Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Fox Factory Holding Corp's second 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 that this conference is being recorded. And now I would like to turn the conference over to Toby Merchant, Chief Legal Officer at Fox Factory Holding Corp. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's second quarter 2024 earnings conference call. I'm joined today by Mike Dennison, Chief Executive Officer, and Dennis Shem, Chief Financial Officer. 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 securities 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 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, and thank you for joining us today. As anticipated, our second quarter results demonstrated continued sequential improvement in both net sales and profitability. For Q2, we delivered $348.5 million of revenue, a sequential increase of 4.5%, and adjusted earnings per share of 38 cents. Our focus and actions enabled adjusted EBITDA margin improvement to 12.7% from 12.1% in the prior quarter. Since the fourth quarter of fiscal 2023, our adjusted EBITDA margins have improved approximately 70 basis points, the result of a continued focus on expense controls and productivity optimization. Our results have stabilized due to our enhanced equilibrium between our OEMs and our aftermarket channels. When we first became a public company in 2013, our aftermarket business was 19% of sales. In 2021 through Q2, we were at 47%, and today we stand at 57%. Diversification of our business is an essential component of our long-term strategy as it mitigates risk and enhances optionality with demand. both of which are crucial in the current macro environment. At the same time, diversification across business segments, products, markets, and geographies within those segments provides incremental opportunities for growth. When combined with our history of successful acquisitions, which have unlocked incremental growth opportunities, we believe we have positioned Fox as an industry leader across the categories where we compete. Our launch of UpFit UTV, our expansion in the entry premium mountain bike product, and our accelerated growth internationally are perfect examples of us putting this strategy to work. While the market remains incredibly difficult to forecast, we are encouraged by the stabilization we're seeing in bike, where revenues grew 52% sequentially, lending more confidence that we are in the late stages of Channel D stocking. However, macroeconomic dynamics continue to weigh on the speed of the recovery of consumer discretionary spending. Consequently, we continue to focus on innovation and product development, driving a relentless commitment to delivering performance-defining products. Currently, we are also laser-focused on aligning costs with demand and have made a concerted effort to tighten up spending across the organization. particularly through reduction of non-revenue generating positions and workforce reductions in our factories. Before reviewing our segment performance, I want to briefly touch on some leadership transitions that we announced today. Beginning August 1st, Dennis Shemp, our Chief Financial Officer, will assume responsibilities for the AAG segment as its president, following the departure of Tom Fletcher. Tom has served as president of AAG since May of 2021, and during that time has been instrumental in building the AAG segment through strategic acquisitions that have bolstered our leadership position in the aftermarket channel. We wish Tom well as he departs Fox. As AAG's new leader, Dennis' responsibilities will include overseeing the segment's manufacturing operations, commercial activities, and R&D efforts. His past operating experience and fresh insights on Fox's businesses have been invaluable and impactful since joining our team. Dennis will continue to lead our finance organization as well as CFO and report directly to me. In support of this transition, Brendan Enoch, our Chief Accounting Officer, has taken over the treasurer role from Dennis. Brendan joined us in May of 2023 and has been heavily involved in driving across our accounting and finance organization, overseeing financial stewardship and audit. He has demonstrated exceptional leadership and has a strong capacity to take on the Treasury function. Brendan will continue to work closely with Dennis to lead the capital allocation strategy, oversee the balance sheet, and diligently manage our cash flows and financial risk. I look forward to Dennis and Brendan's contributions in their respective new roles. Turning now to discussion of our segment performance. In the power vehicle group, net sales were $118 million, down from $140 million in the prior year. This reduction is primarily due to lower OEM demand in power sports and automotive. This demand reduction is a result of consumer fatigue, quality issues within the auto OEMs, and the extended duration of high interest rates. The power sports industry outlook for 2024 remains challenged. and retail sales expectations for the second half have been revised downward by many, if not all, of our OEMs. Dealers continue to manage inventory conservatively, and OEMs are aligning production and orders accordingly. In the automotive sector, demand from our major OEMs is mixed, with premium trucks remaining robust as they ramp production for model year 2025 vehicles. The premium, limited production nature of these vehicles, we believe, continues to insulate this important portion of our business from broader interest rate concerns. However, in the broader OEM automotive space we support, we are seeing the signs of excess inventory and consumer conservatism similar to our power sports customers. We remain steadfast in our long-term strategy for PVG. While we've implemented targeted cost reductions, we've retained our core engineering talent to support our product roadmap and future innovations. We're already seeing the fruits of this strategy through continued market share gains, underscoring the strength and differentiation of our product portfolio. We're particularly excited about upcoming new product introductions and opportunities in motorcycle, military, and power sports. We recently partnered with Ford to take on Dakar with the Ford Raptor T1 Plus, a program which we won based on the capability of our products in support of Ford's entire team. Look for us to be on the podium of Dakar in 2025. Moving to AAG. Net sales were $107 million compared to $156 million in the prior year quarter. Our component aftermarket portion of this business, which includes wheels, tires, and lift kits, continues to show growth, demonstrating the resilience and appeal of our portfolio. This growth also exemplifies the importance of our diversification strategy, which enables consumers to participate in the Fox product portfolio at price points which may be more approachable in the short term. Our automotive upfitting business continues to face challenges from reduced chassis supply, mix, and stubbornly high interest rates. However, these impacts have been tempered by the strong demand and excitement for our higher-end outfits, which aligns well with our premium brand positioning. Our AAG business presents a huge opportunity for us to operationalize our 1 plus 1 equals 3 framework, which dovetails perfectly with our broader goal of creating a more resilient business supported by aftermarket channels. While we believe we did a good job of creating a that portfolio of leading brands in AAG, our next phase of growth is expected to maximize product synergies like what you see on our newly launched Fox factory truck. Given the intensity and rate of growth over the past five years, we have not yet fully recognized core strategies which we saw when architecting the AAG business. We believe now is the time to refocus our efforts to ensure we are meeting the needs of all the stakeholders in this channel. With this refocused effort, we believe that we can drive sustainable long-term growth and restore margins to their appropriate levels. In SSG, net sales were $124 million compared to $105 million last year, reflecting a $19 million increase, driven by the inclusion of Marucci and offset by a $23 million reduction in sales within our bike business. Within bike, we're seeing positive signals at the OEM inventory destocking phase, which we have been discussing over the last several quarters, is nearing its conclusion. We were pleased to deliver a 52% sequential increase in bike revenue, which is a positive sign of both significance and predictability. In addition, our move into the entry premium space has been very well received and is helping offset broader sluggishness. Although the U.S. market remains in a state of transition towards stabilization, the European market continues to improve on a relative basis due to its lower exposure to excess inventory. I'm particularly excited about our multiple new product launches scheduled throughout the year. These innovations are already generating incremental demand and are expected to drive growth in the coming quarters. The e-bike category also continues to exceed our expectations and is an important avenue for our expanding addressable market. On the other side of the house, Marucci continues to be a standout performer. I just returned from attending the Marucci World Series where over 10,000 fans, players, coaches, and families descended upon Baton Rouge. While the highlight was watching young players compete for the championship, The excitement for me was seeing the potential for our combined businesses. Our hitter's house and associated pop-up stores were essentially sold out. Marucci and Victus bats were literally everywhere as thousands of players got into the swing of things. And parking lots were filled with trucks boasting Fox shocks, including our latest vehicles such as the Fox factory truck and outfitted UTVs, which generated tons of interest. It was a reminder that Marucci and Fox customers are one and the same, united by two aspirational brands and a combined vision to make high-performance products for our enthusiasts. Marucci's success is being driven by a host of growth factors across their product portfolio, including the Victus and Marucci brands in baseball and softball, lizard skins accessories, apparel, and international markets. The Henders House platform also continues to gain traction, And with the opening of Hitters House Tokyo, it further solidifies Marucci's market position as the innovation leader in this category. In fact, both our Victus and Marucci brands were very well represented at the MLB's recent All-Star Game with both finalists of the Home Run Derby using our bats. To that end, I'm particularly thrilled to highlight that we recently announced the exclusive license agreement with Major League Baseball, designated Marucci and Victus as the official bats of MLB starting January 1st, 2025. This four-year agreement not only underscores our brand's leadership in professional baseball, but also provides exclusive rights for our products. This partnership, combined with Lizardskin's position as the official back grip of MLB, further cement our status as a premier choice for players at all levels. With this new MLB agreement on the horizon, we're even more excited about Marucci's future growth potential and congratulate the team for achieving this distinction. Looking ahead, we're optimistic about the trajectory of SSG. The anticipated recovery in the bikes segment, coupled with Marucci's consistent strong performance and our exciting product pipeline, positions us well for continued growth through the second half of this year. Now for some comments on our outlook. While we continue to see encouraging signs of stabilization in bike, we must be prudent and responsible in aligning our guidance with revised expectations of our large OEM customers. As a result, we are adjusting our full-year guidance to reflect a more temperate sequential revenue lift in the second half of the year. This adjustment is directly driven by ongoing industry demand and quality challenges which pass from our OEMs directly to us in the form of lowered forecasts which culminate in reduced orders that are subduing but not eliminating our anticipated growth. Despite these near-term challenges, we maintain a positive outlook. We still expect sequential growth throughout the second half of the year, albeit at a more moderate pace than initially projected. Furthermore, we anticipate this trend of sequential improvement to continue through 2025. Our revised assumptions for the second half of the year include gradual improvement in bike channel inventory and the impact of OE's model year 2025 releases, Marucci's continued growth across its diversified portfolio and new product launches, slow but steady improvement in power sports dealer inventory, ongoing progress in upfit chassis availability and mix, and new product launches within our lip kit and wheel business. In closing, our company remains well positioned for the second half fueled by a strong pipeline of new product launches. We're doubling down on what's made us successful, our brand strength, product excellence, and relentless innovations. Our R&D investments are strategically targeted at groundbreaking 2025 model releases and high-margin aftermarket components, both of which we believe will expand our market share and augment our growth. In the meantime, we're navigating this cycle by focusing on what we can control to position us to emerge stronger and well-equipped to capitalize on future opportunities. We're not just adapting to the current environment. We're building a more diversified company intended to enhance and protect shareholder value. And with that, I'll turn the call over to Dennis.