Holley Inc.

Good morning, ladies and gentlemen, and welcome to the conference call to discuss Holly's first quarter 2025 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. We ask that participants please limit themselves to one question and one related follow-up during the Q&A period. Please be advised that 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, Anthony Rasmus with Investor Relations. Please go ahead.

Good morning, and welcome to Holly's first quarter 2020-25 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. Our discussion today includes forward-looking statements that are based on our best view of the world and our businesses as we see them today and are subject to risk and uncertainties, including the ones described in our SEC filing. This morning, we will review our financial results for the first quarter and discuss guidance for the full year 2025. At the conclusion of our prepared remarks, we will open the lineup for questions. With that, I'll turn the call over to our CEO, Matt Stevenson.

Thank you, Anthony, and good morning, everyone. As we review the first quarter results for 2025, I'm excited to share the early achievements from the transformation we embarked on over 18 months ago. We have seen significant progress in our business and your support has been greatly appreciated as we navigated dynamic macroeconomic and consumer environment. Despite the challenges, we have made considerable strides and I'm eager to present that to you today. We will present compelling evidence demonstrating how the focus areas of our strategic plan and the initiatives within them are driving growth across our business. For the first time in five quarters, we have experienced growth in our core business across both direct-to-consumer and business-to-business channels. As a reminder, core business excludes divested businesses and discontinued products from our skewed rationalization efforts last year. Our comprehensive omnichannel approach is crucial to driving our growth. We are dedicated to meeting our customers wherever they prefer to do business, whether through e-retailers, distributors, wholesalers, third-party marketplaces, installers, national retailers, and our own e-commerce platform. Now, despite a challenging macroeconomic environment, we are successfully gaining market share from our competitors. We have accomplished this by creating captivating consumer experiences through our events and expert merchandising, leveraging best-in-class digital capabilities, implementing a new third-party marketplace strategy, and introducing great new products across our divisions. Additionally, we have strengthened our partnerships with B2B customers who are adopting more of our product line due to enhanced support, better data quality, and our robust marketing calendar. While focusing on growth, we're also committed to improving operations by eliminating non-value-added costs and enhancing our operational KPIs across the business. These efforts enable us to reinvest in the business while maintaining margins despite decreased market demand. Before we delve into the specific highlights for Q1 of 2025, I would like to address the current macroeconomic environment and its impact on our business. Tariffs have become a significant topic across our economy, and Holly is no exception. Although the majority of our production costs are based in the United States, we are still affected by these tariffs. The fluid nature of the situation with weekly changes in policies from the administration, coupled with the hard work our teams are doing to mitigate the impact, make it challenging to model the exact effects of tariffs on our business at this time. We anticipate gaining better clarity on the permanence of these policies and the results of our initiatives when we report our second quarter results in early August. During this call, we will outline how we are addressing the dynamic situation of tariffs and safeguarding the health of our business. It is important to note that the guidance Jesse will present later in the call does not reflect any impact from the tariffs on our business nor does it consider any macroeconomic impact the overall tariff situation may have on the domestic economy and consumer discretionary. Regarding demand in the first quarter, our results were driven by capturing market share through our growth initiatives. As of today, we are seeing no material pre-buy from our customers in the second quarter. We're closely monitoring behavior and demand from both our D2C and B2B channels. But so far, we have not observed any significant changes one way or the other. Now, let's turn to slide five, which includes some highlights for the first quarter of 2025. Despite the challenging market conditions, we have achieved meaningful revenue growth of 3.3% in our core business across all divisions. We also improved our gross margins through enhanced labor and overhead efficiencies, along with a reduction in warranty costs. These operational efficiencies have played a crucial role in our financial performance, allowing us to reinvest in growth while maintaining or even increasing margins. This growth across our business was felt in 25 brands in both our direct-to-consumer and business-to-business channels. This broad-based growth highlights the impact of our strategic initiatives and the power of our brands, In the B2B channel, we have strengthened relationships with our partners, resulting in over 2.5% growth. Additionally, we are gaining market share based on our calculations of out-the-door sales and the commentary from our B2B partners. This growth is a direct result of our increased sales support and commitment to our partners. Our direct-to-consumer channel has also seen significant growth, with more than a 10% increase. Third-party platforms such as Amazon and eBay experience growth of over 50%. Third-party marketplaces are a key growth channel within our direct-to-consumer strategy, and we are meeting customers where they want to be met with our enhanced third-party marketplace approach. Product innovation is the driving force behind our consumer enthusiast platform, and Q1 saw significant contributions from numerous new products across our portfolio. Plus, our strategic price initiatives, crafted to hit the elasticity sweet spot for both our consumers and distribution partners, are aiding in propelling growth and maximizing total profitability across the channels. New products, combined with these strategic pricing efforts, result in revenue contribution of $8.1 million for the quarter. To mitigate the impacts of tariffs, we're implementing proactive cost reductions and strategic sourcing initiatives. I will go into these details in an upcoming slide. Now let's turn to slide six, which features some more quantitative highlights from the first quarter of 2025. We achieved net sales of 153 million, representing a 3.3% increase in the core business compared to the prior year. This growth underscores the effectiveness of our robust strategic initiatives and the hard work our teams are delivering across our business. Our gross margins also saw significant improvement, rising year-over-year to 41.9%. While there are various factors contributing to this sizable increase, which Jesse will elaborate on later in the call, it is important to note that approximately 200 basis points of this improvement are directly attributable to our continuous improvement efforts to enhance labor and overhead efficiency, as well as reduce warranty costs. Despite these positive developments, our free cash flow for the quarter was negative 10.8 million, a decrease of 28.6 million compared to the prior year. As we noted in previous calls, changes in our accounts payable process extended the timing of some payables into Q1 of last year. Additionally, slow demand trends in January and February driven by weather conditions shifted a significant portion of demand into March. This shift elevated our receivables for the quarter, which subsequently converted to cash in this current quarter. Our adjusted EBITDA margin improved to 17.8%, an increase of 460 basis points from the prior year. However, this figure can be somewhat confusing due to the one-time effects of the skew rationalization implemented in the first quarter of last year. When factoring in the decline in overall Q1 revenue year-over-year, which includes the impact of divested businesses and these discontinued product lines, our EBITDA margins are actually down by approximately 100 basis points due to the lower volume. In Q1, we continued to innovate and expand our product offerings across various divisions. Just a few of the notable launches in our portfolio include the Sniper 2 EFI Hyperspark bundles and the NOS Octane Booster from our domestic muscle verticals. In the modern truck and off-road division, we continue to broaden our offerings of performance packages. Under the Dinan brand in the Euro segment, we introduced inline tuning modules for the BMW S58 engine, found in many popular BMW M cars. Lastly, in the safety division, we launched the next version of the leading head and neck restraint in racing, the Hans IV. This is just a minor selection of the great new products launched in the quarter. These products are well received and expected to drive further revenue growth. In a few slides, we will touch on some of the new products coming this quarter. Our commitment to operational excellence is evident in several key metrics. We achieved a 2% year-over-year increase in the in-stock rates of our top 2,500 products, ensuring better availability for our customers. Additionally, we improved operational efficiency by over 1 million year-over-year and reduced past dues by 16% compared to the previous year. Moreover, we made significant progress in reducing inventory levels, achieving a reduction of over 3 million since year-end 2024. This reduction aligns with our strategic goal of optimizing inventory management and improving cash flow. The continuous refinement of our marketing calendar led to a successful outcome in the first quarter. During the IRS sale held in the period, our e-commerce growth rate increased by 27% year-over-year. Plus, our strategic communications and PR efforts generated nearly 600 million earned media impressions from over 1,300 media clips. And we continue to reach a large population of enthusiasts with 8 million followers across our various social media platforms. a number that has increased since the previous year. These achievements demonstrate our marketing effectiveness and the ability to enhance our engagement with enthusiasts. In summary, our first quarter results reflect our focus on strategic initiatives and the collective effort of our teams to drive growth and operational excellence. Slide seven provides a comprehensive overview of the meaningful growth in our core business achieved across our divisions. In the domestic muscle vertical, the division experienced a 3% year-over-year growth, with the three power brands listed here averaging an oppressive 11% growth. The modern truck and off-road division saw an overall growth of 2%, with some power brands achieving remarkable year-over-year growth rates as high as 27%. Our euro and import division recorded the highest growth at 17%. driven by renewed focus, product innovation, and an emphasis on comprehensive platform packages. The safety and racing division also experienced 3% growth, with the power brands listed contributing significantly more, such as Stilo, which saw an 8% year-over-year increase in the quarter. These results demonstrate that by strategically focusing our resources on the power brands within our four-division structure, we are driving growth and gaining market share. even in a generally softer market year over year. On slide eight, you'll find a reminder of the eight areas of our strategic framework that we discussed during our last earnings call. At the core of this framework are steering principles. The first principle is fueling our teammates, which aligns with our goal of making Holly a designated great place to work. We aim to create an engaging workplace where employees have a voice, opportunities for growth, in an environment they are excited to come to every day. The second principle is supercharging our customer relationships, whether it's with our consumer enthusiasts or B2B partners. This principle encompasses three key areas of our strategic framework. Designing and implementing the premier consumer journey in our space, being a trailblazing trusted partner for our B2B customers by discovering new and exciting ways to drive mutual growth, and launching innovative new products that are the envy of their categories. All this is achieved while actively managing and merchandising our entire portfolio with clear differentiation. The final principle, accelerating profitable growth, includes expanding into new global and adjacent markets, transformational M&A, and funding our growth through operational improvements. These efforts, along with the others mentioned, culminate in our ultimate goal of delivering superior financial results. Now on slide nine, I'm pleased to share the highlights and achievements for the first quarter as reflected in our strategic initiative tracker. Let's begin with our trailblazing trusted partner pillar, which encompasses our B2B sales initiatives. We have continued to see significant growth through our targeted efforts with national retailers. Our partnership with R&R for additional B2B sales support has yielded impressive results. particularly in data adoption, increasing our presence among the top 50 accounts. Additionally, we have launched the Holly Pros initiative, which provides a strategic approach to engaging with smaller accounts. These efforts have collectively contributed to an additional $2.5 million in revenue. Moving on to the premier consumer journey pillar, which focuses on the direct consumer, our e-commerce growth has been strong. exceeding 10% year-over-year. This growth has included focused efforts on third-party platforms, particularly Amazon, where we saw an increase of over 15%. These initiatives have resulted in an additional $3.3 million in revenue for the quarter. Furthermore, we restructured Holly Events to enhance customer experiences, which will not only drive future revenue increases, but will also boost media value during our upcoming event season. In product innovation and portfolio management, we launched several new products across our divisions and are gaining momentum in our performance packages. These innovative products and solutions contributed approximately $4 million in revenue for the quarter. Additionally, our portfolio management efforts, including strategic pricing changes, generated an additional $4 million. Our global expansion and new market initiatives are also progressing well. We're on track with the early stages of our Mexico market expansion, which includes on-the-ground activation events and promotions. To date, we have signed up 15 distributors in this market. In the car dealer channel, a relatively new market for us, we've increased engagement with BMW dealers, with now 22 participating in the program. These combined efforts have generated $300,000 in revenue as they continue to develop we anticipate greater contributions in the future. Under the Fund the Growth Pillar, we completed and implemented projects related to purchasing savings amounting to $2.1 million. Additionally, we achieved approximately $1 million in operational improvements during the quarter and are on track to reach $6 million for the fiscal year. These initiatives have collectively contributed $3.1 million in cost reductions for Q1. Lastly, our commitment to being a great place to work is yielding positive results. We saw a 3% increase in our Great Place to Work survey scores, reflecting our ongoing efforts to create an engaging and supportive work environment. In summary, our strategic initiatives have driven $15 million in revenue across key areas, achieved $3.1 million in cost reductions, and improved our Great Place to Work scores by 3%. In addition to advancing our strategic initiatives, the team has been dedicating a significant amount of their time to mitigating the impact of the excessive tariffs announced since our last meeting. The changes in the tariff policy since we last met in March have been meaningful for our business, but the team is proactively addressing the challenge and making substantial progress. If we turn to slide 10, You can see that we are first and foremost proactively managing our business's cost structure. We have implemented comprehensive plans across the company to manage costs and help offset the tariff headwinds we are facing. Our approach is multifaceted, focusing on spend optimization and operational improvements, along with tariff mitigation and strategic pricing actions. First, let's discuss our spend optimization efforts. We have taken decisive steps to eliminate discretionary spending. This includes reducing expenses such as travel, off-site meetings, and other non-essential items. By prioritizing key projects that are aligned with our major growth initiatives within our strategic priorities, we are effectively reducing planned expenditures in both operational and capital expenditures. Additionally, we are optimizing our spending on professional services by transitioning to lower-cost vendors and renegotiating agreements in areas such as legal, benefits, marketing, and auditing. Transitioning to operational improvement, we have accelerated our efforts to enhance operational efficiency. This includes reducing warranty spend and returns, as well as improving first-time yield and minimizing waste. We have also evaluated and accelerated site consolidation, putting new sites on hold to optimize our existing infrastructure. Furthermore, we have frozen headcount, and we will proactively adjust our workforce management to match new volume realities should they occur. Also, we will reduce overtime and tightly manage frontline operations. A key aspect of our operational improvement strategy is to reduce existing and inbound inventory by minimizing order quantities and enhancing demand planning through our improved sales, inventory, and operational planning processes. Next, let's address our tariff mitigation related to pricing strategies on slide 11. We are overseeing these efforts through a swiftly established comprehensive project management office. Now, to tackle the various aspects of tariff mitigation, we have developed five major work streams. Governance, products, logistics and supply chain, regulatory and classifications, and pricing and margin protection. Our approach is multifaceted, involving daily meetings to ensure we stay on track. Each Workstream is specifically designed to tackle unique challenges and opportunities, ensuring a coordinated and effective response. Workstream governance has been established to oversee the entire process. We have set up a steering committee and brought in outside PMO support and contractors to assist with daily and weekly reporting. A burn-down chart has been established to track progress and ensure accountability. Product Workstreams have been a critical component of our strategy. We conducted an ideation workshop involving 11 product teams with dedicated team leaders. This workshop focused on prioritization and developed an insistent action playbook, which includes supplier negotiations, relocations, resourcing, footprint analysis, and make versus buy decisions. Additionally, we have verified product classifications to ensure compliance and optimize tariff coding. Logistics and supply chain efforts have been focused on optimizing tariff volatility. We secured a bonded warehouse in Memphis to manage inbound containers and inventories from high-tariff countries. Ski rationalization and inventory analysis have been components of this workstream, helping us streamline our logistics and reduce costs. The regulatory and classifications workstream has evolved utilizing third-party expertise, such as various custom brokers and trade advisory services, along with legal experts. to assist us in navigating this complex situation. We have identified exemptions for lobbying, particularly non-auto parts, and are actively engaging with organizations such as CEMA, MEMA, and local governments to advocate for favorable tariff classifications. Pricing and margin protection has been another crucial area of focus for us. We announced a comprehensive pricing action on April 11th with an 8.75% increase to be implemented on June 9th. allowing for a 60-day notice to the market. Additionally, we are looking at implementing category-specific actions where needed, with plans to roll those out potentially by Q4. In summary, our strategic measures to mitigate tariff impacts are thorough and well-coordinated. By establishing dedicated workstreams, conducting workshops, securing logistics solutions, engaging with regulatory experts, and implementing strategic pricing actions, we are addressing the challenges posed by tariffs. We plan to update you during our August call when we have better clarity on the permanence of the tariffs and the effects of our mitigation efforts. Now, before I turn it over to Jesse, let's turn to slide 12 to highlight just a few of the exciting product innovations occurring in the second quarter of 2025 across our four divisions. In the domestic muscle vertical, we are pleased to announce the latest addition to our chemical product line, the new Holley, fuel system, and carburetor cleaner. Expanding our chemical offerings is a strategic priority, as these products represent a significant growth opportunity within the national retailer channel. Following the successful launch of our Bluetooth capability on our entry-level Sniper fuel injection line, we are excited to extend this feature to our Terminator X fuel injection series. This enhancement will allow users to control functionality and access display features directly from their phones. providing a seamless and convenient experience. In the realm of modern trucks and off-road vehicles, we continue to broaden our package availability. A key differentiator for Holley Performance brands is the breadth and depth of our product line, touching more parts of the vehicle than any other performance aftermarket company. This unique capability enables us to design components that work seamlessly together, meeting consumer demand for integrated and easily accessible products. Our new packages will also cater to the UTV market, including a range of products such as shocks, brakes, exhaust system, and tuning capabilities from various brands within our portfolio. In our Euro division, we are actively expanding our range of performance packages for BMW vehicles under the Dyna brand. Additionally, we are finalizing the at-home flash tuning product for Dyna and look forward to discussing this in upcoming quarters. For the ATR brand, which focuses on Audi, VW, and Porsche performance, We are preparing packages for key high-volume models. We are developing these offerings with exhaustive solutions, such as those developed for the Audi S4 and S5. In our safety and racing division, our commitment extends beyond ensuring safety with cutting-edge technology. We also prioritize style for both riders and drivers. For our motorcycle line for Simpson, we are introducing a wider range of colors for our popular Outlaw Bandit helmets. responding to consumer demand. On the automotive side of Simpson, we are expanding our seat line to be FIA certified with more colors appealing to a broader range of global markets. Additionally, we are launching new product lines within our airspeed racewear collection designed to keep drivers safe while looking great. This is just a fraction of the great new products arriving across the Holley Performance Brands portfolio in Q2. At this point, I would like to hand over the presentation to Jesse, who will offer a more detailed financial analysis and comparisons of our Q1 2025 results. Jesse?