Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation, and instructions will be given at that time. Please note this conference is being recorded. I'd now like to turn the conference over to your host, Vivek Bakuni, Director of Investor Relations and Business Development. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's third quarter 2021 earnings conference call. I'm 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 financial results for the quarter 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 or 5 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.rightfox.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 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.

Thank you, Vian. Good afternoon. We appreciate everyone taking the time to join us for today's call. This past quarter really put our teams to the test, as overall supply chain conditions remained challenging. As these macro obstacles worsened this quarter, our team continued to out-innovate, out-pace, and out-think our peers to deliver performance-defining results, just like our products. I am proud to say our strategies and our execution are rising to meet these challenges. as we delivered another record of quarterly revenue performance. Delivering five consecutive record quarters in this current volatile operating environment represents what Fox stands for, a culture of innovation and commitment to deliver best-in-class products to our ever-growing base of performance-driven enthusiasts. I am also happy to report that we hosted our inaugural Investor Day on September 21st. After months of planning, our Investor Day message was well received by the investor community. Our teams came together to showcase what we do best, maximize performance. This included a morning full of results-driven and forward-looking presentations, a showroom full of vehicles and bikes equipped with our products, as well as a tour of our new manufacturing center in Gainesville. In the afternoon, we offered a very unique experience. Investors had the opportunity to interact with Fox-sponsored athletes, ambassadors, and the broader management team to ride e-bikes and drive off-road vehicles to fully understand how our products dramatically improve the way enthusiasts experience their rides. As you know, we've had remarkable growth since our IPO in 2013. but we felt this was the perfect time to host the event so we could exhibit what we think is the inflection point for our next phase of growth, the vision of our management team and why we think we can achieve this new target of growth that we call Fox 2.0, achieving over $2 billion in revenue by 2025. Moving on to the Q3 numbers, we had a successful third quarter with over 347 million in sales which is over 33% growth versus the third quarter of last year. Something I want to highlight here is the double-digit revenue growth comes against a very strong comparing Q3 of 2020, which reflected the auto OEMs coming back online from COVID shutdowns, a rebound in the economy, and an unprecedented strong surge in demand for our products across all channels. Continuing our growth analysis, This quarter also reflects approximately 6% growth on a sequential basis versus Q2 of 2021. This outstanding growth is driven by both our SSG and PVG businesses, which grew 48% and 23% respectively versus the prior year period. The demand across our product categories continues to be strong with no signs of abating given our uncompromising brand and customer loyalty. complemented by the fundamental shift in consumer behavior towards a more health-conscious and outdoor lifestyle. All of our businesses performed extremely well, posting strong sales increases in the face of a challenging supply chain and an environment of increasing input costs. Our non-GAAP adjusted earnings per share increased from $1.07 in the third quarter of 2020 to $1.19 in the third quarter of 2021. I want to acknowledge our team for their phenomenal operational agility, which was required to deliver such fantastic results. Starting with the specialty sports group, this was our sixth consecutive record revenue quarter. It is safe to say the primary reason we have been able to deliver such staggering numbers quarter over quarter is due to the SSG team's ability to not only anticipate industry demand fluctuations, but also to scale and accelerate production to meet such levels of demand while managing supply chain, inflation, and labor challenges. We continue to optimize our capacity and labor expansion plans in Taiwan as we keep a finger on the pulse of demand, which continues to stay strong. We believe we are in a strong position as we have a good view of demand throughout 2022 for both OEM and aftermarket orders. As it pertains to lead times in 2022 and 2023, we are working towards improving capacity, expanding supply lines, and entering into additional long-term supply agreements. But talking about the current inventory levels and replenishment, my comments are similar to last quarter, where the inventory levels continue to remain close to historic lows. With the current pace of industry demand, we believe it will still take 8 to 10 months to meet the current customer demand level and another 12 to 18 months to replenish the depleted inventory channels. Additionally, we are investing in key areas of our development process to improve our speed to market and continue to grow our service network in terms of capacity and regional coverage. As an example of our team's ability to stay ahead of the competition, we successfully launched the new Fox AWL fork, our first purpose-built ESUV suspension product in the exciting and rapidly growing adventure mobility category. In addition, we had another very successful quarter in the world of racing. Box-equipped athletes dominated mountain bike races through the conclusion of the 2021 International Race Calendar. Highlights included Greg Menard winning the men's and Miriam Nicole winning the women's downhill world championships. In addition, David Serrano and Linda Indergant on Fox LiveValve claimed two medals at the Tokyo Olympics. Shifting to our powered vehicles group, Q3 marked another remarkable revenue quarter led by strong sales in the power sport, upfitting, and automotive OEM product lines as more model year changeovers come online. The growth in these product lines is remarkable as our teams are unlocking new ways to mitigate the macroeconomic pressures we face while leveraging the power of our brand to expand our relationships in both the aftermarket and the OEM sides of the business. We are getting confident in our ability to continue this growth trajectory and to leverage the efficiency of our new Gainesville factory, which allowed us to set unit volume production records again this quarter. Moving on to our accomplishments in the world of motorsports. At the Ultra 4 Black Hills Race in Sturgis, Vaughn Gittin Jr. earned his first career 4,400 class win in his Fox-equipped Ford Performance Bronco. And Fox took the top three UTV spots at the Best in the Desert Vegas Torino, where our patented live valve technology tacked on another podium. In short course off-road racing, Fox racers racked up five ultra four-class wins and 11 pro-class wins and a clean sweep of all seven pro-class points championships at the Crandon World Championships over Labor Day weekend. Sweeps were the theme of the quarter and continued in Baja. where Fox took the top six spots overall and 11 class wins in total at the SCORE International Baja 400. To be successful in our vision, we aren't just making investments to meet the historic level of demand. We have always said product innovation remains a key component of our growth strategy. Even in this inflationary environment, we have not taken our foot off the pedal, as we increased R&D spending by nearly $4 million in the third quarter versus the prior year period. Once again, the story on the continued challenges from labor to input costs, freight and supply chain, has increased in strength from the prior quarter. Material costs have been increasing throughout the second half of the year, which has been our biggest headwind. We may begin to see some easing in the supply chain starting mid-next year, but inflationary challenges might persist longer than that. We will continue to monitor the impact of these factors on this unprecedented demand environment and, as always, remain agile and nimble. Delivering solid results in the third quarter and raising our guidance to close out the year deserves to be celebrated. And I cannot thank each and every single member of our Fox family enough for helping us challenge the impossible every day.