Holley Inc.

Good morning, ladies and gentlemen, and welcome to the conference call to discuss the results from Holly's fourth quarter of 2022. 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. We ask that participants limit themselves to one question and one related follow-up during the Q&A period. Please be advised the reproduction of this call in whole or in part is not permitted without written authorization of Holly. And as a reminder, this call is being recorded and will be made available for future playback. I would now like to introduce your host for today's call, Mr. Russ Collins, Managing Director of Alpha IR.

Please go ahead. Thank you, and good morning, everyone. Thank you for taking the time to join us today. On the call with me today are Matt Rubell, Executive Chairman, Michelle Gleckler, Interim President and Chief Executive Officer, Jesse Weaver, Chief Financial Officer, and Vinny Nimagata, 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 included in this call in the future. Additionally, we will be discussing certain non-GAAP financial measures. The reconciliation of these items to US GAAP are included in today's press release, which is also posted on our investor relations website. At this time, I'd like to turn the call over to Michelle Gleckler, Holly's interim president and chief executive officer. Michelle?

Thanks, Ross. Good morning, everyone, and thank you for joining us today. As we enter the next chapter for Holly, I know I can speak for myself and the board when I say that we are excited about the organization's focus supported by the incredible talent and depth of the organization and this leadership team. This is a business built for enthusiasts by enthusiasts. Many of our associates have decades of experience in the industry and not only believe in our company vision, to inspire and enable enthusiasts in their automotive adventures by bringing innovation, discovery, and fun to motor life, but they also live our vision in their day-to-day lives outside of Holley. Our team's experience and direct connection to the enthusiast consumer as enthusiasts themselves is a strategic asset that underpins the foundation necessary for us to execute on our strategy and capitalize on continued growth in this category. That strategy is built on five pillars. One, prioritizing key categories and platforms. Two, product innovation. Three, mergers and acquisitions. Four, our consumer-focused channel strategy. And five, engaging and inspiring the enthusiast. Moving forward, we are confident that we have the right team and the right plan in place to drive shareholder value. Our markets remain fundamentally strong, and although sector demand is experiencing a normalization to pre-COVID levels, we firmly believe our industry is capable of growing organically at 6% to 7% over the long run. Given our unmatched scale, market-leading brands, new product innovation, direct-to-consumer powerhouse, and proven M&A platform, Holley is poised to grow at or above the market. We continue to believe this business can return to 40% gross margins with EBITDA margins greater than 20% in the near future. While we did not meet these targets in 2022 due to a combination of macroeconomic and cost headwinds, we are implementing several initiatives directly tied to our strategic pillars to drive both top and bottom line growth. These initiatives are beginning to gain traction in 2023 and will be contributing factors in our efforts to deliver free cash flow growth in 2023 and return to long-term profitability levels. 2022 was a challenging year for Holly and one that surfaced many areas of improvement for our broader organization. Despite these challenges, I want to sincerely thank our employees for their tireless efforts to deliver on our strategic vision and also to acknowledge the wins and successes we achieved this year. We are pleased with the continued solid demand we are seeing through our DTC sales channel. For the full year, DTC sales were $149 million, up 27% or 32 million compared to 2021, which is a new Holly record. These DTC sales represented 20.9% of total sales in 2022 compared to 16.3% in 2021. We look forward to continued growth in the DTC channel as it is a core pillar of our growth story and directly connects us with our enthusiast customers. Holly's M&A platform continued to drive value in 2022 with three additional acquisitions made during the year, but just as importantly, by successfully integrating acquisitions made in previous years. Over the past three years, our team has completed 16 acquisitions, integrated 13 ERP systems, and consolidated 160,000 square feet of facilities. These acquisitions contributed nearly 175 million of sales in 2022. Furthermore, our actioned integration efforts will allow us to capture $10 million in annualized cost synergies over the next 12 to 18 months. The success of our self-funded enthusiast events continues to surpass our expectation and is a key pillar of our consumer engagement strategy. We hosted seven events in 2022 with a total attendance of 106,000 individuals, which is an increase of 16.9% over last year. It's a true testament to the growing multi-generational Holly community. As we outlined last quarter, past due orders remain elevated due to various operating headwinds, including the supply chain and our strained ability to receive chips in a timely and reliable fashion. During the quarter, we were able to reduce our past due orders by 9.6 million, with approximately 60% of that reduction coming from our mechanical product category. With that said, total past due levels remain elevated at 27 million at the end of the quarter, and are concentrated in our electronics category. As we look to 2023, Holley is a more focused organization, and our team is ready to execute on all pillars of our strategy. Company-wide execution will be critical as we continue to face various headwinds to our business, including a normalization of demand from COVID levels, heightened inventory levels, and broader supply chain constraints. Additionally, inflationary pressures have persisted, causing elevated input costs as well as heightened freight costs. While general supply chain congestion has reduced and helped us make progress on our mechanical products, we continue to experience headwinds related to the availability of microchips. The challenge we have with semiconductors is unique to us as our Holley EFI product line, we call it HEFI, is designed today on semiconductors that are not widely available. This is both a product lifecycle management and an engineering opportunity. Engineering is intently focused on redesigning the product line to support more accessible chips. Product lifecycle management processes are being improved to better anticipate reduced supply on critical components and prioritize engineering resources ahead of any potential challenges. Redesign efforts take time, So we will continue our efforts to secure supply where possible on the spot market for these critical components, which will help minimize further anticipated top and bottom line headwinds during 2023. In the face of these uncertainties, I can assure you that both the board and our management team are committed to addressing these issues head on. This will include dedicated efforts in the year to align our costs to key pillars of our strategy by prioritizing categories and platforms, maximizing and accelerating our M&A synergy capture, and returning to operational excellence through refinement of our operations. Because of our efforts to refocus the organization on prioritized categories and platforms, we have been able to successfully optimize our operations and remove costs from the business. In Q4, we rationalized more than 20,000 SKUs across 18 brands while reassessing our overall inventory management processes, reevaluating contract manufacturing options, and drop ship arrangements, which combined are expected to improve working capital management and our path back to meaningful free cash flow in 2023. Additionally, our team is driving synergy capture from our previous acquisitions And in 2023, the team is expected to deliver an incremental $3 to $3.5 million in savings through consolidation. These efforts, combined with initiatives Jesse will talk about, including improvements in shipping costs and right-sizing our cost structure, are all expected to improve profitability on our path back to 20% EBITDA in the near future. With a large, vibrant, and loyal customer base, strong innovation pipeline, and a powerful roster of brands with robust sales channels, we believe Holly is in a solid position to deliver long-term growth for our shareholders. Fueled by a strong focus on our strategy, clear prioritization of initiatives, and depth of our leadership team, we will be emerging as a much stronger company in 2023. We look forward to sharing our progress with you in future calls. With that, I'll now pass the call to Jesse to provide an overview of our financial results. Jesse?