Q3 2024 Holley Inc Earnings Call
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Operator: Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holley's third quarter 2024 earnings results. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session, and instructions for asking questions will be provided at that time.
Speaker Change: Good morning, ladies and gentlemen, and welcome to the conference call to discuss how these third quarter 2024 earnings results.
Speaker Change: At this time, all participants are in listen only mode.
Speaker Change: Later, we will conduct a question and answer session and instructions for asking questions will be provided at that time.
Operator: We ask that participants limit themselves to one question and one related follow-up during the Q&A period.
Speaker Change: We ask that participants limit themselves to one question and one related follow up during the Q&A period.
Operator: Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Holley. And as a reminder, this call is being recorded and will be made available for future playback.
Speaker Change: Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Holly.
Speaker Change: And as a reminder, this call's being recorded and will be made available for future playback.
Anthony Rozmus: I would now like to introduce your host for today's call, Anthony Rozmus with Investor Relations.
Speaker Change: I would now like to introduce your host for today's call Anthony Rasmus with Investor Relations. Please go ahead.
Matthew Stevenson: Please go ahead. Good morning and welcome to Holly's third quarter 2024 earnings conference call.
Anthony Rasmus: Good morning, and welcome to the Holly third quarter 2024 earnings Conference call. All the call with me today are President and Chief Executive Officer, Matt Stevenson, Chief Financial Officer, Jesse Weaver.
Matthew Stevenson: On the call with me today are President and Chief Executive Officer Matt Stevenson and Chief Financial Officer Jesse Weaver.
Matthew Stevenson: This webcast and the presentation materials, including non-GAAP reconciliations, are available on our investor relations website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our businesses as we see them today and are subject to risk and uncertainties, including the ones described in our SEC filings.
Anthony Rasmus: This webcast and the presentation materials, including non-GAAP reconciliations are available on our Investor Relations website.
Our discussion today includes forward looking statements that are based on our best view of the world.
Anthony Rasmus: All of our businesses as we see them today and are subject to risks and uncertainties, including the ones described in our SEC filings. This morning, We will review our financial results for the third quarter and share our guidance for the fourth quarter and full year 2024 at the conclusion of the prepared remarks, we will open the call up for questions.
Matthew Stevenson: This morning, we will review our financial results for the third quarter and share our guidance for the fourth quarter and full year 2024. At the conclusion of the prepared remarks, we will open the call up for questions.
Matthew Stevenson: With that, I'll turn the call over to CEO Matt Stevenson.
With that I'll turn the call over to CEO, Matt Stevenson.
Anthony Rasmus: Okay.
Matthew Stevenson: Thank you, Anthony, and good morning, everyone. Today, I'm excited to share the progress we've made in Holly's transformation. Your support is crucial as we navigate a consumer environment impacted by persistent inflation. Despite these headwinds, we've made remarkable progress and I'm eager to highlight our achievement. Today we will share more evidence of our transformation, even in a market that often obscures the remarkable work happening within our company. We have built an exceptional leadership team and added talent at various levels, creating a formidable organization poised to drive us towards becoming a multi-billion dollar enthusiast platform. We have consistently demonstrated that placing the right leaders in key positions drives significant progress within our business.
Matt Stevenson: Thank you Anthony and good morning, everyone.
Speaker Change: Today I am excited to share the progress we've made in Hollywood transformation, you're support is crucial as we navigate a consumer environment impacted by persistent inflation concerns. Despite these headwinds we made remarkable progress and I'm eager to highlight our achievements.
Speaker Change: Today, we will share more evidence of our transformation even in a market that often obscures the remarkable work happening within our company.
Speaker Change: We have built an exceptional leadership team and added talent at various levels, creating a formidable organization poised to drive us towards becoming a multibillion dollar enthusiasm platform.
Speaker Change: We have consistently demonstrated that placing the right leaders in key positions drives significant progress within our business.
Matthew Stevenson: A prime example is the outstanding work by our digital and consumer experience. where our direct-to-consumer business has seen substantial year-over-year growth. This success is driven by our ability to capture market share from other manufacturers through creating engaging consumer experiences, effectively merchandising and promoting our products, and leveraging best-in-class digital capabilities. We are also channeling an equal amount of energy into supporting our loyal distribution partners, with the goal of driving their growth in parallel with ours, and winning market share by being the best partner. Balancing channels is crucial. We must meet consumers where they prefer to engage in this omni-channel environment.
Speaker Change: A Prime example is the outstanding work by our digital and consumer experience teams, where our direct to consumer business has seen substantial year over year growth.
Speaker Change: This success is driven by our ability to capture market share from other manufacturers through creating engaging consumer experiences effectively merchandising and promoting our products and leveraging best in class digital capabilities.
Speaker Change: We are also channeling an equal amount of energy into supporting our loyal distribution partners with the goal of driving their growth and parallel with ours and winning market share by being the best partner bound.
Speaker Change: Balancing channels is crucial we watch must meet consumers, where they prefer to engage in this omni channel environment. This includes our distributors third party marketplaces, installers national retailers and our own E Commerce platform.
Matthew Stevenson: This includes our distributors, third-party marketplaces, installers, national retailers, and our own e-commerce platform. Each of these channels presents opportunities for growth and further coordination. As we have shown this year as we build fundamental growth capabilities, we are also maintaining rigorous financial discipline and making meaningful progress on our financial... This includes debt reduction, credit upgrades, and maintaining or improving on revenue conversion even as the market demand has softened. We have made significant strides in operations this year by eliminating non-value added costs, allowing us to either reinvest in the business or improve our bottom line. During this call, we also share more proof points on the progress of our transformation and highlight more of the innovative products that are hitting the market across all four of our consumer verticals.
Speaker Change: Each of these channels presents opportunities for growth and further coordination.
Speaker Change: As we have shown this year as we build fundamental growth capabilities. We are also maintaining rigorous financial discipline and making meaningful progress on our financial goals.
Speaker Change: This includes debt reduction credit upgrades and maintaining or improving on revenue conversion, even as the market demand has softened.
Speaker Change: We have made significant strides in operations this year by eliminating non value added costs, allowing us to either reinvest in the business or improve our bottom line.
Speaker Change: During this call. We also share more proof points on the progress of our transformation and highlight more of the innovative products that are hitting the market across all four of our consumer verticals.
Matthew Stevenson: Now, let's touch on some of the key highlights for the third quarter of 2024 on slide five. Consumer demand in our industry remains soft as post-pandemic trends favoring experiences and services persist. And American consumers tighten their belts due to inflationary costs of household items and essential Additionally, economic volatility, higher interest rates, and geopolitical uncertainties, including this election year, are weighing on consumer confidence. Despite this softer market demand, we have successfully maintained our out-the-door share gains year-to-date. This is a testament to the power of our brands with consumers, our marketing efforts to support distribution partners, and our improved direct-to-consumer marketing capabilities.
Speaker Change: Now, let's touch on some of the key highlights for the third quarter of 2024 on slide five.
Speaker Change: Consumer demand in our industry remains soft that's post pandemic trends favoring experiences and services persist and American consumers tightened their belt student inflationary costs of household items and essentials.
Speaker Change: Additionally, economic volatility higher interest rates and geopolitical uncertainties, including this election year are weighing on consumer confidence.
Speaker Change: Despite the softer market demand, we have successfully maintained our out the door shares gains year to date. This is a testament to the power of our brands with consumers our marketing efforts to support distribution partners and our improved direct to consumer marketing capabilities.
Matthew Stevenson: An example of this is our well-executed marketing calendar during the third quarter. during the event period resulted in a remarkable 110% lift in our direct-to-consumer sales. This success was further bolstered by strong B2B participation, leading to positive uplifts and out-the-door sales for our participating partners. Our solid out-the-door performance relative to market demand is being masked in our reported sales this quarter by a couple of critical factors. First, our major distributors have been normalizing inventory levels due to lower market Second, our unprecedented ability to fulfill demand driven by our improved operational performance has played a meaningful role.
Speaker Change: An example of this is our well executed marketing calendar during the third quarter, which during the event period resulted in a remarkable 110% lift in our direct to consumer sales.
Speaker Change: This success was further bolstered by strong BTB participation, leading to a positive uplift and out the door sales for our participating partners.
Speaker Change: Our solid out the door performance relative to the market demand is being masked in our reported sales this quarter by a couple of critical factors.
Speaker Change: First our major distributors had been normalizing inventory levels due to lower market demand.
Speaker Change: Our unprecedented ability to fulfill demand driven by our improved operational performance has played a meaningful role.
Matthew Stevenson: Our customers have reported that our lead times are effectively three weeks better year over year, allowing them to reduce nearly a month of inventory from the supply chain. The compounding of these two factors impacted our revenue this past year. However, we consciously partnered with distributors to remove slack from the system, supporting sell-out programs to aid them in reducing inventory. We are pleased to report the distributor inventories have normalized, which is a positive step towards stabilized revenue moving forward. Operationally, this quarter, we've continued to make strides, achieving a 55% year-over-year reduction in past dues. Our cost-to-serve initiatives launched over a year ago have saved $2.5 million this quarter and $6.7 million year-to-date.
Speaker Change: Our customers have reported that our lead times are effectively three weeks better year over year, allowing them to reduce the amounts of inventory from the supply chain.
Speaker Change: Compounding of these two factors impacted our revenue this past quarter.
Speaker Change: However, we consciously partnered with distributors removes slack from the system supporting selloff programs to aid them in reducing inventory levels. We.
Speaker Change: We are pleased to report the distributor inventories have normalized which is a positive step towards stabilized revenue moving forward.
Speaker Change: Operationally this quarter, we've continued to make strides achieving a 55% year over year reduction in past due.
Speaker Change: Our cost to serve initiatives launched over a year ago, a save two and a half million this quarter and $6 7 million year to date.
Matthew Stevenson: These savings are supporting year-over-year gross margin expansion, which is strengthening our financial position. We are continually evolving our multi-channel approach to consumer engagement. For Lifestyle Empower Brands, our ambition is to deliver unparalleled consumer experiences in every category. As part of this initiative, we are launching branded experience sites that are significantly boosting engagement and order. Plus, our dynamic events are the cornerstone of our engagement strategy and are designed to directly interact with and entertain enthusiasts. We recently concluded our 2024 event season, attracting over 110,000 attendees to various events nationwide.
Speaker Change: These savings are supported year over year gross margin expansion with us, which is strengthening our financial position.
Speaker Change: We are continually evolving our multichannel approach to consumer engagement.
Speaker Change: For our lifestyle and power brands, our ambition is to deliver unparalleled consumer experiences in every category.
Speaker Change: As part of this initiative, we are launching branded experience sites that are significantly boosting engagement and order growth.
Speaker Change: Our dynamic events are the cornerstone of our engagement strategy are designed to directly interact with an entertaining enthusiasts.
Speaker Change: We recently concluded our 2024 events season, attracting over 110000 attendees to various events nationwide.
Matthew Stevenson: Let's turn to slide. That features the quantitative highlights from the third quarter. Net sales decreased 14.4% to $134 million. Despite the decline in sales, our adjusted gross margins are up 170 basis points year over year at 39 percent, again a testament to our improved operations. However, with volume coming off due to distributor inventory adjustments, our conversion was affected and EBITDA margins were reduced to 16.5%. Free cash flow for the quarter was negative $2.1 million, a decrease of $23.8 million compared to the prior year. Again, a combination of factors drove this result, including a lower volume, but also last year at this time, we were significantly reducing inventory levels from highly inflated levels.
Speaker Change: Let's turn to slide six that features a quantitative highlights from the third quarter net.
Net sales decreased 14, 4% to $134 million. Despite the decline in sales our adjusted gross margins were up 170 basis points year over year at 39% again, a testament to our improved operations.
Speaker Change: However, with volume coming off due to distributor inventory adjustments, our conversion was affected and EBIT margins were reduced to 16, 5%.
Speaker Change: Free cash flow for the quarter was negative $2 1 million, a decrease of $23 8 million compared to the prior year.
Speaker Change: Again, a combination of factors drove this result, including the lower volume, but also last year. At this time, we are significantly reducing inventory levels from highly inflated levels in 2022 and that was tying up a lot of liquidity plus.
Matthew Stevenson: And that was tying up a lot of liquidity. Plus recently we implemented a new accounts payable process that delayed some payments in Q2 that we began to catch up with in Q3.
Speaker Change: Most recently, we implemented a new accounts payable process that delayed some payments in Q2 that we began to catch up with in Q3.
Matthew Stevenson: In the third quarter, we initiated the launch of several key products spanning our brand portfolio and our four principal consumer I'll go into more detail regarding some of these notable innovations in an upcoming slide. As I previously mentioned, the continuous enhancement of our operations is reflected in multiple key performance... By refining our forecasting and demand planning processes, we have achieved a 3.2% increase in the in-stock rates of our top 2,500 products, reduced past dues by over 50%, and improved inventory returns by 0.3 times year over year. To further illustrate our connection with enthusiasts, we continue to elevate our efforts to engage with more consumers and promote our fantastic products.
Speaker Change: In the third quarter, we initiated the launch of several key products spanning our brand portfolio and our four principal consumer verticals I'll go into more detail regarding some of these notable innovations in upcoming slides.
Speaker Change: As I previously mentioned and the continuous enhancement of our operations is reflected in multiple key performance indicators by refining our forecasting and demand planning processes. We have achieved a three 2% increase in the in stock rates of our top 2500 products reduce past dues by over 50% and then improve.
Speaker Change: Improved inventory turns by 0.3 times year over year.
Speaker Change: To further illustrate our connection with enthusiasm we continued to elevate our efforts to engage with more consumers and promote our fantastic products.
Matthew Stevenson: Our LS events continue to gain recognition, and our flagship LS Fest East event had an attendance of approximately 45,000 enthusiasts. up meaningfully from last year. Events such as these, coupled with our focused public relations and their relationships with social. culminated in generating $2 million in media value from this event.
Speaker Change: R. L. S events continued to gain recognition in our flagship L. S. First east event had an attendance of approximately 45000 enthusiastic this year up meaningfully from last year.
Speaker Change: Such as these coupled with our focused public relations campaigns and our relationships with social Influencers culminated in January 2 million and media value from this event.
Matthew Stevenson: Slide 7 offers additional details for those unfamiliar with our famed LS Fest. These events are key to our status as a leading automotive enthusiast platform. LS Fest East, our original event, launched 15 years ago and is a highly created and owned consumer event celebrating everything powered by GM's remarkable LS engine. This event has been crucial in generating substantial content and forging connections with influencers and media. This year, we achieved 6 million social media impressions. 191,000 engagements and an influencer reach of 11 million. This year's event featured participation from over 2,700 vehicles from all our consumer verticals, including domestic muscle, modern truck and off-road, your own import, and safety and racing.
Speaker Change: Slide seven offers additional details for those unfamiliar with their feigned L. S. S. These events are key to our status as a leading automotive enthusiasts platform unless first east. Our original event launched 15 years ago and is a highly creative and on consumer event celebrating everything powered by.
Speaker Change: Jim's remarkable L S engine.
Speaker Change: This event has been crucial in generating substantial content forging connections with Influencers and media.
Speaker Change: This year, we achieved 6 million social media impressions.
Speaker Change: 191000 engagements and an influencer reach of 11 million.
Speaker Change: This year's event featured participation from over 2700 vehicles from all our consumer verticals, including domestic muscle modern truck and off road euro and import and safety and racing.
Matthew Stevenson: LS Fest East continues to be a key driver in the success of Holley, providing a platform to engage with enthusiasts, promote our products, and strengthen the presence of our The event's success is a testament to our commitment to creating unique and engaging experiences for the enthusiasts.
Speaker Change: Alex first east continues to be a key driver in the success of Holly providing a platform to engage with synthes promote our products and strengthen the presence of our brands.
Speaker Change: That event success is a testament to our commitment to creating unique and engaging experiences for the enthusiast.
Matthew Stevenson: On the left of slide 8, we show the three main principles that guide our organization. These principles help us focus on four key areas shown on the right. The first area is our commitment to our team members, ensuring Holly is a great place to The second area is the engagement with our customers, prioritizing and appreciating all channels, including our amazing base of enthusiasts as well as our distribution. We are always exploring ways to expand and enhance our sales channels to engage a wider group of enthusiasts through an omni-channel approach. The third area is improving our operations by eliminating non-value-added costs and aligning inventory with marketing.
Speaker Change: On the left of slide eight we show the three main principles that guide our organization.
Speaker Change: These principles help us focus on four key areas shown on the right there.
Speaker Change: The first area is our commitment to our team members, ensuring Holly is a great place to work.
Speaker Change: Second area is engagement with our customers prioritizing and appreciating all channels, including our amazing base of enthusiasts as well as our distribution partners.
Speaker Change: We are always exploring ways to expand and enhance our sales channels to engage the wider group of enthusiasts through an omnichannel approach.
through an omni-channel approach.
Speaker Change: The third area is improving our operations by eliminating non-value added costs and aligning inventory with market demand.
Matthew Stevenson: We also aim to provide the best customer experience for both enthusiasts and distributors. Finally, the last key area is optimizing your acquisitions. Holley has acquired several amazing brands and businesses in recent years, and it's important to nurture their unique traits for success.
Speaker Change: We also aim to provide the best customer experience for both enthusiasts and distribution partners.
Speaker Change: Finally, the last key area is optimizing our acquisitions. Holley has acquired several amazing brands and businesses in recent years, and it's important to nurture their unique traits for success.
Matthew Stevenson: Slide 9 highlights the progress we made in the third quarter on the Keys to Unlocking Transformative There have been significant strides in developing a high-performing All key leaders are in place in driving increased professionalism and effective We executed restructuring to further deepen capabilities within the organization and made numerous strategic hires at the second and third levels of leadership. Also, we conducted a Great Place to Work survey this past quarter and are using the results to elevate our company culture. Our efforts around digital modernization and consumer experience continue to drive out performance. Our brand experience sites for key lifestyle and power brands in our portfolio have demonstrated approximately 20% of incremental growth in our direct-to-consumer channel for those brands.
Speaker Change: Slide 9 highlights the progress we made in the third quarter on the keys to unlocking transformative growth.
Speaker Change: There have been significant strides in developing a high-performing team. All key leaders are in place and driving increased professionalism and effectiveness. We executed restructuring to further deepen capabilities within the organization and made numerous strategic hires at the second and third levels of leadership.
Speaker Change: Also, we conducted a Great Place to Work survey this past quarter and are using the results to elevate our company culture.
Speaker Change: Our efforts around digital modernization and consumer experience continue to drive out performance.
Speaker Change: Our brand experience sites for key lifestyle and power brands in our portfolio have demonstrated approximately 20% of incremental growth in our direct-to-consumer channel for those brands. These sites, along with other improvements in SEO, have significantly improved marketing efficiency through increased organic traffic.
Matthew Stevenson: These sites, along with other improvements in SEO, have significantly improved marketing efficiency through increased organic traffic. As we already discussed, our well-executed marketing calendar was a great success, which racked consumer sales up by 110% during the event. Additionally, we are spending a lot of time on our customer product. And we recently completed our CRM data consolidation, setting the stage for activations in Q4, as well as finalize our product information management. to serve as a single source of truth of product data for our channel. In terms of B2B sales capabilities, we onboarded R&R to support growth among our top 50 B2B partners.
Speaker Change: As we already discussed, our well-executed marketing calendar was a great success, with direct-to-consumer sales up by 110% during the event.
Speaker Change: Additionally, we are spending a lot of time on our customer and product data.
Speaker Change: And we recently completed our CRM data consolidation, setting the stage for activations in Q4, as well as finalize our product information management system to serve as a single source of truth of product data for our channels.
Speaker Change: In terms of B2B sales capabilities, we onboarded R&R to support growth among our top 50 B2B partners.
Matthew Stevenson: retailers, e-tailers, national retailers, and wholesale distributors. R&R is the leading third party sales organization in the automotive performance. R&R has been instrumental in driving product data adoption, which will improve the organic growth of existing products. We have also engaged in joint planning with our top customers to drive partnership and growth. We are developing standardized tracking tools to drive customer level accountability. Our product management and innovation efforts continue to drive progress. Our product launch groups and phase gate system have increased new product revenue by 25% this year through better product adoption with distributors. We also formalized B2B product sales training for our Tier 1 products and invested in workflow management tools to enhance efficiency in new launches.
including e-tailers, national retailers, and wholesale distributors.
Speaker Change: R&R is a leading third-party sales organization in the automotive performance aftermarket.
Speaker Change: R&R has been instrumental in driving product data adoption, which will improve the organic growth of existing products.
Speaker Change: We have also engaged in joint planning with our top customers to drive partnership and growth. We are developing standardized tracking tools to drive customer level accountability.
Our product management and innovation efforts continue to drive progress.
Speaker Change: Our product launch groups and phase gate system have increased new product revenue by 25% this year through better product adoption with distributors.
Speaker Change: We also formalized B2B product sales training for our Tier 1 products and invested in workflow management tools to enhance efficiency in new launches
Matthew Stevenson: The strategic pricing initiatives we put in place are also yielding positive results. We have automated competitive pricing updates in our top 500 SKUs and are developing good, better, best pricing strategies for major categories. We have implemented targeted pricing changes for psychological price movements on approximately 1,500 SKUs. In our experience, seeing positive results from that as well as our 80-20 pricing methodology. Additionally, MAP enforcement is now in place for over 20,000 SKUs, which is 12 times more than it was just a short time ago. This is key.
Speaker Change: The strategic pricing initiatives we put in place are also yielding positive results.
Speaker Change: We have automated competitive pricing updates in our top 500 SKUs and are developing good better best pricing strategies for major categories
Speaker Change: We have implemented targeted pricing changes for psychological price movements on approximately 1,500 SKUs.
Speaker Change: Seeing positive results from that as well as our 80-20 pricing methodology
Speaker Change: Thank you for watching. Please subscribe to our channel. And if you like our videos, please give us a thumbs up. Also, check out our other videos over here. And as always, thanks for watching.
Speaker Change: Additionally, MAP enforcement is now in place for over 20,000 SKUs, which is 12 times more than it was just a short time ago. This is key to earning trust with distributors and keeping everyone on a level playing field.
Matthew Stevenson: to earning trust with distributors and keeping everyone on a level playing In summary, we are continuing to make progress across all keys to unlocking transformative growth for Hollywood. And as you will see on slide 10, we have highlighted some proof points on our transformation, specifically in four areas. Our digital and consumer marketing initiatives have delivered direct-to-consumer sales that are up 16% year-over-year. Additionally, our new standalone brand experience websites are providing over 20% growth in sales. Second, within our B2B strategy, we are partnering more closely than ever with distributors. Those who have partnered with us on our well-executed marketing calendar events have seen a 10% lift in their out-the-door sales.
Speaker Change: In summary, we are continuing to make progress across all keys to unlocking transformative growth for Holley.
Speaker Change: And as you will see on slide 10, we have highlighted some proof points on our transformations, specifically in four areas.
The first
Speaker Change: Our digital and consumer marketing initiatives have delivered direct-to-consumer sales that are up 16% year-over-year.
Speaker Change: Additionally, our new stand-alone brand experience websites are providing over 20% growth in sales.
Speaker Change: Second, within our B2B strategy, we are partnering more closely than ever with distributors.
Speaker Change: Those who have partnered with us on our well-executed marketing calendar events have seen a 10% lift in their out-the-door sales.
Matthew Stevenson: Plus, over the past six months, we have strategically enhanced our National Retail Channel support resulting in an impressive 12% year-over-year growth. Third, our product innovations, new product phase gate system, and enhanced execution on product launches have resulted in a 133% improvement. and revenue per new product launch year over year, driving overall new product revenue up 25%. Our strategy of organizational changes, innovative products, and targeted marketing is driving significant growth in some of our power brands, like ADS, Stilo, Dynan, APR, and Simpsons. Some seeing over 30% increase year-to-date. These points provide tangible evidence that our transformation is working despite being masked by some of the overall market dynamics I commented on earlier.
Speaker Change: Plus, over the past six months we have strategically enhanced our National Retail Channel Support Team.
resulting in an impressive 12% year-over-year growth.
Speaker Change: Third, our product innovations, new product phase gate system, and enhanced execution on product launches have resulted in a 133% improvement.
Speaker Change: and revenue per new product launch year-over-year, driving overall new product revenue up 25%.
Speaker Change: Our strategy of organizational changes, innovative products, and targeted marketing is driving significant growth in some of our power brands like ADS, Stilo, Dynan, APR, and Simpson.
with some seeing over 30% increase year-to-date.
Speaker Change: These points provide tangible evidence that our transformation is working, despite being masked by some of the overall market dynamics I commented on earlier.
Thank you for watching!
Matthew Stevenson: Let's turn our attention to slide 11. which highlight some of the exciting new products we have launched or are planning to launch across our various consumer versions. Starting with domestic muscle, we have three standout products. First, we have the Sniper II EFI Bundle with the Hyper Spark Ignition This bundle offers significant retail savings and allows users to turn their iOS or Android device into a self-tuning and monitoring interface without the need for a laptop. Next is the Small Block Chevy Hi-Ram Intake Manifold. These manifolds feature a modern race-inspired look that complements other EFI and accessory drive products for small block Chevy engine applications.
Let's turn our attention to slide 11.
Speaker Change: Which highlights some of the exciting new products we have launched or are planning to launch across our various consumer verticals
Starting with domestic muscle, we have three standout products.
Speaker Change: First, we have the Sniper II EFI Bundle with the Hyper Spark Ignition System.
Speaker Change: This bundle offers significant retail savings and allows users to turn their iOS or Android device into a self-tuning and monitoring interface without the need for a laptop.
Next is the Small Block Chevy Hi-Ram Intake Manifold.
Speaker Change: These manifolds feature a modern race-inspired look that complements other EFI and accessory drive products for small block Chevy engine applications.
Matthew Stevenson: Finally, under the domestic muscle vertical, we have the Ford mid-mount accessory drive. Our General Motors LS engine platform solutions contribute significantly to our revenue. Our goal is to simplify engine swaps for enthusiasts across various platforms. Our new system designed for small block Ford engines boosts horsepower with OEM quality and styling in a compact design. This leaves room for additional upgrades like a turbocharger or supercharger. Our customers have been delighted with our existing LS mid-mount solutions. We anticipate the forward solution will be equally successful. Moving on to modern truck and off-road, which is a large focus of growth for us, we have the Flowmaster Signature.
Speaker Change: Finally, under the domestic muscle vertical, we have the Ford mid-mount accessory drive system.
Speaker Change: Our General Motors LS engine platform solutions contribute significantly to our revenue.
Speaker Change: Our goal is to simplify engine swaps for enthusiasts across various platforms.
Speaker Change: Our new system designed for small block Ford engines boost horsepower with OEM quality and styling in a compact design.
Speaker Change: This leaves room for additional upgrades like a turbocharger or supercharger.
Speaker Change: Our customers have been delighted with our existing LS mid-mount solutions and we anticipate the forward solution will be equally successful.
Speaker Change: Moving on to modern truck and off-road, which is a large focus of growth for us, we have the Flowmaster Signature Series.
Matthew Stevenson: This premium exhaust series offers increased performance of up to 21 horsepower and 26 foot-pounds of torque on certain applications. Clean, high-end look, with brushed 304 stainless steel, and a lifetime warranty made right here in the USA. This new Flowmaster Signature Series meets consumer demands for high-quality offerings lined with the increasing upscale positioning and pricing of full-size trucks. Next is the Behr Big Claw. We are really excited about this product, which is focused on all major late-model, full-size pickup platforms. The value proposition here is fantastic, as it enables consumers to swap to bigger brakes using the stock caliper.
Speaker Change: This premium exhaust series offers increased performance of up to 21 horsepower and 26 foot-pounds of torque on certain applications.
Speaker Change: A clean, high-end look with brushed 304 stainless steel and a lifetime warranty made right here in the USA.
Speaker Change: This new Flowmaster Signature Series meets consumer demands for high quality offerings lined with the increasing upscale positioning and pricing of full-size trucks.
Speaker Change: Next is the Bear Big Claw. We are really excited about this product which is focused on all major late model full-size pickup platforms.
Speaker Change: The value proposition here is fantastic, as it enables consumers to swap to bigger brakes using the stock caliper.
Matthew Stevenson: Whether you're looking for improved stopping distances because you tow a lot or because you added bigger tires, these brakes will improve stopping distance and performance at a fraction of the cost of a full big brake. They are easy to install, require no brake bleeding, and have easy to get replacement pads. Another great product for full and mid-sized trucks is the ADS Mesa Shop. These shocks are available for a wide range of custom and direct-fit applications. They enhance handling capabilities, improve ride quality, and offer competition-inspired performance in an easy-to-install package. Plus they are made in the USA at our Tucson, Arizona facility.
Speaker Change: Whether you are looking for improved stopping distances because you tow a lot or because you added bigger tires, these brakes will improve stopping distance and performance at a fraction of the cost of a full big brake kit.
Speaker Change: They are easy to install, require no brake bleeding, and have easy to get replacement pads.
Speaker Change: Another great product for full and mid-sized trucks is the ADS Mesa Shocks.
Speaker Change: These shocks are available for a wide range of custom and direct fit applications. They enhance handling capabilities, improve ride quality, and offer competition-inspired performance in an easy-to-install package. Plus they are made in the USA at our Tucson, Arizona facility.
Matthew Stevenson: In the euro and import vertical, we have the new Dyning carbon fiber cold air intake for the V8 found in the BMW M550 and 850. The intake offers power gains of 17 horsepower and 18 foot-pounds of torque without any additional modification. Next is the APR Cat-Back Exhaust System for the very popular Volkswagen Mk8 Golf R. This cat-back system improves turbocharger response with peak gains of horsepower and torque at all four wheels. Precision bracketry ensures professional-grade installation at any skill level. Additionally, we have the Dynamic Performance Control Unit for late model BMWs equipped with the S58 engine.
Speaker Change: In the Euro and import vertical, we have the new Dyning carbon fiber cold air intake for the V8 found in the BMW M550 and 850. The intake offers power gains of 17 horsepower and 18 foot-pounds of torque without any additional modifications.
Speaker Change: Next is the APR Cat-Back Exhaust System for the very popular Volkswagen Mk8 Golf R. This cat-back system improves turbocharger response with peak gains of horsepower and torque at all four wheels.
Precision bracketry ensures professional-grade installation at any skill level.
Speaker Change: Additionally, we have a Dynamic Performance Control Unit for late model BMWs equipped with the S58 engine.
Matthew Stevenson: This unit offers Bluetooth connectivity and control via a free iOS or Android app with five adjustable power levels. It provides peak gains of up to 155 horsepower and 163 foot-pounds of torque on select applications. Finally, in the safety vertical, we have the new Stilo Venti WRX helmet. These helmets engineered for extreme conditions offer top performance and protection. With a 34% increase in the field of view, they ensure you never miss a detail. Next is the Simpsons Adventure Motorcycle Helmet. This exciting new line is targeted at enthusiasts who own an adventure motorcycle. These new helmets offer exciting attributes with a wide range of color options, and this is Simpsons' first helmet series in the growing adventure segment of the motorcycle market, offering a fantastic growth opportunity for the brand.
Speaker Change: This unit offers Bluetooth connectivity and control via a free iOS or Android app with five adjustable power levels. It provides peak gains of up to 155 horsepower and 163 foot-pounds of torque on select applications.
Speaker Change: Finally, the safety vertical, we have the new Stilo Venti WRX helmets.
Speaker Change: These helmets engineered for extreme conditions offer top performance and protection. With a 34% increase in the field of view, they ensure you never miss a detail.
Speaker Change: Next is the Simpson Adventure Motorcycle Helmet. This exciting new line is targeted at enthusiasts who own adventure motorcycles.
Speaker Change: These new helmets offer exciting attributes with a wide range of color options and this is Simpsons first helmet series in the growing adventure segment of the motorcycle market offering a fantastic growth opportunity for the brand.
Matthew Stevenson: And last but not least, the Stilo ST-6. The ST-6 is a successor to the highly successful ST-5 and is ready to set new standards in motorsport helmet technology and use. Mrs. Feldman offers improvements in energy management, safety, and performance and meets the latest FIA regulations. These exciting new products are a testament to our commitment to innovation and excellence. We are confident they will contribute to Holley's growth and success. Now...
Speaker Change: And last but not least, the Stilo ST-6. The ST-6 is a successor to the highly successful ST-5 and is ready to set new standards in motorsport helmet technology and user experience.
Speaker Change: This helmet offers improvements in energy management, safety, and performance and meets the latest FIA regulation changes.
Speaker Change: These exciting new products are a testament to our commitment to innovation and excellence. We are confident they will contribute to Holley's growth and success.
Jesse Weaver: I'd like to turn the presentation over to Jesse, who will discuss our Q3 results in more detail in the outlook for the remainder of 2020. Thank you, Matt, and good morning, everyone. Turning to slide 13, I'd like to begin by providing an update on the progress we've made on our four financial priorities year-to-date, which include restoring historical profitability, improving free cash flow, optimizing working capital, and reducing debt. First, while EBITDA margins were challenged from fixed cost yield leverage from lower sales in the quarter, we continue to make excellent progress restoring historic profitability, and working towards our long-term goal of 40% gross margin and at least 20% EBITDA margin on an annualized basis.
Now?
Speaker Change: I'd like to turn the presentation over to Jesse, who will discuss our Q3 results in more detail and the outlook for the remainder of 2024.
Thank you, Matt, and good morning, everyone.
Jesse Weaver: Turning to slide 13, I'd like to begin by providing an update on the progress we've made on our four financial priorities year-to-date, which include restoring historical profitability, improving free cash flow, optimizing working capital, and reducing debt.
Jesse Weaver: First, while EBITDA margins were challenged from fixed cost D leverage from lower sales in the quarter, we continue to make excellent progress restoring historic profitability and working towards our long-term goal of 40% gross margin and at least 20% EBITDA margin on an annualized basis.
Jesse Weaver: Our progress was demonstrated in the quarter as we realized another $2.5 million from our cost-to-serve efforts, bringing our year-to-date total to $6.7 million, surpassing our expectations for Q3. I'm proud of the team's efforts on restoring profitability over the last two years. Since I joined, the team has been able to achieve over $33 million in cost savings, which is worth more than 500 basis points in EBITDA. While our free cash flow is down significantly in the quarter, we have delivered strong free cash flow of $40 million year-to-date. And after adjusting for the timing impacts related to changes in our accounts payable process, free cash flow would have been roughly $4 million for the quarter.
Jesse Weaver: Our progress was demonstrated in the quarter, as we realized another $2.5 million from our cost-to-serve efforts, bringing our year-to-date total to $6.7 million, surpassing our expectations for Q3.
Speaker Change: I'm proud of the team's efforts on restoring profitability over the last two years. Since I joined, the team has been able to achieve over $33 million in cost savings, which is worth more than 500 basis points in EBITDA margin.
Speaker Change: While our free cash flow is down significantly in the quarter, we have delivered strong free cash flow of $40 million year-to-date. And after adjusting for the timing impacts related to changes in our accounts payable process, free cash flow would have been roughly $4 million for the quarter.
Jesse Weaver: Free cash flow management is a key organizational focus of our leadership. And as we discussed during our Q2 call, in anticipation of a potentially challenging back half, we implemented furloughs that generated cost savings of $1.2 million in the third quarter. Moving on to our working capital, we once again managed inventories well in the quarter, which is a continuation of the trend we have seen throughout 24. Inventory hit near levels we saw last quarter and was reduced by roughly $28 million year over year to $179 million. Inventory turns also improved to 2.2 times at the end of the third quarter in 2024 versus 1.9 times a year ago at the end of the third quarter in 2023, and it's held steady quarter over quarter despite a challenging top line coupled with continued improvement in our in-stock levels on top-performing products.
Speaker Change: Free cash flow management is a key organizational focus of our leadership team.
Speaker Change: And as we discussed during our Q2 call, in anticipation of a potentially challenging back half, we implemented furloughs that generated cost savings of $1.2 million in the third quarter.
Speaker Change: Moving on to our working capital, we once again managed inventories well in the quarter, which is a continuation of the trend we have seen throughout 24. Inventory helped near levels we saw last quarter and was reduced by roughly $28 million year over year to $179 million.
Speaker Change: Inventory turns also improved to 2.2 times at the end of the 3rd quarter in 24 versus 1.9 times a year ago at the end of the 3rd quarter in 23.
Speaker Change: and has held steady quarter-over-quarter despite a challenging top line coupled with continued improvement in our in-stock levels on top-performing products.
Jesse Weaver: Finally, we are committed to decreasing our debt and strengthening our balance sheet, which was recognized again earlier in the quarter by Moody's. Moody's ratings upgraded Holley's corporate family rating to B2 from B3. And overall, I'm proud of this team's efforts on making continuous progress on our financial priorities, even as we operate in this challenging macro environment. Regarding the macroenvironment, the September inflation figures increased sequentially but showed a slight decrease from August on a year-over-year basis. What is distinctive about our current position in the economic cycle is that the effects of the COVID stimulus have largely dissipated, leaving consumers experiencing inflation.
Speaker Change: Finally, we are committed to decreasing our debt and strengthening our balance sheet, which was recognized again earlier in the quarter by Moody's. Moody's ratings upgraded Holley's corporate family rating to B2 from B3.
Speaker Change: And overall, I'm proud of this team's efforts on making continuous progress on our financial priorities, even as we operate in this challenging macro environment.
Speaker Change: Regarding the macro environment, the September inflation figures increase sequentially, but showed a slight decrease from August on a year over your basis.
Speaker Change: What is distinctive about our current position in the economic cycle is that the effects of the COVID stimulus have largely dissipated, leaving consumers experiencing inflation fatigue.
Jesse Weaver: Due to the prolonged and widespread impact of inflation, we observe that all consumer groups are becoming more cautious with their purchases and emphasizing value. Furthermore, it is important to note that not all consumer spending is consistent. There is notable strength in areas such as services and experiences, which continue to outperform spending on discretionary goods. Historically, an increase in spending on services and experiences comes at the expense of good spending. Combined with deceleration in wage growth, rising household debt, and delinquency expectations reaching their highest levels since April 2020, pressure remains on discretionary goods spending, adversely affecting our target enthusiasts.
Speaker Change: Due to the prolonged and widespread impact of inflation, we observe that all consumer groups are becoming more cautious with their purchases and emphasizing value.
Speaker Change: Furthermore, it is important to note that not all consumer spending is consistent. There is notable strength in areas such as services and experiences, which continue to outperform spending on discretionary goods.
Speaker Change: Historically, an increase in spending on services and experiences comes at the expense of good spending.
Speaker Change: Combined with deceleration in wage growth, rising household debt, and delinquency expectations reaching their highest levels since April of 2020, pressure remains on discretionary goods spending, adversely affecting our target enthusiasts.
Jesse Weaver: In the performance aftermarket, while our estimates suggest the overall market has declined roughly 4-5% year-to-date, the out-the-door sales of highly-performance brands at our distribution partners is only down 3%, suggesting that our partnership efforts with our distribution partners and marketing support is allowing us to gain share during this time period. While the market softness had an impact on the overall quarter, the declines in the quarter were magnified by multiple factors that I'll cover in detail in a few slides.
Speaker Change: In the performance aftermarket, while our estimates suggest the overall market has declined roughly 4-5% year-to-date, the out-the-door sales of Holley Performance brands at our distribution partners is only down 3%.
Speaker Change: suggesting that our partnership efforts with our distribution partners and marketing support is allowing us to gain share during this time period.
Speaker Change: While the market softness had an impact on the overall quarter, the declines in the quarter were magnified by multiple factors that I'll cover in detail in a few slides.
Jesse Weaver: First, let's turn to slide 14, where we've highlighted some of our key financial metrics. Net sales in the third quarter were $134 million compared to $156.5 million in the same period a year ago. Well, at the low end, this result is in line with the guidance we provided previously. And as I'll discuss further momentarily, this top-line headwind was largely the result of distribution partner inventory adjustment and reduced benefits from past-due burndown in the quarter versus the same quarter last year. Gross margin for the quarter was 39%, up from 37.3% a year ago. This improvement is due to better freight cost, reduced purchasing price variance, warranty improvements, and fewer write-downs from strategic product rationalization.
Speaker Change: First, let's turn to slide 14, where we've highlighted some of our key financial metrics for the quarter.
Speaker Change: Net sales in the third quarter were $134 million compared to $156.5 million in the same period a year ago.
Speaker Change: Well, at the low end, this result is in line with the guidance we provided previously. And as I'll discuss further momentarily, this top-line headwind was largely the result of distribution partner inventory adjustment and reduced benefits from past-due burndown in the quarter versus the same quarter last year.
Speaker Change: Gross margin for the quarter was 39%, up from 37.3% a year ago. This improvement is due to better freight costs, reduced purchasing price variance, warranty improvements, and fewer write-downs from strategic product rationalization.
Jesse Weaver: These efforts protected against margin compression on softer sails, resulting in a 170 basis point margin expansion. SG&A, including R&D expenses for the third quarter, was $34.7 million, versus $35 million from the prior year. The decrease in SG&A was predominantly driven by the $1.2 million furlough savings, offset by $1 million of one-time advisory costs to execute the Strategic Transformation Initiative. Net loss in the third quarter of 24 was $6.3 million, compared to net income of $800,000 in the same period a year ago. Adjusted net loss was $500,000 in the third quarter of 24, compared to adjusted net income of $3.5 million a year ago.
Speaker Change: These efforts protected against margin compression on softer sails, resulting in a 170 basis point margin expansion.
Speaker Change: SG&A, including R&D expenses for the third quarter, was $34.7 million versus $35 million from the prior year.
Speaker Change: The decrease in SG&A was predominantly driven by the $1.2 million furlough savings offset by $1 million of one-time advisory costs to execute the Strategic Transformation Initiatives.
Speaker Change: Net loss in the third quarter of 24 was $6.3 million compared to net income of $800,000 in the same period a year ago. Adjusted net loss was $500,000 in the third quarter of 24 compared to adjusted net income of $3.5 million a year ago.
Jesse Weaver: We also report adjusted non-GAAP results in order to better focus on the operational performance of the company during the period. And despite a continued challenging macro environment, we were able to deliver adjusted EBITDA in the third quarter of $22.1 million with adjusted EBITDA margin of 16.5%.
Speaker Change: We also report adjusted non-GAAP results in order to better focus on the operational performance of the company during the period.
Speaker Change: and despite a continued challenging macro environment, we were able to deliver adjusted EBITDA in the third quarter of $22.1 million with adjusted EBITDA margin of 16.5%.
Jesse Weaver: Slide 15 explains the third quarter net sales decline. Several factors contributed to the lower sales compared to the same period last year. Overall consumer demand affected our distribution partner sales, but our marketing support, distribution efforts, and D2C performance provided some meaningful offsets. However, headwinds from higher sales from rationalized SKUs last year, a one-time sale on an OEM program in 23, reduced tailwinds from past dues, and the distribution partner inventory adjustments that Matt discussed earlier in the call led to much lower third quarter sales. Based on conversations with distribution partners and our own internal analysis, it appears that we are approaching minimum inventory levels at our distribution partners, and our collaborative efforts to drive out-the-door sales are expected to result in a more predictable revenue trend going forward, with fewer significant impacts from inventory adjustments.
Slide 15 explains the third quarter net sales decline.
Speaker Change: Several factors contributed to the lower sales compared to the same period last year.
Speaker Change: Overall consumer demand affected our distribution partner sales, but our marketing support, distribution efforts, and D2C performance provided some meaningful offsets.
Speaker Change: However, headwinds from higher sales from rationalized SKUs last year, a one-time sale on an OEM program in 2023, reduced tailwinds from past dues, and the distribution partner inventory adjustments that Matt discussed earlier in the call led to much lower third quarter sales this year.
Speaker Change: Based on conversations with distribution partners and our own internal analysis, it appears that we are approaching minimum inventory levels at our distribution partners.
Speaker Change: and our collaborative efforts to drive out-the-door sales are expected to result in a more predictable revenue trend going forward, with fewer significant impacts from inventory adjustments.
Jesse Weaver: As shown on page 16, we've generated $40 million of free cash flow year-to-date. After several quarters of delivering strong free cash flow, we experienced slightly negative free cash flow in the third quarter. But after adjusting for $5.9 million due to an accounts payable process change in the second quarter, we would have generated roughly $4 million of free cash flow in the third quarter, with year-to-date cash flow being unchanged. Moving to the next slide, we remain dedicated to reducing our leverage. We ended the third quarter with a net leverage ratio of 4.25 times, significantly lower than our five times covenant and the 4.89 times in the third quarter of 23, thanks to our execution on our financial priorities.
Speaker Change: As shown on page 16, we've generated $40 million of free cash flow year-to-date.
Speaker Change: After several quarters of delivering strong free cash flow, we experienced slightly negative free cash flow in the third quarter. But after adjusting for $5.9 million due to an accounts payable process change in the second quarter, we would have generated roughly $4 million of free cash flow in the third quarter, with year-to-date cash flow being unchanged.
Moving to the next slide.
Speaker Change: We remain dedicated to reducing our leverage. We ended the third quarter with a net leverage ratio of 4.25 times, significantly lower than our 5 times covenant and the 4.89 times in the third quarter of 2023, thanks to our execution on our financial priorities.
Jesse Weaver: We remain focused on improving our financial health through improvements in business performance. Last quarter we spoke about S&P's upgrade to our debt and credit ratings, and in August Moody's also recognized our improved financial position with their ratings upgrade. The recent upgrades from both Moody's and S&P affirm that the strides we've made operationally are flowing through to our financial performance and are acknowledged by leading rating agencies.
Speaker Change: We remain focused on improving our financial health through improvements in business performance. Last quarter, we spoke about S&P's upgrade to our debt and credit ratings, and in August, Moody's also recognized our improved financial position with their ratings upgrade.
Speaker Change: The recent upgrades from both Moody's and S&P affirm that the strides we've made operationally are flowing through to our financial performance and are acknowledged by leading rating agencies.
Jesse Weaver: Now I'd like to turn to slide 18 to discuss our outlook for the fourth quarter and the full year. For the full year of 24, we are updating our guidance to align around the lower end of the previous outlook we shared with you during our Q2 call. This is due to the continued softness in the overall performance aftermarket. We now expect net sales to be in the range of $595 million to $605 million and are modifying our adjusted EBITDA to be in a range of $115 million to $120 million. And as noted earlier, we remain committed to de-leverage, but given the revision to the Guide, we anticipate year-end leverage to be slightly higher than previously discussed and in the range of 4.15x and 4.35x by the end of the year, but will remain well below our 5x covenant.
Speaker Change: Now I'd like to turn to slide 18 to discuss our outlook for the fourth quarter and the full year.
Speaker Change: For the full year of 24, we are updating our guidance to align around the lower end of the previous outlook we shared with you during our Q2 call. This is due to the continued softness in the overall performance aftermarket.
Speaker Change: We now expect net sales to be in the range of $595 million to $605 million and are modifying our adjusted EBITDA to be in a range of $115 million to $120 million.
Speaker Change: And as noted earlier, we remain committed to de-leverage, but given the revision to the guide, we anticipate year-end leverage to be slightly higher than previously discussed, and in the range of 4.15x and 4.35x by the end of the year, but will remain well below our 5x covenant.
Jesse Weaver: Our full year net sales and adjusted EBITDA guidance implies fourth quarter guidance ranges of $133 million to $143 million for net sales and $24 to $29 million for adjusted EBITDA. Our transformative efforts have enabled us to gain share even in a challenging environment where consumers facing inflation fatigue and prioritized discretionary spending on services and experience. We remain confident in our enthusiast customer base and believe that demand trends will stabilize in the near term. As these trends normalize, Holley will be well positioned to leverage growth initiatives within our transformation strategy while continuing to achieve our financial objectives of maintaining strong margins, generating significant free cash flow, and reducing net leverage.
Speaker Change: Our full year net sales and adjusted EBITDA guidance implies fourth quarter guidance ranges of $133 million to $143 million for net sales and $24 million to $29 million for adjusted EBITDA.
Thanks for watching!
Speaker Change: Our transformative efforts have enabled us to gain share even in a challenging environment where consumers facing inflation fatigue and prioritize discretionary spending on services and experiences.
Speaker Change: We remain confident in our enthusiast customer base and believe that demand trends will stabilize in the near term.
Speaker Change: As these trends normalize, Holley will be well-positioned to leverage growth initiatives within our transformation strategy while continuing to achieve our financial objectives of maintaining strong margins, generating significant free cash flow, and reducing net leverage.
Operator: This concludes our prepared remarks, we would now like to open up the line for questions. Thank you.
Speaker Change: This concludes our prepared remarks and we would now like to open up the line for questions.
Operator: Ladies and gentlemen, at this time you may register your desire to ask a question by pressing star 1 on your phone. Once you've been called upon, please make sure you're not on mute and proceed with your question.
Speaker Change: Thank you. Ladies and gentlemen, at this time you may register your desire to ask a question by pressing star 1 on your phone. Once you've been called upon, please make sure you're not on mute and proceed with your question.
Thanks for watching!
Christian Carlino: Our first question comes from Christian Carlino with J.P. Morgan. Hi, good morning. Thanks for taking our question.
Speaker Change: Our first question comes from Christian Carlino with J.P. Morgan. Please proceed with your question.
Thanks for watching!
Hi, good morning. Thanks for taking our question.
Speaker Change: Good morning, could you speak to your direct and indirect exposure to China and maybe what percentage of your COGS are you currently paying tariffs on from the last round?
Christian Carlino: Could you speak to your direct and indirect exposure to China and maybe what percentage of your causes are you currently paying tariffs on from the last round? Yeah, thanks for the question, Christian. You know, as part of our cost to serve initiative that now is over a year old, we've been focusing on inbound and outbound freight, and a big piece of that inbound, of course, is looking at total landed costs, which included terrorists. And so we've been working on, you know, resourcing and reducing terrorists now for over a year. So we think we're in pretty good shape, and we don't see any significant impacts going forward.
Speaker Change: Yeah, thanks for the question Christian, you know as part of our cost to serve initiative that now is over a year old We've been focusing on
Speaker Change: Inbound and outbound freight and a big piece of that inbound of course is looking at total landed costs which included Terrorists and so we've been working on, you know, resourcing and reducing terrorists now for over a year So we think we're in pretty good shape and we don't see any significant impacts going forward and you know We look forward to seeing how you know, the policies actually get implemented But right now we feel like we're in a good direction with the initiatives we've been working on for over a year
Christian Carlino: And, you know, we look forward to seeing how, you know, the policies actually get implemented. But right now, we feel like we're in a good direction with the initiatives we've been working on for over a year.
Christian Carlino: Got it, that's helpful. And understanding it's a small channel for you, you talked about national retailer sales up 12%. I think the some of the bigger parts retailers have talked about discretionary sales being down mid single digits, which aligns with your view of the market.
Speaker Change: Got it. That's helpful. And understanding it's a small channel for you, you talked about national retailer sales up 12%. I think some of the bigger parts retailers have talked about discretionary sales being down mid-single digits, which aligns with your view of the market.
Christian Carlino: So I guess, could you talk about how much of that do you think is, you know, increased shelf space and better brand positioning with the retailers versus just expanding the number of doors and boxes that you're selling into? Yeah, I mean, because we think in the future, it'll be a significant area of growth for us. You know, the sales cycles there are a little longer.
Speaker Change: So I guess, could you talk about how much of that do you think is, you know, increased shelf space and better brand positioning with the retailers versus just expanding the number of doors and boxes that you're selling into?
Yeah, I mean, uh...
Speaker Change: because we think in the future it'll be a significant area of growth for us. You know, the sales cycles there are a little longer, but previously it was not a focus for this organization to partner with the national retailers. And there's a lot of focus in some of the major ones about positioning differentiation by offering performance parts.
Christian Carlino: But, you know, previously, it was not a focus for this organization to partner with the national retailers. And there's a lot of focus in some of the major ones about positioning differentiation by offering performance parts. So we've seen growth in some of our products there, definitely year over year that are taking share. And we think there's more opportunity to get product placement in some of our key categories.
Speaker Change: So we've seen growth in some of our products there definitely year-over-year that are taking share And we think there's more opportunity to get product placement in some of our key categories
Christian Carlino: Thank you very much. Thank you, Christian.
Thank you very much.
Thank you, Christian.
Michael Swartz: Our next questions are from a line of Mike Swartz with Truist Security. Hey, guys, good morning. Maybe start just a question on pricing. And I think, Matt, you kind of called out a number of actions you've taken to refine and optimize pricing and put in place a map policy or expanded the map policy. I guess I'm just trying to understand, like, what does this all, you know, equate to? Is this is this positive for pricing? Is this a negative for pricing?
Speaker Change: Our next questions are from a line of Mike Schwartz with Truist Security. Please proceed with your question.
Speaker Change: Hey guys, good morning. Maybe start, just a question on pricing and I think Matt, you kind of called out a number of actions you've taken to refine and optimize pricing and put in place a map policy or expand the map policy. I guess, I'm just trying to understand, like, what does this all, you know, equate to? Is this positive for pricing? Is this a negative for pricing?
Matthew Stevenson: It's definitely a positive, Mike, and I appreciate the question. Pricing is a discipline we've been working on putting into this organization for over the last year. And one of the things relative to map policy alignment was the number of SKUs we were monitoring and enforcing was very low compared to what we're doing now.
Speaker Change: It's definitely a positive, Mike, and I appreciate the question. Pricing is a discipline we've been working on putting into this organization for over the last year.
Speaker Change: And one of the things relative to map policy alignment was the number of SKUs we were monitoring and enforcing was very low compared to what we're doing now. As I commented in my prepared remarks, it's up 12x compared to what we were doing before. One of the great benefits of that, it builds confidence.
Matthew Stevenson: As I commented in my prepared remarks, it's up 12x compared to what we were doing before. One of the great benefits of that, it builds confidence in your distribution partners to invest in your brands because they know you're going to hold everybody on a level playing field and people won't be undercutting them in the market.
Speaker Change: and your distribution partners to invest in your brands because they know you're going to hold everybody on a level playing field and people won't be under-accounting them in the market.
Michael Swartz: Okay, that's super helpful.
Michael Swartz: I mean, just to follow up on that, is there any any, you know, way to kind of think about what kind of pricing benefit that that is? Is that like a low single digit? I'm just trying to understand like what that actually means.
Speaker Change: Okay, that's super helpful. I mean, just to follow up on that, is there any, you know, way to kind of think about what kind of pricing benefit that is? Is that like a low single-digit, mid-single-digit? I'm just trying to understand like what that actually means.
Matthew Stevenson: Yeah, so on that one, that's just more, I think, of building trust and aligning the market. Now, relative to, you know, price materialization, some of the other initiatives we talked about around psychological price points are 80-20 initiatives in really driving the competitive analysis of our top 500, and now we're on to our top 2,500 SKUs. Now, that is where we're trying to optimize the, you know, elasticity sweet spots to drive increased total profitability.
Speaker Change: Yes, so on that one that that's just more I think of building trust and aligning the market now relative to
Speaker Change: You know, price materialization, some of the other initiatives we talked about around psychological price points are 80-20 initiatives in really driving the competitive analysis of our top 500 and now we're on to our top 2,500 SKUs. Now that is where we're trying to optimize the, you know, elasticity sweet spots to drive increased total profitability.
Michael Swartz: Okay, okay, that's helpful. And then just final question for me, I think, you know, your cost to serve savings, I think you said, was ahead of expectations, you took some furloughs.
Speaker Change: Okay, okay, that's helpful. And then just final question for me, I think...
Speaker Change: You know, your cost of service savings, I think you said, was ahead of expectations. You took some furloughs. Is there an updated estimate on, you know, some of the savings that I guess you expect this year from the actions you've taken? And are there any opportunities, you know, as we look out to 2025 for incremental cost savings?
Jesse Weaver: Is there an updated estimate on, you know, some of the savings that I guess you expect this year from the actions you've taken? And are there any opportunities, you know, as we look out to 2025 for incremental cost savings?
Jesse Weaver: Sure, Michael.
Jesse Weaver: It's Jesse. So for the full year, we've guided to 5 to 10 million at the beginning of the year, and it looks like we're going to be close to 7 to 8. So we get another million or so from cost to serve here in Q4. And the total impact of the furlough activities for the year should, between furlough and 401k, should be around 3 to 3.5 million, with another 700,000 or so coming in Q4 related to the 401k specifically.
Jesse Weaver: Sure Michael, it's Jesse So for the full year We've guided to five to ten million at the beginning of the year and it looks like we're going to be close to seven to eight
Jesse Weaver: So we get another million or so from cost to serve here in Q4.
Jesse Weaver: And the total impact of the furlough activities for the year between furlough and 401k should be around 3 to 3.5 million with another 700,000 or so coming in Q4 related to the 401k specifically.
Jesse Weaver: Okay, great.
Okay, great. Thank you.
Joe Altobello: Our next questions come from the line of Joe Altobello with Raymond James. Please receive your question. Thanks. Hey guys, good morning. Thanks for slide 15, by the way, very, very helpful, at least for me.
Speaker Change: Our next questions come from the line of Joe Altobello with Raymond James. Please receive your questions.
Joe Altobello: Thanks. Hey guys, good morning. Thanks for slide 15, by the way. Very helpful, at least for me. But on that point, if I understand you guys correctly, and...
Joe Altobello: But on that point, if I understand you guys correctly, and If I'm not, let me know, but it sounds like you're looking for maybe one more quarter of pain here in terms of distributor inventory normalization. We are at pretty low levels. Is it your expectation that that will be done with that destocking activity by year-end?
Joe Altobello: If I'm not, let me know, but it sounds like you're looking for maybe one more quarter of pain here in terms of distributor inventory normalization. We are at pretty low levels. Is it your expectation that that will be done with that destocking activity by year-end?
Joe Altobello: Yeah, Joe, appreciate the question. Yeah, you know, a large chunk of that slack that we talked about came out in Q3. And there might be some residual in Q4. But yes, to your point, by the end of the year, we think all the inventories are going to be in line relative to overall market demand and put us in a good shape for 25.
Speaker Change: Yeah, Joe, appreciate the question. Yeah, you know, a large chunk of that slack that we talked about came out in Q3, and there might be some residual in Q4, but yes, to your point, by the end of the year we think all the inventories are going to be in line relative to overall market demand and put us in a good shape for 25.
Joe Altobello: Okay, which leads to my next question.
Speaker Change: Okay, which leads to my next question, I'm not sure if you're going to answer it, but how should we think about 25? Is your base case that sales would be up next year?
Joe Altobello: I'm not sure if you're going to answer it. But how should we think about 25? Is your base case that sales would be up next year? I mean, when you look at Q1 of next year, that's when we expect to see organic growth. starting in Q1. Okay.
Speaker Change: When you look at Q1 of next year, that's when we expect to see organic growth.
Joe Altobello: Yeah, in Q1.
Joe Altobello: It's a little early, Joe, for us to give a full year guide, but, you know, Q1, when we look at out-the-door sales, should be a reasonable lap for us to start to see growth, and then we'll give more full year guidance at the end of the year.
Speaker Change: Starting in Q1, okay. Yeah, in Q1. It's a little early, Joe, for us to give a full-year guide, but you know, Q1, when we look at out-the-door sales, should be a reasonable lap for us to start to see growth, and then we'll give more full-year guidance at the end of the year.
Joe Altobello: Okay, just one last one if I could, it looks like you sold Detroit Speed, can you speak to that? Are there other brands that you would look to sell? Joe, yeah, Detroit Speed, you know, great team down there at Detroit Speed, and that really just wasn't core to our business.
Speaker Change: Okay, just one last one if I could. It looks like you sold Detroit Speed. Can you speak to that? Are there other brands that you would look to sell?
Speaker Change: Joe, yeah, Detroit Speed, you know, great team down there at Detroit Speed, and that really just wasn't corridor business. They do a lot of high-end services and builds on cars, and, you know, the group at QA1, that was just a better fit for that team and that overall business, but we don't see anything else in our portfolio at this time.
Joe Altobello: They do a lot of high-end services and builds on cars, and, you know, the group at QA1, that was just a better fit for that team and that overall business, but we don't see anything else in our portfolio at this time. Okay, thank you guys.
Okay, thank you guys.
Brian McNamara: Our next questions are from the line of Brian McNamara with Kanica Urginuity. Please proceed with your questions. Good morning, guys. Thanks for taking the question.
Thanks, Joe.
Speaker Change: Our next questions are from the line of Brian McNamara with Kanicord Genuity. Please issue your questions.
Good morning, guys. Thanks for taking the question.
Brian McNamara: Hey, good morning, Brian. I'm curious how you guys think the election results will impact your business, specifically on the top line. I'm assuming your customer leans a little more rural, a little less urban. Should the removal of uncertainty help?
Hey, good morning, Brian.
Brian McNamara: Yeah, Brian, appreciate that question. We believe so.
Brian McNamara: I mean, I think you touched on it, the way our industry is in alliance relative to the policies of the elected administration. You know, I think overall, there was a buzz in the air at SEMA this week after the election results. And, you know, we look forward to seeing how that plays out.
and Alliance relative to policies of the elected administration.
Speaker Change: You know, I think overall there was a buzz in the air at SEMA this week after the election results and, you know, we look forward to seeing how that plays out.
Brian McNamara: Great. And then secondly, just if you could comment on kind of what you saw at SEMA this week, it seems like your presence there was more robust in past years. There's definitely a method to the madness.
Speaker Change: Great and then secondly just if you could comment on kind of what you saw at SEMA this week. It seems like your presence there was more robust in past years. There's definitely a method to the madness. Any color you'd be willing to provide on that?
Brian McNamara: Any color you'd be willing to provide on that? Yeah, yeah, absolutely. Brian, we were really thrilled with SEMA this year. As you said, our presence was a dramatic change from years past. We showed all four of our consumer verticals and all our key lifestyle and power brands. And the feedback from our key distributors were just wow. I mean, a lot of distributors we do business today were even somewhat unaware of the great brands that are under the different verticals within our portfolio. Personally, I also had the opportunity to meet with a large number of our distributors and they commented on just the change of mindset we've had over the last year, how they're partnering with us to drive growth, and how they're seeing our sales out the door better than the market.
Speaker Change: Yeah, yeah, absolutely, Brian. We were really thrilled with SEMA this year. As you said, our presence...
Speaker Change: was a dramatic change from years past. We showed all four of our consumer verticals and all our key lifestyle and power brands.
Speaker Change: and the feedback from our key distributors were just wow. I mean a lot of distributors we do business today were even somewhat unaware of the great.
Speaker Change: Brands that are under the different verticals of our portfolio. Personally, I also had the opportunity to meet with a large number of our distributors and they commented on just the change of mindset we've had over the last year, how they're partnering with us to drive growth.
Speaker Change: and how they're seeing our sales out the door better than the market. So it was really great feedback, and we took away, I think, in total 10 awards.
Brian McNamara: So it was really great feedback. And we took away, I think, in total 10 awards, including one distributor of the year award from one of our major customers or manufacturer of the year from one of our distribution partners. So overall, it was great showing by the team and really proud of the presence we put out there.
Speaker Change: including one Distributor of the Year award from one of our major customers or Manufacturer of the Year from one of our distribution partners. So overall it was great showing by the team and really proud of the presence we put out there.
Brian McNamara: That's great. I appreciate the call.
That's great. I appreciate the call.
Brian McNamara: Thanks, Brian.
Thanks, Brian.
Bret Jordan: Our next questions are from the line of Bret Jordan with Jeffries. Please proceed with your question. Hey, good morning, guys.
Speaker Change: Our next questions are from the line of Brett Jordan with Jeffries. Please receive your questions.
Okay, good morning, guys.
Bret Jordan: Morning, Bret. Could you talk about the sort of street level health of the distributor, the channel, I guess, as far as the independent speed shops and what you're seeing there after they've seen some cyclical pressure for a while? I mean, are we losing store counts, you know, at the, you know, on the street? Or is it relatively stable? No, Bret, we're not seeing any notable change there in that number of installers. And generally, you know, the industry as a whole seems to be quite stable. And like I said, we met with a number of key distributors across the show.
Speaker Change: Good morning Brett. Could you talk about the sort of street level health of the distributor, the channel I guess, as far as the independent speed shops and what you're seeing there after they've seen some cyclical pressure for a while? I mean are we losing store counts you know at the you know on the street or is it relatively stable?
Speaker Change: We're not seeing any notable change there in that number of installers and generally you know the industry
Speaker Change: As a whole, it seems to be quite stable, and like I said, we met with a number of key distributors across the show. Some of those, of course, are seeing those year-over-year declines, but generally the industry is quite optimistic for 2025, especially after the election results.
Bret Jordan: And yeah, some of those, of course, are seeing those year-over-year declines. But generally, the industry is quite optimistic for 25, especially after the election results. And I guess sort of related to that, you know, sort of anything you have on the end consumer trend as far as the sort of the cadence or sequential health, I think, in the prepared remarks is it becoming more cautious? Is that sounding as if things are incrementally more cautious at the consumer level? Or are we sort of bouncing on the bottom?
Speaker Change: And I guess sort of related to that, you know, sort of anything you have on the end consumer trend as far as there's sort of a cadence or sequential health, I think in the prepared remarks, is it becoming more cautious? Is that sounding as if things are incrementally more cautious at the consumer level or are we sort of bouncing on the bottom?
Bret Jordan: So, Bret, great question. I would say that, you know, the marketing calendar support that we've been giving our distribution partners was very helpful in making sure our out-the-door sales with our distribution partners in Q3 was relatively stable relative to the prior quarter, and we suspect if we're able to continue this partnership, which that was one takeaway from SEMA, lots of appreciation from customer discussions on those partnerships, you know, we should continue to maintain and gain share here in Q4, but obviously the overall market health will play a role in us achieving any amount of growth in Q4.
Speaker Change: No, I think so. Great question. I would say that, you know, the marketing calendar support that we've been giving our distribution partners was very helpful in making sure our out-the-door sales with our distribution partners and
Q3 was relatively stable.
Speaker Change: relative to the prior quarter and we suspect if we're able to continue this partnership, which that was one takeaway from SEMA, lots of appreciation from customer discussions.
Speaker Change: on those partnerships, we should continue to maintain and gain share here in Q4.
Speaker Change: Obviously, the overall market health will play a role in us achieving any amount of growth in Q4.
Bret Jordan: Okay, and then as a housekeeping, we talked about sort of skew optimization or rationalization in the last quarters on the low volume product. Could you tell us sort of where we are in cleaning up those low volume skews or getting them off the catalog? Yes, I mean, we've only, the only meaningful, you know, strategic product skew rationalization that we've done in the year was at the end of Q1, and that's just a continuation of what we'd started in the prior year, and, you know, there's no additional work there to be done. Now there will always be just the ongoing pruning, if you will, of the portfolio, but nothing of significance.
Speaker Change: Okay, and then just the housekeeping. We talked about sort of skew optimization or rationalization in the last quarters on the low volume product. Could you tell us sort of where we are in cleaning up those low volume skews or getting them off the catalog?
Yes, I mean we've only
Speaker Change: The only meaningful, you know, strategic product skew rationalization that we've done in the year was at the end of Q1. And that's just a continuation of what we'd started in the prior year. And, you know, there's no additional work there to be done. Now, there will always be just the ongoing pruning, if you will, of the portfolio, but nothing of significance. I think we've got a really good process internally to, one, make sure we launch the right products.
Bret Jordan: I think we've got a really good process internally to, one, make sure we launch the right products, invest in, you know, R&D where the consumer is and is going, and then throughout the year we are just continually just taking a look at that portfolio, so there shouldn't be any call-outs going forward.
Speaker Change: invest in R&D, where the consumer is and is going. And then throughout the year, we are just continually just taking a look at that portfolio. So there shouldn't be any call-outs going forward. Great, thank you.
Phillip Blee: The next questions are from the line of Phillip Blee with William Blair.
Speaker Change: The next questions are from the line of Philip Lee with William Blair. Please issue your questions.
Phillip Blee: Matt, Jesse, good morning. Good morning, Phillip. Sounds like de-stocking pressure should be largely over and you're seeing positive out-the-door sales and healthy growth in DTC, with a lot of those investments that you've made really starting to ramp up, but fourth quarter sales guide still suggests high single visit decline at the midpoint.
Matt, Jesse, good morning.
Good morning, Philip.
Speaker Change: Sounds like de-stocking pressure should be largely over and you're seeing positive out-the-door sales and healthy growth in DTC with a lot of those investments that you've made really starting to ramp up, but fourth quarter sales guide still suggests high single-digit decline at the midpoint. So can you maybe just help us reconcile expectations and whether there's sort of a higher level of conservatism built in given the uncertain macro backdrop?
Phillip Blee: So can you maybe just help us reconcile expectations and whether there's sort of a higher level of conservatism built in given the uncertain macro backdrop? No, I would say that Q4 is pretty consistent with the trends we're seeing, the conversations we're having. I would say what's different now as we've gotten better customer intimacy and engagement is we've got visibility into their out-the-door sales and we're aligning sort of expectations on their reorder to those out-the-door. So what you're seeing is, I would say, a pretty solid 50-50. There may be some upside there as we support them even more this year with holidays than we did in years past, but I think what makes me feel good about this guide in particular is we don't have the looming cliff of a destocking situation that we went through in Q3.
No, I would say that Q4 is...
Speaker Change: pretty consistent with the trends we're seeing, the conversations we're having. I would say what's different now as we've gotten better customer intimacy and engagement is, you know, we've got visibility into their out-the-door sales and we're aligning sort of expectations on their reorder to those out-the-door. So, what you're seeing is, I would say, a pretty solid 50-50. There may be some upside there as we, you know, support them even more this year with holidays than we did in years past.
Speaker Change: But, you know, I think what makes me feel good about this guide in particular is we don't have the, you know, looming cliff of a destocking situation that we went through in Q3.
Phillip Blee: Okay, great. Very helpful.
Matthew Stevenson: And then if we think about the industry reaching a bottom this year and then showing some sort of inflection in early 2025, are there any areas of the business that maybe you have underinvested in over the past year or two that we should expect to maybe see less fall through on the initial return to growth? Thank you. Yeah, thanks, Phillip. No, you know, our focus has been on driving growth in all four consumer verticals, and in all facets of our omni channel approach, right? So we have, you know, four division leaders over each of those verticals, focused on driving growth with those lifestyle and power brands.
Speaker Change: Okay great, very helpful. And then if we think about the industry reaching a bottom this year and then showing some sort of inflection in early 2025...
Speaker Change: Are there any areas of the business that maybe you have underinvested in over the past year or two that we should expect to maybe see less fall through on the initial return to growth?
Thank you.
Speaker Change: Yeah, thanks, Philip. No, you know, our focus has been on driving growth in all four consumer verticals and in all facets of our omni-channel approach, right? So we have, you know, four division leaders over each of those verticals focused on driving growth with those lifestyle and power brands. So our goal is, you know, to bring them all up in parallel going forward in 25.
Matthew Stevenson: So our goal is, you know, to bring them all up in parallel going forward in 25.
Matthew Stevenson: Thank you, guys.
Matthew Stevenson: Thanks a lot. All right. Thanks, Phillip.
Speaker Change: Thank you guys. Thanks a lot. All right. Thanks for listening.
Michael Baker: Our next question is from the line of Michael Baker with D.A. Davidson. Please proceed with your question. Okay, thanks. So I guess following up on a couple of questions, it sounds like, correct me if I'm wrong, but sell-in should be matching sell-out roughly in the fourth quarter, sort of at steady state. So I guess... How does it get much better in the first quarter? Is that just predicated on macro getting better? Because, you know, you said you think you'll grow in the first quarter, which means $160 million or so versus, you know, the last couple quarters here, which will be, you know, less than that, and inventory sort of steady state now.
Thanks for watching!
Speaker Change: Our next questions are from the line of Michael Baker with D.A. Davidson. Please proceed with your questions.
Michael Baker: Okay, thanks. So I guess following up on a couple questions, it sounds like, correct me if I'm wrong, but sell-in should be matching sell-out roughly in the fourth quarter, sort of at steady state. So I guess...
Michael Baker: How does it get much better in the first quarter? Is that just predicated on macro getting better? Because you said you think you'll grow in the first quarter, which means...
Michael Baker: $160 million or so versus, you know, the last couple quarters here, which will be, you know, less than that in an inventory sort of steady state now. So what drives that growth in the first part of next year? Is that just enthusiasm on consumers bottoming, you know, election results, et cetera?
Michael Baker: So what drives that growth in the first part of next year? Is that just enthusiasm on consumers bottoming, you know, election results, etc.?
Matthew Stevenson: Yeah, thanks for the question, Michael. Yeah, there's a number of things. So one point you touched on, I think is really critical, is our goal is to really drive that equilibrium in sell-in and sell-out. And I think our efforts over the last year in building confidence with our distribution partners, really getting better information and tailoring our marketing calendar with our events as well as events they have to really drive that balance. And I think we're making some great progress there. And we talked about there's a bit of residual inventory adjustment that may occur in Q4.
Speaker Change: Yeah, thanks for the question, Michael. Yeah, there's a number of things. So one point you touched on I think is really critical is our goal is to really
Speaker Change: drive that equilibrium and sell in and sell out. And I think our efforts over the last year in building confidence with our distribution partners, really getting better information.
Speaker Change: and tailoring our marketing calendar with our events as well as events they have to really drive that balance.
Speaker Change: I think we're making some great progress there. And we talked about there's a bit of residual inventory adjustment that may occur in Q4, but when you look at...
Matthew Stevenson: But when you look at Q1, which we commented on, of 25, there's a number of things that are setting up. One is all the great work our team has been doing. And I hope you can see that in the proof points that we provided in the deck. But our Q1 last year, you look at those comps, was really soft. And that, as an industry, had a very, very tough Q1. And just based on all the work we're doing, the outcome of the election, and just the general normalization we've now seen in the industry, we think we're set up to drive that growth in the first quarter.
Speaker Change: Q1, which we commented on, of 25. There's a number of things that are set. One is all the great work our team has been doing, and I hope you can see that in the proof points that we provided in the deck.
Speaker Change: Q1 last year, you look at those comps, it was really soft.
Speaker Change: And that, as an industry, had a very, very tough Q1. And just based on all the work we're doing, the outcome of the election, and just the general normalization we've now seen in the industry, we think we're set up to drive that growth in the first quarter.
Matthew Stevenson: Okay, a follow-up to that is in terms of the marketing events, so it sounds like you did some, you know, big ones in the third quarter, what's planned different in the fourth quarter versus fourth quarter a year ago, or do you have incremental, you know, marketing type days that help the third quarter, do you have those set up for the fourth quarter as well? So relative to our marketing calendar, we continue to get better on our execution of it in terms of partnering with distributors, getting more engagement, and really tailoring the elasticity of what SKUs we include and what we don't.
Speaker Change: A follow-up to that is in terms of the marketing events, so it sounds like you did some big ones in the third quarter. What's planned different in the fourth quarter versus the fourth quarter a year ago, or do you have incremental marketing-type days that help the third quarter? Do you have those set up for the fourth quarter as well?
Speaker Change: So, relative to our marketing calendar, you know, we continue to get better on our execution of it in terms of partnering with distributors, getting more engagement, and really tailoring the elasticity of what SKUs we include and what we don't. So, in Q4, we're going to run our normal holidays, which is, you know, successful.
Matthew Stevenson: So in Q4, we're gonna run our normal holidays, which is a successful program that we've run for many years, but we just remain the fact that we're getting better of how we execute that. So nothing from our side in the calendar, but also too we're participating with distributors on some of their key programs to make sure we're moving that sell-in and sell-out in parallel. So nothing significant outside of holidays in the quarter, but a lot of different constructs as we partner with distributors on some of their smaller programs. Okay, that makes sense.
Speaker Change: program that we've run for many years, but we just remain the fact that we're getting better of how we execute that. So nothing from our side in the calendar, but also too we're participating with distributors on some of their key programs to make sure we're moving that sell-in and sell-out in parallel. So nothing significant outside of holidays in the quarter, but a lot of different constructs as we partner with distributors on some of their smaller programs.
Michael Baker: If I could ask one more, unrelated, I'm intrigued by bringing in or onboarding R&R marketing. Is that new for you guys, using outside sales forces? And if so, how does that impact your margins? I mean, I'm sure they're taking some of the profits, presumably. So, how do we think about that impacting gross margins going forward? Yeah, Michael, in fact, you know, a number of our amazing brands in our portfolio actually had a history of being built by R&R. So they're very familiar with our product portfolio. And, you know, for us, as much as we have in our portfolio of these amazing brands and product lines and setting up around our four consumer vertical structure, the size of our B2B team was not at a level needed to really drive that growth that we're looking for.
Speaker Change: If I could ask one more unrelated, I'm intrigued by bringing in or onboarding R&R marketing. Is that new for you guys, using outside sales forces? And if so, how does that impact your margins? I mean, I'm sure they're taking some of the profits, presumably. So how do we think about that impacting gross margins going forward?
Speaker Change: Michael, in fact, a number of our amazing brands in our portfolio actually had a history of being built by R&R. So they're very familiar with our product portfolio. And for us, it's been great.
Speaker Change: Much as we have in our portfolio of these amazing brands and product lines and setting up around our four consumer vertical structure the size of our b2b team
Speaker Change: was not at a level needed to really drive that growth.
Matthew Stevenson: So we partnered with R&R a few months back and are really optimistic about what we're going to do together. Their combined team has hundreds of years of experience, and we think the growth that they're going to help us drive will offset any investment made in that partnership.
Speaker Change: that we're looking for. So we partnered with R&R a few months back and we're really optimistic.
Speaker Change: about what we're going to do together. Their combined team has hundreds of years of experience.
Speaker Change: And we think the growth that they're going to help us drive will offset any investment made in that partnership.
Michael Baker: Thank you.
Okay, thank you.
Thank you.
John Lawrence: The next question is from the line of John Lawrence with Benchmark Company. Yeah, thanks. Good morning, guys.
Speaker Change: The next question is from the line of John Lawrence with the Benchmark Company. Please receive your question.
Yeah, thanks. Good morning, guys.
John Lawrence: Hey, good morning, John. Matt, would you comment a little bit on slide 10? Obviously, the metrics for some of the new product development are really strong, coming out of the box. Remind us a little bit, if you don't mind, just about, you know, that process you put in place several quarters ago. Obviously, you've hit the market strong with some exciting products. Is it the research and development before you make that decision? And maybe talk about the highs and lows of maybe some of those oil products that you talked about. Yeah, John, thanks for that question.
Speaker Change: Hey, good morning, John. Matt, would you comment a little bit on slide 10? Obviously, the metrics for some of the new product development are really strong, coming out of the box. Remind us a little bit, if you don't mind, just about that process you put in place several quarters ago. Obviously, you've hit the market strong with some exciting products. What is it, the research and development before you make that decision? And maybe talk about the highs and lows of maybe some of those oil products that you talked about.
Yeah, John, thanks for that question. Yeah, I mean...
Matthew Stevenson: Yeah, I mean, You know, the size of our organization, when I came in, really did not have that discipline and structure about what to design, what to build, and then ultimately, you know, how to launch it. So now we put a simple phase gate system in across our organization, across all our major product categories, to help the team get the visibility and the urgency around developing the right products. And so, you know, the business cases, and then making sure they have the resources through that development process, and ensuring that we're accelerating what they're doing and not slowing it down.
Speaker Change: You know, the size of our organization, when I came in, really did not have that discipline and structure about what to design, what to build, and then ultimately, you know, how to launch it. So now we put a simple phase gate system in across our organization, across all our major product categories, to help the team get the visibility and the urgency around developing the right products.
Speaker Change: And so, you know, the business cases and then making sure they have the resources through that.
Speaker Change: development process and ensuring that we're accelerating what they're doing and not slowing it down. One of the other key deficiencies that we're correcting was
Matthew Stevenson: One of the other key deficiencies that we're correcting was the product launch process. So we were designing some great products, but there was not an effective process to bring along sales and marketing on both our DTCs, as well as our distributor channel, to get nearer term adoption. So that's one of the things we're looking at, is what we've executed on, and that's what you're seeing in the results there, is the fact that not only are we bringing the right products to market, we're now being able to get better adoption in both our own channel and that of our distributors by partnering them on various marketing initiatives to get more awareness in the market.
Speaker Change: The product launch process. So we were designing some great products, but there was not an effective process to bring along sales and marketing on both our D2C as well as our distributor channel.
Speaker Change: to get nearer term adoption. So that's one of the things we're looking at is what we've executed on and that's what you're seeing in the results there.
Speaker Change: is the fact that not only are we bringing the right products to market, we're now being able to get better adoption in both our own channel and that of our distributors by partnering them on various marketing initiatives to get more awareness in the market.
Matthew Stevenson: So it's just prioritizing products that we know are going to have a great value proposition, and making sure we're executing it properly in terms of the launch, where previously it was just an email to the market. Now our distribution partners get all the data and product information and pricing 60 days in advance of the launch. They can order 30 days in advance of the launch to make sure they have it in stock with their customers so when we say go to the market, they're ready to go as well. And again, that's just another initiative we've done, that's building the trust with our distribution partners to know they can participate in growth with us.
Speaker Change: So, it's just prioritizing products that we know are going to have a great value proposition and making sure we're executing it properly in terms of the launch. Where previously it was just an email to the market, now our distribution partners get all the data and product information and pricing 60 days in advance of the launch. They can order 30 days in advance of the launch to make sure they have it in stock with their customers so when we say go to the market, they're ready to go as well.
Speaker Change: You know initiative we've done that's building the trust with their distribution partners to know they can participate in growth with us And that's where that's what's driving some of the success. You're seeing
Matthew Stevenson: And that's what's driving some of the success you're seeing.
John Lawrence: Right, thanks. Last question is, as you work out those efficiencies, would the development spend ramp up a little bit or sort of stay where it is as you work out those efficiencies?
Speaker Change: Great, thanks. Last question is, as you work out those efficiencies, would the development spend ramp up a little bit or sort of stay where it is as you work out those efficiencies?
Matthew Stevenson: I think from a development spin perspective, John, this goes back to... teams are working on the right thing. And being efficient now and where they spend their time and what we invest in shouldn't require us to invest more there But you know as we grow and we see more opportunities, we're not going to We will invest if necessary, but I don't think anything changes our long-term margin structure of 40% gross margin.
Speaker Change: I think from a development spend perspective, John, this goes back to making sure that the teams are working on the right things and being efficient now and where they spend their time and what we invest in shouldn't require us to invest more there, but as we grow and we see more opportunities, we're not going to...
Speaker Change: We will invest if necessary, but I don't think anything changes our long-term margin structure of 40% gross margin and 20% EBITDA.
Matthew Stevenson: Thanks guys, congrats.
Thanks, guys. Congrats.
All right, thanks, John.
Matthew Stevenson: Thank you.
Matthew Stevenson: I'll now pass the call back to Matt for a few closing remarks. All right, well, thank you, Rob. Slide 21 underscores what we believe there is a compelling investment narrative surrounding Holley. This market, propelled by automotive enthusiasts, extends beyond a mere pastime. It's a passion, and it's a way of life for our customers. We command a vast addressable market approaching $40 billion. Holley is at the forefront of the industry with a collection of storied brands that have a legacy of innovation. Additionally, our history is marked by successful acquisitions and value creation through strategic integration. Plus, we are presented with a unique opportunity to forge a new digital frontier that will transform how our consumers and distribution partners engage with their brands, providing us with a competitive edge in fostering growth.
Speaker Change: Thank you. I'll now pass the call back to Matt for a few closing remarks.
Speaker Change: All right, well thank you Rob. Slide 21 underscores what we believe there is a compelling investment narrative surrounding Holley. This market, propelled by automotive enthusiasts, extends beyond a mere pastime. It's a passion and it's a way of life for our customers.
Speaker Change: We command a vast addressable market approaching $40 billion. Holley is at the forefront of the industry with a collection of storied brands that have a legacy of innovation.
Speaker Change: Additionally, our history is marked by successful acquisitions and value creation through strategic integrations.
Speaker Change: Plus, we are presented with the unique opportunity to forge a new digital frontier that will transform how our consumers and distribution partners engage with our brands, providing us with a competitive edge in fostering growth.
Matthew Stevenson: When we emerge from this transformation, our commitment is to be delivering stable, organic top-line growth of at least 6%, maintaining 40% gross margin targets and greater than 20% adjusted EBITDA margin targets, generating sustainable free cash flow, and establishing a platform that facilitates the unlocking of value in strategic acquisition. The combination of the allure of our automotive enthusiast marketplace and Holley's distinguished brand portfolio presents an exceptional investment opportunity.
Speaker Change: When we emerge from this transformation, our commitment is to be delivering stable, organic top-line growth of at least 6%.
Speaker Change: Maintaining 40% gross margin targets and greater than 20% adjusted EBITDA margin targets, generating sustainable free cash flow, and establishing a platform that facilitates the unlocking of value in strategic acquisitions.
Speaker Change: The combination of the allure of our automotive enthusiast marketplace and Holley's distinguished brand portfolio presents an exceptional investment opportunity.
Matthew Stevenson: In closing, I wish to express my sincere appreciation to our team members for their dedication to serving our customers daily, to our remarkable consumers who support our brands, as well as our distribution partners, many of whom have been integral to our success for decades. I also want to thank you for your attention today and look forward to providing updates on our progress in subsequent quarters. I want to thank you again and have a great week.
Speaker Change: In closing, I wish to express my sincere appreciation to our team members for their dedication to serving our customers daily, to our remarkable consumers who support our brands, as well as our distribution partners, many of whom have been integral to our success for decades.
Speaker Change: I also want to thank you for your attention today and look forward to providing updates on our progress in subsequent quarters.
Speaker Change: I want to thank you again and have a great weekend.
Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Weaver, Ross Collins, Matthew Stevenson, Anthony Rozmus