Release Date: May 08, 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 progress in SKU rationalization, reducing complexity and focusing on high-turn SKUs that drive long-term growth.
- The company has maintained robust margins despite a year-over-year decline in sales, showcasing effective cost management and investment in growth areas.
- Holley Inc (HLLY) has successfully launched several new products, particularly in the modern truck and off-road segments, which are expected to drive future growth.
- The company has strengthened its leadership team, bringing in top talent from premier companies to drive transformation and growth.
- Holley Inc (HLLY) has demonstrated strong free cash flow, allowing for significant debt reduction, which has improved the company's financial health.
Negative Points
- Net sales decreased by 7.9% due to elevated inventory levels and modest holiday demand, reflecting a weakening consumer environment.
- The company experienced a slight decrease in adjusted gross margins by 40 basis points from the previous year.
- Despite efforts to optimize inventory, Holley Inc (HLLY) still faces challenges with inventory management and forecasting accuracy.
- The company's transformation and growth initiatives require continuous investment, which could impact short-term profitability.
- Holley Inc (HLLY) is still in the process of refining its operations and eliminating non-value added activities, which may take time to fully realize benefits.
Q & A Highlights
Q: Could you speak to how trends evolved over the quarter in terms of out-the-door sales and quarter to date and just to the degree that you saw variability in out-the-door sales during February and March around tax refund timing?
A: (Jesse Weaver - CFO) Out-the-door sales improved throughout the quarter, with January being particularly tough, possibly due to storm impacts. However, improvements were seen in February and March, especially in direct-to-consumer (DTC) sales, which is encouraging.
Q: Could you speak to maybe what the actual SKU count is now and are these primarily legacy categories that are just turning too slowly because there's a limited carpark for those types of modifications or is it more rightsizing some of the categories you've entered through acquisition over the past couple of years?
A: (Jesse Weaver - CFO) The SKU count is now around 40,000, with a reduction of about 45% in total finished goods SKUs, impacting only about 3% of sales. The focus has been on large growing segments, moving away from developing SKUs without strong end markets, which led to SKU proliferation.
Q: Q1 orders look like they're down about 12%. The midpoint of your Q2 guide implies minus three in sales. And then your H2 guidance implies a nice return to growth. For those of us, maybe a little less familiar with the business, can you remind us how long orders typically take to convert to revenues and highest grade of deviations?
A: (Jesse Weaver - CFO) Orders from DTC convert quickly, while those from distribution partners typically convert within four weeks, depending on availability. This isn't a perfect one-for-one on orders to shipments, but it's used as a leading indicator for trends.
Q: What gives you guys confidence that growth will come back in H2 for maybe some investors that are doubting that?
A: (Matthew Stevenson - CEO) The confidence comes from the significant activities and initiatives behind the scenes, including new leadership aimed at driving growth. Improvements in go-to-market strategies, particularly in digital and data, under leaders who have been with the company for over six months, are expected to yield positive results in H2.
Q: Can you clarify your stance on M&A versus debt reduction in terms of capital allocation in the near term? Is the bar fairly high for acquisitions?
A: (Jesse Weaver - CFO) The primary focus is on paying down debt with free cash flow. While M&A activities are not ruled out, the company is conscious of its leverage commitments. Equity could be a tool for acquisitions, but not at current stock price points.
Q: Can you talk a little bit more about your promotional plans and what you've seen from the distributors? How effective has supporting the distributors been?
A: (Matthew Stevenson - CEO) The promotional strategy aims to lift all channels with the company's products, including supporting distribution partners during promotional periods. This approach has been optimized for future promotions to ensure coordination and effectiveness with partners.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
