Q1 2022 Holley Inc Earnings Call

Yeah.

Hello, everyone and thank you for joining us today for Holly first quarter 2022 earnings Conference call. As a reminder, all phone participants are in a listen only mode. But later you will have the opportunity to ask questions.

A reminder, also today's meeting is being recorded.

Now for opening remarks, and introductions I am pleased to turn the floor over to Investor Relations for Holly Mr. Ross Collins.

Thank you Jim 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, Daniel <unk> Executive Vice President of corporate development, and New ventures, and Holly after their prepared remarks, we will.

On the call for questions.

Now I will reference the safe Harbor provisions under the private Securities Litigation Reform Act of 1095. 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 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 for an S. One filings with the Securities and Exchange Commission.

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 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 you.

The us 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.

Thanks, Ross good morning, everyone and thank you for joining us today.

Holly delivered strong first quarter results driven by strength continued strength in consumer demand.

Our net sales grew by 25% in the first quarter with a healthy balance of organic and acquired growth.

Sales, excluding the impact of acquisitions, which we refer to as organic sales increased by $21 6 billion contributing 13, 5% of year over year growth, whereas sales associated with acquisitions contributed $18 1 million or 11 three.

Set of year over year net sales growth.

While supply chain challenges continue to limit our ability to fully satisfy consumer demand our team performed well, enabling us to capture very nice growth in the quarter. Despite the challenges pricing actions, taking taken in 2021 allowed us to overcome higher freight and.

Product costs and deliver a slightly higher gross margin.

Looking to the balance of 2022 supply chain and inflationary headwinds are very much at the top of our minds and we remain committed to actively managing these challenges while simultaneously maintaining our focus on developing innovative and exciting new products for our enthusiast consumers.

Now I'll turn it over to Danny to discuss <unk> recent M&A activity.

<unk>.

Thank you Tom and good morning to everyone on the call as we have discussed on previous calls M&A remains a pivotal piece of our growth strategy. Our dedicated M&A team continues to manage a robust pipeline of acquisition opportunities.

<unk> engaging with potential targets in our industry.

We are focused on attractive companies that will allow holly to expand share in current product categories enter new product categories increase our DTC scale and ultimately drive shareholder value.

During the first quarter sales associated with our nine recent acquisitions contributed $18 1 million or 11, 3% of year over year growth further highlighting the strength of our platform and the synergies we are able to capture.

Not only are these acquisitions accretive to the business, but they will also provide a more complete this.

Journey, and ultimately foster customer loyalty.

As it relates to recent acquisitions, we are well on track to integrate these businesses realized cost savings synergies and drive growth.

We are also actively exploring opportunities to further accelerate the execution of our integration efforts in order to maximize value creation and the year.

That overview I'd now like to hand, the call over to Dominic who will discuss our financial results in greater detail Dominic.

Thank you Danny and good morning, everyone.

Holly delivered net sales of $201 million in the first quarter, an increase of $39 7 million or 24, 8% from the first quarter of 2021.

As Tom mentioned earlier organic sales provided $21 6 million or 13, 5% of year over year growth.

This organic growth was driven by improved price realization, which contributed $13 6 million or 63% of the total organic growth in the quarter the.

The improvement in pricing represented eight 5% year over year organic growth by itself.

The remaining $8 million of organic growth came from higher unit sales volume largely driven by strong consumer demand and our electronic fuel injection and safety product categories.

Non comparable sales from acquisitions provide the remaining $18 $1 million of year over year sales growth.

Gross margin increased to 41, 3% from 41.0% in the first quarter of 2021 the improvement in gross margin reflects higher price realization more than offset the significant freight expense increases in the first quarter. You may recall that freight cost rose sharply mid year in 2021 and while some.

<unk> and shipping rates has occurred since the peak in the fourth quarter freight costs still remain elevated in the first quarter and were significantly higher in the first quarter of 2021.

We will not lap the significant freight cost increases until the third quarter of this year.

Pricing gains also offset less impactful increases in component costs and product mix.

Total selling general and administrative expenses increased 43% in the first quarter. The large increase in SG&A is a continuation of increased costs related to equity compensation and public company expenses acquisitions and investments for growth.

Noncash equity compensation was $3 million higher than the first quarter of 2021.

Represented 150 basis points of deleverage in the quarter.

Recent acquisitions accounted for $1 9 million of the increase in SG&A as.

As a reminder, we anticipate equity compensation and public company expenses to continue to Delever until we pass the anniversary of becoming a public company in the third quarter of this year.

Interest expense decreased by 27% from the first quarter of 2021 to $7 4 million.

Interest expense positively benefited from the $100 million pay down on our second lien notes in July of last year and the credit facility refinancing we completed in November .

We recorded net income of $16 9 million in the first quarter of 2022 and 2021 net income was impacted by the recognition of higher earn out contingent liabilities due to the Simpson acquisition.

On an adjusted basis net income increased to $21 $5 million versus $15 1 million from the first quarter of 2021.

Adjusted EBITDA increased to $46 million in the first quarter up from $43 8 million in 2021.

Moving to our outlook for 2022, we are reaffirming the guidance that we laid out in last quarter's call. This includes annual net sales in the range of 765% to $790 million and adjusted EBITDA between $186 million and $194 million.

We are also reiterating our capex D&A and interest expense guidance, which are between $14 $14 million to $16 million $24 million to $26 million and 30% to $32 million respectively.

While it is not our policy to provide quarterly guidance I believe it's important to recognize that current economic and supply chain headwinds may continue to impact margins in the near term also as a reminder, certain SG&A expenses associated with becoming a public company will not be lapped until the back half of the year.

We look forward to delivering our annual targets in 2022, we will continue to navigate these tumultuous times to the best of our abilities controlling what we can control engaging with are enthused as consumers developing new and innovative products and making prudent investments to drive long term profitable growth for shareholders.

That now concludes our prepared remarks, Ross, we can open up the call for questions.

Absolutely Dominic as a reminder, we ask that you. Please limit yourself to one question with one related follow up as needed.

<unk>. Please open the line for questions from our participants.

Certainly, thank you gentlemen, and to our phone audience joining today. Please press star and one on your telephone keypad. If you would like to ask a question pressing star one replace your line into a queue and also a friendly reminder, if you are joining us today on a speaker phone. Please return to your handset prior to pressing star and wanted to be.

Certain that Youre signal does reach our equipment once again, ladies and gentlemen that is star one if you would like to ask a question. We will hear first from anti glass skin at Jefferies. Please go ahead.

Hi, good morning, Thanks for taking our question.

I appreciate all the color on the pricing impact and how that helps.

The growth in Opex.

The cost headwinds that you see.

Could you help us a little bit more in terms of the magnitude.

Headwinds from freight.

As we think about this year.

Are you assuming that eases as we get to the back half as we lap higher cost.

The shape of that headwind and what's assumed in the guidance.

Helpful.

Yeah. Thanks, Andrew this is Dominic.

So a couple of things we haven't really disclosed the exact deleverage of freight we just referred to the overall magnitude of increases from containers coming from international shipping and some of the airfreight that we saw we did see rates start to moderate and come back down from peak container cost, which were north of 20000.

A container in Q4 back down to.

Closer to the 10% to $12000 per container that we recently saw.

The key for US is that we haven't lapped those freight expenses, yet Q2 is still going to be higher freight costs and then we start lapping. It again, so we havent really disclosed exactly what the point deleverage is but it is significant in pricing is expected to keep managing that.

Great.

As we think about that go forward pricing opportunity.

Given you have such a high vitality index.

Introducing a lot of product year over year is it safe to assume.

New introductions to continue that offer.

With the deal volume.

I'll, let Tom jump in on that one there's a couple of things about it.

Some of our major Super popular product lines supply chain is a burden. It is a headwind in terms of getting some of the component increases our electronic fuel injection is an extremely popular line right now and some of our new product development in that space is being slowed because of the headwinds that we have in supply chain, but new product development.

Is the core of our organic growth driving it is we have over 200 individuals now in our R&D and development areas, including our engineers. So we believe that new product development will continue we are going to continue to make those investments even if short term there are some pressures because that is our long term health.

Great also.

I would add that we're not reliant on.

We're not totally reliant on new product introductions to get price. So we've got.

Yes, very strong brands and a history of being able to take price and we've also been disciplined over the years about doing price increases so.

We have we have additional ability to take price and as Dominic said very eloquently I mean, we're continuing to focus on our development efforts, our innovation efforts and bringing constantly bringing new products to market.

Thanks.

Next we'll hear from Joe Al Debello at Raymond James.

Thanks, Hey, guys good morning.

Quick couple of questions from me I guess first.

Was there any correlation.

Terms of fuel.

Fuel prices gas prices.

And the industry in terms of demand.

So.

Or are consumers are enthusiasts.

And.

They will make sacrifices to continue to pursue this automotive lifestyle, but at the end of the day. It obviously affects the amount of discretionary income they have left.

At the end of the week or the pay cycle.

And so it is something that we're watching very closely and even where the ratio is going to have an event.

Obviously diesel fuel for example, being very high effects.

Them as well, so I mean I think.

Really really to sum it up it is something that we're watching it can have an impact but compared to other consumers. This is an activity that people love to engage in very much part of their lifestyle and.

Our consumers also tend to be more affluent than the broader population, which gives them a little.

A little more flexibility as well.

Bad economic times.

Okay. That's helpful and just maybe on supply chain.

If anything it Matt that worse over the past few weeks.

How does it impact the M&A pipeline I am guessing that a lot of you were.

Smaller competitors are seeing even more.

Issues on that front so.

That actually expand potential opportunity on the M&A side for you.

I think at the moment, we really haven't seen that pipeline changed dramatically.

<unk>.

With our strong financial position.

Depending on the severity and the duration of the economic conditions, we are seeing it could very well create an opportunity for us.

Okay.

Got it thanks guys.

Okay.

Our next question today comes from Mike Swartz that Truest Securities.

Hey, Good morning, guys, maybe just a follow up on Joe's first question just relating to the correlation between fuel prices and demand.

Is there any historical evidence of maybe.

Looking the other way with a lot of your products actually improving fuel efficient fleet as higher fuel costs play into maybe the interest level in some of these products.

I really think for our consumers improving fuel efficiency is key.

Kind of a nice secondary or tertiary benefit they're really more focused on performance.

Okay.

For that and then.

Just I think on the prior call you had mentioned you expected a return to more normal seasonality in 2022, which would imply.

Larger rate of growth in the back half of the year, but you just had a very nice top line print in the first quarter you maintain guidance.

Are we supposed to be thinking about that maybe a little differently now.

Well I mean, our normal seasonality is a.

A higher percentage of our sales occur in the first half of the year.

And there's still a lot of year ahead of us I mean, Mike we have three quarters to go. So we just don't believe that it's appropriate to change the guidance, we have enough confidence in our ability to hit that range that we just don't want to make any adjustments to that at this time.

Fair enough. Thank you.

Ryan Sundby William Blair Your line is open.

Hey, guys. Good morning, Thanks for the question.

I guess I'll follow up with another one on consumer demand here.

Wondering if you saw any changes in demand as you went through the quarter or even here more recently.

And then any color there if you've seen any changes between your DTC channel gradient or pullback from your retail partners.

I will I will say that direct to consumer has continued to be very strong.

And we do have the ability for some of our resellers also to look at their out the door sales.

So.

Through for the quarter, which is the visibility we have <unk>.

Direct to consumers remains strong.

And.

One of the things that we have seen historically.

<unk> that are resellers, particularly the ones that carry inventory do have the ability to pull back and reduce their inventory when they become concerned about the economy and so we did see a little bit of that in the in the quarter.

Yes.

It really I think we saw that timed with the Russian invasion of Ukraine, which happened at the very end of February and for US that was the month of March.

Okay that makes sense.

And then I guess.

Last call you talked about contribution in 'twenty one for acquisitions.

More than $30 million.

With acquired growth, adding 18 million here in Q1, just wondering if you could talk about maybe where the acquired businesses have outperformed.

And then if you've got maybe an update on what you think full year contribution could be.

Yes, just as a clarifying point the contribution of the $30 million was just for the acquisitions that we made at the very tail end of the year.

There are nine acquisitions that are contributing to the non comparable growth number the $18 million and that includes for the first quarter.

M, which was a nice acquisition. If you recall, we made in April of last year. So all nine combined will drive the.

The contribution from M&A North of the 30 that we originally discussed.

Thanks, Greg.

Thanks for your questions.

Our next question today comes from Joe Feldman Telsey Advisory group.

Hey, guys good morning.

Wanted to ask about inventory and you just kind of how you feel about your inventory position today and your ability to meet demand or are there any areas, where you wish you had a little bit more or a little bit less in some cases.

Given the given the consumer demand.

In the context of the current supply chain challenges.

We we.

We don't have enough inventory.

A lot of our most most important products.

Got it.

And then in anything.

I assume you are working hard to improve that situation I mean, I guess, when you think that would be better spot.

Well, that's the crystal ball and it depends on who you listen to.

So we're certainly hopeful to see it improve but we have not seen it improve yet.

Got it Okay, and then if I could ask one more on that.

I don't recall you guys mentioned in the DTC business. Specifically this morning I was just curious how it performed in the quarter and if you could maybe remind us what percentage of sales it is today.

We haven't released individual quarterly D to C. Because there is some fluctuation in that but <unk> did outpace our organic growth and continue to do that just as we saw through 2021. So.

'twenty one.

I believe we landed around 17% Tom.

Trying to do that on top of my head there I think it was about 17% of our sales in 2021, 16% to 17%.

Yes, I think thats pretty close to 16 or 17.

Yes.

Great. Thanks, guys. Good luck with this quarter.

And by the way that's a.

By the way that as a percent of sales number not the growth number.

Right right got it thank you okay.

Uh huh.

John Lawrence with benchmark your line is open Sir.

Alright, Thanks, Congrats guys.

Could you talk a little bit about the immigration plan, obviously, I guess, we're rolling up about a year.

And sort of.

Talk about how that integration plan and has the supply chain affected that plan at all.

As you try to integrate these companies.

Supply chain really Hasnt had an impact on the integrations.

Yeah.

Yeah.

And I guess John .

That's the most direct answer to your question if there's more color there I'm happy to respond to it.

Yes, just a question. Okay. So we started we're going to start with a yield thats been.

<unk> had a year and now some of these other ones can you just talk so it'll be it'll.

It'll be a rolling process as you continue to make acquisitions Im just trying to get a sense of where we are safe for aes.

Is it closer to being eighth or ninth inning of the ballgame or is it still sixth or seventh inning to get those.

Just to get a roadmap of where those where those stand in terms of activity.

We have made progressive move.

Moves at a.

Our primary focus right now is wrapping up the Sympson integration, which is the largest acquisition that we've done relatively recently, although it's worth saying that we didn't start integrating that.

For a year.

Until a year after the acquisition date because of the earn out and I think Thats I think.

Pretty thoroughly discussed discussed that and so so that actually is the priority we plan to have that done in the second quarter.

We would also expect to have a finished in the third quarter.

Great. Thanks.

Good luck.

Thanks, John Thanks, John .

And once more to our phone audience today that is star one on your telephone keypad. If you would like to ask a question.

We'll hear from Christian Carlino at J P. Morgan.

Hi, good morning, everybody. Thanks for taking my question.

Wondering either this year or in the past that you noticed any correlation to weather realizing it would likely result in a shift of spending.

Other than destruction of demand, but you see that impacting seasonal.

Auto parts.

So I'm just wondering if you guys.

I would say historically, we have seen a little bit of that.

And it really manifest itself in the form of a delay.

In the start of the season, so people do get out they raise more they drive there.

Cars.

These lifestyle cars special interest cars more in the warmer weather.

But generally generally we felt it's been a delay in the season, but.

And maybe a little bit of a delay in the spending but it seems to have even out during the course of the year.

Got you that's really helpful color and then I guess.

Can you just gives us an update on some of the organic investments.

The way to think about is that you're prioritizing marketing and building the enthusiasts.

Site.

Pickup engineers through M&A.

How do you prioritize.

Sure.

Sure. So so we actually look at the vehicle platforms.

Categories that consumers are most interested in.

We maintain an idea bank of products and then we prioritize them in the context of our strategic plan and assign those projects to our engineers to drive the <unk>.

Largest.

Opportunities there from a revenue and profitability standpoint.

We do pick up engineering talent when we acquire businesses. That's one of the things we're always looking for.

And diligence.

And then.

One of the things over time is just we put a lot of effort into accelerating the pace of their new product development.

Other investments.

We are looking at and have have discussed is really to take our digital platform to the next level and there is ongoing.

Significant ongoing effort around that.

Got it thanks, Thanks for all the color and congrats on a great quarter.

Thanks, so much.

Ladies and gentlemen, we thank you for joining us for this Holly first quarter 2022 earnings Conference call. This does conclude today's meeting and we thank you all once again.

You may now disconnect your lines and we hope that you enjoy the rest of your day.

Thank you everyone.

Thank you.

Okay.

Okay.

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