Good afternoon, and welcome to the Holley Third Quarter 2022 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Ross Collins with Investor Relations. Thank you. You may begin.

Thank you, Diego. Good morning, everyone. Thank you for taking the time to join us today. On the call with me today are Tom Tomlinson, President and Chief Executive Officer; Steve Trussell, Vice President of Finance and Interim Chief Financial Officer; Vinny Nimmagadda, Executive Vice President of Corporate Development and New Ventures. After their prepared remarks, we'll 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, they 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 the company's recent 10-Q, S4 and S1 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. A 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 would like to turn the call over to Tom Tomlinson, Holley's Chief Executive Officer. Tom?

Thanks, Ross. Good afternoon, everyone, and thanks for joining us today. As part of the call today, we'll be referring to a slide deck titled Third Quarter 2022 Supplemental Earnings Information. This deck is available for download on our IR website, investor.holley.com. As we stated in our press release this afternoon, while we're encouraged by the sequential improvement we saw during the quarter, our earnings fell short of expectations. After decreasing further in July, sales improved in August and September as we began to overcome supply chain-related challenges. Although sales for the quarter were down year-over-year, our shipment rates progressively improved within the quarter and sales in September were above prior year as highlighted on Slide 3. Supply chain constraints peaked in July and then began to ease. Increased receipts of components from global suppliers allowed us to steadily produce and ship more product in August and September. These improving run rates in Q3 are illustrated on Slide 4. Our suppliers of certain automotive-grade microchips also began to resume shipments during the quarter, which allowed us to progressively build and ship more of our popular electronic products. These suppliers have also provided improved visibility to future shipments. As discussed last quarter, we acquired a large quantity of automotive-grade microchips on the spot market that were unusable upon initially receiving them. We've now developed and validated a process to reprogram those chips, restoring them to full functionality and enabling us to begin consuming them in production. While challenges remain in the supply chain, we're focused on improving availability of components and increasing shipments. Profitability was negatively impacted by lower production volumes that drove negative operating leverage and manufacturing inefficiencies, especially earlier in the quarter. We also saw higher input costs from both inflationary pressures as well as scarcity-related cost escalation in…

Thank you, Tom, and good afternoon to everyone on the call. Though we did not complete an acquisition during the third quarter, we are progressing on integrations. As we have said on prior calls, driving synergies from our past acquisitions enables Holley to continue to maximize value creation within the year. As we realize these savings on an annualized basis, we will enhance our balance sheet strength and further improve our liquidity position in support of long-term growth. As a reminder, over the past 12 months, we have completed 5 acquisitions that were highly strategic and expanded our wide range of products. During the quarter, we further integrated several of our acquired companies onto our internal ERP system, reducing overall costs and increasing operational efficiencies. Just to provide an example, we closed on RaceQuip in late June and I'm proud to report the team's success in completing our integration in early September. To that end, RaceQuip's safety products are now seamlessly offered to resellers alongside our existing performance and safety offering and for the first time, sold direct-to-consumer through holley.com in our existing digital platform. I would now like to shift to our Holley owned consumer events as we have just completed a very productive event season highlighted by positive consumer engagement. During the quarter, Holley hosted its 13th Annual LS Fest East event in our hometown of Bowling Green, Kentucky, as well as Holley MoParty and Holley's Intergalactic Ford Festival. In total, our 2022 event attendance is up 12% from the prior year's events. The growth in popularity of Holley's company-owned events allows our team the opportunity to make an emotional connection with our enthusiast community, learn more about our consumers and further bolster our idea bank for new products. In addition, our events hosted in Bowling Green continue to make a positive local impact in our community. Last, we are continuing to leverage content marketing as a way to engage, inspire and support our enthusiast customers. During our fall 2022 event season, Holley experienced a 52% increase in social engagement and our social media platforms experienced 6.4 million video views. With that overview, I'd now like to hand the call over to Steve, who will discuss our third quarter financial results in greater detail. Steve?

Thank you, Vinny, and good afternoon, everyone. Holley delivered net sales of $154.8 million in the third quarter, a 3.1% decrease from $159.7 million in the third quarter of 2021. Noncomparable sales associated with acquisitions contributed $7.7 million or 4.8% of year-over-year growth. The remaining comparable sales decreased by $12.6 million or 7.9% compared to the prior year quarter, offsetting the impact from the acquisitions. As we have stated in the past, we typically don't disclose monthly pacing of results, but we believe it is important to illustrate how sales trends improved as the quarter progressed. We had lower sales early in the quarter with July seeing the worst of the impact. We began to see improvements late in August, and we saw a meaningful turnaround in sales performance in September as sales grew 31% year-over-year. The headwinds that Tom discussed were the main reason for the weakness in July and August sales, although as the quarter progressed, we saw shipments improve. Gross profit for the third quarter of 2022 decreased $16.8 million or 25.8% to $48.4 million when compared to $65.2 million for the third quarter of 2021. Gross margin for the third quarter of 2022 was 31.3% compared to a gross margin of 40.8% for the third quarter of 2021. Of the 960 basis point decrease in gross profit, 510 basis points were driven by inflationary pressures and 290 basis points came from higher expenses associated with warranty costs. The remaining decrease came from lost leverage due to the lower sales volume. Total selling, general and administrative expenses increased by $3 million or 10.5% in the third quarter. The increase in SG&A was driven by a $2.6 million increase in outbound shipping and handling costs related to inflationary pressures from domestic shipping companies and an increase of $1…

Absolutely, Steve. As a reminder, we ask you please limit yourself to one question with one related follow-up as needed. Diego, please open the line for questions from our participants.

[Operator Instructions] Our first question comes from Joe Altobello with Raymond James.

I guess first question, I wanted to follow up on the commentary regarding September. It looked like trends did improve in the month. And I look at your guidance and at least your sales guidance assumes a further decline in sales in the fourth quarter. It looks like it worsens a little bit from Q3. So I'm curious, I guess, how October and first half of November looked? Did you see continued improvement? And do you think those issues that you saw on the supply chain side are going to continue throughout 2023? Or could we see them continue to get better next year?

So from the standpoint of the question around supply chain, I would say that while we made improvements, saw improvements on the supply chain, there continue to be risks around supply chain. One of the specific areas of risk I would mention is just in the availability of microchips. And while we have seen that improve, when we talk to the manufacturers and distributors of those microchips, there is still scarcity. And when we talk about the fact that our receipts of microchips have improved, those -- the specific microchip we're talking about there is one that is used in our largest electronic product line that uses those types of chips. The second largest category or product category or product line is where we are still seeing constrained chips and there is risk that we receive less chips in the remainder of the year than we did in the second and third quarter. And so obviously, this category has a large overall impact on our sales. And so we're looking at the risks as well as the opportunities as we set our guidance going forward.

Okay. So just to be clear, it doesn't sound like you're seeing anything getting worse in October and November, but it sounds like you're just trying to lay out a more conservative outlook at this point?

Yes.

Yes. We think that's fair.

Our next question comes from Ryan Sundby with William Blair.

I wanted to ask a little bit more on the warranty costs. Was that kind of a onetime hit this quarter? Or should we expect that you had -- continue to happen moving forward?

So we believe there was a backlog of warranty claims or warranty returns that we're sitting at our resellers. And a lot of those came in, in the quarter. We have provided for an increase in warranty throughout the remainder of the year to ensure that that was our effort to make provision for any additional warranty that would come in.

Okay. Got it. And then thanks for all the progression that you provided in the slides here. I guess sticking in on the reseller destocking, we did start to see that improve in September. Could you talk a little bit more about where inventory levels sit today? How comfortable are you with them? And should we expect to see more refill taking place in Q4? Or is that kind of cut up now?

When you -- so we don't have perfect visibility to channel inventories, but we're able to track the increases and decreases in channel inventories with our largest resellers. And basically, when -- in this environment, when you see channel inventory go down specifically in July and August, that is primarily driven by our inability to ship our excess past due orders. And as we saw our ability to ship improve in September, there was an immediate improvement in terms of the channel inventory. So we're certainly working hard to drive continued improvement from a supply chain standpoint, from a manufacturing operation standpoint, so we can get more throughput and ship more product. And at this point, we believe that that will allow us to improve the channel inventory position.

Our next question comes from Christian Carlino with JPMorgan.

So I know you're not guiding to '23, but you've had a few events recently as well as the industry trade show. So I guess, could you give us an update on some of the learnings you're hearing going on in the industry? What are your peers saying? And could you speak to any level of promotionality or softness at least for your peers or the industry more broadly?

So I mean, I think one of the things that would be good to talk about here is the discussions that we have with many of our resellers. And they have indicated us that our -- to us that our competitors are also struggling with supply chain issues. And they've indicated that our performance is at the top of the performance that they're seeing from our competitor -- among us and our competitors. So we continue to see demand that is solid. You saw that our DTC sales continue to grow. And again, that's against the backdrop of just being out of stock on so many of our most popular items. And when you don't have them in stock, most consumers don't buy them. And so that represents a missed opportunity there. I mean I think there's a lot of optimism in this industry has historically grown year-over-year-over-year. And we're just looking forward to being able to take advantage of that by improving our shipping performance.

Got you. That's all really helpful color. And then I guess, on some of the cost-cutting measures, most of the margin decline is from just fixed cost deleverage. But I guess, do you have to get back to the like prior trend of sales to return to mid-20%s EBITDA margin? Or are there other areas of self-help that you haven't implemented yet, but you have visibility to?

We have visibility to opportunities, and we have some extra help now with Brian Applegate coming onboard as our interim COO. So that gives us more bandwidth to go after these. And so that very much is going to be our focus and that will allow us to drive sales higher as we improve our operations. And then as we -- you get the leverage associated with the higher sales. And then as we reduce the various costs we've talked about, obviously, that will further enhance profitability.

Got you. So you're not cutting into the meat of the business, you're rightsizing your operations and you'll benefit from the leverage on the other side of this as well?

That's correct. And one of the things to think about is that we have a number of recent acquisitions. There's more work to do there in terms of integrations and capturing synergies. And that's just an ongoing effort within the company to see those costs come out and that will improve our position from a fixed cost standpoint.

Our next question comes from Alex Perry with Bank of America.

Just first on Slide 3, which I think shows sort of sell and can you maybe help us think about the sequential point-of-sale trends at retail in the quarter? I think you said reseller destocking continued in July and August before recovering due to your strong shipments in September. But does that imply that the point-of-sale trends didn't change given it just sort of led to rebuilding up inventory? Or did you also see the point-of-sale trends improve in the retailers that you have visibility into?

So the visibility that we have is around our products and we, because of our inability to ship the sell-through, the out-the-door sales have been below what they could have otherwise been if we were shipping. As we've seen shipping -- our shipping rates improved, we have seen the sell-through, and we have seen resellers now start to report increases, year-over-year increases in their out-the-door sales.

That's really helpful. And then my follow-up question was on gross margin. So I mean, how should we think about 4Q gross margins here? Should we expect a similar level of compression as we saw in the third quarter? What would be the sort of puts and takes here for looking at trying to model out 4Q gross margins?

Yes. You should expect to see similar type compression in the fourth quarter as some of the factors that hit us in the third quarter are going to continue higher freight costs, continued inflationary pressures on our component costs.

[Operator Instructions] Our next question comes from Joe Feldman with Telsey Advisory Group.

I actually want to follow up on that last question too. Should we think about a new level of gross margin going forward? Or I mean, is there any reason you shouldn't get back to the historical percent that you normally have? Or are we going to see this kind of pressure for the next few quarters into '23 as well?

It's our intent to restore margins to historical levels. So I mean, we see an opportunity to do that, and there's a lot of work to do, I think, to do that. But the team is very committed to making that happen.

Okay. Got it. And then just I was thinking, with regard to inflation, I know you called it out on the cost side, but I'm just wondering how much inflation is baked in on the price at this point at retail? Has that been much of an impact on driving sales?

So it has been pretty significant in terms of over the last 2 or 3 years. We have adjusted -- typically, we make price adjustments once a year about midyear. And last year, in particular, we did 3. We did our increase this year in the mid-June time frame and that increase was about mid-single-digits. So we were able to get price. We're also mindful that our consumers are stressed. So we've been careful not to push that lever or pull that lever too hard.

There are no further questions at this time. I'll turn the floor back to Tom Tomlinson for closing remarks. Thank you.

Thank you, Diego. Demand has remained solid throughout the quarter, demonstrating the resilience of our enthusiast consumers. As supply chain pressures eased during the quarter, we saw sequential improvement in our production levels, which in turn drove higher sales and earnings. We are intently focused on driving further improvement in these areas in the coming months and fully committed to the aggressive pursuit of near-term opportunities to streamline our cost structure. We remain confident in the underlying profitability and cash flow generation potential of our business. And as an industry leader, we firmly believe Holley is positioned to capitalize on the long-term favorable demand trends in the performance automotive aftermarket. This concludes our remarks for today. Thank you for joining us, and we'll now end the call. Goodbye, everyone.

Thank you. All parties may now disconnect. Have a great evening.