Good morning, ladies and gentlemen. And welcome to the conference call to discuss Holley's Fourth Quarter and Full Year 2024 Earnings Results. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions for asking questions will be provided at that time [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, Anthony Rozmus with Investor Relations. Please go ahead.

Good morning. And welcome to Holley's fourth quarter and full year 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 Web site. 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 the ones described in our SEC filings. This morning, we will review our financial results for the fourth quarter and full year 2024 and share our guidance for the full year 2025. At the conclusion of the prepared remarks, we will open the call up to questions. With that, I'll turn the call over to our CEO, Matt Stevenson.

Thank you, Anthony. And good morning, everyone. As we look back on the fourth quarter and present the final results for 2024, I'm excited to share the significant strides we've made in the Holley's transformation. Your unwavering support has been crucial as we've navigated a challenging consumer environment. Yet despite these hurdles, we achieved remarkable milestones and I'm eager to highlight our success. Today, we'll continue to provide concrete evidence of our transformation, even in a market environment that often obscures the extraordinary work happening within our company. We have assembled an exceptional leadership team and infused talent at various levels, creating a powerhouse organization poised to propel us toward becoming a $1 billion enthusiast platform. Over the past year, we have consistently demonstrated that placing the right leaders in key positions has driven significant progress within our business. A prime example was the stellar performance of our digital and consumer experience teams where our direct to consumer business experienced substantial year-over-year growth. This success was fueled by our ability to capture market share from other manufacturers through creating captivating consumer experiences, expertly merchandising and promoting our products and leveraging best in class digital capabilities. We've also dedicated an immense energy to supporting our loyal distribution partners with the goal of driving their growth alongside ours and seizing market share by being the ultimate partner. Balancing channels is paramount. We aim to meet consumers where they prefer to shop in this omni-channel environment. This includes our distributors, third party marketplaces, installers, national retailers and our own e-commerce platform. Each of these channels presents abundant opportunities for growth and further synergies. Throughout the year, we have demonstrated our commitment to building fundamental growth capabilities while maintaining rigorous financial discipline and making meaningful operational improvements. These efforts have included debt reduction, credit…

Thank you, Matt, and good morning, everyone. I'd like to start by providing an overview of the fourth quarter and full year '24 financial results. On Slide 11, I will also share an update on the progress we have made on our 4 financial priorities in '24 which, as a reminder, include: restoring historical profitability, improving free cash flow, optimizing working capital and reducing debt. While sales were challenged throughout the year by a combination of reseller destocking, industry demand headwinds and the significant past due burn down from '23; the team was able to protect margins and sustain meaningful free cash flow by remaining focused on these critical priorities. Through strategic identification of savings opportunities and maniacal focus on execution, we've been able to deliver nearly $8 million in year-over-year savings from the cost to serve program in '25, which was above our original target of just over $5 million that we communicated at the beginning of the year. Cost to serve combined with year-over-year inventory turn improvements largely coming from the strategic product rationalization of nearly 45% of our SKUs historically accounting for only 3% of total sales helped with continued inventory optimization efforts and played pivotal roles in helping us achieve approximately $42 million in free cash flow. By using the free cash flow to prepay $25 million on our term loan and successfully exiting the covenant relief period, we were able to receive upgrades from both Moody's and S&P during the year. I'm proud of the incredible business optimization work this team has been able to achieve over the past two years that supported these financial priorities. Consider that in 2022, Holley was essentially free cash flow neutral on a much higher revenue base. Now this team over the past two years has been able to…

[Operator Instructions] Our first question is from Christian Carlino with JPMorgan.

Could you talk about the Mexico opportunity and just what excites you about that market in general? Like how big is the market and how does the car park differ from the U.S.? I think it's an older car park so does that play well into your assortment? And just any other color there on the distribution relationship with AutoZone.

So let's touch base on Mexico. Mexico is a market that obviously has a lot of interest in our products, but it was not something we were approaching directly. And so now with this new relationship with key distributors in Mexico, we're providing our products and communicating directly with those key distributors down there. And that market has some older car park, which is great for our carburetor and fuel injection lines in Domestic Muscle; but also just given the nature of the train, they're seeing a lot of modifications in jeeps, broncos and other trucks. So it's also a great vertical relative to our modern truck and off-road division. In terms of market size, we think that market is somewhere between $3 billion and $5 billion in Mexico, the enthusiast market. And then related to AutoZone, Christian, was your comment for the domestic market or the Mexican market or all the above?

It was about the Mexican market, but I guess you could speak to all of the above.

I mean national retailers has been a focus of our B2B team, a lot of interest from the various national retailers to get our products and performance planograms on their shelves. And so we've been working with folks like AutoZone both in the US and their team in Mexico to make that happen and are seeing that growth within the channel. So it's a great opportunity for future growth both domestically and in the Mexican market.

That's really helpful and appreciate the margin bridge in the presentation. But I guess could you sort of peel back the gross margin performance in the fourth quarter? Like how much of it is onetime if at all? And how should we think about the cadence over '25 just given you had some pretty wide variance in '24? Obviously part of that is the strategic product rationalization. But just any color there on how we should think about it going forward?

I mean we haven't broken out sort of the details on the pieces of contribution on the gross margin front. But I think just based on the commentary, you can see that it's a combination of things. Obviously our cost to serve efforts actually impact gross margin, which is a piece of it. That should continue. I think the purchasing price variance piece, which is just kind of lapping last year, we had some pretty meaningful headwinds, I think just as a reminder, related to some of the things that we had experienced on the chip side. So just from a onetime increase year-over-year, that's some of it. And then I think continued improvements that we've seen in D2C is part of the mix piece here. But I would say when you look at our gross margin on an annualized basis, you're probably not going to see as much in Q4 as we saw this time. It's going to be a bit more balanced throughout the year. So that should help you on phasing.

Our next question is from Joe Altobello with Raymond James.

First question on the guidance. You mentioned that consumer confidence took a little bit of a dip here in Q1. I'm just curious does your guidance for the year assume that gets better or are you assuming that we kind of remain at these levels for the balance of the year?

I think that part of the guidance would assume that things don't get worse. Things getting better would probably put us towards the top end on the growth range. As you can tell in our guidance and in my commentary, most of this growth will be back half loaded partly because we're lapping in Q3, Q4 of last year the destocking as well as just giving our transformative initiatives a bit more time to take root. And then we called out sort of pulling out some of these SKU rationalization things even, a lot of that was front-end loaded. But even pulling that out, it still would probably be a flat first half just at the midpoint of the guidance with mid-single digits in the back half.

And maybe second question, it sounds like inventories in the channel are much healthier than they were a year ago. I guess first, would you assume sell-in and sell-through are sort of in alignment this year? And second, how would you assess the health of your distributors at this point?

So on the first question, we're working much more closely with our distribution partners, Joe, as I commented as it relates to Q4 just to make sure that we don't get in an over-inventoried or underinventoried position with them. So it should marry up much more closely with the out-the-doors. And then remind me of the second question just more as it relates to their health overall.

Yes, exactly.

I would say that our key distribution partners are continuing to make investments in their business, seeing growth in the areas and partnering with us in ways that we've never seen before. I think obviously you've kind of got some shifting in the lower ranks. But one of the things that we've started to do is actually even focus on some of that next tier down that had not been shown the investment from Holley that we are showing now. So we expect to see B2B overall continue to show strength, which is the next sort of shoe to drop for us when it comes to driving growth because I think the team has done a great job on D2C and rebuilding the relationships with B2B takes a bit more time. It's like you lose that trust quickly and it takes a lot more time to get it back. So I think we're in a much better place there.

Our next question is from Brian McNamara with Canaccord Genuity.

So how should we think about Q1 sales? I know, Jesse, you just mentioned flat H1 and kind of mid-single H2. But reading between the lines in your prepared remarks, it sounds like you're expecting Q1 to be down, but a little more color there would be helpful.

As we sit here today, we're trending flat for Q1 on that core business, which excludes that divested businesses in '24 as well as the discontinued product lines that Jesse mentioned in his prepared remarks. But three weeks left to go, it's probably going to be plus or minus 1% to 2% with the weeks left and the team continues to push as hard on the growth initiatives.

And then you guys said in your prepared remarks like you kind of -- I remember when you guys reported in November, we were at SEMA and like you can just feel the buzz in the air. How much of like that mood changing is kind of factoring into your guidance today and I guess how temporary do you think this will be?

As you said, in our prepared remarks we commented on that. There was definitely a lot of optimism coming out of SEMA and I think you heard that from us in our call when we spoke shortly thereafter in November. And yes, that momentum has definitely died down and that is a factor in how we look at our guidance for 2025. And we're just hopeful as the policy settles down and people get more clarity, there's just a lot of unknown right now and of course you're seeing that uncertainty ripple through the consumer stocks out there. But we're optimistic in terms of the growth initiatives that we have going to be able to take share. We offered a lot of proof points in the discussion today to build that confidence of the work the team is doing and the success that we are having.

And just one last quick one. Do we have an idea of what the actual market did overall last year? I think it was down like 5%-ish through Q3 or something like that?

Brian, the way we look at the market, our gauge on it was down somewhere between 5% to 7% and of course our results were more than that based on the distributors normalizing their inventories levels to market demand in that back half, which we talked about on the call last time. So that's why you saw that decline more than the market last year. But as Jesse just referenced, our sell-in and sell-out is in a much better position and it is starting to mirror each other at a number of key distributors.

Our next question is from Bret Jordan with Jefferies.

Could you talk a little bit about the Cataclean acquisition? And I guess you're doing the Octane Boost with NOS. So is that sort of a category that you're getting further into on additives and sort of the economic profile of that business? And obviously buying a UK based additive company, does that expand the opportunities over there?

Bret, we see chemicals as a growth opportunity for us and we're continuing to expand our portfolio around chemicals focused with a performance aspect to it. So that new NOS is proprietary development that we're doing. That's not with any partner. But relative to Cataclean, we've had an amazing partnership with the team in the U.K. that is behind Cataclean and this was an opportunity just to extend our relationship in perpetuity and that's a great product for us and that product really allows us to build a beachhead to continue to grow our chemical expansion in national retailers and in other distributors.

And then I guess as you talk about the consumer trends recently I guess in the last couple of months specifically, is there a piece of the market that's more or less resilient in this backdrop of softening consumer sentiment? Is modern truck outperforming some of the maybe more discretionary upfitting of American muscle or is it all pretty much soft in line?

No, there's definitely variations within the portfolio. On the modern truck and off-road vertical, of course 80% of the vehicles sold in the U.S. are either trucks, CVs and SUVs, right? So that just has a natural push on it. Now when we look across our portfolio, of course we're seeing gains in some of the categories there, but also our Safety portfolio showed great growth year-over-year, great growth in motorcycle. So it's a combination of the verticals, but also product innovation that we're driving in those sectors. But in general, the market on what we call the four digit items in [hire] is where we're seeing the most softness.

[Operator Instructions] Our next question is from Phillip Blee with William Blair.

Can you provide maybe a bit more color on your core customer? Any detail on regional concentrations or spread by income demographic and maybe how these key cohorts have trended in the first quarter to date amidst some of this noise compared to any bump that you saw in the fourth quarter?

I would say just generally the demographic data we have shows that our consumers are modestly higher income so just think $100,000 and above. In terms of like the level of depth in the demo of research and things that you're talking about, that's something that we would be able to do as we get more mature in our CRM database to start to slice it that way; but at this moment, we're not able to kind of give that type of color. What I'll say is, as we pointed to consumer confidence in particular, expectations of new car purchases in the near term six to 12 months in this demo, I mean that's one of the metrics that we look at that is showing a little bit of hesitancy just overall given the uncertainty in the market. But I don't think that's unexpected given all the news that we're reading right now. So all of that is kind of baked into our guide and I think as Joe had asked previously, assuming things don't get worse, we feel good that our initiatives will continue to exceed market expectations and gain share to help drive growth. And this is something we're watching pretty regularly and obviously we'll update you as we know more in the coming quarters.

And then you spoke a bit about the strength in new product demand over the past year. Can you maybe quantify how much of a lift did that have to the total top line in 2024 and then how we should think about that level or impact of newness going into 2025?

Philip, I think as it relates to new product lift, I mean the team obviously demonstrated an ability to gain more efficiency on the new products that we were launching. We had multiple products that were $1 million a year in annual run rate out the gate. Now the maturation on these things obviously is 2 to 3 years and we're bringing it closer to 2 with our improved launching. But I would say continued efforts on that, that's going to be one of those things that's a flywheel that builds on itself over time. And I think going into this year, we're expecting some continued modest improvement in that area as the pipeline now has been refined over the past year. But I wouldn't say that it's the primary driver of the growth here in this moment. It will be long term. The bigger driver in the near term is just continuing to repair these B2B relationships, gain share and improve our strength with launching these new products.

With no further questions in the queue, I would like to turn the floor back over to Matthew Stevenson for closing remarks.

Okay. Thank you, Cheryl. Turning to Slide 21. It highlights the compelling investment narrative we see surrounding Holley performance brands. This market driven by automotive enthusiasts is more than just a hobby. It's a passion and it's a way of life for our customers. We have a vast addressable market nearing $40 billion and Holley leads the industry with a collection of stored brands known for their legacy of innovation. Our history is also marked by successful acquisitions and value creation through strategic integrations. Additionally, we have a unique opportunity to create a new digital frontier that will transform how our consumers and distribution partners engage with our brands giving us a competitive edge of fostering growth. As we emerge from this transformation, our commitment is to deliver stable organic top line growth of at least 6%, maintain 40% gross margin targets and achieve greater than 20% adjusted EBITDA margin targets. We aim to generate sustainable free cash flow and establish a platform that unlocks value in strategic acquisitions. The combination of our automotive enthusiast marketplace and Holley's distinguished brand portfolio presents an exceptional investment opportunity. In closing, I want to express my sincere appreciation to our team members for their dedication to serving our customers, to our remarkable consumers who support our brands and to our distribution partners, many of whom have been integral to our success for many decades. Thank you for your attendance this morning and have a great day.

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