Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holley's Second Quarter 2025 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. 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 Second Quarter 2025 Earnings Conference Call. On the call with me today are President and Chief Executive Officer, Matthew Stevenson, and Chief Financial Officer, Jesse Weaver. This webcast and 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 the ones described in our SEC filings. This morning, we will review our financial results for the second quarter of 2025 and discuss guidance for full year 2025. At the conclusion of the prepared remarks, we will open the line up for questions. With that, I'll turn the call over to our CEO, Matthew Stevenson.

Thank you, Anthony, and good morning, everyone. As we look back on our second quarter of 2025, I am happy to report that the momentum we began building more than 24 months ago continues to grow. It's been a highly productive quarter, one that not only reflects strong operational discipline, but also the impact of staying focused on our strategic priorities. Thank you, as always, for your continued support as we navigate a constantly evolving consumer and macroeconomic environment. For the second straight quarter, our core business delivered solid growth. Just as a quick reminder, when we say core business, we're referring to results that exclude the businesses we divested in the product lines we phased out as part of last year's strategic rationalization efforts. This quarter, our team made strong progress across the board with core growth showing up in every division of the company. What's especially encouraging is that we're again seeing this momentum in both our direct-to-consumer and business- to-business channels. That speaks to the strength and balance of our omnichannel strategy. As we emphasized many times before, our omnichannel approach is a cornerstone of our growth strategy as the leading consumer enthusiast platform in automotive performance aftermarket. We're committed to meeting customers wherever they choose to do business, whether it's through e-tailers, distributors, wholesalers, third-party marketplaces, installers, national retailers or our own e-commerce platform. Our second quarter performance reflects the foundation we have built over the last 2 years in key areas like go-to-market execution, product innovation, digital capability and operational excellence, all of which are now driving the progress we're making under our 3-year strategic plan. With that foundation firmly in place, we're focused on keeping up the momentum and building on the progress we've already made. Before we get into the specifics of Q2…

Thank you, Matt, and good morning, everyone. I'd like to start by providing an update on our progress against our financial priorities, then discuss our second quarter '25 results, our updated view on the tariff impacts to free cash flow and our refinements to our guidance. Moving to Slide 13. We remain focused on our financial priorities, which are restoring historical profitability and optimizing working capital. Our keen focus on these financial priorities has allowed us to generate our strongest quarterly free cash flow results in the history of Holley, achieving approximately $35.7 million in Q2. We relentlessly work towards restoring historical profitability and make progress towards our full year operational efficiency targets again in the second quarter. We saved roughly an additional $1 million in the second quarter, primarily driven by a reduction in freight costs, which brought our year-to-date cost savings in '25 to just over $2 million. And as a reminder, we anticipate savings of $5 million to $10 million through improved manufacturing efficiency, warranty and return policy compliance and quality improvements to better the customer experience in '25. In Q2, we made strong progress optimizing working capital by proactively managing inventory by continuing to make improvements in our SIOP processes to build a more agile demand-driven model. These efforts are aligning production with market needs, optimizing safety stock and lead times and cutting slow-moving inventory, all while maintaining high service levels and boosting operational efficiencies. Through these efforts, we've been able to reduce inventory by more than $9 million year-to-date and are on track to achieve our year-end reduction target of $10 million to $15 million. On Slide 14, we'll walk through our key financial metrics for the second quarter. Net sales for the second quarter were $166.7 million versus $169.5 million in the same period…

[Operator Instructions] Your first question comes from Brian McNamara with Canaccord Genuity.

Congrats on the strong progress. First on pricing, how have your partners and enthusiasts overall responded to the price increases you put in and kind of the change in tact in terms of approaching your resellers with the 60-day notice? And with that, how would you characterize current sentiment in the marketplace? Has it improved with a little more certainty on tariffs? Any other color there would be helpful.

Sure. Brian, thanks for the question. When we look at just kind of that sentiment in June and just the overall out-the-door sales, they were strong in the marketplace. Now we notified to our distributors in April that price increase would take effect roughly in middle of June. And then July is historically one of the softest months of the year. But generally speaking, the feedback was -- the pricing was in line or lower than competitors in the relative categories. Of course, just given how many categories were present, that wide range of competitive dynamics exist. But overall, our pricing was definitely in line with the competition. And we just got to see in terms of just that overall elasticity of industry demand, pricing and discretionary spending, how that plays out once we get past the slower summer months and into more of the higher months of the year.

Next question, Christian Carlino with JPMorgan.

Follow-up on the prior question. Similar to how you're moving some sourcing to vendors in lower-cost countries, what are your conversations like with the resellers? Like are you winning share or shelf space because you're taking less price than the industry in addition to the channel expansion and product innovation work you've been doing?

Christian, it's Jesse. It's a good question. I think all the indicators that we've got as we work much more closely with our distribution partners is that we are continuing to take share in the market. When we look at sort of our out-the-door growth relative to what the overall business is doing in these distribution partners, we continue to outperform there, and that continued all the way up through our most recent data, which is June. So, I think to Matt's earlier point, the pricing we put in was in line, if not better. and that is certainly helping us kind of continue to remain and gain momentum here.

Got it. That's helpful. And just given the full impact of the tariff cost increases should start to flow through in the second half, how are you thinking about gross margin for the year and maybe cadence over the back half? Understanding it's hard to predict consumer behavior and elasticities right now, but are you anticipating maybe higher prices overall, but key seasonal periods being more intense promotionally to maybe offset the impact to consumers' wallet? And just how you're thinking about that?

We're not planning to do anything incremental from a promotional period. I mean, we've got a pretty strong partnership with our distribution partners on marketing calendar support in the back half. So, no intended changes there. We do anticipate, to your question on gross margins to continue to maintain, if not increase gross margins in the back half, just relative to the pricing that we had taken, obviously. But I think our guidance in the back half kind of captures the squeeze on what you would expect in terms of margins there.

Next question, Joseph Altobello with Raymond James.

This is Martin on for Joe. My first question here is regarding sort of inventory. You've reduced so far by $9 million. So, I was wondering if we can get an update on sell-through/sell-in.

Yes. This is Jesse. I think we don't report out on the exact numbers we get from our distribution partners, but we're seeing really good numbers and results from them on the sell-out, and that's kind of what we look at to understand just generally what the end user demand is. And I think that, that's a testament to our relative pricing, our continued enhancement in our partnerships with them and just making sure that we're partnering with them to make sure their inventory levels are in a good spot. So, I feel like the end distribution partner indicators are continuing to be really strong for us, particularly relative to what the rest of their business is doing.

Great. And I just want to touch really quickly on this free cash flow net impact bridge, very helpful, by the way. But you mentioned 2025 net pricing/volume it's going to be about a $3 million tailwind, earlier in the preamble, you had mentioned that about $10.8 million in revenue was contributed from product innovation and strategic pricing. I also believe the PR said that product innovation was about $8 million, which implies that strategic pricing was about $2.8 million. Given that that's pretty close to that $3 million number, does that sort of imply that there's going to be lower volumes in the back half of the year? Or what should be the read-through through that?

So, I think those are 2 different metrics to be clear. The strategic pricing was an action that was taken earlier in the year to realign our channel margins with our distribution partners on some key product lines. So those aren't necessarily related. As it relates to your question on the back half, I think generally, we feel like our visibility is much better than it was 3 months ago in the back half of the year. And we're just -- from a volume's perspective, as you can imply in the guidance, just taking a pretty conservative view relative to the back half, just given everything we're seeing in the economic indicators just generally around the consumer. But what we are seeing now, we feel like demand is holding up and the back half from what we can tell, is headed in the right direction to hit this guidance.

Next question, Philip Lee with William Blair.

The product innovation growth is an interesting metric here. So just curious around the level of new products that you've launched year-to-date and then maybe how that would compare to plans for next year or just steady state going forward, assuming we're past a lot of the tariff-related trade disruptions.

Yes. Philip, this is Matt. Thanks for the question. Philip, we're really focused on quality versus quantity. I mean we, of course, want to continue to drive the right innovations and, of course, increase the volume of those. When you think back to our strategic product rationalization that occurred where we took out basically about 45% of the portfolio, there was a lot of work being done for innovations that really weren't moving the needle. So now we put in a very robust phase gate system with 7 gates to make sure we're bringing those right innovation to markets that are really going to drive the top line forward and to underline this organic growth trajectory. So again, it's not about quantity, but for us, we want to continue to drive more revenue through innovation.

Okay. Makes sense. Great. And then now that you have some comfort around tariff mitigation, core business seems to be moving in the right direction. How are you thinking about free cash flow and capital allocation in the second half of the year and then maybe going forward? And then just timeline around reaching leverage around 3x.

Great question, Philip. And we obviously don't guide on free cash flow. I think as we've talked about historically, just given this guide, you can back into a free cash flow profile that would be about $40 million to $50 million at the current interest rates. I think we're on track to be in that range with better free cash flow in the back half this year versus last year. And just as a reminder, this time last year in Q3, Q4, we had some headwinds to the tune of $6 million to $8 million in each quarter from AP process changes. So, we should continue to see positive free cash flow in the back half. And just in terms of capital allocation, we continue to maintain a pretty robust pipeline on M&A, but we are very conscientious on any transactions we look at as to sort of the net leverage profile on the back end. But in the absence of having a really good target in mind, we're going to continue to look at prepayment of debt like we've done historically. And this year, obviously, with that cash flow we've talked about, around $23.8 million of it is used for the perpetual license on [indiscernible] which we look back and say it has really been a really good deal and growth driver for us.

Next question, Bret Jordan with Jefferies.

This is Patrick Buckley on for Bret. On the new market growth, could you talk a bit about the trajectory of growth moving forward in Mexico and potential size there? And maybe how that strategy differs from the growth strategy in the U.S.? And I guess a quick follow-up there would be, is this the primary market expansion for the foreseeable future? Or are you guys seeing any other markets that you've identified for potential growth?

Yes, Patrick, thanks for the question. This is Matt. I mean, Mexico is just a natural market, of course, for us, just the adjacency to the -- and proximity to the U.S. and the amount of enthusiasts that are down there. And that was something that just was just not focused in years past. And how we look at the potential of Mexico, we would see that long term to be about 5% of the U.S. market is where we would see that. And it's going to take some time to get there, right? It's really an all-do market entrance for us. It's everything from setting up distributors, setting up the proper product distribution, working with the national retailer footprint there. So, it's all going to take some time. But in terms of other markets, this is just a great market that we're spending the majority of our time on right now, again, for those reasons. But we -- there's a lot of enthusiasts around the globe, and we can continue to evaluate where it makes sense to plant a flag, so to speak, in a larger presence.

Next question, Mike Baker with D.A. Davidson.

Can I ask you, Jesse, you said flat sales so far in the third quarter. What's the base? In other words, is that including or excluding some of the one-timers from a year ago?

Michael, we didn't -- we're trying not to speak specifically to the third quarter thus far, but I think what you implied from the script is kind of in line. And those trends we are seeing versus prior year as well as for the back half are embedded in our guidance. And your question around how does that compare to last year? I mean, I think to Matt's earlier comments, I mean, this is seasonally one of our lowest volume periods and demand is holding up relative to the prior year. And that's just on a gross basis. I think as we get into the back half, you're not -- there's only about $3 million in each quarter related to divested businesses, and we're largely past the meaningful SKU rationalization that happened in the first half.

Okay. Okay. And then I also wanted to ask just a little bit more detail on unit versus price in terms of your -- if we use a 3.9% sales growth in the second quarter, is there a way to break out how much of that was price versus unit?

Yes. I think we put in the Q that actually volumes were pretty strong in the second quarter with a portion of it coming from price and unit growth. I mean year-to-date, unit growth has been positive with some pricing, obviously, to kind of get you over the 3% on the core business. So, we've been really pleased with how units have really picked up this year year-to-date. But as we mentioned, we're taking a bit of a conservative approach given what we're seeing in the economic indicators and just the magnitude of the pricing across the market and in the economy on units for the back half. But there's certainly some room for that to go north of what we're putting in our guidance.

So, in other words, you've raised prices, you're not necessarily seeing unit degradation, but you are assuming that to be conservative in the back half?

We're taking a conservative approach to it. But again, this is a business that you don't get a lot of visibility. But from what we can tell in our testing and trend evaluation and discussions with distribution partners, we feel like this is a good guide.

Next question, Joe Feldman with Telsey Advisory Group.

I wanted to ask about just your view of the consumer at this point. I know you said summer is always a soft period and you pass through price increases now, so it's a little hard to tell. But I mean, what the customer has been buying, at least in the second quarter, are you seeing people stepping up? Are they adjusting their spend? It sounds like unit sales are up. So, I assume that's a good thing. People are kind of back at the projects. But just how do you view the consumer right now?

Joe, it's Matt. Thanks for the question. As I commented, Joe, the out-the-door sellout in June was really good. And so, generally speaking, to Jesse's point, what we saw on units for the first half of the year, there's a couple of components. I mean, overall, the market is hanging in there, but more importantly, we're taking share, right? And so, now that you have that price increase that goes through in June, July typically is that softer or one of the softest months just due to a lot of back-to-school summer vacations and things that go on. So right now, we haven't seen anything meaningful one way or the other, but it will -- we'll get more color here as the third quarter plays out. But right now, nothing meaningful one way or the other from what we've been seeing.

Got it. And then maybe just a follow-up for Jesse. With regard to the guidance, I know you're not giving too many specifics, but like are there any puts and takes we should think about in the second half? Like is there anything unique about maybe third quarter versus fourth quarter this year? Or should we -- are we safe to use kind of the last year kind of flow to get us to the numbers for the full year?

Yes. I would say just as a reminder, in the back half, usually Q3 is slightly lower than Q4, just with our end of year holidays is a really big sales cycle for us. When you think about -- we're not going to give necessarily the quarterly guidance on the top line, but it's usually around like a 48% in the third quarter -- 49% in the third quarter with slightly more, obviously, in the fourth. And then we've talked about sort of our operational initiatives and the pricing, and a lot of that stuff is kind of helping bolster margin on a year-over- year basis as we go into the back half.

Next question, Brian McNamara with Canaccord Genuity.

So great job on the tariff mitigation. Looking at Slide 11, it looks like $8.5 million out of the $15 million in tariff mitigation is relocation with existing suppliers and sourcing with new suppliers in lower-cost countries. I was wondering if we could get a little color there, specifically on how your exposure to China, maybe some of the higher-cost countries is changing and then what kind of lower-cost countries you're kind of shifting to? China sourcing exposure is a consistent question we get from investors.

Yes, Brian, I'd say our overall strategy had a number of facets to it, as you could see in the prepared material. But overall, we want to be in countries that have a more stable long-term relationship with the United States, and that's where we've been focusing on either relocating with our current suppliers or finding new suppliers in lower-cost countries. So that's just been the main focus and mitigating that exposure in China.

And then at risk of beating a dead horse on the H2 guide, and maybe I'll try it a different way. So, it calls for a big deceleration in organic sales. I think it's up less than 1% despite you're lapping much easier comps. And I know July is typically a slow month, so -- and you mentioned it's flat. I guess why wouldn't all the heavy lifting you've done internally kind of help achieve a little bit better H2 growth? Or is it just simply conservatism on your part?

Yes. I think, Brian, again, we all have been saying the back half is the biggest question mark just given what we were all seeing in April with the consumer and the tariffs and the pricing flowing through. And so, we were really just taking like to your point, a bit of a conservative view on what the units are going to do. I mean, I think we've all read the headlines of the pricing across the economy starting to actually flow through and what's going on with just employment. And we're in the thick of all of that right now. And if you give us a couple more months, obviously, we'll be in a much better position. And we're just not in the position where we feel like it's prudent to lean out until we know more.

I would like to turn the floor over to Matthew Stevenson for closing remarks.

All right. Thank you, Stacy. Slide 20 underscores the compelling investment thesis behind Holley Performance Brands. At the heart of this story is a passionate and deeply engaged automotive enthusiast community. For our customers, this is far more than a past time. It's a lifestyle rooted in performance, personalization and pride. With an addressable market exceeding $40 billion, Holley is uniquely positioned as the industry leader, powered by a portfolio of iconic brands recognized for decades of innovation and excellence. Our growth story is grounded in a proven track record of successful acquisitions and disciplined integration. We consistently created value by expanding our reach, enhancing capabilities and unlocking synergies across the platform. Looking ahead, we see a transformative opportunity to redefine how both consumers and distribution partners interact with our brands. Through expanded digital capabilities and omnichannel engagement, we're building a new frontier that strengthens loyalty, accelerates conversion and expands access. Now as we emerge from our multiyear transformation and return to growth in our core business, our financial ambitions are clear. We remain focused on delivering sustainable organic growth, maintaining gross margins of 40% and achieving adjusted EBITDA margins greater than 20%. At the same time, we are committed to generating strong, consistent free cash flow and to building a disciplined M&A platform that unlocks long-term value. Together, our powerful enthusiast ecosystem and Holley's trusted best-in-class brand portfolio represent a rare and differentiated investment opportunity. In closing, I want to thank our dedicated team members for their tireless efforts to commitment to excellence, our loyal consumers who bring our brands to life and our valued distribution partners, many of whom have been with us for decades. Your partnership and passion continue to drive Holley forward. I want to thank you for your attendance on our call today and wish you all a great morning. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.