Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holding Corp's fourth quarter and full year 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. I'd now like to turn the conference over to Toby Merchant, Chief Legal and Compliance Officer at Fox Factory Holding Corp. Sir, you may begin.

Thank you. Good afternoon, and welcome to Fox Factories' fourth quarter and full year 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 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 statement or other statements herein, whether as a result of new information, future events, or otherwise. In addition, where appropriate in today's prepared marks 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 measure are included in today's earnings release, which has also been posted to our websites. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks, everyone, for joining today's call. In the fourth quarter, we delivered on our financial commitments with sales and adjusted earnings per share in line with our guidance. We also demonstrated progress in our $25 million cost reduction initiative and drove improvements in our working capital, resulting in $63 million of debt pay down during the fourth quarter. While we experienced unevenness in demand across our OEM customers during the quarter, we remained focused on executing against the strategic initiatives we outlined last quarter, continuing to exert control where we can in a challenging market environment. More importantly, we remained committed to our long-term success through our ongoing focus on product development initiatives, which are creating new customer engagements and opportunities. And while delivering our long-term strategy, we drove near-term actions to improve profitability. As an example, both AAG and PVG demonstrated sequential adjusted EBITDA margin improvement of 250 basis points and 310 basis points, respectively, through better inventory controls, strategic chassis mix management, and facility and resource rationalizations. Our working capital improved by $55 million year-over-year as we balanced strategic priorities. In AEG, working on chassis mix resulted in a $60 million improvement in prepaids, partially offset by additional necessary inventory ahead of the holiday season. In SSG, year-end component sales drove an improvement in inventory, and in PVG, stronger sales in our aftermarket business enabled further inventory optimization. As you may recall from last quarter's earnings, we are taking action across four key initiatives. One, simplifying and consolidating our footprint. Two, fixing or eliminating non-performing products in our portfolio. Three, improving working capital. And four, reducing overhead costs. Here's a quick update. We completed the closure of our Colorado facility in the fourth quarter and initiated additional footprint consolidation in PVG and AAG operations, driving benefits starting in the second quarter of 2025. We recently traveled to Taiwan to work with our bike team as they consolidate and optimize our footprint on the island. We've made progress on our cost optimization plan, having identified 25 million in savings across COGS and SG&A. We've executed on multiple initiatives across the organization, from footprint optimization and operational consolidation to strategic sourcing improvements. Some of these actions are complete with benefits beginning to materialize in our results, while others are in various stages of implementation. The benefits from these collective actions will continue to build as we move through 2025, with full realization expected to be visible in 2026. And the early success gives us confidence in our ability to identify and execute on additional opportunities as we advance our optimization initiatives. Importantly, we're not just focused on cost reduction. We're strategically repositioning our business to operate more efficiently. As I have said in prior calls, we are focused on continuing to diversify across segments, products, markets, and geographies, enabled by a world-class organization which has responded to volatile customer demand and industry cyclicality. We believe these efforts put us on a path to restore our best-in-class EBITDA margin as market conditions normalize while driving higher rates of free cash flow to improve our balance sheet. Now turning to our segment performance. In the powered vehicle group, net sales were $116 million, slightly down from $118 million in the prior year quarter but up 6 million or 5% sequentially from the third quarter. Adjusted EBITDA margin also improved sequentially by 310 basis points. Revenue is largely in line with expectations as we continue to navigate challenging market conditions affecting both our power sports and automotive OEM partners. In the automotive sector, we continue to face headwinds from ongoing OEM production issues affecting forecast and timing of orders. While the premium truck category continues to show resilience, growth is more subdued as consumers remain conservative in purchasing behaviors. In the power sports sector, conditions remain consistent with what we discussed last quarter. OEMs are aggressively managing production levels to address dealer inventory and sell through. This aligns with what we're seeing across the industry where OEMs are expecting flat to down low single digit retail sales in 2025. with any potential recovery skewed toward the second half of the year. What differentiates us from everyone else is that our product development teams continue to win new customers such as CFMoto and Buell in 2024. And additional new OEM customers to our portfolio in 2025 include BMW, Ducati, and Triumph. By expanding our focus to suspension for motorized two-wheel vehicles and completing the purchase of the assets of Marzocchi, we are delivering our products to new customers, thereby helping to offset declines in other areas of power sports. The Fox brand remains the standard in performance, continuing to be sought after by enthusiasts who want to partner with a leader in on- and off-road performance. The enduring nature and value of our partnerships was recently highlighted in an article by Ford touting the value of our technology to their high-performance off-road truck segment. The strength of the Fox brand is also evident in PVG's aftermarket business, where we see resilience in both domestic and international channels. This resilience reinforces a trend during this post-pandemic cycle where customers are choosing to service and upgrade their current vehicles when they're not in a position to make new vehicle purchases. Looking ahead, while we expect continued market pressures in 2025, we're maintaining our focus on operational efficiency and cost management to protect margins. We're also continuing to win new partnerships and expand our presence in the market, as evidenced by our new products and OEM relationships. In our aftermarket applications group, net sales were 112 million, down from 121 million in the prior year quarter. but up 12 million or 11% sequentially. Adjusted EBITDA margin was 12%, a sequential improvement of 250 basis points as cost reduction actions were implemented. This performance was in line with our expectations for the quarter and reflects the progress we're making on our operating initiatives. This improvement reflects chassis inventory optimization completed in the third quarter and improving chassis mix from our OEM partners. In fact, we're seeing some of the best mix of chassis that we've received in years. We remain cautiously optimistic about the pace of broader market recovery as our partners work through their delivery challenges and our dealers work through their higher inventory. We're also working with our dealers to drive the appropriate vehicle mix that meet the needs of their end customers rather than simply chasing volumes. We continue to strengthen our relationships with key partners, recently hosting OEM executive teams at our testing facility in Southern California. These engagements, along with our expanding partnership with RTR and our long-term relationship with Shelby, demonstrate the strength and opportunity in this business. In our aftermarket components business, we are experiencing sustained growth in wheels and lift kits. In addition, we continue to make strides on optimizing strategic inventory of high-demand units to ensure availability when customers are ready to buy. This was particularly evident during the holidays, where our decision to increase select inventory levels enabled record sales in several product lines. Additionally, we're expanding into new categories, including the launch of what we have termed the Ag Wagon. The Ag Wagon represents an exciting expansion into a new market, offering performance-built vehicles designed for farmers, ranchers, and anyone else who uses their vehicle to not only get to work, but to do their work. Available across all major super duty and heavy duty truck platforms, this product combines rugged performance with practical features tailored for the unique demands of these customers. We also launched a suspension package with Grand Design RV for vehicles based on a Ford chassis. This product recently debuted at the Tampa RV Show and showcased a better driving experience using adjustable suspension settings, from highway cruising to off-road exploration. This system includes remote reservoir Fox shocks at each corner, as well as BDS control and custom radius arms, delivering unprecedented performance. Looking ahead, our optimized inventory position, strengthening dealer relationships, and operational improvements provide a solid foundation for long-term growth. And combined with our expanded product portfolio and successful facility consolidation efforts, we believe we are well-positioned to capture opportunities as market conditions normalize. In SSG, net sales were 125 million compared to 93 million last year, primarily reflecting a 41.5 million increase from a full quarter of Marucci and a 6.7 million increase in the bike category. consistent with our expectations. Adjusted EBITDA margin of 22.4% was down sequentially by 190 basis points due to inventory optimization efforts in the fourth quarter, as well as incremental investments we are making at Maroochee ahead of the upcoming MLB baseball season. As with the previous quarter, we're seeing varied recovery rates in our bike business across different geographies, channels, and customers. with this uneven pattern likely to continue through 2025. Similar to the chassis inventory optimization work we completed in AAG in the third quarter, we took action in our bike business to better align inventory with current demand levels. While the inventory rebalancing significantly impacted our SSG segment margins in the fourth quarter, our working capital will benefit from a healthier inventory position and better alignment between production and demand as we enter 2025. Additionally, the consolidation of our Taiwan operations that I mentioned earlier, combined with strategic sourcing projects and cost-saving opportunities, will provide additional levers for margin improvement beginning this quarter and gaining strength as we move forward. Our expansion in the entry premium bike segment continues to progress, with growing strength among our top OEM customers helping to offset softness with smaller OEMs. While the European market demonstrated strength in early 2024, a reluctance to end the year with inventory weighed on purchasing habits in Q4. Throughout the last year, we have implemented enhanced forecasting and planning processes with our strategic OEM partners to ensure better alignment between our production capabilities and their demand patterns, which continues to improve our visibility. In product development, we have been hard at work developing several new products we will announce and launch in 2025. Some of these we believe are going to revolutionize the way people think about suspension and bikes. We are excited to get these products out on the trails and in our enthusiast's hands. In our Marucci business, we're excited to have officially begun our role as MLB's official BAT partner as of January 1st. We have expanded our bat manufacturing capacity as well as design new products to drive incremental sales and reinforce our market leading position in the MLB with Marucci Invictus. Incidentally, both of these brands had record market share in the MLB for 2024. Additionally, we have made growth investments in our softball business to further capitalize on the fastest growing team sport in America. We have aligned and coordinated our Fox and Marucci engineers to accelerate new product advancements that we can drive additional growth. These near-term investments weighed on our Q4 margins as we focused on long-term success. We look forward to sharing more details about several of these exciting initiatives in the coming months as we ramp up for the 2025 MLB season. In closing, I'll share some high-level comments on our outlook, which Dennis will review in more detail. Based on our recent performance, our current order book, and latest forecasts from OEM partners across all segments, the framework for 2025 remains in line with what we shared in our third quarter update. While we see several opportunities for year-over-year growth, our base case expectation is for the OEM customer environment to remain challenged. I'd emphasize that amid the tempered industry growth expectations for 2025, we are committed to driving margin improvement and enhanced free cash flow generation through our comprehensive cost optimization and operational excellence initiatives, which are already yielding results. And finally, with the new administration, multiple changes have begun to surface in regulatory policy as well, including tariffs. Our teams have spent considerable time analyzing these potential and planned tariffs. As you can imagine, it's a complex and fluid environment. Our current manufacturing footprint is well positioned relative to these policy shifts, with no significant presence in Mexico, Canada, or China, with the exception of some of our wheels and all of our aluminum baseball bats, which are manufactured in China. In both of these categories, we are executing plans to mitigate the potential impacts through cost reductions and pricing adjustments. Our bike business operates out of Taiwan and therefore the majority of aluminum tariffs would be felt by our customers as they import our products or completed bikes into the U.S. The impact to the U.S. bike industry is yet to be fully understood by our OEM customers. As you know, the core of our powered vehicle manufacturing resides here in the U.S. Although we use aluminum and steel in our products, much of the supply chain originates in the U.S. with no impact. For the portion of our supply chain which is imported, our customer agreements have pass-through provisions related to the specific indexes on materials for scenarios such as this. However, while Fox is not disadvantaged relative to our competitors, we share our customers' concerns as many of these OEMs face meaningful direct exposure across their global manufacturing footprints. This added complexity during a period of right-sizing production and ongoing macro challenges may create additional inflationary pressure for consumers and present another headwind for the industry to overcome as it works through the cycle. We plan to provide a more comprehensive update during our next earnings call. And with that, I'll turn the call over to Dennis.