricanes that impacted the Southeast, we were able to support our customers before and after the storms with minimal impact to service levels. Second, our 1,100 sales and service warriors not only take care of our normal customer needs but also enable us to flawlessly execute in-store resets across the country. For example, one of our top 5 customers is investing alongside of us for a multiyear nationwide reset of the fastener aisle.

This is an entire reset of the 40-plus foot run of fasteners, which includes thousands of Hillman SKUs and complex merchandising. We're ripping everything out going all-new, which takes well over 100 labor hours to complete and is one of the most important aisles in the store. And so far, the results are encouraging.



Third, with 60 years of experience, we understand the products, categories, and markets. For example, we recently launched a new range of high-performance patented PowerPro structural screws. These new products are being rolled out in the traditional hardware channel and will contribute to growth in 2025. Now that you understand the 3 pillars and how they add value for our customers, let me now give you some examples of what the moat does for Hillman.



Vendor of the Year at Lowe's in the Home Depot, adjusted gross margin of 48%, adjusted EBITDA margins of 17% double-digit EBITDA growth for the year even in a challenging macro environment, generated meaningful cash flow, investing for long-term growth with our customers, and we are executing low-risk accretive acquisitions where our customers want us to grow.



Look at what happened with Koch. We secured a meaningful piece of new business shortly after the acquisition that will increase that business by 20% over time. Our customers trust us and have confidence that Hillman can handle the complexity of a national rollout of new products and resets. This moat is critical to growing both organically and through M&A. When we offer new categories, it allows our teams to bring more value to our customers and do so efficiently. As Doug mentioned, in August, we closed on the acquisition of Intex, a leading supplier of cleaning rags, cloth, and textiles.



We love Intex because it expands our product offering to new aisles and new customers. And importantly, we can leverage our moat to grow this business in the future as we take advantage of the cross-selling opportunities with both new and existing customers. For nearly 20 years, Intex has developed patented and innovative cleaning rags, cloth, and textiles for use in home improvement, painting, cleaning, and maintenance projects as well as janitorial, auto, and marine care. Intex has great products, an excellent team, and great customers, many of which we share.



When you combine that with the unique strengths Hillman brings to our customers every day like in-store service, direct ship capabilities, and 25-plus years of retail relationships at every level, you get accretive acquisitions that should gain market share for years to come. Intex marks our second acquisition of the year with Coke and Ropen Chain being our first. Our M&A pipeline is healthy as we continue to see companies like Koch and Intex that would be great additions to the Hillman family. Coke has been successfully integrated into our operations, and we are working to fully integrate Intex. I'm proud of how Hillman has welcomed Koch and Intex to the Hillman family. With the team on board and aligned, we are now ready and focused on growth opportunities. We would love to do at least 2 similar acquisitions every year.





Now let me touch on operations. Our global operations team continues to do a fantastic job and add value throughout the supply chain. We ship products on time and in full to our customers with industry-leading fill rates. Our North American distribution network continues to run efficiently. We have never seen our team operating as well and believe there's still room for improvement. We continue to have great relationships with our suppliers around the globe. About 1/3 of our products are currently sourced from North America, 1/3 are sourced from Taiwan and the rest of the world, and 1/3 are sourced from China, which is down approximately 50% from less than 5 years ago.



Further, about a dozen of our major long-term suppliers are in the process of expanding operations outside of China. We have healthy relationships with our reliable long-term suppliers, and we believe, as do our customers do, this strategy gives us flexibility and options when it comes to tariffs and geopolitical tensions.



Let me now give you a quick update on ocean freight. The spot market for ocean containers has been volatile. but this does not have a material impact on our business because we continue to ship approximately 90% of our containers under our 12-month contracts, which were put in place on May 1, 2024. That said, we will begin to negotiate ocean container contracts in the first quarter of next year ahead of the May 1, 2025, renewal date.



Current industry projections are for higher rates. And if true, we would plan to offset and/or price for this increase. Our team is controlling the controllables, efficiently running our operations and taking care of our customers. We are and we will be ready for when the market improves.



With that, let me turn it over to Robert Kraft to talk financials. Robert Kraft?

[Robert Kraft, executive]

Thanks, John. Let's dive right in. Our net sales for the third quarter of 2024 totaled $393.3 million, a decrease of 1.4% versus the prior-year quarter. Third quarter adjusted gross margin increased by 400 basis points to 48.2% versus the prior year quarter of 44.2%. Sequentially, adjusted gross margins were down slightly from 48.7%, but were in line with our expectations and what we said on last quarter's call. We expect our adjusted gross margins to come down during the fourth quarter as a result of Intex's lower-margin products but will remain above 47% this year and next as we believe we have structurally improved our gross margin profile.



Adjusted SG&A as a percentage of sales increased to 29.9% during the quarter from 27.5% from the year-ago quarter, which was also in line with our expectations. Driving the increase was our standard employee bonus expense, which was the result of a strong bottom line during the year-to-date period when compared to 2023. Adjusted EBITDA in the third quarter was $72.6 million, which grew 9% versus the year-ago quarter. Our adjusted EBITDA to net sales ratio during the quarter was 18.4%, which compares favorably to 16.7% a year ago. Contributing to our healthy adjusted EBITDA margin was our positive mix of price cost and efficient operations.



Now let me turn to our cash flows. For the 39 weeks ended September 28, 2024, operating activities generated $140.2 million of cash as compared to $171.5 million in the year-ago period. Remember, during 2023, we had outsized working capital benefits as we were able to reduce our net inventories by over $100 million throughout the year as we returned to normal inventory levels.



Free cash flow for the 2024 year-to-date period totaled $76 million and totaled $39.6 million for the quarter. Capital expenditures totaled $64.2 million for the first 9 months of 2024. This compared to $52.1 million in the prior year period. For 2024, we will invest between $80 million and $85 million of CapEx and anticipate 2025 capital spend to be slightly above our 2024 number as we invest in RDS and other growth initiatives like racks for resets in our hardware business. We continue to strategically invest in our high-margin RDS business, but let's be clear, this is not a build it and they will come strategy with MinuteKEY 3.5.



Our service teams are retrofitting existing 3.0 machines in the stores, and we will only build new machines where we see a return on our invested capital or new store growth opportunities. As Doug mentioned, our 900-plus MinuteKEY 3.5 machines are performing well and where there is a return on our investment, we will ramp up our capital spend to deliver more machines during 2025 with our strategic RDS customers.



Now to the balance sheet. We ended the third quarter of 2024 with $698.7 million of total net debt outstanding. We were able to reduce our debt during the quarter while funding the Intex acquisition from our free cash flow. We have not had a net debt figure below $700 million since 2013, and that was when our total annual sales were just $700 million and our leverage ratio was nearly 5x net debt to adjusted EBITDA.



At the end of the third quarter of 2024, our net debt to trailing 12-month adjusted EBITDA ratio was 2.8x compared to 3.3x at the end of 2023 and 3.7x just a year ago. Looking forward, we maintain our expectation that we will end 2024 around 2.7x net leverage. Our long-term adjusted EBITDA to net debt leverage ratio target is to be at or below 2.5x. This will give us the flexibility to grow via M&A and allow us to be strategic and opportunistic when it comes to using our balance sheet to add stockholder value.



As Doug mentioned earlier, we have a few changes to our 2024 guidance. We are increasing our net sales to be between $1.455 billion to $1.485 billion with a midpoint of $1.47 billion. Driving the increase are sales contributions from Intex, partially offset by the market. Our new midpoint makes the following full-year assumptions: a 1% headwind from price, a 2% lift from new business wins, a 4% lift from Koch and Intex, and market volumes being down about 5%.



Altogether, our new net sales midpoint guide is down less than 0.5% from 2023. Similarly, we are increasing our 2024 adjusted EBITDA guidance. Based on our year-to-date and October results, our expectations for our 2024 full-year adjusted EBITDA is now approximately $250 million, which is a 14% increase from 2023.



Lastly, we are adjusting down the top end of our 2024 free cash flow guide as a result of our anticipated CapEx spend, which is between $80 million and $85 million for the year. The new range for our 2024 free cash flow is $100 million to $115 million and has a midpoint of $107.5 million versus $110 million previously. More information on the assumptions that have driven our guidance are available in our earnings call presentation.



A few weeks ago, one of our customers, True Value filed for Chapter 11 at the corporate level. The hardware co-op made the filing while entering into an agreement to be sold to another hardware co-op Do-It-Best. We have a great relationship with Do-It-Best, and they have been a Hillman customer for over 30 years. Because of its co-op nature, True Value serves as a wholesaler for independently owned hardware stores throughout the U.S. They are not hardware store operators. Hillman will continue taking care of its independent hardware store customers that fly the True Value banner, shipping products directly to stores while having its field and service folks continue to write orders and manage the shelves. We believe the long-term health of these independently owned hardware stores remains strong and True Value's Chapter 11 and potential sale to Do-It-best should not have a material impact on our long-term business.



That said, in the shorter term across all our business segments, we have about $8.8 million of receivables at risk from True Value net of discounts and allowances. Based on what we've learned so far since the filing, we are not assuming we will recover a material amount of these receivables. Accordingly, our third quarter results will reflect a $7.8 million charge for the balance of receivables we do not expect to collect. Due to the one-time nature of this event, this has been backed out of our adjusted non-GAAP financials. Hillman does business with 12,000 independently owned hardware stores throughout the U.S. and Canada, which generate about $250 million or nearly 20% of our revenue. ACE is by far the market leader in this space, making up about 2/3 of the market, along with 13% of our revenues. ACE continues to grow revenues, open new stores, and be financially sound. Your local hardware store as expected, continues to perform during this cycle as they focus in cater to the repair and maintenance categories and differentiate themselves with their customer service.



Last November, we said that even if the top line is down in 2024, our adjusted EBITDA will increase, and that is exactly what we have seen so far this year, up 17.1% during the first 9 months of the year. Our focus remains controlling the controllables, and we believe we have done a great job doing that. Historically, our business has seen organic growth of 6% per year and high single to low double-digit organic adjusted EBITDA growth before M&A.



Assuming we can get some help from the macro, we think returning to our historic growth algorithm is achievable for 2025. Longer term, now that we are active on the M&A front, top-line growth of high single to low teens is realistic and should yield adjusted EBITDA growth in the low to mid-teens, assuming a healthy macro environment.



With that, let me turn it back to Doug.

[Douglas Cahill, executive]

Thanks, Rocky. Before we get to the Q&A session, I want to express our condolences to the families who have lost loved ones and have seen their lives just turned upside down in the wake of Hurricane Helene and Hurricane Milton, just awful. No surprise, our Hillman team has stepped up during this time of need by working long hours, expediting deliveries, and servicing our customers in order to ensure those affected have the products they need to start their rebuilding process. Additionally, Hillman as well as all of our retailers have donated products and cleaning supplies to assist with the cleanup efforts. Helping those in need is deeply ingrained in the Hillman spirit. We're proud of the way our employees have showed up for their teams and our customers. Without these Hillman Warriors, we would not be where we are today, and I want to express my gratitude for their loyalty, their teamwork, and for always taking great care of our customers.



As we look to the future, we firmly believe taking a disciplined approach to strengthening our moat while seeking accretive growth opportunities will drive long-term shareholder value for years to come. And what we can see on the horizon, we're very excited about the future.



With that, let me turn it back to Jonathan, the operator for the Q&A portion. Jonathan, I'm not sure if you have a face for radio, but you definitely have a voice. So open it up for questions.

[Operator]

[Operator Instructions]. And our first question for today comes from the line of Matthew Bouley from Barclays.

[Matthew Bouley, analyst]

[indiscernible] on for Matt today. First off, I was wondering on foot traffic and demand trends. Wondering if you can just parse out how this trended in October relative to September. And if you guys have any early thoughts on R&R growth expectations for 2025?

[Douglas Cahill, executive]

I mean, yes, right now, we're seeing kind of same thing, right? The volume is soft and margin continues strong. Mix has been good. I think everybody is rooting for this thing to return. But when you think about our business, there's going to be a lot of retailers focused on holidays and then we'll really get started in '25. But nothing's really changed. We continue to see our share growth slightly with some wins. But again, the market has stayed about the same. As we look at '25, it's hard to say. The macro, nobody knows. I think interest rates declining will definitely help. Our retailers are bullish. But as I said, they really are not predicting when, but they know that as that starts to go, there's pent-up demand, existing home sales, and a lot of equity in homes that can be used for expansions and then people definitely want to move, and that's good for our business.

[Matthew Bouley, analyst]

And then I guess my second question, I know you guys in your prepared remarks mentioned that 1/3 is sourced from Taiwan. I think it was 1/3 from China, but correct me if I'm wrong there.



If you can just go into more detail, if we were to see an increase in tariffs, how you guys would be equipped to mitigate the impact that this could have on your cost structure? Any details would be helpful.

[Douglas Cahill, executive]

Yes. So first of all, I'll turn it to JMA, but 1/3 North America, 1/3 Taiwan, and then rest of really the Asia, like if you think Vietnam, Indonesia, you think of all the different places. So it's 1/3 North America, 1/3 Taiwan and all other, and then 1/3 China. But JMA, why don't you touch on that?

[Jon Adinolfi, executive]

Yes. So to build on that point there, I mean, the 1/3 China, I mean, when you think about tariffs and where you're going after with your question, I mean, we look at it just like we handled tariffs last time they came through. We'll price dollar for dollar. We work with our retailers to pass that cost on, and we'll be ready in the event that is what happens.

[Operator]

And our next question comes from the line of Dave Manthey from Baird.

[David Manthey, analyst]

First off, Intex, could you talk about who that's being carried by in terms of your partners currently? And is there any limitation where you can sell it? And you mentioned the gross margins are lower there. Is that structural? Or is there room for improvement?

[Douglas Cahill, executive]

Dave, as for the Intex businesses, they sell to really a lot of the same customers we do, not nearly as deep in the traditional hardware channel where we're strong, but you think about Depot, Lowe's, Walmart, all the major customers that are out there that we serve each and every day, they sell into and some others, like they are in the paint and auto channels where we don't serve today. So we're really excited about the growth opportunities and expansion. There are no limitations in where we take what products we have. They've got some good innovative products with IP around them. So we're really excited about the future and where we're going.

[Robert Kraft, executive]

Yes, I guess -- David, it's Rocky. On your second question, I think the answer is yes. They're structurally lower at Intex. We will improve those over time as you think about areas like freight from overseas and things like that, where we just have a lot more volume. So we'll improve their margins, but they will be structurally lower than fleet.

[David Manthey, analyst]

And then on RDS as we move into 2025, if I heard you right, it sounded like MinuteKey 3.5 might kind of tail off, and Resharp wasn't mentioned at all. What might move the needle that would lead to growth in RDS next year?

[Douglas Cahill, executive]

Yes, so 3.5 is not tailing off, it's just really starting, Dave. That's basically taking the existing MinuteKey 3.0 and adding RFID, auto: both transponder and smart, as well as endless aisle any key you want. So we've got 900 out there, we've got great demand coming from our customers who want it because for them, it's just all upside. We'll have 1,200 at the end of the year, and we will both have conversions of existing 3.0 machines in 2025 as well as new placement in stores that don't have them today by our major retailers who now want machines in stores. And I think you'll see over time some pricing opportunities there as well. So that's why we feel like we've turned that corner and that you'll see us begin growing in '25 and certainly into '26.

[Operator]

And our next question comes from the line of Lee Jagoda from CJS Securities.

[Lee Jagoda, analyst]

So just starting with Intex, Rocky, can you break out the revenue that was added to the PPS segment in Q3? And then if you have any expectations for Q4? And then given that you've only owned it a little while, I assume the answer is probably not yet, but are there any early signs that existing customers are gearing up to award you guys new business because you own Intex now, similar to the way that it evolved with Koch when you bought that?

[Robert Kraft, executive]

Yes, Lee. So I'm not going to get into the details around the specifics in the quarter for Intex. What I will tell you is we've said it's about $55 million of annualized revenue. And so we owned it for a month in the third quarter, and we'll own it for 4 months in the fourth and then -- over 3 months in the fourth, obviously. And then as we think about next year, we would expect that to be about the size of the business. Obviously, we would expect to grow it a bit. Finally, I would say, as we've said, it's kind of a high single to low double-digit kind of EBITDA business. So if anyone is doing the modeling, that's the way to think about that business.

And JMA, you want to talk about Intex.

[Jon Adinolfi, executive]

Absolutely. Yes, Lee. So we're excited about the growth opportunities with Intex. We are seeing some nice opportunities pop up with our existing customer base and even beyond with some of the new customers out there as we look to leverage the Hillman moat, and really integrate that business. So we are excited about growing that business next year, low double digits, and we feel good about the future of [Technical Difficulty]. We've done that with clubs and things over the years. And again, stacking high and watch it fly is our plan, but we will get that revved up probably midyear next year, and I'm excited about that because when you run into those, you buy them. And Intex, while we love that team, it's very slim, have no service, no real ability to do that, and we do that every day.

[Lee Jagoda, analyst]

And then one more for you, Rocky. Just the $7.8 million charge, I assume that hit your SG&A, and assuming that was the only big add-back, it looks like SG&A as a percent of sales would have been closer to 31% in Q3. How should we think about SG&A either as a percent of sales or in dollars in Q4? And then as we get into 2025 and start to integrate those 2 acquisitions, is there and how much is there leverage on that SG&A line in 2025?

[Robert Kraft, executive]

Yes. Clearly, there'll be some as we integrate, Lee. What I would tell you is the fourth quarter, we always have a little less leverage on our SG&A, as you know, because of volumes and the seasonality of the business. So we'll probably be, I would say, a bit above 31% in the fourth quarter, but we said was for the full year, we expect it to be around 30%, and I think we'll still stick to that.

[Lee Jagoda, analyst]

And that's 30% adjusted, correct?

[Robert Kraft, executive]

Correct. That's right.

[Operator]

And our next question comes from the line of Gerard Patel from Jefferies.

[Stephen Volkmann, analyst]

Actually it's Steve here if that's all right. A couple of quick questions. So first, [JMA, I think you were talking -- I think it was you who was talking about renegotiating your container rates for next year. Just remind us how we should think about the timing differences sort of when you're able to pass that through. Is there a temporary impact on gross margin?

[Jon Adinolfi, executive]

Yes. So yes, that is correct. So we'll negotiate, rates will go into effect as of May 1, 2025. We typically have 4 to 6 months depending on the contract and the timing, at least, for that to be able to hit, that stacks up on the balance sheet rolls off. So any increases will really be nominal at the end or in the fourth quarter of 2025.

[Stephen Volkmann, analyst]

Okay. And I think one of you said something about 47% or better kind of in '25. Please correct me if I'm wrong. But just any puts and takes relative to kind of gross margin as we think about '25?

[Douglas Cahill, executive]

Yes. I think, Steve, as we think about our business, as we said on the call, we believe RDS returns to growth in 2025. And so that's a natural kind of barrier or floor to that rate because we see such good rates in that business. We've grown our gross margin and our EBITDA rate despite our largest business kind of being depressed over the last year or 2. And so as we see it returning, that creates a natural floor to that number. I think over time, as you see us winning categories, there'll be mix issues that could be positive or negative, but a lot of the categories that were likely to grow in the HPS business, they'll probably be slightly negative.



Again, we're leaving a quarter at 48%. So we've got some room to start with. And I think, again, we create a natural floor with RDS growing that allows us to maintain that 47% type plus rate, not only in '25 but kind of for the foreseeable future.

[Operator]

And our next question comes from the line of Brian McNamara from Canaccord Genuity.

[Brian McNamara, analyst]

I guess I want to dig in a little more to RDS, and it's been weak for several quarters. Most of it is out of your control. But I guess my question is, do you guys need to be there? And I guess I want to gauge your willingness to maybe move on from that asset if it doesn't significantly improve.

[Douglas Cahill, executive]

Yes. I mean, first of all, we don't need to be there. I mean our customers would love us with it or without it. I don't think there's any issue there on either side of that. What I've said before because of what's been out there is that this is a business that we will turn with new 3.5 investment, and we'll have this thing in a place where it will be valuable to keep or valuable to sell. And I like having, Brian, the option because we have so many things we could do in addition to what we have planned if we did sell it. But again, it's not bad to hang on to a 72%, 73% gross margin, 32% EBITDA margin business that's growing.



We're just in that period right now that we're transferring, transitioning from one technology to the next in an environment, as you know, that is existing home sales-dependent. So we're going to get it going and then have options and no, but there's no negative here if we decided to -- there was better value for our shareholders to sell it versus to keep it. But we're going to put it in a position where it doesn't matter.

[Brian McNamara, analyst]

And then secondly, I'm just curious about how the Intex integration has gone so far relative to your expectations. I believe the Koch acquisition took about 90 days to complete. And then just any follow-up in terms of how the M&A pipeline is looking? It looks like you had a few candidates the last time we spoke.

[Robert Kraft, executive]

Great. Brian, I'll take the Intex piece. The team has done a great job. Structurally, we have integrated that business. We have the teams operating with the different parts of our organization from sales, product operations. So we feel really good about that as quick as we did with Koch. The system side will be -- over the next couple of months, we'll finish that up, but we actually feel really good about where we are and where the alignment is in that business. So super excited about having Intex a part of Hillman. And I'll turn it over to--

[Jon Adinolfi, executive]

Yes. I mean, Brian, what's exciting for me personally is that we've been able to get this going again. I will tell you that convincing an entrepreneur or a management team that they should be owned by Hillman is literally like shooting fish in a barrel. And so as Executive Chairman, I'm going to be helping JMA and Rocky and Hillman with that. Super excited about that. And as you know, with the debt markets right now, there's not a lot of private equity competition. Now flip side, when private equity comes back out, they're going to be obviously selling some things. So I think the prospects will be good. As JMA said, a couple of years makes great sense, and I don't see any change to that.

[Operator]

And our next question comes from the line of Brian Butler from Stifel.

[Brian Butler, analyst]

Just the first one on the -- you talked about price was, I think, down 1%. When you think of the price/cost spread, what does that trend look like in the third quarter? And then, I guess, going into the fourth quarter and even 2025?

[Douglas Cahill, executive]

Yes. I mean it's going to be a slight headwind, Brian, obviously, relative to where we were in the second because of the rollout of the price get-back. And pretty much we're at a good spot around the cost of our inventory now. There's not dramatic changes. What we would tell you is there will be in the first half of '25, there will going to be a bit of a negative from price unless we do something around pricing with our customers. And we would expect as we go into '25 that we could potentially see a little bit of commodity benefit. But as you think about things like freight, you think about things like rent as we renew facilities, you think about things like labor, none of those costs are going down in our business.



So, we have to think strategically about that, how we offset those costs. And then to the extent that we can't, we have to go to market with price. Historically, that's been every 3 years, we go to market with about 3% price, and we'll have to think about and are thinking strategically now about when and how we take price to market in the future.

[Brian Butler, analyst]

And then a follow-up, just on the RDS segment, second quarter, you talked about some opportunities post the Redbox liquidation. Do you have an update there maybe on what those opportunities look like now, if they've changed, and maybe how they play out over the next couple of quarters?

[Douglas Cahill, executive]

Yes. I think we've started -- we've secured 2 contracts. One has already started, and the second one will start in this quarter, and it's essentially us servicing machines for other kiosk operators. At this point, Brian, it should be good for us in '25. Whether we expand it outside of that or not is really dependent on what we decide to do taking care of and how big the auto side of that is. So that's the juggling act right now. But no, both are signed, both are off and running and both are profitable about the same fleet margin rate and EBITDA rate that we have in our business. So yes, it's good right now. Both are on their way.

[Operator]

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mr. Cahill for any further remarks.

[Douglas Cahill, executive]

Thanks, Jonathan. Thank you, everybody, for joining us this morning. We look forward to updating you on our progress early next year.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.