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.

Thanks, Mike, and good afternoon, everyone. I'll begin by discussing our fourth quarter and full-year financial results and then move to our balance sheet and cash flows, capital structure strategy, and then wrap up with a review of our guidance. Total consolidated net sales in the fourth quarter of 2023 were $332.5 million, a decrease of 18.6% versus sales of $408.6 million in the fourth quarter of 2022. The Powered Vehicles Group, PVG, delivered a 10.7% decrease in net sales in the fourth quarter compared to the same quarter last year. This performance was negatively impacted in October during the UAW strike given OE manufacturing site closures, and for the remainder of the year on a slower ramp-up given OE supply chain disruptions. Strike, along with the slower-than-anticipated ramp-up, also delayed upcoming development programs with OEs, which we expect will impact first-half sales for 2024. EVG also had reduced sales in power sports given dealer and distributor conservatism with inventory. We expect this conservatism to continue into the first half of 2024. Our aftermarket applications group, AAG, delivered a 3.5% increase in net sales in the fourth quarter compared to the same quarter last year. This growth was primarily driven by sales from the custom wheelhouse acquisition and aftermarket lift kits and suspension sales, partially offset by lower sales in the upfitting business because of reduced chassis availability, mix, and dealer and distributor conservatism by holding lower inventory due to higher interest rates. Net sales in the specialty sports group decreased 41.4% compared to the fourth quarter of 2022 due to the persistent level of high inventory across various channels and therefore fewer new model year launches. This result also includes a 16.8 million positive revenue contribution from the Marucci acquisition. Excluding the impact of Marucci, SSG sales declined by 52%. On a full-year basis, sales were 1.46 billion versus 1.6 billion in 2022. The decrease in full-year sales is driven entirely by the decline in SSG's bike sales. The decline in SSG's bike overshadows significant accomplishments in PDG and AAG, which grew over 21.2% and 12.7% for the full year, even when taking into consideration the UAW strike, the slow ramp-up after the strike's conclusion, and the mix and chassis allocation decline that impacted our upfit business. While we address the dealer conservatism, the chassis allocation mix impact, and model year changeovers, which are delaying sales, I think it's important to note that our upfit business has grown more than 40% over the last two years. Box factories' gross margin was 27.7% in the fourth quarter of 2023, a 430 basis point decrease from 32% in the same period in the prior year. The decrease in gross margin in Q4 2023 is primarily driven by a shift in our portfolio mix with lesser sales from high-margin bike and upfitting, the impact of the UAW strike as we absorb less costs given our decreased production, and our decision to maintain our manufacturing workforce offset by increased efficiencies at our North American facilities. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, organizational restructuring expenses, and strategic transformation costs, decreased 300 basis points to 29% versus 32% in Q4 of 2022. On an annual basis, both gross and adjusted gross margin decreased by 150 and 60 basis points, respectively. The decrease in gross margin was primarily due to a shift in the portfolio mix offset by increased efficiencies at our North American facilities. Total operating expenses were $81 million or 24.4% of sales in the fourth quarter of 2023 compared to $74.2 million or 18.1% of sales in the fourth quarter of last year. Operating expenses as a percentage of sales were higher compared to the same quarter in the prior period due to the inclusion of custom wheelhouse and Marucci operating expenses and the amortization of intangibles, partially offset by cost controls and continuous improvement. Adjusted operating expenses as a percentage of sales increased by 440 basis points to 20.6% in the fourth quarter of 2023. compared to 16.2% in the same period in the prior year. On an annual basis, total operating expenses were $304.7 million or 20.8% of net sales for fiscal year 2023, compared to $284.6 million or 17.8% of net sales for fiscal year 2022. Operating expenses increased by $20 million, primarily due to the inclusion of custom wheelhouse and Marucci operating expenses of $15 million and $6 million, respectively. Amortization of additional acquired intangibles and operating expenses associated with facility expansion, partially offset by strong cost controls. Adjusted operating expenses were $268.1 million or 18.3% of sales in the fiscal year 2023 compared to $257.1 million or 16% of net sales in the prior year. The company's effective tax benefit was $3.1 million in the fourth quarter of fiscal 2023 compared to an effective tax expense of $0.2 million in the fourth quarter of fiscal year 2022. the decrease in the company's income tax expense was primarily due to a decrease in pre-tax income. For the full year, the company's effective tax expense was $17.8 million versus $28.5 million in the prior year period due to a lower pre-tax net income. Net income in the fourth quarter of 2023 was $4 million or $0.10 per diluted share compared to $53 million or $1.25 per diluted share in the same prior year period. Adjusted net income was $20.3 million in the fourth quarter of 2023, a decrease of approximately $40.6 million, or 66.7%, compared to $60.8 million in the fourth quarter of last year. We delivered $0.48 of adjusted earnings per diluted share in the fourth quarter of 2023 compared to $1.43 in the fourth quarter of 2022. On a full year basis, net income was $120.8 million compared to $205.3 million in the prior fiscal year. Earnings per diluted share for fiscal year 2023 were $2.85 compared to $4.84 in fiscal year 2022. Adjusted net income in fiscal year 2023 was $167.5 million or $3.95 of adjusted earnings per diluted share compared to $232.7 million or $5.49 of adjusted earnings per diluted share for the prior year. Adjusted EBITDA decreased by 49.5% to $38.8 million for the fourth quarter of 2023. compared to 76.8 million in the same quarter last year. Adjusted EBITDA margin decreased by 710 basis points to 11.7% in the fourth quarter of 2023, compared to 18.8% in the fourth quarter of 2022. The decrease in the adjusted EBITDA margin in the fourth quarter of 2023 is primarily due to the change in the portfolio mix, the impact of the UAW strike, and the slow ramp-up after the strike ended, the decision to keep our highly trained workforce, and cost increases associated with our facilities expansion to support our continued growth. Adjusted EBITDA decreased to $261 million in fiscal year 2023, compared to $321.8 million in fiscal year 2022. Adjusted EBITDA margin decreased to 17.8%, in fiscal year 2023 compared to 20.1% in fiscal year 2022. Moving to the balance sheet and cash flows, our balance sheet continues to be a source of strength for Fox and underpins our capital allocation strategy. The increase in inventory of 21.2 million is driven by the inclusion of 52.5 million of inventory from Marucci and 13.5 million from Custom Wheelhouse. Excluding Marucci and Custom Wheelhouse, we decreased inventory by 44.7 million driven by lower sales and by our continuous improvement efforts to further optimize inventory across the organization. The increase in goodwill and intangibles reflects the Custom Wheelhouse and Marucci acquisitions. Our net leverage is 2.3 times as of year end and in line with our expectations. Our flexible capital structure gives us the ability to invest in growth through R&D, CapEx, and sales and marketing, and provides the optionality to repurchase shares and pay down debt. Our revolver balance as of December 29, 2023, is $370 million versus $200 million as of December 30, 2022. Our term loan A balance is $380 million. We drew $400 million from our existing revolver and $400 million from our new term loan during 2023 to finance our purchase of Custom Wheelhouse in March 2023 and Marucci in November 2023, and to support our working capital. These withdrawals were partially offset by $230 million in payments on our revolver and $20 million in prepayments on our new term loan. In the third quarter of 2023, our Board of Directors approved a $300 million share repurchase program. During the fourth quarter, we repurchased $25 million in shares at an average purchase price of $58.80 per share. CapEx spend for the quarter was $14.8 million, up 81.8% versus the prior year quarter of $8.1 million. CapEx for the full year was $46.9 million, up $7.2 versus the prior year spend of $43.7 million. The increase in CapEx spend in the fourth quarter is due to SSG's bike test and innovation lab, upgrades to PBG's machine shop, and its power sports upfit capacity. Additionally, we stayed true to our capital allocation tenets and invested back into our core. In R&D, we invested $13.8 million, and in sales and marketing, we invested $25.8 million, representing 4.2 and 7.8% of sales, versus 3.8 and 5%, respectively, in the prior year period. For the full year, we invested $53.2 million in R&D and $100.5 million in sales and marketing, representing 3.6% and 6.9% of sales, respectively, versus 3.5% and 5.7%, respectively, in the prior year period. In PVG, our R&D efforts resulted in 141 new SKUs during the year, and we are looking to introduce north of 160 in 2024. In SSG's bike, our investments continue to drive innovation, supporting podium-winning Fox riders in both suspension and in components. We are proud that we continue to gain in spec share as well. and we are advancing exciting new releases in the e-bike space. And in AAG, we are focusing on multiple growth vectors. We continue to invest in improving content and design for our off-road upfitting business and in our new business venture in side-by-side upfitting, where we are designing premium, high-performance, state-of-the-art models to cater to different price points. And lastly, we are heavily investing and expanding our e-commerce capabilities across all of our business groups. Now, I would like to share some select guidance. We continue facing headwinds in AAG and PVG due to the higher interest rate environment and macroeconomic outlook at the consumer level and at the dealer-distributor level, as the cost of carrying inventory is more expensive. While SSGs bike At trough-like levels in the fourth quarter, we expect to see further declines in the first half, with the first quarter of 2024 being the lowest since the destocking began, as the inventory recalibration is taking longer than anticipated. And consumer demand is expected to decline year over year, but will be partially offset by new product launches and growth in e-commerce. For the first quarter of 2024, we expect sales in the range of $315 million to $350 million, and non-GAAP adjusted earnings per diluted share in the range of $0.17 to $0.27. Our net sales in EPS are lower year on year. In Q1, given the continuation of bike OED stocking, overhang from the UAW strike that impacted chassis availability and mix, model year changeover timing, which is delaying dealer purchases, and weaker demand from power sports and PBG. We expect to see sequential improvement into the second quarter as bike OEs prepare for model year 2025 releases, chassis mix and availability improve, model year change for RAM is launched, and the expectation that the interest rate environment improves. As a result, we expect the first half of 2024 to decline year over year before expanding to growth in the second half of 2024. For the fiscal year 2024, the company expects sales in the range of $1.53 billion to $1.68 billion and adjusted earnings per diluted share of $2.30 to $2.60. Our full-year guidance assumes an income tax rate to be in the range of 15% to 18%. Our belief is that this race will be won by the innovator, and given our robust pipeline of innovative products, industry-leading market share, and best-in-class brands, we believe our product roadmap supports our 2025 vision of $2 billion in sales. However, our vision of $2 billion in sales and 25% EBITDA margins will depend on several factors, including uncertainties on volume and product mix since we are largely tied to OEMs, the larger macro environment, including interest rates, and our exit rate in Q4 of this year. As a result, we will revisit 2025 aspirations in the second half of this year when we have more visibility. We're certainly operating in a dynamic environment and will continue to watch retail and consumer trends to adjust our cost and business model accordingly. However, because of our strong and flexible capital structure, we are working from a position of strength during this downturn and investing in our future. With that, I would like to turn the call back over to Mike.

Thank you, Dennis. As we start the new year, we recognize that we are still managing through some of the same challenges that we faced last year. However, I have never had more conviction in this business or this team. Based on the number of product launches, new customer relationships, exciting developments around EV platforms, the ability to sustain and increase our pricing, based on innovation and advanced product development and our international expansion. There is much to be proud of in our accomplishments, and I am energized by a future where we are shifting into a higher gear across the enterprise. The team remains galvanized on winning, as we prove every day in every way. Armed with a strong balance sheet, cash flow, and our one plus one equals three strategy, I could not be more excited about our positioning and our future. I would now like to open the call for questions, operator.

Thank you. At this time, if you'd like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star and one to ask a question. And we'll take our first question today from Larry Solow with CJS Securities.

Hey, good afternoon, guys. I guess the first question, Mike, lots of moving parts. It feels like not a lot of new issues, but the issues have just seemed to have gotten deeper and probably a little worse. I guess clearly your guidance builds in a big ramp up, not only in sales, but in margin as the year progresses. And You talked about exit rates. I'm sure you're not ready to share what your guidance incorporates in terms of what you, you know, exit in the year, but clearly a lot higher than what you start the year. What, you know, as you exit the year, what's your vision today? What, you know, how much of that, you know, correction from today to year end? um is just driven by improved chassis supply oem production um and and slow down inventory stocking you know which hopefully maybe that's a little bit less certain that you know but if you can get most of those improvements versus kind of an improvement in demand that you need to you know, drive from today to the year end again. You know, can you gather that question, just kind of, can you bucket, like, how much of that, you know, that the improvement is driven by some of the demand versus some of the things that hopefully will improve just over time?

Yeah, thanks, Larry. That's a good question, and a lot of questions. So let me take a minute to try to piece through that and get some feedback. The things that give us positivity towards the back half of the year are the number of product launches that start now and continue through the year. So internally, the things that we can control, as you know, are quality of product, product innovation, and product launches. And as an example, in PBG, alone, PDG alone, we're launching 160 new products this year alone. That's over 140 we launched in 2023 to support 2024. And the year prior to that was 42. So you can see that we have been on our game relative to driving new product development, which is key to our business. So our product portfolio and our product roadmap this year supports that exit rate, that vision for the back half. What we need to materialize to continue to drive volume with those product launches are things like, you know, model year 25 is going to happen and bikes are very comfortable with that, but what are the volumes of model year 25 bikes? That's the question. That needs to materialize. We need to see interest rates start to come down a little bit to give consumers more confidence in those big spend items. You know, again, on the high end of our range, on with a highly affluent customer, less impacted. But in that middle range, those interest rates do matter. So that macro has to continue to improve in the back half. And then OEMs, you've got to get back to the forecast. You know, what we saw in the late Q4 timeframe was OEMs really backed up their commitments on forecasts. You know, interestingly enough, and when you think about what it was like in COVID, Larry, where they would under-forecast and then we would over-deliver people to come back and ask for more. We got into an environment in 23, especially late 23, where they over-forecasted and then backed off massively. And so we've learned a lot in this process. And now when we think about their forecast, we're pretty conservative and we tend to hedge down versus hedge up like we had to do in the years past. You're seeing that too. So we have to get back to actual forecasts that we can believe in. And as we do that, I think we'll be in a great shape.

And have you seen any real switch in demand? I get that the interest rate environment, higher interest rates, the dealers don't want to hold as much vehicles. But in terms of end market demand, are you actually getting, at least in terms of your higher end markets on the vehicle side, are you seeing any actual customer blowdown too, or are you just more fearful that that could occur in this environment?

I think, you know, when I've seen customers slow down in the aftermarket for sure, so maybe customers are moving away from buying a brand new vehicle and they're fixing the one they have in the driveway. We've talked about that before. You know, that's one of the things that we have going for us in the portfolio is that, you know, if OEM business slows down because new vehicles and sales slow down, than after market picks up. I'll tell you this, though. On the OEM side, and we talked about Raptor and Raptor R and a lot of those projects, Ranger Raptor, they're at max capacity in 2024, so they're not seeing winnings for them in the sales of those units. So we have a lot of conviction that that customer has stayed just as strong. It's another part of the business where we see some of that start to soften.

Got it. And then just last question. It sounds like there's not much, you know, in terms of, cost-cutting. You're not cost-cutting too much because you're expecting a rebound in these businesses, right? So the margins will likely suffer again in Q1, maybe even a little bit worse than they were in Q4, and then start to improve just as absorption improves, leverage improves in the back half of the year. Is that a good way to look at it?

That's a great way to look at it. You know, we're doing some optimization in the corporate side just to be better and more efficient. That's just improvement. In my mind, it should be an ongoing event. We're doing some trimming in factors where For whatever reason, we don't need a shift right now, or we don't need a certain night shift or something like that. But for the majority of this, we understand that we're in a near-term problem, and it's hard to find great people, and we have a huge amount of conviction in our long-term future. So we're sticking to our guns and sticking to the product roadmap.

So you'll see sales, marketing, R&D, we're going to continue to spend all through this period. Do you think it's the right move for the future?

Sure. Understood. Great. Thank you for the call. I appreciate it.

Thanks, Larry. Thanks, Larry.

Next, we'll hear from Alex Perry with Bank of America.

Hi. Thanks for taking my questions here. First, I was just hoping we could get some more color about how you're thinking about the various business segments for the year, you know, maybe SSG versus PVG and AAG from a growth rate standpoint. And then I guess, If we just isolate the legacy SSG business, how are you thinking about that coming in versus the $370 million that you did in 2023? Thanks.

Yeah, good question, Alex. So we'll talk SSG specifically here for a second. So we're not expecting, you'll see it in the guide, you can see it obviously in the guide, we're not expecting any improvement in SSG this year just as a function of the first half being down and the back half kind of recovering the inversion

of 2023 and 2024, as Dennis talked about. So, you know, we'd like to see improvement in that business this year. We think there's an opportunity for improvement in that business this year. But our forecast visibility there is, or our PO visibility is pretty short, about 45 days. So while our customers give us You heard my answer to Larry. As customers give us these glowing forecasts that we love to see, we take that with a bit of a grain of salt. And so right now we don't have that big indoor numbers, and so we're expecting that business to be flat down in 24. In the other businesses, it's really a reflection. It's going to be a reflection of power sports mainly and PBG. and potentially so many automotive spaces. They go through their cycling changes and things like that. That's really good to do in OEM. We've got our aftermarket built absolutely where we want it built. We're going to do a lot of product launches in aftermarket. That will help us. But there's so much volume in OEM. if they don't get their forecast right, it's going to be tough. And so we're, again, we're building this forecast and hedging this forecast to give us some room for improvement.

And relative to AAG, I mean, this is mainly

a flattish year for them in the sense that we've got, you know, the upfitting business is relatively flat, but we also have the new side-by-side operation going into effect that I think will help us offset some of that decline that we're seeing in the first half of the upfit business. Perfect. That's really helpful. And then just one other modeling question.

What is the expected emerging contribution in 2024? You know, any help on sort of how that plays out by quarter given the seasonality of the business? Thank you.

Yeah, putting me in a little challenging position here because, again, Cody certainly has not gone live yet with the results of Marucci. But what we do know is this, like through three quarters last year, Marucci delivered about 144 million. With us, they did 17. So, you know, essentially you're at 160. And so then you just got to account for that period of time, October to November, where Cody has not reported yet.

My take on it is they probably had a bigger October and early November because that would have been pre-Black Friday sales. So roughly speaking, I'm guessing these guys were probably around $180, $185-ish. That's how I would get there.

I think that would be normal assumptions that you guys could make as well.

And then so just... put some growth on top of that, right? That's probably the best way to look at it without me giving you, you know, more details.

Make sense?

Perfect.

Yep, that's incredibly helpful. Best of luck going forward. Thank you.

Our next question will come from Craig Kinison with Baird.

Hey, good afternoon.

Hey, thanks for taking my question.

On the PowerSports side, I'm curious how recently your PowerSport OEM customers reset their order pattern with you. Yeah, it's not digital, Craig. Think about it as a bit more analog, but it started kind of post-Labor Day, and it carried into Q4. The biggest shift was probably really late in Q4, call it December, and it early January. And the reduction between December and early February was significant. So that's what really caused us to go, you know what, we're not going to take these forecasts at face value. We're going to back off because we think these customers are in the process of backing off on their own and we're just not telling them this yet. That's what you're sensing from us, is that conservatism is really just coming from, you know, as we saw the really significant reduction December to February, that they're having some inventory challenges.

Yeah. Yeah, that helps.

We've done some work in that area. It just feels like there is an inventory issue, and I'm wondering whether the recent glut that we've detected has been processed in your guidance or whether there's still another signal for the whole channel to absorb.

I think it's in our guidance. Like I said, we taking the forecast that we get and we've hedged them down based on what we're seeing in the actuals on a real-time basis. Could be the worst potentially. You know, the good news is we're actually approaching some new customers and some new products this year, and that's that might help offset some of that. So, like I said before, product development and product roadmap is everything for us, and I think we can help offset some of this with some of that. It's just, you know, we're not going to buy into the current forecast that we've been given for the year and believe it completely. Yeah.

Great. Thank you. Thank you.

Our next question will come from Michael Swartz with Truist Securities.

Hey, guys. Good evening. Maybe sticking with the bike business, maybe you can provide a little more color around your commentary on the model year 25 changeover and the timing therewith. And also, are you seeing any difference in the behavior between some of the larger global OEMs and some of the more domestic-oriented OEMs? customers?

Yeah, great, great question, Mike. My perspective is this.

What we're seeing is the smaller boutique, whether it's in Europe or here in the U.S., companies, companies that are exiting that inventory problem or have already exited that inventory problem are already back in the gas. What We're taking POS now from the model year 2025 with those companies, which is obviously a great sign of positivity, right? So that's the good side. The bad side is while we have tons of spec on model year 2025 launches for later in the year with the big global guys that you referred to, we're confident they will move to model year 2025. What we're concerned about is what's the volume behind that Model 25 launch that they're actually going to have. So we're pretty comfortable that all the companies will be on Model 25 by late Q3. It's just a function of what's the volume of Melio 25 as they exit their inventory challenges. So that's how we're kind of reading it. We love our SPAC. We're gaining SPAC. We've got some great new product launches. We're actually seeing some products that we just recently launched sell out fairly quickly in the aftermarket. quickly in the after market. So there's some green shoots out there. It's just too early to, you know, say we've won the war, just do stocking that we've all faced, and you're going to have to give it some time before we want to go out and be that aggressive about it.

Okay, awesome. Thanks, Mike.

And then maybe for Dennis, you just referenced it, you know, adding some growth for the Maruti business in 24 as it pertains to what's embedded in your guidance.

Maybe remind us again what the big growth opportunities are in that business, you know, maybe both 24 and longer term.

Yeah, they, you know, one of the things that really impressed us when we purchased them back in November was the multiple growth vectors that they had. And, you know, some of them that we're expecting to capitalize on this year, they're clearly, you know, continuing to see strong growth from the BATS. strong growth in softball. It's probably one of the fastest growing sports out there. I feel like we're well positioned to demonstrate some growth there as well. They've got some really, really cool apparel launches and, you know, trying to keep a tight lip on those, but those are due to come out as well this year.

And then we'll see continued expansion on the hitter's house as well.

And so that should be revenue generating for us too.

So, again, lots of strong growth opportunities here and then strong accretion in the market.

margin size as well. One final point, international expansion is pretty significant too.

So be expecting some news there as well, just because we're getting more of a presence there in Japan. And so we should start to see some acceleration there. Okay. And just a follow-up on Merge here. Are you embedding any material synergies? I know you've talked about the cost synergies. Are you embedding any of those in the 24 outlook?

Not in 24. I think there are opportunities for that in 25. There's some work to do in 24. And I don't think those are insignificant opportunities, by the way, but we're not putting that in our 24 guide. Okay.

Awesome. Thank you.

Our next question will come from Brett Jordan with Jefferies.

Good morning, guys. The follow-up, I guess, on the Marucci, the seasonality, I think you talked about maybe 180, but maybe some strength around things like ball sales.

But how do we think about that on a, you know, I think it sells into the start of baseball season and maybe softens after that. But what's the quarterly shakeout?

Seasonality used to be more extreme than it is now, Brad. The newest product launches that Dennis referred to in the different spaces, not just BATS, in the rest of the product portfolio, again, 45% of the business today is not BATS per se. So that's taking some of that seasonality out. And I think, you know, you'll see the biggest quarters typically or used to be historically Q4 and Q1. What we're seeing now is Q3 is actually quite a big quarter. So Q3, Q4, you know, the lighter quarter probably being a little bit lighter quarter being Q2. It really comes down to what products we launch and when. And as we enter some new spaces, I think we can, we can absorb that even further into a more even revenue throughout the year.

Okay. And I guess we haven't talked in the last couple of quarters about the margin potential from Gainesville production leverage. Is that something that, you know, is there a number we need to get back to before you start getting the fixed overhead absorption there? Or have you changed your thoughts as far as that? whatever 250 basis points plus of margin potential from that facility.

We saw a lot of improvement in 23, although Q4 we didn't see any, of course, as we called out in our prepared remarks, just because of UAW. So we'll go back on that path now in Q1, and we'll keep pushing all those improvements throughout the year. But we came a long way, you know, until, let's say, Labor Day and then just some softness in the UAW. So we know what to do. Volume does matter, to your point. So, you know, once we get past UAW and we're moving forward, I think we'll see that coming back in.

Great. Thank you.

Our next question will come from Anna Gleason with Wiley.

Hey, good afternoon, guys. Thanks for taking my question. I guess I'm trying to understand a little bit better, you know, what's changed since we last spoke in November or the last report, you know, It seems like, you know, the UAW strike impact, at least at that point, was fairly well understood. You know, we had started incorporating higher interest rates in terms of, you know, dealer reluctance to take inventory. Would it be fair then to say that, you know, this power of sports shifts and inventory recalibration is kind of the biggest piece that's moved into them? Or any way to kind of frame up those buckets a little bit more would be great.

Well, I think in general, this really is the function of early-in forecasting and early-in softness. And I don't think that's just in power storage. That's probably the major contributor in December and Q1.

You know, we do see some softening in the automotive space, not necessarily in the high-end vehicles but on other vehicles. We see some softening in AEG just relative to floor plan financing, as we've called out in the past. Is it more significant? Yes and no. It's really a function of floor plan financing tied to do you have the right product on the right lot. If it's a Shelby truck at $120,000 plus, you're fine. If it's a $75,000 Ram truck, you may not be fine. So it's just a function of macro interest rates and mix. And I think that stuff works itself out. Again, it's nothing around product development or product roadmap issues.

It's just around you have to have something new and fresh for a consumer to want to spend their money. I think you're seeing that in all companies like ours. If you can create something that's enticing to a consumer, they're going to pull out their wallet and spend money. And if you don't, then it's going to be a problem. So these product launches, in 2024 are going to be incredibly important to our growth and success this year. And I think the other thing to add to that, Mike, would just be bike certainly was a little softer than what we had expected when we were, you know, out with you in November. So, you know, Clearly there's been some deterioration, you know, in demand. And so we built that into the forecast. This is in the first quarter. We should start seeing growth there in the second quarter as more and more of these OEMs go to that model year 25. It's a good point. Anna, you've heard me say, you know, the faster they get out of, problem the better off we're all going to be so if they have to take more pain just take it and get it done and i'm not so worried about quarter whether it's q4 or q1 i want to get back to a normalized business pattern um where our product wins inspection you know show that how differentiated we are but i can't get there until they get through So it's like, just take the pain and go. Let's deal with it.

Thanks. I just want to clarify one other thing. Dennis, did you say back to growth in 2Q, or was it the second half for us?

Sequential. Sequential growth. We should do Q1 to Q2, the sequential growth. And then the back half would be growth with our current. expectations.

Got it. And on that, going back to some of the prepared comments, I think you said SSG should be like the lowest level in 1Q since the destocking started. So that would be, you know, the $72 million in 3Q. Is that the right way to think about that?

That is absolutely correct. We will be lower than 72. Okay, thanks.

That's it for me.

Okay, thank you. Our final question will come from Jim Duffy with Speedful.

Thank you. Hi, guys. Good to hear your voice. Good to get an update on the business. I appreciate it's a difficult environment for sure, and I appreciate the ability to challenge. With that in mind, can you help us a little more detail on your process and the assumptions that are shaping the guide. I want to dig in some on the upfit business, which has been a big driver in recent years. Dealerships have been destocking. I appreciate 4chan, 4plan financing has been a challenge. Where are they in the destocking process? Like how much aged inventory is still around? Is Is there a framework you guys use to think about this, be it number of dealerships, vehicles per dealership, that type of thing?

Yeah, I'm framing up some of those components.

Again, just starting with SSG, we are off to a slower start in Q1. We are experiencing those trough levels now because of demand, because of where the OEs are at right now. And that's, you know, clearly a pretty significant factor in the guide, right? So just a softer SSG business overall year on year, so flat to down year on year, but especially in the first half. You know, from a PVG perspective, again, last year, fantastic growth when you think about it with 21%. year-over-year growth with a UAW headwind and a slow ramp-up. And as we start to move into Q1, that power sports division is off to a slower start.

So that's clearly built into our guide, and that's shaping a tougher – for them this year because of a weaker power sports group. And that's, you know, we're seeing that with the dealers and distributors just having a tougher time with the floor plan financing there. And then, you know, in AAG, again, fantastic growth over the last couple of years with the outfit business. I mean, it was 40% for two years back-to-back. And so that growth is fantastic in the outfit business. But this year, definitely slower just because we're not getting the right chassis. We're not getting enough chassis. And then you have dealer floor plan financing just really inhibiting dealers from taking more risk and putting the product on their lot. And so that's happening. a pretty significant influence on us, and quite frankly, from the margin standpoint as well.

Does that help? It does. Just more on the update business, are you close to a point where sell-in can more closely match sell-through? or is there even an opportunity for restocking in that outfit business, given all the destocking that's happened on dealer lots as the year unfolds?

You know, generally, Mike, let me jump in. So what we're seeing from the dealers is a very conservative approach to model your changes. So let's say you're a RAM dealer. You know, Ram has had the same truck for four or five years. They haven't updated that truck, you know, in the last five years. And so while there's inventory available for them to put on their lot right now, they're holding out for model year 25, which is actually going to get launched in early 2024. So you'll find dealers who, because of full-time financing, don't want to go with the current model year because they're just going to wait for the next model year. In this case, it's going to come out fairly early in the year. So you've got a challenged dealer who's really trying to understand, what do I want to have on my lot and how many vehicles do I want to have on my lot? It's a dynamic that's pretty interesting, and it just moves, as I said before. It's going to come down to, do you have the new product, the new models, with the new custom packages? When you have that, the selling and sell-through will work out just fine. I don't think it's going to be a problem at all. Even if we're in a bit of an elevated interest rate world, I think if you can show the customer something new and fresh, they're going to come buy it. We feel the same way about side-by-side upfitting. But it really comes down to when do those new model year vehicles launch and how fast can we get our custom upfit model year trucks out on the dealer lots to sell.

thanks for that mike last question for me i'll take the uh the rest offline but i'm still trying to get my arms around the influence from the uaw strike which platforms have been most influenced by the uaw strike and i'm curious like how this rolls forward is there a catch-up opportunity from the strike when would that start to manifest in the numbers And then specific to that auto OEM business, is there now difference in the timing for new platforms like the Ranger Raptor or even the ramp of production for vehicles like the Bronco Raptor and so forth, which we had been thinking about as nice incremental contributors?

Yeah, it's interesting because we're not being told that UAW specifically changed a launch platform timeframe for a vehicle from our OEMs. And it looks to us like some of these things were UAW potentially induced. And so we saw some things push into Q1 of this year that were supposed to be launched in Q4 of last year. So there is some implication there. Again, Nobody says that outright, Jim, so it's hard for us to just make that statement. But we really look forward to that from what we've seen. You know, I think what we saw was some companies early on were faster to get back on production in November, and others, really kind of let the year play out. I think they had enough inventory out there and the dealers to not be in any real hurry to get back to full production. We saw them exit the quarter not being back to full production, which was interesting to us, and not what we expected, not what they forecasted, but in fact kind of what materialized. So I think, you know, on a long-term basis, I think there's some catch-up that can happen. But I think it's so influenced by the macro, so influenced by the model you're changing and by interest rates. It's hard to just take a number out of Q4 and reapply it to any quarter this year. So I think there's positivity there. But I would be hard-pressed to say that, you know what, we're going to get a one-for-one move from Q4 into Q2 or Q3. We might, but we're not betting on that just yet.

I understand. Thank you, Mike.

Thanks, Jim.

That will conclude today's question and answers. session. I'll now turn the call over to Mike Dennison for any additional closing remarks.

Thanks, James. Again, I appreciate everybody's interest in Fox Factory. Have a good evening. We'll talk to you soon.

This does conclude the Fox Factory Holding Corporation's fourth quarter and full year 2023 earnings call. You may now disconnect your