Thanks everyone for attending our 45th Annual Growth Conference. I'm Brian McNamara, one of the analysts at Canaccord in the consumer/industrial space. We are delighted to have Holley here and the host CEO Matt Stevenson, CFO Jesse Weaver. Matt, why don't you take it away?
Okay, right. Thanks, Brian, and good afternoon everyone. I'll just do a brief overview of Holley for those that aren't as familiar with us, and then we can jump into some questions, Brian, if that works. Sure. Of course, standard disclaimer here, and then we're going to jump into a little bit about Holley. One thing that's fantastic about Holley is we serve enthusiasts. A lot of the world of consumer discretionary and the unknowns right now, our folks, this is their passion. This is their hobby, and we liken it to folks that are fitness enthusiasts, golf enthusiasts, skiing or surfing. You can see our consumer basement enthusiasts, around 70 million, actually dwarfs a lot of those other segments that people think are much larger.
Sometimes when you come to the East Coast and people in New York City aren't really understanding the amount of car enthusiasts that exist across the country, they're immense. I myself am one of them, and it's just a great, passionate marketplace of customers. Holley, we're actually over 120 years old. A lot of people know us as a carburetor company. That was wrong. The original Model T, but we've changed a lot over the years. We actually have 70 brands in our portfolio. We went public in 2021, and Jesse and myself, Jesse has a little over two and a half years. I'm about just over two years. We're a team that was brought in after the company went public in 2023 to really take this organization to the next level, to turn this into the billion-dollar-plus platform in this consumer auto, performance enthusiast space.
Some of the amazing brands in our portfolio, we'll jump to that in a second, but a long storied history of successfully integrating a ton of fantastic automotive enthusiast brands. One of the big things we did when we came in is organize the company into four distinct verticals. You can see the total addressable markets up there. Traditionally, Holley was focused on the Domestic Muscle segment. The Domestic Muscle, you can think about as older vehicles. It tends to be the cars people lusted after in high school or their collegiate years. Walk that back from the peak spending years of 45 and 55. A lot of the cars that are coming into favor right now are cars in the 1990s and early 2000s because people in the peak spending years, it's when they went to high school. It's not that old cars go out of style.
That window tends to shift, right? We stay on top of those trends in Domestic Muscle. That's a $5 billion space. Holley had all these fantastic brands and products that we've been investing in, positioning in the marketplace to drive this growth. The Truck & O ff-Road, again, not a surprise to probably many folks that 80% of the vehicles Americans buy are trucks, CUVs, or SUVs. The largest part of the total addressable market, $26 billion there. We love a lot of great brands that are positioned in that market. Euro & Import, we have two of the leading brands. APR focuses on Volkswagen, Audi, and Porsche. Dinan focuses on BMW. The domestics aren't making many cars anymore, making the Corvette, some Cadillacs, Mustang, but the Euro & Import custom companies are having a resurgence around performance cars.
Our brands are doing quite well in that space, $14 billion segment there, our total addressable market. Safety & Racing, most people don't know we have this in our portfolio with enthusiasts. It's not only for the street, but the track. A lot of our enthusiasts take their cars or their second or third or 10th or 20th car on the track on the weekends. We have some of the leading brands of safety across the world. We have Simpson both on auto helmets as well as motorcycle helmets. We have Stilo, a very high-end carbon fiber helmet manufacturer. Our team in Italy sits. We do F1, WRC, INDYCAR, NASCAR drivers. We also have good, better, best. We have RaceQuip as our entry-level safety brand, which a lot of people use if they're not racing every weekend. They do once a month or once a quarter.
We just have a great portfolio of products, including the HANS device, which is the device invented after the unfortunate death of Dale Earnhardt. That is the head and neck restraint. We have the patent and the brand on that. A lot of great things to serve enthusiasts, whether on the street or on the track, is how we cover them. That's kind of the main thing. Maybe quickly, what we like to do is we're not a replacement part company. This is very important to us. Our mission every day, bringing performance, safety, and fun to excitement and automotive enthusiasts. I think you can see that across our portfolio. The vision, of course, to be the undisputed leader and drive this to a billion-dollar-plus platform and the values that we have internally for our teams.
You can see some of the key themes across our Domestic Muscle, Modern Truck & Off-Road, Euro & Import. I think that gives you a little bit of flavor of what we do every day. It's an exciting place to work. Like I said, I myself am an enthusiast. Over the last two years, we've been really focused on this transformation. For two quarters in a row, we've posted back-to-back growth in our core business, which in a market that is pretty flat and in some segments down, we're taking a lot of share. Our unit volume is up, and it's because we built a growth engine over the last two years to outperform the competition. Great time for some Q&A.
Absolutely. Matt, the company's undertaken a huge turnaround over the last 2+ years. Can you frame up the opportunities you saw when you arrived, the initiatives you've since put in place, and the progress you've made?
Yeah, I think one of the things that was really interesting to come to Holley. Again, I'm an auto enthusiast, but I saw a company that had been a culmination of a lot of great small brands and businesses who really hadn't had that professionalization on the operations as well as building that growth engine. When you take roles like this, you're always like, well, if I can invest in growth, how am I going to fund it? I saw a lot of opportunity on the operational side. I think we're just still scratching the surface on. We've been able to bootstrap just about all the investments in growth over the last two years by creating, taking out the non-value-added cost. You can see in a down market, we've been able to relatively maintain margin and EBITDA through that. Now that we're starting to generate growth, even all the better.
Really, it's been about putting processes in the company, putting a division structure to manage the complex business, right? Holley Performance brands is effectively a holding company. We run about 20 different businesses, division leaders, category leaders under that, and putting just processes a company of our size should have. Stage-Gate processes to make sure the right new products are coming to market. We talked about a lot, you know, Brian, on the calls about the growth engine we built around D2C and B2B we can get into, but really, it was a company that had amazing brands, amazing products, just really needed that professionalization, which includes a host of things around process, people, systems, et cetera.
Great. Matt, you're no stranger to successful turnarounds, but timing that inflection is obviously very difficult. At this very conference last year, I asked you kind of how long a turnaround would take to bear fruit. You said 18 - 24 months. It looks like you kind of nailed that. The company returned to growth in Q1 this year, sustaining that in Q2. Understanding July is a seasonally slow month, I think you mentioned July sales were flat. Why would that momentum slow to the sub 1% growth range that's implied in the back half guide?
Yeah, I think, Brian, we're just being conservative on this back half of the year. Like you said, these turnarounds, I'm always impatient. Jesse's impatient, but having done this a couple of times, it's always that 18 - 24 months you're walking out to the parking lot one night and you're like, finally, all the momentum's built up and the thing's turning, right? It's just the nature of moving 1,500 people and all the brands and everything else, right? We're seeing that momentum, but you know, I think we all spend a lot of time watching CNBC and, you know, the tariffs rolling through the economy. How does that impact discretionary spending? We put some pricing through along with our tariff mitigation actions that we just want to see how the price elasticity volume trade-off happens. July is a slow month for us.
For us to comment on trends, generally our customers are hanging in there, right? They're stable. They're enthusiasts. Again, what we talked about, these aren't one-time purchases for these folks, but I think until we get another quarter under our belt, then we'll better know how that core business growth plays out, versus the growth we've had in the first half.
This has been a pretty resilient category for decades. I think you've averaged, the industry's kind of averaged, like that mid-single digit, 6% top line growth since 2001, at least up until the pandemic. When is it a reasonable expectation for the industry to get back to that level, and what's required to get there?
Yeah, I think ultimately there's a lot that does come in with vehicle sales, right? Although on the Domestic Muscle side, we're serving a lot of customers that may have a 5, 10, 20-year-old car that they bought a few years ago, what have you. Ultimately, when cars change hands, people want to make them their own. Whether it's a new car or a new-to-them car, they just bought a used car. They want to personalize it. They want to make it different than the other person, right? We've seen a SAR at 15 million and be quite depressed for a number of years. I think, you know, the industry, just the macro hasn't been a friend to the industry. If we can get back to a SAR of 17 million, probably interest rates have to lower, manufacturers have to get more aggressive on the rebates. That's a good one.
Fuel prices have stayed low, which is good. That's always a good sign for us. I think it just gets back to some of the more macro factors of the economy. We've seen the trend, you know, we know we're taking share. The industry's kind of flattened out after a heavy impact from COVID positively when people were at home more, they worked on their cars more when they weren't traveling with their family. It's like someone, you know, who's passionate in golf gets stuck at the country club. They're going to golf more, right? When people were at home, working in other garages 10 ft from them, they just spent more on auto parts. Now that travel freed up and everything, they're spending in other places, but we're seeing that market all normalize out now.
To your point, the company realigned its market segmentation a couple of years ago, but you still have a pretty sizable exposure to kind of classic muscle given the company's heritage. Where do we stand on kind of each segment today in terms of its growth ambitions?
Brian, for us, there's growth in all of them. I mean, of course, you should start to see a disparate amount of growth percentage- wise in Truck & Off-Road because some of those brands just aren't as pronounced, right? The ability to grow those double digits is effectively easier than some of these that are more established. Like you said, that window just walks. It goes from cars in the 1960s and 1970s, now we're seeing cars in the late 1980s and 1990s. There is a huge runway in front of Domestic Muscle. I think that's one of the misconceptions about this business, is, oh, EVs are going to take over the world and Holley, what's your market? Let's walk through it. Domestic Muscle, we're sitting about the 2000s right now, late 1990s, early 2000s. We've got at least probably 30 - 40 or not more years there.
We haven't seen an EV penetration there. Truck & O ff-Road, EVs really aren't applicable for towing the way to the off-road. Trucks really don't have adoption there. Euro & Import, the resurgence we've seen in performance cars is being led by the Euro & Import manufacturers. Safety & Racing, of course, that's not applicable. That's helmets, belts, seats, and all that. It's one of those things where there's just a ton of runway in all these verticals. Now, carburetors, you know, they haven't made a carbureted car since 1988. Every day, every month, we're selling a ton of carburetors, right? That just shows you the life cycle and how sticky these products are for a long time.
Tariffs, I'm sure we've discussed this quite a bit. They've taken up a lot of investor focus. We have not seen kind of broad-based price increases, at least on the shelf across kind of consumer yet. Some of those are expected in H2. On the whole, do you expect tariffs to be a net positive or a net negative to your company?
Boy, that's a great question. Without a crystal ball now. Look, we've done a lot of hard work to mitigate the tariffs. We kind of gave visibility to that in the last earnings call. That was assembling really about 90 people in the organization, Eleven Tiger teams focused on the major categories, daily report outs. We went through a whole host of mitigation actions in a very short amount of time. We had also been working on it for over 1+ year , just trying to get that non-value added cost out of the business. For us, we put in some pricing of $8.75 in the market. Competitors were generally anywhere from mid- to high- single digits to 30%. We feel like we're the best run platform in the industry. We're the largest, but we also feel that we're the best run.
Our ability to continue to take share, navigate any supply chain, whether it's tariffs or what comes up, and the ability to pass through pricing with our relationships with our distributors. I think we've shown that being able to do that over the last two years. Is it a net? I don't know if I'd go so far to say it's a net positive, but we think we are well positioned better than anyone else, just given everything we're bringing.
A lot of investors ask, you know, companies, why aren't you moving out of China kind of faster? I guess, why is it not so easy to move supply chains quickly? Why is China still important in terms of craftsmanship and maybe cost?
Yeah, I think 10, 20, 20 years ago, people chased China or some of these other countries because of cost. Then they became the only source of certain products or they became a competency for products, right? It's not about just cost. It's, you know, carbon fiber is a great example. Carbon fiber is very hard to get the quality of carbon fiber anywhere else in the world except in China. We do it really well in Italy, and we're bringing in, that's part of our Stilo business. We're bringing some of those parts back to Italy and doing those. There's a lot that goes into moving suppliers, right? You got to make sure the cost structure is there, the quality is there, and you're validating these parts along the way to ensure consumers are getting a high-quality product.
There's just finding that competency, but then there's everything that goes into it. You just can't, you know, buy from Brian yesterday and Jesse tomorrow. It just doesn't happen that fast.
Fair enough. Jesse, maybe one for you. You and your corporate finance team have done a tremendous job deleveraging over the last few years since you arrived. You still remain a little north of 4x. What would be a comfortable net leverage range for you?
I mean, we've realized the long term we need to get much lower. You know, our target internally is to get down to closer to three. I mean, I think with the free cash flow generation alone, we should be south of four by the end of the year. Just doing $40-$ 50 million in free cash flow a year, not adding any additional assumptions on growth or anything, I think by the end of next year, we'll be probably three and a quarter. By the end of the following year, definitely south of three. We're on a path to do that. Certainly, continued operational efficiency, growth on the top line, and just continued optimization of the working capital could accelerate that path. Getting to three is the goal.
One of the more underappreciated features of your business is your cash generation. Jesse, maybe can you touch on how or why the company can generate the cash it does on an annual basis, even in the last few years when obviously the top line has been challenged?
Sure. I would say one, the gross margin profile is pretty, you know, phenomenal given it is a consumer business that, you know, these enthusiasts, the brands matter, so we're able to, you know, command a pretty decent margin there. I think the other big thing is it's a capital-light business. The CapEx in this organization is roughly 2% of sales. Certainly one of the biggest features are those two things. When we talk about the free cash flow, it's in today's interest rates. If interest rates continue to fall, that could accelerate that pretty meaningfully.
Holley has grown organically and through M&A throughout its history. Where do you have holes in your current product portfolio? Do you have to wait to get your leverage in an appropriate spot to actively pursue deals in the market?
Maybe Matt can speak to the specific holes. I think we've maintained a pretty robust pipeline on M&A, just continually looking at deals, as you could imagine in this environment. There's more that kind of shows up on the list, but the thing that we're really focused on is just making sure any transaction that we do, the multiple, the synergies are there so that we're not putting our path to three times at risk. We may, depending upon the transaction, take like a slight pause on that continued progression, but generally what we're talking about are smaller deals that it would take a pretty meaningful transaction to really move the needle on the leverage.
The stock currently sits around $3- $4 right now. Would a capital raise ever make sense to kind of clear the decks on debt so you could be more active in M&A?
Yeah, I mean, I think this is a question we get sometimes. I think there's certainly a stock price where it makes complete sense, right? Relative to, from an EPS perspective, I mean, we're well south of that right now. You kind of have to look at all different interest rate environments to triangulate on where that would make sense. The stock price well north of where we are today, I think the math looks really good on something like that.
Jesse, you've been in your seat almost three years, Matt, a little over two. Where are the biggest areas of improvement you've seen during your tenure at the firm? Let's maybe start with you, Jesse, since you've been there a bit longer.
Yeah, I mean, I would say the work that, you know, Matt's really done with his experience to bring in sort of the commercialization aspect, all of the things in the go-to-market. One of the things that we kind of speak to internally that was a prevailing thought from the organization before, previously was, you know, the demand will be what it will be, but we've obviously not taken that for what it is and put in a sales team, developed the competencies around, you know, solution-based selling, making sure that we're filling all the gaps where necessary, partnering more closely with our distribution partners. I think that that's really yielded a lot of fruit for us and been a big part of seeing B2B grow, you know, Q1 and Q2.
I mean, I think that mindset of going from really leaning into D2C, but leaning into both because we really want all channels to grow. It's a big part of this.
Matt?
It's got to be the team. I mean, the team's a night and day difference. I mean, the professionalism they operate with, and you know, there was an approach prior to coming in. The company was run more like an entrepreneur of a whack-a-mole. You know, problems come up, try to knock them down. Same problems come up 90 days later and that kind of thing. We've professionalized the company where, you know, I put us against a lot of Fortune 1000s of how they operate, right? We have pricing committees every Friday. We have product phase gate meetings every two weeks. We have the business unit reviews. We have daily huddles Monday and Wednesday. There is a system now that the business operates on. It's because we get around the right people. We probably have upgraded talent in the top two levels.
Well north of 50 teammates have joined us or replaced those that have left. The processes that we now have, and the systems we have, do you use data to run the business? The other big thing is just the partnerships with distributors. They're a huge part of how you meet a consumer, where they want to be met. That was something I just don't feel was nearly as appreciated as much as we appreciate it. The team's done a great job. We brought on a ton of great people. You feel like you can actually take a day off, and the business is in a good spot. Yeah, they've done a good job.
Talk about where those distributor relationships are today versus maybe the day you arrived.
I think there was, you know, we're a consumer auto, automotive enthusiast platform, right? There's no doubt. Our job is to know the consumer better than anyone, engage with them, which we do. Ultimately, there's a reason why distribution models exist, why they are. Consumers have everything from a spur-of-the-moment purchase. I want to work on my car on Saturday because my spouse took the kids. Where do you go get that part? We're not going to get it there that day. Amazon's not going to get it there today. The national retailers down the street, you can pick it up. You have wholesale distributors that serve all these little mom-and-pop hot rod shops across the country. We can't have a direct relationship with 20,000 shops or more. They serve their purpose.
The e-tailers, like great customers of ours, like Summit and JEGS, they have their purpose where people go just for everything, performance out of all the brands, right? Of course, your own direct-to-consumer platform. For us, it's really appreciating that 75% - 80% of our business, the value they bring, and ensuring we're helping them grow not only their top line, but their bottom line, because if they grow, we grow. We've invested a lot in the sales force. We've probably brought on 25 new resources that work with our distributors every day. Data quality we dramatically enhanced to make it easier for our B2B partners to merchandise. We've also made sure we've given a lot of margin back to our key distributors to ensure they're profitable in selling our products. I'd say that this has been a massive change in mindset internally.
Matt, the day you started, the share price that day is similar to the share price today, despite some.
What are you saying? What did I do?
Pretty Herculean efforts, right? In our view, obviously the business is in a much better footing. There are a bunch of improvements out there. Are the shares undervalued today? If so, what do you think it takes for the market to, I guess, agree with that view?
I think, you know, often we ask, are we doing what we say we're going to do? I think that's the big thing. Over the last two years, we've done exactly what we said we were going to do in the timeframe we said we were going to do it in. That's building that credibility with investors. We just got to continue to do that. I think, you know, we've seen that share performance up, what, 60% in the last five days.
Not bad.
I think it just takes repetition, right? People start to see it. We're executing in a market that is doing us no favors, right? We're earning the growth. We're earning the skew velocity. We're creating a sustainable platform to drive growth in the future and eventually do the M&A and everything, right? I think people will catch on.
A question we're asking all of our consumer companies at this conference: how healthy in your view is the consumer today versus this time a year ago when you were sitting next to me at this very conference? How do you see consumer spending shaping up in the back half of the year and as we enter 2026?
Obviously, that's a tough question to answer, right? I think the nature of our industry, kind of who's leading the administration today, how our customer base leans, I think their confidence in the administration for our customer base is much higher. Even though we continue to see inflation and pricing and things, I think the nature of our consumer base feels a little more confident in where the country is headed, even though they may be still dealing with a lot of the same macro factors. I wouldn't say they're worse. I wouldn't say it's dramatically better, but I feel like our customer base is quite stable and, you know, generally excited about what we're doing and is passionate about the industry.
Great. I think we're out of time, but thank you so much, guys. Appreciate it.
Yeah.