Good morning, ladies and gentlemen, and welcome to the conference call to discuss the results from Holly's Second Quarter of 2023. Please be advised that 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. Ross Collins, Senior Managing Director of Alpha IR. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Thank you for taking the time to join us today. On the call with me today are Matthew Stevenson, President and Chief Executive Officer; and Jesse Weaver, Chief Financial Officer. After their prepared remarks, we will open the call for questions. We will be referencing page numbers from our second quarter 2023 quarterly earnings presentation, which can be found on our Holly Investor Relations website. 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 from those reflected in the forward-looking statements are included in the company's recent 10-Q, S-4 and S-1 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'd like to turn the call over to Matthew Stevenson, Holly's President and Chief Executive Officer. Matt?

Thank you, Ross, and good morning, everyone. It is an absolute pleasure to be joining you on my first earnings call here at Holly. Not only did I join this company because I am an automotive enthusiast, but I also saw the remarkable growth potential in this organization. We have great brands, great products, great people, and great customers. What more could you ask for? I joined the company in June of this year, and there was a lot of fantastic progress already underway from the leadership of our Board member and Interim CEO, Michelle Gloeckler. I want to thank Michelle for all her efforts in the four months prior to me joining Holly. On Slide 5, we've highlighted the key takeaways for the second quarter. It is clear we are continuing to build a path for gross margins of approximately 40% and EBITDA greater than 20% over the long term. We demonstrated that ability by delivering nearly 40% gross margins and 21.6% adjusted EBITDA for the quarter. Through forecasting and operational improvements, we brought down net inventory levels by more than $10 million in the quarter, boosting our year-over-year improvement in free cash flow. We also reduced past dues across both our electronic and mechanical categories by $4 million. And on the new product development side, we launched our all-new Sniper 2, the next evolution of our marquee fuel injection product line. The Sniper 2 features enhanced capabilities and greater compatibility with older vehicles, plus installation is a lot simpler, which greatly reduces install time for our customers. Also, our unique QuickStart feature allows users to get their Sniper EFI system running by answering only a few questions about their engine. No laptop or prior tuning experience is required. In addition, future product line extensions like wireless connectivity will allow enthusiasts to connect their Sniper 2 to Holly via their smartphone. With this level of consumer connectivity, we will unlock multiple avenues for greater consumer engagement, which will allow us to better understand how our products are being used and what additional needs our consumers may have. We launched Sniper 2 at the tail end of the second quarter. And through the end of July, we have already registered $1.5 million in sales. As a key piece of my onboarding process at Holly, I spent a lot of time on the road, visiting 11 of our facilities and a number of major customers over an eight-week period. I wanted to get out and form my perspective as quickly as possible. Getting out to see over 90% of our teammates, along with customers who represent a sizable portion of our annual revenue was a great start. What I found, frankly, was not a real surprise, an incredibly passionate group of teammates that are excited about where the company is headed and great distribution partners who are enthusiastic about Holly and want to find ways to grow their business with us. This valuable input, time spent with our Board and our leadership team have informed the development of what we call the steering principles for the business. You can see the steering principles on the left side of Slide 6. The first one of those centers around fueling our teammates. That principle is about making sure we here at Holly are on a journey to make this a great place to work by providing the resources and the environment for our teammates to be successful. This means clear direction, strong leadership, and appreciation for diversity, accountability, and opportunities for growth. We want to create a working environment where our teammates' opinions and insights are welcomed and respected. When our teammates are fueled, it allows us the opportunity to supercharge our customer relationships by delivering exciting brands and innovative products, as well as making it as easy as possible to do business with Holly. By doing so, it will enable us to accelerate profitable growth, driving to exceed the returns our shareholders expect and allow us to invest back into our teammates and customer relationships in this continuous cycle of growth. The way we make these principles a reality is by focusing on four key areas. On the right, you can see those. First, we need to listen to our teammates and ensure we get their input in the daily and strategic actions of the business. Our teammates are enthusiasts and have great knowledge of the market, our customers, the competition, and our products. Second, we need to enhance our operations in order to take out non-value-added activities, while ensuring we have the right products available with the right inventory levels to serve the market. We also need to analyze and understand the cost to serve of each of our business lines, product categories, and customer types. Plus, we need to offer our enthusiast consumers and distribution partners the best omnichannel customer experience in our space. The third key area is focused on optimizing our acquisitions. Holly 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 to deliver in their distinct markets. We are making sure that there is no one-size-fits-all approach, and we are striking the appropriate balance of integration and synergy creation in order to fully optimize each organization's growth potential. Finally, we are focused on putting all customers first. This not only includes our fabulous base of consumers but also our loyal distribution partners. We are finding ways to grow and expand all of our sales channels in an effort to reach and serve a broader range of enthusiasts. The great thing about our business is that there is a $40 billion total addressable market, so there is plenty of growth potential out there. On Slide 7, you can see some of the financial and business highlights from our second quarter. Our net sales were down just over 2% due to the normalization of demand we have previously forecasted, with a similar reduction in gross margins, mainly due to sales mix. However, our adjusted EBITDA margin was 21.6%, up nearly a full percent compared to the prior year. This is a testament to the operational improvements the team has made in reducing costs throughout the organization by rightsizing the team's structure, finding efficiencies in manufacturing, and making meaningful improvements in freight. These efforts have helped generate free cash flow of $29 million for the quarter, which is a $30 million improvement versus the prior year. Let's also touch on some of the business highlights for the quarter. For this call, we will touch on two areas in particular. The first is on our product innovation, and the second is on our consumer engagement, both key pillars of our overarching strategy. Just this quarter alone, we launched 75 new products, including the Marquee Sniper 2 EFI, which I already discussed. Not only does this product have great new features and enhancements, but it's also built on a newer generation of microprocessors that are much more readily available. In addition, we launched new in-vehicle tuning products at our Edge brand for the 2020 to 2023 full-size General Motors pickup platform through our user-friendly EGHT 2 handheld. Aside from serving the domestic platforms, great brands in our portfolio like APR focused on the Euro segment. For example, APR recently launched several new air and tech products for the highly successful eighth generation Volkswagen Gulf that started with model year 2022. The APR full intake system improves performance, offers personalization between OEM style or carbon fiber covers, and enhances the natural sounds of the engine. We are not just launching new products, but we are also winning awards with them. This past quarter, our Detroit Speed team attended the 25th Annual Good Guys event in Columbus, Ohio. While there, they took home two awards, including a muscle car award with our 1965 Buick Riviera and best new product with our 1967 and 1970 Ford Mustang front-end kit. This kit is a complete front-end solution to dramatically improve the handling and ride of the classic Ford Mustang. A big part of our strategy as the leading consumer-branded company for automotive enthusiasts is to make sure we are driving consumer engagement, particularly at the grassroots level. As many of you know, we hold enthusiast events throughout the year. In this past quarter, we held three major events, two of our famous LS events, LS Fest West held in Las Vegas and LS Fest Texas, as well as the 24th Annual Brothers Truck Show held in Silverado, California. These events drew total attendance of nearly 50,000 people, up over 20% year-over-year. These events give us a direct connection with our consumers and enable us to listen to their product needs and keep a pulse on where the enthusiast trends are headed. We also use events like these as tools for online social engagement. For example, at LS Fest Texas, we invited key social media influencers, YouTube celebrities, and brand ambassadors to join us for the three-day event. Collectively, these influencers have a social following of over 29 million, enabling Holly to digitally reach more enthusiasts and share the experience of our events. Now, I'd like to turn it over to Jesse to discuss our financial priorities, our Q2 financials in more detail, and our updated guidance.

Thank you, Matt, and good morning, everyone. Our second quarter results were encouraging as we continued to see sequential improvement in our financials. Despite the year-over-year decline in sales, we did see an improvement in sales and EBITDA from the decline seen in the first quarter. Improvement was driven by normalizing order growth, past due fulfillment, and a continued realization of our cost savings initiatives that were implemented at the end of 2022. Results from these initiatives generated approximately $11 million in savings for the quarter. As a reminder, on Slide 9, our key financial priorities for the year are restoring profitability, improving free cash flow, optimizing working capital, and deleveraging our balance sheet. Through the incredible efforts of the team, we were able to drive profitability in line with our long-term targets this quarter. With an organization focused on improving operations and capitalizing on go-to-market opportunities, we are on the right track to delivering these priorities for the year. On Page 10, we've laid out a summary of key income statement line items. I will cover the key drivers of our financial performance in the subsequent slides. However, as is highlighted on this slide, Holly delivered improved adjusted EBITDA and adjusted net income year-over-year despite the declines in net sales and gross margin. As Matt already alluded to, our financial performance continues to be propelled by our team's tenacity and dedication to optimizing our operations while also remaining focused on engaging and inspiring our enthusiast customer base. These fundamental improvements over time will deliver market-leading results and lay the foundation for sustainable long-term growth. Turning to Slide 11, you'll see that we're comparing our second quarter net sales results to comparable net sales in 2019. We believe comparisons versus 2019 are important for us as we focus on long-term growth trends outside of COVID-related stimulus and consumer stay-at-home spending. Net sales of $175 million in the second quarter represent a 15% compound annual growth rate versus the second quarter of 2019. In addition, second quarter net sales from legacy businesses owned prior to 2019 ended the quarter at $133 million, which when compared to the second quarter of 2019 represents a 7% CAGR and slightly above the long-term SEMA growth trends for the industry of roughly 6% when compared to the second quarter of the prior year. You'll see on Page 12, net sales decreased $4 million or 2.3%. While net sales decreased year-over-year, we think it's important to highlight that the magnitude of the decline was much less than the year-over-year declines in Q1, and these improvements have been largely driven by improving order trends. Net sales in the quarter benefited from a $4 million reduction of past dues across both electronics and nonelectronic categories, which can be found on Page 13. Ending the quarter with $22 million marks the sixth consecutive quarter of past due reduction since the peak of $56 million in the fourth quarter of 2021. Turning to gross margin on Page 14. You can see that we were down 220 basis points from 42% last year to 39.8% in the second quarter of 2023. Decreases in margin were primarily driven by headwinds from sales mix and the flow-through of higher input costs from prior periods being partially offset by current year lower cost in production and distribution operations, which continues to benefit meaningfully from inbound freight cost savings. Page 15 lays out SG&A on a quarterly basis. As you can see in the second quarter, SG&A was down $7 million to $29 million from $36 million in the second quarter of 2022. R&D expense was down $2 million year-over-year for a combined reduction of $9 million versus the second quarter of 2022. The $9 million reduction has been through a combination of around $2 million for lower equity compensation, with $7 million coming from a combination of reduced outbound freight, headcount, and facilities consolidations. Fight sales headwinds for the year, SG&A, excluding equity compensation at 16% of sales remains in line with historical trends, which reinforces the team's original commitment to cost containment coming into the year. The results noted in the previous slides can be seen in the adjusted EBITDA results for the quarter on Page 16. Adjusted EBITDA increased to $37.9 million in the second quarter, up from $37.2 million in the second quarter of 2022. It's important to note that we had an offset of $800,000 from a partial reversal of the product rationalization add-back from the Q4 2022 SKU rationalization efforts. As can be seen on Page 17, the EBITDA results for the quarter combined with cash generation from improvements in inventory management, resulted in free cash flow of $29 million for the second quarter versus negative free cash flow of $1 million in the prior year. I'd like to call out that in the second quarter of 2022, inventory investments were a $24 million headwind to cash flow versus a $10 million tailwind in the second quarter of this year. This further demonstrates the free cash flow generation potential of Holly and the great efforts of this team. Free cash flow has been a significant contributor to the results we're seeing on Page 18 with our net leverage ratio for the quarter coming down from 5.67x in the first quarter to 5.58% in the second quarter. Both quarters have remained meaningfully lower than the covenant that was outlined in our amended credit agreement of 7.25x. As you'll see in the guidance, we expect leverage to continue to improve throughout the year. Turning to our outlook for 2023 on Page 19. Given our strong year-to-date results, we are raising and narrowing our full-year guidance. For the full year, we are now projecting net sales in the range of $635 million to $675 million and adjusted EBITDA between $118 million to $128 million. Our guidance does imply a back half step down in EBITDA margins, which is consistent with the normal seasonality of the business. We expect these results to include capital expenditures between $5 million and $10 million, and our CapEx expectations have been adjusted as we re-evaluate overall CapEx priorities to ensure that we are focused on the highest returning projects for our shareholders. Our depreciation and amortization guidance is unchanged between $23 million and $25 million. Our interest expense expectations are now in a range of $58 million to $62 million, based on the benefits we're seeing with the interest rate collar, which is in effect until 2026, and it also includes higher interest on cash balances. This range excludes the impact of any noncash interest rate hedge revaluation. Our revised guidance ranges and outlook continue to be supported by the strength of our brands, a constantly evolving product portfolio, as well as many operational and cost savings initiatives that are directly tied to driving both top and bottom line growth. This concludes our prepared remarks, and we would now like to open up the line for questions.

As a reminder, we ask that you please limit yourself to one question with one related follow-up as needed. Operator, please open the line for questions from our participants.

Thank you. Our first question comes from Brian with Canaccord Genuity.

Congratulations on the strong quarter and the progress your team is making. I would like to know about the early reception to Sniper 2, both from your customers and dealers in the channel. Additionally, how should we anticipate revenue contribution from this product launch in the latter half of the year?

Brian, this is Matt Stevenson. I appreciate the question. I mean we're just seeing a tremendous amount of interest in the new Sniper 2. And as I mentioned in my prepared remarks, we already saw $1.5 million of sales out through the end of July, which was pretty early because we just launched that at the end of the quarter. And we're also seeing some great stock orders by our major distribution partners. So overall, a lot of great excitement around this product for us.

And then, just a quick follow-up on kind of your 40/20 margin algorithm, but maybe for Jesse. It seems like you guys got back here pretty quickly, at least faster than maybe we had expected. And this is with sales down considerably. Like how should we think about that evolving when you guys actually start growing sales again?

Brian, it's a good question. And I think just to clarify on the 40-20 for us, I mean the way we think about it for our internal goals is that 40-20, we need to deliver on a full year. And certainly, we've come out of the gate this year, moving in the right direction, I think, hopefully reinstilling confidence that this is achievable. And as we go into the back half, as I've noted in the prepared remarks, typically, you'll see a step down in margins. And so I don't see at this moment us necessarily being able to fully commit to that this year. But going into next year, it is a focus of the team.

Thank you.

Our next question comes from Mike Swartz with Truist Securities.

I want to follow up on your comment about seeing normalizing order growth. Could you clarify what that means? Also, how much visibility do you have into distributor and retailer orders for the second half of the year?

Michael, it's Jesse. Good question. The normalization of order growth, just to kind of remind the group is the concept that we came into the year as we were guiding for the year and just coming off of the stimulus coming from '21 and '22. When we were seeing the decline in orders, we anticipated that the front half from an order growth perspective, would be soft but improving throughout the year. The declines we're seeing are sort of the anticipated declines, but the trend is what we're looking for, which is an improvement. I think orders were down about 13% in Q1. We were running down 1.6% in Q2. Our guidance implies that in the back half, we start to see orders be positive. So we're headed in the right direction there. That's the normalization, just getting back to what we would call a pre-COVID normal rate. In terms of what we're seeing on the out-the-door sales, it's our best barometer in terms of consumer pull-through through some of our key resellers. We get about 50% of their data on what our out-the-door sales are. I think they're seeing relatively stable out-the-door sales on their end despite our year-over-year sales. That's just due to they were heavily overstocked coming into the year. The last couple of months that we've looked at have been pretty encouraging, reinforcing the guidance that we have in place.

Okay, great. And maybe just sticking on the topic of retailer and consumer demand. I guess, how did the direct-to-consumer business perform during the quarter? And what was the percentage of sales from that business?

Yes, it's a good question. I'm going to start, and I'll let Matt kind of finish this as we refocus our efforts as a team on what the overall best way to grow the business as a whole is. But as it relates to D2C, D2C as a percentage of gross sales was 21% for the quarter, which is about 100 basis points better than it was in Q2 last year. On a growth rate perspective, we are seeing improving trends sequentially with D2C, where D2C was about flat while a business as a whole was down 2.3%. So from Q1, where D2C was down 6% versus the overall business at 13%. I will point out that the down 6% in Q1 is an updated number based on a more direct-to-consumer sales comparable for the prior year. In terms of D2C long term, we're still evaluating where that needs to be, but it's still an important part of our business.

Thank you. Our next question comes from Christian Carlino with JPMorgan.

Could you just help us bucket out some of the changes in the guidance at a high level? Just how much was it versus the internal plan in the first half versus an updated look at the second half? And any color on the cadence of DTC through the quarter and quarter-to-date that helped inform your updated view?

It's a good question, Christian. We've raised the guidance on the top end, I think modestly from the bot like raising the bottom end because of the trends that we started to see in the order growth. Coming into the year, the question mark was how are orders going to actually trend coming through the first half? We've gotten better at understanding where our past due balance is going to end up. What you're seeing in that back half guidance is some mid-single digit, mid- to high single-digit growth on orders with continued improvement in past dues. Getting to the top end of the range would mean higher order growth, closer to double-digit order growth, and then getting into the bottom end of the range would be closer to low single-digit order growth. That should help you understand the key drivers.

Got it. That's helpful. And then I guess, how are you thinking about gross margin in the updated guidance? Yes, there's a step down in sales, but you should also benefit from the lower manufacturing costs to a greater degree as you turn through the inventory, plus you have the lag pricing in electronic mix benefits. So I guess, is there anything else we're missing in those big buckets? And how should we think about gross margin exiting the year?

The key thing to remember is we have a fixed cost base in our gross margin that when sales comes down, there's a bit of deleveraging that happens there. We have pricing that helps offset some of that. We're kind of working through the back half, just based upon our accounting method with manufacturing accounting, there are some costs on a year-over-year basis that are from previous periods that roll through at a higher rate. We think that the gross margin back half could step down a little bit just given the sales leverage piece.

Thank you. Our next question comes from John Lawrence with Benchmark Company.

Congratulations on the quarter. Jesse, could you talk a little bit about maybe when you look at the slides with the business, Slide 7 and you talk about the new products launched in Q2. Where would that sit as you look sequentially over the past few quarters? I mean, is this a major step-up in development as cash was tighter, et cetera? Or where would that sit in that progression?

This aligns well with the team's ongoing efforts. With Matt joining us, we will ensure that innovation remains a key factor in influencing our consumers' purchasing decisions. As we roll out new products, we want to emphasize the excellent work the team has accomplished and the awards they have received. We will also provide better insight into areas we are progressing with that we have not previously concentrated on. Overall, things are consistent.

Great. And Matt, the slide before, the optimizing acquisitions, that's been a part of the team's strategy. As you moved around and visited these facilities, et cetera, where do you think you are in that category and aligning with that, the CapEx? Is it a return issue now that you want to set that bar a little higher before and then maybe about the pullback in CapEx for the rest of the year?

John, I want to address that in two parts. I've been traveling to visit the amazing brands and companies within the Holly family, and I've encountered some incredible opportunities. However, there are specific nuances to consider regarding their retail, service, and direct-to-consumer components. We are carefully ensuring that these business units are well-prepared for optimal growth moving forward. Regarding capital expenditure, I want to ensure that we are aligning the organization with the scope of our CapEx investments that will truly elevate this company. It's essential to pause and evaluate the full growth potential, making sure we allocate our capital appropriately.

Thank you. Our next question comes from Joe Altobello with Raymond James.

This is Martin filling in for Jon Altobello. I wanted to know if, regarding capital allocation, your top priority after investing in the business is still to reduce debt.

Sorry, Joe, can you say that again?

Yes. In terms of capital allocation, is your first priority beyond investing in the business, debt reduction?

Yes. That's a good question. You can see we generated a lot of cash in the quarter and sitting at $42 million, a lot of questions probably coming up on capital allocation at this point. It's a great place to be when you can start to have those discussions. Understanding that debt deleveraging the balance sheet continues to be a focus, we're not in a position at this point to give you specifics.

Got it. And when you talked about the COVID-driven demand bump, what do you think it will take to lap that demand bump?

Based on the work that I had done coming into the year and what we've shown in the appendix on normalization, my estimation is the back half, we should be lapping a period when there's probably a lot less stimulus tailwind, largely in Q4 when I view that the number is relatively small. Obviously, going into next year, that should be behind us unless there is some new stimulus that has not been printed thus far.

Thank you. Our next question comes from Alex Perry with Bank of America.

I guess just first, how should we be thinking about sort of 3Q versus 4Q sales cadence? Should we be thinking outsized growth in the fourth quarter, given the easier comp from last year?

That's a great question, Alex. We're currently providing full year guidance, so I don't want to specify too much. However, if you look at historical trends from before COVID, there was roughly a 50-50 split between the two sales channels. That being said, before COVID, our direct-to-consumer channel wasn't at the level it is now. We expect a slight increase in the fourth quarter compared to the third quarter, mainly due to our holiday strategies and direct-to-consumer growth. By then, our distribution partners will typically have less inventory available, allowing us to meet consumer demand more effectively. While we usually see a 50-50 split, in the fourth quarter, it will likely be closer to 50% to 52% for the back half split.

That's really helpful. And then could you maybe just help us think through the margin implications of the launch of your newer generation products like Sniper 2.0 versus prior generation products? Are these products generally higher margin for you guys?

The pricing and the efforts put in by the team have resulted in a product that offers all the features consumers are looking for in newer technology. We have positioned it in a way that maintains our margin compared to the previous generation, so there should not be any significant increase in margins from these products.

Thank you. Our next question comes from Bret Jordan with Jefferies.

Could you provide more details regarding your comment about evaluating the long-term potential of the direct-to-consumer model? Are the costs associated with that business something you are concentrating more on compared to the reseller market? What insights can you share?

Yes, Brett, it's Matt. For us, being a leading consumer platform for automotive enthusiasts, direct-to-consumer is absolutely core to our strategy. At the same time, we need to look at the cost to serve, but we also see tremendous potential in this business across various sales channels, whether it's international, OE, and a lot of growth with our distribution partners. When we think about pegging an arbitrary number around D2C, we don't think it's the best barometer of the engagement we're driving with our consumers.

Okay. And then I guess, last quarter, we talked a bit about sort of applications related to electric vehicles. Have you made any more internal progress there or anything to discuss?

Yes. Nothing to discuss specifically today, Brett. Progress continues and there's really two focuses for EV for us. One is providing aftermarket performance parts for EV vehicles that come out of the factory OE as well as looking at some retrofit applications for EV components for classic and modern cars. Some exciting things we're looking at, and I'd just say more to come in the future.

Okay, and then just a quick question. Do you have any updates on the progression of retail POS as the quarter went on?

We haven't given specific month-by-month or quarter-to-quarter updates, but I'll say the last couple of months we've seen positive growth on the out-the-door sales from our resellers. So it's headed in the right direction here as we go into the back half.

Thank you. Our next question comes from Michael Baker with D.A. Davidson.

Yes, sorry, I was on mute. I want to ask Matt about the long-term top-line growth algorithm and your thoughts on organic growth. I assume you believe it will grow at or above the 6% industry growth rate. How do you view acquisitions? Has your perspective on the benefits of acquisitions for the long-term top-line strategy changed?

Yes. Thanks for the question, Michael. It hasn't changed; absolutely not. We definitely remain opportunistic around acquisitions. It's key to our strategy going forward.

So based on the commentary previously on some acquisitions, should we expect the pace of acquisitions to be similar, less, or more than what we've seen in the last few years?

Relative to that pace, I said, for the next six months or so, we're really focused on optimizing the great brands and businesses that have become part of our portfolio. Again, we remain opportunistic and look at acquisitions that are part of our long-term strategy. In terms of the relative pace, we have to just look at that as part of our capital allocation strategy going forward.

I have a couple more follow-up questions. The direct-to-customer business has been discussed multiple times, and I want to address it as well. It seems like there has been a significant shift in focus since the demerger compared to when we went public through the SPAC. For a while, the emphasis was on direct-to-customer, which, although it represented only 2% of the business, was seen as key to growth. Now, it has been explicitly mentioned in the earnings call script and has come up several times during Q&A sessions. This indicates a notable change, which I understand the reasoning behind. My question is, what internal changes do you need to make—whether regarding personnel or focus—given this new direction? Or is it simply a matter of stating that this aspect will receive less attention in the future?

Just to be clear, it's not a change of focus. We're a leading consumer platform for automotive enthusiasts, and direct-to-consumer is part of our core strategy. But pegging this percentage of our business relative to D2C, I just give you a hypothetical example, if we grow OE international by x number of millions. When you look at the same percentage, the overall growth of the business keeps going up, but D2C may slightly go down quarter-over-quarter. We don't want to get hung up on the percentage. We want to look at meaningful growth across all of our channels, especially D2C.

Yes. No, that makes perfect sense. It just seemed like a little bit of a different messaging to me, maybe not. Last one, if I could. Your back half, my math is the back half implied sales guidance at the midpoint is flat even down slightly. To me, that seems a little conservative seeing the momentum that you saw in the second quarter and just the commentary in the back half. Is it fair to call the back half sales implied sales guidance conservative at the midpoint being down about 50 basis points, I think?

The guidance we've provided is based on our current understanding, and we believe it reflects a reasonable range that aligns with the trends we are observing and the actions we need to take regarding past dues. It is crucial for investors to recognize the relationship between orders and past dues and how they impact net sales. Last year, we reduced about $20 million in past dues, which significantly eased the year-over-year order declines we need to address this year. Currently, we do not have as much capacity in the past due category to make that adjustment. Therefore, for our guidance, we have discussed mid-to-high single-digit order growth, which is essential. While we are heading in the right direction, I believe the guidance reflects a risk-adjusted perspective of what is possible. The past due adjustment is a significant factor for the latter half of the year.

Well then if I could ask one more follow-up, sorry to hog the mic, but the past dues has definitely come down to $22 million, but still above where it was pre-code. I guess the question is do we expect that past due number to continue to fall from $22 million to now million, $18 million in the coming quarters? Or have you sort of hit the right level now or does it just go to zero?

It won't go to zero. We provide that 2019 view in their pre-COVID to give you a benchmark for what it was prior to all of this. Not zero, but close to zero; that is the goal, but probably not feasible. Given where we are, you can see that we do have a lot of work to do there. We've done great work over the past several quarters largely outside of electronics. In our guidance, we assume that the past dues continue to improve outside of electronics, and as we go into next year, the intent is to work that down even further on the electronics side.

Got it. Okay, fair enough. Thanks for all the time. I appreciate it.

Thank you, Michael.

Thank you. There are no further questions at this time. I'll now pass the call back to Mike for a few closing remarks.

Thank you. Now Slide 22 highlights the compelling thesis around Holly. This is an incredibly attractive market, driven by automotive enthusiasts. This is not just a hobby for our customers. It's our passion and it's a lifestyle. We are focused on being the leading consumer-branded company for these automotive enthusiasts. Because it's more than just a high year trend, this industry weathers the economic cycles extremely well. Plus, we have a massive addressable market, nearly $40 billion, that offers decades of uninterrupted growth. Holly continues to lead this industry through a powerhouse of iconic brands with a history of innovation. We have a track record of successfully integrating acquisitions where we have captured synergies while also unlocking growth. We have a unique opportunity to create a transformational digital experience that will redefine the way our consumers and distribution partners interact with brands. This will create a competitive advantage and drive growth. All this leads to an attractive investment thesis with a business focused on delivering consistent organic growth of at least 6%, 40% gross margins, 20% plus EBITDA margins, and sustainable free cash flow, all within a platform that enables value to be unlocked with strategic acquisitions. The combination of the attractiveness of our automotive enthusiast marketplace and the great portfolio of Holly brands offers a fantastic investment opportunity. Today, I hope you got a sense of my passion for this great company, the industry, and the bright future ahead for this organization. I thank you for your time today on the call and look forward to continuing to update you on the progress in future quarters. I wish you all the best until we speak again. Thank you, and have a great morning.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.