Hello, and welcome to the Holley Third Quarter 2021 Earnings Call. My name is Charlie, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Ross Collins with Alpha IR to begin. Ross, please go ahead.

Thank you, Charlie. Good morning, everyone. Thank you for taking the time to join us today. On the call with me today are, Tom Tomlinson, Chief Executive Officer, Dominic Bardos, Chief Financial Officer, and Vinny Nimmagadda, Executive Vice President of Corporate Development and New Ventures at Holley. After their prepared remarks, we will open the call for questions. Now I will reference the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond the company's control. Although, the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included in a company's recent 10-Q, S-4 and S-1 filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain relevant and operative at a later time. Holley undertakes no obligation to update any information discussed in this call in the future. Additionally, we will be discussing certain non-GAAP financial measures. The reconciliation of these items to U.S. GAAP are included in today's press release, which is also posted on our Investor Relations website. At this time, I’d like to turn the call over to Tom Tomlinson, Holley's Chief Executive Officer. Tom?

Thanks, Ross. Good morning, everyone, and thank you for joining us today. As you saw in our press release, Holley's third quarter results demonstrate continued benefits from recent acquisitions, solid consumer demand and strong engagement from our enthusiast consumers. Our net sales grew by 20% in the quarter, non-comparable sales from acquisitions drove our growth. Sales excluding the impact of acquisitions, which we refer to as organic sales declined by $3.4 million, or 2.6%. However, this comparison is to an extraordinarily strong third quarter in 2020, which benefited from a COVID-related shift in sales from the second quarter to the third quarter, and also grew by 43% compared to 2019. In the third quarter of 2021, we also experienced a cybersecurity incident that impacted organic sales. Until the occurrence of the cybersecurity incident, organic sales had been on track for positive growth in the quarter. The incident occurred in September and disrupted our system availability, as well as our ability to ship product to our resellers and consumers. Due to the timing of the incident near the end of the quarter, we estimate that $7 million of sales were deferred into the fourth quarter. While the timing of sales was impacted, we do not believe the incident will have a material impact on our annual results. And we've confirmed our annual guidance with no changes from last quarter. Importantly, we're taking additional steps to reduce the risk of similar cybersecurity incidents in the future. While technology systems are rarely immune from attack, we're working with our strategic technology partners in order to harden our business systems and processes, and help ensure that we can resume operations more quickly in the event of a future attack. We continue to face challenges related to supply chain constraints and raw material inflation similar to many other companies across the globe. In response to this, our team is taking the necessary steps to protect margins and pass cost increases through to our consumers mainly in the form of more frequent price adjustments. In light of consistent supply chain cost pressure and our projections looking forward, we recently announced another price increase to take effect this quarter. Despite the challenges I discussed we're pleased by the progress and results in the third quarter, and remain focused on developing new and innovative products, growing our direct to consumer channel, and ultimately enhancing the modification and personalization journey for our enthusiast consumers. I'll now turn it over to Vinny to discuss recent M&A activity, our Holley consumer events and our path to becoming a public company.

Thank you, Tom, and good morning to everyone on the call. Our team continues to manage a robust pipeline of acquisition opportunities, targeting quality companies to accelerate Holley's expansion into new categories, drive profitability, cash flow and shareholder value. During the third quarter, we closed on two smaller proprietary acquisitions, expanding our offering and powertrain agnostic categories, and enabling Holley to meet more of our consumers' journey with brands that matter. Switching gears, I wanted to highlight an important part of how Holley engages with our enthusiast consumers, and deepens its emotional connection. During the quarter, Holley was proud to host three consumer events in Bowling Green, Kentucky, including Holley LS Fest East, Holley MoParty, and the Holley Intergalactic Ford Festival. Each of these events had record levels of attendance, further illustrating the influx of new consumers and returning enthusiast. We know, we are stewards of some of the most iconic brands in our industry, and are pleased that our events resonate so deeply and create a sense of community. We would like to thank the City of Bowling Green, and our partners in hosting these events. This partnership is an impactful and unique way to support Holley's hometown, while serving our enthusiast consumers. Finally, as we discussed in last quarters call, we completed the merger with Empower during the third quarter. Again, this is a major milestone in our company's 118-year journey. And we look forward to the road ahead as a publicly traded company, and to sharing our results with you regularly. I'd now like to hand the call over to Dominic, who will discuss our third quarter results in greater detail. Dominic?

Thank you, Vinny, and good morning, everyone. Holley delivered net sales of $159.7 million in the third quarter, an increase of $26.3 million or 20% in the third quarter of 2020. Acquisitions provided $29.8 million of that growth, with the remaining organic sales being slightly negative in the quarter. As Tom mentioned earlier, our organic growth was impacted by an unforeseen cybersecurity incident, which caused shipping delays and the corresponding deferral of approximately $7 million in sales to our fourth quarter. Gross margin decreased from 41.7% last year to 40.8% in the third quarter 2021. The reduction in gross margin reflects the continuation supply chain inflation on inbound shipping, and some component cost increases. Gross margin was also impacted by product mix and to a lesser extent negatively leveraged from the lower organic sales that resulted from the cybersecurity incident. We continue to monitor global supply chain and raw material cost projections closely, and we factored these current economic realities into our recent pricing action. Total selling, general and administrative expenses increased 67% in the third quarter. The increase does include approximately $5.4 million of acquired SG&A expense as well as $2.4 million increase in non-cash equity compensation expense. Additional SG&A expense increase was due to the outbound freight costs tied to higher DTC sales and domestic shipping rates, and additional costs associated with the Empower merger. Interest expense was up modestly at $9.8 million versus $9.3 million for the third quarter of 2020. We have publicly announced our desire to refinance our existing credit facility to reduce this interest expense, extend maturity and provide greater flexibility to support our acquisition strategy going forward. We recorded a net loss of $30.2 million in the third quarter of 2021. Several transactions impacted GAAP net income, including the change in warrant and earn out liabilities and the transaction fee paid to a third-party. We believe adjusting net income for these items is valuable for investors to see underlying business performance, and we provided a non-GAAP measure of adjusted net income this quarter. On an adjusted basis, net income was flat with the $13.5 million of net income in third quarter of 2020. Adjusted EBITDA increased to $35.5 million in the third quarter, up from $34.4 million in 2020. As we turn to our outlook for the balance of the year, we reiterate the guidance previously provided for the fiscal year 2021. This includes annual net sales in the range of $648 million to $663 million, pro forma net sales of $655 million to $670 million, and resulting pro forma adjusted EBITDA in the range of $165 million to $170 million. That concludes our prepared remarks. Ross, we can open up the call for questions.

Absolutely, Dominic. [Operator Instructions] Charlie, please open the line for questions from our participants.

[Operator Instructions] Our first question comes from Randy Koenig of Jefferies. Your line is open. Please go ahead.

Hey, guys, good morning. I guess, Tom I wanted to ask you a question on your thoughts around market demand, durability. It seems, you talked about in the prepared remarks about record or Vinny talked about record attendance at your events during the quarter. It seems like there's a stickiness to work from home trends that are out there. So just want your thoughts on and data points you could share on the demand from your customer base continues to be very robust? And how you think about that demand over the next few years from here? So

Randy, everything we see at this point points towards continued strong demand for our products. Our enthusiast consumers are very engaged. And, when you look at basically the trend for growth in the industry and when we think about and see additional consumers coming into the enthusiast category every year, I mean, we think that outlook is very positive. And, we're continuing to pursue our core strategies, focusing on our enthusiast consumer, giving them what they need, what they want. Those are products that allow them to step by step go through their modification journey for the cars and trucks they love.

Got it. And then maybe a quick follow-up maybe for Vinny. The company has embarked upon rounding out the product portfolio with different acquisitions. So maybe you could give us some perspective on how the company might be thinking about future acquisition strategies in terms of product areas of opportunity? I know you've gotten more into foreign cars, for example, maybe just give us some perspective on where the company may have some I guess underpenetrated opportunity, when it goes through different categories, just that would be helpful? Thanks.

Yeah, Randy. It's a great question. And I think, kind of going back to one of the sides in the Analyst Day presentation. We've got a really strong share and about a $5 billion category, and if you think about that adjacent $4 billion in additional truck engine and safety products. We're definitely looking at categories in that $4 billion, as well as that broader call it $25 billion of additional whitespace that's in chassis and drive train, suspension, and really serving the same enthusiast consumers with integrated systems and products that we know that as they continue their modification journey, they're getting into modifying these parts of their cars and trucks. And that's how we intend to prioritize, but that is one of many filters that gets overlaid on a very robust pipeline. So there's a methodology, as we've talked about in past calls, as well about really prioritizing opportunities that we can be more strategic.

And Randy, this Dominic. I would add to that, as you saw -- I just want to add one thing, and that's in our Q, you see that we did announce the acquisitions of Finspeed and Classic Instruments in the quarter. And Finspeed is absolutely with their high-end wheels goes across any platform, which is one of the things we've talked about, wheels and suspension being something that really will be transformative going forward. So, there is additional information in our Q filing. Just want to point that out.

Perfect. I’ll check it out. Thank you.

The next question comes from Michael Baker of D.A. Davidson. Your line is open. Please go ahead.

Good morning, guys. This is Jeff Walter on for Michael Baker. I was hoping we could dig in to the organic growth numbers a little more. And if we could just access cybersecurity $7 million, if we can get any more color on kind of what's been driving this organic growth? Are you guys seeing a lot of repeat customers? Have you guys been able to attract new customers? And what's kind of being able -- there what's being done to help retain some of these new customers, and hopefully turn them into repeat customers down the road? Thank you.

So, I think the number one thing I would point to is the strategy of continuous innovation. So we just continue to launch products that are exciting to our enthusiast consumers. We do see new consumers coming into our fold. And we continue to build out our digital ecosystem that allows us to have the capability to target these new consumers that buy from us. And we're also assessing the potential to add in basically, loyalty programs as a layer to help basically help retain consumers, once they actually do buy directly from us. So we haven't launched a program like that yet and so that's future opportunity. But, we continue to see a tremendous amount of interest on the part of consumers in our products and brands.

Jeff, this is Dominic. If I can just say one thing, as Tom mentioned in his prepared remarks, we did have the back-half of last year was a little bit unusual in terms of the seasonality. But we're seeing very consistent to your stacks with consumer demand and our sales. So we're very pleased to see the continuation of that demand. Just wanted to add that.

Thank you very much. That's all I have.

The next question comes from Ryan Sundby of William Blair. Your line is open. Please go ahead.

Yeah, hi, good morning. Thanks for taking my questions, guys. First of all, if you could talk a little bit more about how the business performed across different sales channels? I think, I heard in the script there that DTC was up, any more color there across the traditional retail and B2C and your retail partners?

DTC continues to be the fastest-growing channel. And, when we look at the quarter, the cybersecurity incident would have had a greater impact on basically our reseller channels. Demand across the channels remained strong.

Great. And I guess just to follow up on Finspeed and Classic Instruments, anymore color there on what we should expect from a top-line contribution? And what it was [technical difficulty].

So, I would just start by talking about those acquisitions qualitatively. We really view them as platforms or components of platforms that we're assembling, that allow us to provide product categories to enthusiast consumers. So, these were relatively small product line, really acquisitions of product lines, as well as some capability technology. And, we'll grow on that over time organically and possibly through additional product category or product line acquisitions.

Great. Thanks for the questions.

Sure. Thank you.

The next question comes from Mike Swartz of Truist Securities. Your line is open. Please go ahead.

Good morning, guys. Just a quick question on pricing, I think maybe Tom, you'd mentioned you're looking at taking more frequent pricing actions going forward. I think historically you've done more one price increase per year. So I guess maybe the question is, how are your customers or consumers reacting to those prices? And what mechanism are you using to pass those through? Are you doing any surcharges? Are these all list price increases?

So, we actually look at our retail pricing and our wholesale pricing separately. And then we also have the benefit of a very broad product portfolio. And so by spreading these increases around the product portfolio, we're able to get more price without shocking our consumers. So the feedback has been really good on the way we're approaching this. I think we'd all rather not have to do this, but we're also very focused on protecting our margins. And so, I mean, I guess, I'd say, is that responsive to your question. I think, that basically sums it up. I guess the other thing I would add is, we have historically preferred to do one price increase a year. But over the years, we've been in situations where a particular commodity that goes into our products sees very heavy increases, and we've demonstrated the ability to get those price increases when the need arose. So we're careful, thoughtful about how we approach the price increases, but generally, we've been able to get the price increases.

Okay. Thank you for that. And the follow up question just on the cybersecurity incident. I mean, maybe provide us a little more color about some of the remediation efforts you're taking. And are there any incremental investments to think about going forward?

Yeah, this is Dominic, I'll handle that one, Mike. Yeah, there's a few things but obviously we're not going to tell folks publicly all the things we're doing to prevent future attacks. But there are some things to air gap backup systems, there's some things that you can do to have better monitoring. Any increase in the SG&A expense, there is going to be a modest increase. But that's been encompassed in the recent pricing action as we look forward. So, I would say that it's not going to be anything that impacts the guidance of our margins, our stated desire to keep our EBITDA margins north of 25%. But yeah, it was definitely a busy quarter for us here at Holley.

Okay. Thank you.

You got it, Mike.

The next question comes from John Lawrence of Benchmark. Your line is open. Please go ahead.

Yeah, thanks. Good morning, guys. Dominic, would you talk a little bit about dig into gross margin just a little bit. I mean you mentioned a couple of things, shipping cost, inbound product mix. Can you just sort of walk through that bucket of the decline and sort of give us a sense of?

John, we have limited detail that we are disclosing publicly. But, in the magnitude, one of the things that we've continued to talk about, as everyone has seen is the tremendous increase in container pricing, the Trans Pacific containers. We have seen that stabilizing here towards the back end of the quarter, actually, early into Q4 here. So we're optimistic that we've seen the worst on the pressures of containers that we've now factored that in going forward. So container shipping on about the big portion of our cost of goods sold. As you recall from Analyst Day materials, between 50% and 66% of our product actually does come overseas. So container shipping costs was a big pressure point. And another point that impacted our gross margin was the product mix, in that some of our most popular items right now, which continue to drive sales and good top-line growth and have good dollars, access some of the lower margin items, some of the EFI products in our Sniper line. Those things which may cost a little bit more, the margin might be a little bit lower. So there's a product mix impact as well. Channel mix was actually favorable for us in the quarter, as our DTC did outpace the resellers. So that was a positive there. So those are some of the things that impact us. We are seeing the continued pressure on electronic components. So we are keeping that in mind and we did factor that into our pricing.

Excluding cybersecurity, how's the backlog at this moment? I mean, I know it really is building up. Is it still manageable at this point?

Yes, John. It's manageable. It's still a very robust backlog.

Great. Thanks. And last question for me is, with the percentage of DTC have gone up in the quarter with the challenges on the retailer side.

Yeah, we're not releasing the quarterly. But that's a fair assessment, because DTC was positive, and some of the resellers were on the organic basis were challenged. But we will release annual direct to consumer numbers, because we feel that's a better comparable number to have.

Great. Thanks, guys. Good luck.

Thanks, John. Appreciate it.

The next question comes from Joe Altobello of Raymond James. Your line is open. Please go ahead.

Good morning. First, on the cybersecurity, it's two months on now. And cybersecurity, you're fairly confident it's not going to have a lingering issue. But have you seen any effects in terms of relationships with your resellers?

I was just going to say, no effects with resellers. They're very supportive. Our brands are Muskerry brands. And for the period of time we were down. Again, they were very supportive, and very anxious to get us back up and shipping to them.

Got it. In terms of guidance, you reiterated today, but it's a fairly wide range. We have what two months left in the quarter, what are the biggest variables that you're watching? Obviously, supply chain, I'm assuming is one of them. But what are the biggest variables that will drive you out to the lower or higher end of that range?

So from the guidance perspective, the biggest variable that we see is supply chain. We do believe that, as I mentioned, we're seeing some stabilization in supply chain. And then, as we've characterized it, our production has been more of a slowdown from supply chain, more than the inability entirely to get the thing. So from our perspective, I think we do see stabilization going into the last eight weeks of the year. And we are being very mindful of the supply chain factor. We have improved our inventory positions, as you see in the financial statements that we released. We are getting inventory positions higher, but some of the most popular items are still where the weakest in our inventory position. So we are building all of that. So I think the guidance issues for us is just keep an eye on supply chain, as long as ports are open and things are coming in and we have the ability to keep chunking through this inventory situation, we'll be fine and should be fine with the guidance. No problem.

That's helpful. And then just last one for me on the M&A. You just announced a couple of smaller acquisitions in the quarter. It sound like it's not going to impact the balance sheet all that much. So what are your appetite for additional M&A? And what does the pipeline look like at this point?

So, I'll start with what we're doing from the credit facility standpoint. And then we'll let Vinny talk about some of the pipeline things. As we're approaching the credit facility, we are looking for paying down and refinancing the existing facility, but also looking to expand the capabilities there for M&A. And so, I'm going to hand it back over to Vinny, and let Vinny talk about the pipeline and what we're looking for.

Yeah. Thanks, Dominic. I think the refinancing is definitely important. And as we look at the pipeline ahead, it continues to be very robust, Joe, and, even extending into the future. So I think, again, it's one where we're prioritizing certain opportunities and looking at deals of various sizes. I think the two recent deals done in the quarter, definitely strategic and smaller acquisitions, we are looking ahead at a pipeline that does have companies of varying sizes and ones that are in the guidance and ranges commensurate with kind of past transactions in 2020. And really the opportunities are ones that that prioritizing, expanding our TAM and expanding into new categories and that's the major focus.

Okay. Great. Thank you guys.

Thanks, Joe.

[Operator Instructions] Our next question comes from Joe Feldman of Telsey Advisory Group. Your line is open. Please go ahead.

Hey, good morning, guys. With regard to the level of inflation that you're seeing, can you kind of break it down like maybe what you're seeing on the cost side and how much is actually being passed through? Or kind of somehow quantify the level of inflation on both sides of it that you're working with?

Well, I would start by saying that basically our intent with pricings is to maintain margins. And, beyond that Dominic, go ahead.

Yeah, I was just going to say the pressures that we're seeing on the inflation side, which we have not disclosed individual component inflation numbers. But the cost inflation that we're seeing is more on components and shipping than it is on labor. Our labor rates are very fair for the markets that we operate in. So the pressures that we're feeling are really supply chain-driven. And as Tom mentioned, the pricing action takes that into account, so that we can keep our gross margins north of 40%, as we've guided.

Thanks, guys. And then actually, Dominic that was another thought I had was about labor. So, you're seeing any pressure on labor? Or, do you have the staffing and people you need and the ability to move the goods and make the goods?

Yeah, the limitations that we have on production are more the slowdown from supply chain than our own labor. We've been very competitive in our markets where we operate. And we feel like we've had competitive wage, for example, when Amazon and others were going to $15 an hour, we were already there. So we don't feel like there's a huge wage issue. We have labor in our markets. It's really the limitations external to us.

Okay, got it. Thanks. And then, just sort of one other kind of topic, which you mentioned, like EV or maybe someone asked about it, where are you with that? And are you still seeing demand at a level you would expect compared to traditional engine from an EV perspective? Yeah, thanks.

Yeah, sure. So, this is an emerging opportunity. When you look at the vehicles in operation, EVs are still a miniscule part of the overall. But anecdotally, we are seeing growing consumer interest and performance-oriented EVs, as well as powertrain conversion. So this would be installing an EV drivetrain into whether it's classic vehicle or even more modern vehicles, basically pulling out the old ice drivetrain and putting in the EV drivetrain. And we think it's a very strategic category for us. We expect to see it grow in the future. But today, it is an emerging opportunity, meaning that there's not a critical mass of sales associated with it yet.

Understood. But that's really interesting. So you could -- people are actually looking to put in an -- I guess, turn to a regular engine car into an EV car. Is that what you're saying?

Yes.

Wow. Okay. Interesting. Okay. Thanks, guys. Good luck with this fourth quarter.

Thanks. We appreciate it.

There are no further questions on the lines at this time.

Well, at this point Ross, I think we can conclude. We appreciate everyone's attention today. Thanks for the interest and I look forward to speaking to many of you one on one. Thanks.

This concludes today's call. Thank you for joining. You may now disconnect your lines.