Good morning, ladies and gentlemen, and welcome to the Conference Call to discuss Holley's First Quarter 2024 Earnings Results. [Operator Instructions] Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization of Holley. 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, Anthony Rozmus with Investor Relations. Please go ahead.

Good morning and welcome to Holley's first quarter 2024 earnings conference call. On the call with me today are President and Chief Executive Officer, Matt Stevenson; and Chief Financial Officer, Jesse Weaver. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. Our discussion today includes forward-looking statements that are based on our best view of the world and our businesses as we see them today and are subject to risks and uncertainties, including ones described in our SEC filings. This morning, we will review our financial results for the first quarter and share our guidance for the second quarter and full year 2024. At the conclusion of the prepared remarks, we will open the call up for questions. With that, I'll turn the call over to CEO, Matt Stevenson.

Thank you, Anthony, and good morning to everyone on the call. We appreciate you taking the time to join us. It's our pleasure to share the latest on Holley's transformation and the exciting developments we have in store. As I approach the 1 year mark with Holley, I'm proud of the many improvements we've made. Even as the market finds its new normal, it's important to recognize the significant progress happening behind the scenes at our company. We're elevating the level of professionalism and enhancing the capabilities within our organization. Our efforts have yielded substantial improvements in a remarkably short timeframe. We've also been diligent in eliminating nonvalue-added costs, which has meaningfully impacted our bottom line. At the same time, we're building a robust growth engine to secure Holley's future success and to leverage the strength of our brands. To achieve this, we welcome top talent with expertise from premier companies who share our enthusiasm for the automotive performance aftermarket and have the vision and know-how to take Holley to the next level. During our call today, we'll also discuss the key developments in our transformation, show you some of the recently launched innovative new products and give you a sneak peek at the ones to come later in the year. Let's move on to Slide 5, which shows some of the key highlights for the quarter. Despite a year-over-year decline in sales, we've maintained robust margins, showcasing our team's skill in managing costs while still investing in growth areas. Our strong free cash flow has allowed us to reduce our debt by an additional $15 million, totaling $65 million since September, reaffirming our dedication to lowering leverage. We've also observed notable EBITDA contributions from our cost-to-serve program, which is an internal continuous improvement program launched last fall. This program's…

Thank you, Matt, and good morning, everyone. Turning to Slide 14. Early last year we set 4 main financial goals for the full year: restore historical profitability; improve free cash flow; optimize working capital; and reduce debt. As we ended the year, we advanced in '23 on all 4 fronts and continue to be focused on achieving these goals in '24. I'd like to start by sharing the progress we made on our financial goals in the first quarter despite a difficult environment. First, we continue to remain focused on restoring Holley profitability and making progress towards our long-term goal of 40% gross margin and at least 20% EBITDA margin on an annualized basis. As we laid out in our original guidance, efficiency gains from cost-to-serve efforts are expected to deliver at least $5 million within the year, and we were able to successfully capture more than $3.7 million in the first quarter. Our next financial priority is to improve our free cash flow. We demonstrated progress on this initiative in the first quarter by delivering approximately $18 million of free cash flow, a $15 million improvement versus the same period a year ago. Over the last year, we've seen significant improvements in free cash flow through the optimization of inventory, and during the quarter we continued to support our initiative to optimize working capital with our transformative SKU rationalization of approximately 12,000 finished goods SKUs, representing 23% of our SKUs and only 1% of sales. As a reminder, the objective of the SKU rationalization efforts is to reduce complexity and focus internal development and management resources on high turn SKUs that will drive long-term growth in growing consumer categories. And finally, we remain committed to reducing our debt position and deleveraging our balance sheet. We reduced our net leverage…

[Operator Instructions] Our first question comes from the line of Christian Carlino with JPMorgan.

Could you speak to how trends evolved over the quarter in terms of out-the-door sales and quarter-to-date? And just to the degree that you saw variability in out-the-door sales during February and March around tax refund timing?

Sure. That's a good question, Christian. So, out-the-door sales throughout the quarter improved. Certainly, January was a really tough month. I think part of that could have been impacted by what was going on with the storms. But we saw some improvement in out-the-door sales. I think a bright spot here is, as we drive participation with our partners, one of the areas where we 100% participates in D2C, and we saw even better improvements in trends between January, February and March, which is extremely encouraging overall.

Got it. That's helpful. And then, understanding there has been new products. But you've talked to, I think, over 40,000 in SKUs that you've rationalized over the past year to 1.5 years. Could you speak to maybe what the actual SKU count is now? I think you implied is closer to 50,000. And are these primarily legacy categories that are just turning too slowly because there's a limited car park for those types of modifications? Or is it more rightsizing some of the categories you've entered through acquisition over the past couple of years?

Yes. So just to kind of put a finer point on it, yes, we're ending at around 40,000 SKUs. And I think the key metric here is, we've reduced around 45% of our total finished goods SKUs, which is an important piece of this. And it's really only impacting about 3% of sales. I think to your question on why and how, you really have to pay attention to the strategy that we've employed here. So, organizationally, the focus on large, growing segments of the population where we need to drive new product development wasn't as refined as it is today. And so, in a world where you're developing a lot of SKUs without a lot of good, strong end markets, you end up with this SKU proliferation, where I think you can do the math on this, average, these SKUs are doing $600 a year. And as we've tightened that up, we look at the portfolio and we say the carrying costs, the working capital, all of the efforts on the distribution and R&D, it just does not make sense, particularly given the strategy.

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

So maybe 1 for Jesse. Q1 orders looks like they're down about 12%. The midpoint of your Q2 guide implies minus 3% in sales, and then your H2 guidance implies a nice return to growth. For those of us maybe a little less familiar with the business, can you remind us how long orders typically take to convert to revenues and how you square the deviation?

It really depends on the source of the orders. Obviously, D2C comes pretty quickly, the distribution partners, it's usually within 4 weeks of the order coming in, and a lot of that also depends on availability. So it's not going to be a perfect one-for-one on the orders, Brian, to the shipments. But we use it as a good leading indicator into kind of how those trends then would cascade into the P&L.

Great. And then on, I mean, H2 looks like it's a little more -- the year feels a little more H2 loaded here in terms of growth resuming. I mean, clearly this is a turnaround story. What gives you guys, if you could rank order the confidence that, that growth will come back in H2 for maybe some investors that are doubting that?

Brian, it's Matt. There's -- as I hope it came across in the prepared remarks, there's just a ton of great activity going on behind the scenes to put in place strong initiatives to drive growth, as well as onboarding new leaders to really fuel that. And I think where you're seeing some of the upgrades in talent into the organization that have been here a little longer, you're already seeing those great strides and Jesse talked about the trends in D2C. That's under Philip Dobbs leadership, who's been here over 6 months and is really improving our go-to-market strategy around digital and data and third-party, et cetera. So there's a lot of great activity going on and we're confident that will bear fruit later on in the back half of the year.

Then, I guess, finally, maybe I'll put you on the spot here, Matt, you've been here for about a little under 11, right around 11 months. I mean, what would you say to an investor considering an investment in Holley here? Like why step in here? Obviously, there's a ton of work going on behind the scenes that maybe investors can't really see, can't get under the hood for a forced pun there. But like, why step in now? Why is the future bright there?

Yes, Brian, and a great question. We're all matching the breadth and depth of our brands and our products and all the consumer verticals we reach and how we're bringing better data and professionalism to drive the business forward to where the growth segments are in the market and really putting processes behind it to accelerate that growth. And it's just -- it's a different way than it's been done in the past. And we're just very optimistic as we continue to improve our processes and as we talked about, bring on this talent that it's going to yield the fruit we're confident it will. So, overall, very resilient market. We've seen it through ups and down cycles and really we're just getting going on the early innings of driving this growth engine.

Our next question comes from the line of John Lawrence with The Benchmark Company.

So when you look at the rationalization, can you take another step deeper, Matt, how long ago have some of these products been in inventory? And was -- from looking at that rationalization, should it have been done a long time ago, obviously, with that many SKUs? Can you give us sort of a history? And what was the criteria? You mentioned, $600. What was basically the criteria to make that cut?

Yes, John. I mean, we take a very analytical approach to look at really what is driving value into the market like where there's clear differentiation in our products. We got to look at it by overall brand, by category, and understand are there SKUs that are adding value to the portfolio and to the brand, or these things just done to be done without really a clear value proposition and direction. And as Jesse talked about a few minutes ago, there was a lot of quantity over quality, right? And so, now we put in a very developed and diligent Phase Gate System where we then vet the opportunities based on the market potential, the value proposition, competitive pricing, et cetera, to make sure that then these things take off into the marketplace. So it's just driving that level of professionalism in the business that wasn't there before. And so, yes, these products should have been rationalized a while ago. And I think we're in a good spot. The team did a great job about a year ago, starting in rationalization exercise. We thought that there was one more that was needed, and we feel the portfolio is in good shape now and it allows us to really concentrate on driving innovation.

Great. And just last question for me. Just when you look at the process and you talk about the new products, can you give us just a sense of behind the scenes how long this took to make the Bluetooth, et cetera? Obviously, just some examples of how quickly the new team has assembled that data, gone to market with a new product and how that process, maybe from a timeline, is a lot different than it was in the past?

Yes, and one of the things, John, this Phase Gate System is elevating the biggest opportunities to the surface that then we can accelerate by putting in the proper resources. And I think a great example of that is that, APR Ultralink. I mean, literally, John, this is a product that was talked about in the organization for years. But really the market segmentation and the appreciation for the data driving the business opportunities, because Euro is a large growth segment and there was a bias to Domestic Muscle previously and we made sure we saw a great opportunity, worked collaboratively within the business, the functional areas and the business units drove the right resources that will accelerate that product. So literally, it took it from something that had been in development for years and got it done in months. And those are the things we want to continue to do to highlight the large opportunities and bring them to market faster.

Congrats and good luck.

[Operator Instructions] Our next question comes from the line of Joe Altobello with Raymond James.

This is [ actually ] Martin on for Joe. I was wondering if you can clarify your stance on M&A versus debt reduction in terms of capital allocation. In the near-term, is the far fairly high for acquisitions? And is there a price you'd think about using stock?

Yes. So good question. I would say, right now, primary focus when it comes to free cash flow, as we've said, and we've committed to and consistently delivered on is to pay down debt. Now, I think, as Matt said a few times, it doesn't mean we're going to take ourselves out of the market when it comes to looking at M&A activities. But we're certainly very conscious of our leverage commitments and our path with free cash flow. But I think when it comes to using equity, I think in my prior call, I know I said that, that could be a tool, but definitely not at these price points on the stock, and certainly something well north of this. It's just kind of saying, "Hey, we've got -- given to our public company, a lot of tools at our disposal, and we will be very conscious of driving shareholder value when it comes to formulating the capital structure on any acquisition".

Got it. And just turning to the free cash flow conversion for the year. How should we think about that, particularly given that you had the relatively high level of interest expense? And I guess, a nice boost last year from inventory reductions. I think if we're using the [ near-term ] guidance, we get somewhere around 30% of adjusted EBITDA. Is that a good near-term run rate?

I think just using what you've got there in terms of guidance on the EBITDA side, and just assuming, unlike last year, where we got well over $40 million of free cash flow from inventory, there may be some modest improvements on free cash flow from inventory this year, but nothing to the level that we saw last year.

Our next question comes in line of Joe Feldman with Telsey Advisory Group.

Can you talk a little bit more about your promotional plans and what you've seen from the distributors? Because if I recall, you guys were trying to support the distributors a little bit more. And how effective that's been? Is that working how you'd like it?

Joe, yes. Regarding our promotional strategy, our goal is to lift all channels with the great products in our portfolio and that those are introducing. And our distribution partners are a key piece of that. And previously, I think we covered on the last earnings call, when Holley ran a promotion, we didn't include our distribution partners and we felt that was a real miss, as they're an important part of our go-to-market strategy. So now going forward, we support them and during this promotional time period and work together, and we're continuing to optimize that as we work on future promotions and continue to get more coordinated with our partners.

Got it. And then just 1 more question on the leverage, just to be a little more clear. Are you guys -- to get to the leverage target that you outlined for us, is that more the EBITDA? Or will there be more debt pay down this year? I just haven't ran through the math yet, but maybe you could share some thoughts on further pay down through the year.

Joe, I think to get there, I mean, just the cash generation just drives it, with the EBITDA hitting the midpoint of the guidance and actually generating cash in the interim to drive down the net leverage gets you there. In terms of buying back debt, we look at that as -- we did $15 million in Q1. It's one of those things that I've been very opportunistic about and just kind of balancing our free cash flow forecast in any given quarter and really just making sure that, from our leverage covenant perspective, we don't get any credit for having cash on the balance sheet over $50 million. So my objective there is just to make sure that we, based on our forecast, make sure that we stay under $50 million in cash on the balance sheet by buying back the debt. But I'm not going to give you a specific number on that. But just note that getting to that leverage target is really just hitting the guidance and generating cash in the process.

Good luck with this quarter.

Our next question comes from the line of Phillip Blee with William Blair.

This is Sabrina on for Phillip. Could you provide some color on the performance of Sniper 2.0 during the first quarter? And then any early signs on second quarter performance to date with new products, and then also just more broadly?

Yes, Sniper 2 is, of course, a really important product for our business and has resonated extremely well in the marketplace. And we just introduced this new Bluetooth connectivity kit for your phone. So previously, when you purchased a Sniper 2, it came with a digital display. So now with this new Bluetooth module that hooks up to the phone, more price sensitive customers can get a great Sniper 2 product at a lower entry point. So we're very optimistic in Sniper 2 performance. It's doing well, and it's the leader in its space relative to this premium entry level EFI conversion. So, all things are looking strong for that product.

Great. And then a quick follow-up. Your team has made considerable progress working down past due. So how are you thinking about your plans for past due order fulfillment for the remainder of the year and that incremental margin impact versus last year?

Yes, this is Jesse. So, I would say, Sabrina, that most of the past due fulfillment improvements happened in the back half. And so, we would expect potentially some improvement here in Q2. But largely we see that happen in the back half. And I think we're probably getting close to what would be a standard run rate of past dues, which I would say is in the $5 million range of the business at its current size. The plan is to work as hard as possible to get down to that by the end of the year, but that's kind of where we expect it to level off.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Stevenson for any final comments.

All right. Thank you, Melissa. The Slide 21 underscores the compelling investment narrative surrounding Holley. This market, propelled by automotive enthusiasts, extends beyond a mere pastime. It is a passion and it is a way of life for our customers. Its resilience to economic cycles is notable given that is more than just a fleeting trend. We command a vast addressable market approaching $40 billion, which has demonstrated consistent growth over many years. Holley is at the forefront of the industry with a collection of storage brands that have a legacy of innovation. Additionally, our history is marked by successful acquisitions and value creation through strategic integrations. Plus, we are presented with the unique opportunity to forge a new digital frontier that will transform how our consumers and distribution partners engage with our brands, providing us with a competitive edge and fostering growth. This leads to a compelling investment case with a business committed to delivering stable organic growth of at least 6%, maintaining 40% gross margins, achieving over 20% EBITDA margins, generating sustainable free cash flow, and establishing a platform that facilitates the unlocking of value and strategic acquisitions. The combination of the allure of the automotive enthusiast marketplace and Holley's distinguished brand portfolio presents an exceptional investment opportunity. In closing, I wish to express my sincere appreciation to our team members for their dedication to serving our customers daily, to our remarkable consumers who support our brands, as well as to our distribution partners, many of whom have been integral to our success for decades. Also, thank you for your attention today and look forward to providing updates on our progress in subsequent quarters. I want to thank you, and wish you a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.