Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Fox Factory Holding Corporation's first quarter fiscal 2024 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. And now at this time, I would like to turn things over to Toby Merchant, Chief Legal Officer at Fox Factory Holding Corporation. Please go ahead, sir.

Thank you. Good afternoon and welcome to Fox Factories' first quarter 2024 earnings conference call. I'm joined today by Mike Dennison, Chief Executive Officer, and Dennis Shem, Chief Financial Officer and Treasurer. First, Mike will provide business updates, and then Dennis will review the quarterly results and outlook. Mike will then provide some closing remarks before we open up the call for your questions. By now, everyone should have access to the earnings release, which went out earlier this afternoon. 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 within the meaning of federal security laws and management may make additional forward looking statements in response to your questions. Such statements involve a number of known and unknown risks and 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 quarterly reports on Form 10-Q and in the company's latest annual report on Form 10-K, each filed with the Securities and Exchange Commission. Investors should not place undue reliance on the company's forward-looking statements and, except as required by law, the company undertakes no obligation to update any forward-looking statements 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 earnings 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.

Thanks, Toby. Good afternoon, everyone, and thank you for joining us today. Diversification is a key element in building resiliency, and it is all the more important during the period of industry cyclicality. Our ability to navigate through the current market headwinds is a testament to the strength of our diversified product portfolio, which spans across multiple sectors and markets. This diversification not only mitigates risk, but also provides us with multiple avenues for future growth and expansion, and in turn, drives value creation for all of our stakeholders. For the first quarter of 2024, we delivered $333.5 million of revenue, which was consistent with our expectations. and adjusted earnings per share of 29 cents, which exceeded our plan. We are confident we will see sequential improvement in our operating results over the coming quarters, ultimately returning to the strong growth rates and margins that our business can deliver. While we believe that our premium positioning and innovation helps mitigate macroeconomic forces, the OEMs we serve continue to face unique challenges in the near term. In SSG, and more specifically in bike, Our results continue to be impacted by the ongoing inventory recalibration. However, we are already seeing positive signs in Q2 and believe this business is turning back the right direction. In PBG, power sports continues to be impacted by dealer inventory levels, and in AEG, up fits are being challenged primarily by mix and model year changeover issues from our OEMs. In addition, we are seeing ongoing consumer fatigue given the extended duration of high interest rates. which is impacting discretionary spending with consumers and cautious management of inventory levels at dealerships and OEMs. Despite this confluence of headwinds, we remain laser-focused on what we can control, which is delivering exceptional value through our uncompromising commitment to innovation and performance-defining products across our diversified set of businesses. This focus is resulting in continued share growth with our OEM partners, which speaks to the value of our product roadmap and is a central tenet of our long-term strategy. While we remain focused on product, we recognize that near term, we must also keep a close eye and tight control on our costs. Although we have not executed a company-wide workforce reduction, we have consistently and continuously refined our workforce in conjunction with work optimization and productivity targets. We have also reduced spending and investments to ensure we run as lean and focused as possible. To be clear, This is not a one and done or even periodic management tactic at Fox, but the way we think about our jobs every day. Turning now to our segment performance. In the powered vehicle group, net sales were 118 million, down from 142 million in the prior year quarter, primarily due to lower OEM demand in power sports. At the dealer distributor level, the industry expects 2024 power sports retail to be done modestly versus 2023. which is driving a conservative approach to inventory management among dealers. In response, Powersports OEMs continue to curtail production to balance supply with demand, which will continue to impact our results in the near term. In the automotive space, we continue to see strong demand from our major OEMs as they produce model year 25 products. As these are mainly limited production vehicles, we believe this significant portion of our business is insulated from interest rate issues that have impacted us elsewhere. We remain committed to our long-term growth strategy within the PVG business. While we took prudent cost reduction actions commensurate to volume reductions, we were more deliberate in maintaining most of our highly trained engineers and leaders who are critical to developing our technologically advanced products. While this decision is impacting near-term profitability, it is essential to ensuring that we can support growth over the long term as industry conditions improve. We are seeing the benefits from our development team as we continue to win market share, demonstrating the power and differentiation behind our product portfolio. We're excited by new product introductions for the Polaris Indy Dynamics, Toyota 400 TRD Pro, and the Sierra Echo, and believe we'll be able to increase our spec share with both existing and new OEMs through this cycle given our brand leadership. In AAG, net sales were $102 million compared to $139 million in the prior year quarter. The results were driven by lower sales in our upfitting business, offset by strong aftermarket growth in sales of wheels, tires, and lift kits. Upfit was lowered due to product mix and unique model year changeover challenges from OEMs, which delayed model year launches. We expect these impacts to largely be behind us as we exit the second quarter. Additionally, we are seeing a slowdown in sales in moderately priced upfits as consumers who generally finance these purchases are challenged with a higher interest rate environment that is persisting longer than expected. Despite the macro environment, dealers continue to make good progress in reducing existing aged inventory ahead of the release of new redesigned model year vehicles, which are expected to launch throughout the balance of the year. As we've said before, these changeovers present a great opportunity for us as we collaborate with OE partners on developing and introducing new packages for the latest models. We remain encouraged that the higher-end upfits continue to see strong consumer demand and interest. To that point, in March, we announced the launch of the company's first branded high-performance off-road upfitted truck and high-performance upfitted UTVs. We're thrilled to introduce these state-of-the-art upfitted vehicles, which exemplify all of our best-in-class products engineered to work together to create a new premium class of vehicles. With our heavily contented Fox factory trucks, our upfit is worth four times the value of our average upfit, making these vehicles significantly more creative to our business in the future. In SSG, net sales were $114 million compared to $119 million last year. The decline in revenue was primarily due to a $65 million reduction in sales within bike as a result of the OEM inventory destocking we have been discussing the last several quarters. Notably, the declines in bike were partially offset by above-planned performance at Marucci, which was fueled by success across their diverse product lineup in baseball, covering their Victus and Marucci brands, softball, lizard skins, soft goods, international growth, and hitter's house. This was a strong quarter, despite not having a significant new product launch. As demonstrated by the results, Marucci also played a key role in bolstering the resiliency of our bottom-line performance given their attractive margin profile relative to the segment average. As we look ahead to the rest of the year, our bike segment is strengthening. OEs are gearing up for new model year launches and expanding their product offerings, which are factored into our second quarter and back half forecast. Additionally, we are seeing growth with multiple product launches, which occur throughout the balance of the year. The e-bike category continues to experience robust growth as well, and we firmly believe that e-bikes will not only attract a broader demographic of riders, but also fuel industry-wide expansion via this growing addressable market. In the face of challenged results, our focus remains on key elements that define our brand and long history of excellence in product development. These elements include maintaining strong brand relationships, avoiding brand dilution for short-term gains, and investing in research and development to drive long-term growth. Our objectives with R&D investment are twofold. First, support innovative model year 2025 releases, which will expand our share of the OEM market. And second, capitalizing on new launches of higher margin aftermarket components, where we are also gaining significant traction with our recently expanded e-commerce business. Now for some comments on our outlook for the balance of 2024. We continue to expect the first half of 2024 to be down year over year with the second quarter being sequentially stronger than the first quarter. Our expectation for the second quarter remains unchanged and is consistent with our plan. Dennis will speak more to our second quarter guidance in his remarks. Our full year guidance continues to be weighted to the back half and predicated on the following. Bikes, channel inventory continuing to improve and OEMs model year 25 releases. Marucci's continued growth across its diversified portfolio and new product launches, power sports dealer inventory improvement, upfit chassis availability and mix improvement, and new product launches within our lift kit and wheel business. While those assumptions remain intact and show positive signs so far within Q2, our full-year guidance also assumed easing macro pressures and an improved consumer outlook driven by the timing of interest rate relief. With the Fed recently signaling that rates are likely to remain higher for longer, we have removed that as a positive catalyst in our FY24 thesis. Thus, while we continue to expect solid growth for the second half, we have prudently narrowed our full-year 2024 outlook to the bottom half of our previous range. In closing, we continue to be positive about the back half of the year. In terms of innovation, we have a robust product roadmap in place. we eagerly anticipate our upcoming product launches, which are happening across all three segments of our business. And we are confident that these new products, coupled with our spec share gains in the OEM market, will drive growth in the second half of the year. As we navigate this cycle, we remain focused on managing the elements of the business that we can control, while playing to our strengths, which include balanced growth through improved diversification, a deep technological moat, that is advanced by our unwavering commitment to innovation and our ability to deliver free cash flow through the cycle, which allows for opportunistic share repurchases and management of our capital structure. And with that, I'll turn the call over to Dennis.