Holley Inc. (HLLY) Earnings

Management highlights

- **Overall Financial Performance**: * Reported net sales increased 3.2% year-over-year to $172 million; core net sales (adjusted for portfolio rebalancing/divestitures) grew 4.9% year-over-year, with three of four divisions delivering double-digit core growth. * A one-time net loss from the divestiture of non-core restoration brands impacted GAAP results; adjusted net income rose to $24 million, more than double the $10.6 million reported in Q2 2025. * Free cash flow increased 5.2% year-over-year to $40.9 million, driven by operational discipline, working capital improvements, and a one-time IEPA tariff refund. * Gross margin was 41% (down 72 bps YoY), and adjusted EBITDA margin was 19.6% (down 223 bps YoY); the decline is largely due to a non-recurring one-time non-cash tariff capitalization benefit in Q2 2025, with underlying adjusted EBITDA roughly flat year-over-year. - **Portfolio Rebalancing**: * Completed divestiture of non-core restoration brands (Brothers Trucks, Scott Drake) during the quarter; only one of the five originally identified businesses remains to be divested, with strong buyer interest. * Year-to-date: 4 non-core brands divested, 2 facilities eliminated, 95,000 square feet of warehouse footprint reduced, workforce cut by ~5% via divestitures, and ~7,000 low-margin SKUs (16% of total portfolio) removed. * Annualized benefits from portfolio rebalancing and cost optimization include >$12 million in one-time net cash, 150 to 200 bps of EBITDA margin expansion, $3 to $5 million in additional EBITDA benefit, 0.2 to 0.3 turns of accelerated deleveraging, and ~5% improvement in inventory turns. - **Organizational & Operational Improvement**: * Completed transformation of the marketing organization: reduced reliance on outside agencies, hired over 20 in-house marketing professionals embedded directly within operating divisions. Early results show improved consumer engagement, marketing effectiveness, and direct-to-consumer sales. * Delivered $8.3 million in total cost savings in Q2: $5 million from purchasing and tariff-related actions, $3.3 million from operational improvement initiatives. YTD 2026 cost savings are on track to meet or exceed the full-year target range of $5 to $7 million. * Achieved over $10 million in year-to-date inventory reduction (adjusted for portfolio rebalancing), on track to meet full-year targets. * Strategic initiatives across all eight long-term strategic pillars contributed a combined $13.4 million in revenue during the quarter. - **Balance Sheet & Capital Allocation**: * Ended Q2 with a leverage ratio of 3.74x, the lowest level in four years. Completed an additional $15 million voluntary debt repayment after quarter end, bringing total voluntary debt reduction to $115 million since September 2023. * Opportunistically repurchased ~$2 million of common stock during the quarter, reflecting management confidence in long-term value. Capital allocation priorities: 1) invest in core business growth and innovation, 2) pursue targeted complementary bolt-on acquisitions, 3) reduce leverage, 4) return capital to shareholders via opportunistic share repurchases when valuations are attractive.

Guidance

- Management reaffirms the full-year 2026 guidance issued last quarter. - The company remains on track to end 2026 with a leverage ratio below the targeted 3.5x. - Full-year 2026 cost reduction initiatives are expected to come in at or above the top end of the prior $5 to $7 million target range. - Management expects gross margin to tick up slightly in H2 2026 compared to the 41% reported in Q2 2026, in line with typical seasonal trends. - No additional price increases are planned for 2026, after a modest recent increase to offset freight and component cost headwinds. - Long-term target guidance remains unchanged: stable organic top line growth of at least 6%, 40% gross margins, and greater than 20% adjusted EBITDA margins supported by sustainable free cash flow generation.

Segment performance

Holly operates four product segments, with the following Q2 2026 performance: 1. **American Performance**: Net sales declined 2.1% year-over-year, an improvement from a 9.7% decline in Q1 2026. The decline was driven by temporary headwinds of elevated channel inventory (now normalized) and intentional shifting of product category marketing launches to H2 2026. 2. **Modern Truck and Off-Road**: Net sales increased 15.7% year-over-year, accelerating from 3.8% growth in Q1 2026. Growth is supported by strong consumer demand and successful new product introductions across retail and enthusiast channels. 3. **Your Own Import**: Net sales grew 13.1% year-over-year, a significant acceleration from 1% growth in Q1 2026. Earlier supply constraints have been resolved, allowing the segment to capitalize on strong demand from the resilient European enthusiast vehicle market. 4. **Safety and Racing (Stacey and Racing)**: Net sales increased 13.8% year-over-year, following 10.2% growth in Q1 2026. Growth was driven by consistent new product introductions across the Stilo and Simpson brands, sustained demand from the Snell 2025 helmet certification cycle, and expanding share in the growing motorcycle safety market.

Risks & headwinds

- The macroeconomic backdrop remains uncertain, with ongoing inflationary pressures, higher fuel and transportation costs, and an evolving tariff landscape creating potential headwinds. - Tariff costs have increased compared to prior year periods, and the one-time IEPA tariff refund received in Q2 2026 does not offset ongoing higher tariff costs from other trade policies. - The company operates in a dynamic market environment, with consumer demand trends subject to shifts in macro conditions.

Analyst Q&A

• Q: Can you elaborate on recent marketing organization changes, KPIs used to measure success, and early performance improvements? /

  A: Holly shifted over 20 marketing roles from external agencies to in-house teams embedded within each operating division, while retaining a central center of excellence for cross-divisional work. Embedded teams are closer to enthusiast customers, can create content faster and respond more quickly to market trends across social media and enthusiast forums. Success is tracked across the full performance marketing funnel from awareness through to conversion and re-purchase. Early results are positive, with the Modern Truck and Off-Road division (which had the embedded model the longest) already delivering strong growth. Early improvements in engagement and sales productivity are already visible.

• Q: What is the size of the impact of last year's one-time Q2 tariff capitalization benefit on this year's year-over-year EBITDA comparison? /

  A: The impact is approximately $3 to $3.5 million. Adjusting for this non-recurring benefit, 2026 Q2 EBITDA in dollar terms is slightly higher than 2025 Q2, and the adjusted EBITDA margin is very close to last year's level. This adjustment aligns with management's framing that underlying operating performance is roughly flat year-over-year.

• Q: Which of the five cited H2 2026 growth drivers do you expect to have the largest impact, and what is your M&A pipeline outlook? /

  A: All five drivers (simplified operations, new national retail placements, robust product pipeline, empowered in-house marketing, strong HRX performance) are meaningful. Simplifying the business by exiting non-core unproductive inventory has improved operational efficiency significantly, while the newly embedded marketing model is already driving faster response to market trends. HRX continues to outperform original acquisition forecasts. For M&A, management maintains a robust pipeline of targets, and remains selective focused on deals matching the HRX profile: founder-led businesses with double-digit growth, positive free cash flow, and complementary positioning to Holly's existing portfolio.

• Q: Why did the projected annualized net cash impact from cost optimization drop from $15 million to $12 million, while the EBITDA benefit increased? /

  A: The original $15 million projection excluded expected cash tax benefits from portfolio write-downs. The updated $12 million reflects current realized progress, with potential for additional gains to close the gap to the original forecast. The higher EBITDA benefit reflects additional cost reduction actions completed since the last update, including additional facility closures and headcount optimization that were not included in the initial projection.