Fox Factory Holding Corp. (NASDAQ:FOXF) Q4 2022 Earnings Call Transcript February 26, 2023
Operator: Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Fox Factory Holding Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note this conference is being recorded. I’d now like to turn the conference over to Vivek Bhakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. You may begin.
Vivek Bhakuni: Thank you. Good afternoon and welcome to Fox Factory’s fourth quarter and full year 2022 earnings conference call. I am joined today by Mike Dennison, our Chief Executive Officer and Scott Humphrey, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Then Scott will review the quarter and full year financial results and then the outlook, followed by closing remarks from Mike. We will then open the call up for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4:00 or 5:00 Eastern Time. 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 and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the company’s control and can cause future results, performance or achievements to differ significantly 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 latest Form 10-Q and in the annual report on Form 10-K filed with the Securities and Exchange Commission.
Except as required by law, the company undertakes no obligation to update any forward-looking 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 non-GAAP financial measures to evaluate our business as we believe these are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today’s press 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.
Mike Dennison: Thank you, Vi and good afternoon. We appreciate everyone taking the time to join us for today’s call. I am pleased to announce that we delivered another record year for both revenue and earnings. We are creating more separation between us and our competition, thanks to the meaningful relationships we have with OEMs and enthusiasts as well as the continued execution of our strategy. This differentiation is propelled by our team’s dedication and tenacity as they capitalize on opportunities while navigating significant challenges throughout 2022. Our consistent strong performance is achieved primarily due to two factors: the power of our brand and the sustainability of our diversified portfolio. As we entered Q4, the macroeconomic and inflationary challenges persisted, but we delivered the best fourth quarter for both the top and bottom line in our company’s history.
Besides our team’s ability to be agile, nimble and execute at the highest level, what made this quarterly performance even more gratifying was the continued improvement in our Gainesville, Georgia facility. We delivered the highest number of shocks in the quarter since the facility’s inception in late 2020 and the highest number of shocks for PVG ever. These results as well as less-than-expected seasonality in our Specialty Sports Group supported the impressive results in Q4. Consequently, I am pleased to report fourth quarter sales of $408.6 million, an increase of 19.4% compared to the same period last year. For the fourth quarter, we reported earnings per diluted share of $1.25 versus $0.89 in the same period in 2021, an increase of 40.4% quarter-over-quarter.
We also reported non-GAAP adjusted earnings per diluted share of $1.43 versus $1.06, an increase of 34.9% over the prior year. We continue to prove that our collective resilience and strength are able to carry us through these turbulent economic times. I am proud of the team for delivering over 23% annual year-on-year revenue growth as we finished the year with revenue of more than $1.6 billion. These results continue to give us confidence in our long-term vision of $2 billion in revenue by 2025 and therefore, we are now beginning to set our sights on even more ambitious goals. As announced earlier this week, we signed a definitive agreement to acquire Custom Wheel House, LLC. Custom Wheel House is known for designing, marketing and distributing high-performance wheels, performance-offered tires and accessories, including the premier performance branded method race wheels.
This acquisition broadens and diversifies our product offerings across the truck, SUV and power sports space and provide significant vertical integration and synergistic opportunities, especially for our lift kit, our upfitted truck and our outside band businesses. This acquisition will enable us to continue to create an ecosystem of high-performance integrated products for our enthusiast customer base. Our ability to weave together these iconic brands to build a robust platform of products is unique amongst our competition. I am excited to welcome the Custom Wheel House team to Fox and we take the next step in building the best aftermarket applications product group in the business. Let us take a closer look at the product lines. Starting with Specialty Sports Group, we delivered a quarterly revenue of $159.5 million, a decline of 1.9% as compared to the same quarter last year.
The last time we had a quarter-over-quarter revenue decline was Q1 of 2020. We’ve had an incredible run in our bike business for over 2 years and I am proud to say we did substantially better than most of our industry peers. As I had mentioned in our previous call, we were expecting the return of seasonality in the business. However, the Q4 performance was stronger than we had anticipated which moves we expect the seasonality impact in Q1 to be more significant. I know one of the questions on top of everyone’s mind is how will the bike business hold up in 2023. Let me start by saying that the volatility in sentiment and confidence within the industry is likely even greater than the volatility of demand. I believe end customer demand, even though seasonality has finally returned, continues to be generally positive and the largest challenges are a function of supply chain bloat and the corresponding cash flow challenges within our OEM and aftermarket partners.
Clearly, the strength of our balance sheet and the performance of our team has protected us from similar challenges. In our opinion, these next couple of quarters will provide the time necessary to get back to equilibrium between supply and demand and the persistent issues of semi-finished bikes and excess inventory, paving a path for a strong second half. Having said that, there is a lot of unpredictability in the bike world currently and how the next few quarters shake out will be crucial. Our team is keeping a finger on the pulse of the market. And as we sit today, we believe the full year Specialty Sports Group could be down anywhere between high single digits to high teens before it returns to our long-term growth expectations. And lastly, I finally had a chance to return to Taiwan since COVID.
It is just incredible what the team in Taiwan has done in the last 2 plus years and it is no surprise that Taiwan government presents the team with the Best Place to Work title and Golden Merchant Award. Shifting to our Powered Vehicles Group, Q4 marked another remarkable revenue quarter led by 38.5% growth in sales versus the same quarter last year, driven by strong performance in our OE channel and outfitted product lines. We delivered a quarterly revenue of $249.2 million, a fourth consecutive record revenue quarter for our Powered Vehicles Group. We are heading into 2023 with great momentum, thanks to the foundation provided by our Gainesville facility and the continued resilience of our outfitting product lines. As automotive OE production plans stabilize, it will enable a more predictable production plan as well as alleviate pressure on cash flows with less stockpiling of chassis in updating, which primarily drive our prepaid balance.
In addition, with some positive signs of easing in our supply chain, we expect to see a reduction in inventory as lead times return to a more normal environment. I am pleased to see how our Powered Vehicle Group has performed in 2022. And given the above-mentioned expansionary drivers and industry tailwinds, I feel confident that 2023 will be another strong year of performance with an expectation to deliver 20% revenue growth or more. Considering the macroeconomic and supply chain challenges, we believe our 2022 results reflect the strength of our brand, highlight the power of our well-diversified portfolio and the strong execution by our teams. As we head into 2023, the macroeconomic challenges we experienced in 2022 will likely persist and could intensify.
Photo by Axel Brunst on Unsplash
Thus, we are choosing to remain conservative in spending and hiring, but we’re steadfastly committed to a stronger customer-focused business that generates sustainable profitable growth with returns well above the cost of capital. Therefore, our plan is to focus on ongoing top and bottom line growth while investing in critical long-term opportunities that we believe will position Fox well for the eventual return of economic stability. We will continue to invest in the people, technology and innovation that drive customer loyalty and retention and all of this cannot be done without our incredible team. So I thank each and every single member of our Fox family that help us challenge the impossible every day. And with that, I’ll turn the call over to Scott.
Scott Humphrey: Thanks Mike. Good afternoon, everyone. I will begin by going over our fourth quarter and full year financial results and then review our guidance. Sales in the fourth quarter of 2022 were $408.6 million, an increase of 19.4% versus sales of $342.3 million in the fourth quarter of 2021. Our Powered Vehicles Group, PVG delivered a 38.5% increase in sales in the fourth quarter compared to the same quarter last year, primarily due to strong performance in our upfitting product lines and increased demand in our OEM channels. Moving to our Specialty Sports Group, SSG delivered a 1.9% decrease in sales compared to the fourth quarter of 2021, primarily due to a return to seasonality in the bike business. On a full year basis, sales were $1.602.5 billion versus $1.299.1 billion in the same period last year, an increase of 23.4%.
This jump in full year sales is driven by increased demand, primarily in SSG’s OEM business, strong performance from our upfitting product lines and increased demand in our PVG OEM channels. Fox Factory’s gross margin was 32% in the fourth quarter of 2022, a 70 basis point increase from 31.3% in the same period in the prior year. For the fourth quarter of 2022, non-GAAP adjusted gross margin also increased by 40 basis points to 32% versus Q4 of 2021. The increase in gross margin and non-GAAP adjusted gross margin in Q4 2022 were primarily driven by increased efficiencies in the Gainesville facility and strong performance in our upfitting product lines. On an annual basis, both our gross margin and our non-GAAP adjusted gross margins decreased 10 basis points to 33.2% and 33.3% respectively.
The decrease in gross margin and non-GAAP adjusted gross margin were primarily due to increases in factory overhead and materials costs, each of which were driven higher by inflation. Additionally, the completion of the planned shutdown of our Watsonville, California facility and transition of those production lines resulted in inefficiencies in the first half of fiscal year 2022. Total operating expenses were $74.2 million or 18.1% of sales in the fourth quarter of 2022 compared to $64.2 million or 18.8% of sales in the fourth quarter of last year. The increase in operating expenses in Q4 2022 in dollar terms was primarily due to higher employee head count and benefits, higher insurance and facility-related costs and higher commission costs.
Looking at non-GAAP operating expenses as a percentage of sales, our non-GAAP operating expenses decreased by 50 basis points to 16.2% in the fourth quarter of 2022 compared to 16.7% in the same period in the prior year. Focusing on operating expenses in more detail, sales and marketing expenses increased approximately $1.8 million in the fourth quarter of 2022 compared to the fourth quarter of 2021, primarily due to higher commissions. Research and development costs increased approximately $2.2 million in the fourth quarter of 2022 compared to the fourth quarter of 2021, primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $5.9 million in the fourth quarter of 2022 compared to the fourth quarter of 2021 due to higher employee head count and benefit-related costs of $5.3 million.
On a full year basis, operating expenses were $284.6 million or 17.8% of sales compared to $235.4 million or 18.1% of sales in the prior year, a decrease of 30 basis points. Our non-GAAP operating expenses as a percent of sales were flat versus the prior year period, going from $207.8 million and 16% of sales in 2021 to $257.1 million and 16% of sales in 2022. On a full year basis, sales and marketing spend increased by approximately $19.9 million compared to the prior year, primarily due to commissions of $9.7 million, higher head count and employee benefit-related costs of $5.8 million and higher marketing-related costs of $4 million. As a percent of revenue, the sales and marketing spend increased by 20 basis points in the full year of 2022 versus the prior year.
Research and development dollar spend increased by approximately $9.6 million for the full year 2022 as compared to the prior year due to head count investments to support future growth and product innovation. As a percent of revenue, however, research and development spend decreased by 10 basis points in 2022 versus the prior year. Lastly, general and administrative dollars spend increased by $18.9 million in full year 2022 as compared to the prior year, but was lower as a percent of revenue by 30 basis points versus the prior year. The increase in dollar spend in fiscal year 2022 is primarily due to higher head count and employee benefit-related costs of $11.7 million and higher insurance and facility-related costs of $11.1 million. These increases were partially offset by lower acquisition-related compensation.
For the fourth quarter and full year 2022, our effective tax rate was 0.4% and 12.2% respectively. This rate was lower than our previously estimated full year 2022 guidance of approximately 16%. The decrease in the company’s effective tax rate was primarily due to U.S. tax regulations proposed in November of 2022 that the company early adopted, which resulted in the ability to use certain foreign tax credits. On a GAAP basis, net income in the fourth quarter of 2022 was $53 million or $1.25 per diluted share compared to $37.7 million or $0.89 per diluted share in the same prior year period. Q4 earnings per diluted share were positively impacted by approximately $0.23 due to a lower-than-expected tax rate. On a full year basis, net income was $205.3 million or $4.84 per diluted share compared to $163.8 million or $3.87 per diluted share in the prior year.
Non-GAAP adjusted net income was $60.8 million in the fourth quarter of 2022, an increase of approximately $16 million or 35.8% compared to $44.8 million in the fourth quarter of last year. We delivered $1.43 of non-GAAP adjusted earnings per diluted share in the fourth quarter of 2022 compared to $1.06 in the fourth quarter of 2021. Full year earnings per diluted share had approximately the same positive impact due to lower-than-expected tax rate. On a full year basis, non-GAAP adjusted net income was $232.7 million, an increase of approximately $41.9 million or 21.9% compared to $190.8 million in the prior year period. We also delivered $5.49 of non-GAAP adjusted earnings per diluted share for full year 2022 compared to $4.50 in the prior year period.
These results include approximately $0.23 in nonrecurring tax benefits realized in 2022 due to tax law changes. Adjusted EBITDA increased by 25.9% to $76.8 million for the fourth quarter of 2022 compared to $61.1 million in the same quarter last year. Adjusted EBITDA margin increased by 100 basis points to 18.8% in the fourth quarter of 2022 compared to 17.8% in the fourth quarter of 2021. The increase in adjusted EBITDA margin in the fourth quarter of 2022 is primarily due to increased efficiency in our Gainesville plant, offset by inflationary cost pressures. On a full year basis, adjusted EBITDA increased by 21.9% to $321.8 million versus the prior year. However, the adjusted EBITDA margin decreased by 20 basis points to 20.1% versus the prior year period.
Now focusing on our balance sheet. For the fourth quarter, which ended on December 30, 2022, compared to our 2021 full year, which ended on December 31, 2021, we ended with cash on hand of $145.3 million compared to $179.7 million. Accounts receivable was $200.4 million compared to $142 million. Inventory was $350.6 million compared to $279.8 million. Prepaid and other current assets, was $101.4 million compared to $123.1 million and accounts payable was $131.2 million compared to $100 million. The increase in inventory as of year-end is primarily due to several factors, including natural growth to meet anticipated demand receipt of long lead time items that had been delayed and higher levels of safety stock to mitigate supply chain uncertainty.
The changes in accounts receivable and accounts payable reflect business growth as well as the timing of vendor payments. The decrease in prepaid and other assets at the end of the year is primarily due to a lower supply of chassis as we worked through the safety stock we secured in the first half of 2022. Our net property, plant and equipment increased to $202.2 million as of December 30, 2022, compared to $192 million at the end of fiscal year 2021, reflecting capital expenditures of $43.7 million for the year. Our deferred tax assets increased by $22.3 million, primarily due to recently finalized tax regulations that require the capitalization of research and development expenses. Now turning to guidance. For the first quarter of 2023, we expect sales in the range of $380 million to $400 million and non-GAAP adjusted earnings per diluted share in the range of $1.10 to $1.30.
For the fiscal year 2023, the company expects sales in the range of $1.67 billion to $1.7 billion and non-GAAP adjusted earnings per diluted share in the range of $5.15 to $5.45. Please note the current guidance doesn’t account for the impact of the Custom Wheel House transaction. We expect to provide updated guidance that takes this into account in our Q1 2023 earnings call. For our 2023 full year tax guidance, we expect our tax rate to be in the range of 15% to 18%. We also expect CapEx for 2023 to be in line with our long-term outlook of 3% to 4% of sales. I’d also like to note that we’re not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of actually predicting the elements necessary to provide such guidance and reconciliation.
Finally, as we all know, 2023 looks to be another year of macro uncertainty. The possibility of a global recession and lingering inflationary pressures has our attention as we begin the year. For margin expansion to higher inventory turns to stability in the bike business, we are focused on some key initiatives in 2023. That being said, I have full faith in the agility of our team to help us deliver solid results as we continue our journey towards our 2025 goals. In addition, as the acquisition multiples stabilize, we will continue to be more acquisitive and look for quality names like Custom Wheel House to join our Fox family. As positive as we may feel about our momentum going into 2023, we remain cautious in our outlook for our Specialty Sports Group in the first half of the year, along with the anticipated revenue mix normalization in our Powered Vehicles Group throughout the year, driven by higher percentage mix of OEM sales.
As our understanding of the global business environment evolves, we plan to provide incremental updates each quarter regarding our expectations for 2023. With that, I would like to turn the call back over to Mike.
Mike Dennison: Thanks, Scott. We are incredibly proud of the way our team has delivered stellar results in 2022 through their sheer perseverance, commitment and execution. As we head into 2023, we acknowledge the multidimensional challenges ahead of us, but at the same time, I am confident that we will continue to capitalize on our strong momentum with Fox’s diversified product portfolio, resilient operating model and strong balance sheet. We believe our world-class team, financial discipline and our relentless focus on delivering best-in-class products to our ever-growing base of performance-driven enthusiasts will enable us to continue delivering in support of our customer and shareholder expectations. I would now like to open the call for questions. Operator?
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Q&A Session
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Operator: Thank you, sir. And our first question will come from Michael Swartz with Truist Securities. Your line is open.
Michael Swartz: Hey, guys. Good evening. Maybe just to start with the guidance, I think if you’re doing the math right, it looks like you’re guiding to EBITDA margins maybe flat to slightly down year-over-year. I think we had talked about and discussed before 2023 being a year for a lot of the synergies and savings out of the Georgia facility to come through. So maybe walk through what the offset is? Is it investment? Is it channel mix or customer mix that’s kind of the negatives?
Scott Humphrey: Yes. Hi, Mike, thank you. Yes, channel mix is the biggest obstacle as we talk about any kind of slower quarters or weakness on SSG side. And we’re talking about all of our growth, Mike mentioned in his prepared remarks, 20% plus in PVG, the vast majority of that is expected to come from our OEM automotive customers. And so we’re having a mix shift that is going to be tough to overcome even though we are seeing benefit from Gainesville and the efficiencies that we’re getting there, it’s being offset by that mix shift and just the makeup of our customer base for 2023.
Michael Swartz: Okay, that’s helpful. And then just maybe around the SSG business back in November, you guys kind of backed off the longer-term growth algorithm for at least for 2023, now you’re talking about maybe down high singles to down teens for that business. Maybe walk us through what’s changed over the past 2 or 3 months to, I guess, change your temporary outlook a little?
Mike Dennison: Yes, Mike, this is Mike. So a couple of things. One, we expected Q4 to actually be more seasonal than it was. And I think I mentioned that in my comments earlier, so without the seasonality in Q4, that really pushed into Q1. So you’re seeing a bigger seasonality play in Q1. And there are like €“ in early in the year, I went to Taiwan now with some of our customers and really witnessed the challenges they were having with half tilt bikes and inventory kind of stuck in the channel. And I think that gave us more concern over Q1 and Q2 at least. So as we kind of see what’s happening, we’re unfolding in almost a real-time basis, we want to be very thoughtful about that and we put it together into our guide, which is what we’ve done.
And I think €“ again, I think that below will take care of itself over a couple €“ two or three quarters, and we’re expecting the back half to be better. But we’re also pretty conservative until we see the light near that tunnel.
Michael Swartz: Okay. Just to clarify, the glut that you’re talking about is not retail inventory. It’s just working capital and have completed inventory throughout the supply chain?
Mike Dennison: Exactly. Yes, you correct.
Michael Swartz: Okay, thank you.
Operator: Thank you. Our next question will come from Larry Solow with CJS Securities. Your line is open.
Larry Solow: Great. Thanks, guys, taking the question. Just to clarify on the €“ Mike, you said the high single digit to high teens drop for the year back-end loaded. Does that assume that Q1 and Q2 are even worse than that or are you kind of just not building in much recovery even in the back half of the year, but hopefully, that will occur? Just trying to figure out I think where we stand there?
Mike Dennison: Yes, Larry, good question. I think you see the majority of that reduction in Q1 and Q2.
Larry Solow: Okay. Okay. So that’s going to drive a lot of inefficiencies too. So whatever margin improvement you’re getting from a high level, you’re going to probably lose that and then the mid-shift in on the powered vehicle side?
