Lawrence Solow: Okay, great, thanks. I appreciate the color.
Operator: We’ll go next now to Jim Duffy at Stifel.
James Duffy: Thank you. Hi, Mike, Dennis, Toby. Hope you guys are doing well.
Michael Dennison: Hey, Jim.
James Duffy: I’ll focus into two questions. One, that’s one on the auto OEM dimension of the PVG business. And I have a question on gross margin. The PVG group numbers in the quarter were a little bit better than we thought. If I heard you correctly, it seems like the entirety of the year-to-year decline was due to Powersports. Is that accurate?
Michael Dennison: Got it. I wouldn’t say majority. Everything else is kind of immaterial. But Powersports is the largest decline and it flows throughout the quarter, frankly, from beginning to end. So it was a consistent decline too.
James Duffy: Understood. And then on the auto OEM production schedules, can you just help us with what you saw in the first quarter and then your visibility on auto OEM production for the balance of the year? I’m curious, has the guide assumed just a ramp in existing platforms or is there any consideration for new platforms on the auto OEM front in the balance of the year?
Michael Dennison: Yeah, Jim, our guide is fundamentally what’s already in play. As you know, there’s long duration cycles to get designs to production, so we can see that years in advance. And so we have a pretty good view of what this year will look like from product launches and from the vehicles we have in play today. Frankly, our automotive business has stayed very consistent. As you know, we’re on kind of limited production vehicles with the Raptor series and TRD Pro. Those vehicles tend to weather the storm very well and we’ve seen that materializing and their forecasting their actual pull of material. So that feels pretty good for us right now.
James Duffy: Okay, good. And then, Dennis, I wanted to ask on gross margins, assuming Marucci did its thing on gross margins with the accretive contribution. The report implies some pretty big margin compression in the organic business. What I’m trying to get my arms around is how much of that is mix versus regular weight pressure, and then within that regular weight pressure, how much of it is fixed cost deleverage or is there something else we should be considering with respect to the gross margins as we try to think about normalization?
Dennis Schemm: Yeah, so two things here. So one, Marucci delivered right on track across the board. Margins in place, exactly where we thought they would be. Their new product launches. Strength of the business continues to impress. So way back from Marucci. So getting back to base business, it comes down to volume. It all comes down to operating leverage, both in those plants. And then from the OpEx stand, so we were pretty much coming right in line forecast and it’s all about how do we optimize these plants. And so you heard it in my commentary. You heard it in Mike’s commentary. We’re continuing to look for cost-outs, and we were very delighted to see those cost improvements come in a big way in Q1 to help offset these volume declines that we have been seeing.
And we continue to think that we’re going to see them through the year as we start to ramp back up because our cost structure will lag the volume growth that we’re going to be seeing. So it’ll actually serve as a slight tailwind for us as we progress through the year. The trick in all of this is not to cut too deep because we expect this business to turn around and to ramp back up. And so we want to hold on to the really good people. And so what we’ve been doing is really looking at when somebody leaves, are they non-revenue generating or are they revenue generating? If they’re revenue generating, we’re going to take a decision to backfill. If they’re not, we’re going to see what we can do to hold off until it’s absolutely necessary to add somebody.
And so we’ve been absolutely militant on the cost front.
James Duffy: Okay, helpful. And then final clarification question. I think in the prepared remarks, there was a comment about PVG inventories. Does this relate to inventories on your books or was that related more to channel inventories? I’m trying to understand.
Dennis Schemm: Yeah, two-fold. So if it were in my — under my section, it would be about us continuing to make improvements in inventory within PVG, and we’re absolutely taking out inventory and reducing that commensurate with the decline in the business. So we’re managing the working capital extremely well, I think, on the demand side if it were there, then we’re talking about, like, Powersports inventory challenges in the channel, which we expect to get cleared up by year end as there’s a lot of focus on this with the likes of Polaris and BRP and helping dealers manage that inventory. So it could have been two points where you heard inventories.
James Duffy: Understood. Thank you for that clarification.
Operator: Thank you. We go next now to Anna Glaessgen at B. Riley.
Anna Glaessgen: Hi. Good afternoon, guys.
Dennis Schemm: Hi, Anna.
Anna Glaessgen: I’d like to touch back on bikes between the first half implied guidance, in the second half we are expecting to see a pretty big improvement in the back half as the model year ’25 launches. Clearly, expectations have been a bit fluid in this segment as the industry works through channel inventories. Can you speak to where do channel inventories stand today and how much improvement you need to see to really meet the expectations for this business in the back half?
Michael Dennison: Yeah, Anna, the inventory improvement is mixed across the board within bike OEMs. The more boutique or smaller bike manufacturers, European bike manufacturers specifically, have done a great job. They’re already through all the inventory challenges and they’re going fairly quickly in the model year ’25 and pushing us pretty hard. In fact, pushing us beyond some of our current inventory levels. So we’re chasing some inventory, which is a nice place to be. That’s pretty clear and really clean. Other bigger, larger OEMs are working through it, and some are getting pretty close and some are still little ways away. So it’s a bit of a mixed bag. We are kind of taking that whole conglomerate or aggregation of all these different customers into our guide and into our forecast for this year.
And again, what we started to do end of last year was take a look at those forecasts from OEMs and give them a pretty significant haircut as to what we think they would actually do. And that helped us in Q1. As I said in an earlier comment, we actually delivered Q1 right above the plan we had for Q1. So getting that confidence back in the team and the ability to plan the business is really important to us. And I think that’s happening and happening for sure in Q1.
Anna Glaessgen: Thanks, Mike. And yes, I know last year, particularly, you were dealing with a lot of last minute cancellations. I guess, is that — is it fair to say that dynamic has eased a bit in 2024?
Michael Dennison: That has. Yep, that has eased. And they’re starting to place purchase orders out a little bit further again. And again, the whole chasing inventory to meet demand is a great place for us to be. So seeing some of that pressure, positive pressure on the system is really good. It’s still too early. We’re still in the woods, so we’re not calling victory lap yet on bike. But we just, again, seeing the positivity in the team, seeing the positivity in the market with our customers has been great, and the product launches have been really strong so far.
Anna Glaessgen: Great. And shifting gears to Marucci, I think in the quarter grew in the low-single-digits based on Cody’s prior disclosures. Now that you’ve owned the business for six months or so, can you give a little bit of an update on what the go forward growth opportunity should be there?
Michael Dennison: Yeah. I mean, again, they delivered a little bit above the plan in Q1. They’ve got solid product launches the balance of this year to get above the plan or at the plan for the balance of the year. And frankly, we think this is a double-digit growth business for us. So you should park it somewhere in the low-double-digits. And we think we can go from there. We’ve got a lot of exciting things coming on the merchant side of the business, and frankly, we’re going to unlock some doors and create some new opportunities from that business organically.
Dennis Schemm: Yeah. We’re excited about the growth there, both Marucci and Victus. So Victus is an important part of that composition as well. And just, yeah. Again, could not be more delighted with the EBITDA profile as well that we continue to see.
Anna Glaessgen: Great. Thanks, guys.
Operator: We’ll go next now to Bret Jordan at Jefferies.
Bret Jordan: Hey, guys. Overhead I guess if you look at the year-over-year addition from Custom Wheel House and Marucci, is there much synergy available or cost to take out as you integrate those businesses, or are you going to run them with the incremental overhead?
Michael Dennison: Bret, on the fringe, there’s probably some opportunities, but not significant. Where the opportunity really lies with the Marucci acquisition is in the supply chain. I’ve talked about that in the past where we think some of our factory management structures from our vertical integration, how we think about design, some of those synergies can still be had, and we never planned them for early ’24. We’re starting to work on those projects now, and I think that’s more material in ’25. But we do think there’s some long-term synergies in that part of the business seeing backup is in our front office.
Dennis Schemm: And to add on that, we haven’t talked about this in a long time, but last year we talked about these acquisitions being, some acquisitions being OpEx heavy, CapEx light. And in this particular case, both with Marucci and Custom Wheel House, these are more OpEx heavy businesses, CapEx light businesses, and they are delivering right on track. So we are very, very pleased with the models that we have there with both companies.
Bret Jordan: Okay. And could you talk about the cadence of what you’re seeing in Powersports? Are we — as the quarter progressed at the channel level, are you seeing inventory clearing and demand and conversion picking up, or is it still sort of soft, but maybe getting softer at the consumer level, given rates and all the headwinds?
Michael Dennison: I think it’s still soft. I wouldn’t say it’s picking up yet. I think it’s seasonal, depending on the product as well. So obviously, we had a bad snow season, so snowmobile sales were way off. We’ve got a new snowmobile launch this year, so this upcoming season is better. It depends on the snow. But in UTVs and side by sides, it’s a bit of a mix, but I’d say it’s soft, and we’re expecting it to be soft for the next probably two quarters.
Bret Jordan: Okay, great. Thank you.
Dennis Schemm: And this is a great point because our Powersports came in hard with order books and strong order books. And throughout that first quarter, what did we see? They just kept pulling it back, pulling it back, pulling it down. And so this is why Mike, in his opening comments, talked so heavily about diversification. Diversification into aftermarket, and why it’s so strategically important to us, because it gives us that ability to exert control, be relevant, create new in different markets. And this is what Marucci does for us. It’s disruptive, it’s high margin, takes advantage of all the industry complacency and makes a difference. And that’s why we love the diversification model that Mike has put in place.
Michael Dennison: And, you know, interestingly enough, Greg, a point on the Powersports side, what we did in that space is we actually started our own outfit, side-by-side business in conjunction with Polaris and others. And that is the premium end of content in vehicle pricing that we talk about in automotive, where it’s more resilient to affluent buyers, and we’re seeing strength in that business that middle market, kind of lower cost type vehicles in side by side isn’t seeing. So I do think with performance and content, you can get around the corner of some of the softness and some of this high interest rate challenge by delivering a premium product that people really want to have and are willing to stand in line to get.
Bret Jordan: Okay. Thank you.
Operator: And we’ll go next now to Mike Schwartz of Truist.
Michael Swartz: Hey, guys. Good evening. Just want to start on the bike side, and if we go back over the past 18 months, I think to frame it at a high level, visibility has been the biggest challenge. It does sound now like you might have better visibility than you did three months ago, but I just wanted to tie your commentary into something that — another public supplier, Shimano, had called out a couple of weeks back talking about they thought the industry would bottom in the third quarter and maybe start to return to growth in the fourth quarter. But it sounds like you’re thinking bottoming is more first quarter, second quarter. Is that — any discrepancies or any other thoughts or color between those two comments?
