Q2 2024 Holley Inc Earnings Call

Speaker Change: Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holly's second quarter 2024 earnings results.

Operator: Second Quarter 2024 Earnings Results. 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 HALI. 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.

Speaker Change: 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.

Speaker Change: Please be advised that the reproduction of this call in whole or in part is not permitted without written authorization of HOLI. And as a reminder, this call is being recorded and will be made available for future playback.

Speaker Change: I would now like to introduce your host for today's call, Anthony Rozmus, with Investor Relations. Please go ahead.

Anthony Rozmus: Good morning, and welcome to Holley's second 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.

Speaker Change: Good morning, and welcome to Holley's second 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.

Anthony Rozmus: This webcast and the presentation of 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 those described in our SEC filings. This morning, we'll review our financial results for the second quarter and share our guidance for the third quarter and full year 2024. At the conclusion of the prepared remarks, we'll open the call to questions. With that, I'll turn the call over to our CEO, Matt Stevenson.

Speaker Change: This webcast and the presentation of materials including non-GAAP Reconciliations are available on our investor relations website

Speaker Change: 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.

Speaker Change: This morning, we'll review our financial results for the second quarter and share our guidance for the third quarter and full year 2024. At the conclusion of the prepared remarks, we'll open the call up for questions. With that, I'll turn the call over to our CEO , Matt Stevenson.

Matt Stevenson: Thank you, Anthony. I extend a warm welcome to everyone joining us on the call. Today, I'm eager to convey the advancements we've made in activating Holly's Growth Engine. Your steadfast support and interest are crucial as we navigate our transformation journey, even amidst a fog that often conceals our significant progress. We've also made considerable strides in streamlining operations, cutting non-value-added costs, and improving inventory management, all of which are key to strengthening our cash flow and ensuring predictable financial performance.

Matt Stevenson: Thank you, Anthony. I extend a warm welcome to everyone joining us on the call. Today, I'm eager to convey the advancements we've made in activating Holley's growth engine.

Matt Stevenson: Your steadfast support and interest are crucial as we navigate our transformation journey, even amidst a mark that often conceals our significant progress.

Matt Stevenson: We've also made considerable strides in streamlining operations, cutting non-value-added costs, and improving inventory management, all which are key to strengthening our cash flow and ensuring predictable financial performance.

Matt Stevenson: As we have stated in the past, a pivotal aspect of our transformation is our dedication to elevating and enhancing the organizational capabilities at Hollis. Central to this endeavor has been recruiting top-tier talent to spearhead various functions. Our approach of strategically hiring the right individuals has consistently led to measurable performance improvements in their respective areas. We are pleased to announce that the final leadership appointments have been made to complete an exceptionally dynamic team poised to drive Holly toward our ambition of becoming a multi-billion dollar enterprise.

Matt Stevenson: As we have stated in the past, a pivotal aspect of our transformation is our dedication to elevating and enhancing the organizational capabilities at Holley.

Matt Stevenson: Our approach of strategically hiring the right individuals has consistently led to measurable performance improvements in their respective areas.

Matt Stevenson: Further details on the enhancements in our key transformation areas, as well as insights into the innovative products emerging from our leading brands, will be discussed later in the call. However, let's touch on some of the key highlights for the second quarter of 2024 on slide five. The overall performance after the market continues to be soft, driven by the slowdown in consumer spending attributed to the persistently high price of goods, services, and housing, plus the higher-for-longer interest rates, all culminating in a reduction in the growth of real disposable income. Plus, economic uncertainty combined with an election year and a cooling labor market is contributing to restrained spending habits.

Matt Stevenson: Further details on the enhancements in our key transformation areas, as well as insights into the innovative products emerging from our leading brands, will be discussed later in the call.

Matt Stevenson: However, let's touch on some of the key highlights for the second quarter of 2024 on slide 5.

Speaker Change: The overall performance after market continues to be soft, driven by the slowdown in consumer spending attributed to the persistently high price of goods, services, and housing, plus the higher for longer interest rates, all culminating to a reduction in growth of real disposable income.

Speaker Change: Plus, economic uncertainty combined with an election year and a cooling labor market is contributing to restrained spending habits.

Matt Stevenson: In a market that's showing signs of slowing, we remain confident in our ability to gain market share, anchored by the pillars of our ongoing transformation. Our roadmap to increasing market share is built on the strength of our esteemed brand, bolstering our digital capabilities, refining our promotional strategies, launching innovative new products, and Optimizing Your Prices. We've already seen promising growth, specifically in our direct-to-consumer channel, which has experienced significant sales growth year over year, driven by the progress in these essential facets of our transformation.

Speaker Change: In a market that's showing signs of slowing, we remain confident in our ability to gain market share, anchored by the pillars of our ongoing transformation. Our roadmap to increasing share is built on the strength of our esteemed brands.

Speaker Change: We've already seen promising growth, specifically in our direct-to-consumer channel, which has experienced significant sales growth year over year, driven by the progress in these essential facets of our transformation.

Matt Stevenson: We aim to mirror this success with our distribution partners by fostering stronger collaboration. Working closely with distributors is key to expanding our market presence, and by enhancing their involvement in our promotions and product launches, we strive to achieve comparable growth in all our channels. Through operational improvements and the implementation of various cost reduction programs, we have maintained margins and provided healthy free cash flow even as industry sales volume has declined. Our multiple cost reduction programs alone have yielded more than $6 million year-to-date.

Speaker Change: Through operational improvements and the implementation of various cost reduction programs, we have maintained margins and provided healthy free cash flow even as industry sales volume has declined.

Matt Stevenson: We have reduced inventory levels by 44 million year over year and improved turns from 1.9 times to 2.2 times, a testament to the hard work and sacrifice of our team. We ended the quarter in a strong liquidity position with over $53 million in cash after proactively paying down another $10 million in debt.

Matt Stevenson: Our operational improvements and solid financial performance have not gone unnoticed. In June, S&P upgraded our credit rating, reaffirming our company's financial well-being and stability. This collective progress, coupled with significant advancements in pivotal aspects of our transformation, has been instrumental in igniting our growth engine and propelling our organization forward with momentum. Let's turn to slide 6, which features the quantitative highlights for the second quarter. Net sales decreased 3.

Matt Stevenson: This is a significant improvement compared to the nearly 8% sales decline in the first quarter. Despite the modest dip in sales, our adjusted gross margins are up 170 basis points year-over-year at 41%, and adjusted EBITDA margins are up 50 basis points versus the prior year at 22.1%. Free cash flow remained robust for the quarter at $24.4 million.

Speaker Change: Net sales decreased 3.3%. This is a significant improvement compared to the nearly 8% sales decline in the first quarter.

Speaker Change: Despite the modest dip in sales, our adjusted gross margins are up 170 basis points year-over-year at 41 percent and adjusted EBITDA margins are up 50 basis points versus the prior year at 22.1 percent.

Speaker Change: Free cash flow remained robust for the quarter at $24.4 million. In year-to-date, we are $10 million better than prior year.

Matt Stevenson: In year-to-date, we are $10 million better than in prior years. Last quarter, we initiated the launch of 30 key products spanning our brand portfolio and our four principal consumer verticals. I will delve into more detail regarding some of these notable innovations later in the presentation. We continue to make our efforts to engage with enthusiasts and promote our fantastic products. Our famed LS events continue to gain recognition, and our LS Fest West, held at the end of April in Las Vegas, was named one of the 10 best auto races in the country by USA Today.

Matt Stevenson: At LS Fest West, we hosted over 30,000 enthusiasts from nearly all 50 states for a thrilling lineup of events, including a sold-out grand champion competition and the largest off-road race participation in the fest's history. We also hosted LS Fest Texas in Maine.

Speaker Change: Our famed LS events continued to gain recognition and our LS Fest West held at the end of April in Las Vegas was named one of the 10 best auto races in the country by USA Today.

Speaker Change: At LS Fest West, we hosted over 30,000 enthusiasts from nearly all 50 states for a thrilling lineup of events, including a sold-out grand champion competition and the largest off-road race participation in the fest's history.

Matt Stevenson: Between the two events, we directly engaged with nearly 50,000 enthusiasts in just two months. These types of events, coupled with our focused public relations campaigns, generated over 1.7 billion media impressions for the quarter. As we touched on last quarter, we have improved the precision of our promotional planning and execution to focus on periods of heightened consumer spending. In collaboration with our distributors, we have engaged in highly synchronized promotions that have significantly elevated our overall sales.

Speaker Change: We also hosted LS Fest Texas in Maine. Between the two events, we directly engaged with nearly 50,000 enthusiasts in just two months.

Speaker Change: These types of events, coupled with our focused public relations campaigns, generated over 1.7 billion media impressions for the quarter.

Speaker Change: In collaboration with our distributors, we have engaged in highly synchronized promotions that have significantly elevated our overall sales. Notably, our Memorial Day promotion resulted in year-over-year sales increase that exceeded 100% through our direct-to-consumer channel.

Matt Stevenson: Notably, our Memorial Day promotion resulted in a year-over-year sales increase that exceeded 100% through our direct-to-consumer chain. The results of our operational improvements can be seen in many of our key performance indicators. Through our dedicated Cost to Serve continuous improvement program, we have realized savings of $4.2 million thus far in 2024.

Speaker Change: The results of our operational improvements can be seen in many of our key performance indicators.

Matt Stevenson: Furthermore, by refining our forecasting and demand planning processes, we have achieved a 2% increase in the end stock rates of our top 2,500 products, alongside a 0.3 times improvement in inventory turns year over year. To the left, we outline our organization's three fundamental steering principles. These tenets form the bedrock that directs our concentration on our four primary areas, which are illustrated to the right.

Speaker Change: Furthermore, by refining our forecasting and demand planning processes, we have achieved a 2% increase in the in-stock rates of our top 2,500 products, alongside a 0.3 times improvement in inventory turns year over year.

Speaker Change: On slide 7.

Speaker Change: To the left, we outline our organization's three fundamental steering principles.

Speaker Change: These tenets form the bedrock that directs our concentration of our four primary areas, which are illustrated to the right.

Matt Stevenson: The first one is our pledge to our team members to ensure Holley is synonymous with an outstanding work environment. The secondary is the refinement of our operations, which aims not only to eliminate non-value-added costs but also to enhance product availability and drive inventory levels that are in sync with market demand. Furthermore, it is imperative that our operations offer enthusiasts, consumers, and distribution partners the premier omni-channel customer experience in our industry. The third area is the optimization of our acquisitions. Holly has acquired several distinguished brands and businesses in recent years, each possessing unique characteristics. Nurturing these unique traits is vital for their success in their respective categories.

Speaker Change: The first one is our pledge to our team members to ensure Holley is synonymous with an outstanding work environment.

Speaker Change: The secondary is the refinement of our operations, which aims not only to eliminate non-value-added costs, but also to enhance product availability and drive inventory levels that are in sync with market demand.

Speaker Change: Furthermore, it is imperative that our operations offer enthusiasts, consumers, and distribution partners a premier omni-channel customer experience in our industry.

Speaker Change: The third area is the optimization of our acquisitions. Holley has acquired several distinguished brands and businesses in recent years, each possessing unique characteristics.

Matt Stevenson: Lastly, is our unwavering focus on prioritizing all our customers, encompassing both our value consumer base and our devoted distribution partners. We are actively working to expand and enhance our sales channels, aiming to connect with and serve a broader spectrum of enthusiasts. Slide 8 highlights the areas of our transformation that catalyze growth, which we have discussed during prior calls.

Speaker Change: Slide eight highlights the areas of our transformation that catalyze growth, which we have discussed during prior calls. These areas include the development of a high-performing team, the modernization of our digital strategy, and the optimization of our customer experience marketing initiatives.

Matt Stevenson: These areas include the development of a high-performance team, the modernization of our digital strategy, and the optimization of our customer experience marketing initiatives. They also include the enhancement of our B2B sales capabilities, the pursuit of best-in-class product management and innovation, and the implementation of strategic pricing. Nearly a year ago, we embarked on the challenging journey of creating and instituting a high-performance leadership team. I'm delighted to announce that we have completed this mission.

Matt Stevenson: The final pieces of the puzzle were the appointments of a seasoned head of operations and supply chain with an extensive background in the automotive industry and a head of pricing with vast experience in the automotive aftermarket. We are indeed fortunate to have incredible leaders now in these crucial roles. Alex Buccelli is the newly appointed head of operations in the supply chain. He brings a wealth of experience from Genie, the industrial equipment manufacturer, coupled with an impressive 17-year stint at PACCARB. Allocat has a proven track record of leveraging Fortune 500 experience to improve operations, elevate quality, reduce costs, and improve product availability. Victor Aguilar is the new leader of Holly's Pricing Team.

Speaker Change: We are indeed fortunate to have incredible leaders now in these crucial roles.

Matt Stevenson: Victor joins us from Mann and Hummel, where he played a key role in shaping their pricing strategies for the automotive option. He is skilled at optimizing pricing structures to drive growth and profitability, particularly with a complex product range that includes a vast array of SKUs. At the heart of any successful digital strategy lies the quality of data. It's not an area which Holly has traditionally excelled.

Speaker Change: Victor Aguilar is the new leader of Holley's pricing team. Victor joins us from Ann and Hummel, where he played a key role in shaping their pricing strategies for the automotive option market.

Speaker Change: At the heart of any successful digital strategy lies the quality of data.

Matt Stevenson: Historical data quality issues have hindered the adoption and expansion of our product lines with our distribution partners, particularly in the national retail channel. However, we have made a concerted effort across the country to enhance our data quality, and we are making significant progress on this initiative. A major milestone in this project is set for the end of the third quarter, when we are targeting a step function change in our data quality, and we'll introduce a cloud-hosted solution that will feed both our digital properties and those of our distribution partners, ensuring seamless integration.

Matt Stevenson: We are propelling growth by launching new digital platforms that offer an enhanced consumer experience. A prime example is our newly unveiled Steelo website. Steelo is a premium brand within our portfolio and is renowned for delivering the utmost style and safety in automotive racing helmets.

Speaker Change: We are propelling growth by launching new digital platforms that offer an enhanced consumer experience. A prime example is our newly unveiled Steelo website.

Speaker Change: Stilo is a premium brand within our portfolio and is renowned for delivering the utmost style and safety in automotive racing helmets. The introduction of this fresh digital platform has led to a remarkable surge in direct-to-consumer sales for the brand, which were up over 150% for the quarter year-over-year.

Matt Stevenson: The introduction of this fresh digital platform has led to a remarkable surge in direct-to-consumer sales for the brand, which were up over 150% for the quarter year-over-year. As previously mentioned, we are improving our execution of key quarterly promotions and increasing distributor engagement. We're also directing our marketing efforts to bolster the efficiency of our B2B sales team during major product launches to improve distributor adoption. Concurrently, we're enhancing our B2B expertise through targeted training and initiatives aimed at augmenting the team skill set.

Speaker Change: We're also directing our marketing efforts to bolster the efficiency of our B2B sales team during major product launches to improve distributor adoption.

Speaker Change: Concurrently, we're enhancing our B2B expertise through targeted training and initiatives aimed at augmenting the team skill set. The strategic enhancement of talent is enabling us to tailor partnerships with key distributors representing a substantial advancement in strengthening our relationships.

Matt Stevenson: The strategic enhancement of talent is enabling us to tailor partnerships with key distributors, representing a substantial advancement in strengthening our relationship. We are not only enhancing engagement with our distribution partners through promotions; we are also collaborating with key distributors on launching new products via our Jumpstart program.

Speaker Change: We are not only enhancing engagement with our distribution partners through promotions, we are also collaborating with key distributors on launching new products via our Jumpstart program. This initiative boosts awareness and accelerates the adoption of new product offerings.

Matt Stevenson: This initiative boosts awareness and accelerates the adoption of new product offers. Beyond the strides we've made in the B2B channel, we are also discovering new customers and markets eager to partner with us and represent the Holley Performance Brands portfolio. This expansion is a testament to our appeal and the potential for even greater market penetration. As we continue to broaden our customer base and explore new opportunities, we are also enhancing our product development and pricing capabilities to drive profitable growth.

Speaker Change: As we continue to broaden our customer base and explore new opportunities, we are also enhancing our product development and pricing capabilities to drive profitable growth.

Matt Stevenson: Through the first half of 2024, our new product revenue is up over 25% compared to 2023. This is a direct result of the product management innovation processes we have implemented. We now have coordinated launch groups that work closely with our distribution partners to plan and drive mutual engagement and adoption of our new product. We're also improving the volume of consumer insights to drive the right innovations and line extension. Now, a pricing strategy is crucial to any consumer-oriented business.

Speaker Change: Through the first half of 2024, our new product revenue is up over 25% compared to 2023. This is a direct result of the product management innovation processes we have implemented.

Speaker Change: We now have coordinated launch groups that work closely with our distribution partners to plan and drive mutual engagement and adoption of our new products.

Speaker Change: Now pricing strategy is crucial.

Matt Stevenson: Blending analytical rigor with market intuition, we are leveraging enhanced data and insights to fuel growth. We are revising and reinforcing essential policies, including our minimum advertised price and dropship program.

Speaker Change: to any consumer-oriented business.

Speaker Change: Blending analytical rigor with market intuition. With the appointment of our new head of pricing, we are leveraging enhanced data and insights to fuel growth. We are revising and reinforcing essential policies, including our minimum advertised price and drop ship program.

Matt Stevenson: Furthermore, we are undertaking initiatives to position our products strategically, ensuring they reflect their total value while optimizing overall profitability. Slide 9 serves as a strategic map, illustrating the alignment of our growth initiatives with our principal consumer segments, domestic muscle, modern truck and off-road, year-round import, and safety and racing. While the Holley name is a dominant force in the domestic muscle arena, our product portfolio has been significantly enriched with outstanding brands and product lines, many of which were integrated through recent acquisitions.

Speaker Change: Furthermore, we are undertaking initiatives to position our products strategically, ensuring they reflect their total value while optimizing overall profitability.

Speaker Change: Slide 9 serves as a strategic map illustrating the alignment of our growth initiatives with our principal consumer segments, domestic muscle, modern truck and off-road, year-on-import, and safety and racing.

Speaker Change: While the Holley name is a dominant force in the domestic muscle arena, our product portfolio has been significantly enriched with outstanding brands and product lines.

Matt Stevenson: These strategic acquisitions have both strengthened our foundation and positioned us for substantial growth in markets not traditionally dominated by the Holley brand. On slide 10, I am thrilled to present a suite of product advances that underscore our commitment to innovation and growth. At Domestic Muscle, we begin with the bare classic brakes, a seamless integration for early GM, Ford, and Mopar models that enable the modernization of brakes while maintaining the classic aesthetic of the original 13 inch wheel.

Speaker Change: At Domestic Muscle, we begin with the bare classic brakes, a seamless integration for early GM, Ford, and Mopar models, which enable the modernization of brakes while maintaining the classic aesthetic of the original 13-inch wheel.

Matt Stevenson: Next to Bayer, Eratospeed Plus rotors represent a leap forward for domestic muscle platforms offering upgraded two-piece rotors that enhance cooling, reduce weight, and improve appearance. Also, the Holley EFI Terminator X2 marks the evolution of our class-leading EFI system. Boosting enhanced features and an improved customer interface, and setting a new standard for the industry. For the modern truck segment, the Flowmaster F-150 expansion extends our exhaust solutions to the F-150 Hybrid and other premium F-150 trims, further solidifying our presence in this growing market. Next up are the Arizona Desert Sharks.

Speaker Change: Also, the Holley EFI Terminator X2 marks the evolution of our class-leading EFI system.

Speaker Change: boosting enhanced features and improved customer interface and setting a new standard for the industry.

Matt Stevenson: Mesa shocks deliver unparalleled ride, handling, and performance, leveraging race-proven US-made technology in a bolt-on 2.5-inch shock for popular truck applications. For enhancing braking power for modern trucks, the Behr Big Claw Brakes offer a straightforward installation using OE calipers with the relocation bracket to accommodate larger rotors. Our important EV brand, AEM, now has an EV vehicle controller unit that integrates EV systems and unifies the tuning experience with features ready for motorsports and conversions, all through a modern, customizable interface. Expanding into the tuning realm in the Euro segment, Dyna-Connect provides BMW drivers with an OBD2 tuning solution that allows for convenient at-home tuning without the need for a dealership.

Speaker Change: Next up, the Arizona Desert Shocks Mesa Shocks deliver unparalleled ride handling and performance, leveraging race-proven U.S.-made technology in a bolt-on two-and-a-half-inch shock for popular truck applications.

Speaker Change: Our important EV brand, AEM, now has an EV vehicle controller unit that integrates EV systems and unifies the tuning experience with features ready for motorsports and conversions all through a modern, customizable interface.

Speaker Change: Expanding into the tuning realm in the euro segment, Dynaconnect provides BMW drivers with an OBD2 tuning solution that allows for convenient at-home tuning without the need for a dealership visit.

Jesse Weaver: Our Volkswagen chassis solutions bring big brake kits and coilover suspension systems to popular Volkswagen and Audi platforms, ensuring comprehensive support with APR. We are extremely excited about the growth prospects of our safety and racing vertical with the amazing brands of products that we have in our portfolio. As an example, in helmet innovation, Simpsons Devil Ray helmets are the next evolution of Simpsons Trusted Motorsports helmets, while the Simpsons Adventure motorcycle helmet breaks new ground for us, the first dedicated helmets for the adventure segment, tapping into this four billion plus motorcycle safety market.

Speaker Change: Our Volkswagen chassis solutions bring big brake kits and coilover suspension systems to popular Volkswagen and Audi platforms, ensuring comprehensive support with APR components.

Speaker Change: We are extremely excited about the growth prospects of our safety and racing vertical with the amazing brands of products that we have in our portfolio.

Speaker Change: As an example, in helmet innovation, the Simpsons Double Ray helmets are the next evolution of Simpsons Trusted Motorsports Helmets.

Jesse Weaver: Now the Hans Florit introduces a revised design as a global leader in frontal head and neck restraints, enhancing driver comfort without compromising safety. Together, these products reflect our dedication to quality and performance, as well as our strategy to diversify and lead in key markets. Now I would like to turn the presentation over to Jesse, who will discuss our Q2 results in more detail and our revised outlook and guidance for the remainder of 2024.

Hans Flohr: Now the Hans Florit introduces a revised design as a global leader in frontal head and neck restraints, enhancing driver comfort without compromising safety.

Jesse: Now, I would like to turn the presentation over to Jesse, who will discuss our Q2 results in more detail and our revised outlook and guidance for the remainder of 2024.

Jesse Weaver: Thank you, Matt, and good morning, everyone. Turning to slide 12, I'd like to begin by providing an update on the progress we've made on our four financial priorities for the year, which include restoring historical profitability, improving free cash flow, optimizing working capital, and reducing debt. First, we've made excellent progress restoring profitability and working towards our long-term goal of consistently delivering 40% gross margin and at least 20% EBITDA margin on an annualized basis. For both metrics, Holly achieved those levels in the second quarter of 2004.

Jesse: First, we've made excellent progress restoring Holley profitability and working towards our long-term goal of consistently delivering 40% gross margin and at least 20% EBITDA margin on an annualized basis.

Jesse: For both metrics, Holly achieved those levels in the second quarter of 2004. After realizing another $500,000 from our cost-to-serve efforts in the quarter, our cost savings now total $4.2 million year-to-date.

Jesse Weaver: After realizing another $500,000 from our cost-to-serve efforts in the quarter, our cost savings now total $4.2 million year-to-date. We now expect to deliver at least $6.5 million in savings, which is in the range of our initial guidance of $5 to $10 million for the year. As Matt previously mentioned, the performance aftermarket continues to be soft, so we are taking a cautious approach in order to actively manage our cash. After observing these trends in the market during this past quarter, we promptly implemented temporary cost-cutting actions with a furlough, which contributed about $2 million in savings for the quarter. The furlough is extended into July, and we expect additional savings from the suspension of the 401k match for the last two quarters of the year.

Jesse: As Matt previously mentioned, the performance aftermarket continues to be soft, so we are taking a cautious approach in order to actively manage our cash. After observing these trends in the market during this past quarter, we promptly implemented temporary cost-cutting actions with a furlough, which contributed about $2 million in savings for the quarter.

Jesse Weaver: Combined, these temporary cost cuts are expected to contribute about $1.2 million in savings during the quarter, which I will address in more detail in the Q3 guidance. Next, we continue to stay focused on generating significant free cash flow. Year-to-date, we delivered roughly 42 million of free cash flow, a $10 million improvement versus the first six months of 23. This improvement in free cash flow is due to a combination of continued strong EBITDA and inventory management.

Jesse: Next, we continue to stay focused on generating significant free cash flow. Year-to-date, we delivered roughly $42 million of free cash flow, a $10 million improvement versus the first six months of 2023.

Jesse: This improvement in free cash flow is through a combination of continued strong EBITDA and inventory management. Inventory was reduced to 174 million in the second quarter versus 218 million at the end of Q2 in 23, an improvement of 44 million dollars.

Jesse Weaver: Inventory was reduced to 174 million in the second quarter versus 218 million at the end of Q2 in 23, an improvement of $44 million. Inventory returns also improved to 2.2 turns at the end of the second quarter versus 1.9 turns a year ago at the end of Q2. Finally, we are committed to decreasing our debt and strengthening our balance sheet. After repaying $10 million of debt in the second quarter, our cash stood at $53 million by the end of the period.

Jesse Weaver: Additionally, our net leverage ratio has continued to fall, reaching 4.02 times this quarter. However, though we've managed to continue making progress on our financial priorities, the health of the consumer is still struggling with numerous challenges in the current environment. In June, inflation eased slightly, but it's still an issue and not abating as quickly as the Federal Reserve had anticipated. We anticipate that slow wage growth coupled with increasing debt will keep pressuring consumers to spend for the rest of the year.

Jesse Weaver: In the performance aftermarket, we believe we're gaining share, but the market is down overall. Our estimate suggests a 5% overall market decline year-to-date, while our out-the-door direct-to-consumer and B2B sales figures show a smaller decline of 2.8%. It's clear that there's a shift happening in consumer spending habits that we believe will continue throughout the balance of the year.

Jesse: In the performance aftermarket, we believe we're gaining share, but the market is down overall. Our estimate suggests a 5% overall market decline year-to-date, while our out-the-door direct-to-consumer and B2B sales figures show a smaller decline of 2.8%.

Jesse: It's clear that there's a shift happening in consumer spending habits that we believe will continue throughout the balance of the year. Given this trend and the end-of-the-quarter out-the-door sales, we've lowered our 24 guidance to account for a range of outcomes that are dependent on the overall macro consumer environment.

Jesse Weaver: Given this trend and the end-of-the-quarter out-the-door sales, we've lowered our guidance for the second quarter to account for a range of outcomes that are dependent on the overall macro-consumer environment. With that in mind, I'd now like to spend a few minutes discussing our financial results for the second quarter. Turning to slide 13, we've highlighted our second quarter 24 results and key financial metrics. Net sales in the second quarter of 24 were $169.5 million, compared to $175.3 million in the same period a year ago.

Jesse Weaver: This result is in line with the guidance we provided previously and consistent with our previous expectations as distribution partner inventory levels were elevated coming into the quarter. Past-due order balances remained low in the second quarter at $9 million, but past-due fulfillment couldn't provide the tailwind of sales like it did in Q2 of 2023 when the team made meaningful progress on shipments related to EFI chip availability.

Jesse: With that backdrop, I'd now like to spend a few minutes discussing our financial results for the second quarter.

Jesse: Turning to slide 13, we've highlighted our second quarter 24 results and key financial metrics.

Jesse: This result is in line with the guidance we provided previously and consistent with our previous expectations as distribution partner inventory levels were elevated coming into the quarter.

Jesse Weaver: Going into the back half, we historically see past-due balances decline and anticipate leveling out long-term around $5 million by the end of the year. Gross margin for the quarter was 41.5% compared to 39.8% in the same period a year ago. Adjusted gross margin for the quarter was 41%, compared to 39.3% in the same period a year ago. Due to our continued efforts to improve operational efficiencies, we were able to protect margin compression downside on softer sales and experienced margin expansion of 170 basis points on an adjusted basis.

Jesse: Gross margin for the quarter was 41.5%, compared to 39.8% in the same period a year ago. Adjusted gross margin for the quarter was 41%, compared to 39.3% in the same period a year ago.

Jesse: Due to our continued efforts to improve operational efficiencies, we were able to protect margin compression downside on softer sails and experienced margin expansion of 170 basis points on an adjusted basis.

Jesse Weaver: SG&A, including R&D expenses for the second quarter, was $38.9 million versus $35.3 million from the prior year. The increase in SG&A was predominantly driven by $2.6 million in transformation-related one-time advisory costs to execute on the strategic initiatives.

Jesse Weaver: Net income in Q2 of 24 was $17.1 million, an increase of $4.1 from $13 million in the second quarter of 23. Similar to our past calls, the results discussed in this call will be on an adjusted non-gap basis in order to better focus on the operational and performance of the company during the period. And despite the headwinds in sales due to market conditions, we delivered strong second quarter adjusted EBITDA of $37.4 million, with the adjusted EBITDA margin expanding by 50 basis points to 22.1% versus a year ago.

Jesse Weaver: As shown on page 14, we once again delivered strong free cash flow of $24.4 million in the quarter and roughly $42 million year-to-date compared to $32 million a year ago. And as you can see on slide 15, this remarkable cash flow has enabled us to continue reducing our leverage. We continue deleveraging during the quarter by proactively paying down an additional $10 million of debt, which brings our total in prepayments to $75 million in principal against our first lien term loans in September of 2023. This has allowed Holley to recognize up to an estimated $3 million in annualized net interest savings.

Jesse: Similar to our past calls, the results discussed in this call will be on an adjusted, non-gap basis in order to better focus on the operational performance of the company during the period. And despite the headwinds in sales due to market conditions,

Jesse: We delivered strong second quarter adjusted EBITDA at $37.4 million, with adjusted EBITDA margin expanding by 50 basis points to 22.1% versus a year ago. As shown on page 14, we once again delivered strong free cash flow.

Jesse: We continued deleveraging during the quarter by proactively paying down an additional $10 million of debt, which brings our total in prepayments to $75 million in principal against our first lien term loans in September of 2023.

Jesse Weaver: With these efforts and continued improvements in business performance, we ended the quarter with a net leverage ratio of 4.02 times, which continues to be meaningfully below our original covenant of five times. And I'm proud to announce that, after 18 months, we have successfully exited our amended covenant relief period. Now I'd like to turn to slide 16 to discuss our outlook for Q3 and the full year. We've consistently prioritized meeting our commitments over the past year.

Jesse: which continues to be meaningfully below our original covenant of five times. And I'm proud to announce that after 18 months, we have successfully exited our amended covenant relief period. Now I'd like to turn to slide 16 to discuss our outlook for Q3 in the full year.

Jesse Weaver: Given the uncertain consumer outlook for the remainder of the year, we will continue to adhere to this philosophy of transparency and accountability and are therefore adjusting our guidance to align with market conditions. For the full year, we are reducing our guidance for net sales to be in the range of $605 million to $645 million and modifying our adjusted EBITDA to be in a range of $117 million to $132 million. As we work to manage cash flow, we now expect 24 results to include capital expenditures of $6 to $8 million, depreciation and amortization between $24 and $26 million, and interest expense, excluding the mark-to-market on the collar, in a range of $50 to $55 million.

Jesse: We've consistently prioritized meeting our commitments over the past year. Given the uncertain consumer outlook for the remainder of the year, we will continue to adhere to this philosophy of transparency and accountability, and are therefore adjusting our guidance to align with market conditions.

Jesse Weaver: As noted earlier, we remain committed to deleverage, but given the revision to the guide, we anticipate year-end leverage to be slightly higher than previously discussed and in the range of 3.75 times and 4.25 by the end of the year. Moving on to our outlook for the third quarter, inventory levels remained elevated at our distribution partners at the end of Q2 due to lower than expected out-the-door sales. Therefore, we are expecting net sales in the range of $133 million to $153 million and adjusted EBITDA in the range of $20 to $30 million.

Jesse: Moving on to our outlook for the third quarter.

Jesse Weaver: The midpoint on revenue for Q3 does imply year-over-year growth deceleration, in part due to substantial progress on past dues in the third quarter of last year. However, we continue to believe that our sales and marketing initiatives, including distribution partner participation and quarterly promotions, along with efforts around clearance and overstock inventory, and improvements in our ability to launch innovative new products, continue helping us offset headwinds in the market, allowing us to gain share.

Jesse: The midpoint on revenue for Q3 does imply year-over-year growth deceleration, in part due to substantial progress on past dues in the third quarter of last year.

Jesse Weaver: And based on our latest guidance, while our second half seems to be softer than originally expected due to the challenged consumer, we are confident in the resilience of this enthusiast-based industry over the long term and have made excellent progress on our organizational transformation to incubate our organic growth while simultaneously generating strong free cash flow and paying down our debt. This concludes our prepared remarks. I would now like to open up the line for questions.

Jesse: And based on our latest guidance, while our second half seems to be softer than originally expected due to the challenged consumer, we are confident in the resilience of this enthusiast-based industry long-term and have made excellent progress on our organizational transformation.

Speaker Change: to incubate our organic growth while simultaneously generating strong free cash flow and paying down our debt. This concludes our prepared remarks. You would now like to open up the line for questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 2.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

Operator: One moment, please, while we poll for questions. The first question is from Christian Carlino from J.P. Morgan. Please go ahead. Good morning. Hi, good morning. Thanks for taking our question. You'd previously talked about, I think, a 3% to 4% price reality.

Speaker Change: One moment, please, while we poll for questions.

Speaker Change: The first question is from Christian Carlino from J.P. Morgan. Please go ahead.

Christian Carlino: Good morning. Hi, good morning. Thanks for taking our question. You'd previously talked about, I think, 3% to 4% price realization this year after, I think, 2% in the first quarter.

Christian Carlino: Good morning. Hi, good morning. Thanks for taking our question. You'd previously talked about, I think, 3% to 4% price realization this year after, I think it was 2% in the first quarter. So could you speak to what it was in 2Q and if you're thinking about that number any differently?

Jesse Weaver: Yeah in Q2 it was about the same in Q1 with that roughly 3% and going into the back half I mean we're we're continuing to do you know price increases because we're lapping a price increase last year it's just what's great is we've started that process of being more strategic about it and so you know same pricing but just on a different approach on products that you know are lower volume products that higher cost to serve and we feel will not impact the consumer as much given that our high runners you know we don't feel like can sustain a price increase at this time I got it. It makes sense.

Speaker Change: And going into the back half, I mean, we're continuing to do, you know, price increases because we're lapping a price increase last year.

Speaker Change: What's great is we've started that process of being more strategic about it.

Speaker Change: And so, you know, same pricing, but just on a different.

Speaker Change: approach on products that

Jesse Weaver: Could you help us bucket out, I guess, the drivers of the gross margin expansion in the second quarter? You know, was it pricing, product, or channel mix? Is it fixed cost leverage? And just how are you thinking about gross margin for the year? Yeah, I think there's certainly some fixed cost D leverage on the lower sales. Pricing was a part of it, because we did some price taking in Q1 that flowed into Q2 over last year.

Speaker Change: Got it. Makes sense. Could you help us bucket out, I guess, the drivers of the gross margin expansion in the second quarter? Was it pricing, product or channel mix? Is it the fixed cost leverage? And just how you're thinking about gross margin for the year.

Speaker Change: Yeah, I think on you know, there's certainly some fixed cost D leverage on the lower sales Pricing was a part of it because we did some price taking in Q1 that flowed into Q2 Over last year and then just our cost to serve initiatives certainly have been really helpful when it comes to the freight piece

Jesse Weaver: And then just our cost to serve initiatives certainly have been really helpful when it comes to the freight piece. Freight returns and allowances and warranty that all impact that have really helped. And then a bit of the furlough that we called out as well, because the furlough impacts both Operations and SG&A.

Speaker Change: Freight Returns Allowances and Warranty that all impact that have really helped and then a bit of the furlough that we called out as well because the furlough impacts both Ops and SG&A

Speaker Change: Thank you very much, best of luck. Sure.

Joseph Altobello: The next question is from Joe Altobello from Raymond James. Please go ahead.

Speaker Change: The next question is from Joe Altobello from Raymond James. Please go ahead.

Joseph Altobello: Hey, good morning, Drew. Good morning, guys.

Joseph Altobello: So I guess the first question, if you look at the second quarter, you know, it was in line with guidance and expectations generally, and it looks like order trends also got better. So is there something that you're seeing here in July and August that's getting worse? Is it the consumer slowing down, or is it distributors getting a little bit more conservative on inventory?

Joe Altobello: Hey, good morning, Joe.

Joe Altobello: Good morning guys. So, I guess the first question, if you look at the second quarter,

Joe Altobello: You know, it was in line with guidance and expectations generally, and it looks like order trends also, you know, got better. So is there something that you're seeing here in July and August that's getting worse? Is it the consumer slowing down, or is it distributors getting a little bit more conservative on inventory?

Jesse Weaver: I think, Joe, a little bit of both to your point there, and we follow the out-of-the-door trends very closely, not only of our products but the overall out-of-the-door sales of our distribution partners, and, of course, you know, watch our D2C business. And so, you know, after Memorial Day, we saw that really start to slow relative to consumer demand, and we saw that in June and also saw it in So we're just being prudent on the guidance for the back half of the year, but we're still confident in our initiatives that are, you know, critical to our transformation to take share.

Speaker Change: I think it's a little bit of both to your point there and we follow the out-the-door trends very closely and not only of our products but the overall out-the-door sales of our distribution partners and of course

Speaker Change: You know, watch our D2C business.

Speaker Change: that are, you know, critical to our transformation to take share.

Joseph Altobello: Got it. Okay, just to follow up on that, it looks like R&D spending, at least in the first half, is down significantly from where it was last year. Is that going to pick up in the second half, and how should we sort of interpret that, since innovation is a big part of the story here?

Jesse Weaver: Yes, I'll answer that in two parts. So the way we like to look at SG&A is I would look at both the R&D spending and the SG&A combined. It really is partly just a classification of the different roles that people are classified internally that would move one to the other.

Speaker Change: Yes, I'll answer that in two parts. So the way we like to look at the SG&A is I would look at both the R&D spending and the SG&A combined.

Speaker Change: It really is partly just a classification of the different roles that people are classified internally that would move one to the other.

Speaker Change: as we did the initial reallocation of resources in the first half. Some of that came from R&D, but, you know, what we talked about is we're seeing much more efficient.

Jesse Weaver: You know, as we did the initial reallocation of resources in the first half, some of that came from R&D, but you know what we talked about is we're seeing a much more efficient launch of products coming into the year. And we're seeing three times the revenue per SKU, and so a lot of those efforts we did on SKU rationalization, phase gate determination of what products we launch, you know, they really are playing out the way that we would expect. And so that R&D bucket should not necessarily grow, and there should be no impact on that as we're actually seeing new product revenue up about 25% year-over-year.

Joseph Altobello: Okay, I got it. Thank you.

Michael Swartz: The next question is from Mike Schwartz from Truist Securities. Please go ahead.

Michael Swartz: Morning, Mike. Hey, guys. Hey, good morning.

Michael Swartz: Just maybe a question on guidance. I mean, it's a pretty, pretty wide range of outcomes you've laid out for us, you know, for the full year. Could you give us a sense, Jesse, maybe a little bit of what's predicated on the high end of the guidance versus what's predicated on the low end of the guidance?

Jesse: You know, for the full year. Could you give us a sense, Jesse, maybe a little bit of, you know, what's predicated in the high end of the guidance versus what's predicated in the low end of guidance?

Jesse Weaver: Sure, and I think that the range of the guidance does capture the fact that it is a bit broad at this moment still. A bit of the range of kind of what we're seeing in the macroeconomic impact, the impact on our consumer health, and you know, the bottom end and the top end really largely depend upon just overall industry trends. Because, as Matt and I pointed out, we feel confident that we're gaining share, and so the initiatives that we're launching here in the back half, we think will continue to help us in that regard.

Jesse: Sure, and and I think that the range of the guidance does capture the fact that it is a bit broad at this moment still a bit of the range of kind of what we're seeing in the macroeconomic impact the impact on our consumer health

Matt Stevenson: You know, the bottom end and the top end really largely depends upon just overall industry trends. Because I think as Matt and I pointed out, we feel confident that we're gaining share. And so the initiatives that we're launching here in the back half, we think will continue to help us in that regard.

Jesse Weaver: So it really does come down to our trends in the consumer environment and our distribution partners, frankly, their response to it with the stocking and prepping for the following year is going to impact us in some way. And it's still too early to tell one way or the other, so hopefully, that range, we feel pretty confident that range will capture the range of outcomes in the back half.

Matt Stevenson: are going to impact us in some way. And it's still too early to tell one way or the other. So hopefully that range, we feel pretty confident that range will capture the range of outcomes in the back half.

Jesse Weaver: Okay, great. And I think you just referenced, in response to Joe's question, some softening in consumer, you know, DTC or out-the-door sales that you track in June and July. Is there any way to quantify maybe what that looked like relative to, I think you said in the first half of the year that you're kind of, at least the business you have visibility into was down about 3%. Any quantification of maybe what that looked like in June or July?

Speaker Change: Is there any way to frame maybe what that looked like relative to, I think you said in the first half of the year, you're kind of, at least the business you have visibility into was down about 3%. Any quantification of maybe what that looked like in June or July ?

Michael Swartz: Yeah, I think as it relates to D2C, Michael, we're trying not to get back into the world of reporting on the specific D2C numbers, but we saw some continued strength in D2C going into May and June. And then, in the more recent time period, we've seen a bit of softness on that growth, but it's still been in positive territory, relative to what we're seeing in the B2B business and, you know, their relative out-of-the-door sales. That's the number to compare out-of-the-door versus D to C.

Speaker Change: Michael we're trying not to get back into the world of reporting on the specific D2C numbers But we saw some continued strength in D2C going into May and June and then in the more recent time period We've seen a bit of softness on that that growth, but it's still been in the positive territory relative to what we're seeing in the B2B business and you know their relative out-the-door sales

Michael Swartz: Okay, great. Thank you.

Bret Jordan: The next question is from Bret Jordan from Jeffreys. Please go ahead.

Michael: Okay, great, thank you.

Michael: The next question is from Bret Jordan from Jeffreys, please go ahead. Hey, good morning guys.

Bret Jordan: All right. Could you talk about the distribution partner health? I guess, you know, given a sustained slowdown, do you see any substantial shrinkage in door cans out there, the speed shops, or is that channel largely down but healthy?

Bret Jordan: substantial shrinkage and door can out there are the speed shops or is that channel largely down but healthy?

Jesse Weaver: Yeah, I'll take that, Bret. I would say that, overall, the industry, you know, with our top customer, in particular, and the national retailers, you know, the ones that, you know, you're very familiar with, they seem to be pretty strong. I mean, we continue to monitor our receivables and make sure that we're in good standing or they're in good standing with us when it comes to payments. I mean, certainly, the industry is a bit soft in some pockets.

Jesse Weaver: And, you know, we're staying very close to those customers to make sure that we're not in a position where, you know, our receivables are at risk. I think in some areas, if there is any softness, it's likely that those sales will just kind of shift over to a stronger, less levered customer, frankly, because, you know, we work with a lot of, you know, all of the And I think that they're just taking a share from each other in some ways.

Bret Jordan: Okay, great. And I guess within the verticals, are there any, you know, relative outperformers? You know, is the Euro consumer more socioeconomically advanced than a domestic muscle? You know, are there sectors that are doing relatively better or worse within your verticals?

Speaker Change: Okay, great. And I guess within the verticals, are there any, you know, relative outperformers? You know, is the Euro consumer higher socioeconomic than a domestic muscle? You know, are there sectors that are doing relatively better or worse within your verticals?

Matt Stevenson: Yeah, Brett, relative to the verticals, I mean, we look across kind of those four that we call it out, really seeing that strength and safety in racing. And, you know, I think that is just such a lifestyle for those people, you know, out on the track every weekend, as well as the support we give professional teams within that. But also, it's a testament to our product innovations. You know, the great products we have in Simpsons, Delo, Hans, RaceQuip, you know, continue to lead the market, and it shows in those year over year sales trends. Okay, great. Thank you.

Phillip Blee: The next question is from Phillip Blee of William Blair. Please go ahead.

Speaker Change: Okay, great. Thank you.

Phillip Blee: Morning, Matt. Morning, Jesse. Thanks for the question. So I just want to talk about a little bit about how potential interest rates coming in the near term could impact the business, you know, including directly on the financials, but then also from a consumer, you know, sensitivity standpoint, what your business has seen historically there. That'd be great.

Phillip: Hey, good morning Phillip.

Phillip: Morning, Matt. Morning, Jesse. Thanks for the question. So I just want to talk a little bit about how potential interest rates coming in the near term could impact the business, including directly on the financials, but then also from a consumer sensitivity standpoint, what your business has seen historically there. That'd be great. Thanks.

Jesse Weaver: Sure, this is a great question, and I think, obviously, directly on our financials, with our debt level, a 100 basis point decline in interest rates would generally impact our business by $5 to $6 million in free cash flow benefit. The good news, though, for us overall in the past year, is we've had a collar in place, so we won't feel the full benefit of that. We'd probably feel about 50 basis points of that as the rate floats below our collar ceiling of 5%, and then anything below that will participate in the benefits all the way down to 2.8% of the base rate.

Speaker Change: You know, a hundred basis point.

Speaker Change: decline in interest rates generally would impact our business five to six million dollars in free cash flow benefit. You know the good news though for us overall in the past year is we've had a collar in place so we have we won't feel the full benefit of that we'd probably fill about 50 basis points of it.

Jesse Weaver: So we should be benefiting pretty soon from that. As it relates to the consumer specifically, certainly the things that we've outlined in consumer health related to credit card balances, interest rates, slowing wage growth, and higher unemployment are putting pressure on the consumer, and, you know, we would anticipate that a lowering of interest rates would help take some of that pressure off, but in terms of exactly how that would flow through to consumer confidence and how they think about their pocketbooks, we don't have good I can just tell you that it will help.

Phillip Blee: Okay, great. That's a great color.

Phillip Blee: And then you recently hired the new head of operations and supply chain. Could you talk a bit more about what the biggest opportunities are there to professionalize the business? And then can you remind us about your sourcing structure and then whether or not you have much exposure to the recent increase in ocean freight costs? Thanks.

Matt Stevenson: Yeah, I appreciate that question. So, Alex is really focused on kind of in the short term, you know, increasing our in-stock rates for our top 2,500 as well as, you know, reducing past dues that still hang around that eight to ten million. So really focused on improving our sign-up processes and ensuring we have our fast movers in stock at all times. You know, then longer term, Alex will look at our operational footprint, how we continue to make products better at a lower cost, and outline that future relative to our manufacturing and sourcing strategy.

Matt Stevenson: You know, currently, we kind of, you know, make about 50% purchase about 50% relative to our product mix. And we've done a great job locking in long-term rates on containers with our logistics partner. So we've been able to navigate the ups and downs of that, as you know, those Middle East conflicts have driven some, I'd say, short-term ups and downs of container rates, nothing sustainable, nothing like we saw back in, you know, post-pandemic.

Speaker Change: We saw back you know post pandemic.

Phillip Blee: Excellent, I appreciate it. Best of luck.

Speaker Change: Excellent I appreciate it best of luck.

Speaker Change: Alright, thank you.

Joseph Feldman: The next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.

Speaker Change: The next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.

Joseph Feldman: Thanks, guys, for taking the questions. I wanted to go back to kind of the demand in the industry. And, you know, I'm just a little curious because it seems like your DTC business was quite strong. You get – it sounds like the enthusiasm at the LS Fest remains very high, and then the largest, you know, resellers seem to be holding up okay. So, like, I guess I'm curious what – where is it down the line that you're seeing the pressure, and does that mean, you know, does it mean maybe rethinking the reseller network that you have?

Joe Feldman: Yes, Thanks, guys for taking my questions I wanted to go back to kind of the demand in the industry.

Joe Feldman: I'm just a little curious because it seems like your DTC business was quite strong you've got it sounds like the enthusiasm at the L. S. First for men remains very high end and then the largest you know resellers seem to be holding up okay. So like I guess I'm curious, what where is it down the line that you have.

We're seeing the pressure.

Speaker Change: And does it mean, you know does it mean, maybe rethinking the reseller network that you have.

Matt Stevenson: Joe, I appreciate that question. Just, you know, to double down on our D2C business, we brought in Phillip Dobbs over, really, over a year ago now to really drive our performance relative to kind of the critical parts of our consumer marketing experience, right? And that includes everything from our consumer engagement events in different initiatives to our digital strategy, SEM, and SEO. You know, we talked about the performance of our new digital property.

Speaker Change: Joel I appreciate that a quick question just I think just the double down our D to C business. You know we brought in Philip Dobbs over really over a year ago now to really drive our performance relative to kind of the critical parts of our consumer marketing.

Matt Stevenson: So what you're seeing in that D2C business is really us just getting better at what we do, right? And so that's driving some meaningful share growth from our competitive manufacturers. Now, our distributors are still a critical part of our long-term strategy, and that softness they're seeing in their out-the-door sales is really what's going on in the macro consumer environment. So I think you've got to kind of separate us getting better at what we do versus what's going on in the macro consumer market.

Joseph Feldman: Got it, that's helpful, thank you. And then, just a sort of separate topic, but on the inventory side of things, you guys have done a great job, you know, trimming inventory and improving turns. I guess, do you guys have a turn target in mind, or how should we think about maybe inventory levels in the second half of the year as we kind of go through this environment?

Jesse Weaver: Yeah, Joe, I think, you know, we don't want to call it a specific turn number, but we definitely see opportunities as we, you know, refine our product mix, right? Just as a reminder, we took out 45% of our SKUs that were less than 3% of our sales over the last 18 months. And so, you know, some of that inventory is still moving out. And as we really focus on products that consumers want and continue to bring out great innovations that have high adoption, we feel that, you know, there's just definitely a lot of room for improvement on the turn size.

Joseph Feldman: Got it. That's good to hear. Thanks and good luck this quarter, guys. All right.

Brian McNamara: The next question is from Brian McNamara from Canaccord Genuity. Please go ahead.

Brian McNamara: Good morning, guys. Thanks for taking the questions.

Brian McNamara: So, you know, turnarounds are always difficult at the time, but it sounds like there's some good things happening under the surface there but not yet showing up in the results. For example, DTC sales sound pretty good, and new product sales are up. So, are your distributor partners like the weakest link, or should it just continue to repair and kind of nurture those relationships you had mentioned as strong with your Memorial Day promotion? Thanks. Yeah, I...

Matt Stevenson: Yeah, I'd say, you know, Brian, it's just our distribution partners relative to feeling that kind of macro impact of the consumer. And really, that's a main focus for us to continue to nurture and take those partnerships to the next level. I mean, the things we're implementing with our distribution partners in terms of promotional planning, launch planning, and just closer collaboration were things that never existed before. So we're really optimistic about our ability to win share in our distributors by really professionalizing our approach and being better partners.

Brian McNamara: That's helpful. I guess, you know, a big debate for investors that we speak to about the stock is whether or when sustainable growth will return. And I know guidance this year was hardly a layup, but with H2 now expected to decline roughly 5% versus your prior expectation of 6, what has changed, I guess, in your view over the last 90 days outside of the macro? Presumably, a return to growth is now pushed out for at least another two quarters, but any thoughts there would be helpful.

Matt Stevenson: Brian, it really centers on what Jesse commented on, really the macro health of the consumer, you know, what the Feds do with interest rates, you know, there's a tight correlation between credit card balances and interest rates, and, you know, how does that play out relative to the macroeconomic position in the back half of the year? You know, we're really focused internally on outperformance, meaning we want to outperform the market, right? And so as the market, you know, stabilizes and starts to grow, we want to be growing above market rates.

Matt Stevenson: And so really that's where we're focused, is continuing to take share if this market, you know, continues to remain soft, and, you know, continue to focus on the key elements of our transformation, which are yielding results, as you indicated in some of the areas that we called out in our prepared remarks.

Brian McNamara: And then just if I could squeeze one last one in here. You mentioned you're confident in the resilience of the auto enthusiast long term. But with the macro side of today, that turns that on its head a little. Is there a historical precedent here with maybe folks pulling back early in a downturn and adjusting their spending and perhaps cutting other discretionary areas later? Is there any such historical precedent?

Matt Stevenson: You know, Brian, the best data the industry has is relative to the indicator SEMA, you know, outlines. And, you know, this industry has fared very well through all the economic cycles, right? And so I think just right now there's a lot of things culminating with, you know, the geopolitical, election year, you know, the interest rates, there's just a lot I don't think we've seen for a long time.

Brian McNamara: So, you know, we'll get past this, and, you know, we're still confident in the resiliency of this industry. It's a lifestyle. It's a passion for folks. And, you know, this is how people unwind. They spend time with their vehicles, or they race them on the track, and we're really confident in how this lifestyle industry performs.

Brian McNamara: Great. Thanks very much, guys.

John Lawrence: Thank you. The next question is from John Lawrence from the Benchmark Company. Please go ahead.

John Lawrence: Would you comment just a little bit, I mean obviously a tough top-line environment. We've looked at the model for several years, and we've talked about 40 growth, 20 adjusted EBITDA, and you're making real strides in beating some of those numbers. Can you talk a little bit about that? That idea of as you get some revenue increases over the next several quarters, you know, what could that bandwidth look like as you continue to get some leverage on the top line and some of these productive, some of the initiatives that you've got? You know, I don't know if you're willing to commit today, but what could that bandwidth be, can we see that adjusted EBITDA number in the 25 zone?

Jesse Weaver: John, you're putting a big target out there for me at 25. I would say that you can see, and appreciate the challenge. Hopefully, you can see in the guide that even in spite of the headwinds on the top line, we've been able to maintain something close to, you know, 20% on EBITDA. And that really is a testament to the work the team's doing on driving efficiencies and getting more efficient, frankly, on the SKUs that we put out so that we're not eating up as much of the E and O and optimizing, you know, the distribution and supply chain all the way through.

Speaker Change: I appreciate the challenge.

Speaker Change: Hopefully you can see in the guide that even in spite of the headwinds on the top line that we've been able to maintain something close to 20% on the EBITDA and that really is a testament to the work the team is doing and driving efficiencies and getting more.

Speaker Change: Efficient frankly on the Skus that we put out so that were not eating as much in <unk>.

Speaker Change: Optimizing.

Speaker Change: Distribution and supply chain all the way through.

Jesse Weaver: But I think that until we start to see growth, it'll be tough to kind of see that expand. And what that expands to, I think, is just going to be a function of where we see investments might need to be made in order to drive growth sustainably higher than that mid-single digits that we're targeting. You know, I think it's one of those things where, you know, you would expect to see some leverage on the fixed cost, and we'll do everything we can to, you know, reap the benefits of that.

Speaker Change: But I think that until we start to see growth it'll be tough to kind of see that expand in and what that expands to I think is just going to be a function of where we see.

Speaker Change: Investments might need to be made in order to drive growth sustainably.

Speaker Change: Higher than that mid single digits that we're targeting.

Speaker Change: I think it's one of those things, where you would expect to see some leverage on the fixed cost and we will do everything we can to.

Speaker Change: Reap the benefits of that but if we need to make some additional investments in key areas to help drive sustainable growth, we'll be looking at that and making those business cases, accordingly, because we anticipate growing this business for a long time.

Jesse Weaver: But if we need to make some additional investments in key areas to help drive sustainable growth, you know, we'll be looking at that and making those business cases accordingly because we anticipate growing this business for a long time. So, but as you're modeling, I think that 40-20 is the right way to think about the long-term model of this.

Speaker Change: So, but I think as you're modeling.

Speaker Change: <unk> I think that 40 <unk> is the right way to think about the long term model of this.

John Lawrence: Great, thanks. And as you continue to pay down, another initiative obviously is looking at companies with this slow down across the board, I assume a lot of them, companies you might be interested in, at some point, obviously, they're having lower EBIT DOS at these prices, I mean, the environment as well. Absolutely.

Speaker Change: Alright, Thanks, John as you continue to pay down.

Speaker Change: Another initiative, obviously is looking at companies with this.

Speaker Change: Slowdown across the board some a lot of them.

Speaker Change: And as you might be in scan them at some point obviously.

Speaker Change: Obviously, they are having lower ebitdas of each problem at these prices environment as well.

John Lawrence: Absolutely. Absolutely.

Speaker Change: Absolutely absolutely.

John Lawrence: Great. Thanks, guys. Good luck.

Speaker Change: Great. Thanks, guys. Good luck.

Sean: Thanks, Alright, thanks, Sean.

Michael Baker: The next question is from Michael Baker from D.A. Davidson's. Please go ahead.

Sean: The next question is from Michael Baker from D. A Davidson. Please go ahead.

Michael Baker: Okay, great. Thanks. Two questions real quick. Can you talk about your distribution partner's inventory?

Michael Baker: Okay, great. Thanks, two questions real quick can you talk about the.

Speaker Change: Your your distribution partners inventory.

Michael Baker: Where does this stand? How heavy is it today versus where it was three months ago?

Michael Baker: Where where does it stand how heavy is it today versus where it was three months ago.

Michael Baker: And then the second question I'm, just curious on the impact of the election.

Michael Baker: I'm just curious about the impact of the election. Looking back on your data historically, have you...

Speaker Change: Looking back on your data historically have you seen election years have an impact on sales before or is this election may be more contentious and therefore unique because I don't really see it in the macro data and companies are citing it but I'm just wondering if you see that internally and then does that come back therefore after <unk>.

Michael Baker: I wanted to ask you, historically, have you seen election years have an impact on sales before, or is this election maybe more contentious and therefore unique? Because I don't really see it in macro data, and companies are citing it, but I'm just wondering if you see that internally, and then does that come back after elections?

Jesse Weaver: Thank you.

Speaker Change: Elections. Thank you.

Jesse Weaver: Yeah, a great question, Michael. I would say on inventory levels. I mean, they've tended to hang in there where they were at the end of Q4, quite frankly. It's almost like a replenishment of what the out-the-door was. And so, you know, I think part of our guide here, obviously, is just based on what we're seeing and what we're seeing in out-the-door, distribution partners really de-stocking quite a bit here in the back half as they prepare themselves for, you know, really trying to get a read of what the consumer's going to do.

Speaker Change: Yes, Great question, Michael I would say on the inventory levels.

Speaker Change: Tended to hang into where they were at the end of Q4 quite frankly.

Speaker Change: It's almost like a replenishment of what the out the door was and so I think part of our guide here. Obviously is just based on what we're seeing and what we're seeing and out the door.

Speaker Change: Distribution partners really destocking quite a bit here in the back half as they.

Speaker Change: Prepare themselves for really trying to get a read on what the consumer is going to do.

Speaker Change: So I think we've quoted in the past $10 million to $15 million above where they were at the prior year same time and Thats kind of where we were sitting at the end of June in terms of the election and the impact on the consumer I mean, it's a really tough thing to kind of tease out in the data I think the main thing that we're seeing just as all those other things impacting the consumer.

Jesse Weaver: So, you know, in the past, we've quoted, you know, $10 to $15 million above where they were at the prior year, same time, and that's kind of where we were sitting at the end of June.

Michael Baker: In terms of the election, the impact on the consumer, I mean, it's a really tough thing to kind of tease out in the data. I think the main thing that we're seeing is just all those other things impacting the consumer. An uncertain election with a lot of uncertainty in general just impacting consumer confidence. And when consumers need to make large spending decisions, they'll often kind of wait on some of the things that would be impacting their lives to make those decisions.

Michael Baker: Okay, fair enough. Thank you.

Speaker Change: The uncertain election with a lot of uncertainty in general just impacting consumer confidence and when consumers need to make large spend decisions.

Speaker Change: Often kind of wait on some of the things that would be impacting their lives.

Speaker Change: To make those decisions.

Speaker Change: Okay fair enough. Thank you.

Michael Baker: Thanks, Michael.

Matt Stevenson: There are no further questions at this time. I would like to turn the floor back over to Matthew Stevenson for closing comments.

Michael Baker: There are no further questions at this time I would like to turn the floor back over to Matthew Stevenson for closing comments.

Matt Stevenson: All right. Thank you, Sachi, and we appreciate all the questions. Now, turning to slide 19, it underscores why we believe there is a compelling investment narrative surrounding Holley. This market, propelled by automotive enthusiasts, extends beyond a mere past... It's a passion, it's a way of life for a customer.

Matthew Stevenson: Alright. Thank you saw June we appreciate all the questions.

Now turning to slide 19, and underscores why we believe there is a compelling investment narrative surrounding Holly this market propelled by automotive enthusiasts extends beyond mere pastime, it's a passion, it's a way of life for our customers.

Matt Stevenson: We command a vast addressable market approaching $40 billion, and 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 integration. Plus, we are presented with a unique opportunity to forge a new digital frontier that will transform how our consumers and our distribution partners engage with their brands, providing us with a competitive edge and fostering growth.

Speaker Change: We command a vast addressable market approaching $40 billion in Hollywood is at the forefront of the industry with a collection of storied brands that have a legacy of innovation.

Speaker Change: Additionally, our history is marked by successful acquisitions and value creation through strategic integrations.

Speaker Change: Plus we are presented with a unique opportunity to forge new digital frontier that will transform how our consumers and our distribution partners engage with our brands, providing us with competitive edge and fostering growth.

Matt Stevenson: When we emerge from this transformation, we have a clear commitment. We will deliver stable, organic top-line growth of at least 6%. We will maintain 40% gross margins and greater than 20% adjusted EBITDA margins. We will generate sustainable free cash flow, and we will establish 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.

When we emerge from this transformation, we have a clear commitment we will deliver stable organic topline growth of at least 6%, we will maintain a 40% gross margins and greater than 20% adjusted EBITDA margins, we will generate sustainable free cash flow and we will establish a platform that facilitates the unlocking of value in.

<unk> acquisitions.

Speaker Change: The combination of the lower of our automotive enthusiast marketplace and highly distinguished brand portfolio presents an exceptional investment opportunity.

Matt Stevenson: In closing... I wish to express my sincere appreciation to our teammates for their dedication to serving our customers daily, to our remarkable consumers who support our brands, and as well as our distribution partners, many of whom have been integral to our success for decades. I also thank you for your attention today and look forward to providing updates on our progress in subsequent quarters. Thank you, and have a great rest of the day.

Speaker Change: Closing.

Speaker Change: Youre Express my sincere appreciation to our teammates for their dedication to serving our customers daily to a remarkable consumers who support our brands.

Speaker Change: And as well as storage distribution partners, many of whom have been integral to our success for decades.

Speaker Change: I also thank you for your attention today and look forward to Friday, providing updates on our progress in subsequent quarters.

Speaker Change: Thank you and have a great rest of the day.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Speaker Change: Okay.

Operator: ? ? ? ? ? ? ? ? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??

Speaker Change: Yes.

Speaker Change: [music].

Thank you.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Sure.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Uh huh.

Speaker Change: [music].