Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holdings Corporation third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the former presentation. Please note this conference is being recorded. I now turn the conference over to your host, Vivek Bakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. Please go ahead.

Thank you. Good afternoon and welcome to Fox Factory's third quarter 2023 earnings conference call. I am joined today by Mike Dennison, our chief executive officer, and Dennis Shem, our chief financial officer and treasurer. First, Mike will provide business updates. Then Dennis 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.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 within the meaning of federal securities laws, 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 materially 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 company's latest annual report on Form 10-K, each 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 certain non-GAAP financial measures to evaluate our business, including adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted net income, adjusted earnings per diluted share, adjusted EBITDA, and adjusted EBITDA margin. As we believe, these are useful metrics that allow investors to better understand and evaluate the company's core operating performance and trends. 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, V. Good afternoon, everyone, and thank you for joining us on our third quarter 2023 earnings call. Today, I will discuss our strategy, operating highlights, and business activities. Dennis will then discuss additional details on our financial results, balance sheet, and outlook. After our prepared remarks, we will open the call for questions. While Fox's near-term results are clouded by the ongoing inventory recalibration in SSG and the impact of the UAW strike on both PVG and AAG's results, on a strategic level, our three pillars of growth continue to prove powerful and resilient. One, our industry-leading high-performance brands continue to win market share. Two, our research and development teams continue to innovate, generating a deep and disruptive product development pipeline. And three, our one plus one equals three growth mindset continues to drive top-line and bottom-line improvement. Innovation and brand strength are the heart of our company and core to our go-to-market success as our technology engineers continue to challenge the impossible, and lead in the never-ending pursuit of maximum performance. By focusing on the world's best athletes and surpassing their demands, our team continues to outperform the competition, launching award-winning products and designs that propel champion Fox athletes across the globe to new heights. In SSG, Fox athletes leveraging the highest quality products for the most extreme environments dominated the Enduro and World Cup DH race season, winning 18 races and taking 89 podiums, more than any other suspension company. And it's not just Fox products that are winning. Recently, Race Face's turbine wheel was named Bicycle Magazine's Best Mountain Bike Wheel for 2023. In our Powered Vehicles Group, the speed of innovation is accelerating as we commercialize 15 new vehicle suspension packages in 90 days. Over the last two quarters, we have launched more than 28 new packages, not only outperforming our nearest competitor, but far surpassing our own internal targets. We are at the top of our game, and the results from Fox athletes around the world are the proof. But our work is never done, and we will continue to invest in innovation and disruptive technologies to enable Fox athletes in their relentless drive to win. That same innovation is leveraging dramatic gains for us within and across our AAG portfolio as we drive our 1 plus 1 equals 3 growth thesis. When we purchased Custom Wheelhouse, we knew we were buying a superior brand with the best wheels in the business. But what we didn't know was how quickly their products would be integrated into the AEG family of businesses. The award-winning Method wheels are being integrated into our premium packages and systems across BDS, RideTech, and powered vehicle divisions, leading to better performance, aesthetics, and higher profitability. Our ability to find companies that act and operate with the same level of innovation, enthusiast loyalty, and a culture to drive a never-ending pursuit of maximum performance are the keys for our strategic growth and profitability. That's why I could not be more pleased to announce today that we signed a definitive agreement to acquire Marucci Sports. An industry-leading innovator, designer, manufacturer, and distributor of highly engineered, premium performance aluminum composite and wood baseball bats, as well as other Diamond Sports products. Marucci checks all the boxes as we combine two leading brands that are disrupting the respective industries through innovation and technology. Building on the tradition of winning and creating the best performing products for the most demanding athletes, Marucci is unmatched as its Halo Brands Marucci Invictus wood bats drive more than 56% market share with Major League Baseball pros. Marucci is a continuation of our diversification strategy, expanding our business away from OEs and into the aftermarket, and it is the epitome of our 1 plus 1 equals 3 strategy, having made several acquisitions, including lizard skins and bomb bats that are creating exponential growth factors within our portfolio. We see a significant TAM opportunity from Marucci and potential to unlock new growth vectors, expanding far beyond diamond sports. Not only do we expect Marucci to be accretive to Fox's growth and EBITDA margin, but we are also excited about the synergy potential in metallurgy, manufacturing and supply chain. While there is so much to be excited about with this deal, what inspires me the most is the similarities in our cultures. Having spent considerable time with the Marucci team, its authenticity is undeniable, and it's founded by and led by a collective group of former elite athletes and coaches. Walking the hallways and meeting employees, I honestly felt like I was in a Fox factory where winning is everything and challenging the impossible happens every day. Turning to our operating highlights, sales in SSG hit a low watermark in the third quarter, as expected. only contributing $72 million in revenue as OEs continue to focus on depleting inventory through discounts and promotional activities. Actual sales were lower than our estimate for the quarter by approximately $25 million as we saw slower buying patterns, especially in September, as consumers adjust to an environment of higher interest rates and costs coupled with macroeconomic uncertainty. Both PVG and AEG experienced growth year-on-year of 12% and 8% respectively but declined sequentially by 12% and 13% respectively as the UAW strike impacted both groups. Legacy PVG was impacted by reduced shipments given OE manufacturing site closures and OE supply chain disruptions, as well as a delayed launch of a new model just prior to the strike. AAG was impacted sooner than expected as dealers were prioritized for chassis deployment over our outfitting group. In addition, We also received a weaker mix of chassis, which caused us to miss higher value contented vehicles in exchange for lower contented, lower price packages. Between AEG and PVG, we estimate a reduction in sales of approximately $45 million in Q3 2023 versus our outlook. While we continue to address the near-term pressure on the top line, we delivered strong adjusted EBITDA margins of 19.2%, with lower revenue, marking the third consecutive quarter where our adjusted EBITDA margins exceeded 19%. Our strong and consistent bottom line performance and our ability to manage an exceptional balance sheet fuel our ability to allocate capital to unlock our 1 plus 1 equals 3 growth and diversification strategy. This consistent financial performance also resulted in our board of directors approving a share repurchase plan up to $300 million, providing us with another strategic use of our cash, returning value to shareholders. Authorization of a share buyback plan of up to 8% of our outstanding shares demonstrates our belief in the strength in our operating model and growth plans. With the UAW strike nearing a formalized settlement, our customers in AEG and PDG are enthusiastic about the future, given the innovative product offerings and go-to-market strategies that we are delivering. However, businesses in AEG and PBG were impacted throughout October, and we expect residual impacts in November as OEs work to restart supply chains and ramp manufacturing. In SSG, we continue to see softness as the channel works through inventory. We recently met with the CEOs and executive teams of our largest and most important bicycle customers. While they remain optimistic about the future, especially the acceleration of e-bike across various categories, They acknowledge that the past and new models and technology will be modestly delayed as they work their way through excess inventory in the channel. Additionally, we are seeing consumers grappling with a higher cost environment, and our distributors cope with a higher interest rate environment by scaling back on inventory levels. Given these impacts, we are reducing our full-year guide from the low end of $1.67 billion to $1.7 billion to $1.3 billion to $1.47 billion. While we continue to work through the channel inventory recalibration in SSG and return to a more normalized run rate, our year-to-date growth in PBG and AEG of 35% and 16% respectively give us confidence in our growth thesis. The strength of our brands, our unrivaled history of innovation and discovery, the strong growth in automotive and powered vehicles, and the 1 plus 1 equals 3 TAM Expanding Acquisition Merchie put us on a trajectory to accomplish our 2025 vision of 2 billion sales and 25% EBITDA margins. To conclude, we acknowledge the challenges in front of us, but at the same time, we are pleased with top and bottom line performance, thanks to the power of our brands, our customer loyalty, and our incredibly talented and dedicated team members. As our history has proven, no matter what the challenges, we have always found ways to grow our business, be it through new product categories, adjacencies, geographies, or manufacturing efficiencies. And with that, I'll turn the call over to Dennis.