Holley Inc.

Greetings. Welcome to the Holly third quarter 2023 earnings call. At this time, all participants are on a 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 your host, Ross Collins, of Investor Relations. You may begin.

Thank you, operator. Good morning. and welcome to Holly's third quarter 2023 earnings conference call. On the call with me today are President and Chief Executive Officer Matt Stevenson and Chief Financial Officer Jesse Weber. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our investor relations website. From time to time, we post new information that may be of interest or material to investors on this website. Our discussion today includes forward-looking statements that are based on our best view of the world and of our business 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 full year 2023. As always, we'll leave time for your questions at the end And with that, I'll turn the call over to our CEO, Matt Stephenson.

Thank you, Ross. And good morning, everyone. This is now my fifth month at Holley, and I continue to remain extremely impressed by the team and the incredible opportunity that exists with this great company. Not only are there tremendous prospects for growth, but we're also finding ways to be more efficient while we're also enhancing our service levels to both consumers and distributors. We are undergoing a comprehensive transformation of the company to unlock all these opportunities and prepare our organization for extensive growth. During this call, I will highlight some of the transformation that is underway, including a new organizational structure focused on becoming even more consumer-centric, the development of a robust product development cycle, increasing the engagement levels with all our customers, including our great distribution partners, lowering our cost to serve by taking a holistic look at our operations, and adding new leadership talent to the team. Plus, while transforming the company for the long term, we are also continuing to deliver in the short term through strong alignment of internal resources and an intense daily focus on meeting our commitments. All of this hard work continued to pay off as we delivered a solid third quarter. Now let's take a look at some of the highlights from the quarter. On slide five, we've highlighted the key takeaways. Due to seasonality, the third quarter is historically our lowest for order demand. But even under those circumstances, we continue to build a path toward our goal of gross margins of approximately 40% and EBITDA margins greater than 20%. Year over year for the third quarter, We dramatically improved gross margins by 600 basis points and increased EBITDA margins by 840 basis points. We also continued the progress of bringing down inventory and past dues through forecasting and operational improvements, which has enabled us to improve our free cash flow and further pay down our debt. The summer is always an exciting time for us regarding consumer engagement, and it is the peak of our event season. And we had four amazing events in the third quarter that continue to show year-over-year increases in attendance. As part of our transformation, we also rolled out a new organizational structure focused on unlocking growth in our consumer verticals and empowering our leaders in our product categories and brands. We'll dive into this in more detail in a few slides. On slide six, you can see some of the financial and ongoing business highlights from our third quarter. Net sales were $156 million, up 1% year-over-year for the quarter. Gross margins and EBITDA margins were both up significantly from the prior year. Gross margins were 37.3%, and EBITDA margins were 19%, as our lower fixed cost base and numerous operational improvements elevated the bottom line year-over-year. Pre-cash flow was $21.7 million for the quarter. a $32 million improvement versus the prior year. This improvement was driven by solid operational performance and meaningful reductions in past due and inventory. Now, on to some of the business highlights for the quarter. We continued our leadership in product innovation, introducing over 65 new products in the third quarter, including a new plug-and-play adapter kit for Sniper 1 owners to upgrade to Sniper 2, As you recall, Sniper 2 is our new electronic fuel injection system, which we discussed last quarter. It is a marquee product for us and is our mainstream EFI offering. We also launched multiple accessories to enable enthusiasts to swap the modern 7.3-liter Ford Godzilla engine platform into classic trucks and muscle cars, including a high-mount accessory drive and oiling system and a low-profile cast intake manifold. Plus, we are expanding our offerings in modern trucks and new exhaust kits under our Flowmaster brand for the popular 2022 and up Toyota Tundra. As the leading consumer platform for automotive performance enthusiasts, our events are critical for engaging consumers at the grassroots level. Summertime is the height of our event season, and we held four major events this past quarter. All four of those events were held on our home turf, here in Bowling Green, Kentucky, LS Fest East, Ford Fest, Jeep Experience, and Mo Party. These events hosted over 75,000 enthusiasts, up over 12% year-over-year. These events give us unparalleled direct connection with our consumers and allow us to understand firsthand where the enthusiast automotive performance aftermarket trends are headed. In addition to connecting with consumers in person, digital engagement is critical to our success and through activating on our q3 events we are also able to partner with popular social influencers with over 29 million followers enabling us to continue to build up our digital community and social engagement to promote our sniper 2 launch we also worked with key digital media partners such as hot rod garage hp academy motor trends engine masters and ford muscle which generate 4.8 million digital impressions. We're also bringing in new leaders to continue to elevate our customer experience, increase product innovation, and drive growth. We engaged a former chief marketing officer at Bridgestone to lead our customer experience marketing team. Then our efforts increased innovation to implement a comprehensive product stage gate system across our business. We hired a new vice president of product management with extensive experience at tier ones like Wabco. We also see the OEM performance aftermarket as a growth vertical for us and hired a new leader with extensive OEM experience with major tire manufacturers and Fox factory to lead this for us. As you'll see on slide seven, we finished up last week with a strong presence at SEMA in Las Vegas. We continued our leadership and product innovation by winning SEMA's Best Engineered New Product Award with our new Holley Easy Level Fuel Level Sender, which uses LiDAR technology to precisely measure the depth of fuel remaining in your tank. It prevents the need to set up float-type fuel level sensors, which saves time and improves accuracy. Pictured here, accepting the award, is John McCloud, leader of our classic instrument in Detroit Speed Brands. We also took home a number of global media awards. These awards are nominated by premier journalists from throughout the world that come to the SEMA show with a purpose of identifying and discovering what new products are likely to succeed in their home countries. Included in that list were the following Holley Performance products. Our Sniper II EFI system, our Detroit Speed 1964 to 1970 Mustang front end kit, and our hooker Blackheart brand's LS Swap stainless steel manifolds. On the right side of the slide, you can see another project we're really excited about. They debuted at SEMA. Through our Detroit Speed brand, we are one of the premier Restomod builders, and that reputation gets recognized by some of the biggest celebrity names out there. Plus, it gives us a platform to promote all the possibilities that Holly can provide on your next project. At this year's SEMA, we displayed a project we've been working on for comedian and actor Kevin Hart. As an avid auto enthusiast, we were delighted Kevin chose us for his build on this 1969 Pontiac GTO. In addition, our APR brand, which focuses on European platforms, also won an Innovation Award at SEMA from one of our major customers for its Direct Turbo Replacement Kit for the Audi 3.0L engine found on many 2018 and up platforms. Last quarter, we introduced you to our three fundamental steering principles. You can see those on the left side of slide eight. We expect to make these principles a reality by focusing on the four key areas to the right. The first centers around our teammates and making Holly a great place to work. The second area we focus on is enhancing our operations. to not only remove non-value-added activities, but also ensure we have the right products available and the right inventory levels to serve the market. Plus, we must offer enthusiast consumers and distribution partners the best omni-channel customer experience in our space. The third key area is optimizing acquisitions. Poly has acquired some amazing brands and businesses over the last few years, and we realize that each of these has their nuances. We must foster these differences to enable them to continue delivering their distinct markets. We are working to ensure that there is no one-size-fits-all approach and that the appropriate structure is in place with leadership and accountability to make sure these businesses achieve outsized market growth in their respective areas. Finally, we are putting a focus on all customers first. This not only includes our fabulous base consumers, but also our loyal distribution partners. we're finding ways to grow and expand our sales channels in an effort to reach and serve a broader range of enthusiasts. On to slide nine. The transformation occurring in our organization is extensive as we work to grow the company both organically and inorganically. There are four areas we'd like to highlight for today's call, and they include the marketing and sales evolution, cost to serve, enhanced product development, and the rollout of our new organizational structure. When it comes to marketing and sales capability, there is a comprehensive evolution happening. We're aligning our resources around the goal of increasing our customer engagement with both our consumers and distribution partners and focusing on key areas of opportunity with the greatest impact. On the distributor side, we're finding more ways to partner with key distributors in our consumer verticals to win a larger share of their business and identify mutual growth opportunities. We have also refocused resources to be even more customer-focused and have advanced what was our call center into a new customer experience and engagement center. This new path with additional resources is rooted in providing the highest level of customer support. We are investing in our digital capabilities to offer the leading experience in our space to attract and convert more customers. through our own as well as third-party consumer and distributor platforms. We are also focused on improving our cost position through a project we put in place called Cost to Serve. With some outside assistance and by combining data sources that were previously not available, we're able to identify by product category the cost to serve various customer types. The focus of this project is on both the inbound cost of the sourcing of the components for a product, as well as the internal and external distribution of the product, and after sales support that is required for us to serve the various channels. Now, not only are we finding low-hanging fruit with inefficiencies in our operation, but at the same time, we are uncovering ways to improve our customer service. Now, that's definitely a win-win scenario. Product innovation is key to our business, and with so many great brands and categories, we need a more refined structure and process to manage our product development efforts. This has meant installing seven new consumer verticals with leaders to steer that development across the key platforms and categories. We're also creating robust product development roadmaps by category and implementing a product development phase gate system with a goal of filtering out low-return projects and elevating the highest priority product launches in the organization to ensure they are receiving the necessary resources to have successful market adoption. To help unlock the potential of this great company, we are instituting a new organizational structure. This new structure better focuses on the needs of the consumer, accelerates product development, enhances customer service, and drives clear accountability and responsibilities in the company. The new structure is intended to be as cost efficient as possible. Through in-depth input from our stakeholders, we settled on a matrix structure. It comprises 10 product categories that will be focused on executing a business plan developed in conjunction with our seven consumer vertical leaders who will drive the strategy across the business as to what platforms and what products we are targeting to bring to market. Additionally, we developed a support structure at the home office that ensures we are providing our leaders with the right amount of functional support and resources to execute their strategies efficiently and effectively. One of the goals of this organizational structure is to drive empowerment within our brands with guardrails of support and direction. All this change has required an extensive change management focus with greatly enhanced communication across our company. On slide 10, you can see our new consumer verticals. These consumer verticals line very closely with how CMIT and other organizations in our space look at the market. Now, Legacy Holly was focused on classic truck and muscle, which we've shown a clear leadership position in. But the biggest areas of opportunity based on our consumer market segmentation exist in modern truck, Euro, and off-road, which is informing much of our go-forward strategy. With our vertical leaders focusing more on the needs of consumers, which includes where they shop, what vehicles they've purchased, and what products they are interested in, and allows us to become hyper-focused on delivering platform solutions. The world of the performance automotive aftermarket is vast and confusing, and consumers do not want to spend hours and hours trying to uncover who has what for the new or used vehicle they just purchased. They are increasingly going to specialists who understand the verticals and the respective platforms in them. Few companies, if any, have the opportunity that Holly does to present a comprehensive platform offering with all the product categories we cover. We have significant potential for growth by focusing and organizing our products in a manner that best resonates with the consumer. More to come on this in the future. Now, I'd like to turn it over to Jesse to discuss our financial priorities and our Q3 results in more detail.