Q4 2021 Holley Inc Earnings Call
Greetings and welcome to the Holly fourth quarter and full year 2021 earnings call.
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A question and answer session will follow the formal presentation.
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I will now turn the conference over to your host Ross Collins, managing director of Alpha IR. Thank you you may begin.
Okay.
Thank you Alex Good morning, everyone. Thank you for taking the time to join US today on the call with me today are Tom Tomlinson, Chief Executive Officer, Domenic, Bartos, Chief Financial Officer, Danny NIM, I Gotta Executive Vice President of corporate development and new ventures of Holly.
Shawn Crawford Chief marketing officer 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 $19 95. 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.
The company believes the expectations reflected in its forward looking statements are reasonable it can give no assurance that such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectations important risk factors that could cause actual results to differ materially from those reflected in the forward looking.
Statements are included in the company's recent 10-Q S. Four.
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 operative at a later time.
<unk> 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.
Thank you Ross good morning, everyone and thanks for joining us today Holly.
<unk> fourth quarter and full year 2021 results demonstrate continued strong consumer demand and robust sales growth capping off a milestone year for our business.
As highlighted on slide five our net sales grew by 30% in the fourth quarter, 17% from acquisitions with 13% organic growth for the full year net sales grew by 37%, 23% from acquisitions with 14% organic growth.
While supply chain challenges limited our ability to fully satisfy consumer demand our team performed well and we've been able to capture meaningful growth. We also executed on a price increase during the fourth quarter, which helped offset inflationary cost pressures and allowed us to maintain solid gross profit margins.
Which Dominic will talk about later in the presentation.
Looking forward to 2022, we'll continue to focus on developing innovative new products and engaging with our enthusiast consumers to broaden and deepen those all important relationships I'll now turn it over to Sean to touch on Holly strong consumer engagement Sean.
Thanks, Tom.
Holly continues to focus on building relationships directly with our consumers.
Digitally and in person at our company owned events, our team's efforts to expand all these digital capabilities continues to drive incremental DTC revenues as was evidenced by our fourth quarter results.
DTC sales were up significantly in the fourth quarter, driven by strong performance marketing content and social media marketing events expansions to new brand integrations.
For the full year 2021, DTC DTC sales were $113 million.
35% or roughly $29 million compared to 2020 results. These DTC sales represented 16% total 2021 sales up from 13% of total sales in 2020.
Our DTC strategy this quarter, what we do as we continue to directly align our sales channels with our enthusiast customers purchase preferences.
As a result, we would expect to grow DTC sales.
To wrap up the rate of our overall business.
Poly owned events also continue to be a key pillar of our consumer engagement strategy.
These self funded events acts as an invaluable opportunity to learn more about our customers and truly understand the products that are resonating with the enthusiast community.
Our consumer events are scalable.
Cited to expand our event calendar as we continue to grow and innovate our product offerings. We hosted five total events in 2021 with a total attendance of 93000 individuals.
As outlined on slide seven since 2015, we have seen an average annual attendance growth of 37% proving that the Holly community is growing rapidly during.
During the fourth quarter, we were very excited to launch Holly high performance experience.
The high voltage experienced Robert our inaugural consumer event dedicated to having fun with electric vehicles.
The event attracted many easy enthusiasts and influencers as well as some of the leading EV manufacturers, such as Ford and tests.
Finally, we continue to leverage and invest in content marketing, our educational and entertainment content, coupled with our strong social media presence truly allows us to engage inspire and support our consumers on their journey, while also driving incremental web traffic and sales for Holly for.
For example, how is very on motor life digital application continues to experience strong traffic growth with page views more than double the prior year importantly, the large majority of this growth is coming from organic unpaid searches as well as direct web traffic, indicating that our consumers are finding all the online research as well as returning for Greg.
With that I'll now turn it over to Danny to discuss how these recent M&A activity.
Yeah.
Thank you, Sean and good morning to everyone on the call as highlighted on slide nine we closed on four separate acquisitions during the fourth quarter, including Arizona Desert shocks bear brakes brothers trucks and rocket racing wheels further strengthening our product offering across several vehicle platforms.
These acquisitions are in highly strategic powertrain agnostic product categories, such as off road suspension braking systems appearance items and wheels.
Ultimately these brands expand our range of performance products and capabilities, which will allow us to connect with a broader set of enthusiast consumers going forward.
As we have communicated previously we have a robust pipeline of acquisition opportunities for our team to evaluate holywell remain disciplined with the ultimate goal of unlocking and expanding new and large addressable markets our strategic importance to the company I'd now like to hand, the call over to Dominic who will discuss our financial results in greater detail.
Dominic.
Thanks, Danny and good morning, everyone. Thank you for joining us on this morning's call I'll now cover our fourth quarter and full year 2021 results, which are highlighted on slides 10 through 13.
Holly delivered net sales of $179 $8 million in the fourth quarter, an increase of $41 4 million or 29, 9% from the fourth quarter of 2020.
Year over year sales growth from acquisitions accounted for $24 million of the $41 4 million growth with a balance of $17 4 million being organic in nature.
So all of the 29, 9% sales growth of 17, 3% was due to acquisitions and 12, 6% was organic.
Gross margin increased from 39, 4% last year to 41, 6% in the fourth quarter of 2021. The increase in gross margin can be attributed to pricing increased leverage from the higher sales volume and product mix.
Total selling general and administrative expenses increased $15 6 million to $37 7 million in the fourth quarter incremental SG&A from recent acquisitions was responsible for $4 $1 million of the increase in the quarter.
Additional cost drivers include an increase in equity compensation public company expenses and increase in outbound shipping costs due to the higher sales volume and an increase in professional fees.
Net income for the fourth quarter of 2021 was impacted by accounting charges to reflect the higher value of warrants and sponsor earn out shares as a reminder, these are noncash items that are required to reflect the increased liability associated with those instruments.
Net income in the quarter was also impacted by the refinancing of our credit facility in November which resulted in a loss on the early extinguishment of debt.
These large items more than offset growth in operating income in the fourth quarter and as a result, we recorded a net loss of $18 million. This compares to net income of $2 million in the fourth quarter of 2020.
Adjusted net income in the quarter was $9 million, which compares to the same $2 million in 2020.
Adjusted EBITDA increased to $36 $1 million in the fourth quarter up from $30 4 million in 2020.
Now, let's turn to 2021 full year results.
We delivered net sales of $692 $8 million, an increase of $188 6 million or 37, 4% from 2020.
Net sales from acquisitions drove $116 4 million of that growth with a balance of $72 3 million from comparable organic sales growth. So of the 37, 4% net sales growth in 2021 23, 1% was from acquisitions and 14, 3% was organic.
Gross margin increased slightly from 41, 3% last year to 41, 4% in 2021, we effectively managed prices during the year to offset supply chain and cost of goods sold pressure.
Total selling general and administrative expenses increased $45 $9 million to a total of $116 8 million for the year incremental SG&A from recent acquisitions was responsible for $18 5 million of the increase.
Additional cost drivers included increased professional fees and increase in outbound shipping costs related to the higher sales volume.
And DTC growth and equity compensation.
Net income for the full year was also impacted by charges for warrants and earn out share counting in the third and fourth quarters fees paid directly to the business.
Paid related to the business combination and the third quarter the increased acquisition earn out charge in the first quarter and the loss of the early extinguishment of debt in Q4.
As a result, we recorded a net loss of $27 $1 million for the year compared to net income of $32 9 million in 2020.
Adjusted net income for the year was $61 $8 million when the aforementioned items are removed.
Adjusted EBITDA increased to $169 5 million for the year up from $126 2 million in 2020.
I want to take a moment to touch on a quarterly cadence of our sales slide 13 contains quarterly net sales from 2021 compared to 2020 as we've stated previously we saw a return to more normal seasonality in 2021 in a typical year, we expect over 50% of our annual sales to be realized in the first half of the year.
The second quarter being the largest sales quarter of the year.
The fluctuations in our cruise sales growth percentages in 2021 are largely due to the unusual sales pattern. We saw in 2020 due to the COVID-19 pandemic that impacted reseller buying patterns.
I'll now provide our full year 2022 guidance, which is outlined on slide 15.
These ranges include organic growth and acquisitions that we've completed to date only no new acquisitions in 2022 are projected in these ranges, although we're always exploring potential strategic acquisitions and have available capacity on our new credit facility.
For the full year 2022, we are projecting net sales in the range of $765 to $790 million and adjusted EBITDA in a range of 180 $694 million for modeling purposes. We're also providing guidance for capex depreciation and amortization and interest. We expect 2020 results to include capital expenditures.
$14 million to $16 million, depreciation and amortization between 24 and $26 million and.
And interest expense in a range of 30% to $32 million.
That now concludes our prepared remarks, so I'd like to turn the call back over to Ross to open up the call for questions Ross.
Absolutely Dominic as a reminder, we ask you. Please limit yourself to one question with one related follow up is needed Alex. Please open the line for questions from our participants.
Thank you.
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Our first question comes from the line of Joe <unk> with Raymond James. Please proceed with your question.
Hey, guys good morning.
A few questions on the quarter I guess first I assume the four tuck ins that you did in the quarter were fairly negligible in terms of their contribution.
Sales and EBITDA is that correct.
Yeah, Joe This is Dominic yes, the the timing of those they were late in the quarter. So it was immaterial.
Great. So if I look at you were.
Sales and EBITDA in the quarter versus the implied guide you obviously beat your sales guide fairly a fairly.
But EBITDA guide by a much smaller amount what surprised you positively on the sales front and I guess, what surprised you negatively on the Opex side.
Yes, so a couple of things one is we entered into the year.
Basically going into the second half we knew that we had very strong consumer demand and the big wildcard for US was our ability to overcome the supply chain challenges to meet it if.
If you recall, we did the first $7 million out of Q3 into Q4, which did assist us on the sales side in the quarter, but that had already been contemplated in our guidance right. So from a sales perspective, I think we were very pleasantly.
Surprised I don't know if surprises right word, but pleasant pleasantly I guess encouraged to see the continuing consumer demand has been robust the entire time.
With regards to some of the expenses on the SG&A side, we did have an increase in some of our professional fees associated with acquisitions that we did in the fourth quarter as we did.
Some of the refinancing and some of the work from a public company standpoint billings were higher we knew those were coming we didn't want to raise the guidance on sales without necessarily raising the guidance on the EBITDA and on a pro forma basis I think as we've released in the past and discussed in the past we would have added another eight or $10 million in sales.
So forma basis with another $3 million in EBITDA. So we're above the guidance range. So we felt very comfortable maintaining the guide that we've given.
That's helpful and maybe turning to 'twenty two.
Your guidance implies flattish EBITDA margins this year.
Talk about what sort of headwind tailwind you're expecting.
From that perspective.
Yeah. So the first half of the year, we still have not lapped all of our public company expenses and if you recall, we've talked about that before when we were privately held those things would would've been an adjustment out and we just know as a public company. Those expenses just have to be absorbed so for the first half of the year, we still have those expenses to overcome.
But from a from an overall margin standpoint, we're just balancing it with investments that we want to make to consider to continue to drive consumer engagement on the DTC front theres, some marketing initiatives that were undergoing as well and so we feel like the guide that we've given is great we'd love that 24% to 26% sweet spot and we believe we can.
Managed to that.
Okay. Thank you guys. Good luck.
Thanks, Joe.
Our next question comes from the line of Mike Swartz with Truest Securities. Please proceed with your question.
Hey, good morning, everyone I'm.
Just the I guess from the the the acquisitions and in the course of the four acquisitions it doesn't sound like.
And much of an impact on the fourth quarter, but thinking about the 2022 guide I guess what are you actually embedding in your estimates from those acquisitions.
Yes, Thanks, Mike.
Again, we've projected that those out of an estimated impact of $30 million in 2022 and I believe that's also in the slide deck.
And when an EBITDA basis.
We haven't disclosed EBITDA, but the things that we're looking at I would say the best way, we look at that is on par with what we achieved.
Okay got you and then.
I think you said you took some price increases in the fourth quarter, which had a positive effect on revenue and margin just maybe talk about that where those price increases broadly across the business are on select items and then should we expect further pricing actions to go into effect or I should say off cycle pricing actions to go in.
The effect in early 'twenty two.
Those increases were applied broadly to the product portfolio.
And.
Then in terms of going forward into 2022.
We generally do one price increase decrease a year, we've historically done that but obviously.
When.
<unk> cost pressures demand, we've demonstrated the ability to get off cycle increases. So we will just continue to evaluate kind of the the cost environment and make those decisions as we work our way through the year.
Okay, Great and then just a final question maybe Dominic.
Help us think about just the moving parts for margins in 'twenty, two and just meaning how should we think about gross margin and operating costs relative to 'twenty, one maybe it's the percentage of sales.
Yeah. So.
<unk> talked about this before we do know that we're overcoming some increased SG&A expenses. So if anything we're hoping to continue to drive gross profit margin expansion.
The target for EBITDA margin is really what we're after.
Around the 25% targets, what we're always after so for US we do know that we have to get a little bit more out of the gross profit margin side to overcome some increased SG&A. So that's the best guide I can give you.
Okay, great. Thanks, a lot guys.
You got it thanks, so much.
Our next question comes from the line of Ryan Sundby with William Blair. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question.
Over the past year, we've got to hear about your enthusiast consumer base quite a lot.
Whether that be through the strong attendance metrics at the festival that Sean shared or the higher repeat rates and average spend per consumer we are seeing in your so I guess I'm going to flip this around a little bit and ask about more of a financially motivated consumer.
With the really impressive performance, we've seen at some of the collector car auction shows so far here in 2022.
I think we've seen strong sell through record volumes average tightening up 50% in some cases I guess as you look back historically when you've seen these trades, where there's more of a financial reward for upgrading and restoring vehicles like this.
Can you talk about what kind of impact that's had I guess on top.
Your passion to the states.
When you kind of built into this economic incentive like we're seeing right now.
Well.
I think we're poised to benefit from trends like that.
But what I would say is that.
You know most of these financial and investors, we see moving into the market and bidding up prices.
We feel like they've become.
<unk>.
As a a lifestyle, it's an activity that.
Thats contagious that gets in your blood and the more excitement there is in general around the automobile.
We feel like that benefits benefits, our company and our business.
Yes.
Yes, yes that makes sense.
It should be a strong motivator there.
And then I guess just to.
Follow up I think D. C was up 35% for the year sell through were up 37% for the year I'm, assuming that's probably a contribution from <unk>.
Quite a bit since they don't have to touch the POC penetration, yet, but why I guess why would <unk> be up less than maybe sales for the full year.
Well when you when you look at organic for the full year it was 14% with.
With the balance of that being from acquisitions. So I.
I mean basically.
That's my view of it the acquisitions drove a large portion obviously of that 37% growth I think comparing the.
And I think your assumption is right about the acquired businesses by and large having lower.
DTC penetration, but I think you should compare the 35% DTC growth to the 14% organic growth.
Okay.
Okay that makes sense. Thank you guys.
Thank you appreciate it.
Yes.
Our next question comes from the line of Michael Baker with D. A Davidson. Please proceed with your question.
Hi, guys. This is Jeff Walter on for Michael Baker to that.
We were just wondering if you guys could kind of talk about some of the trends youre seeing in new customers versus old customers.
Kind of maybe talk about some of the initiatives that are being taken to help maintain the new customers.
Then I know you guys have also talked about the loyalty program in the past and if we can just get an update on that.
And the other initiatives around there thanks.
Sean do you want to take this one.
Sure sure yes so.
New customer acquisition continues to be strong.
What I can tell you is that we continue to focus on enhancing our digital capabilities that are going to further enable our customer retention and increase lifetime value. So as I mentioned in the presentation digital capabilities.
As it relates to communicating to the consumer and scaling that is a big focus of us right now.
We're optimistic about what we can do there.
Okay.
Thank you.
Our next question comes from the line of John Lawrence with Benchmark. Please proceed with your question good morning, guys. Congratulations.
Thanks, Tom.
Thanks, John .
Tom would you would you would you talk a little bit about over the second half of the year just about some of the.
Some of the different categories that you've seen has there been any change in the third and fourth quarter as far as.
Some of these components where people are looking for.
Then secondly, maybe just a little bit of a.
A dive into E M and these new acquisitions sort of the integration plan and where we sit as you look at it as far as.
Getting the profitability out of that thanks.
Okay.
Sure John I mean, when you look at the.
But when you look at the second half of the year. We saw continued strength in some of our leading categories.
Like fuel injection electronic fuel injection like electronic tuning.
Also in our exhaust business.
So there was really nothing there that surprised us.
Those are all categories, we've been investing in and growing.
When you.
In the context of integration we made progress.
During the during the second half of the year.
Still a lot of work to do there.
We.
You mentioned aes were exciting to be working more closely with that group. We've got those teams on the innovation side folded in together.
They are very focused on.
Providing us with the electronic.
Products that facilitate.
EV conversions on click one classic vehicles, so very excited to be making progress with that we did start the sympson integration in the in the second half of the year.
Just as a reminder, there was a one year earn out there and so we tread very lightly.
And that business ended up performing very well. So we are in process integrating that as well.
And.
Now we've got a host of.
Other acquisitions that we did in the.
In the half that we're looking forward to getting integrated.
Great. Thanks, just one more what about you know we've talked about obviously, you know that navigated the supply chain extremely well.
What did you warn and everything of that backlog you made a lot of change.
Changes.
To sort of execute against that did that backlog number come down as we as we move through the end of the year.
Yes.
The the <unk>.
Back to the backlog only came down minimally.
And I think the way to interpret that as you know despite what I would call a yeoman's effort on the part of the team, we werent able to fully satisfy the demand. So so we still have a very robust backlog out there.
Great last thing I'm, sorry last question, Sean that I did.
So you Wanna add for.
So some of the marketing events that you've arranged other sponsorships so is it even more.
Support for those programs is that correct.
Are you asking if we if we have sponsored programs related to our events <unk>, yes, yes.
Yes, yes, we do that but also in a way that pertains Holly as the Premier brand and the owner of the of that so we did just bring on ebay motors recently as a presenting sponsor for our event series.
But as you can see on slide seven where the integration of their brand is limited. So we want to make sure that that asset is protected and communicated at the Oems.
Great Great. Thanks, guys. Congrats good luck. Thanks, John Thank you.
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Thanks, everybody.
Thank you.
Okay.
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Thank you.
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