Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's first quarter 2023 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. I'd now like to turn the conference over to your host, Vivek Bakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Fox Factories' first quarter 2023 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer, and Maggie Torres, our Interim Chief Financial Officer and Interim Treasurer. First, Mike will provide business updates. Then Maggie will review the quarterly 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 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 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, V, and good afternoon. We appreciate everyone taking the time to join us for today's call. I am proud to report that we have started 2023 with strong first quarter results. Thanks to the power of our diversified product offerings and the differentiated market position, along with our committed and capable team, we executed incredibly well during the first quarter against a volatile economic and changing product mix environment. As we manage through all of these economic and market changes, our top priority is to ensure the long-term sustainable growth of our business. To achieve this, it was important to recognize the shifting requirements for workforce utilization and alignment. On this front, we instituted cost reductions, which primarily resulted in a reduction of workforce within our specialty sports group. We are also in the process of rolling out an enhancement to our organizational structure, which is designed to be more aligned with our end customers and drive additional focus on product development. Our plan includes bifurcating our existing powered vehicles group into two new product groups that better align with our go-to-market strategies and product synergies. These two product groups would consist of, firstly, our PVG legacy suspension business, and secondly, our portfolio of non-suspension aftermarket applications and upfitting. We will provide quarterly updates regarding our internal organization changes, which we expect to be completed by the end of this year. Turning to the numbers, our first quarter sales were approximately $400 million, an increase of 5.8% compared to the same period last year. We reported earnings per diluted share for the quarter of 98 cents versus $1.13 in the same period in 2022, a decrease of 13.3% quarter over quarter. We also reported non-GAAP adjusted earnings per diluted share of $1.20 versus $1.32, a decrease of 9.1% over the same period last year. This quarter-over-quarter decrease is primarily driven by a significantly lower effective tax rate in the same period last year. Let's break down the numbers further, beginning with our powered vehicles group. Q1 marked another remarkable revenue quarter led by a 35% growth in sales versus the same quarter last year, driven by strong performance in our OE channel and upfitting product lines. We delivered a quarterly revenue of $281 million, a fifth consecutive record revenue quarter for our powered vehicles group. We are pleased with the Q1 momentum, thanks to the foundation provided by our Gainesville facility improvements and the continued growth of our upfitted vehicles. In our upfitting business, the end consumer and the premium truck portion of the automotive market is showing continued signs of resilience. Consequently, we will remain focused on new vehicle development as well as expanding dealer relationships while monitoring the sensitive balance between consumer financial health and our financial targets. In addition, we closed our custom wheelhouse acquisition on March 3rd of 2023. As a result, custom wheelhouse contributed $6.9 million to our top line. For the full year, we expect a revenue contribution of approximately $60 to $70 million, with the margin profile being accretive to Fox's overall margin profile. Lastly, as I had mentioned in our prior earnings call, the significant change in the revenue mix will continue to negatively impact margins. However, I feel very confident we will offset some of that headwind through the integration of custom wheelhouses. In addition, I've spoken before about the potential for margin improvement in PVG of 250 to 350 basis points based on the ramp of Gainesville. I am thrilled to report that we saw much of that improvement achieved in the first quarter. I'm more thrilled to report that we are not done. As our volume continues to grow in PVG, we believe we have another 200 to 300 basis points of improvement ahead of us. While this will not be linear margin expansion and will be tied to volume increases, we clearly have a line of sight over the next 12 to 18 months to keep improving. Turning to our specialty sports group, we delivered a quarterly revenue of $118.9 million, a decline of 30% as compared to the same quarter last year. This is primarily due to the stronger than anticipated seasonality impact in Q1 of 2023. As you may recall, Q4 of 2022 didn't reflect the expected seasonality impact, which consequently made Q1 of 2023 even more dramatic. In addition, we are continuing to hear about the larger-than-anticipated inventory glut foreshadowing a longer period of decline before we return to a more normal environment. Hence, we now expect our specialty sports group to be down over 20% for the full year, with the worst of the impact occurring in Q2. Our team is keeping a finger on the pulse of the market, and we will continue to update you every quarter as we work our way through the channel inventory challenges. Once accomplished, we feel confident equilibrium in the bike industry will return to normal as we continue to see positive signs with end customer demand. To conclude, we are happy with the strong foundation Q1 has provided. We are also pleased to see the power of our diversified portfolio, which we have painstakingly built over the last several years. As we look for signs of stabilization in a specialty sports group, our custom wheelhouse growth will provide us with a reasonable offset in both revenue and margin headwinds. And finally, I want to introduce you to Maggie Torres, who has stepped in to pinch hit as our interim CFO. Maggie has been a key leader in our organization for many years, and while she had planned to retire, her commitment to the company and this team overrode that decision temporarily. And I want to take this opportunity to personally thank Maggie for her partnership and leadership. And with that, I'll turn the call over to Maggie.