Fox Factory Holding Corp.

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holding Corp's third 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. I'd now 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 third quarter 2024 earnings conference call. I'm joined today by Mike Dennison, Chief Executive Officer, and Dennis Shem, Chief Financial Officer and President of the Aftermarket Applications Group. 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 the 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, 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, 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, and thanks to all of you for joining the call today. Our third quarter results reflected continued sequential improvement as we delivered $359 million of revenue, representing a 3.1% increase from the second quarter and an 8.5% increase compared to the prior year. This sequential growth was led by our bike business, which delivered a second consecutive quarter of double-digit sequential growth of 22%, following last quarter's 52% increase. The acquisition of Orochi also provided growth as our team delivered another quarter of solid growth. While the underlying demand for FOX's innovative and performance-defining products remains strong, our results in the third quarter landed at the lower end of our guidance range as OEM partners further reduced their forecast for our products during the quarter. These forecast reductions align with the quarterly results. I will talk more about this in the outlook section later in the call. Additionally, ongoing quality issues and model year changeovers at several of our automotive OEM partners continue to impact chassis mix and availability. Although we continue to evolve our business through diversification and expansion within the aftermarket, over half of our business remains closely tied to our OEM customers. And when they face challenges, whether from constrained demand, quality concerns, misaligned inventories, or production slowdowns, those impacts flow through to our business. The good news is that we have seen these lingering issues begin to abate in Q4 as model year 25 vehicles are beginning to ship to our facilities now. We've responded decisively to the challenges throughout the year by implementing both immediate and longer-term actions to strengthen our business. For example, as we saw demand tighten, we've aggressively managed and reduced controllable costs across our corporate structure and at our plants by reducing direct and indirect labor. We've also taken more strategic action by closing a plant in Colorado in our AEG business and making other factory efficiency improvements. However, there is more we must do, and we must do it with the same level level of urgency and commitment we have in building our world-class brand. We hit the ground running in Q3 driving initial actions that while they negatively impacted the profitability of the quarter, they are designed to enable margin growth in Q4 and beyond. The focus of our work is centered around the following four initiatives, simplify and consolidate our footprint, reduce and eliminate non-performing products in our portfolio, reduce inventory, and finally, reduce costs. Beyond the four initiatives, I have challenged our entire team to identify opportunities to strategically optimize our cost structure across all of our segments. While we remain a company oriented toward generating long-term growth, we want to ensure that our business is optimally positioned to operate efficiently in a number of demand environments so that we can protect margins and drive significant and consistent free cash flow. An important step of this process was the change in management with Dennis taking over AEG. In his first quarter, he has identified opportunities to reduce inventory and has taken action to drive significant improvement within the quarter. We are developing similarly impactful strategies across our other businesses that we expect to implement this year. We are also continuing to focus on creating diversification across our segments, products, markets, and geographies to create a more resilient organization that can be nimble in response to demand shifts and industry cyclicality. Recent growth initiatives like our move into the entry premium bike category, the Marucci acquisition and MLB partnership, and our accelerated international growth have significantly expanded our addressable market while improving multiple price points for consumer accessory brands. Turning now to a discussion of our segment performance. In the powered vehicle group, net sales were 109 million, down from 123 million in the prior year quarter, which reflects a reduction in demand forecast from our OEM partners in response to broader market conditions and a deferral of larger ticket discretionary spending by consumers, as mentioned previously. This hesitancy, combined with ongoing OEM quality issues that are continuing to delay production at the OEMs, resulted in lower volumes than we anticipated. This has impacted our facility utilization rates and consequently our margin performance in the quarter. In the automotive sector, while our premium truck category has historically demonstrated more resilience to market pressures, we're now seeing some moderation in demand within this category as well. The broader OEM automotive space continues to face excess dealer inventory, and although we're seeing gradual improvement as we move through the year, inconsistent general consumer demand continues to weigh on the pace of destocking. The level of decommit from our automotive OEM customers in the quarter was significant. For the top three automotive customers, this translated to a sequential reduction by customer of 9.2%, 37.1%, and a whopping 87% unforecasted reduction from Q2 to Q3. Overall, this equated to a 19.5% drop in this overall product sector within the quarter. This was partially offset by our PVG aftermarket business, which improved 28.3% sequentially. Similarly, the power sports market faces ongoing challenges, with our OEM partners deliberately managing production well below retail demand to address dealer inventory levels consistent with the prior quarter. The forecast reductions we have previously taken in this segment appear to be within line of current expectations. Even though the customer demand outlook within PVG continues to be a headwind, the Fox brand remains the standard and continues to be sought by consumers. In fact, in the PVG aftermarket, we achieved the highest level of new bookings in both domestic and international channels in over six quarters, which highlight that customers will fix their current vehicles if they can't justify the expense of the new one. We also continue to win across new customers, new partnerships, and as always, in racing. In Q3, we announced a return to our motorcycling roots by partnering with Buell USA on their new Super Cruiser bikes, launching in 2025. In side-by-sides, we kicked off new products and announced a partnership with CFMoto on their Z-Force line, as well as new wins with BRP on the Maverick R4 Seater and the new Outlander UTV. With Ford, we were not only awarded the new program on the JMC Ranger Extreme, but also unveiled the new Raptor 2.1 Dakar race vehicle at the annual Goodwood event. And finally, in racing, there were frankly too many wins to list, but overall, we were at the top of the podium in six different races across both UTV and trucks. Moving to AAG, net sales were $100 million compared to $136 million in the prior year quarter. Alongside the AAG leadership transition, we've completed a comprehensive assessment of the business that has led to a clear phased approach to drive improvement. Phase one included a deep dive into the team, customers, and the operations. identifying both challenges and opportunities, including the critical need to optimize our inventory position and strengthen our dealer relationships. And we closed our facility in Colorado, transitioned this business to other facilities to further improve productivity. Phase two, which we're executing now, has centered on taking decisive action. While inventory optimization was always part of our plan for the second half of 24, it became clear following discussions with key OEMs and dealer partners that accelerating this activity in September would best position the business for 2025 with new late model trucks that meet the latest consumer preferences. As such, we provided incremental support to our dealers through targeted promotional programs to help move inventory in an efficient manner. The acceleration of our plan impacted third quarter margins to a greater degree than we contemplated in our prior guidance. However, completing this before year end has removed a significant constraint to future growth and has positioned us to capture the full benefit of the recovery when the market rebounds. Thus, we expect Q3 will be the low-water mark for AAG margins before inflecting upward in the fourth quarter, which we expect to continue through 2025. Looking ahead, Phase 3 of our strategic plan focuses on building and diversifying AAG through multiple initiatives. This includes furthering new relationships with existing and potential OEMs and other partners, expanding our products to new platforms, implementing a common marketplace for our up-fit and aftermarket components, and increasing overall brand accessibility. Importantly, we're renewing our focus on our performance roots while building the infrastructure to support significant long-term margin improvement. The enthusiasm among our teams is building as we execute these initiatives. In Q3, Our product development teams launched raised wheels for Method, designed to better support 4 to 6-inch lifts with 20 and 22-inch wheels for the light truck market. RideTech launched a front and rear suspension system that modernizes the popular Ford box-body Mustang, and Sport Truck launched the GM 1500 long-travel suspension with Baja kits by the Brentall brothers. These aftermarket launches have been well received and continue to fuel our growth in the sector. In terms of the current environment, our outfitting business continues to face near-term chassis mix and availability challenges, which we expect to persist through at least year-end as dealers work through existing inventory and high floor plan financing. However, the strength of our aftermarket components business is providing some buffer with continued growth in wheels and lip kits, demonstrating both the resilience of our portfolio and the success of our diversification strategy. With our inventory well positioned, strengthened operational foundation, and clear strategy to maximize the power of our brand portfolio, we believe we're taking the right steps to drive sustainable growth and restore margins. In SSG, net sales were $150 million compared to $72 million last year, primarily reflecting a $50 million increase from the inclusion of Marucci and continued growth in the bike business. Our bike business delivered a $28 million increase in sales year-over-year and built on last quarter's 52% sequential increase with another 22% sequential increase in Q3. Notably, we achieved this improvement while maintaining flat operating expenses year-to-date, demonstrating the significant operating leverage potential in our business model. While our bike business grew sequentially and year-over-year, which certainly supports a return to a more balanced outlook, than we have seen in the last 18 months. We are not ready to call the inventory destocking complete. As I have said previously, not every channel or customer will exit at the same time or rate and that lumpiness will persist into next year. Our strategic expansion into the entry premium bike segment and consistent strength in the top 10 OEMs has buffered us from some of the softness in the smaller OEM customers. The entry premium category represents a transformative opportunity for us to challenge the status quo further diversifying our business and effectively doubling our total addressable market while maintaining our brand's premium positioning. The early response from our OEM customers has been overwhelmingly positive, further validating the strategy to broaden market participation while staying true to our performance-defining heritage. We're also seeing similar success in the e-bike category, which represents another important avenue for market expansion. From a regional perspective, the European market maintains its relative strength due to better inventory positioning, while the U.S. market continues to progress towards stabilization. In the third quarter, we also launched our new NEO live valve wireless solutions to overwhelming positive reviews and early success, another example of our commitment to innovating at the premium, high-performance end of the sport. Turning to Marucci, our brands continue to demonstrate relative strength in market share expansions, While we are seeing particular excitement around Marucci with the World Series and stars such as Freddie Freeman utilizing our bat to become the MVP and our new Marucci CatX2 bat launch, we are focused behind the scenes preparing with Major League Baseball to take the field as official bat partners beginning 2025. The amount of work to ensure that 2025 is the first year of a multi-year success story is keeping us busy 24-7. In addition, we believe that recent investments in Hitters House, Softball, as well as new product lines from both Marucci and Victus set us up very well for 2025. Some of these upcoming product launches will likely weigh on near-term margins as we build the capacity and capability to deliver home runs. With all of this excitement around Marucci business, It is important to also acknowledge that we are seeing some signs of softness from the consumer as they balance their budgets for discretionary items against their immediate needs during this uncertain period. Which brings me to some comments on our outlook. Based on the recent performance as well as the latest forecast from our OEM partners across all segments for Q4, we are providing a tempered view of the upcoming quarter that Dennis will review in more detail. We think this is only prudent based on the public and private feedback we have received from these OEM customers and their ongoing challenges. These dynamics are also influencing our early thoughts around 2025. While we're poised to capture growth in our aftermarket applications group, Marucci and Bike, as well as new customer wins in PDG, our base case expectation is for the industry retail environment to remain challenging. However, As I highlighted earlier, and as Dennis will discuss in more detail, we will be driving our four improvement initiatives and taking decisive actions to recapture margin and drive improved cash flow generation, regardless of the macro. If we can recapture our best-in-class EBITDA profile, even with diminished near-term top-line growth, we will set ourselves up for exponential success as consumer demand refills the pipeline for robust growth. As we experience this year, the pace and the magnitude of the overall recovery will largely depend on consumer sentiment around broader macroeconomic conditions and the strength and reliability of our OEM partners. Nonetheless, we are focused on what we can control, which is continuing to invest in innovation to create new products that drive traction with new and existing customers while aggressively managing costs. And with that, I'll turn the call over to Dennis.