Q2 2023 Holley Inc Earnings Call

August 10, 2023

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Good morning, ladies and gentlemen, and welcome to the conference call to discuss the results from Holley second quarter of 2023 at this time all participants are in a listen only mode. Later, we will conduct a question and answer session.

And instructions for asking questions will be provided at that time, we ask that participants limit themselves to one question and one related follow up during the Q&A period. Please be advised that the 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. Mr. Ross Collins Senior managing director of Alpha IR. Please go ahead Sir.

Thank you operator, good morning, everyone. Thank you for taking the time to join us today.

On the call with me today are Matthew Stevenson, President and Chief Executive Officer, and Jesse Weaver, Chief Financial Officer. After their prepared remarks, we will open the call for questions.

We will be referencing page numbers from our second quarter of 2023 quarterly earnings presentation, which can be found on our Holley Investor Relations website.

Now I will reference the safe Harbor provisions under the private Securities Litigation Reform Act of 1995. This call may contain certain forward looking statements that are subject to significant risks and uncertainties.

<unk> future operating and financial performance of the company.

Many cases these risks and uncertainties are beyond the company's control.

Though the company believes the expectations reflected in its forward looking statements are reasonable it can give no assurance that such expectations or any of its forward looking statements will prove to be correct and actual results may differ materially from expectations important risk factors that could cause actual results to differ from those reflected in the <unk>.

<unk> looking statements are included in the company's recent 10-Q S. Four.

For an S. One filings with the Securities and Exchange Commission.

The information contained in this call is accurate only as of the date discussed investors should not assume that statements will remain relevant and operated at a later time.

Holley undertakes no obligation to update any information discussed in this call in the future. Additionally, we will be discussing certain non-GAAP financial measures.

A reconciliation of these items to U S. GAAP are included in today's press release, which is also posted on our Investor Relations website.

At this time I'd like to turn the call over to Matthew Stevenson, Holly's, President and Chief Executive Officer, Matt.

Thank you Ross.

Everyone.

It is an absolute pleasure to be joining you on my first earnings call here at Holly.

Not only did I joined this company because I am a automotive enthusiasts, but.

But I also saw the remarkable growth potential in this organization.

We have great brands, great products, great people great customers.

What more could you ask for.

I joined the company in June of this year and there was a lot of fantastic progress already underway from the leadership of our board member and interim CEO Michel Gleckler.

I want to thank Michele for all of her efforts in the four months prior to me joining holley.

On slide five we've highlighted the key takeaways for the second quarter.

It is clear we are continuing to build a path for gross margins of approximately 40% and EBITDA greater than 20% over the long term.

We demonstrated that ability by delivering nearly 40% gross margins and 21.6 adjusted EBITDA for the quarter.

Through forecasting and operational improvements, we brought down the inventory levels by more than $10 million in the quarter boosting our year over year improvement in free cash flow.

We also reduced past dues across both our electronic and mechanical categories by $4 million.

And on the new product development side, we launched our all new sniper too but.

The next evolution of our marquee fuel injection product line.

The sniper two features enhanced capabilities and greater compatibility with older vehicles, plus installation is a lot simpler which greatly reduces install time for our customers.

Also our unique quick start feature allows users to get their sniper EFI system running by answering only a few questions about their engine no laptop or prior tuning experience is required.

In addition, future product line extensions like wireless connectivity will allow enthusiasts to connect their sniper two to holley via their smartphone.

With this level of consumer connectivity, we will unlock multiple avenues for greater consumer engagement.

Which will allow us to better understand how our products are being used and what additional needs our consumers may have.

We launched sniper too at the tail end of the second quarter and through the end of July we have already registered $1 5 million in sales.

As a key piece of my on boarding process at Holly I spent a lot of time on the road visiting 11 of our facilities and a number of major customers over an eight week period.

I wanted to get out and inform my perspective as quickly as possible.

Getting off to see over 90% of our teammates along with customers who represent a sizable portion of our annual revenue was a great start.

What I found frankly was not a real surprise.

And incredibly passionate group of teammates that are excited about where the company is headed and great distribution partners, who are enthusiastic about holley I want to find ways to grow their business with us.

This valuable input time spent with our board and our leadership team.

Inform the development of what we call the steering principles for the business.

You can see the steering principles on the left side of slide six.

The first one of those centers around fueling our teammates.

That principle was about making sure we here at Holly are on a journey to make this a great place to work by providing the resources and the environment for our teammates to be successful.

This means clear direction strong leadership and appreciation for diversity accountability and opportunities for growth.

We want to create a working environment, where our teammates opinions and insights are welcomed and respected.

When our teammates are fueled it allows us the opportunity to supercharge, our customer relationships by delivering exciting brands and innovative products as well as making it as easy as possible to do business with Holly.

By doing so it'll enable us to accelerate profitable growth driving exceed the returns our shareholders expect and allow us to invest back into our teammates and customer relationships in this continuous cycle of growth.

The way we make these principles the reality is by focusing on four key areas.

On the right you can see those.

First we need to listen to our teammates and ensure we get their input into daily and strategic actions of the business.

Our teammates are enthusiasts and have a great knowledge of the market our customers the competition and our products.

Second we need to enhance our operations in order to take out non value added activities.

While ensuring we have the right products available with the right inventory levels to serve the market.

We also need to analyze and understand the cost to serve of each of our business lines product categories and customer types.

Plus we need to offer our enthusiast consumers and distribution partners the best Omni channel customer experience in our space.

The third key area is focused on optimizing our acquisitions.

Holly has acquired some amazing brands and businesses over the last few years and we realized they each of these has their nuances.

We must foster these differences to enable them to continue to deliver in their distinct markets.

We are making sure that there is no one size fits all approach and we are striking the appropriate balance of integration and synergy creation in order to fully optimize each organization's growth potential.

Finally.

We are focused on putting all customers first.

Not only includes our fabulous base of consumers, but also are loyal distribution partners. We are finding ways to grow and expand all of our sales channels in an effort to reach and serve a broader range of enthusiasm.

And the great thing about our business is that there is a $40 billion total addressable market. So there's plenty of growth potential out there.

On slide seven you can see some of the financial and business highlights from our second quarter.

Our net sales were down just over 2% due to the normalization of demand we have previously forecasted with a similar reduction in gross margins, mainly due to sales mix.

However, our adjusted EBITDA margin was 21, 6% up nearly 4% compared to the prior year. This is a testament to the operational improvements. The team has made in reducing costs throughout the organization by right sizing the team structure finding efficiencies in may.

Any factoring in making meaningful improvements in freight.

These efforts have helped generate free cash flow of $29 million for the quarter, which is $30 million improvement versus the prior year.

Let's also touch on some of the business highlights for the quarter.

For this call we will touch on two areas in particular.

The first is our on our product innovation.

And the second is on our consumer engagement.

Both key pillars of our overarching strategy.

Just this quarter alone, we launched 75 new products.

Including the Marquis sniper to EFI, which I already discussed.

Not only does this product have great new features and enhancements.

But it's also built on a newer generation of microprocessors that are much more readily available.

In addition, we launched new in vehicle tuning products at our edge brands for the 2020 to 2023 full size General motors pick up platform through our user friendly ego H T. Two handheld.

Aside from serving the domestic platforms great brands in our portfolio like APR focus on the Euro segment. For example, APR recently launched several new air and take products for the highly successful eighth generation Volkswagen golf that started with model year 2022.

The APR full intake system improves performance offers personalization between OEM style or carbon fiber covers and enhances the natural sounds of the engine.

Plus you are not just launching new products, but we are also winning awards with them.

This past quarter, our Detroit speed team attended the 25th annual good guys event in Columbus, Ohio.

While there the tea took home two awards.

Included a muscle car award with our 1965 Buick Riviera.

And best New product with our 1967 to 1970 Ford Mustang front end kit.

Kit is a complete front end solution to dramatically improving the handling and ride of the classic Ford Mustang.

A big part of our strategy as the leading consumer branded company for automotive enthusiasts.

Is to make sure we are driving consumer engagement, particularly at the grass roots level.

As many of you know we hold enthusiast events throughout the year and in this past quarter, we held three major events.

Two of our famous L S events.

Les first west held in Las Vegas.

And L S first, Texas and Fort worth as well as the 24th annual brothers truck show held in Silverado, California.

These events drew a total attendance of nearly 50000 people.

Up over 20% year over year.

These events give us a direct connection with our consumers and enable us to listen to their product needs and keep a pulse on where the enthusiast trends are headed.

We also use events like these as tools for online social engagement.

For example.

Ellis first Texas, we invite a key social media Influencers Youtube celebrities and brand ambassadors to join US for this three day event.

Collectively these influencers have a social following of over $29 million, enabling highly to digitally reached more enthusiasm and share the experience of our events.

Now I'd like to turn it over to Jesse to discuss our financial priorities.

Our Q2 financials in more detail.

And our updated guidance.

Thank you, Matt and good morning, everyone.

Our second quarter results were encouraging as we continued to see sequential improvement in our financials.

Despite the year over year decline in sales, we did see an improvement in sales and EBITDA from the declines seen in the first quarter.

Improvement was driven by normalizing order growth pass do fulfillment and a continued realization of our cost savings initiatives that were implemented at the end of 2022.

Results from these initiatives generated approximately $11 million in savings for the quarter.

As a reminder, on slide nine our key financial priorities for the year are restoring profitability improving free cash flow.

Optimizing working capital and deleveraging our balance sheet.

And through the incredible efforts of the team.

We were able to drive profitability in line with our long term targets this quarter.

With an organization focused on improving operations and capitalizing on go to market opportunities. We are on the right track to delivering these priorities for the year.

On page 10, we've laid out a summary of key income statement line items I will cover the key drivers of our financial performance in the subsequent slides however.

However, as is highlighted on this slide Holley delivered improved adjusted EBITDA and adjusted net income year over year. Despite the declines in net sales and gross margin and as Matt already alluded to our financial performance continues to be propelled by our team's tenacity and dedication to optimizing our operations.

While also remaining focused on engaging and inspiring our enthusiast customer base.

These fundamental improvements overtime will deliver market, leading results and lay the foundation for sustainable long term growth.

Turning to slide 11, you'll see that we're comparing our second quarter net sales results to comparable net sales in 2019.

We believe comparisons versus 19 are important for us as we focus on long term growth trends outside of Covid related stimulus and consumers stay at home spending.

Net sales of $175 million in the second quarter represent a 15% compound annual growth rate versus the second quarter of 2019.

In addition, second quarter net sales from legacy businesses on prior to 2019 ended the quarter at $133 million, which when compared to the second quarter of 2019 represents a 7% CAGR and slightly above the long term sema growth trends for the industry of roughly 6%.

Yeah.

When compared to the second quarter of the prior year, you'll see on page 12, net sales decreased $4 million or two 3%, while net sales decreased year over year. We think it's important to highlight that the magnitude of the decline was much less than the year over year declines in Q1 and that these improvements have been.

Largely driven by improving order trends, which you can find in the appendix on slide 25.

Net sales in the quarter benefited from $4 million and the reduction of past dues across both electronics and thats non electronic categories, which can be found on page 13, and ending the quarter with $22 million marks the sixth consecutive quarter of past due reduction since the peak of $56 million.

In the fourth quarter of 2021.

Turning to gross margin on page 14, you can see that we were down 220 basis points from 42% last year to 39, 8% in the second quarter of 'twenty three.

Decreases in margin were primarily driven by headwinds from sales mix and the flow through of higher input costs from prior periods being partially offset by current year lower cost in production and distribution operations, which continues to benefit meaningfully from inbound freight cost savings.

Yeah.

Page 15 lays out SG&A on a quarterly basis and as you can see in the second quarter SG&A was down $7 million to 29 million from $36 million in the second quarter of 2022.

R&D expense was down $2 million year over year for a combined reduction of $9 million versus the second quarter of 'twenty two.

The 9 million reduction has been through a combination of around $2 million for lower equity compensation was $7 million coming from a combination of reduced outbound freight head count and facilities consolidations.

Despite sales headwinds for the year SG&A, excluding equity compensation at 16% of sales remains in line with historical trends, which reinforces the team's original commitment to cost containment coming into the year.

The results noted in the previous slides can be seen in the adjusted EBITDA results for the quarter on page 16.

Adjusted EBITDA increased to $37 $9 million in the second quarter up from $37 2 million in the second quarter of 'twenty two.

It's important to note that we had an offset of $800000 from a partial reversal of the product rationalization add back from the Q4 'twenty to SKU rationalization efforts.

And as can be seen on page 17, the EBITDA results for the quarter combined with cash generation from improvements in inventory management.

<unk> and free cash flow was $29 million for the second quarter versus negative free cash flow of $1 million in the prior year.

And I'd like to call out that in the second quarter of 'twenty to inventory investments were $24 million headwind to cash flow versus a $10 million tailwind in the second quarter of this year.

This further demonstrates the free cash flow generation potential of Holly and the great efforts of this team.

Yeah.

Free cash flow has been a significant contributor to the results. We're seeing on page 18, with our net leverage ratio for the quarter coming down from 567 times in the first quarter to $5 five eight in the second quarter.

Both quarters have remained meaningfully lower than the covenant that was outlined in our amended credit agreement of 7.25 times.

And as you'll see in the guidance, we expect leverage to continue to improve throughout the year.

Turning to our outlook for 'twenty three on page 18.

Given our strong year to date results, we are raising and narrowing our full year guidance for the full year. We are now projecting net sales in the range of 635 million to $6 75, and adjusted EBITDA between $118 million to $128 million.

Our guidance does imply a back half step down in EBITDA margins, which is consistent with the normal seasonality of the business.

We expect these results to include capital expenditures between five and $10 million.

And our Capex expectations have been adjusted as we reevaluate overall capex priorities to ensure that we are focused on the highest returning projects for our shareholders.

Our depreciation and amortization guidance is unchanged between $23 million and $25 million.

And our interest expense expectations are now in a range of 58 million to $62 million and this is based on the benefits, we're seeing with the interest rate collar.

Which is in effect until 'twenty six and it also includes higher interest on cash balances.

This range excludes the impact of any noncash interest rate hedge reevaluation.

Our revised guidance ranges and outlook continue to be supported by the strength of our brands a constantly evolving product portfolio as well as many operational and cost savings initiatives that are directly tied to driving both top and bottom line growth.

This concludes our prepared remarks, and we'd now like to open up the line for questions.

As a reminder, we ask that you. Please limit yourself to one question with one related follow up as needed operator. Please open the line for questions from our participants.

Ladies and gentlemen at this time you May Register your desire to ask a question by pressing star one on your phone.

A confirmation tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

Okay.

Once you can call the bonds. Please make sure you are not on mute and proceed with your question one moment. Please.

Thank you our first question comes from Brian make it narrow.

With Canaccord Genuity. Please proceed with your question.

Good morning, everyone. Thanks for taking the question congrats on the strong quarter and the progress you guys are making.

I guess I'll walk, where you want to we don't want to know about the early reception to the sniper too.

Both of them as you know with your customers and dealers and the like in the channel.

Now how should we should think about revenue contribution from this product launch in the back half. Thanks.

Hey, Brian This is Matt Stevenson I. Appreciate the question I mean, we're just seeing a tremendous amount of interest in the new sniper too and as I mentioned in my prepared remarks, you already saw $1 5 million of sales out through the end of July which was pretty early because we just launched that at the end of the quarter.

And we're also seeing some great.

Stock orders by our major distribution partners. So overall a lot of great excitement around this product for us.

And then just a quick follow up on kind of your 40 20 margin algorithm, but maybe for Jesse it.

It seems like you guys got back here pretty quickly at least faster than maybe we had expected.

And this is with sales down considerably like how should we think about that.

Evolving when you guys actually start growing sales again.

Thanks.

Hey, Brian Good question and I think just to kind of clarify on the 40 <unk> 'twenty for US I mean, the way we think about it for our internal goals is that 40 20, we need to deliver on our full year and certainly we've come out of the gate. This year moving in the right direction I think hopefully re instilling confidence that that is achievable.

And as we go into the back half as I've noted in the prepared remarks, typically youll see a step down in margins and so I don't see at this moment.

Us necessarily being able to fully commit to that this year, but going into next year. It is a focus of the team.

Understood. Thanks, guys congrats.

Thank you.

Okay.

Thank you. Our next question comes from Mike Swartz with tourists Securities. Please proceed with your question.

Hey, good morning, guys.

I think you made the comment in your preamble around you are now seeing normalizing order growth. So I just wanted to dig into that a little more I guess, what exactly does that mean and I guess, how much more visibility do you have into distributor and retailer orders for the back half of the year.

Hey, Michael It's Jesse good question and the normalization of order growth just to kind of.

Remind the group is the concept that we came into the year as we were guiding for the year and just coming off of 'twenty, two and the stimulus coming from 'twenty, one and 22, when we were seeing the decline in orders, we anticipated that the front half from an order growth perspective would be soft but improving throughout.

The year end so the declines we're seeing are towards the anticipated declines, but the trend is what were looking for which is an improvement I think orders were down about 13 in Q1, we were running down one six in Q2 and our guidance implies that the back half we start to see orders be positive.

And so we're headed in the right direction, there and so that's the normalization. So just getting back to what we would call a pre COVID-19 normal rate.

And in terms of what we're seeing on the out the door sales as our best barometer in terms of consumer pull through.

Through some of our key resellers, we get about 50% of their data on what our out the door sales are.

And.

I think the.

They are seeing relatively stable out the door sales on their end despite our year over year sales and I think we've communicated that that is just due to they were heavily overstocked coming into the year end.

Couple of months that we've looked at have been pretty encouraging reinforcing the guidance that we have in place.

Okay, Great and maybe just sticking on the topic of retailer and consumer demand.

I guess, how does the direct to consumer business perform during the quarter.

And what was the percentage of sales from that business.

Okay.

Yes, it's a good question and I'm going to start and I'll, let Matt kind of <unk>.

Finish this as we kind of refocus our effort as a team on what the overall best way to grow the business as a whole is but as it relates to D to C. D to C. As a percentage of gross sales was 21% for the quarter, which is about 100 basis points better than it was in Q2 last year and on a growth rate perspective, we are seeing.

We are seeing improving trends sequentially with DTC.

<unk> was actually about flat, where our business as a whole was down two 3% versus Q1 <unk> was down six versus the overall business at <unk> and I will point out that that down six in Q1 is an updated number based on a more direct ticket sales direct to consumer sales comparable for the prior year.

But on a year over year basis as a percentage of the overall business. We are seeing improving trends there, but I will say that DTC is mats come in and recognize that 80% of our business is reseller business and I think as we've talked about before when you look at the gross margin on D to C versus resellers certainly.

Accretive D to C. But you have to look at the full P&L there and sales between the two is relatively flat and so we need to optimize I think the overall go to market.

Channel that has the highest profit potential based across the categories and certainly the partnerships with the resellers has an opportunity to grow so in terms of D to C. Long term I don't I think we're still evaluating where where that needs to be but it's still an important part of our business.

Okay. Thank you.

Yeah.

Thank you. Our next question comes from Christian Carlino with Jpmorgan. Please proceed with your question.

Hi, good morning.

Could you just help us bucket out some of the changes in the guidance at a high level just how much of the beat versus the internal plan in the first half versus.

<unk> look at the second half and any color on the cadence of DTC through the quarter and quarter to date that helped inform your updated view.

Yes, it's a good question Christian and what I'll say is we've raised the guidance on the top end I think.

Okay.

Honestly from the bought like raising the bottom end because of the trends that we started to see in the order growth in a lot of the.

Coming into the year. The question Mark was how our orders going to actually trend coming through the second through the first half and so as we've raised that guidance, we've gotten I would say better at understanding where our past due balances going to end up and so what youre seeing in that back half guidance is some some mid mid single digit mid to high <unk>.

Single digit growth on orders with some continued improvement in past dues I would say getting to the top end of the range would mean.

Higher order growth closer to double digit order growth and then getting into the bottom end of the range it would be closer to low single digit order growth. So.

Hopefully that helps you understand what the key drivers are we also include in that is just based this is based on the visibility that we have on a risk adjusted basis and chip availability and I'll reinforce the team did a really good job coming into this quarter and I think we mentioned it in the last call and securing chips on the spot market.

But we're still taking a cautiously optimistic approach as it comes to setting guidance there and if they are able to exceed what we've seen historically, we've been able to do there that could be another tailwind on the revenue side.

Got it that's helpful. And then I guess, how are you thinking about gross margin and in the updated guidance.

Yes, Theres a step down in sales, but you should also benefit from the lower manufacturing costs to a greater degree as you as you turn to turn through the inventory plus you have the lag pricing in electronics and mix benefits. So I guess there is there anything else we're missing in those big buckets, and how should we think about gross margin exiting the year.

Yes. So the key thing to remember is we have a fixed cost base and our gross margin that when sales comes down there is a bit of deleveraging that happens there.

We have pricing that kind of helps offset some of that and then the other thing that we're kind of working through in the back half is just based upon our accounting method with.

Manufacturing accounting there are some cost on a year over year basis that are from previous periods that roll through at a higher rate and so we think that the gross margin back half is.

Something that we should probably see kind of be year over year positive on the gross margin line, but it could step down a little bit just given the sales leverage piece.

Got it.

So all the help.

Yes.

Thank you. Our next question comes from John Lawrence with Benchmark Company. Please proceed with your question.

Yeah.

Congratulations on the quarter.

Yes.

Jesse could you talk a little bit about maybe when you look at.

The slides with the business highlights slide seven and you talk about the new products launched in Q2, where where would that sit.

As you look sequentially the over the past few quarters and this is this a major step up in development.

No cash was tighter et cetera, or where would that sit in that progression.

Good question, John and I mean.

This is pretty consistent with what the team has been doing I would say that with Mac coming on board, we're going to continue to make sure that these products are innovation is one of the key product drivers of our consumers purchase intent.

And so that as we continue to release new products, we want to highlight the great work that the team is doing the awards that they are winning and as we continue to shape the strategy around new product development I think we'll be able to show more.

So more visibility into some of the areas that we're moving into that we haven't historically had focus on.

But it's pretty consistent.

Great.

And Matt.

The slide before the optimizing acquisitions, it's been a part of.

The teams sort of.

Strategy, what is because you moved around and visited these facilities et cetera work. What do you think you are in that category and aligning with that.

The Capex is it a return issue now that you want to set that bar a little higher before.

And then maybe about the pull back maybe on Capex for the rest of the year.

Yes, John .

Break that into two there. So in my travels just visiting all of these great brands and companies that are part of the Holley family like there are just some tremendous opportunities there. So at the same time.

They do have their nuances relative to do they have a retail component of service component. The DTC component. So we're really going through and making sure. We're preparing those business units for optimal growth going forward and so really over the next six months, we're going to spend time.

Making sure we're providing those businesses the resources.

For that growth going forward in terms of the Capex, then just really as I've come in just want to make sure. We're preparing the organization relative to the scope of some of our Capex spend that is really going to take this company to the next level. So it's more just a pause making sure we're looking at it with the full growth potential.

We intend to make sure we're spending that capital appropriately.

Great. Thanks, Good luck.

Thank you.

Thank you. Our next question comes from Joe Alto Bello with Raymond James. Please proceed with your question.

Good morning, this is Martin.

<unk> Johnson of Belo.

Wondering in terms of capital allocation is your priority first priority beyond investing the business still is debt reduction.

Joe can you say that again.

Yes.

In terms of yes in terms of capital allocation is your first priority beyond investing in the business there'll debt reduction.

Yeah, and I think that's a good question I mean, I think you can see we generated a lot of cash on the quarter end.

Sitting at $42 million, a lot of questions, probably coming up on capital allocation at this point and it's a great place to be when you can start to have those discussions and it's one of the things that we internally are really focused on but I would say that understanding we got to understand a few more pieces of what we need to do for the business here in the next.

Six to 12 months, but.

Debt deleveraging the balance sheet continues to be a focus but.

Have any we're not in a position at this point to kind of give you any specifics on that.

Got it.

Yeah.

You talked about the Covid driven demand bump when do you think it will take to lap that demand bump.

Okay.

Based on the work that I had done kind of coming into the year and what we've shown in the appendix on normalization. My estimation is the back half we should be lapping a period when theres, probably a lot less stimulus tailwind in largely in Q4 is whenever I view that the number is.

<unk> small.

And then obviously going into next year that should be behind us unless there is some new stimulus that has been not in print thus far.

Got it thank you and great quarter.

Thank you.

Thank you. Our next question comes from Alex Perry with Bank of America. Please proceed with your question.

Hi, Thanks for taking my questions I guess, just first how should we be thinking about sort of <unk>.

<unk> versus <unk> sales cadence should we be thinking.

Nice growth in the fourth quarter, given the easier comp from last year. Thanks.

Yes, good question, Alex and I mean, we're not obviously, we're just giving full year guidance. So I don't want to be too prescriptive on it but I think if you look at.

Kind of what we've been seeing historically pre COVID-19 time frame you would see roughly 50 50 split between the two now that said pre COVID-19 DSC wasn't where it is today and I think what we generally internally anticipated a slight uptick in Q4 versus Q3.

And largely that's just driven to what we do with holidays and our D to C penetration.

And typically at that point, our distribution partners have.

Less inventory and stock and we have it available. So we often find ourselves in a position to fulfill what the consumer needs at that moment, but typically around 50 50, but you would see probably something more like.

50% to 52% in Q4 on the back half split.

That's really helpful. And then could you maybe just help us think through the margin implications of the launch of your newer generation products like sniper to point out versus prior generation products or these products generally higher margin for you guys. Thanks.

Now.

The way, it's been priced and the work that the team has done is we're offering I think a really good great product out there Thats got all the features that consumers have been asked asking for on newer technology and we've priced it in a way that we're able to be.

Margin neutral to prior generation so it shouldnt expect any meaningful margin bump from those products.

Perfect. That's very helpful best of luck going forward.

Thank you.

Thank you. Our next question comes from Bret Jordan with Jefferies. Please proceed with your question.

Hey, good morning, guys.

Alright.

Could you give us a little more color to your comment about evaluating the direct to consumer longer term is there.

That is the cost associated with that business may be something that you'd focus more on the.

The reseller market or I guess, what I would call it there.

Yes, Brett.

Matt you know for us being a leading consumer platform for automotive enthusiasm.

Direct to consumer is absolutely quarter, our strategy right at the same time, we need to look at cost to serve but also too.

We see tremendous potential in this business in a variety of sales channel, whether it's international OE as well as a lot of growth with our distribution partners. So Kevin when you think about pegging, an arbitrary number around D to C. We don't think it's the best barometer of the level of engagement, we're driving with our consumers.

Okay.

I guess last quarter, we talked a bit about sort of applications related to electric vehicles have you made I guess any more internal progress there or anything that discussed.

Yes, nothing to discuss specifically today, Brett but progress continues and there's really two focuses for EV for US one is providing.

Aftermarket performance parts for EV vehicles that come out of the factory OA as.

As well as looking at some retrofit applications for EV components for classic and modern cars. So some exciting things, we're looking at and I would just say more to come in the future. Okay. And then one real quick question I think somebody asked earlier, but just do you have any color on the cadence of retail Pos as the quarter progressed.

Yes.

We haven't given Brett historically, the month by month or quarter to quarter, but I'll say the last couple of months that we've gotten and we just got the July numbers, we've seen positive growth on the out the door sales from our resellers. So its headed in the right direction here as we go into the back half okay.

Okay, great. Thank you.

Thanks, Brett.

Thank you. Our next question comes from Michael Baker.

Davidson. Please proceed with your question.

Excuse me your line may be muted.

Yes, sorry, I was on mute.

I wanted to ask Matt.

Well, so long term topline growth algorithm and how you think about organic growth I assume you think you will grow at or above that 6% industry growth, but how do you think about acquisitions.

Has that changed at all in terms of the benefit of acquisitions for the long term top line strategy.

Yes, thanks for the question Michael.

Has it changed absolutely not I mean, we definitely remain opportunistic around acquisitions is key to our strategy going forward.

Yeah.

But based on the commentary previously on some acquisitions should we expect.

Pace of acquisitions to be you know.

<unk> less more than what we've seen in the last few years.

Yes relative to that pace, you said for the next six months or so we're really focused on optimizing.

The great brands and businesses that have become part of our portfolio, but again remain.

Opportunistic and looking at acquisitions that are part of our long term strategy in terms of the relative pace. We have to just look look at that as part of our capital allocation strategy going forward.

Okay fair enough.

Couple more questions if I could follow ups.

The announced a couple of times, but I'm going to ask also the direct to customer business. It does seem like a big change in tone like you know what what would you do you merged relative to the stock in the last few years. This has been like DTC has been a focus this is directly even though it was only 20% of the business.

The growth was all about direct customer now its like you really mentioned it in the script and it came up a couple of times in Q&A. So it seems like a pretty big change to me, which.

Which I get I get why you're doing it but I guess my question is.

What do you need to change to do we do anything differently internally different people different.

Focuses whatever or is it just as easy as saying Hey, you know this is going to be less of a focus going forward and thats that.

Yes, I think Michael just just to be clear it is not a change of focus.

Like I mentioned.

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