Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's second quarter 2022 earnings conference call. This is your host, Vivek Balcony, Senior Director, Investor Relations and Business Development. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. 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 or 5 Eastern Time. If you have not had a chance to review the release, it's available on Investor Relations portion of our website at Investor 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 through 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, Vee, and good afternoon. We appreciate everyone taking the time to join us for today's call. I am proud to report that we delivered yet another record quarter with the highest revenue in our company's history. These results were driven by record-breaking performance in both our specialty sports and powered vehicles product groups. We also delivered the all-time highest earnings per share by successfully navigating the unpredictable and turbulent macroeconomic and operational environment. Entering 2022, we knew our team had a daunting task ahead with the challenge to deliver continued growth through optimization at our Gainesville facility in a highly volatile macroeconomic environment. I'm happy to report continued progress in our Gainesville facilities output, which produced a record number of units in Q2. Thanks to the dedication and the resilience of the entire Fox team, we crossed the $400 million mark in quarterly revenue, $50 million mark for net income, and an $80 million mark in adjusted EBITDA for the first time in our company's history. Taking a deeper look at the numbers, our second quarter sales were $406.7 million, an increase of 23.9% compared to the second quarter of last year. This outstanding growth is driven by both our SSG and PVG product categories, which grew 28% and 21% respectively versus the same prior year period. Our commendable quarter-over-quarter beat exemplifies our belief that Fox's expanded portfolio of high-performance products continue to deliver on quality, engineering, and service which consistently resonates with our end consumers. We reported an earnings per diluted share of $1.26, an increase of 20% from the same period last year. On a non-GAAP adjusted basis, we reported an earnings per diluted share of $1.38, increasing 15% from the same period last year. Starting with specialty sports group, Q2 2022 was our ninth consecutive record revenue quarter. We delivered approximately 178 million in sales, a 28.1% revenue growth, on a quarter-over-quarter basis. We continue to optimize our capacity, our productivity, and workforce in Taiwan, as well as combat the increased prevalence of COVID on the island and within our factories. With regards to channel inventory, high-end mountain bike levels are still below the preferred levels, and the rising popularity of e-bikes is continuing to fuel demand while supply chains are improving. We are, however, seeing the signs of a return to normal, and consequently, we expect SSG to return to more typical growth rates beginning in Q3 and return of seasonality in Q4. Shifting to the powered vehicles group, the second quarter of 2022 marked another record quarter with revenue of $229 million, which represents a 20.9% increase as compared to the same period last year. This is our second consecutive quarter with over $200 million in revenues led by strong performance in our upfitting product lines and increased efficiency and output in our Gainesville facility. For the second half of the year, we anticipate the PDG Group will continue to grow at the current rates given the significant backlogs in our auto OE and power support business, along with strong demand in our upfitting product lines. However, we anticipate an increase in OE revenue contribution given the recent OEM launches versus the first half of the year. This translates to a tailwind for our top line, but a headwind for margins. We plan to offset those margin headwinds through further productivity gains in Gainesville. We recognize that we are just beginning our factory optimization journey, and we will continue to make progress over the course of the next several quarters, delivering the 250 to 350 basis point margin improvement as we have discussed in prior calls. As the world is slowly migrating towards electric vehicles, I'm excited to share some highlights from our electric vehicle racing program with the Xtreme E circuit. As you may recall, Fox was named the official shock provider for the Xtreme E series back in early Q2. We just finished our first race in Sardinia, Italy, and team feedback indicated that drivers and teams were thrilled with the Fox upgraded suspension package. We learned from drivers that the cars finally worked as they should. The handling was much more predictable and safer, and drivers were much more relaxed and less shaken up. This improvement in performance allowed the drivers to push the cars much harder and showcase their driving skills, versus just trying to ensure the vehicle survived the course. We are pleased to see Fox right at the forefront of its evolution in off-road racing. From a general economic standpoint, we continue to deal with inflation, labor, and supply chain disruptions, and we believe this difficult environment will likely persist well into 2023. What exacerbates our supply chain issues and lead times in general are the highly engineered and precision machine components we require that utilize higher-grade aluminum and steel. Consequently, we will continue to leverage dynamic pricing to combat inflationary pressures. Demand remains healthy across most of our diversified portfolio, and we believe that will remain for the balance of the year. We will continue to strengthen our core competencies and be relentless in extending our competitive differentiation. We also believe that the continued optimization of our Gainesville plant will drive some marginal improvement, as I discussed earlier. The dynamic operating environment has only become more complex as the year has progressed, and still, this team has delivered a 7.6% revenue growth on a sequential basis. Hence, I want to thank each and every member of our Fox family for their continued elevated performance. And with that, I'll turn the call over to Scott.

Thanks, Mike. Good afternoon, everyone. I'll begin by going over our second quarter financial results and then review our guidance. Sales in the second quarter of 2022 were $406.7 million, an increase of 23.9%. versus sales of $328.2 million in the second quarter of 2021. Our specialty sports group, SSG, delivered a 28.1% increase in sales compared to the second quarter of 2021, primarily due to increased demand in our OEM channels. Moving to our powered vehicles group, PVG delivered a 20.9% increase in sales in the second quarter compared to the same quarter last year, primarily due to strong performance in our upfitting product lines. On a year-to-date basis, sales were $784.7 million, an increase of 28.7%. This jump in sales is driven by increased demand, primarily in the SSG OEM channel, and strong performance from our upfitting product lines in PBG. Fox Factory's gross margin was 35.1% in the second quarter of 2022, a 120 basis point increase from 33.9 in the same period of the prior year. For the second quarter of 2022, non-GAAP adjusted gross margin increased by 120 basis points to 35.3% versus Q2 of 2021. The increase in gross margin and non-GAAP adjusted gross margin were primarily driven by favorable product mix compared to Q2 of 2021, led by higher volume sales in our specialty sports group and strong performance in our upfitting product lines. Our results were also positively impacted by increased factory efficiencies. The increases in gross margin and non-GAAP-adjusted gross margin were offset by higher inflationary pressures on all fronts including labor costs, input costs, and freight costs. Total operating expenses were $72.5 million, or 17.8% of sales in the second quarter of 2022, compared to $58.4 million, or 17.8% of sales in the second quarter of last year. The increase in operating expenses in Q2 2022 was primarily due to higher employee-related costs, higher commission costs, higher facility-related costs, and the impact of higher incentive compensation accruals. Looking at non-GAAP operating expenses as a percentage of sales, our non-GAAP operating expenses increased by 60 basis points to 16.3 percent in the second quarter of 2022, compared to 15.7 percent in the same period in the prior year. Focusing on operating expenses in more detail, Sales and marketing expenses increased approximately $6.4 million in the second quarter of 2022 compared to the second quarter of 2021, primarily due to higher commissions of $2.4 million. Research and development costs increased approximately $3 million in the second quarter of 2022 compared to the second quarter of 2021, primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $4.1 million in the second quarter of 2022 compared to the second quarter of 2021 due to higher employee-related costs of $2.9 million as well as higher insurance and facility-related costs of $2.5 million. For the second quarter of 2022, our effective tax rate was 18.9%. As anticipated, the rate was higher than our estimated full-year 2022 range of 11 to 15 percent. The higher rate was primarily due to the impact of recently finalized U.S. tax regulations, which limit the amount of newly generated foreign taxes that are creditable against U.S. income taxes and resulted in an increase in foreign withholding tax, as well as decreased benefits from lower stock-based compensation. These increases were partially offset by a lower tax rate on U.S. foreign-derived earnings. On a gap basis, net income attributable to Fox in the second quarter of 2022 was $53.5 million, or $1.26 per diluted share, compared to $44.3 million, or $1.05 per diluted share, in the same period in the prior year. On a year-to-date basis, net income attributable to Fox was $101.5 million or $2.40 per diluted share compared to $82.3 million or $1.94 per diluted share in the prior year period. Non-GAAP adjusted net income was $58.6 million in the second quarter of 2022, an increase of approximately $7.7 million or 15% compared to $51 million in the second quarter of last year. We delivered $1.38 of non-GAAP adjusted earnings per diluted share in the second quarter of 2022 compared to $1.20 in the second quarter of 2021. On a year-to-date basis, non-GAAP adjusted net income was $114.4 million, an increase of approximately $19 million or 19.8% compared to $95.5 million in the prior year period. We also delivered $2.70 of non-GAAP adjusted earnings per diluted share compared to $2.25 in the prior year. Adjusted EBITDA increased by 26.5% to $88.1 million for the second quarter of 2022 compared to $69.7 million in the same quarter last year. Adjusted EBITDA margin increased by 50 basis points to 21.7% in the second quarter of 2022 compared to 21.2% in the second quarter of 2021. The increase in adjusted EBITDA margin in the second quarter of 2022 is primarily due to higher sales, favorable product mix, and increased efficiency in our gains build plan, offset by inflationary cost pressures. On a year-to-date basis, adjusted EBITDA increased by 22.9% to 159.9 million. However, the adjusted EBITDA margin decreased by 90 basis points to 20.4% versus the prior year period. Now focusing on our balance sheet. For the second quarter, which ended on July 1st, 2022, compared to our 2021 year end on December 31st, 2021, we ended with cash on hand of $108.6 million compared to $179.7 million. Accounts receivable was $195.4 million compared to $142 million. Inventory was $349.1 million compared to $279.8 million. Prepaid and other current assets were $267.7 million compared to $123.1 million, and accounts payable was $161.6 million compared to $100 million. The increase in inventory as of July 1, 2022, is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and higher input costs. The increase in prepaid and other assets at the end of the quarter is primarily driven by deposits for securing chassis for our upfitting business, which has been experiencing significant growth. The changes in accounts receivable and accounts payable reflect business growth, as well as the timing of vendor payments. Our net property, plant, and equipment increased to $194.6 million as of July 1, 2022, compared to $192 million at the end of fiscal year 2021, reflecting capital expenditures of $19.9 million for the year. Lastly, our interest in other expense went up by $2.8 million versus Q2 of 2021. The primary driver of the increase was a $1.9 million write-off of the unamortized loan fees in the second quarter of fiscal year 2022 upon refinancing of our prior credit facility. Now turning to guidance. For the third quarter of 2022, we expect sales in the range of $385 million to $405 million and non-GAAP adjusted earnings per diluted share in the range of $1.15 to $1.35 per share. For the fiscal year 2022, the company expects sales in the range of $1.535 billion to $1.565 billion and non-GAAP adjusted earnings per diluted share in the range of $5 to $5.30. For our 2022 full-year tax guidance, we still expect our tax rate to be at the higher end of the previously guided 11% to 15% range. 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 reconciliations. With that, I'd like to turn the call back over to Mike.