Good morning ladies and gentlemen and welcome to the conference call to discuss Holley's Third Quarter 2024 Earnings Results. At this time, all participants are in listen-only mode. Later, we'll conduct a question-and-answer session and instructions for asking questions will be provided at that time. [Operator Instructions] And 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 third 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 of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning we will review our financial results for the third quarter and share our guidance for the fourth 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 everyone. Today I am excited to share the progress we've made in Holley's transformation. Your support is crucial as we navigate a consumer environment impacted by persistent inflation concerns. Despite these headwinds, we've made remarkable progress and am eager to highlight our achievements. Today, we will share more evidence of our transformation even in a market that often obscures the remarkable work happening within our company. We have built an exceptional leadership team and added talent at various levels, creating a formidable organization poised to drive us towards becoming a multibillion dollar enthusiast platform. We have consistently demonstrated that placing the right leaders in key positions drives significant progress within our business. A prime example is the outstanding work by our digital and consumer experience teams where our direct-to-consumer business has seen substantial year-over-year growth. This success is driven by our ability to capture market share from other manufacturers through creating engaging consumer experiences, effectively merchandising and promoting our products and leveraging best-in-class digital capabilities. We are also channeling an equal amount of energy into supporting our loyal distribution partners with the goal of driving their growth in parallel with ours and winning market share by being the best partner. Balancing channels is crucial. We must meet consumers where they prefer to engage in this omnichannel environment. This includes our distributors, third-party marketplaces, installers, national retailers in our own e-commerce platform. Each of these channels presents opportunities for growth and further coordination. As we have shown this year, as we build fundamental growth capabilities, we are also maintaining rigorous financial discipline and making meaningful progress on our financial goals. This includes debt reduction, credit upgrades and maintaining or improving on revenue conversion even as the market demand has softened. We have made significant strides…

Thank you, Matt, and good morning, everyone. Turning to Slide 13, I’d like to begin by providing an update on the progress we’ve made on our four financial priorities year-to-date, which include restoring historical profitability, improving free cash flow, optimizing working capital and reducing debt. First, while EBITDA margins were challenged from fixed cost deleverage from lower sales in the quarter, we continue to make excellent progress restoring historic profitability and working towards our long-term goal of 40% gross margin and at least 20% EBITDA margin on an annualized basis. Our progress was demonstrated in the quarter as we realized another $2.5 million from our cost to serve efforts, bringing our year-to-date total to $6.7 million surpassing our expectations for Q3. I’m proud of the team’s efforts on restoring profitability over the last two years. Since I joined, the team has been able to achieve over $33 million in cost savings which is worth more than 500 basis points and EBITDA margin. While our free cash flow was down significantly in the quarter, we have delivered strong free cash flow of $40 million year-to-date. And after adjusting for the timing impacts related to changes in our accounts payable process, free cash flow would have been roughly $4 million for the quarter. Free cash flow management is a key organizational focus of our leadership team. And as we discussed during our Q2 call, in anticipation of a potentially challenging back half, we implemented furloughs that generated cost savings of $1.2 million in the third quarter. Moving on to our working capital, we once again managed inventories well in the quarter, which is a continuation of the trend we have seen throughout 2024. Inventory near levels we saw last quarter and was reduced by roughly $28 million year-over-year to $179 million. Inventory…

Thank you. [Operator Instructions] Our first question comes from Christian Carlino with JPMorgan. Please just use your question.

Hi, good morning. Thanks for taking our question.

Hi. Good morning, Christian.

Good morning. Could you speak to your direct and indirect exposure to China and maybe what percentage of your causes are you currently paying tariffs on from the last round?

Yes, thanks for the question, Christian. As part of our cost to serve initiative that now is over a year old, we've been focusing on inbound and outbound freight and a big piece of that inbound of course is looking at total landed costs, which included tariffs. And so we've been working on resourcing and reducing tariffs now for over a year. So we think we're in pretty good shape and we don't see any significant impacts going forward. And we look forward to seeing how the policies actually get implemented. But right now we feel like we're in a good direction with the initiatives we've been working on for over a year.

Got it. That's helpful and understanding it's a small channel for you. You talked about national retailer sales up 12%. And I think some of the bigger parts retailers have talked about discretionary sales being down mid single-digits, which aligns with your view of the market. So I guess could you talk about how much of that do you think is increased shelf space and better brand positioning with the retailers versus just expanding the number of doors and boxes that you're selling too?

Yes. I mean, Christian, we think in the future it will be a significant area of growth for us. The sales cycles there are a little longer, but previously it was not a focus for this organization to partner with the national retailers. And there's a lot of focus in some of the major ones about positioning differentiation by offering performance parts. So we've seen growth in some of our products there definitely year-over-year that are taking share, and we think there's more opportunity to get product placement in some of our key categories.

Got it. Thank you very much. Best of luck.

Thank you, Christian.

Our next questions are from a line of Mike Swartz with Truist Securities. Please proceed with your question.

Hey guys. Good morning. Maybe start just a question on pricing. And I think, Matt, you kind of called out a number of actions you've taken to refine and optimize pricing and put in place a MAP [ph] policy or expanded the MAP policy. I guess I'm just trying to understand like what does this all equate to? Is this – is this positive for pricing? Is this a negative for pricing?

No, it's definitely a positive, Mike, and appreciate the question. Pricing was a discipline we've been working on putting into this organization for over the last year. And one of the things relative to MAP policy alignment was the number of SKUs we were monitoring and enforcing was very low compared to what we're doing now. As I commented in my prepared remarks, it's up 12x compared to what we were doing before. One of the great benefits of that, it builds confidence in your distribution partners to invest in your brands because they know you're going to hold everybody on a level playing field and people won't be undercutting them in the market.

Okay, that's super helpful. I mean, just to follow up on that, is there any way to kind of think about what kind of pricing benefit that is? Is that like a low single-digit, mid single-digit? I'm just trying to understand like what that actually means?

Yes. So on that one that's just more I think of building trust and aligning the market. Now relative to price materialization, some of the other initiatives we talked about around psychological price points are 80/20 initiatives in really driving the competitive analysis of our Top 500, and now we're on to our Top 2,500 SKUs. Now that is where we're trying to optimize the elasticity sweet spots to drive increased total profitability.

Okay, okay. That's helpful. And then just final question for me. I think your cost to serve savings I think you said was ahead of expectations. You took some furloughs. Is there an updated estimate on some of the savings that I guess you expect this year from the actions you've taken? And are there any opportunities as we look out to 2025 for incremental cost savings?

Sure, Michael, it's Jesse. So for the full year we've guided to $5 million to $10 million at the beginning of the year and it looks like we're going to be close to $7 million to $8 million. So we get another $1 million or so from cost to serve here in Q4 and the total impact of the furlough activities for the year should between furlough and 401-K should be around $3 million to $3.5 million with another $700,000 or so coming in Q4 related to the 401-K specifically.

Okay, great. Thank you.

Our next questions come from the line of Joe Altobello with Raymond James. Please proceed with your questions.

Thanks. Hey guys. Good morning.

Good morning, Joe.

Thanks for Slide 15, by the way, very-very helpful at least for me. But on that point, if I understand you guys correctly and if I'm not, let me know. But it sounds like you're looking for maybe one more quarter of pain here in terms of distributor inventory normalization. We are at pretty low levels. Is it your expectation that, that we'll be done with that destocking activity by year end?

Yes, Joe, appreciate the question. Yes, a large chunk of that, that slack that we talked about came out in Q3 and there might be some residual in Q4. But yes, to your point by the end of the year we think all the inventories are going to be in line relative to overall market demand and put us in a good shape for 2025.

Okay, which leads to my next question, I'm not sure if you're going to answer it, but how should we think about 2025? Is your base case that sales would be up next year?

I mean, when you look at Q1 of next year, that's when we expect to see organic growth.

Starting in Q1, okay.

Yes, in Q1 it's a little early, Joe, for us to give a full year guide, but Q1, when we look at out the door sales should be a reasonable lap for us to start to see growth and then we'll give more full year guidance at the end of the year.

Okay. Just one last one, if I could. It looks like you sold Detroit Speed. Can you speak to that? And are there other brands that you would look to sell?

Joe, yes. Detroit Speed, great team down there at Detroit Speed and that really just wasn't core to our business. They do a lot of high end services and builds on cars and the group at QA1 that was just a better fit for that team and that overall business. But we don't see anything else in our portfolio at this time.

Okay, thank you guys.

Thanks, Joe.

Our next questions are from the line of Brian McNamara with Canaccord Genuity. Please proceed with your questions.

Good morning guys. Thanks for taking the question.

Hey, good morning, Brian.

I'm curious how you guys think the election results will impact your business specifically on the top line; I'm assuming your customer leans a little more rural, a little less urban. Should the removal of uncertainty help?

Yes, Brian, appreciate that question. We believe so. I mean, I think you touched on it the way our industry is in aligns relative to policies of the elected administration. I think overall there was a buzz in the air at SEMA this week after the election results and we look forward to seeing how that plays out.

Great. And then secondly, just if you could comment on kind of what you saw at SEMA this week, it seems like your presence there was more robust in past years, there's definitely a method to the madness. Any color you willing to provide on that?

Yes, yes, absolutely. Brian, we were really thrilled with SEMA this year. As you said, our presence was a dramatic change from in years past. We showed all four of our consumer verticals and all our key lifestyle and power brands and the feedback from our key distributors were just wow. I mean a lot of distributors we do business today were even somewhat of unaware of the great brands that are under the different verticals within our portfolio. Personally, I also had the opportunity to meet with a large number of our distributors and they commented on just the change of mindset we've had over the last year, how they're partnering with us to drive growth and how they're seeing our sales out the door better than the market. So it was really great feedback and we took away, I think in total 10 awards, including one distributor of the year award from one of our major customers or manufacturer of the year from one of our distribution partners. So overall it was great showing by the team and really proud of the presence we put out there.

That's great. I appreciate the color.

Thanks, Brian.

Our next questions are from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Hey, good morning guys. Good morning guys.

Good morning, Bret.

Could you talk about the sort of street level health of the distributor, the channel, I guess, as far as the independent speed shops and what you're seeing there after they've seen some cyclical pressure for a while. I mean, are we losing store counts at the – on the street or is it relatively stable?

No, Brett, we're not seeing any notable change there in that number of installers and generally the industry as a whole seems to be quite stable and like I said, we met with a number of key distributors across the show and yes, some of those of course are seeing those year-over-year declines but generally the industry is quite optimistic for 2025, especially after the election results.

And I guess sort of related to that, it's sort of anything you have on the end consumer trend as far as the sort of the cadence or sequential health. I think in the prepared remarks you said becoming more cautious. Is that sounding as if things are incrementally more cautious at the consumer level or are we sort of bouncing on the bottom?

No, I think so, Bret, great question. I would say that the marketing calendar support that we've been giving our distribution partners was very helpful in making sure our out the door sales with our distribution partners in Q3 was relatively stable relative to the prior quarter. And we suspect if we're able to continue this partnership, which that was one takeaway from SEMA, lots of appreciation from customer discussions on those partnerships. We should continue to maintain and gain share here in Q4, but obviously the overall market health will play a role in us achieving any amount of growth in Q4.

Okay. And then just the housekeeping. We talked about sort of SKU optimization or rationalization in the last quarters on the low volume product. Could you tell us sort of where we are in cleaning up those low volume SKUs or getting them off the catalog?

Yes, I mean we've only – the only meaningful strategic product SKU rationalization that we've done in the year was at the end of Q1 and that's just a continuation of what we'd started in the prior year and there's no additional work there to be done. Now, there will always be just the ongoing pruning, if you will of the portfolio, but nothing of significance. I think we've got a really good process internally to one, make sure we launch the right products, invest in R&D where the consumer is and is going. And then throughout the year we are just continually just taking a look at that portfolio. So there shouldn't be any call outs going forward.

Great, thank you.

The next questions are from the line of Phillip Blee with William Blair. Please proceed with your questions.

Matt, Jesse, good morning.

Good morning, Philip.

Sounds like destocking pressure should be largely over and you're seeing positive out the door sales and healthy growth in DTC with a lot of those investments that you made really starting to ramp up. But fourth quarter sales guide still suggests high-single-digit decline at the midpoint. So can you maybe just help us reconcile expectations and whether there's sort of a higher level of conservatism built in given the uncertain macro backdrop?

No, I would say that Q4 is pretty consistent with the trends we're seeing, the conversations we're having. I would say what's different now as we've gotten better customer intimacy and engagement is, we've got visibility into their out the door sales and we're aligning sort of expectations on their reorder to those out the door. So what you're seeing is, I would say a pretty solid 50-50. There may be some upside there as we support them even more this year with holidays than we did in years past. But, I think what makes me feel good about this guide in particular is, we don't have the looming cliff of a destocking situation that we went through in Q3.

Okay, great. Very helpful. And then if we think about the industry reaching a bottom this year and then showing some sort of inflection in early 2025, are there any areas of the business that maybe you have under invested in over the past year or two that we should expect to maybe see less fall through on the initial return to growth? Thank you.

Yes, thanks, Phillip. No, our focus has been on driving growth in all for consumer verticals and in all facets of our omnichannel approach. Right. So we have four division leaders over each of those verticals focused on driving growth with those lifestyle and power brands. So our goal is to bring them all up in parallel going forward in 2025.

Awesome. Thank you guys. Thanks a lot.

Thanks, Phillip.

Our next question is from the line of Michael Baker with D.A. Davidson. Please proceed with your questions.

Okay, thanks. So, I guess following up on a couple questions, it sounds like, correct me if I'm wrong, but sell-in should be matching sell-out roughly in the fourth quarter, sort of at steady state. So I guess how does it get much better in the first quarter? Is that just predicated on macro getting better? Because you said, you think you'll grow in the first quarter, which means $160 million or so versus the last couple quarters here, which will be less than that and inventory sort of steady state now. So what drives that growth in the first part of next year? Is that just enthusiasm on consumers bottoming, election results, et cetera?

Yes, thanks for the question, Michael. Yes, there's a number of things. So one point you touched on I think is really critical is our goal is to really drive that equilibrium and sell-in and sell-out. And I think our efforts over the last year and building confidence with our distribution partners really getting better information and tailoring our marketing calendar with our events as well as events, they have to really drive that balance. And I think we're making some great progress there. And we talked about there's a bit of residual inventory adjustment that may occur in Q4, but when you look at Q1, which we commented on of 2025, there's a number of things that are setting up. One is all the great work our team has been doing, and I hope you can see that in the proof points that we provided in the deck. But our Q1 last year, you look at those comps, was really soft and that as an industry had a very, very tough Q1. And just based on all the work we're doing, the outcome of the election and just the general normalization we've now seen in the industry, we think we're set up to drive that growth in the first quarter.

Okay. A follow up to that is in terms of the marketing events. So it sounds like you did some big ones in the third quarter. What's planned different in the fourth quarter versus fourth quarter a year ago? Or do you have incremental marketing type days that help the third quarter? Do you have those set up for the fourth quarter as well?

So relative to our marketing calendar, we continue to get better on our execution of it in terms of partnering with distributors, getting more engagement and really tailoring the elasticity of what SKUs we include and what we don't. So in Q4, we're going to run our normal holidays, which is a successful program that we've run for many years, but we just remain the fact that we're getting better of how we execute that. So nothing from our side in the calendar, but also too we're participating with distributors on some of their key programs to make sure we're moving that sell-in and sell-out in parallel. So nothing significant outside of holidays in the quarter, but a lot of different constructs as we partner with distributors on some of their smaller programs.

Okay, that makes sense. If I could ask one more unrelated, I'm intrigued by bringing in or onboarding R&R Marketing. Is that new for you guys using outside sales forces? And if so, how does that impact your margins? I mean, I'm sure they're taking some of the profits, presumably. So how do we think about that impacting gross margins going forward?

Yes, Michael, in fact, a number of our amazing brands in our portfolio actually had a history of being built by R&R. So they're very familiar with our product portfolio. And for us, as much as we have in our portfolio of these amazing brands and product lines and setting up on our [ph] four consumer vertical structure, the size of our B2B team was not at a level needed to really drive that growth that we're looking for. So we partnered with R&R a few months back and we're really optimistic about what we're going to do together. Their combined team has hundreds of years of experience and we think the growth that they're going to help us drive will offset any investment made in that partnership.

Okay, thank you.

Thank you.

The next question is from the line of John Lawrence with The Benchmark Company. Please proceed with your questions.

Yes, thanks. Good morning, guys.

Hey, good morning, John.

Matt, would you comment a little bit on Slide 10? Obviously the metrics for some of the new product development, really strong coming out of the box. Remind us a little bit, if you don't mind, just about, that process you put in place several quarters ago, Obviously you've hit the market strong with some exciting products. What is it, the research and development before you make that decision and maybe talk about the highs and lows of maybe some of those, well, products that you talked about?

Yes, John, thanks for that question. Yes, I mean, the company, the size of our organization, when I came in, really did not have that discipline and structure about what to design? What to build and then ultimately how to launch it? So now we put a simple phase gate system in across our organization, across all our major product categories to help the team get the visibility and the urgency around developing the right products. And so the business cases and then making sure they have the resources through that development process and ensuring that we're accelerating what they're doing and not slowing it down. One of the other key deficiencies that we're correcting was the product launch process. So we were designing some great products, but there was not an effective process to bring along sales and marketing on both our D2C as well as our distributor channel to get nearer term adoption. So that's one of the things we're looking at is making as what we've executed on and that's what you're seeing in the results there, is the fact that not only are we bringing the right products to market. We're now being able to get better adoption in both our own channel and that of our distributors by partnering them on various marketing initiatives to get more awareness in the market. So it's just prioritizing products that we know are going to have a great value proposition and making sure we're executing it properly in terms of the launch, where previously it was just an email to the market, now our distribution partners get all the data and product information and pricing 60-days in advance of the launch. They can order 30-days in advance of the launch to make sure they have it in stock with their customers. So when we say go to the market, they're ready to go as well. And again, that's just another initiative we've done that's building the trust with their distribution partners to know they can participate in growth with us. And that's where, that's what's driving some of the success you're seeing.

Right, thanks. Last question is, as you work out those efficiencies, would the development spend ramp up a little bit or sort of stay where it is as you work out those efficiencies?

I think from a development spend perspective, John, this goes back to making sure that the teams are working on the right things and being efficient now and where they spend their time and what we invest in shouldn't require us to invest more there. But, as we grow and we see more opportunities, we're not going to, be. We will invest if necessary, but I don't think anything changes our long term margin structure of 40% gross margin and 20% EBITDA.

Thanks, guys. Congrats.

All right, thanks, John.

Thank you. I'll now pass the call back to Matt for a few closing remarks.

All right, well, thank you, Rob. Slide 21 underscores what we believe there is a compelling investment narrative surrounding Holley. This market, propelled by automotive enthusiasts, extends beyond a mere pastime. It's a passion and it's a way of life for our customers. We command a vast addressable market approaching $40 billion. Holley is at the forefront of the industry with a collection of storied 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 a unique opportunity to forge a new digital frontier that will transform how our consumers and distribution partners engage with their brands providing us with a competitive edge in fostering growth. When we emerge from this transformation, our commitment is to be delivering stable organic top line growth of at least 6%, maintaining 40% gross margin targets and greater than 20% adjusted EBITDA margin targets, generating sustainable free cash flow and establishing a platform that facilitates the unlocking of value in strategic acquisitions. The combination of the allure of our 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 our distribution partners, many of whom have been integral to our success for decades. I also want to thank you for your attention today and look forward to providing updates on our progress in subsequent quarters. I want to thank you again and have a great weekend.

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