Q2 2021 Holley Inc Earnings Call
Thank you for your patience, the Hollies second quarter 2021 earnings call will begin shortly.
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Good morning, ladies and gentlemen, and welcome to the conference call to discuss the results from the police second quarter of 2021.
At this time all participants are in listen only might later, we will conduct a question and answer session and instructions for asking questions will be provided at that time, we ask that participants limit themselves to one question and one related follow up during the Q&A period.
Please be advised that reproduction of this call in whole part if not let me say, it's without written authorization of Holly.
And how's it reminds that this call is being recorded I will be made available for future playback.
I would now like to introduce your host for today's call. Mr. Ross Collins, managing director of Alpha IR Ross. Please go ahead.
Thank you Lauren good morning, everyone. Thank you for taking the time to join US today on the.
With me today are Tom Tomlinson, Chief Executive Officer, Domenic, BARDA as Chief Financial Officer.
Mcdonald Executive Vice President of corporate development, and new ventures with Holly.
After their prepared remarks, we will open the call for questions now I will reference the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
This call may contain certain forward looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company in many cases these risks and uncertainties are beyond the company's control.
Although the company believes the expectations reflected in its forward looking statements are reasonable it can give no assurance as such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectations.
Risk factors that could cause actual results to differ materially from those reflected in the forward looking statements are included in the Companys. That's for an S. One filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed investors should not assume that statements will remain relevant and opera.
It is at a later time Holly undertakes no obligation to update any information discussed in this call in the future.
Additionally, we will be discussing certain non-GAAP financial measures a reconciliation of these items to U S. GAAP are included in today's press release, which is also posted on our Investor Relations website. At this time I'd like to turn the call over to Tom Tomlinson, Holly's Chief Executive Officer Tom.
Yeah.
Thanks, Ross good morning, everyone. Thank you for joining us today.
As you saw in our press release, Holly delivered another quarter of strong growth.
Our net sales grew by 54% in the second quarter. This is on top of the 24% growth we achieved in the second quarter of 2020 versus 2019.
Organic growth drove 25% year over year growth this year and the remaining 29% came from the acquisitions, we made in the fourth quarter of last year and this April.
Our organic growth was driven by strong consumer demand across our categories with electronic products, performing particularly well.
We continued to see exceptional levels of enthusiast engagement and excellent growth in our direct to consumer channel.
Following the close of our second quarter, we completed another milestone event in our company's history, and we're now a public company.
Today, we're stewards of many of the most iconic brands in our industry. These are brands that resonate deeply with our enthusiast consumers brands, They know love and trust.
We are enthusiastic and we built this business for enthusiasts before we hand, the call over to Dominic to discuss our second quarter results in greater detail I'd like to ask Vince to provide more color regarding our recent merger with empower Vinny.
Thank you Tom and good morning to everyone on the call as Tom mentioned, we completed the merger with empower on July 16, it's a major mile marker in our company's 118 year journey and we look forward to the road ahead is a publicly traded company as disclosed in our recent SEC filings over 57% of our outstanding.
Shares are held by Holly parent holding a limited liability corporation controlled by our historical partner Sentinel Capital partners. An additional 10, 47% are held by mid Ocean partners and the rest are held by our new public investors.
Both of those larger positions are subject to lockup restrictions. So we do not expect any significant changes in ownership for the balance of the year.
During the transaction Hollywood received approximately $108 million in cash we immediately paid $100 million of that cash to reduce our most expensive second lien debt. We will continue to evaluate our credit needs and expect to refinance the remaining credit facility. This year, enabling improved terms and greater flexibility.
To pursue acquisitions.
Before I close I'd like to double click on a core component of our strategy M&A and highlight a recent transaction on April 14th Holly close the acquisition of AAM performance electronic a leading developer and supplier of electronic control and monitoring systems or performance automotive applications.
AAM transaction is both strategic and accretive adding another strong brand of the Holly family, well known and trusted across the important sports compact car segment will we welcome our teammates to Holly who share our passion for accelerating development and innovative products our consumers Love a great example, here would be.
Aam's electronic control solutions for enthusiasts at EV electric vehicle conversions.
We are managing an active pipeline of acquisition opportunities going forward and we continue to target opportunities that will enhance profitability cash flow and shareholder value now I'd like to hand, the call over to Dominic will discuss our second quarter results in greater detail Dominic. Thank.
Thank you Danny and good morning, everyone.
Holly delivered net sales of $193 million in Q2, an increase of $67.7 million or 54% from the second quarter of 2020.
Acquisitions provided $37 million of that growth with the remainder of the net sales growth being organic in nature.
Adjusting the 2020 baseline on a pro forma basis for acquisitions, the total comparable organic growth across the entire holiday portfolio was 25% in the quarter.
Strong organic growth was once again supported by strong growth in our DTC channel, but it was also driven by growth of our reseller channel this quarter.
Some of our resellers reduced purchases in the second quarter of 2020 due to the economic uncertainty created by the COVID-19 pandemic. This year's higher growth in the quarter reflects more normalized purchasing activity associated with high consumer demand.
Gross margin decreased from 43, 8% last year to 42, 1% in the second quarter of 2021.
The reduction in gross margin reflects some shift in product mix, but was also impacted by inflationary pressure on certain input costs.
We continue to monitor global supply chain and raw material costs closely and the fact that these current economic realities into our recent pricing actions.
Total selling general and administrative expenses increased 61% in the second quarter the.
The increase reflects approximately $5 million of acquired SG&A expense from those new companies that we purchased and Thats just under just under $2 million of additional shipping cost tied to higher sales and global supply chain conditions.
There's also additional cost associated with the empower merger.
Interest expense was relatively flat at $11.2 million versus $11 million for the second quarter of 2020.
Net income increased 85% to $23.1 million in the second quarter of 2021, driven primarily by the higher level of sales.
Adjusted EBITDA increased 49% to $54.1 million in the second quarter, driven by the higher sales level, but slightly offset by the higher cost of sales and SG&A expense.
As we turn to the projections for the balance of the year, we reiterate the guidance provided last quarter.
You may recall that we raised our annual guidance at that time to reflect the <unk> acquisition and higher sales volume trends, we are experiencing at that time.
As we indicated in our press release. This morning, we do believe the high sales growth rate achieved in the first half of the year will moderate in the second half as we lap stronger comp sales periods from 2020, and the acquisitions, we completed in the fourth quarter of last year.
We are projecting 2021 annual net sales in the range of $648 million to $663 million pro forma net sales of $655 million to $670 million.
And resulting pro forma adjusted EBITDA in the range of $165 million to $170 million.
That concludes our prepared remarks, so Ross we can open up the call for questions at this time.
Absolutely Dominic as a reminder, we ask that you. Please limit yourself to one question with one related follow up as needed Lauren. Please open the line for questions from our participants.
Ladies and gentlemen at this time you May Register you desire to ask a question by pressing star one on your telephone keypad. Once you have been called upon please make sure you have enough for me and proceed with your question.
Our first question comes from John Lawrence from Benchmark John Your line is now a pen.
Yeah. Thanks, good morning, congratulations guys.
Thank you. Thank you.
Dominic would you start off a little bit but just.
Give a little further clarification about the supply chain.
How do you how do you see the products and how far out are you looking in.
It looks like you've taken a little pricing increase could you sort of.
Give a little more detail on that situation. Please.
Sure I'll start that and then Tom I add some additional color.
Look it's no surprise that the supply chain pressures globally right now containers from China are probably 400% higher than they were at this time a year ago.
So there is definitely some backlog going on from supply chain, some cost increases and Theres also some component parts some of our input parts facing inflationary pressures.
In particular I would call out that we did have some higher cost of electronic components going into some of the things that drove our sales.
In the quarter, you know when I referenced there's some higher input costs as well as some supply chain that really reflects both of those items.
As I mentioned, we did have a pricing action and we've adjusted we do look out for the balance of the year, we forecast our components out months in advance because we have to it's just the nature of the business. So Tom would you like to add some additional color.
Sure I would say in the second quarter.
Our team effectively handled the challenges associated with the global supply chain situation that we currently see it is dynamic and that's one of the reasons that we're talking about it we expect them to continue.
To handle those challenges well and with respect to the price increase that became effective.
<unk> actually in the third quarter.
And so it will be some time before we see the benefits of that show up in the numbers because we have to work through our backlog.
So John I think that's how we would respond at this point. Please let us know if you have a follow up.
Great just a.
Follow up for Vinnie would that situation in the dynamic activity going on in the market place what.
What's the kind of response from.
Suitors or a possible candidates that youre looking at this point.
It's a great question John.
There is a number of opportunities that we're evaluating frankly, the supply chain impacts and things like that are impacting our whole industry.
It makes it an opportunity for Holly to add strategic value to a number of those targets, but we are being disciplined on what we're looking at right now and how we're prioritizing.
Great. Thanks congratulations.
Thank you thanks, John appreciate your call.
Our next question comes from Michael Baker with D. A Davidson Michael Your line is now 810.
Okay. Thank you.
Wanted to ask you about the <unk>.
Topline I think if I did my math, right and maybe I'm, a little bit off, but I think that the guidance implies back half sales down about 6%.
Versus the back half of last year.
If that is right I guess can you break that down by third and fourth quarter, one quarter see more pressure than another sounds like maybe the fourth quarter, we'll see a little bit more pressure because of the.
And secondly, the acquisitions and then related to that is that indicative of what youre seeing now in other words, the pace through the second quarter and in <unk>.
You already have five week under your belt here in the third quarter or is that just sort of your expectation as to what you think could happen.
So Michael let me take a run at that first and then we'll see if anyone wants to add some color.
The guidance, we look at our guidance as there is a lot of year left in front of US. There is we're halfway through the year, we do have July under our belt.
And we did we did want to be very mindful of some of the global economic conditions going on right now.
So mathematically, we do see a declining growth rate of sales.
Back half the third quarter, we will have a higher than it should have a higher growth rate in the fourth quarter to your point because our acquisitions were made in the fourth quarter of last year.
So we're just being very mindful as Tom mentioned, we do have a relatively high backlog at this point in time, we want to make sure that our supply chain doesn't get in the way of us fulfilling all that demand and so we've given the guidance that we believe is achievable in spite of all the uncertainty going on with the global economic condition.
Tom did you want to add anything else to that.
I don't think so Dominic I think that sums it up.
I guess as a follow up to that and the same amount of questions.
Has your outlook changed or have the trends changed at all since you previously gave this guidance in other words you maintain the same guidance, but it was a big beat in the second quarter.
At least versus my model was that a beat versus your expectations in the second quarter and if so that would imply just on the math and maybe you're being conservative, but that would imply a less robust outlook for the back half in other words, you don't necessarily flow through the beat because the back half isn't as strong as you thought or or is it.
That.
The second quarter was more in line with your expectations. So it's a long way of asking how does your back half outlook changed at all in the last couple of weeks or is it sort of progressing as you had always thought thanks.
Yeah, Michael So a few things on that number one our sales are consumer enthusiasm.
Are these consumers are definitely engaged and we're seeing good interest in all of our products our markets are very strong.
The ability to fulfill all of that right now is what we're being a little bit mindful of and considering all the potential disruptions from global supply chain from our ability to get the right products to the consumers at the right time.
In addition to that we did have a guidance that we issued in Q4, the last quarter, but we have seen very strong sales trends in Q2. So our guidance. If you recall reflected the AAM transaction, but also we lifted the sales at that point in time for the trends that we saw in the first half so we are being.
Very mindful as we look forward of something that we believe we can achieve and we want to make sure that we don't overreach at this point in time with the uncertainties.
Okay. It makes sense. Thank you.
Okay.
Thanks, a lot I appreciate your time.
As a reminder to ask any further question. Please press star followed by one on your telephone keypad.
We now have a question from J C bench with Telsey Advisory group.
<unk> is now a pen.
Great. Thanks, and good morning, guys congrats on the quarter.
So thanks.
Thanks Gerald OTC.
Hey.
With well, what's the latest where's the penetration of DTC stand now and.
Are you hearing any pushback from the retail partners you have you know about them being frustrated with the shift towards DTC.
So.
With respect to the channel conflict question that Youre, referring to.
We've been selling direct to consumer now for many many years and it really got started because our consumers came to us and.
Told us they wanted to buy directly from us So we were.
Worked through that with our reseller partners.
And part and parcel to that is that we have let them know very clearly how we intend to create value for them and we have been delivering on those promises a year over year and it goes back largely to our strategy of creating demand through our compelling marketing and <unk>.
Consumer engagement, which drawls that demand drawls product through their organizations and then also our innovation strategy.
Which and they recognize the value of new product and how that excites consumers about about brands. So so.
<unk> chips are strong and solid.
And then.
I guess the other the other part of your question is just just penetration I mean.
We see good consumer interest.
Across all of our brands.
That's good.
So presumably it's going up then okay and then.
Can you talk a little bit about your innovation pipeline.
And I'm also thinking with regards to electric vehicles, we get asked that a lot of chrome chrome investors.
You know kind of how you're positioning figure maybe you could share some of the latest trends that are happening there.
Sure.
The pipeline is very robust.
We've actually grown our engineering team from about 135 in 2020 now to just a little over 150.
It is a very important part of our strategy and one of our core beliefs that this is what drives organic growth.
So.
We've continued to develop continue to launch products.
We launch products really in a very continuous stream.
Rather than on a periodic or analog.
Or dish digital basis like some of our some.
Some of our competitors and then from the <unk> side, we continue to be charged up about that.
We're continuing to evaluate dedicating more and more resource resources to it it is an emerging opportunity, but it is an opportunity that we intend to be on top of those absolutely and just to add in there Jeremy.
Opportunities on both.
Factory kind of battery electric vehicles side and on the electric vehicle conversion. So we're very excited about all of that is just really it's white space for us.
Got it that's great.
Thanks, guys good luck with the quarter.
Thank you I appreciate it.
Our next question comes from Ryan Sundby from William Blair.
Line is now 810.
Yeah, Hi, Thanks for taking my questions and congrats on a great quarter there.
Thanks, Tom I guess just to.
Just to follow up on the EV.
Question there.
Guidance announcement last week around saying that target for 50% of <unk>.
Vehicles sold by 2030, I think it was.
Was that consistent with where you thought the market was headed and has that changed your view on your own portfolio or maybe rearrange the where targets sit in your acquisition pipeline at all.
I mean, we.
We are.
And have been very interested in EV acquisition targets, we've looked at a number of them they tend to be much smaller today, but.
But we're continuing to pursue acquisitions in that space.
Again, we're excited about this as an opportunity.
As performance oriented Evs are launched.
It gives us more platforms to work on and like many said, we see the opportunity in really two pieces modification of OE vehicles, as well as helping consumers convert their older vehicles to electric powertrains.
Other interesting opportunity that this will create for us as there will be consumers that.
We will continue to be extremely passionate for decades about internal combustion engine vehicles, and so we're uniquely positioned really to help.
To serve consumers, whether theyre passionate about.
Gasoline or diesel or or electrons.
Okay makes sense.
That's it from both sides there.
<unk>.
I guess when you look at the 25% organic growth through the first half of this year and more than 30% last year.
Can you talk a little bit more about who it is that's driving this growth is it new consumers to the category.
Is it more of your existing consumers, taking a deeper here and if you are seeing new people enter the category. What can we do to help kind of retain them and make them bigger enthusiasts down the road.
So when we look at the categories that are that are really driving.
A lot of the growth it really is electronic categories, and we feel that those appeal more to young people electronic fuel injection.
Electronic tuning products. So so we do think.
New consumers and young younger consumers.
Prefer those products to some of the older school ways that we used a modified cars.
In terms of how we keep them with our marketing team has worked have been working diligently to put the building blocks in place to allow us to do that we've made great progress and.
We're really poised to increase the level of consumer engagement to highly targeted our marketing efforts.
But that those would be initially how we plan to retain those consumers.
Great. Thank you.
Thanks for your questions.
We now have a follow up question from Michael Baker from D. A Davidson Michael Your line is now 810.
Thanks figured I'd jump back in because no one asked about the gross margin outlook for the back half suite. So we have your.
Implied sales guidance and EBITDA guidance, but how should we think about gross margins should it be.
Better or worse than the 166 basis point decline.
And in the.
Second quarter, maybe one way to think about that is how much of that decline was because of mix and then how much of that was because of the acquisitions and then as we cycle up against the acquisitions in the fourth quarter, how does that impact the mix gross margin pressure. Thanks.
Yes, so it's a good follow up Theres a couple of things that are loaded in there that we're not really giving specific guidance on.
What we're looking at though is in Q2, there was a balance between some of the product mix and channel mix that we experienced in the quarter as well as some of the cost pressures. We are expecting some of those cost pressures to remain in the back half as you know everyone's dealing with supply chain and potential inflationary pressures.
But we also recently took a pricing action has not manifest itself in the numbers yet. So our intent is that the margin decline that you saw in Q2 is not going to worsen and we want to keep it above 40% as we've said all year.
<unk>.
The pricing increase that we recently made effective.
As.
The normal cycle that we've selected for our price increases.
And our preference.
As always to try to capture the pricing that we need.
Once a year. However, we are not bound to that end, we've often done off cycle increases. It has we have done that during periods of extraordinary increases on the cost side for us and we are watching the situation closely.
And <unk>.
Depending on what we see we could decide to do additional price increases in the short term.
How long do those usually take to flow through to the gross margins.
So it is a little bit complex obviously.
We would need to work through the backlog, we don't price the backlog most of our resellers we have.
The ability to take price increases very quickly.
We have a few in the traditional retailer category, where supply arrangements resulted in that taken a little bit longer but.
It's <unk>.
Small additional period, I guess I would say.
So we can we can generally move them through pretty quickly, but not instant yes, as Tom mentioned, our backlog is a good news bad news situation into higher than we want right now which shows the incredible demand is sustained.
But it is something that will take a little bit of time for us to work through this quarter.
Okay, well, one more and then I'll, let you go I'm just curious do you have I think on your calendar three.
Festivals in September planned how does it how does the delta variant and rise of Covid impact that if at all.
We don't expect any impact.
Last year during Covid, we worked with our Governor's office here in Kentucky, We held all of the Kentucky events last year, we saw fantastic interest nice increases in you know.
Overall participants and spectators. So the pre registrations were seeing this year are already showing nice increases. So we expect it to be a good a good show season for us.
Okay. Thank you very much for the time.
Thanks for the thanks for the question.
As a final by mine Jacks ask any further questions. Please press star followed by one on your telephone keypad.
We now have a follow up question from John Lawrence from Benchmark John Your line is now open.
Yes. Thank you.
Tom would you would you when you look at the backlog situation and you look at some of the acquisitions as you move forward to put a to integrate say a M and some of those on the direct model.
Does that help profitability on the gross margin line overtime.
Yes, John It does we see a nice pickup in gross margin when we can convert of the <unk>.
Sale through a reseller to a direct to consumer sale.
So so those acquisitions fourth quarter of 'twenty and then a M.
By the first of 22, we start to see that product move online.
We are we are working diligently to integrate those businesses and.
Obviously, we havent completed those efforts at this time there is a lot that goes into it.
But I would expect early in 'twenty two.
Again to see the effects of.
Really pushing forward with a direct to consumer strategy at those acquired businesses.
And one point I would follow up on that is that Simpson does have a fair amount of direct to consumer presence already it's just in a different.
Infrastructure. So we do want to have the full consolidated view.
Great. Thank you good luck.
Thanks, so much thanks Joshua.
Lauren were there any more questions.
So we currently have no further questions I will now hand, you back to hoist enticing remarks.
Thank you everyone for your time today and we appreciate your interest in Holly So have a great day.
Thanks, everybody. Thank you. Thank you take care.
Yeah.
This concludes today's call. Thank you for joining and I Hope you have a lovely rest of your day you may now disconnect your lines.
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