Fox Factory Holding Corp.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory second quarter 2025 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 would now like to turn the conference over to Toby Merchant, chief legal officer at Fox Factory.

Thank you. Good afternoon and welcome to Fox Factory's second quarter 2025 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 of the company's control and can cause future results, performance, or achievements to differ materially from 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 accept 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, and thanks to everyone for joining our Q2 call. We delivered solid progress in the second quarter with $375 million in net sales, representing growth across all three segments. Further, consolidated adjusted EBITDA margin continued to improve this quarter to 13.1%, which is the highest level for Fox Factory in nearly two years. We achieved growth through the first half of the year in a turbulent market as a result of our relentless pursuit of innovation, which is illustrated by our product launches and commitment to the roadmap. Our focus on R&D and product innovation during these macro challenges is allowing us to not only deliver results today, but position ourselves for continued market share gains and wins over the long term as we emerge from these industry cycles. Let me begin by providing a status update on the four key initiatives we've been communicating throughout the year. First, our footprint consolidation efforts continue to advance. In SSG, the benefits from our Taiwan consolidation are now flowing through the P&L. In AAG, we recently took the action to further consolidate manufacturing operations into our primary facility in Indiana, allowing us to leverage our existing operations and R&D teams, which we expect to deliver cost savings going forward. We are also consolidating smaller operations in Arizona to drive profitability as our businesses there grow. Second, our portfolio optimization work is gaining momentum as we make targeted improvements to our product mix, focusing resources on our highest performing SKUs and strategic growth categories. This action is being taken across all of our product lines as we focus on simplicity and customer impact. Our working capital management initiatives are showing results through continued improvements in our supply chain practices and inventory optimization, particularly in PVG and SSG, which is paving the way for enhanced cash flow generation and balance sheet improvement. We are on track to achieve our expectations in debt reduction, which is a clear focus for us in 2025. And fourth, our $25 million cost reduction program is delivering on schedule with approximately 30% of the benefits realized so far and those benefits beginning to impact results and accelerating in the back half of the year. While these efforts are being offset by tariffs currently, we are better positioned than peers and competitors to retain and improve growth and profitability even in the current macro, which has the additional benefit of positioning us ahead of competition when the extraneous noise subsides and business returns to a more normal environment. All of the actions we're taking are focused on exerting control, whether that be on growth opportunities with our product roadmap or mitigating costs through footprint consolidation and supply chain adjustments. I'm pleased with the progress we've achieved through working closely with our suppliers and customers to navigate this environment. We have a great deal of hard work ahead of us, but we're executing on the plan we laid out, and the continued sequential and year-over-year improvement in our results clearly reflect our militant focus. We remain a growth company at our core, and as the consumer discretionary environment stabilizes, we expect this combination of operational excellence and innovation-led growth, particularly in our higher margin product lines, to support the enhanced profitability we've been methodically building toward. And now turning to our segment performance. In our powered vehicles group, second quarter net sales were 123.5 million, representing an increase of 4.9% over the prior year. This growth was primarily driven by the expansion of our motorized two-wheel business, which more than offset continued softness in the power sports OE business. Notably, we delivered sequential PVG adjusted EBITDA margin improvement of 150 basis points to 13.3%, which is the third quarter in a row of improvement and demonstrates the impact of our ongoing cost reduction initiatives and operational improvements. While we invest heavily in product roadmap and new technologies, which will further distance us from competition. Building on the momentum we discussed last quarter, our return to motorcycles has resulted in a deepening relationship with our marquee customers, and we're actively expanding these relationships while pursuing new opportunities, including EV and hybrid vehicles. This strategic expansion represents the enduring strength of the Fox brand across performance categories and represents the halo effect that we often mention. On the operational front, we're making meaningful progress on our supply chain optimization initiatives. We've implemented successful cost-sharing arrangements with our OEM partners and have price increases in place that are helping to partially offset the tariff-generated inflationary pressures. We are also working closely with our OEM partners and supply chain initiatives to align our collective interests, whether that be relocating supply to more favorable regions or insourcing elements of our manufacturing processes. In fact, we have increased our in-source parts by 20% over last year to help improve utilization and reduce external costs, which helps mitigate tariff exposure, while also strengthening our ability to serve customers with greater agility. Our customers are obviously highly motivated to partner on these efforts, given the long-term benefits, and importantly, this work represents one of our biggest cost-out opportunities in the second half of the year. While tariffs are a significant issue for PBG's customers and a challenge that we're spending considerable time to mitigate, we believe we are well positioned against our competition given our predominantly U.S. manufacturing footprint and the operational agility that we have delivered in this business. Looking ahead, while consumer softness is expected to persist in the near term, we remain confident in our ability to drive growth in PBG through our product roadmap. In our aftermarket applications group, we delivered strong top line growth with net sales increasing 6.5% to $114.1 million from $107.1 million in the prior year period. This growth was driven by increased demand for aftermarket products, such as wheels, lift kits, and components, where we are gaining market share, and improved upfitting sales, demonstrating the underlying strength of our diversified platform. As I have stated in prior calls, we strive for equilibrium between vehicle and the more affordable entry points of our aftermarket components business. This represents a strong value proposition for a broader range of consumers who are reacting to high interest rates, high vehicle costs, and macroeconomic conditions. AAG segment adjusted EBITDA margin experienced some compression sequentially, due primarily to an increase in tariff rates on imported wheels and tires from Asian suppliers. which has impacted our margins to a greater degree as tariff conditions worsen. Excluding these tariff headwinds, margins would have been consistent with Q1 levels. We also elected to delay certain consolidation actions that pushed our savings to later in the year and created an additional margin headwind in Q2. In our upfitting business, our chassis mix is better aligned with the needs of our dealer partners and their customers, which is enabling a wider assortment of products in the market. Although we continue to face specific chassis availability challenges in certain models, our broader diversification and optimization efforts show signs of future strength, and we expect this to translate to continued tangible improvements in our results during the second half of the year and into 2026. Our aftermarket components business continues to show strong performance with sustained growth in wheels and suspension kits. The 1 plus 1 equals 3 strategy continues to enable AEG to deliver best-in-class products to enthusiast customers across a growing number of vehicle platforms, as demonstrated by our RideTech lowering kit solutions, which support the growing consumer demand for lowered high-performance on-road trucks. This is a great example of how our team is leveraging our core strengths to expand our opportunity set across both the aftermarket and our upfitted vehicles. Looking ahead in AEG, we are focused on continued improvement in our outfitting business across product, chassis management, and sales, as well as further improvements in footprint optimization and tariff mitigation, and market share growth in our aftermarket business with lift kits, lowering kits, and wheels. In short, we will deliver on our internal objectives while the external markets stabilize and improve eventually. In our specialty sports group, we delivered solid top-line growth with net sales increasing 11% to $137.2 million from $123.6 million in the prior year period. SSG segment adjusted even margin improved 280 basis points sequentially to 22.1%, driven by strength in our bike business and realization of cost savings from our Taiwan facility consolidation. Our bike performance for the first half of the year has been on bright spot with the overall industry stabilizing. Our year-to-date growth is largely due to accelerated model year timing, which should moderate in the second half of the year. However, the net effect of this dynamic is positive, and we now expect to drive modest growth for the full year. All of these factors give us added confidence in a more normal industry outlook. Our product roadmap continues to underpin our strategy, with new product launches resonating well with customers and our market share remaining best in class. In addition, our performance-defining technology continues to expand our addressable market, with our solutions in the entry premium segment and ongoing product innovation developed for e-bikes. In our Marucci business, it's all about product launches and where they land within the calendar year. We faced a difficult comparison in the first half due to last year's CatX2 launch in the second quarter of 2024. Consequently, the flow of revenue this year is inverted from last year and aligned to product launches occurring in Q3. These launches include Victus aluminum bats at an accessible mid-range price point and our high-end Marucci Recluse line launching direct-to-consumer now with retail coming later in the fall. The early response to our new launches in the DVC channel, followed with our retail launches in the second half, support our forecasted growth expectations for this business. I am proud of the work the team has done to become a top-notch product development organization, mirroring what we do in broader Fox. The addition of world-class talent has allowed us to re-enter fast-pitch and slow-pitch softball in a meaningful way with market-leading products. Reentering this space with the right product enables us to build a growth trajectory over the next couple of years supporting our long-term revenue expectations. Our MLB partnership continues to gain momentum. It has been a year of learning, adjusting, and building. Along the way, we're enjoying increased visibility through major sporting events like the recent All-Star Game, which we dominated. You might even say it was a walk-off home run. Our Marucci Invictus brands continue to dominate with the pros and have expanded beyond bats. For instance, we now have approximately 40 MLB players using our footwear, which is helping us leverage the halo effect we create from bats. This is a strategy we've successfully employed elsewhere across our businesses, as you know. We're working with the MLB to grow and evolve the game of baseball, and we love the long-term potential as this partnership matures each year. On the tariff front, our costs have increased relative to our initial expectations due to changes in exemption status for baseball, which is impacting our SSG segment margins in the short term. We're continuing to work on developing and implementing mitigation strategies where we can, including moving our bat finishing and paint to the U.S. But our largest offset to combat tariff costs will be top-line growth, and fundamentally, that's where we remain focused. Further, I also want to call out that the significant investments we have made in the business are nearing completion across softball, apparel, and people. While these investments, combined with the incremental tariffs, are creating near-term margin pressure, our business remains well positioned with leading market share in BATS and growing market share in adjacent products and categories such as softball. This business has a very attractive financial profile, and we believe that we are well positioned for our growth in both top and bottom line. Finally, I'll share some high-level views of the second half, which Dennis will provide more detail on momentarily. Absent any sustained change to macro trends, the base case underpinning our second half forecast is predicated on our current improved order book, product launches, and ongoing sales strategies which support an acceleration in consolidated top and bottom line performance as we progress through the year. Consequently, we are taking this opportunity to raise our full year sales expectations to incorporate our outperformance through the first half. However, In alignment with our commentary on the increasing volatility and growth of tariff rates, we are updating our EPS guidance to reflect the ongoing incremental headwinds by tightening our expectations on EPS within the original guidance range. Our team continues to demonstrate resilience and adaptability, and I'm confident in our ability to control the controllable. We continue to have confidence in our product launches and innovation pipeline, which will not only drive second-half results, but will enable us to win in any market going forward. And with that, I'll turn the call over to Dennis. Thanks, Mike. I'll begin by discussing our second quarter financial results, followed by our balance sheet, cash flow, and capital allocation strategy, before concluding with a review of our guidance for the third quarter and full year. Total consolidated net sales in the second quarter of fiscal 2025 were 374.9 million, an increase of 7.6% versus the same quarter last year, reflecting solid growth in all three segments. Our gross margin was 31.2% in the second quarter of 2025 compared to 31.8% in the second quarter last year, primarily due to shifts in our product mix. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, was 31.3% compared to 31.9% in the prior year period. Sequentially, gross margin and adjusted gross margin increased 30 basis points and 40 basis points, respectively, supported by the progressive realization of our cost reduction initiatives. Total operating expenses were 98.5 million or 26.3% of net sales in the second quarter of fiscal 2025 compared to 92.4 million or 26.5% of sales in the same quarter last year. The increase in operating expense on a dollar basis was mainly due to higher R&D and sales and marketing expenses associated with investments to support future growth and product innovation. Additionally, costs related to our organizational restructuring initiatives drove an increase in general and admin expense. Adjusted operating expenses, which exclude the restructuring and other discrete expenses, as well as the amortization of purchase intangibles, decreased 20 basis points year-over-year to 22.3% in the second quarter of 2025. The company's tax expense was $2.8 million in the second quarter of fiscal 2025, compared to a slight tax benefit of $0.4 million in the same period last year. The tax effect associated with the unfavorable impact of stock-based compensation exercises during the second quarter caused our effective tax rate to grow to nearly 51% as compared to the 21% federal statutory rate. Net income for the second quarter of fiscal 2025 was $2.7 million or $0.07 per diluted share compared to net income of $5.4 million or $0.13 per diluted share in the same period last year. Adjusted net income was $16.6 million or $0.40 per diluted share compared to $15.9 million or $0.38 per diluted share in the second quarter last year, with the primary adjustment being the add-back of expenses associated with our various cost reduction and restructuring initiatives. The tax effect associated with the unfavorable impact of stock-based compensation exercises resulted in almost five cents of negative impact to the adjusted earnings per share. Adjusted EBITDA increased 11.8% year-over-year to 49.3 million for the second quarter of fiscal 2025. Adjusted EBITDA margin was 13.1% in the second quarter of 2025, an increase of 40 basis points versus the prior year period, and a sequential increase of 190 basis points compared to the first quarter of 2025. The increase in the adjusted EBITDA margin was primarily driven by higher sales as well as a realization of our cost reduction initiatives. Moving to the balance sheet and cash flows. Working capital as a percentage of the last 12 months sales improved sequentially by 80 basis points from 31.5% of sales in Q1 to 30.7% in Q2. This improvement is driven in part by lower inventory as a percentage of sales as our strong execution of continuous improvement efforts to optimize inventory levels across the organization, particularly within PDG, were partially offset by planned inventory builds to support anticipated demand, the impact from higher tariffs, and foreign exchange. Managing working capital continues to be an area of focus, providing us flexibility to continue paying down debt. As of July 3rd, 2025, our revolver balance was $157 million and our term loan balance was $517.5 million net of loan fees. Paying down debt remains our top priority for capital allocation. We are pleased to have reduced net leverage to 3.8 times this quarter, and we continue to see a clear path to reducing our net leverage to below three times by year end. The key component driving this deleveraging will be the anticipated acceleration of cash flow generation in the second half of the year, which will be positively impacted by improved earnings as well as working capital gains in areas such as inventory reductions in our AAG and PDG segments. We currently expect to generate approximately $80 million in free cash flow for the full year. Now, moving on to our outlook for the third quarter and the full year 2025. For the third quarter, we expect net sales in the range of $370 million to $390 million and adjusted earnings per diluted share in the range of $0.45 to $0.65. For the full year, we are increasing our sales guidance from the original range of $1.385 billion to $1.485 billion to an updated range that brackets the high end at $1.45 billion to $1.51 billion, given the strength of our products and innovation pipeline. However, we are adjusting earnings per diluted share to $1.60 to $2, which narrows the original range of $1.60 to $2.60 towards the lower end, reflecting the incremental unmitigated tariff pressure we have discussed. While we have proactively engaged with our customers on pricing actions, supply chain optimization, and selective manufacturing relocations to mitigate these headwinds, the fluidity of the tariff rate negotiations has created incremental costs beyond what was considered in our initial 2025 estimate of approximately $38 million of pre-mitigated tariff impact, which we provided in early May. Given the latest visibility to tariff rates, our updated guidance now contemplates a pre-mitigated tariff impact of upwards of $50 million for the full year 2025. While we expect to offset approximately 50% of our full-year tariff costs through various countermeasures, we have not yet been able to fully offset the remaining margin pressure through pricing increases or other actions. As a result, our updated adjusted EPS guidance considers the tariff-associated margin headwind. Our strategic focus remains on growth while improving margins and enhancing free cash flow generation through operational excellence initiatives. These initiatives position us well to further strengthen our balance sheet and create long-term value for our shareholders. Mike, back to you for closing remarks. Thanks, Dennis. In closing, our positive second quarter results reflect the execution and conviction of a team focused on the strategies and objectives we have outlined over quarters and years. We are making meaningful progress on the initiatives that drive long-term value creation. While we continue to navigate a challenging external environment, the sequential improvements we delivered across the adjusted gross margin, adjusted EBITDA margin, and balance sheet leverage are the direct result of our strategic execution. I remain confident in our team's ability to control what we can, all while maintaining our commitment to our world-class brands and our product innovation that has made Fox a leader for decades. With that, Katie, please open the call for questions.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. In the interest of time, we are asking that you please limit yourself to one question and one follow up. We will pause for just a moment while questions queue. Our first question comes from Larry Solo with CJS Security, your line is open.

Good afternoon, guys. Thanks for the question. I guess just I guess on the guidance and the outlook, obviously you're raising sales a little bit. I'm just curious, is that driven by anything in particular? To me, it looks like specialty sports. I know you don't guide to the segments, but it looks like specialty sports and maybe bike sounds like it had a better than you expected performance this quarter and maybe I think you mentioned kind of going forward, we could hopefully get back to some more normalized order patterns and growth rates. So just kind of trying to parse out where you see some of the better pieces of the business going this quarter and going forward.

Yeah, thanks, Larry. You know, from my standpoint, we delivered a really solid first half, you know, really delivering to our plan and our commitments. And as we did that, we gained confidence in what we think the back half will be. Keep in mind, the back half is just on plan. So when we talk about the full year, we're right on track with where we expected to be and where we wanted to go. How it shifted, you know, quarter to quarter is a little bit different. But fundamentally, this is really about just gaining confidence and conviction and in the work that the team is doing and how that's delivering to the results. So really no significant change by any one segment or business. It's really the entire enterprise delivering on our commitments. And Larry, another way to just think about it, because whatever, you know, Mike said it perfectly, but another way to just look at it is we outperformed by about 50 million in the first half. So we effectively just added that on. Yeah, exactly. So we just added that on to the full year.

And as you look out over the next few quarters, obviously, you have a lot of company-specific initiatives, especially on the bottom line. How about top-line initiatives to really invigorate growth considerably more? Or is it going to take the macro and just lower interest rates and an improving consumer to really get things back in gear? Thanks.

Larry, we love to talk about product. I mean, to me, the reason why we're bucking the trend and actually beating year-on-year comps and sequential growth is a clear function of focus on that top line and product. We know it's all about new product, convincing a consumer to spend money today, and how laser-focused we are on developing that product roadmap across every product line is a clear driver of that continued growth. We haven't lost focus with that at all. In fact, we probably doubled down on that and we're expanding into new OEMs, new customers, new relationships, and frankly, new industries. So we're going to keep the foot on the gas there. And I think that's not only going to set us up for delivering this year, but as the market does return to your point, we're just like a coiled spring. We've now expanded our relationships and our ability to drive incremental growth. as the markets return. So you know me, it's all about product for me. And I think the team has done a fantastic job of staying focused on that, even with this extraneous, crazy world we live in.

Gotcha. Great. Thanks, Mike. Appreciate the call.

Thank you. Our next question will come from Brett Jordan with Jefferies. Your line is open.

Hey, guys. Looking at the higher tariff impact that had been expected going from 38 to 50, is that mostly within the Maruchi mix, or is this byproduct coming out of Taiwan that you're seeing that impact? Yeah, Brett, great question. This is Dennis. Pre-mitigation back in May, we had it at 38 million. I think we were talking about 9 million AAG, 9 million Maruchi, 20 million PBG. Now when we're looking at it, we're up at 50. And so I'd put AAG rate at 10, Marucci at 15, and PBG at 25. So in effect, yeah, we're seeing higher rates coming out affecting Marucci and a little bit more affecting PBG as well. Okay. And then within the PVG, you've talked about motorcycle, new ad, new business ad, offsetting some of the weakness in power sports. Are you seeing any directional improvement in power sports?

Are we pretty close to the bottom there? Or I guess how does the second half look for that category?

That's a crystal ball, Brad. But I'll tell you, you know, there is more stability in power sports now than there was probably six months ago, nine months ago. And We see inventories balancing. All those things I think are constructive. Really what PowerSports needs to see to take a leg up is going to be interest rate-based. So, yeah, I see the market getting better. I see the market having a hard time reacting to that improvement without some rate help. Okay. This is sort of the same question. This isn't the third question, but within that PVG group, I think, are there new opportunities for more within power sports or motorcycle or OE light vehicle to expand, you know, incremental businesses? Absolutely. I think we've added... I'm going off the cuff here, probably four or five brands to our business in the last year. And as we look at power sports going forward, I think that trend continues. You also see the price points change. The technology that's going in these vehicles today over two or three years ago, is significantly different. It's a lot more connected. We're getting a lot more data from the actual vehicles back to Fox to understand how to even improve those technologies further. As we increase the technology content in a product, we're also increasing the price point. So you're going to get the benefit of both brand extension to new partners and customers and price improvement as those technologies get deployed into product releases.

Great.

Thank you.

Thank you. Our next question will come from Scott Stember with Roth. Your line is open.

Hey, guys. Thanks for taking my questions. On PVG, you guys didn't really talk about the on-road truck side or the OE side, auto side. Can you just talk about how that performed in the quarter and just give us an idea on that?

Yeah. To be clear, when we talked about on-road and their prepared remarks, we were talking about aftermarket products. I think you knew that, Scott. But just to be clear, that's an aftermarket component that actually makes that truck fit differently on the road. In terms of automotive in general, which I think the basis of your question, We're seeing pretty good consistency. There's a lot of stability in that business for us because we're on the premium SKUs. We're benefiting from OEM's desire to make sure they're driving those premium SKUs through production into the market. That's been a very stable business for us, and we expect that to remain quite stable through the balance of this year. So that stability matters a lot when you're kind of in a world of volatility, and it's performed exactly as we expected it to.

Scott, and then lastly on Marucci, previously I guess we were looking for, I know you guys don't guide by segment, but the narrative I believe was that Marucci would be up this year, and I know that we've had some difficult comparisons, but it sounds like the back half of the year there's some good stuff going on. Are we still looking for year-over-year growth for Marucci?

Yeah, Marucci will be up this year. Yeah, Marucci, Brad will be, or Scott, Marucci will be up this year, and it'll actually be a record year.

Got it. All right. Thank you.

Thank you. Our next question comes from Peter McGoldrick with Stiefel. Your line is open.

Hey, guys. Thanks for taking my question. I was curious on the bike business. You mentioned year-to-date growth. I was hoping you could size the rate of growth and year-to-date within SSG for the bike business. And then I'm interested in the timing of model year sequencing and the inversion that you referenced in the prepared remarks. Can you just set the backdrop for the comparisons and how visibility to orders are developing? Yeah, Peter, it's a good question, and it's one that's a bit nuanced, so I'll walk you through it, and then if you have questions, come back and hit me again. When you think about the first half of the year, the significant growth came because of the Marucci product launch schedule, which I talked about in the prepared remarks. A lot of that growth in SSG in the first half of the year did come from our bike business. which, getting to your bigger point, was a function of bike OEMs eliminating the prior year product inventory excesses and really focusing on new product for new product launches to really bring that consumer into bike shops to buy bikes. That was a great signal for us to see that these bike companies were getting healthier and stabilizing and getting back on the gas relative or the pedal relative to growing their businesses. So that drove a lot of that growth in the first half. When I talk about the back half moderating, it's actually a positive. And the reason why I say it's a positive is because keep in mind these OEMs have lived a life of excess inventory that's been incredibly painful over the last two years. So as they think about ending 25 on solid footing and being prepared for 26 and new growth with new models, they really want to make sure they don't repeat past mistakes and have excessive inventory in the back half. What does that do in terms of product or, you know, the book of business or to how they think about forecasting, they're going to only buy what they really need to make sure they can deliver to their consumer. So they're going to be much more conservative in their buying practices, which we actually attribute to a good thing. We actually think that's a positive because that will ensure We don't get back to prior days of excess inventory. So when you see that slight moderation in the back half, it's really them gauging how much inventory they want to end the year with and then start next year clean and ready to go again. So that's how it's kind of playing out. You know, I think we'll see great quarters in Q3 and Q4, but there'll be a slight moderation as they pulled so much of that demand into Q1 and Q2 to really be prepared for those product launches for model year 26 and 25. And you know how that cycle works. So that's kind of the story. If that doesn't make sense, you know, I can clarify further. I guess I would like to just clarify on that. On the overall bike return to growth or return to normalization, I'm curious on what they have model year 25 and then the ordering visibility to model year 26 as they end the year in a more solid inventory position. How should we be thinking of that, maybe on a 12-month basis? yeah so the way i would think about it is is this is a growth year for bike for us uh this is also a stability year for bike for us so we're gonna we're not only gonna kind of reset that foundation so all you guys can model it correctly on a go-forward basis but it's actually going to be a growth year as well so that's positive and then as we think about 26 i think it's too early to start calling the ball on what the revenue growth will look like But I think it will be up from 25, and I think we'll continue to see a more historical growth rate in bike going forward like we used to see kind of pre-COVID and post-COVID. Does that help? It does. Thank you.

Thank you. Our next question will come from Craig Kennison with Baird. Your line is open.

Yeah, thanks for taking my question. Maybe to follow up on the last line of thinking, are there end markets where you are lapping a big D stock in 26? In other words, like if you just shipped one-to-one instead of something far less than that, you would see growth? Or have you kind of proceeded beyond in any of that easy comp environment in all of your end markets? I haven't looked at it, Craig, as an easy comp environment. So, yeah, I don't see any of that happening. There's no layups in this world. I think our growth is coming from solid execution on product and diversification. So we're going to continue to play those cards, and I think that will help us win. But thinking that we'll get an easy path to growth – Dennis, you can jump in too. I don't see that. I'm thinking segment by segment, business by business. No, there's not been any excessive destocking and easy comp period that I can think of right now. Maybe, Craig, the question earlier from Scott was around you know, do we think power sports is normalized? I think, you know, in power sports, if we got some market rate, well, if we got market rate improvement, that's a whole other story across a lot of our business. But if we got, you know, if we got interest rate improvement, that might help support a thesis that says power sports could get back to growth. And that's for sure in that product line, that's an easier call, no doubt about it. And you know that. Yeah, that's what I meant to say. Yeah, that's what I meant to say. I mean, you went through the bike industry. There was a massive destock. The year after that, you can grow if you're not destocking anymore, even if there's not end market growth. The same happened in power sports. I'm not trying to convey easy comps. I'm just saying you're not in a period of destocking. Yeah, I think that would be true in power sports. Yeah. All right. I'm Marucci. Just maybe give us an update on some of the growth vectors. I know when you acquired that business, you were excited about a number of growth vectors, including shoes. You mentioned that today. But just give us an update on some of the top few vectors where you see your ability to create additional value through investment in growth. Yeah, that's a good question. Probably a longer answer. So when we think about growth in Maruchi, it had several different vectors that we kind of launched when we acquired the business. One of them was global growth. And if you look at Japan, I think Japan is up. I'm going to give you a number that I don't have in front of me. So I'm going to go from my memory. I think it's up about 140 or 50% year on year. We think Japan is a significant growth engine for us. So That's really coming through and proving to be true. So you've got that geographical growth, not just Japan but other locations. You've got kind of the growth of diversification in the product lines. Businesses like Lizard Skins are growing quickly. They're also fairly impacted by tariffs, just to be clear, but those businesses are growing as well. So you're going to see, you know, things that are not a BAT that are going to benefit from our BAT, you know, Halo brand status. continue to grow. I mentioned shoes and getting shoes in the MLB now on the field. That halo effect, transitioning from bats or reflecting from bats to shoes is a real positive sign for us. I can't talk enough about things like softball, both fast pitch and slow pitch. I mean, we just weren't existent in that market. And we have competitors whose businesses in softball are bigger than our entire business in baseball. So softball for us can't go overstated relative to what it could be and how it could help us grow this business. So we have a number of them. Frankly, it's a great question because it also kind of reminds us of you can't do all things at all times. And so we have to really focus and prioritize where we're going to put that investment dollar and that people bandwidth to ensure that we're growing in the right areas. And Marucci, of all of our businesses, has probably more levers to growth than most. And it's up to us to make sure we stay focused on the right ones. But there's a number of them that I just mentioned that I think are significant beyond how we expand our aluminum and composite bats and how we continue to grow with the MLB, which, again, is an important part. Great. Thanks, Mike.

Thank you. Our next question will come from Alex Perry with Bank of America. Your line is open.

Hi. Thanks for taking my questions here. I just wanted to talk about the EPS guide a little bit with it going down. Is it purely just flowing through the $25 million of unmitigated tariff impact to the gross margin line? Is there anything else going on there in terms of margins or tax that we should be thinking of? Thanks.

Yeah, that's a great question, Alex, and thanks for that. And, you know, again, just reiterating, this year is largely playing out as expected right now. Given the tariff implication, we went from 38 to 50. And when we gave guidance back in May, you know, consensus adjusted down to around 180. So basically, you know, what we're just doing now is being a little more specific about that tariff impact. And so we're taking that range to $160 to $2. And I will tell you, we are really running after this tariff from a mitigation perspective. All the segments are really doubling down on trying to mitigate that impact from supply chain optimization. You know, I look right back in custom wheelhouse and how they're starting to move from like three warehouses to two warehouses, right? really get more efficient in delivery of the product line to end customers. They looked at moving molds to Mexico to start avoiding evading or avoiding the tariffs there as well. So making really good progress there. You've got inside PBG tremendous work going on there of insourcing raw materials now to get after a better cost position as well. And so all across the board, this company is trying to control what it can control and And that has been that story all along with us is, you know, delevering, getting after working capital, taking costs out, mitigating these tariffs as much as we can. So, sorry, long answer to a short question.

No, really helpful. Thanks for that. It makes a lot of sense. And I just wanted to ask about the motorized two-wheel business. How much sort of incremental dollars is that business driving? Is it pretty significant year on year? And then what sort of margin profile is attached to that? Does that vary versus core PPG margins? Thanks.

It's generally in line or around the same margin profiles or power sports business. We don't specifically call those out in detail, but think about it as very consistent with a power sports business. And that business has been a significant growth for us. The way I would frame the growth of that business year on year is it's more than offset the decline in power sports. So by diversifying back into motorcycle and really leveraging our 50 years of history in that space, we were able to capture revenue very quickly and new relationships very quickly, which more than offset the decline in what would be traditionally the side-by-side business. So that's how I think about it. On a long-term basis, that business is going to grow in line with the PVG business in general, and we're glad to be back in it, Alex.

Really helpful. Best of luck going forward. Thanks.

Thank you. It appears we have no further questions at this time. I would now like to turn the program back over to Mike Dennison for closing remarks.

Thanks, Katie. We appreciate everybody joining the call today and the continued interest in Fox. We hope you all have a good evening, and we'll talk soon. Thanks.

This does conclude the Fox Factory second quarter 2025 earnings call. You may now disconnect.