Holley Inc. Q2 FY2025 earnings call

Key Sections - Momentum Continues: The momentum built over 24 months continues, with core business growth in every division, seen in both direct-to-consumer and business-to-business channels. - Tariff Mitigation: The tariff mitigation plan is working, with over $15 million in tariff mitigation opportunities executed through 2026. - Product Innovation: Launched products like Terminator X Bluetooth module, Arizona Desert Shocks Mesa 2.5 line, APR high-performance exhaust systems, and new Simpson Outlaw Banded 3.0 motorcycle helmet colorways. - Omnichannel Strategy: Strong performance in direct-to-consumer and business-to-business channels, with e-commerce revenue up year-to-date. - Supply Chain: Reduced inventory by approximately $9 million since the start of the year, improved in-stock rates, and achieved $3.5 million in cost savings from strategic initiatives.

In the second quarter of 2025, Holley's core business showed solid growth across all divisions. The domestic muscle vertical delivered 6% year-over-year growth. The Modern Truck and Off-Road division led with an impressive 17% growth. The Euro and Import division experienced 4% growth, with Euro brands Dine-in and APR up 20% combined. The Safety and Racing division reported 1% growth, but Simpson and RaceQuip brands had a combined 15% growth. Net sales for the quarter were $166.7 million, reflecting a 3.9% increase in the core business. Gross margins were 41.7%, up 26 basis points year-over-year. Free cash flow reached $35.7 million, the highest quarterly free cash flow in history.

Forward-Looking Statements - Updated full-year 2025 revenue range tightened to $580 million to $595 million, implying ~2.2% growth at the midpoint over 2024 core business base. - Adjusted EBITDA guidance range tightened to $116 million to $127 million. - Tariff mitigation initiatives are expected to fully offset tariff-related headwinds in 2025, with net pricing gains and mitigation efforts supporting free cash flow in 2026 even with potential lower volume.

Risks - Tariffs: Continued impact of tariffs, though mitigation strategies are in place. The tariff landscape remains fluid, but efforts are underway to offset costs.

Q: Congrats on the strong progress. First on pricing, how have your partners and enthusiasts overall responded to the price increases you put in and kind of the change in tact in terms of approaching your resellers with the 60-day notice? And with that, how would you characterize current sentiment in the marketplace? Has it improved with a little more certainty on tariffs?

A: Sure. Brian, thanks for the question. When we look at just kind of that sentiment in June and just the overall out-the-door sales, they were strong in the marketplace. Now we notified to our distributors in April that price increase would take effect roughly in middle of June. And then July is historically one of the softest months of the year. But generally speaking, the feedback was -- the pricing was in line or lower than competitors in the relative categories. Of course, just given how many categories were present, that wide range of competitive dynamics exist. But overall, our pricing was definitely in line with the competition. And we just got to see in terms of just that overall elasticity of industry demand, pricing and discretionary spending, how that plays out once we get past the slower summer months and into more of the higher months of the year.

Q: Follow-up on the prior question. Similar to how you're moving some sourcing to vendors in lower-cost countries, what are your conversations like with the resellers? Like are you winning share or shelf space because you're taking less price than the industry in addition to the channel expansion and product innovation work you've been doing?

A: Christian, it's Jesse. It's a good question. I think all the indicators that we've got as we work much more closely with our distribution partners is that we are continuing to take share in the market. When we look at sort of our out-the-door growth relative to what the overall business is doing in these distribution partners, we continue to outperform there, and that continued all the way up through our most recent data, which is June. So, I think to Matt's earlier point, the pricing we put in was in line, if not better. and that is certainly helping us kind of continue to remain and gain momentum here.

Q: This is Martin on for Joe. My first question here is regarding sort of inventory. You've reduced so far by $9 million. So, I was wondering if we can get an update on sell-through/sell-in?

A: Yes. This is Jesse. I think we don't report out on the exact numbers we get from our distribution partners, but we're seeing really good numbers and results from them on the sell-out, and that's kind of what we look at to understand just generally what the end user demand is. And I think that, that's a testament to our relative pricing, our continued enhancement in our partnerships with them and just making sure that we're partnering with them to make sure their inventory levels are in a good spot. So, I feel like the end distribution partner indicators are continuing to be really strong for us, particularly relative to what the rest of their business is doing.

Q: The product innovation growth is an interesting metric here. So just curious around the level of new products that you've launched year-to-date and then maybe how that would compare to plans for next year or just steady state going forward, assuming we're past a lot of the tariff-related trade disruptions?

A: Yes. Philip, this is Matt. Thanks for the question. Philip, we're really focused on quality versus quantity. I mean we, of course, want to continue to drive the right innovations and, of course, increase the volume of those. When you think back to our strategic product rationalization that occurred where we took out basically about 45% of the portfolio, there was a lot of work being done for innovations that really weren't moving the needle. So now we put in a very robust phase gate system with 7 gates to make sure we're bringing those right innovation to markets that are really going to drive the top line forward and to underline this organic growth trajectory. So again, it's not about quantity, but for us, we want to continue to drive more revenue through innovation.

Q: On the new market growth, could you talk a bit about the trajectory of growth moving forward in Mexico and potential size there? And maybe how that strategy differs from the growth strategy in the U.S.? And I guess a quick follow-up there would be, is this the primary market expansion for the foreseeable future? Or are you guys seeing any other markets that you've identified for potential growth?

A: Yes, Patrick, thanks for the question. This is Matt. I mean, Mexico is just a natural market, of course, for us, just the adjacency to the -- and proximity to the U.S. and the amount of enthusiasts that are down there. And that was something that just was just not focused in years past. And how we look at the potential of Mexico, we would see that long term to be about 5% of the U.S. market is where we would see that. And it's going to take some time to get there, right? It's really an all-do market entrance for us. It's everything from setting up distributors, setting up the proper product distribution, working with the national retailer footprint there. So, it's all going to take some time. But in terms of other markets, this is just a great market that we're spending the majority of our time on right now, again, for those reasons. But we -- there's a lot of enthusiasts around the globe, and we can continue to evaluate where it makes sense to plant a flag, so to speak, in a larger presence.

Q: Can I ask you, Jesse, you said flat sales so far in the third quarter. What's the base? In other words, is that including or excluding some of the one-timers from a year ago?

A: Michael, we didn't -- we're trying not to speak specifically to the third quarter thus far, but I think what you implied from the script is kind of in line. And those trends we are seeing versus prior year as well as for the back half are embedded in our guidance. And your question around how does that compare to last year? I mean, I think to Matt's earlier comments, I mean, this is seasonally one of our lowest volume periods and demand is holding up relative to the prior year. And that's just on a gross basis. I think as we get into the back half, you're not -- there's only about $3 million in each quarter related to divested businesses, and we're largely past the meaningful SKU rationalization that happened in the first half.

Q: I wanted to ask about just your view of the consumer at this point. I know you said summer is always a soft period and you pass through price increases now, so it's a little hard to tell. But I mean, what the customer has been buying, at least in the second quarter, are you seeing people stepping up? Are they adjusting their spend? It sounds like unit sales are up. So, I assume that's a good thing. People are kind of back at the projects. But just how do you view the consumer right now?

A: Joe, it's Matt. Thanks for the question. As I commented, Joe, the out-the-door sellout in June was really good. And so, generally speaking, to Jesse's point, what we saw on units for the first half of the year, there's a couple of components. I mean, overall, the market is hanging in there, but more importantly, we're taking share, right? And so, now that you have that price increase that goes through in June, July typically is that softer or one of the softest months just due to a lot of back-to-school summer vacations and things that go on. So right now, we haven't seen anything meaningful one way or the other, but it will -- we'll get more color here as the third quarter plays out. But right now, nothing meaningful one way or the other from what we've been seeing.

Q: So great job on the tariff mitigation. Looking at Slide 11, it looks like $8.5 million out of the $15 million in tariff mitigation is relocation with existing suppliers and sourcing with new suppliers in lower-cost countries. I was wondering if we could get a little color there, specifically on how your exposure to China, maybe some of the higher-cost countries is changing and then what kind of lower-cost countries you're kind of shifting to? China sourcing exposure is a consistent question we get from investors.

A: Yes, Brian, I'd say our overall strategy had a number of facets to it, as you could see in the prepared material. But overall, we want to be in countries that have a more stable long-term relationship with the United States, and that's where we've been focusing on either relocating with our current suppliers or finding new suppliers in lower-cost countries. So that's just been the main focus and mitigating that exposure in China.

Q: And at risk of beating a dead horse on the H2 guide, and maybe I'll try it a different way. So, it calls for a big deceleration in organic sales. I think it's up less than 1% despite you're lapping much easier comps. And I know July is typically a slow month, so -- and you mentioned it's flat. I guess why wouldn't all the heavy lifting you've done internally kind of help achieve a little bit better H2 growth? Or is it just simply conservatism on your part?

A: Yes. I think, Brian, again, we all have been saying the back half is the biggest question mark just given what we were all seeing in April with the consumer and the tariffs and the pricing flowing through. And so, we were really just taking like to your point, a bit of a conservative view on what the units are going to do. I mean, I think we've all read the headlines of the pricing across the economy starting to actually flow through and what's going on with just employment. And we're in the thick of all of that right now. And if you give us a couple more months, obviously, we'll be in a much better position. And we're just not in the position where we feel like it's prudent to lean out until we know more.