Conference Transcript - HLLY 2026-06-03

Philip Lee, Analyst — William Blair

Hi, everyone. My name is Philip Lee. I'm the consumer analyst here at William Blair. For a full list of disclosures, please refer to our website. Very excited to have Holly's president and CEO, Matt Stevenson, and CFO, Jesse Weaver. They're going to kick it off for us and give us an overview of their presentation. Thank you.

Matt Stevenson, CEO

and uh good afternoon everyone so walk through uh holly performance brands my name is matt stevenson i've been ceo for about uh three years jesse weaver is about three and a half in the seat of cfo well you've been very much into transformation over the last three years as we've professionalized the company and got it to more steady state growth and improved the operations so i always like to gauge the room who owns a car all right when you do this in new york it's like whoa wait a minute like we're going to talk about cars like yes we do automotive aftermarket performance for cars and trucks so what we do is we make the vehicle faster louder safer more exciting and we also equip people that either ride two-wheelers or four-wheelers cars is safer with our helmets, race suits, Hans devices, and I'll show you a little bit about that. So first and foremost, get this out of the way, our forward-looking statement here in the Safe Harbor provision. I don't look good in orange stripes, so we always make sure we include this in here. And some of the things we're going to cover today is just the passionate amount of enthusiasts out there. When you'll see the number, I think it really startles folks how many people in the U.S. consider themselves car enthusiasts and how big the market is. We have the most amazing brands in the space, and I'll walk through a bit of the history of how we got there. Also, a big piece of our underlying thesis is the M&A. We participate in an industry where the median company is about 10 million in size, and so it's a great acquisition platform for us to roll up. Also, direct consumer business, which is about 22% of our go-to-market strategy and offers great differentiation platform for us and great free cash flow. Jesse will talk about some of the transformation we've done in the last year and how we've improved the free cash flow profile of this business a lot over the last three years. So our market overview, like if I told you there's more car enthusiasts than golfers, you'd probably be shocked. But when you see that number, there's roughly about 70 million people consider themselves car enthusiasts in some form or fashion. It's either they're modding their car, they're equating to liking racing or what have you. But there's a ton of car enthusiasts out there in the market. There aren't a lot of large platforms that serve those car enthusiasts. So you see us there, you see Fox Factory, which is mostly centered around upfit on trucks and, of course, shocks. And the Australian company ARB, which really hones in on truck and SUV accessories, shocks, bumpers, wenches, various things on the ticket truck or SUV off-road. So we're in a unique company because there aren't many platforms at scale like we are. How we got there, we're over 120 years old. Although we went public through a special purpose acquisition company in 2021, we've been around for over 120 years. We're a very real company. We have real revenue and real cash flow. And it's a foundation on many iconic brands. We were on the first Model Ts with Harley Carburetors, and of course, we've acquired brands like MSD and Flowmaster. And for those that like the Fast and Furious movies, NOS, the nitrous oxide system, yes, that's us too. And then we've really built out the safety portfolio, Simpson race suits, Simpson helmets, Stilo helmets, which is a high-end helmet out of Italy. And we recently acquired a business called HRX, which does, I'd say, European cut-type suits that the vast majority of the world prefers for motorsports racing. They're all FIA certified. And, for example, the driver who just run the Indy 500 on Memorial Day weekend was wearing an HRX suit. So those are some of the iconic, just a fraction of the iconic brands we have in our portfolio. How we segment the business? We have over 70 brands, but we really focus around 20. We consider those our lifestyle and power brands. Lifestyle brands, simple definition, people have tattoos of these. They literally will come to our events with those tattoos of those brands on there. Now, the power brands are the brands that have also the highest growth potential for us or are already sizable revenue for us. So you see those 20, we split them up into four divisions. American Performance, these are cars that were American-made. they tend to be the vehicles people lusted after because they had infinity when when they were in high school so peak spending years of american consumers 45 to 55 walk that back to when those people are in high school you're talking fox body mustangs the late 80s and early 90s you're talking oj broncos from the early 90s f-body camaros from the mid to late 90s those are the vehicles we consider kind of in fashion square body trucks is another big one in american performance trucking off-road those are new or late model trucks and suvs eighty percent of what americans buy are either a truck suv or cuv it is the largest segment growing for us your own import we have some of the most sought after aftermarket performance brands in euro dynan does bmw apr does porsche audi and volkswagen and then we talked about a few of the safety and racing brands simpson steelo racequip hrx and hans this is definitely global global business for us and it is growing quite nicely some of our uh walk through our three-year plans some of the highlights premier consumer journey trailblazing trusted partner around driving our b2b uh growth which we'll see some of the key initiatives in another slide coming up of course being a consumer products company it's all about product innovation and there's a lot of great innovations we're bringing to market this year and the following years that we're working on global expansion and new markets we've been very much a u.s focused company and some of the big growth initiatives for us are outside the united states as well as in adjacent markets like power sports power sports when i mentioned there are utvs they are very much becoming like the new middle class car they're 30 grand people spend 30 grand and modifications on them and they enjoy them with their families got four seats and they enjoy the outdoors so that's something we have a lot of products that are applicable that space that we're finding new roads for those mna hasn't mentioned big part of our story uh that we'll talk about what we're doing with that fund the growth is around our operational improvements we've taken about 40 million dollars of non-value-added costs out of this business over the last three years we still see a runway to take a lot more out this is how we've been able to actually improve margins as the markets declined from its COVID highs over the last few years. We've actually improved margins and free cash flow and deliver results, of course, about delivering the bottom line. And first and foremost, I should have started with making Holly a great place to work. We have the fortunate privilege of working with really fun products and fun people, and that makes it a great place to come to every day. So here's some of the growth drivers for us. We talked about innovation, chemical expansion. we just introduced something uh it's just a natural adjacency a new car care line of course with our customers odds are they're washing and taking care of their own cars on the weekend just introduced new car care line i've seen a lot of expansion in mexico south america and some of our european markets with our new products uh oe we partner with a lot of great companies like fox factory and others provide components for them when they make trucks cooler or more performance oriented in the aftermarket talked about power sports third-party marketplaces are a big growth driver in our industry our goal is to meet the customer wherever they want to shop and right now we do effectively about 10 channels about five in b2b five and d2c we run a pure omni channel and part of that strategy around amazon is getting the product closer to the customer with amazon fulfillment under a 3p business model national retailers o'reilly's advance the auto of the world they're looking to differentiate their inventory versus their competitors and if you're an enthusiast and you get up on a saturday and you have an extra couple hours and want to do a project that's the brick and mortar of the national retailers helps you get the parts that's one of the we think is a it's a very accretive channel uh because amazon or what have you is not going to get that product fulfilled same day someone can go to those national retailers and get it. Package solutions are the things we're working on. Just make sure we offer not just pieces and parts, but solutions for customers. Whether you're taking your car on the track and need a helmet, suit, gloves, and shoes, or you're working on a new BMW and you want an exhaust intake, tune, or other products to make it faster and look better. So very solutions-oriented. And then operational excellence, we have a lot going on in purchasing savings in tariffs. If you'll notice, you look at our financials from last year in a forward projection, there was obviously an impact to our business with tariffs, but if you look in the financials, you really don't see it. There's a lot of hard work that's gone on in the team to mitigate that impact and ensure we're either mitigating it through moving suppliers, redomesticating it, bringing back in-house or what have you. So a lot of hard work was done there. Putting in the basics of Toyota production system and lean manufacturing in all our facilities which has been a real driver efficiencies this year and also at the end of last year then we continue to modernize the business with a new erp and a wms something we just talked about in our last earnings call we're pretty excited about as you can imagine when you have 70 brands and cover as many categories as we do you have some things are doing really well you have some things that are maybe just a little bit neutral and you have some things that are actually a bit of a headwind to generating sustained organic growth at the levels we want to which are the mid single digits so we've been uh taking a really fine tooth comb to the portfolio as the environment has changed and when i mean the environment has changed freight rates tariff rates different things relative to how some of these businesses may have looked a year or two two years ago and how they look today relative to the contribution versus the time we spend on them So we're in an initiative right now to exit some of our what we consider either underperforming brands or brands that take a disproportionate amount of time to their value, taking that capital and then reinvesting it either in higher growth brands or continuing to pay down the debt. Jesse will talk about our leverage goals here over the long term. But when him and I first started, we were close to six times levered and now we're under four. We've paid down proactively 100 million in debt over the last few years. So we've made a lot of great progress, and we want to continue to accelerate that. So one of the other things, as we've taken out some of this complexity during this time, we're also looking at consolidating facilities, freeing up some warehouse space, and then we will naturally reduce our workforce by about 10%. One of the other things that we've done as a leadership team over the last three years, we've cut our portfolio about 45%. We had a really long tail in the business, 45% of the portfolio. sold less than $600 a year, and then with this next move, we're going to take out about another 11,000 low margin SKUs to get around 35,000 active SKUs, which is a huge win from the 80,000 we inherited. Simpler to manage, and we're spending our times on the things that matter. And then through this benefit, there's portfolio rebalancing, one-time benefit of about $15 million in cash, actually an improvement to the bottom line on EBITDA percentage and EBITDA total dollars and will help us actually de-lever faster. So all in all, win-win-win across the board. So when we look at reinvesting this capital, talked about the highly fragment industry. One of the things we've done is really sourced our own pipeline based on our four verticals where we have gaps in categories that we don't have coverage and brands that we find really interesting that are, I'd say, riding a wave of consumer demand, whether in trucks or in motorsports. And we tend to look at businesses that are founder-led. They have an incredible passion. They buck the trends of the market. And they typically have hit a point. What we find is they need more capital or don't have the investments necessary to expand their distribution or reach, whether that's in B2B or D2C. We also look for businesses that are either at 20% or more on EBITDA, or that we can get them there in a pretty quick fashion, and then have positive free cash flow. So one of those that we just recently did towards the end of the first quarter was this business HRX that I mentioned. We've had in our portfolio for a while Simpson race suits, but Simpson race suits are very Americana for NHRA. They're not global certified. And like a sport coat that a European manufacturer makes or a U.S. manufacturer makes, there's definitely a style difference. It's an apparel business. And HRX, candidly, style spoke to most markets around the world, including the higher-end drivers in the U.S., where the Simpsons suit just didn't have that kind of a cachet. So it fits in well to our portfolio. High-end race suit. We have a high-end race helmet in Stilo. Most people consider that the Gucci of racing helmets. One of our Stilo helmets, $5,000, $6,000, and everything from the gentleman driver to we have three drivers in F1, and we own the WRC, Emsa, all the top drivers in the world. Their goal is really to have a Stilo helmet. So a nice complimentary, we're calling on the same customers, and we have the ability to unlock growth with HRX through more global B2B distribution. So it's just an example of how we're thinking about M&A, how we're rebalancing the portfolio, and ultimately with the goal to generate more sustained growth at a higher level. And at the end of the day, that will enable us to de-leverage faster. So with that, I'm going to turn over to Jesse, who's going to go over some Q1 highlights.

Jesse Weaver, CFO

Thank you, Matt. Okay. All right. Anyone here heard of Holly before this? Do you want any Holley products? No? Well at least we got cars and some people have heard of us.

Matt Stevenson, CEO

It's a start.

Jesse Weaver, CFO

It's a start. Yeah, when Matt and I started a big part of the story was helping people understand the business. And the best place to understand the business is come to one of our LS Fest events where we have 50,000 consumers who show up and really get the chance to, you know, partake in the products in a host of different activities that we do. drafting is one of those drag racing drifting sorry off-road course so if anyone's interested come September give us a call happy to host you but for Q1 highlights for the quarter I'd say let's before we get to Q1 last year we logged six a little over six percent organic growth from a combination of price roughly 50% price and volume so coming into Q1 we actually had a little bit of headwind ahead of us because Q4 was very very strong a few of our distribution partners got a little ahead on their inventory purchases whenever we then came into Q1 we had some weather events that I think many people who follow consumer can recognize for impacting the quarter and those two things combined made Q1 very tough to sustain that growth in that quarter but as we came into the call we started to see the signs pick back up in April and are expecting to see you know this quarter to recover a decent amount but overall i think some of the things that are lost in just looking at a singular quarter as matt pointed out our ebitda at this point is above 20 our gross margins are above 40 free cash flow that first year was 80 million dollars free cash flow since been then has been between 35 and 45 million we've paid down 100 million in debt this business is fundamentally meaningfully stronger than it ever was multiple years ago on a much lower revenue base as a result of coming off of covet highs and some portfolio optimization that we're doing so in this quarter while sales were you know challenged ebitda is still up 71 basis points year over year ebitda dollars were flat on lower sales and our free cash flow on a year over year comparable basis was up four and a half million dollars. So we've made a lot of good progress. And as we look forward into this year, this portfolio rebalancing is really just a continuation of I think the optimization of the portfolio that we've been doing. And as a result of it, not only are we going to increase EBITDA slightly, we're actually going to free up another 15 million in cash to put towards the debt on top of the free cash flow that we generate. on top of whatever we get from the IEPA refunds, which we haven't disclosed an amount, but all of these things go to get us to where we hear investors want us from a leverage perspective. And in the public markets, it's under three times. And I'll get into the portfolio rebalancing and the capital allocation here in a second. I'm not gonna drain this slide. I mean, again, it's just rehashing some of the metrics on EBITDA free cash flow and revenue. I think one of the key unlocks here for us has been what's been going on with the operational side. Getting to 92% in-stock rates in the top 2,500, I think when I started, maybe we were 70%, 75%, it's tough to sell product you don't have. On the operational efficiency side, can't congratulate our purchasing team enough on the reduction on the tariff front that they've done and all the great work they've done to to get less of an impact as a lot of people have struggled a lot with these tariffs. But on the operational side, we're just in the beginnings with Q1 generating 2.7 million in operational improvement, and for the year the team's target is 10, all going towards like what we said, improving free cash flow, paying down the debt, improving the leverage profile. And this re-engagement of HRX, first transaction that we've done since Matt and I joined, whenever Whenever I first joined, I remember saying, the team has acquired 16 companies in the last three or four years. We had to put a pause on that to get the organization healthy, structured, and in the right place to not only acquire the right things, but put them in a position so they can be successful. Financial priorities. These have remained largely unchanged for the last several years. The metrics that we're going after here, obviously, are things that help improve free cash flow, either not directly or but in some cases indirectly and all of that goes to delever the balance sheet so on the first end I said it's 2.7 generated in Q1 our range and the target here says five to seven you know I just said five to ten but you know I think we're on the top end of this seven million dollar range based on Q1 optimizing working capital Q1 we did have a little bit of a pickup but you would expect that when sales come in below the plan and expectations but I've seen meaningful improvement within the quarter and I know the team's initiatives they put in place in Q1 they take time just for you know data point here 60% of our inventory is purchased three three months in advance so it takes time once you change minimum order quantities you get the safety stock right you change the approach on high volume SKUs to deliver on a more consistent basis and we're seeing that happen real-time and then leverage I mean we're at three eight four at the end of Q1 you'll see a step up typically like we did last year between quarter year end and Q1 but I feel very confident at this moment that will be three and a half times or below by the end of the year and if you just run 40 to 50 million in free cash flow out for next year you can see a pretty reasonable path getting down to sub three at the end of next year which we feel like is the sweet spot for this business now what do we do with the cash so we recently just issued a press release where we talked about we're adding a share repurchase option to the capital allocation pool so leading up into this point we've been 100 focused on prepaying debt and we like we said we did 100 million dollars through the end of last year and now we've added accretive acquisitions and i think matt did a great job of illustrating to you how these bolt-on acquisitions are you know founder-led incentivize the founder to stay double-digit growers as we acquire them with a clear path to drive synergies and post acquisition EBITDA multiples you know south of what we're trading at as a result of growth not as a result of mass cost cutting I mean that that is a strategy but we don't feel like it's the appropriate one for Holly and the businesses that we're looking to acquire because we really want to fund the growth here and then now with opportunistic share repurchases I think both Matt and I and a lot of the sell-side research analysts and stockholders were surprised to see the stock respond the way it did did after we delivered the year that we did and as we're seeing the stock you know even today and for a lot of reasons related to just outside of our control you know in the sub three dollar range and we know when I started it was two and it's you know meaningfully better as I highlighted there's value here like if we don't see an accretive acquisition in the very near term and we're able to still hit the three and a half you know times leverage at the end of the year we're better to invest than in your existing business so we do have that option it's a 25 million dollar option from the board we're not saying we're gonna use it all we're gonna start with leverage first then acquisitions then share repurchases when the prices right and all those fit from a guidance perspective just you know from our year in to what changed in the update at this point of the quarter I mean we just done the full year guide back in March we had a lot of pencil you know sharpening of the pencil on this portfolio optimization to do so we didn't have enough to really communicate I think effectively what that could look like but the only change to our guidance at that time given the trends we were seeing going into the call was just to adjust the revenue side so again the revenue adjustment here that you see of 15 million is the net impact of rebalancing so that includes businesses we've exited plus the addition of HRX and then the expectation you know in this case it's an incremental million bucks or so that wasn't big enough to adjust the EBITDA at the time so even with that adjustment on the top end we're still anticipating you know Delivering on the EBITDA and the free cash flow elements that I called out free cash flow doesn't change as a result of generating this additional cash But it is you know intact as of this guide And I know that was a lot and I know it's got six minutes on the call or on the Presentation here, but that's the end of my presentation Philip. So you want to open it for questions? Sure. Yep. Great question. So Philip's questions related to skew rationalization and optimization So when I first started, part of the first exercise, it was six months before Matt got here, was we had 70,000 SKUs, something in that range, finished good. That doesn't count all of the hundreds of thousands of raw material SKUs. We cut 20,000 off the bat. Matt got here and said, hey, good start, got more to go. Ultimately, we aligned on there was another 12,500. And so all in that we needed to get rid of, all in there was under these average under $600 in revenue per SKU. Clear opportunity. So ultimately we cut 40% of the SKUs and only impacted about 3% of the portfolio. We wouldn't expect to do anything like that again. The thing that we've done with this portfolio optimization is looked at full business lines, right? Not SKUs within the categories, full business lines. And the result of this is another 10, 11,000 SKUs. So we're you know down in the 25 30,000 range at this point and I think at this point Philip we're in a really good spot outside of normal pruning of the the yard if you will just general lifecycle management of the product portfolio yes let me give him a call great question I think this is a great question Lawrence you about Lawrence all right what's the rationale I don't know that there was any actual thought put into it to have them all just hindsight right looking back it's sort of what Matt and I walked into there was no product development phase gate process in place you had a ton of engineers engineers without guidance do what they make things right and as they make things you then need in the phase gate process sort of a reflection lifecycle management period for people to look back and say hey is this selling why is it sitting over here and to be clear you would expect that when the warehouse is running at 98% capacity that should trigger that um but it hadn't you know at the time you know i just don't think the process and discipline was in place and that's what matt and the team spent a lot of time doing over the last three years on the free cash flow side on the immediate sort of things to fix to get the cash that was but the commercialization engine all the way through i mean the general sentiment and i wasn't here for all of it because the former ceo was here for two months before he retired um the general sentiment at the time was we we can't do anything to influence demand right we are we are at the whims of what occurs to us and obviously matt and i come from uh consumer businesses and that's generally not our experience right you create products people want if you've got something that is inappropriately priced you price it right you give them a reason to come and buy again like these are things that just didn't exist great question oh thank you well stock's perfectly priced yeah so question on operational technology investment and i'm taking this to be broader than just literally classic manufacturing and supply chain because you mentioned one thing that's important the team didn't even we have two or three million customer records we didn't even have a CRM. CRM was what, 99 technology? I don't know. It's been a while, okay? So implementing a CRM was an easy first step as far as that goes, but there is still work to do, and I think as you look at that capital expenditures, that 15 to 20, typically the businesses run in the 10 to 15 range. That step up is partially due to investments that we're making, and people hate to hear this, an ERP, not the thing that Matt and I wanted to do. But it is absolutely necessary to allow this business to operate at a scale that it should be operating and focus on the things that they should be focusing on. I mean, the very simple things such as knowing exactly, making sure that you can have a warehouse management system. I mean, we have a massive distribution center in Bowling Green, Kentucky, but it's not operated with a warehouse management system. I mean, there's millions there sitting in the facility that, if operated effectively, come out of the business. Well, I would say that integrations of the past look very different today. Integrations of the past were very much just jam it into the ERP and then move on. Today, we're being much more methodical about it. We've got a team today, everything from the general counsel to the operators in place, that have done many of these types of things and have a very robust playbook going all the way through the back office so then they've got a detailed work plan on what they need to do to execute the business case. The technology piece is a part of it like from an ERP perspective but mainly on the front end we're focused on making sure that that business continues to do what they've been doing because we're taking founders and helping them grow and then when the timing is right we would put them on the ERP. But as we're going through this ERP transition, I think for the most part they'll operate on their own standalone systems outside of us doing the things that we should be doing from a SOX perspective to get them on the Holley, you know, Microsoft platform and things like that. Okay. Thank you.