Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Holley Inc (HLLY, Financial) has made significant strides in streamlining operations, cutting non-value added costs, and improving inventory management.
- The company has successfully recruited top-tier talent to enhance organizational capabilities, completing a dynamic leadership team.
- Holley Inc (HLLY) has seen promising growth in its direct-to-consumer channel, with significant year-over-year sales growth.
- Operational improvements and cost reduction programs have yielded more than $6 million in savings year-to-date.
- The company ended the quarter in a strong liquidity position with over $53 million in cash and has proactively paid down $10 million in debt.
Negative Points
- Net sales decreased by 3.3% in the second quarter, reflecting a challenging market environment.
- The overall performance aftermarket remains soft due to a slowdown in consumer spending and economic uncertainty.
- Despite operational improvements, the company has lowered its full-year guidance for net sales and adjusted EBITDA.
- Inventory levels at distribution partners remain elevated, impacting sales and necessitating cautious guidance for the third quarter.
- The company has implemented temporary cost-cutting measures, including furloughs and suspension of the 401(k) match, indicating ongoing financial pressures.
Q & A Highlights
Q: You previously talked about 3% to 4% price realization this year after 2% in the first quarter. Could you speak to what it was in 2Q and how you're thinking about that number for the year?
A: In Q2, it was about the same as Q1, roughly 3%. We are continuing to do price increases, focusing on lower volume products with higher costs to serve, as our high runners cannot sustain a price increase at this time. - Jesse Weaver, CFO
Q: Could you help us bucket out the drivers of growth and the gross margin expansion in the second quarter?
A: There was some fixed cost deleverage on lower sales, pricing was a part of it, and our cost to serve initiatives, particularly in freight, returns, allowances, and warranty, have been helpful. The furlough also impacted both operations and SG&A. - Jesse Weaver, CFO
Q: Is there something that you're seeing in July and August that's getting worse? Is it the consumer slowing down or distributors getting more conservative on inventory?
A: It's a bit of both. We follow out-the-door trends closely, and after Memorial Day, we saw a slowdown in consumer demand, which continued in June and July. We're being prudent on guidance for the back half of the year. - Matthew Stevenson, CEO
Q: R&D spending in the first half is down significantly from last year. Is that going to pick up in the second half?
A: The SG&A includes R&D spending, and the classification of roles internally has shifted some costs. We're seeing more efficient product launches, with new product revenue up about 25% year over year. - Jesse Weaver, CFO
Q: Could you give us a sense of what was predicated in the high end of the guidance versus the low end?
A: The range captures the macroeconomic impact on consumer health. The high end depends on industry trends and our initiatives to gain share. The low end reflects a more cautious outlook on consumer spending and distributor destocking. - Jesse Weaver, CFO
Q: Can you talk about the distribution partner health? Are there any substantial shrinkage in door count?
A: Overall, our top customers and national retailers seem strong. We monitor receivables closely to ensure good standing. If there's softness, sales may shift to stronger, less-levered customers. - Jesse Weaver, CFO
Q: Are there any relative outperformers within your verticals?
A: Safety and racing are showing strength, driven by lifestyle commitment and product innovations. Our brands like Simpson, Stilo, and Hans continue to lead the market. - Matthew Stevenson, CEO
Q: How could potential interest rate changes impact the business and consumer sensitivity?
A: A 100 basis point decline in interest rates would benefit us by $5 million to $6 million in free cash flow. We have a collar in place, so we won't feel the full benefit immediately. Lower interest rates should help alleviate consumer pressure. - Jesse Weaver, CFO
Q: Can you talk about the biggest opportunities with the new Head of Operations and Supply Chain?
A: Short-term focus is on increasing in-stock rates and reducing past dues. Long-term, we will look at operational footprint and product cost improvements. We have locked in long-term container rates to navigate logistics costs. - Matthew Stevenson, CEO
Q: Can you talk about the demand in the industry and the pressure points?
A: Our DTC business is growing due to improved consumer engagement and digital strategy. Distribution partners are feeling the macro consumer impact. We are focused on nurturing these partnerships to drive growth. - Matthew Stevenson, CEO
Q: Do you have a target for inventory turns, and how should we think about inventory levels in the second half?
A: We see opportunities for improvement in inventory turns as we refine our product mix and focus on high-adoption innovations. We have reduced SKUs significantly, which should help improve turns. - Matthew Stevenson, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
