Holley Inc.

Good afternoon and welcome to the Holly third quarter 2022 earnings call. At this time, all participants are in the listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Ross Collins with Investor Relations. Thank you. You may begin.

Thank you, Diego. Good morning, everyone. Thank you for taking the time to join us today. On the call with me today are Tom Tomlinson, President and Chief Executive Officer, Steve Trussell, Vice President of Finance and Interim Chief Financial Officer, Vinny Namagata, Executive Vice President of Corporate Development and New Ventures. After their prepared remarks, we will open the call for questions. Now I will reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond the company's control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in the company's recent 10Q, S4, and S1 filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain relevant and operative at a later time. Holly undertakes no obligation to update any information discussed in this call in the future. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP are included in today's press release, which is also posted on our Investor Relations website. At this time, I would like to turn the call over to Tom Tomlinson, Holly's Chief Executive Officer. Tom?

Thanks, Ross. Good afternoon, everyone, and thanks for joining us today. As part of the call today, we'll be referring to a slide deck titled Third Quarter 2022 Supplemental Earnings Information. This deck is available for download on our IR website, investor.holly.com. As we stated in our press release this afternoon, while we're encouraged by the sequential improvement we saw during the quarter, our earnings fell short of expectations. After decreasing further in July, Sales improved in August and September as we began to overcome supply chain related challenges. Although sales for the quarter were down year over year, our shipment rates progressively improved within the quarter and sales in September were above prior year as highlighted on slide three. Supply chain constraints peaked in July and then began to ease. Increased receipts of components from global suppliers allowed us to steadily produce and ship more product in August and September. These improving run rates in Q3 are illustrated on slide four. Our suppliers of certain automotive grade microchips also began to resume shipments during the quarter, which allowed us to progressively build and ship more of our popular electronic products. These suppliers have also provided improved visibility to future shipments. As discussed last quarter, we acquired a large quantity of automotive-grade microchips on the spot market that were unusable upon initially receiving them. We've now developed and validated a process to reprogram those chips, restoring them to full functionality and enabling us to begin consuming them in production. While challenges remain in the supply chain, we're focused on improving availability of components and increasing shipments. Profitability was negatively impacted by lower production volumes that drove negative operating leverage and manufacturing inefficiencies, especially earlier in the quarter. We also saw higher input costs from both inflationary pressures as well as scarcity-related cost escalation in connection with automotive-grade microchips. Warranty costs were higher as resellers caught up on backlog of warranty returns and higher inbound freight and other overhead costs are continuing to work their way through inventory. Pricing actions taken mid-year partially offset these cost headwinds. As sales increased in August and September, we saw operating leverage turn positive, resulting in progressively improving earnings, although still below historical levels as a result of the aforementioned cost headwinds. Channel inventory decreased by $8.4 million in the quarter, although stronger shipments to resellers in September allowed us to begin rebuilding channel inventory, partially offsetting the decreases that occurred in July and August. These monthly channel inventory changes are set forth on slide five. Underlying demand has remained solid despite our supply chain challenges. Past due orders represent demand that we have not yet been able to convert to sales by shipping against orders placed by consumers and resellers. Past due orders have remained elevated throughout the year. As shown on slide six, our steadily improving sales run rates in August and September allowed us to reduce excess past due orders by $11.1 million in the quarter. At the end of the quarter, excess past dues remained elevated and were $30.6 million. We're looking forward to eliminating excess past due orders as supply chain conditions continue to improve. We're pleased with the solid demand we've seen for our products at a time when consumers are stressed by inflationary pressures. Our direct-to-consumer sales were up 11%, and we saw enthusiast engagement continue to accelerate at our Holly-owned events. As highlighted on slide two, DTC sales were up year over year, despite supply chain challenges that left us out of stock on many of our popular products. DTC sales provide us with visibility into consumer behavior and insight into underlying consumer demand, because DTC sales are not influenced by reseller purchasing decisions. Our DTC strategy is core to what we do, and the growth in our DTC channel continues to be driven by innovation, strong performance marketing, content and social media engagement, event expansions, and new brand integrations. Growing DTC sales remains a priority for our team. With the improvements we realized within the quarter, we believe we're now better positioned to convert more of the demand we've seen into sales as supply chain conditions continue to improve and as we continue to execute operationally. There is a lot more work to do to lower our costs and reduce our inventory levels, and we see numerous other opportunities for further operational improvements. Our team is aggressively pursuing strategies to drive higher productivity and lower our cost structure And we're continuing to make progress integrating acquired businesses in order to drive further synergies. With so much work to do, we're pleased to announce the appointment of Brian Applegate as Interim Chief Operating Officer. Brian, who has advised Holly on M&A since 2018, is a performance aftermarket industry veteran with a wealth of operating experience. He's a known quantity to our team and we're excited to partner with Brian to drive near-term improvement in our operating performance. As interim COO, he will be focused on our highest priorities and largest near-term opportunities in supply chain, manufacturing, and engineering. Brian's efforts in these areas will help accelerate our improvement initiatives and allow us to realize the benefits of these improvements more quickly. We remain confident in the underlying profitability and cash flow generation potential of our business, and we firmly believe that Holly's position as an industry leader with ample runway for long-term profitable growth is unchanged. I'll now turn it over to Vinny to discuss recent M&A activity and consumer engagement. Vinny?