Fox Factory Holding Corp. (NASDAQ:FOXF) Q1 2024 Earnings Call Transcript

Fox Factory Holding Corp. (NASDAQ:FOXF) Q1 2024 Earnings Call Transcript May 4, 2024

Fox Factory Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Fox Factory Holding Corporation’s First Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. And now at this time, I would like to turn things over to Toby Merchant, Chief Legal Officer at Fox Factory Holding Corporation. Please go ahead, sir.

Toby Merchant: Thank you. Good afternoon and welcome to Fox Factory’s first quarter 2024 earnings conference call. I’m joined today by Mike Dennison, Chief Executive Officer, and Dennis Schemm, Chief Financial Officer and Treasurer. First, Mike will provide business updates and then Dennis will review the quarterly results and outlook. Mike will then provide some closing remarks before we open up the call for your questions. By now, everyone should have access to the earnings release which went out earlier this afternoon. If you have not had a chance to review the release, it’s available on the investor relations portion of our website at investor.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company.

Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements within the meaning of federal security laws, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the Company’s control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the Company’s quarterly reports on Form 10-Q and in the company’s latest annual report on Form 10-K, each filed with the Securities and Exchange Commission.

Investors should not place undue reliance on the Company’s forward-looking statements and except as required by law the Company undertakes no obligation to update any forward-looking statements or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate, in today’s prepared remarks and within our earnings release, we will refer to certain non-GAAP financial measures to evaluate our business, including adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted net income, adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin, as we believe these are useful metrics that allow investors to better understand and evaluate the company’s core operating performance and trends.

Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today’s earnings release, which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

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Q&A Session

Michael Dennison: Thanks, Toby. Good afternoon, everyone, and thank you for joining us today. Diversification is a key element in building resiliency and it is all the more important during the period of industry cyclicality. Our ability to navigate through the current market headwinds is a testament to the strength of our diversified product portfolio, which spans across multiple sectors and markets. This diversification not only mitigates risk, but also provides us with multiple avenues for future growth and expansion, and in turn drives value creation for all of our stakeholders. For the first quarter of 2024, we delivered $333.5 million of revenue, which was consistent with our expectations, and adjusted earnings per share of $0.29, which exceeded our plan.

We are confident we will see sequential improvement in our operating results over the coming quarters, ultimately returning to the strong growth rates and margins that our business can deliver. While we believe that our premium positioning and innovation helps mitigate macroeconomic forces, the OEMs we serve continue to face unique challenges in the near term. In SSG and more specifically in bike, our results continue to be impacted by the ongoing inventory recalibration. However, we are already seeing positive signs in Q2 and believe this business is trending back the right direction. In PVG, Powersports continues to be impacted by dealer inventory levels and in AAG upfits are being challenged primarily by mix and model year changeover issues from our OEMs. In addition, we are seeing ongoing consumer fatigue given the extended duration of high interest rates, which is impacting discretionary spending with consumers, and cautious management of inventory levels at dealerships and OEMs. Despite this confluence of headwinds, we remain laser-focused on what we can control, which is delivering exceptional value through our uncompromising commitment to innovation and performance-defining products across our diversified set of businesses.

This focus is resulting in continued share growth with our OEM partnership, which speaks to the value of our product roadmap and is a central tenet of our long-term strategy. While we remain focused on product, we recognize that near-term we must also keep a close eye and tight control on our costs. Although we have not executed a company-wide workforce reduction, we have consistently and continuously refined our workforce in conjunction with work optimization and productivity targets. We have also reduced spending and investments to ensure we run as lean and focus as possible. To be clear, this is not a one-and-done or even periodic management tactic at Fox, but the way we think about our jobs every day. Turning now to our segment performance.

In the Powered Vehicle group, net sales were $118 million, down from $142 million in the prior year quarter, primarily due to lower OEM demand in Powersports. At the dealer distributor level, the industry expects 2024 Powersports retail to be done modestly versus 2023, which is driving a conservative approach to inventory management among dealers. In response, Powersports OEMs continue to curtail production to balance supply with demand, which will continue to impact our results in the near-term. In the automotive space, we continue to see strong demand from our major OEMs as they produce model year ’25 products. As these are mainly limited production vehicles, we believe this significant portion of our business is insulated from interest rate issues that have impacted us elsewhere.

We remain committed to our long-term growth strategy within the PVG business. While we took prudent cost reduction actions commensurate to volume reductions, we were more deliberate in maintaining most of our highly trained engineers and leaders who are critical to developing our technologically advanced products. While this decision is impacting near-term profitability, it is essential to ensuring that we can support growth over the long-term as industry conditions improve. We are seeing the benefits from our development team as we continue to win market share demonstrating the power and differentiation behind our product portfolio. We’re excited by new product introductions for the Polaris INDY, DYNAMIX, Toyota 4Runner TRD Pro and the Sierra Echo and believe we’ll be able to increase our spec share with both existing and new OEMs through this cycle given our brand leadership.

In AAG, net sales were $102 million compared to $139 million in the prior year quarter. The results were driven by lower sales in our outfitting business, offset by strong aftermarket growth in sales of wheels, tires and lift kits. Upfit was lower due to product mix and unique model year changeover challenges from OEMs, which delayed model year launches. We expect these impacts to largely be behind us as we exit the second quarter. Additionally, we are seeing a slowdown in sales in moderately priced outfits as consumers who generally finance these purchases are challenged with the higher interest rate environment that is persisting longer than expected. Despite the macro environment, dealers continue to make good progress in reducing existing aged inventory ahead of the release of new redesigned model year vehicles, which are expected to launch throughout the balance of the year.

As we’ve said before, these changeovers present a great opportunity for us as we collaborate with OE partners on developing and introducing new packages for the latest models. We remain encouraged that the higher-end upfits continue to see strong consumer demand and interest. To that point, in March, we announced the launch of the company’s first branded high performance off-road upfitted truck and high performance upfitted UTVs. We’re thrilled to introduce these state-of-the-art upfitted vehicles which exemplify all of our best-in-class products engineered to work together to create a new premium class of vehicles. With our heavily contented Fox Factory trucks, our upfit is worth four times the value of our average upfit, making these vehicles significantly more accretive to our business in the future.

In SSG, net sales were $114 million compared to $119 million last year. The decline in revenue was primarily due to a $65 million reduction in sales within the bike as a result of the OEM inventory destocking we have been discussing the last several quarters. Notably, the declines in bike were partially offset by above planned performance at Marucci, which was fueled by success across their diverse product lineup in baseball, covering their Victus and Marucci brands softball, lizard Skins, soft goods, international growth and hitters house. This was a strong quarter despite not having a significant new product launch. As demonstrated by the results, Marucci also played a key role in bolstering the resiliency of our bottom line performance given their attractive margin profile relative to the segment average.

As we look ahead to the rest of the year, our bike segment is strengthening. OEs are gearing up for new model year launches and expanding their product offerings which are factored into our second quarter and back half forecast. Additionally, we are seeing growth with multiple product launches which occur throughout the balance of the year. The e-bike category continues to experience robust growth as well, and we firmly believe that e-bikes will not only attract a broader demographic of riders, but also fuel industry-wide expansion via this growing, addressable market. In the face of challenged results, our focus remains on key elements that define our brand and long history of excellence in product development. These elements include maintaining strong brand relationships, avoiding brand dilution for short-term gains and investing in research and development to drive long-term growth.

Our objectives with R&D investment are two-fold. First, support innovative model year 2025 releases which will expand our share of the OEM market and second, capitalizing on new launches of higher margin aftermarket components where we are also gaining significant traction with our recently expanded e-commerce business. Now for some comments on our outlook for the balance of 2024. We continue to expect the first half of 2024 to be down year-over-year, with the second quarter being sequentially stronger than the first quarter. Our expectation for the second quarter remains unchanged and is consistent with our plan. Dennis will speak more to our second quarter guidance in his remarks. Our full year guidance continues to be weighted to the back half and predicated on the following.

Bikes channel inventory continuing to improve and OEMs model year ’25 releases. Marucci’s continued growth across its diversified portfolio and new product launches. Powersports dealer inventory improvement, upfit chassis availability and mix improvement and new product launches within our lift kit and wheel business. While those assumptions remain intact and show positive signs so far within Q2, our full year guidance also assumed easing macro pressures and an improved consumer outlook driven by the timing of interest rate relief. With the Fed recently signaling that rates are likely to remain higher for longer, we have removed that as a positive catalyst in our FY’24 thesis. Thus, while we continue to expect solid growth for the second half, we have prudently narrowed our full year 2024 outlook to the bottom half of our previous range.

In closing, we continue to be positive about the back half of the year. In terms of innovation, we have a robust product roadmap in place. We eagerly anticipate our upcoming product launches, which are happening across all three segments of our business, and we are confident that these new products, coupled with our spec share gains in the OEM market, will drive growth in the second half of the year. As we navigate this cycle, we remain focused on managing the elements of the business that we can control while playing to our strengths, which include balanced growth through improved diversification, a deep technological moat that is advanced by our unwavering commitment to innovation and our ability to deliver free cash flow through the cycle, which allows for opportunistic share repurchases and management of our capital structure.

And with that I’ll turn the call over to Dennis.

Dennis Schemm: Thanks, Mike and good afternoon everyone. I’ll begin by discussing our first quarter financial results and then move to our balance sheet and cash flows, capital structure strategy and then wrap up with a review of our guidance. Total consolidated net sales in the first quarter of fiscal 2024 were $333.5 million a decrease of 16.6% versus sales of $399.9 million in the first quarter of fiscal 2023. Our performance continues to reflect the temporary and unique challenges that exist within the various industries we serve. Our gross margin was 30.9% in the first quarter of fiscal 2024, compared to 33.3% in the same quarter last year. The decrease in gross margin was primarily driven by shifts in our product line mix and reduced operating leverage on lower volumes across our three segments, partially offset by increased efficiencies at our North American facilities and cost controls.

Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, decreased to 32.3% in the first quarter of fiscal 2024 versus 34.1% in the prior year. Total operating expenses were $94.3 million or 28.3% of net sales in the first quarter of fiscal 2024 compared to $78.6 million or 19.7% of net sales in the same quarter last year. The increase in operating expenses as a percentage of sales was attributed to the inclusion of operating expenses from our Custom Wheel House and Marucci acquisitions and the amortization of acquired intangibles. Excluding these acquisitions, our base organic operating expenses decreased by approximately $8.8 million, driven by cost controls and continuous improvement. Adjusted operating expenses as a percentage of sales increased to 24.1% in the first quarter of 2024, compared to 17.6% in the same period last year.

Company’s tax benefit was $1.3 million in the first quarter of fiscal 2024, compared to a tax expense of $9.4 million in the first quarter of fiscal 2023. The tax benefit was primarily due to a decrease in pretax income coupled with a one-time foreign tax credit adjustment. Net loss in the first quarter of fiscal 2024 was $3.5 million or $0.08 per diluted share compared to net income of $41.8 million, or $0.98 per diluted share in the same quarter last year. And adjusted net income was $11.9 million or $0.29 per diluted share compared to $51 million or $1.20 per diluted share in the first quarter last year. Adjusted EBITDA was $40.4 million for the first quarter of fiscal 2024 compared to $79.2 million in the same quarter last year. Adjusted EBITDA margin was 12.1% in the first quarter of fiscal 2024 compared to 19.8% in the first quarter of fiscal 2024.

The decrease in our adjusted EBITDA margin reflects the temporary and unique challenges that our customers across various industries are facing, which is impacting volumes and fixed cost absorption at our facilities. Other drivers of our adjusted EBITDA margin performance include shifts in our portfolio mix and cost increases associated with our facility’s expansion to support growth partially offset by cost control measures and continuous improvement initiatives. Sequentially, we delivered a 40 basis point improvement in EBITDA margin to 12.1% on the strength of aftermarket sales and our cost control measures. Moving to the balance sheet and cash flows our balance sheet continues to be a source of strength for Fox and underpins our capital allocation strategy.

In the first quarter, we were able to reduce inventory by $17.9 million or 5% compared to year-end 2023, driven by our strong execution of continuous improvement efforts to optimize inventory levels across the organization, particularly within PVG. Our net net leverage is 2.9 times as of quarter end and in line with our expectations. Our flexible capital structure gives us the ability to invest in growth through R&D, CapEx and sales and marketing and pay down debt while providing the optionality to repurchase shares. Our revolver balance as of March 29, 2024 was $392 million versus $370 million as of December 29, 2023. Our term loan A balance was approximately $370 million net of loan fees. During the first quarter of fiscal 2024 we incurred $70 million of debt on our revolver to support working capital, which included $24 million in prepaid chassis partially offset by $48 million in payments on our revolver and $3.6 million in payments on our term loan.

During the first quarter, we repurchased approximately 25 million in shares and we have a remaining balance of 250 million on our 300 million share repurchase authorization. Now I would like to share some select guidance. While we continue to expect solid growth for the second half of 2024, we are tempering our prior assumption for meaningful interest rate relief and out of prudence we have narrowed our full year 2024 outlook to the bottom half of the previous range. As a result, we now expect fiscal 2024 full year sales in the range of $1.53 billion to $1.61 billion and adjusted earnings per diluted share in the range $2.30 to $2.55. Our full year guidance continues to assume our income tax rate to be in the range of 15% to 18%. For the second quarter of 2024, we expect sales in the range of $340 million to $360 million and adjusted earnings per diluted share of $0.30 to $0.40.

There are several drivers underpinning this sequential improvement, including bike OEs gearing up for model year 2025 releases, improving chassis mix and availability, and the new model year launch for our rams. Our second quarter guidance is consistent with our operating plan at the beginning of the year, which had baked in a year-over-year decline in the first half of 2024 before returning to growth in the second half of 2024. As we said previously, we will revisit 2025 aspirations in the second half of this year when we have more visibility. Our entire team at Fox Factory remains focused on controlling the aspects of the business that we can in order to keep our business optimally positioned to re-accelerate growth as industry conditions improve.

With that I’d like to turn the call back over to Mike.

Michael Dennison: Thank you Dennis. Thank you all for joining us today. We appreciate your time and interest in Fox. To recap, we navigated through some significant industry headwinds in the first quarter, but our diversified business model and strategic growth initiatives have allowed us to remain resilient and on plan for the year. We are particularly excited about the strong performance of Marucci, its attractive margin profile and the long-term growth potential it brings to our portfolio. Looking ahead, we are optimistic about the back half of the year based on a robust product roadmap and consequently we expect growth to be driven by spec share gains in the bike OEM market, strength in aftermarket including Marucci and new product launches in AAG and PVG. I would now like to open the call for questions. Operator?

Operator: Thank you Mr. Dennison. [Operator Instructions] We’ll go first this afternoon to Larry Solow of CJS Securities.

Lawrence Solow: Great. Good afternoon, guys. Hi. First question, I guess just on the guidance, sounds like Q1 was relatively in line and you in Q2, it sounds like in line with where you originally expected. So just on the back half lowering strictly — is everything mostly the same, plus and minuses X the fact that interest rates are clearly, we don’t see any indication of lowering anytime soon. Is that the biggest negating factor there? And is that impact — can you just help us, is that impact more in AAG than the other two? Is it sort of spread out? I’m just trying to get some feel for that too. Thanks.

Michael Dennison: Yeah, Larry, it’s a good question. For us, the back half is in line with us from a product launch perspective and from a market share perspective. So everything that we had intended for the year in the back half is in play and on plan. The difference is really just that accelerator that the macro or the interest rate reduction would have given us. That would have been the top end of that guide. And to your question, I think that really does affect us most in probably two predominant areas. It does affect everything, frankly. Interest rates at a high level is a damper, to, excuse the pun, to all the things in a discretionary consumer purchasing habit. But for the most part, in the back half of the year, where you’re going to feel the most of that impact is going to be in Powersports and in AAG around outfit trucks. So that’s kind of what we’ve tempered in the back half relative to, again, fully just the interest rate issue itself.

Lawrence Solow: And you’re getting more into that customized, more higher content stuff. You think over time, those folks that target are not necessarily impacted as much by the interest rates?

Michael Dennison: Yes, that’s correct. And I think with the Fox factory truck launch, we’re seeing demand on that vehicle coming directly to us, not even through dealership, which is a sign that the further you go in performance and content, the better off you’re going to be.

Lawrence Solow: Thanks. Okay, just lastly, just on the bike market, I think you had thought this would be the bottom this quarter. It seemed maybe a little bit lower than you thought. Certainly lower than we had estimated down to like $54 million, I guess. Looks like just on the side. Sounds like you’re confident we’re at the bottom. What gives you that confidence? And do we kind of bounce around the bottom, or do we think we kind of bounce off that bottom and materially over the next few quarters? Thanks.

Michael Dennison: So I’ll tell you, Q1 is interesting. It’s actually above what we had forecasted for the quarter, but slightly above. It’s the first quarter in a long time that we actually were able to predict the business effectively, which is a great sign. Second great sign Q2 is already booked above Q1. So bookings mean a lot for us. We stopped, as you have heard me talk about for the forecast, got hard to follow because they weren’t accurate. Bookings are more accurate. And having bookings in Q2 already above Q1 is a great step forward. The third thing, frankly, is just the product launches. We’ve got 3x of product launches this year in bike that we’ve had in the past on any given year. And the pep in the step from the bike team is noticeable.

I mean, the team really is starting to feel better about the business and the customers and the health of the customers, especially customers in Europe and all that kind of attributes to feeling a lot better about Q2 and even seeing some positive signs already for Q3. So, yes, Q1 is right where we thought it would be. Q2, I think is going to be right where we think it’s going to be. And we’re hopefully turning the corner and back on the gas.