Holley Inc. (NYSE:HLLY) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the conference call to discuss the results from Holley’s First Quarter of 2023. [Operator Instructions] As a reminder, this call is being recorded and 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. Please go ahead.

Ross Collins: Thank you, operator. Good morning, everyone. Thank you for taking the time to join us today. On the call with me today are Matt Rubel, Executive Chairman; Michelle Gloeckler, Interim President and Chief Executive Officer; Jesse Weaver, Chief Financial Officer; and Vinny Nimmagadda, Executive Vice President of Corporate Development and New Ventures. 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 these 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-K, S-4, and S-1 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. Holley 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 Michelle Gloeckler, Holley’s Interim President and Chief Executive Officer. Michelle?

Michelle Gloeckler: Thanks, Ross. Good morning. And thank you for joining. As we begin today, we would like to thank and celebrate our Holley shops and team members across the company for their commitment to delivering against our strategic pillars and priorities. We had visited most all of our shops this quarter and appreciate their achievements. When we last spoke, we shared our strategic pillars and priorities for 2023. The Board and leadership team of Holley remain laser-focused on executing these initiatives. Early traction drove solid first quarter results with both sequential top line and bottom line growth. Quarter-over-quarter, our gross profit and adjusted EBITDA increased by 43% and 125%, respectively. Holley remains steadfast in its vision to inspire and enable enthusiasts in their automotive adventures by bringing innovation, discovery, and fun to motor life.

Our team of enthusiasts supports the journeys of our enthusiast customers by focusing on five key pillars of our strategy. Those are: One, prioritizing key categories and platforms; Two, product innovation; Three, mergers and acquisitions; Four, our customer-focused channel strategy; and Five, engaging and inspiring the enthusiasts. I’d like to update you on the progress we’ve made on each of these pillars. First, on key categories and platforms. We completed our SKU rationalization program, vastly reducing complexity in our facilities and simplifying the customers’ purchase decisions, all with minimal impact on revenue. Our team made substantial progress in the quarter, working down the inventory of those rationalized SKUs, and I have personally walked our 400,000 square foot distribution center several times in this past quarter, and I have seen the difference firsthand.

We continue to make progress on our past due orders in the nonelectronic segments of our business. During the quarter, company-wide past due orders decreased slightly by $600,000. By segment, mechanical, exhaust, accessories, and safety, all declined in the 17% to 28% range. However, most of that improvement was offset by an increase in electronics of 26%. As we discussed in last quarter’s call, automotive-grade microchip availability continues to be a challenge as it relates to building and shipping our Holley EFI products. However, our team was able to leverage our supply network during the quarter and secured chips to make and ship more Terminator and Dominator EFI products within the Holley EFI product line, albeit at less profitable levels given higher prices paid to secure those chips.

We did, however, take targeted pricing actions to help offset the impact of the higher chip acquisition costs on the spot market. While we are encouraged by our improved shipping rates on these products, new orders in our electronics category continued to outpace our ability to supply, as indicated by the increased level of past dues. These higher levels of past dues are reflected in our current financial guidance. With that said, our supply chain management efforts are paying off, and we now have line of sight on future chip deliveries, which reduce downside risk to our revenue guidance. Product redesign efforts to access a wider available supply of chips continue, and we expect to provide an update on this later this year regarding potential 2024 impacts.

Optimizing our operations is critical, but our team is also committed to driving innovation that delights our enthusiasts. Historically, Holley has excelled in anticipating the future needs of its customers, which is at the heart of our innovation pillar. Later this year, we will be launching Holley Sniper 2.0, an extension of one of our most popular electronic fuel injection platforms. In addition, we are encouraged by the aftermarket tuning technologies created by our R&D team, which recently launched a collaboration with Dodge to utilize Holley aftermarket tuning technologies to enhance vehicle performance for owners, while maintaining factory warranty coverage with installation handled by dealers. These are historic milestones for both Holley and the industry to better serve our growing base of enthusiasts.

With our third pillar, M&A, we continue to accelerate synergy capture from recent acquisitions and remain on track to capture $3 million to $3.5 million of cost synergies in 2023. As a reminder, the near-term focus of our M&A effort is to accelerate value capture from recent transactions. We are on schedule in adding acquired brands to our Holley.com site, our ERP system, and our distribution center. We continued to make strong progress on our fourth pillar this quarter, delivering strong direct-to-consumer growth. DTC sales were up 6% year-over-year and DTC sales growth continues to outpace overall companywide sales. As expected, we also began to see our resellers build inventory ahead of the racing season. A return to normal seasonal stocking cycles is a key indicator that we are on a path to demand normalization in the post-COVID era.

Progress on our fifth pillar, engaging and inspiring the enthusiasts, will be more evident as we enter the heart of our event season. We are currently planning seven Holley events this year, and we are working on something big for our electric vehicle event, Holley High Voltage. This year, we are taking the High Voltage experience to Tesla Takeover, one of the largest Tesla EV gatherings in the United States, which will enable Holley to reach new EV enthusiasts and expose many production EV owners to exciting EV conversions and testing the performance of their vehicles in a motor sports environment. This event will take place in July in San Luis Obispo, California. As always, Holley High Voltage will bring an incredible display of leading-edge and unique EV conversions and a fun motorsports experience that enables our enthusiast to test the limits of their EV vehicles.

We recently hosted Holley LS Fest West in Las Vegas, which saw great turnout in late April, above what we experienced last year. We continue to offer interactive opportunities for our multigenerational enthusiast customers, and we will meet them when and where they choose to engage. Underpinning these five strategic pillars is a strong foundation of talent as well as our commitment to operational excellence. We have the right team in place, we are equipped with the right strategy, and we will continue to be a leader in this attractive auto enthusiast market. As part of our commitment to operational excellence, we continue our efforts to right-size our operational structure and reduce costs, delivering solid progress in the first quarter. Key contributions were a reduction in force, reduced logistics costs, and savings from location consolidation.

We estimate that we drove $9 million in total savings year-over-year in the first quarter and are on track to achieve $30 million of year-over-year savings during 2023. Looking at the balance of 2023, we remain focused and our leadership team is committed to driving the change that Holley needs. This includes streamlining operations, capturing synergies, and improving both supply chain and working capital management. We will drive innovation and focus on serving the needs of our enthusiast customer base. While we continue to expect demand normalization throughout the year, we see additional opportunities to reduce inventories and work down our past due orders in electrical categories through both the proactive acquisition of chips on the spot market and chipboard redesigns.

Overall, we remain encouraged by Holley’s business outlook, and we continue to believe that performance aftermarket will organically grow at 6% to 7% per year as COVID demand normalizes. Furthermore, we made solid progress on profitability this quarter, and we still expect to achieve our targeted levels of profitability, including 40% gross margin and greater than 20% EBITDA margin in the near future. We are driving fundamental improvement in our business that will continue to add value, and we will inspire our large and loyal base of enthusiasts with innovative new products across our strong roster of brands. We are making meaningful progress toward exiting 2023 as a much stronger company, and we look forward to updating you on future calls.

With that, I’ll now pass the call to Jesse to provide an overview of our financial results. Jesse?

Jesse Weaver: Thank you, Michelle. And good morning, everyone. Holley delivered net sales of $172.2 million in the first quarter, a decrease of $27.9 million, or 13.9%, compared to the first quarter of 2022. Non-comparable sales associated with acquisitions contributed $1.8 million, or 0.9%, of year-over-year growth. The remaining comparable sales decreased by $29.6 million or 14.8% compared to the prior year quarter. As Michelle highlighted, past due orders declined by $600,000 in the quarter to $26.2 million. Past due improvements were driven by our mechanical, exhaust, accessories, and safety categories, but were largely offset by past due increases in electronics. While the team made notable progress on securing additional chips on the spot market, we expect elevated past dues within our electronics category for the remainder of fiscal year 2023, which is reflected in our guidance.

While sales levels and total orders were down from the prior year, it’s important to note that our first quarter of 2022 is an exceptionally tough comparable period. Sales levels during this period in 2022 were up 25% to 26%, and we believe overall consumer demand was likely still benefiting from COVID-19 consumer habits and stimulus. Additionally, Holley delivered significant sequential top and bottom line improvements relative to the fourth quarter of 2022, with sales and adjusted EBITDA increasing by 12% and 125%, respectively, driven primarily by sales leverage and cost reduction initiatives beginning to flow through. As it relates to our direct-to-consumer channel, we are pleased to see continued, solid demand as D2C sales were up $2 million, or 6%, year-over-year against the strong results of 39% we delivered in the first quarter of 2022.

This further demonstrates our commitment to meet our customers where they want to shop. D2C sales continue to make up a large share of our revenue, representing 22% of first quarter sales, which is up from 18% last year. Gross margin decreased from 41.3% last year to 39.3% in the first quarter of 2023. The year-over-year decrease in gross margin can primarily be attributed to sales deleverage, combined with inflationary factors, including increases in manufacturing costs and the shift of our sales mix towards products with lower gross margin. This was partially offset by freight and current material cost improvements. Sequentially, our gross margin improved by 870 basis points, up from 30.7% in the fourth quarter of 2022. The sequential improvement was driven by a positive operating leverage and lack of noncash product rationalization costs in the first quarter.

We also began to see the impacts of our recently negotiated logistics contract. Total selling, general and administrative expenses decreased $5.8 million to $36.7 million in the first quarter of 2023 versus the same quarter of 2022. The decrease in selling, general and administrative costs was driven by a decrease in equity compensation cost and a decrease in personnel costs, which was a key piece of our recent cost saving actions. Interest expense for the quarter increased $10.9 million to $18.3 million as compared to $7.4 million in the first quarter of 2022. As a reminder, in an effort to reduce exposure to floating interest rates, we entered into a costless interest rate collar during the first quarter that hedges $500 million of our debt against three-month SOFR rate fluctuations, above 5% and below 2.8% through mid-February of 2026.

Notably, our interest expense for the first quarter includes a $3 million noncash charge related to the change in fair value of the collar. Excluding this noncash charge, our interest paid for the period is aligned with the guidance we laid out last quarter. Going forward, our interest expense will need to be adjusted for the change in valuation associated with the interest collar to arrive at our true cash interest paid. We recorded net income of $4.2 million in the first quarter of 2023. Net income for the quarter was unfavorably impacted by a $1.9 million noncash increase in liabilities for warrants and earn-out shares. On an adjusted basis, net income was $6.1 million versus net income of $21.5 million in the first quarter of 2022. Adjusted EBITDA decreased to $34 million in the first quarter, down from $46 million in the first quarter of 2022.

From a balance sheet and liquidity perspective, we generated positive free cash flow and paid down $7.3 million in debt during the quarter. We ended the quarter with $20.8 million in cash and only $5 million drawn on our $125 million revolver. Turning to our outlook and financial priorities for the remainder of 2023, as we discussed on our last call, the focal points for the year include restoring Holley’s profitability, improving free cash flow, optimizing working capital, and delevering the balance sheet. We fully expect to deliver on these initiatives in 2023, and they’re reflected in our forward-looking expectations for the business. For the full year, we are reaffirming our previously provided guidance ranges. As a reminder, we are projecting net sales in the range of $625 million to $675 million and adjusted EBITDA in the range of $108 million to $122 million.

Given the strong progress we made on our operational improvement and cost savings initiatives during the first quarter, we are increasingly confident in our outlook, and we expect improving year-over-year performance as we progress through 2023, both in terms of revenue growth and EBITDA margin. We expect 2023 results to include capital expenditures of $10 million to $15 million, depreciation and amortization between $23 million and $25 million, and interest expense in a range of $60 million to $65 million, which excludes the impact of any noncash interest rate hedge revaluation. Regarding our working capital levels and free cash flow, we are continuing to see inventory turns come back in line with historical pre-COVID levels. And as I alluded in our last call, we do not anticipate the free cash flow headwinds we experienced from working capital over the course of last year.

While we secured additional financial flexibility to execute our strategy through our recently amended credit agreement, we remain committed to driving free cash flow, paying down debt, and keeping overall leverage levels in check in 2023. At the quarter end, our net leverage ratio, as defined by our financial partners and lenders, was 5.7 times, which remains well below the thresholds negotiated as part of the amendment process. In closing, while we continued to face supply chain uncertainty and continued normalization of demand during the quarter, we are pleased with our results and the progress we are making. Our leadership team is committed to executing our strategy and making the necessary changes to drive value for our shareholders. As these various headwinds subside over the next six to twelve months and as the market returns to more normalized growth levels, we are confident that Holley will get back to achieving its long-term gross margin and EBITDA targets of 40% and more than 20%, respectively.

We continue to believe that Holley’s position as an industry leader with ample runway for long-term profitable growth is unchanged. That concludes our prepared remarks. Ross, we can open the call up for questions.

Ross Collins: Absolutely, Jesse. As a reminder, we ask that you please limit yourself to 1 question with 1 related follow-up as needed. Operator, please open the line for questions from our participants.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.

Operator: Thank you. Our next questions come from the line of Brian McNamara with Canaccord. Please proceed with your questions.

Operator: Thank you. Our next questions come from the line of John Lawrence with The Benchmark Company. Please proceed with your questions.

Operator: Thank you. Our next questions come from the line of Alex Perry with Bank of America. Please proceed with your questions.

Operator: Thank you. [Operator Instructions] Our next questions come from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Operator: Thank you. Our next questions come from the line of Michael Baker with D.A. Davidson. Please proceed with your questions.

Operator: Thank you. Our next questions come from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your questions.

Operator: Thank you. [Operator Instructions] There are no further questions in the queue at this time. With that, I would like to close the call out. We thank you for joining today’s teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.