Thank you for joining. My name is Philip Blee. I'm the consumer analyst here at William Blair, covering Holley. As a reminder, for a complete list of disclosures, please visit our website. I'm excited to have the Holley team here with me today. There's a lot of exciting changes here happening, led by these two over the past year, and a lot of new developments on the way. So, with that being said, I'd like to introduce Holley's CEO, Matt Stevenson, and then CFO Jesse Weaver. Then before I pass it on to Matt, I just want to remind everyone that we have a breakout session immediately following the presentation upstairs in Room Burnham A, and I'll remind you guys at the end. But, I'm gonna kick it over to Matt.
Okay. All right. Thank you, Philip, and good afternoon, everyone. So automotive enthusiasts in the house? Yeah. Okay, a few hands. Good. It's good to be in welcome company. So, as Philip said, Matt Stevenson, been with the company about a year. Jesse Weaver joined about 18 months ago. A bit of a head start, and we'll walk through kind of what's ultimately going on at Holley, right? We're gonna give you an overview of the industry, the company as a whole, what we specialize in, and the transformation that's been going underway for the last year, and the progress we've made in really stabilizing the company and preparing it for growth over the long term in an industry that's really resilient.
Jesse will go through the financial results from the last quarter, and then as well as our investment highlights. All right, so industry overview, this is off the SEMA data, and what this looks at is the automotive aftermarket relative to performance, right? Not replacement parts. And it shows that it's an industry that has a great CAGR of over 6% due to the passionate enthusiast base that it serves. For our consumers, it's their lifestyle. You can almost liken it to people that like fishing, that like outdoors, that like golf. This is where people relax and spend their spare time, and so this is why the industry is so resilient.
And when you see that relative to some of those other comparables I mentioned below, you see that there's 70 million enthusiasts in the United States relative to automotive and performance. And that customer base skews higher in income. You, you can see the average income is over 75,000. It's pretty diverse, and 82% of that customer base considers this a part of their budget, right? So this is, again, it's a lifestyle for them. They're allocating money to kinda keep their sanity, to work on the hobbies they enjoy. Now, just as a bit of in the industry, but now we'll kind of dive into Holley. I get a question a lot of, like, what does Holley do? And for those that aren't car enthusiasts, or I meet people at a dinner or something, they say: "Well, I don't really understand Holley.
I know it as a carburetor company, you guys do something in fuel injection." And I like to say: We make vehicles better. We make them faster, we make them louder, we make it handle better, stop shorter, and we make them safer. We're all about aftermarket performance, and we're the enthusiast platform offering a breadth and depth of product that no one else in the industry offers. You see people participate in categories or a couple categories, but you'll find with our brands and our product lines that amazing iconic brands across Domestic Muscle, Euro and Import, Modern Truck and Off-Road, and Safety and Racing. And our brands and products are generally one or two in every category we participate in.
A big piece of this industry is about grassroots consumer engagement, and we actually engage with over 100,000 consumers at roughly a dozen events around the country. The biggest being in September with our annual LS Fest East, where it's over 60,000 people, where we ultimately throw a party for enthusiasts all about the Holley line of products. And you can see all the areas we touch the car. There's really very few that we don't touch the car, and I'd say before, the company spent a lot of time positioning itself on pieces and parts. Where we have the big unlock, unlike others, is we can provide solutions to the customer.
Customer buys a F-150, or they buy a Mustang, or they buy a BMW M3, they think about what are the performance parts for their cars, and we're the only ones that can really offer solutions with exhaust, intakes, brakes, you know, you name it, to be able to touch that platform. And so recently, through this transformation over the last year, we've aligned all our sales, all our marketing, all our product strategy, and all our product management around four verticals in the company. Traditionally, on the left-hand side there, you can see Holley was very strong in Domestic Muscle. We have tremendous brands and products in these other verticals that I'd say really weren't focused on, and the reason being is we weren't using data-driven decision-making to prioritize where the spend was of categories in the marketplace.
So that is how we're repositioning the company, doing a segmentation exercise by vertical, by category, which would be like exhaust, tuning, EFI, brakes, et cetera, and really prioritizing our opportunities based on where the profit pools, or ultimately, it's where people spend money on what platforms. The other big one we've called out and we're really excited about is safety and racing. Safety and racing, global market addressable for our brands is about $10 billion. Racing is done all over the world, and there's standards around FIA, which you get standards around FIA for your products, you can sell them in any country. And the great portfolio we have with HANS, Stilo, Simpson, and RaceQuip offer us the quintessential good, better, best in high-end, middle-of-the-road, and entry-level racing.
Just some of the products, we're constantly launching and innovating on new products. You can see how we're positioning them in Domestic Muscle, your traditional EFIs, your brakes. And then Modern Truck & Off-Road, the biggest sector in SEMA is Modern Truck & Off-Road. It's about $21 billion. It's the majority of the spend. 80% of all new vehicles being sold in the US right now are SUVs, CUVs, and trucks. It's actually raised quite a bit since pre-COVID. Pre-COVID, it was 70%. So as the capacity came out of the auto market, they took it out of passenger cars, so it's a large focus area for us.
Euro & Import, we have the two leading brands in aftermarket performance for Euro, with APR and Dinan, with AEM, have a pretty good foothold in import, and as I talked about, in safety, really great opportunity for growth for the company in safety. Just our go-to-market strategy, we're around 20% D2C, so that's direct to consumer. The other key pieces of our channel strategy are national retailers. So your O'Reilly's, Advance, your AutoZone, your NAPA Parts, is a significant channel for us. Performance warehouse distributors, which are kind of that two-step distribution. We sell to them, and they sell to people that then install on vehicles. Then performance e-tailers, Summit, JEGS, RealTruck of the world that actually provide those products direct to consumer on their e-commerce platforms, and then, of course, as I mentioned, our D2C.
We also do some small OE business, and when we say OE, that is performance aftermarket OE, that's not production, as well as a small bit of international. Okay, so over the last year, you know, with the new team that's come on board, and I'll go through the steps of transformation, we, we've been really focusing on some fundamental principles to drive our organization forward. On the left-hand side is embedded in servant leadership, and it's really focusing on fueling our teammates, supercharging our customers, and accelerating profitable growth. Those are our steering principles. What it means is fueling our teammates, we want Holley to be a great place to work. We want a place our employees are passionate about coming to, which we have a ton of enthusiasts on the payroll and really want to get them the resources and the empowerment to be successful.
Supercharging our customer relationships and be the preferred company to do business with. Just as simple as that. There's a lot of facets to make that happen, and of course, being the best men of choice, we wanted to accelerate profitable growth. Key focus areas within that, listening to our teammates, what the needs were in the organization, enhancing operations, which has done a really good job of taking out a lot of non-value-added costs, which Jesse will talk about. Optimizing acquisitions. Holley did, I think, about 16 acquisitions from 2020 through 2023. Grew a lot of great brands, a lot of great products. It takes work to really integrate those and unlock the growth and make sure we're applying their distinct uniqueness of the brand and product lines of the market they serve. Then putting all customers first.
For those who are familiar with the Holley story, there was a lot of focus on D2C, and D2C is definitely a growth channel for us, but so are all our channels. We're a lot smarter about our direct-to-consumer business, where it makes the best sense financially, where our products are better served last mile by our distribution partners. Ultimately, our goal is to grow all our channels 'cause we see that opportunity across all of them. All right, the transformation, having done some transformations in the past, it's usually about an 18-24-month process. You typically are following the same steps along the way.
The first one is really driving some basic discipline in the organization, putting a cadence of communication, putting a cadence of process in, putting the right meeting structure to drive focus in that organization, as well as key KPIs. So when I first came on board, we were driving that accountability, empowerment, focusing on the things that mattered in the greatest areas of opportunity. And, you know, with over 60 brands, and at that time, we had 80,000 SKUs, there was a lot to manage. And we really had to drive 80/20 business discipline into the organization to get us focused on the things, the brands, the products, the categories, back to where the spend is in the market, to really prioritize where we spend our energy. Then a step we're really just, I'd say, completing now is developing a high-performing team.
Holley has some tremendous teammates on here. Enthusiasts, these people bleed automotive performance, but a lot of our folks came from some of the origins of the company, which came from $25 million, $50 million, or maybe $100 million companies. Our goal is to build this to a multi-billion-dollar platform, and that takes some different skill sets. So we've brought in some folks I'll introduce in a few minutes, as well as others, to really help us scale and unlock the growth of the organization, which is the primary focus we're in right now. So a few of these individuals... Like, the culture at our company and the passion around auto performance is something we really love and wanna make sure we continue to expand on.
Our job was to go find people that really understood the marketplace, understood our customers, but it came from seeing good and great organizations and can bring those skill sets and experiences to our company. So we had a gap relative to our safety and electronics business, and we went out and found a former professional race car driver. That was his primary career, and then his second career was scaling electronics businesses in large organizations. So Jordan Musser leads our safety and electronics group. Our B2B sales team really needed strong leadership for best-in-class account management, and Chet Baker had worked at Abbott, as well as Ocean Spray, but also had the grittiness from spending time in a lot of startups. We need hands-on leaders, and that's critical for all these positions.
Chet's tie to automotive is he's been using our products his whole life, and his father was one of the largest Chrysler dealers all in the Northeast. Guy just bleeds Mopar. Then you got a guy like Charlie Taylor, we brought on board to lead digital, who's the head of digital at Volkswagen, who's been using our APR products and tunes cars with his sons on the weekends. Then Will Robbins, who was the head of consumer product strategy at Bridgestone, who races on the weekends as an enthusiast, now leads our product strategy team. So that's really how we're balancing, bringing in that best-in-class skill set, as well as that passion for what we do every day.
So here are some of the key ones, and this is, you know, straight out of our earnings call, some of the four blocks we're really focused on. As a consumer products company, product innovation is everything, but we got to make sure we're using data and insights to drive that innovation. We recently reported we took out 35,000 SKUs that were representing less than 3% of our revenue. That says there wasn't the data and the consumer insights driving the product priorities, so we're changing that. Have all new phase gate system in with Will in driving those insights from the market and the consumer, and we put a comprehensive phase gate system in.
Promotional excellence, one of the other gentlemen's been on, on actually the longest, Philip Dobbs, the former SEMAO at Bridgestone, but also had a lot of private equity and scrappy background in his past career. He's been our new Chief Marketing Officer for almost nine months. Has put in now a promotional calendar that we partner with our distributors. We had to build up some of the fundamentals of our digital strategy. We didn't. Our data needed work, our SEO, our SEM, as well as we had to partner with our distribution partners relative to launching new products. So we've made significant progress there. The other big unlock in any consumer business is finding, you know, market value-based pricing and, and hitting the elasticity sweet spots of products. Holley, in the past, we did cost-based pricing with pretty much flat increases.
So we know there's opportunity there for total margin realization relative to making sure we're pricing the products the market-based value methodology. And then, as the leading platform in perf performance auto aftermarket, M&A is a big part of our growth plan long term. And so our primary priority right now is reducing leverage, which Jesse will talk about. But some of these M&A cycles are somewhat long, and we wanna make sure if there's acquisitions that fit into our long-term strategy, that we're looking at and in the market at these assets. Okay, so that's, I'm gonna turn it over to Jesse. He's gonna talk about the financial piece of it, and then we'll be taking some questions.
Thank you, Matt. Can you guys hear me okay? All right. Kind of surprised we're at this point in the presentation already. As Philip said, most people tend to go over, but we're working on this.
Just trying to keep us on time.
Doing a great job, 15 minutes. I promise we won't drape into the numbers, but I know a lot of you guys who are new to this story kind of questioning, "So what, what's the financial picture look like here at Holley?" And one of the things that drew me to the business is it's a consumer-facing business, it's enthusiast. So the enthusiast means this is a part of their lifestyle. Their spend is more than just a nice to have. It literally is their hobby, their day, what they do outside of work, and in some cases, it's what they, why they work. And that's really helped us when it comes to branded products that have been able to stand the test of time and in tough discretionary, you know, in tough consumer environments, hold on to the revenue.
We've been really fortunate that through a lot of the efforts that Matt put in place whenever he joined, that we've been able to maintain pretty solid free cash flow and gross margin and EBITDA during this time. I mean, we're close to 20%, which is our target long term, and in a period of time whenever revenue's actually been a little bit challenged here in the first quarter, and I'll talk to a bit of that in a second. Free cash flow, this business generates a ton of free cash flow. We're looking at really high interest rates.
We have, you know, our debt to EBITDA is in the 4.2x, and it's been something that we've been really focused on over the past 18 months, paying down debt, so we can get our leverage profile closer to 3 in the long term. But even in this interest rate environment, in that level of leverage, we've actually been able to generate roughly $50 million in free cash flow, and with that, we've been paying down the debt. So since September of last year, we've prepaid $65 million in debt, and even in this particular period, whenever year-over-year sales declined about 8%, we still produced, you know, $17 million in free cash flow above what we did last year.
And a lot of that's due to working capital management improvement that really kicked off in the first part of 2023. Because when I joined, one of the things that I noticed as an opportunity is you had a situation where inventory was growing, past dues were growing, so you're bringing in something, but it must not be the things people want, and revenue was going down. And these three moving in that direction relative to each other just didn't seem to make sense. And this team, what I'll say is this team is probably one of the best teams I've ever worked with that can rally around an opportunity and a problem and attack it. And that working capital was the first thing that we got on, which really helped with, you know, delivering these results, even in this challenging environment from a consumer perspective.
So for Q1, from a just high-level financial numbers perspective, we were down about 8% on revenue, and when I was coming into the quarter and we were talking about guidance, we haven't typically guided on a quarterly basis, done full year. But given what we were seeing in inventory levels at our distribution partners at the end of Q4, we felt like it was gonna be a tough quarter because what happened was they got a little ahead of themselves, and sort of holiday spending, and the out the door, which is what goes from the distribution partner into the consumer, was lighter than they'd expected. So that led to a tough Q1. And we actually ended the quarter with still a soft market.
I mean, we were in the range of what our distribution partners were performing at, but we actually saw some wins in D2C, which we don't show D2C on here. But Matt mentioned we're on a transformation, and distribution. I'm sorry, our direct-to-consumer was one of the areas that we needed to improve. And through the efforts of bringing in the right people with a good vision and experience doing these things, we actually have seen direct-to-consumer during this time move to a positive terrain, which is really encouraging to see whenever you see a distribution partner kind of, you know, not performing as well. Like I'd already mentioned, EBITDA was 19.3%, so close to 20%.
But the thing I'd like to point out is, even with 8% decline in revenue, we only saw 40 basis points of decline in margin, and we have a pretty high fixed cost business, where you would see a lot of leverage deleverage. And the reason that is, is that $3.7 million in cost savings initiatives that we were able to deliver in the period. And so, like I pointed out, when Matt got here, it's a lot of figuring out what you've got. One of the big areas was we need to get the operating proficiency of this business in line because that helps fund a lot of the things you need to do, such as bring in the right team, and buying time so you can get the free cash flow in the right place.
This 3.7 is a part of the $5 million-$10 million we will generate throughout this year, and it's on top of, I think in last year, we were in the $25 million-$30 million range that we had done. A good chunk of that was due to freight rates coming down, but a vast majority of it last year, at the end of the year, was just due to operating efficiency. You know, this would be things like consolidating packages when you send them to distribution partners, making sure your shipping fees aren't laden with a lot of, what you call accessorial charges, which are, these are charges for being over the min, max in weight, height, width.
You know, the small things that in a $4,000 invoice, 4,000-page invoice, UPS and FedEx tend to bury in the invoice that add up to hundreds of thousands, millions of dollars. So the team has done a really good job of using data to extract that value. Operations-wise, we've been able to reduce inventory, but we're in stock on more of our top products. So while we've been able to drive inventory to the right levels, we've been able to be in stock on the right things, you know, 4.8 percentage points higher than last year, which is a little over, you know, close to 10% because we're not fully in stock on anything. And then we've reduced SKUs in this most recent quarter by 12,000.
So to Matt's point, since the end of 2022, we've reduced SKUs by 45% and only impacted revenue by 3%, which is the obvious answer whenever you see that only $600 a year was sold on a lot of these products, and you can't order $600 a year of any given item. You just can't do it. And so this really helps free cash flow, it helps focus of the team, and it certainly helps, you know, long term when we look at the profit profile of the business, because what happens in our accounting is these items sit on our shelves, and then over time, we have to write them down. And so there is a margin benefit here in the long term as well, as we produce products that people want to buy, and we launch them appropriately.
So this is a page I'm proud of because it's one that I started with in the first quarter of 2023, whenever I did my first call for the full year, and said, "These are the priorities that we want to lay out from a financial perspective." Because at that time, we just entered an amended credit agreement to get higher leverage targets for 18 months. I'm happy to say we'll be exiting that at the end of this quarter, and it's been a long journey and worked really closely with the lenders and appreciate their partnership. But the main things were restore profitability through things like improving efficiency in the operations, improve the free cash flow, largely through working capital management. And in this most recent quarter, we saw $15 million in year-over-year free cash flow growth.
A lot of it last year, we did $80 million in free cash flow in 2023. It was flat in 2022, and a lot of that $80 million was just improvement in, I'm sorry, focusing on optimizing working capital. So that leads us to the next bucket, which is through a combination of, you know, making sure you're buying the right things, getting your forecast right. That's one data point that Matt often points out, is when he started, our forecast accuracy on supply chain was about 30%. And now, through efforts of the team, implementing technology, getting the right people focused on it, we're close to 70%-80%. So you end up not overbuying and not underbuying in a lot of cases.
In addition to that, we've continued to rationalize SKUs to the magnitude of this most recent quarter, 12,000 of them. Then the last thing is with the free cash flow, pay down the debt. We've heard time and time again, the leverage tolerance in the private markets is very different than the leverage tolerance in the public markets. For this year, we actually signaled we're gonna, you know, work on getting into the 3.5-4x range, with next year being 3-3.5x. But long term, you know, we believe we need to be 3x and under, with some few exceptions, depending on an acquisition at some point. But it's been a really good story, being able to present these and always have a win underneath each of the pillars.
I show this slide just to kinda demonstrate in the numbers how this has played out in our leverage, you know, as the way our covenant is measuring leverage. What I show on there is our covenant, our amended covenant for this quarter was 5.75, but we're well below not only that, but what our long-term, what our typical covenant is, which is 5x. We continue to plan to make progress on that throughout the year... as this business generates, like I said, nearly $50 million in this interest rate environment to help us make progress here. From a guidance perspective, for the full year revenue in this $640 million-$680 million would mean roughly flat on the year. Like I said, coming into the year, we saw a few headwinds that we spoke to.
One, we had a lot of benefits from burning down past dues in the previous year. I want to say it was close to $15 million-$20 million of our revenue in the previous year, was not necessarily due to demand generated in that year, but due to fulfillment of demand in prior years. The other piece of this is coming into the year, we also had about $10 million-$15 million of excess inventory in the distribution partner. So we knew it was gonna be a tough year to really generate growth, but we felt like this is a win in the year if we're able to kinda get to the flat as our midpoint.
EBITDA in this particular guidance would be, the midpoint would be close to 20%, which is in our long-term target, and the way we'd be able to achieve that as we battle inflation is through that $10 million-$50 million or $5 million-$10 million in additional cost savings that, you know, we've been able to successfully secure. And then D&A, which includes, you know, the CapEx, which is $8 million-$12 million, and then some amortization of some of our inventory and things purchased, goodwill and things that it actually amortizes is in that number.
And then interest expense of $50-$55, which, you know, we've been helped by the fact that we got a collar in place within the first month of me being here, that actually has played out really well in this environment where we don't pay any SOFR over 5%. So it's capped at 5%, and as the rates kinda dip below 5% down to 2.8%, we get to participate in that. So all of that kinda brings us to $3.5-$4 for the year. And for this more recent quarter, you know, we'd be looking at $165-$175, which is a slight decline in revenue relative to prior year, but better than our decline in Q1 as we, you know, shooting for growth in the back half of this year.
So wrapping it all up, I mean, I think Matt did a great job of laying out that this is an enthusiast consumer. Like we said, it's a part of their identity. It's more than just, you know, the spend that they do, and they have extra cash. It's where they set their discretionary money aside for first. The TAM is huge, $39 billion. We're only a piece. The company has grown through a series of acquisitions that have been proven to demonstrate, you know, that they can work together when organized accordingly. And brands are important.
I mean, we're number one or number two in some of our key brand, key categories, and we have lots of opportunities to take some of these more nascent brands and suspension and brakes in particular, and make them even bigger with our marketing powerhouse and our connections with our distribution partners. D2C has been a big part, but we also recognize, as Matt pointed out, the power of the business to business relationship. Obviously, navigating that for a lot of different companies has been a challenge throughout the years, but we found we feel like striking a pretty healthy balance, and in some ways, what we're learning in one can support the other.
And lastly, just, you know, last couple of points on here is that, you know, Matt obviously came from Blue Bird, where he demonstrated that in the public markets, he can demonstrate a transformation, and I think we're kind of playing that out here today as we've done a, I think, a decent job just kind of getting the ducks in order and getting the right pieces in place and really getting the team here to take this transformation to the next level. So early innings of this, but certainly hope you guys can see, hopefully, that there's lots of room for growth and, you know, we're headed in the right direction. So, Philip, do you wanna close us out?
Yeah. We're almost at time here, but thank you guys for joining. And then, Matt and Jesse are going to be upstairs in breakout session in Room Burnham A. But thank you, guys.