HLLY-WT Q3 2026 earnings call transcript, November 5, 2026

of the decline, and both were within our control. First, changes to our marketing calendar moved certain marketing activities out of the third quarter. Second, in-stock rates on key products were lower than they should have been, which kept us from fully meeting demand. Neither reflects a change in our view of the health of the European enthusiast market or the strength of brands like APR and Dynan. And the team is focused on restoring in-stock levels and has... adjusted the marketing calendar for the fourth quarter. Taken together, these results show something we've been working toward for some time. Our largest business is growing again, and the growth is coming from more than one part of the portfolio. That is a healthier balance than we had at the start of the year. Slide eight is our long-term strategic framework. You've seen this before, so I'll keep this brief. Our eight pillars, great place to work, premier consumer journey, trailblazing trusted partner, product innovation and portfolio management, global expansion in new markets, transformational M&A. and deliver results continue to guide what we prioritize, where we invest, and how we measure ourselves. What I'd point out this quarter is the breadth of this framework is also a source of resilience. With initiatives underway across all eight pillars, we have many levers available to look at. Which we believe gives us the flexibility to navigate a range of macroeconomic factors while continuing to move this business forward. Slide nine shows select examples of the 2026 initiatives that sit underneath those pillars. They range from Amazon and third-party markets.

Marketplaces, B2B partnerships, and national retailers to power sports, OEM, bailment, and chemical expansion, along with purchasing, manufacturing, ERP, and warehouse management that helps work fund it all. Our initial targets for the year were more than 4% net sales growth. And more than $15 million in cost savings from these top priority initiatives. Through the first three quarters, we have already exceeded our $15 million cost savings target. The next slide shows how each pillar performed in the third quarter. The Strategic Initiative Tracker shows where the eight. $18.6 million of initiative revenue came from this quarter. Trailblazing Trusted Partner was the largest contributor at $6.6 million, up from $1.5 million last quarter. That growth was led by our national retailer channel, where expanded placement at a large national retailer was central to our third quarter performance. This is the program we highlighted on our last call and has shipped as planned. Product innovation contributed approximately $6.4 million, making the third consecutive quarter growth in innovation revenue, again, led by safety in racing and modern trucking off-road. Premier Consumers. Consumer Journey contributed $3.4 million. Our D2C e-commerce channel benefited from the strong modern truck and off-road performance I mentioned earlier, and third-party marketplaces grew roughly 8 percent, supported by strength across multiple divisions and increased paid media investment.

Transformational M&A contributed $2.4 million, reflecting HRX's contribution in the quarter. Global expansion in new markets was essentially flat at negative $200,000. Canada and Australia continued to perform well, but that was offset by regional softness and some other. International markets. Power sports also declined slightly, which we attribute to the timing of shipments rather than underlying demand. And fund the growth delivered $6.1 million in purchasing, tariff, and operational savings I covered on slide 6. Revenue from these initiatives. Grew nearly 40% from the second quarter. Just as important, the tracker does what it's designed to do. It shows you and us where we're winning and where there's more work to do. Slide 11 revisits the portfolio rebalancing cycle we introduced earlier this year. It has four steps. First, rationalize brands with low or no growth, minimal EBITDA contribution, or a weak strategic fit. Second, release the cost and capital tied up in them through facility consolidation, inventory reduction, and SG&A optimization. Third, reinvest that capital with discipline. And fourth, compound the value by scaling EBITDA, generating free cash flow, and paying down net. Then we repeat the cycle. We spent much of the year on the first two steps, including the extra of our restoration brands, and now you're seeing the benefit in our margins and cash flow. Of the five businesses originally

we had... identified in the program, only one remains. It's a smaller business and is currently under a letter of intent, which we expect to close by the end of the year. This quarter, I want to spend a moment on the third step, discipline reinvestment, because that is where more of our focus is now turning. Our target acquisition program... ...looks a lot like HRX. Roughly $5 to $10 million in revenue, $1 to $2 million in EBITDA, and double-digit revenue growth. These are bold-on businesses with passionate customers and strong product positions that we believe can plug into our platform, including our engineering, distribution, retail relationships, and marketing. and grow faster as part of HLLY than they could on their own. As we announced a few quarters ago, our intent is to complete 5 to 10 acquisitions that fit this profile over a 24-month period, and that work is underway. We intend to continue pursuing these acquisitions in a way that is consistent with our commitment. to continued deleveraging. Sixth Element is the latest example of that strategy in action. So let's turn to slide 12. Sixth Element was founded in 2014 and is based in Spartansburg, South Carolina. The company designs performance parts for Toyota trucks and SUVs. Focus on forced induction and airflow along with off-road exhaust and recovery products. It's an engineering-led business. Products are designed in-house using CAD and 3D scanning and are road and dyno tested before they go to market. And customers have noticed. Sixth carries a 4.8 out of 5 range.

Across more than 2,700 reviews. Two things make Sixth especially attractive to us. The first is the platforms. Sixth focuses on Toyota's newest generation of trucks and SUVs, which are among the most demand vehicles in the market. The Tacoma and Tundra together sold. More than 420,000 units in the US in 2025. And the sales of the redesigned 4Runner and Land Cruiser are surging. These are young vehicles with long ownership runways ahead of them. And they're owned by exactly the kind of enthusiasts who modify what they drive. The second is the business model. Roughly 90% of six sales are direct to consumer. Its core products, including cold air intakes, front mount intercoolers, charge pipe kits, turbo endlets and catch cans, carry average selling prices of roughly $250 to $580. And many of them fit across the 2024 newer Tacoma, the 2025 newer. 4Runner Land Cruiser. So engineering investment can serve several platforms. But most importantly, there is an amazing team leading six that positions us to grow this business around a strong nucleus of leadership, innovation and passion for customer service. Six will join our modern truck and off-road division. We believe Holly's scale, retail relationships and marketing capabilities can help the brand reach many more Toyota owners, while Six strengthens our portfolio and platforms where we have historically been underrepresented.

Slide 13 covers the strategic collaboration with Aid Motive that we recently announced. Aid Motive is a publicly traded company listed on the Australian Securities Exchange and owns more than 50 aftermarket brands, including RICO, DBA and X-Clutch. As more than 90. 1,500 team members in over 40 locations around the world organized into three divisions, four-wheel drive accessories and trailering, lighting, power and electrical, and powertrain and undercar. Its roots go back more than 85 years to making chemicals and filters. This is a collaboration between two enthusiasts. Focused companies with complementary strengths and geographical footprints. And it has four elements. The first is already underway. Flowmaster high-performance oil filters engineered by RICO. This will take one of our most recognized brands into a new category. Filtration. Backed by the engineering. A company that has been making filters for decades. It's a good example of extending a powerful brand into an adjacent repeat purchase category. Beginning in 2027, we expect to build on that in three ways. Bringing A-Motive's DBA brakes and X-Clutch brands to new customers through Holley's North American channels. Having A-Motive lead sales and distribution of select Holley products in Australia and New Zealand, and collaborating operationally across select warehousing, distribution, technical support, and supply chain opportunities. For Holley, we believe that this collaboration advances our global expansion pillar in a capital.

in an efficient way. Australia and New Zealand have deep enthusiast cultures and are already among our stronger international markets. We believe that partnering with a company that has an established presence there will allow us to expand our reach without having to build that infrastructure ourselves. Slide 14. This brings us back to where I started. On our last call, we gave you five reasons we were confident in the second half. Here's how they played out in the third quarter. Simplifying operations? Delivered. And it's visible in this quarter's margin expansion. Favorable retail placement? Delivered. Our largest national... Retailer program shipped in the third quarter as planned. Brand marketing? Delivered. Our division-led marketing model is now in place and contributing to our direct consumer results. HRX? Delivered. HRX continues to contribute to both growth and earnings. Product innovation... ...is the one area we marked with a caution. Innovation continues to contribute meaningfully, as you saw on the tracker. That said, we have experienced some minor delays in a few product launches, which shifts the timing of a portion of the innovation contribution we had expected in the second half. Looking ahead... Strong execution continues in the fourth quarter. At the same time, tariffs, freight rates, minor product launch delays, and evolving macroeconomic condition led us to keep our outlook measured. None of these factors changes our view of the long-term opportunity. With the third quarter complete and greater visibility...

...into the remainder of the year, we have tightened our full-year net sales and adjusted EBITDA guidance ranges, while remaining mindful of a more cautious consumer. Jesse will walk through the details. Before I hand it over to him, I want to thank our team members around the world. The progress you heard about this morning is a direct result of their focus and execution in an opaque consumer environment. I'm grateful for their work. I'm proud of what they've accomplished. With that, I'll turn the call over to Jesse to review our financial results and outlook in more detail. Jesse?

Thank you, Matt, and good morning, everyone. Matt described three things this quarter. Broader growth, better profitability, and a stronger balance sheet. I'll show you how each of those came through in the numbers and why, together, they give us confidence in how we finish the year. Let's start on slide 16. Beginning of 26, we set three financial priorities, drive profitability through operational efficiency, optimize working capital, and delever the balance sheet. With the quarter still to go, we are at or ahead of our targets on all three. First, profitability. Our operational efficiency program. has delivered approximately $8.3 million of savings through the first nine months, including $2.3 million in the third quarter. The same operational savings Matt mentioned on slide six. Last quarter, we said we expected to finish the year at or above the top end of our $5 to $7 million target. We have already passed it. These savings come from leaner staffing models, manufacturing and distribution efficiencies, facility consolidation, and cost actions across our network. They are a big part of why our margins expanded this quarter, and we continue to look for more savings opportunities. Second, working capital. Excluding the effect of portfolio rebalancing, our industry inventory initiatives have reduced inventory by approximately $10 million this year. That puts us within our full-year target range of 10 to 15. Third, the balance sheet. We ended the quarter at a leverage ratio of three and a half times, reaching our year-end target a full quarter early. What these three results have in common is that they

like... come from actions within our control. None of this progress has depended on a strong consumer, and it's in an environment like this where it matters. Now turning to slide 17 and our third quarter results. Net sales were $141.6 million, up 2.3% from $138.4 million a year ago. Three things drove that change. Price added approximately $5 million. HRX added approximately $2.4 million. And lower volume took away approximately $4.2 million, primarily from the brands we exited through portfolio rebalancing. Volume in our core business grew. Excluding these exits, core net sales grew approximately 6.7%, accelerating from 4.9% in the second quarter. Gross profit grew 4% to 62%. $2.3 million gross margin was 44% up 73 basis points from 43.2% a year ago. Two things drove that improvement. Higher productivity across our operations and the exit of lower margin businesses. We delivered it while absorbing inflation in our input costs. SG&A. Including R&D, decreased 4.6% to 36.4 million, a 1.7 million lower than last year. As a percentage of net sales, it fell to 25.7% from 27.6%. We did that even as net sales grew and HRX added to our SG&A cost. Lower salaries and wages, consulting fees, and legal fees drove the decrease, partially offset by higher freight and administrative costs associated with HRX. Put together, operating income grew 23.3% to 19.6 million. Below the operating line, interest expense declined 14.7%.

1.6% to 9.6 million, primarily because of our interest rate collar and lower debt balances. Net income was $7.8 million, or $0.06 per diluted share, compared with a loss of $800,000, or a loss of $0.01 per diluted share last year. Adjusted net income, more than doubled to $7.7 million, or $0.06 per diluted share, from $3.3 million, or $0.03 per diluted share last year. Adjusted EBITDA grew 8.6% to $29.4 million, and adjusted EBITDA margin expanded 120 basis points to 20.8%. Free cash flow was $8.8 million, up from $5.5 million a year ago, driven by higher earnings and disciplined working capital management. Turning to slide 18, the portfolio and cost actions on this slide are the same ones we walked through last quarter. What is new is that you can now see them in our results. On the portfolio side, exiting our restoration brands and other non-core businesses allowed us to reduce our footprint by two facilities, clear approximately 95,000 square feet of warehouse space, and remove approximately 7,000 low margin SKUs, or about 16% of the portfolio. It also reduced our workforce by more than 5%. On operating costs, we consolidated two manufacturing sites, reduced more than 115 team member and contractor positions through productivity improvements, trimmed non-value added SG&A into production and distribution days out of seasonally slower periods. Together, we expect these two work streams to generate more.

more than $12 million of one-time net cash. And on an annualized basis, we also expect them to deliver 150 to 200 basis points of EBITDA expansion, an additional $3 to $5 million of annualized benefit, $0.2 to $0.3 turns of DEED leverage acceleration, and roughly 5% improvement in inventory turns. See the results in the third quarter. A simpler, more focused portfolio with higher margins, better free cash flow, and a faster path to deleveraging. Turning to capital allocation on slide 19, our framework has three parts, disciplined acquisitions, reducing leverage, and returning capital to shareholders, all supported by continued investment. Our core business. As Matt said, reducing debt remains our top priority, and the third quarter shows that. We reduced debt by $25 million in the quarter, including the $15 million we announced on our last call, plus an additional $10. That brings our total debt reduction since September of 23 to $125 million. After quarter end, we closed the acquisition of Sixth Element. We funded it with cash on hand, and it does not change our deleveraging trajectory. We believe that Sixth fits the model we proved with HRX, and our M&A pipeline is growing. We will continue to hold every opportunity to our original return thresholds, and we will pace our activity so that we keep reducing leverage. We did not repurchase shares in the third quarter. That was a sequencing decision, not a view on valuation. We chose to reduce debt first and to fund acquisitions like Sixth. We continue to believe our share price does not reflect the value of the business or the progress we are making.

Slide 20. The progress on leverage. Our total leverage ratio has come down from a high of 5.67 times at the beginning of 23 to 3.91 times a year ago to 3.74 times last quarter and to three and a half times at the end of the third quarter. That is our lowest level in four years. Looking ahead, we continue to expect to end the year with leverage below three and a half times, including the impact of the SIX acquisition, and we remain focused on our long-term target of approximately three times. We ended the quarter with approximately $50 million of cash and total liquidity of approximately $147 million. Now turning to our full-year outlook on slide 21. We have tightened our net sales and adjusted EBITDA ranges by adjusting the top end and keeping the bottom end unchanged. We now expect net sales of $610 to $625 million, with core business growth of approximately 2% to 5%, and adjusted EBITDA. EBITDA of $127 to $132 million. We have also lowered our interest expense outlook to be between $40 million and $44 million. Capital expenditures of $15 to $20 million and DNA of $24 to $26 million are unchanged. As Matt said, execution remains strong. Heading into the fourth quarter. But higher fuel prices and broader uncertainty tied to the conflict in the Middle East continue to weigh on consumer sentiment. And we think it is prudent to plan for a more cautious consumer through year end. That, together with the timing of the few product launches Matt described, is why we adjusted the top end of our net sales.

and adjusted EBITDA ranges. The margin profile of the business has not changed. At the midpoint, our outlook implies a full-year adjusted EBITDA margin of approximately 21%. That is essentially unchanged from our prior guidance above our long-term target of more than 20%, and it already reflects tariffs and freight. Our outlook does imply a step up in fourth quarter margin from the third quarter, so let me be specific about what drives it. First, the pricing actions we took late in the second quarter to offset cost increases flow through more fully in the fourth quarter than they did in the third. Second, more of the run rate benefit of our operational savings. The exit of lower margin brands lands in the fourth quarter. To sum it up, the third quarter shows our work coming through in the numbers. Core growth improved, margins expanded, free cash flow got stronger, and leverage reached its lowest level in four years. We expect to exit 26 as a more streamlined business with higher margins.

A stronger balance sheet, and the flexibility to invest in growth, both organically and through disciplined acquisitions, we continue to reduce debt. And with that, Operator, I'd like to open up the line for questions. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, we ask that participants limit themselves to one question. And one follow-up.

Our first question comes from the line of Joe Feldman with TELSI Advisory Group. Please proceed with your question.

Thank you. And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue.

And we have reached the end of the question-and-answer session. And I'll turn the call back over to Matthew Stevenson for closing remarks.

Okay.

Thank you, Shemale.

Slide 23 summarizes the investment case we see for highly performance brands. Our market is driven by automation. It's a huge load of enthusiasts. And for our customers, this is far more than a hobby. It's a passion and a way of life. That passion supports the U.S. market of approximately 40 billion with decades of uninterrupted growth and highly leads it with a portfolio of iconic brands known for their legacy of innovation. We have also built a proven and I'll see you next time. acquisition platform. HRX has shown how a well-chosen bolt-on can contribute to growth and earnings. Sixth element is our latest addition and we continue to make progress toward our goal of five to ten acquisitions that fit our target profile. At the same time, our digital and direct-to-consumer capabilities together with an omni-channel distribution network that now includes expanded national retail placement and new international partnerships like Amotive continue to transform how enthusiasts and distribution partners engage with our brands. Our long-term financial framework remains unchanged. Amid single-digit organic We'll see you next time. top-line growth, a gross margin target of approximately 40%, an adjusted EBITDA margin target of more than 20%, sustainable free cash flow, and strategic acquisitions that build on our platform. This quarter, we operated above both our margin targets, generated free cash flow, and continued to reduce debt, which we believe

demonstrates the earning power of a simpler, more focused HLLY. We believe the combination of a passionate, enthusiast marketplace, HLLY's portfolio of leading brands, a flexible operating model, and an experienced team with a track record of execution presents a compelling long-term investment opportunity. In closing, I want to express my sincere appreciation to our team members for their dedication to serving our customers every day, to enthusiasts who support our brands, and to our distribution partners, many of whom have been integral to our success for decades. I want to thank you for joining the call today, and have a great rest of the morning.

Thank you, and this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.