Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's fourth quarter and full year 2023 earnings conference call. At this time, our 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' fourth quarter and full year 2023 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer, and Dennis Shem, our Chief Financial Officer and Treasurer. First, Mike will provide business updates, and then Dennis will review the quarterly and full year financial results, and then the outlook, followed by closing remarks from Mike. We will then open up the call 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.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. within the meanings of federal security law, 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 you 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 today on our fourth quarter 2023 earnings call. Today, I will discuss our strategy, operating highlights, and business activities. Dennis will then provide additional details on our financial results, balance sheet, and outlook. After our prepared remarks, we will open the call for your questions. For the fourth quarter, we delivered $332 million in revenue, which included approximately $17 million in revenue contribution from Marucci. The fourth quarter was a quarter which saw wins and achievements, as well as significant headwinds exhibited with the ongoing OE challenges, which we began to see after Labor Day. And our current view is these will persist in the first half of 2024. As we have previously highlighted, three main factors created these challenges to near-term results. One, the ongoing inventory recalibration and bike. Two, the impact of the UAW strike on PVG and AEG. And three, higher interest rates causing customers to be more conservative in their purchasing practices. The successes which provided partial offsets within the quarter included year-on-year growth in our aftermarket components businesses, such as wheel, lift kits, and aftermarket shocks, as well as e-commerce growth within our bike business. While these product lines and channels grew, they were unable to offset the declines in the OE-impacted areas of our business. In the powered vehicle group, net sales were 118 million. down from $133 million in the prior year quarter due to the direct impact of the UAW strike on our production and the indirect impact of the strike on original equipment manufacturers who ramped slowly, as expected, following the strike's conclusion. This combination of direct and indirect influence from the strike resulted in lower production, which led to lower sales. Some OEs recovered by the end of November, while others exhibited sharp declines in order volume through the end of the quarter. Based on our consistent long-term growth within the PVG business and the importance of retaining a highly trained and skilled workforce to make our technologically advanced products, we elected not to lay off or shut down any facilities during or after the strike. Consequently, the cost associated with these actions had a significant impact on profitability. Powersports also saw less demand from OEs as their distributors and dealers worked through elevated inventory levels and seasonality factors, including a warm winter, driving down sales in the snowmobile market. To further complicate the problem, high interest rates continue to cause conservatism due to inflated floor plan financing costs. On the positive side for PVG, even with the external headwinds just mentioned, this business grew organically for the year by 21% over the prior year, illustrating the growth of our market share and the power of our product portfolio. In a year with so many businesses in this space exhibiting reduced revenue, we grew significantly. In aftermarket applications group, sales rose to 121 million from 117 million in the prior year quarter. The primary contributor to the increase was our custom wheelhouse business, which delivered nearly $20 million in revenue in the quarter. In addition, record quarters in SportTrek and overall expanded e-commerce solutions contributed to the growth. However, the UAW strike had a significant impact on our updating business, primarily due to limited chassis availability and chassis mix caused by production delays at factories which were shut down due to the strike. As we saw in power sports, the high interest rate environment put pressure on floor plan financing. And as a result, dealers took a more conservative position on inventory. Positively, dealers are reducing existing aged inventory ahead of the release of a slew of new redesigned model year vehicles, which are expected to launch throughout the year. These model year changes will be an exciting opportunity for us as we develop and launch new packages in conjunction with these new models. Expansion in our kit sales is also driving future growth in our outfit business. Customers are remaining resilient on fresh, new product releases and higher-contented vehicles, especially the Shelby and Harley-Davidson branded trucks. In SSG, with respect to bike, OEs continue to work down their inventory levels. Our OE partners have begun to place new orders for Model Year 25 product, which is a positive sign that we will begin returning to a normal environment in the late Q2. In the quarter, bike generated $77 million in net sales, less than half of the $159 million of revenue in the fourth quarter of 2022. The OE 2025 model year launches remain scheduled to begin mid-year, and we are excited as our innovative new products have maintained and gained spec share across our customers. While it is too early to articulate the volume of model year 2025 bikes that will ultimately be ordered, We are excited by our share of whatever volume that will eventually be. The Marucci acquisition closed on November 14th. Marucci generated $17 million in net sales following the completion of the acquisition. These results were better than our expectations for both the top and bottom lines, especially since the prior year period included the CatX BAT launch. The key drivers for Marucci's revenue were strong new product sales driven by direct-to-player and team sales, plus additional product launches in Japan, led by aluminum and wood bats. Like our other businesses, we're inspired by the level of execution in the Marucci team and their ability to have an incredible product roadmap across all product lines throughout 2024. Reflecting on the full year 2023, which was clearly a tale of two halves, the first half of the year, generally unplanned and as expected, and the back half of the year, especially after Labor Day, where previously discussed headwinds grew significantly. Overall, we delivered $1.46 billion in net sales, down 9% from 2022. All of the year-on-year decrease is attributable to Specialty Sports Group, where our bike business was down $309 million year-on-year, or 45%, as OEs dealt with a massive inventory glut. We continue to have confidence that this is a fixable problem for these companies and that the back half of 2024 we'll begin to return to a more normal operating environment. Bike is well positioned as OEs turn to new model year launches and product expansion, some of which are already in our back half forecast. In the face of Q4 sales that were below expectations and an expected soft first half of 2024, we are laser focused on the key elements of our brand and product development, which make us best in class and are the keys to our long-term success. Those elements are maintaining our brand relationship where we have gained spec share across customers, ensuring that we will grow with these customers as they regain their health. Meanwhile, remaining vigilant to not dilute our brand for an easy revenue pickup. Investment in research and development with two objectives. First, to support model year 25 releases that we believe will introduce innovative and best-in-class products and thereby expand our share of the market. And second, New launches within our aftermarket components where margins are typically higher than sales to OEs or through dealers and distributors. A bright spot was our recently expanded e-commerce business that expanded on 2023's record high direct-to-consumer sales, which were 3.6% of sales last year, up 260 basis points from 2022. And finally, the ongoing growth of our e-bike category, which we continue to believe will expand the demographic of riders and drive growth within the industry. On to PVG, which delivered $524 million, up 21% year-on-year due to multi-year momentum gains with Toyota and Ford and strong mix improvements as high-end vehicles and automotive and power sports upgraded to more technologically advanced Fox suspension products. Our recent product launches included the most advanced suspension product ever developed for a vehicle, the dual valve system currently being utilized by Ford on their upcoming Raptor R platform. AAG was up 13% year-on-year to $551 million, mainly in the custom wheelhouse acquisition and strength in our upfit business, despite the impact of dealer floor plan financing and the UAW impact. However, we are encouraged that the higher-end upfits continue to see strong consumer demand and interest. We continue to have confidence in our upfitting business, which this year will expand into UTVs and high-end side-by-sides beginning in late Q1. We believe these high-contented vehicles will perform well with the affluent customer base that wants unique, customized, high-performance vehicles. As we move to 2024, we remain confident in our diverse and differentiated business model, all of which is focused on delivering the highest level of performance-defining products and the growth that it can deliver. For the full year of 2024, we see revenues growing to $1.53 billion to $1.68 billion, inclusive of Naruchi. Our conservatism in this guide is a direct reflection of the conservatism exhibited in by our OE customer forecasts across all of our businesses, which we will not second guess. When their forecasts improve, our guide will improve. We also believe 2024 will be the inverse of what we saw in 23, with the first half of 2024 continuing to be impacted by the same macro pressures that affected the third and fourth quarter continuing to weigh on our business. Again, this is directly aligned with our OEM customers' forecasts as well. Consequently, we expect the first half of 2024 to be down year over year, with the second quarter being sequentially stronger than the first quarter. In the second half of 2024, we expect to see growth driven by easing macro pressures and improved consumer outlook, with expected interest rate easing. While this is likely the case, we cannot be sure of timing or magnitude of these rate reductions. We also believe bike OEs turn the corner from discounting to launching model year 2025 releases. And finally, chassis availability and mix improvement in our upfitted truck product lines. To conclude, we acknowledge the near-term exogenous challenges in front of us. Yet at the same time, I am very pleased with our strategic positioning. We have diversification across three growing groups in AEG, PVG, and SSG, anchored by industry-leading aspirational brands, deep-rooted customer loyalty driven by the pro-athletes, and robust pipelines of innovative market-disrupting products and are incredibly talented and dedicated team members. And with that, I'll turn the call over to Dennis.