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Edited Transcript of FOXF.OQ earnings conference call or presentation 10-Nov-20 9:30pm GMT

·40 min read

Q3 2020 Fox Factory Holding Corp Earnings Call Scotts Valley Nov 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Fox Factory Holding Corp earnings conference call or presentation Tuesday, November 10, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Haugen Fox Factory Holding Corp. - VP, General Counsel & Corporate Secretary * Michael C. Dennison Fox Factory Holding Corp. - CEO & Director * Scott Randall Humphrey Fox Factory Holding Corp. - CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Alexander Rocco Maroccia Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Craig R. Kennison Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst * James Vincent Duffy Stifel, Nicolaus & Company, Incorporated, Research Division - MD * Lawrence Scott Solow CJS Securities, Inc. - Senior Research Analyst * Michael Swartz * Ryan Ingemar Sundby William Blair & Company L.L.C., Research Division - Research Analyst * Scott Lewis Stember CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Fox Factory Holding Corp. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Haugen. Thank you, David. You may begin. -------------------------------------------------------------------------------- David Haugen, Fox Factory Holding Corp. - VP, General Counsel & Corporate Secretary [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, and welcome to Fox Factory's Third Quarter Fiscal 2020 Earnings Conference Call. I am joined today by Mike Dennison, our Chief Executive Officer; and Scott Humphrey, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Scott will then review the quarter financial results and the outlook followed by closing remarks from Mike. We will then open the call up for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4:05 p.m. Eastern Time. 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'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ significantly 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 latest Form 10-Q and in the annual report on Form 10-K filed with the Securities and Exchange Commission. 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, within our earnings release and in today's prepared remarks, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP income tax, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin are referenced. It is important to note that these are non-GAAP financial measures that we believe are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's press release, which has also been posted on our website. And with that, it's my pleasure to turn the call over to our CEO, Mike Dennison. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, David, and good afternoon. We appreciate everyone taking the time to join us for today's call. Before we jump into our business and financial highlights, I hope everyone is staying safe and healthy in these trying times. And I want to thank every single member of our FOX family, who has demonstrated incredible commitment and resilience to help us not only persevere but to achieve a record quarterly performance in our third quarter of 2020. I am pleased to report third quarter sales of $260.7 million, which supports our conviction on the value and innovation that FOX brand is bringing to our customers and our growing end user base. The strength in our performance was a result of our best-in-class and diversified product portfolio within the Specialty Sports Group, which grew over 32% compared to the third quarter of 2019. Our PVG segment further contributed to the strong performance, growing nearly 18% as OEMs came back from significant shutdowns as well as continued strong demand in the aftermarket where we have extended our leading market share through the SCA acquisition. This strong top line growth, coupled with gross margin expansion and operating expense leverage fueled our third quarter profitability, exceeding our expectations, finishing the quarter with an adjusted EPS of $1.07, a growth of 29% over Q3 2019. Within our Specialty Sports Group, our business continued to benefit from the ongoing robust trend in outdoor recreational activities. Importantly, the environment is attracting new and diverse participants, the bicycling category, which is propelling demand for our product offerings in both OEM and aftermarket channels to record levels. In the third quarter, we achieved the highest volume of shocks and forks ever shipped. This is a significant achievement in an environment where production for practices and supply chain has to be constantly monitored to minimize the impact of COVID-19 and social distancing. We have seen our customers and our suppliers adapt to the extended reality we find ourselves in, and we continue to successfully optimize our production to replenish pipelines and meet exceptionally strong customer demand. In the Powered Vehicles Group, we are pleased that all of our OEM, automotive and power sport partners are back to near full operation, and the aftermarket channel demand has never been stronger. What is worth mentioning is that we have managed to meet it's heightened demand and shipment volume without significant disruptions while transitioning to the new Georgia facility amid the global pandemic as well as California wildfires. In our third quarter, we successfully completed the transfer of all of our aftermarket shock manufacturing to the Georgia facility and have already experienced significant productivity gains. Furthermore, we are currently working with our large OEMs to transfer automotive production lines. Georgia remains on schedule to complete the transition in 2021 and we remain confident in our ability to drive improvements in supply chain and manufacturing processes. Our relationships with our PVG, automotive and power sport customers are stronger than ever. And we are optimizing our R&D resources to handle the growth in new product and technology development. I am pleased to share some exciting news related to the ongoing validation of our unique technologies. You have heard me speak regularly about our smart and connected shock technology called Live Valve. This advanced technology has now become a race winning solution in desert trucks taking the first ever Live Valve victory in the premier classes of Bluewater Desert Challenge, further authenticating semiactive electronic suspension at the pinnacle of off-road racing. In addition, Live Valve technology also delivered a complete suite of the Desert Pro Turbo Race podium by FOX athletes running Polaris RZRs at the 2020 UTV World Championship. Live Valve allows for more control, which maximizes off-road vehicle stability and minimizes harshness. It is fully tunable and rebuildable and as we have proven, race ready. What makes us especially proud is that the same technology platform is available on the Ford Raptor, Polaris RZR and Honda Talon UTVs as well as on Mountain bikes from Pivot, Giant and others. Another big accomplishment for our PVG business was on the OEM side. Ford recently introduced the Ranger Tremor off-road package and calls it the most off-road capable factory-built Ranger ever. Featuring our off-road tuned FOX 2.0 monotube dampers. We remain excited and confident in our ongoing product development collaboration across Ford brands. In regards to the current operating environment, we are cautiously optimistic that factory shutdowns, either our own or our customers, are fundamentally behind us. We have integrated the highest safety measures to keep our employees healthy and safe. However, FOX, like all other businesses today, will be required to adjust our operations should states and several governments require us to take different actions. Looking ahead, we believe we are well positioned for future growth. In the near to midterm, we are hoping the pandemic will be in our rearview mirror, and the world will get back to normal. Until then, and as our results have demonstrated, we will continue to work diligently to be flexible and agile, leveraging stronger leadership and nimble operations to navigate and succeed in all potential environments. In summary, we are working to build upon our existing accomplishments and keep our employees safe. And we remain confident in our long-term financial objectives as we generate sustainable growth and drive shareholder value. Finally, and although we continue to operate in an uncertain environment, the view of our growth trajectory hasn't changed. In the long term, we expect our Specialty Sports Group segment to grow in the mid- to high single digits and our Powered Vehicle Group segment to grow in a low double digits. In addition, our visibility in the current order book and overall outlook for our business enables us to reinitiate guidance for the remainder of 2020. Scott will elaborate more on this when he discusses our financials. And as I'm sure you understand, our guidance assumes there are no additional government restrictions or other unforeseen COVID-related impacts. And with that, I'll turn the call over to Scott. -------------------------------------------------------------------------------- Scott Randall Humphrey, Fox Factory Holding Corp. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Mike. Good afternoon, everyone. I'll start with our third quarter financial results and then review our guidance. Sales in the third quarter of 2020 were $260.7 million, an increase of 23.4% versus sales of $211.3 million in the third quarter of 2019. The Specialty Sports Group experienced a 32.4% increase in sales compared to the same period last year, driven by high demand in both the OEM and aftermarket channels. Sales for the Powered Vehicles Group reflected a 17.7% increase compared to the third quarter of 2019, primarily due to sales from SCA, which we acquired in March of this year. Gross margin was 34.3% in the third quarter of 2020, a 130 basis point increase from 33.0% in the prior year period. Non-GAAP gross margin increased by 110 basis points to 34.5%. The increase in gross margin was driven by our SCA acquisition, better product and channel mix and improved supply chain efficiencies. Total operating expenses were $43.9 million or 16.8% of sales in the third quarter of 2020 compared to $34.5 million or 16.3% of sales in the third quarter of last year. The increase in operating expenses on a dollar basis was primarily due to the inclusion of SCA operating costs of $4.4 million, amortization expense of $3.6 million and acquisition-related compensation costs of $1.3 million. However, looking at non-GAAP operating expenses as a percentage of sales demonstrates the operating leverage that we believe is inherent in our business as we further scale our operations. For third quarter, non-GAAP operating expenses decreased by 90 basis points to 14% compared to 14.9% in the prior year period. For the third quarter of fiscal 2020, our effective tax rate was 12.5%. This rate is slightly lower than our previous long-range guidance of 15% to 19%, primarily due to the realization of foreign tax credits and excess benefits related to stock-based compensation. Adjusted EBITDA increased by 38.1% to $60.1 million for the third quarter of 2020 compared to $43.6 million in the same quarter last year. Furthermore, adjusted EBITDA margin expanded 250 basis points to 23.1% compared to 20.6% in the third quarter of 2019. The increase in EBITDA margin is primarily due to the impact from higher sales and gross margins as highlighted above, the positive impact of SCA on our results and improvement in supply chain efficiencies. On a GAAP basis, net income attributable to FOX in the third quarter of 2020 was $38 million or $0.90 per diluted share compared to $29.5 million or $0.75 per diluted share in the prior year period. On a year-to-date basis, earnings per diluted share was $1.46 compared to $1.80 for the first 9 months of 2019. Non-GAAP adjusted net income was $45.4 million, an increase of approximately $12.7 million or 38.8% compared to $32.7 million in the third quarter of last year. Non-GAAP adjusted earnings per diluted share for the third quarter of 2020 was $1.07 compared to $0.83 in the third quarter of 2019. On a year-to-date basis, non-GAAP adjusted earnings per diluted share was $2.12 compared to $2.07 for the first 9 months of 2019. Now focusing on our balance sheet. As of third quarter ended October 2, 2020, compared to our 2019 year-end on January 3, 2020, we ended with cash on hand of $278.2 million, our accounts receivable was $114.1 million compared to $91.6 million. Inventory was $135.7 million compared to $128.5 million. Prepaids and other current assets were $31.6 million compared to $17.9 million. Accounts payable was $101.4 million compared to $55.1 million, and total debt outstanding was $389.2 million compared to $68 million, and our third quarter net leverage ratio on a pro forma basis was approximately 0.95x. The changes in inventory, accounts receivable and accounts payable reflect seasonality as well as timing of vendor payments. The increase in prepaids and other current assets was primarily due to SCA related items, including chassis deposits and contingent retention incentives held in escrow. Our net property, plant and equipment increased to $156.8 million as of October 2, 2020, compared to $108.4 million at the end of 2019. The increase reflects the SCA acquisition as well as investments in our new manufacturing facility in Gainesville, Georgia. Between the cash we now have on hand and the borrowing capacity under our credit facility of $250 million, we believe we have the liquidity and financial strength to manage through any ongoing economic uncertainty, while continuing to proactively execute on our long-term strategic objectives. Finally, an update on our outlook for the remainder of fiscal 2020. We are reinitiating our practice of providing sales and non-GAAP adjusted earnings per diluted share guidance, given the success we have had in managing through this uncertain environment. Our visibility has improved, and we want to provide the market with the most accurate forecast possible. So for the fourth quarter 2020, we expect sales in the range of $240 million to $250 million and non-GAAP adjusted earnings per diluted share in the range of $0.72 to $0.80 per share. I'd also like to note that we're not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of actually predicting the elements necessary to provide such guidance and reconciliation. With that, I would like to now turn the call back over to Mike. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Scott. In closing, as we look to a strong finish to 2020 and heading into 2021, we believe FOX is well positioned to extend our lead and capitalize on any opportunity. Given our diversified product lines to support a growing customer base of enthusiasts that use our products to make their lives exciting, enjoyable and active. Our third quarter results clearly demonstrate the strength of our agile operating network, the resilience of our people, the power of the FOX brand and our performance to finding products. We believe these core competencies, when combined with the strength of our valued OEM partners and aftermarket network will continue to be our competitive advantage in the market as we move forward. I would now like to open the call for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Jim Duffy with Stifel. -------------------------------------------------------------------------------- James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2] -------------------------------------------------------------------------------- Guys, I'm hoping you can provide more color on the Powered Vehicle Group trends. Can you comment on what you saw in the third quarter with the aftermarket business outside of SCA, with your auto OEMs? And then with the non-automotive OEMs? And then what changes do you expect to see with respect to this business in the fourth quarter? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [3] -------------------------------------------------------------------------------- Jim, it's Mike. So good question. Lets start with power sports in the third quarter. That continued to be a very strong product category for us. As you probably know from a lot of our customers who have reported their demand signals continue to be extremely strong, they're still working to try to reinventory showrooms across the country and across the world. So we saw that growth continue on through Q3, and we believe that will continue on to Q4 and into the early part of 2021. Aftermarket didn't slow down at all. As we saw kind of the recovery out of Q2 into Q3, our aftermarket business say in SCA, as you mentioned, continue to be strong through support truck into our legacy business. At the same time, of course, as you know, in Q3, we're moving that production from California to Georgia. So it's a pretty amazing accomplishment from the team that delivered that increased demand while transitioning. So really proud of that. And then I think, finally, when we look at kind of aftermarket going forward, it's hard to really get an early forecast yet on 2021 for aftermarket shock business. But we believe the strength (technical difficulty) and fairly broad strength in that category. There wasn't anything significant to call out as a weakness or as a concern. -------------------------------------------------------------------------------- James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4] -------------------------------------------------------------------------------- Okay. Great. And then, Mike, it's clear from diligence... -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [5] -------------------------------------------------------------------------------- Operator, I didn't catch that. Did you hear what Jim said? -------------------------------------------------------------------------------- James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6] -------------------------------------------------------------------------------- Mike, I'll come again with it. The -- it's clear from diligence in the channel that dealer lots are depleted of inventory, how is your visibility with respect to those powered vehicle OEM categories looking out into 2021? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [7] -------------------------------------------------------------------------------- Yes. The powered vehicle, again, I kind of break it into 2 pieces with the power sports and automotive. You're right on both cases, dealer lots are pretty depleted. We see that reduction that happened in Q3 on the automotive side, which is a functional really been shut down in Q2. When they shut down for 60 days, that created a hole that was really hard for the factories to recover for in Q3. That will slowly improve as you go through Q4 and into 2021. But yes, there's definitely a gap in vehicles and lots. And especially with the demand in the high end of the truck and SUV market, that's complicating matters, which is driving a lot of people to by used trucks. And of course, we don't mind that trend because it allows us to sell in the aftermarket. So it's a good trend for us as well. In power sports, like I mentioned earlier, those showrooms are pretty low, and I think they stay low. I think we are working as hard as we can to fulfill the increased demand for those power sports customers throughout Q4, that will continue on into Q1. I don't envision that those showrooms will be replenished to the extent they used to be until Q2 of next year, 2021, probably at a minimum. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from Larry Solow with CJS Securities. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [9] -------------------------------------------------------------------------------- Congrats on the quarter. A quick follow-up to Jim's question on the powered vehicle side. So clearly, the COVID has lifted a bit of renaissance on the bike side, sports growing at over 30% this quarter. But powered vehicles, I know it sounds like demand in the after channel, you mentioned as stronger than it's ever been. Organic sales are flat last couple of quarters, which is great in this environment or this quarter. Is that -- sounds like it's more of a function of supply than demand, which seems like it's running way ahead of that. So is there like a nice tailwind for a couple of quarters, 2, 3 quarters to sort of get back into what true demand is? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [10] -------------------------------------------------------------------------------- Yes. I think there is, Larry. From my perspective, we've got a record number of engineering projects in the queue right now in power sports and in automotive on the OE side. So when we're looking forward and we're seeing the demand signals coming from the end markets, this really has been more of a supplier recovery story in Q3 with our partners and just with the markets in general. So I think that creates a tailwind in 2021. And we're not in a position yet to give guidance for 2021. We do that at the beginning of the year. But I would tell you we have a very good insight into what demand signals look like on a long-term basis. And what our automotive customers and power sports customers are asking us to go do on a longer period of time. With that information, we're already looking at 2021 and planning for a revenue north of $1 billion. And again, we'll give you more detail on that as we get closer to 2021 and in 2021, but we're very confident in what we're seeing in signals from the market today. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [11] -------------------------------------------------------------------------------- Right. Okay. That's very helpful. I have on the progression, George, you actually mentioned, I think, or Scott mentioned that you're actually experiencing some productivity gains. Is that sort of sequentially? Or would you say that overall, the sort of the transition is at least no longer a headwind to margins and maybe closer to a push right now in terms of equipment next year? Or have you already sort of reached that pinnacle switching to positive? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [12] -------------------------------------------------------------------------------- We're still climbing that hill. So we did see productivity gains. And it gave us a lot of confidence in our long-term view of what Georgia will bring to us, as I've talked to you about quite a bit. I believe that's in front of us, so we're going to be able to achieve some great things with Georgia. So I'm really happy with what we saw in the quarter. That aside, we're not out of the process yet. We're still -- we still have (inaudible) manufacturing in California and Georgia. That's going to continue on, as you know, until the second quarter of next year. So we've got puts and takes is the way I think about it, Larry, we're going to see some things that are going to improve in Georgia and some things that continue to be a a headwind out of California. I'm proud of what the team is doing so far. And I think we're incredibly, as you saw in our numbers, achieving the expectations that we set forward. But more work to do, and we're going to stay after it. -------------------------------------------------------------------------------- Lawrence Scott Solow, CJS Securities, Inc. - Senior Research Analyst [13] -------------------------------------------------------------------------------- Okay. And just switching gears that's on the SCA acquisition, obviously, pretty early in the game there and COVID probably maybe skewed things a bit. Just 6 months later, has the integration been relatively on plan? Is Tuscany able to -- have they actually been able to get some cross-sell opportunities and sort of leverage off of the SCA as much -- see as a much larger base of dealers and relationships? Or is it sort of too early and COVID sort of skewed that? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [14] -------------------------------------------------------------------------------- In the quarter, we actually did some integration between SCA and Tuscany, and the benefit of that integration will really start to deliver in 2021. But we feel good about where that business is. We are incredibly happy with the team that we've integrating into FOX and with the strategy that we've got in that business. So it's performing at or above our expectations. And nobody expected COVID at the time that we did the acquisition. So that's the anomaly that we're all kind of dealing with this year. But when we look forward into the future with the SCA Tuscany business, we're incredibly excited about it. It's allowing us to do a lot of vertical integration in the company. And opens new doors and new channels for us. And we just, as you know, got that [jeep element] in the quarter, which allows us to sell jeep products through our bailment system like we have with Ford, Chrysler and GM. So really, really good story for us, and I think great progress in the quarter. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from Mike Swartz with SunTrust. -------------------------------------------------------------------------------- Michael Swartz, [16] -------------------------------------------------------------------------------- Just wanted to touch on the powered vehicle side of the business. Looking at the 10-Q, it looks like, if I'm reading this correctly, SCA was something in the low 20s in terms of revenue in the quarter, which would imply basically flattish revenue organically in that business. Maybe you could give us a view of some of the puts and takes in the quarter. Were there any supply chain costs or just anything kind of that you were fighting through still in the third quarter? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [17] -------------------------------------------------------------------------------- Yes. Great question, Mike. There were challenges throughout the quarter between California wildfires that made us evacuate facilities for a period of time to just the whole notion of social distancing in the manufacturing plant is pretty difficult. And nothing was elegant in the quarter. We had to kind of fight from day 1. A lot was actually above our original expectations pre-pandemic just based on model changes and things like that. So achieving organic flat in the quarter was actually a strong result. I would say that the one nuance that I probably not covered in my prepared script was that we did end the quarter with some backlog that will then play out into Q4. It wasn't an astronomical number that we aren't used to, but it was the backlog that we just can't get out because of the transitions of George and all the work we're trying to do. So I think when I look at powered vehicles in Q3, again, proud of the team. We did a lot of good work and productivity in Georgia. And I think it's -- on a long-term basis, still exactly where we wanted be and we're -- it's going in the right direction. -------------------------------------------------------------------------------- Michael Swartz, [18] -------------------------------------------------------------------------------- Okay. Great. And then second question, just on EBITDA margins. I know long term, we've talked about this kind of the 20%-plus target. And now with some of the investments wrapping up and SCA obviously being accretive to the mix. And as I look at your third quarter and your implied guidance or margin guidance for the fourth quarter, it looks like you're still kind of shooting for that low 20s. So are we now at a point where 20% plus is kind of the new normal? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [19] -------------------------------------------------------------------------------- Well, we've hit 20% plus in the past. And as you know, we mentioned, we did better than that in Q3, and we're looking good for Q4. We're not ready yet to give 2021 guidance on it. But I do believe, as I said to you, Georgia brings a lot of value to us and a lot of productivity, which will help us on an EBITDA basis. So I do think we're going to stay focused on delivering north of 20%, and we'll come back to you in the near-term and talk about where we're going on a long-term basis. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Our next question comes from Scott Stember with CL King. -------------------------------------------------------------------------------- Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [21] -------------------------------------------------------------------------------- Last quarter, you guys had talked about how, I guess, supply issues or just a shortage of lower-priced bikes in the chain, I guess, led some consumers to buy more expensive bikes would certainly helped you guys out. Are you still seeing that trend as we speak right now? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [22] -------------------------------------------------------------------------------- Yes. I think you see a couple of things happening. Right now, there's still an extreme shortage of bikes in showrooms. And we're seeing kind of an increase in the demographics that is purchasing bikes. Last quarter, Q2, we saw people just buying whatever bike was available. I think you'll see that start to trend. That trend will start to dissipate as lower end bikes have to refill showrooms. We will go back to people looking for premium bikes and e-bikes and the higher end of the range, which, of course, is where we play. So I don't know if that's a material difference in kind of thinking about our end consumer. Our end consumer is still a more affluent buyer. And we're seeing that continued growth in our order book and what we're looking at for Q4, at least the first half of 2021. -------------------------------------------------------------------------------- Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [23] -------------------------------------------------------------------------------- Got it. And the commercial truck offering that you have, can you talk about how that's playing out and how that plays into your estimates for the Powered Vehicles Group going forward? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [24] -------------------------------------------------------------------------------- Yes, both commercial truck and military are areas that have seen growth, military probably more than commercial truck just recently, but both our areas of growth for us going into 2021 as we expand the Georgia facility. Especially with regards to commercial truck, where we really can't fulfill the demand in front of us out of our El Cajon facility. So we really need Georgia up and running in a more mature state for commercial truck to pick up steam? -------------------------------------------------------------------------------- Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [25] -------------------------------------------------------------------------------- Just last question, just bigger picture. Obviously, you talk of a COVID-19 vaccine coming out shortly. There's some folks out there that are concerned that people will go back to their normal ways of recreating. Just talk about high level, how do you guys think about how sticky it is the customer base, the new customers up coming to the market and where do you think that this definitely no matter what happens with a vaccine that your business will benefit no matter what going forward. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [26] -------------------------------------------------------------------------------- Yes. Scott, we don't see it that way at all. We're really excited, obviously, as everybody is on the planet, if not at least the country, that a vaccine is apparently near term. So I don't think that's a surprise for anybody, right? We've all been watching the news and really tracking all these companies, pharmaceutical companies seen a vaccine emerge. So we're excited about that. We think that's a positive to sports in general into biking specifically, I don't think it takes away from this renaissance we're seeing in the biking space or in the powered vehicle space, by the way. We think it actually brings people back to work and creates prosperity and allows people to invest into the hobbies they've created over this last year or 9 months as it may be. So we are not on the same page as some of the articles and we want people's opinions out there that say, this is the end of kind of the outdoor lifestyle, sporting, whether it'd be boating, golfing or biking. I think it's -- I think these are trends that are going to maintain and grow over time. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Our next question comes from Craig Kennison with Baird. -------------------------------------------------------------------------------- Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [28] -------------------------------------------------------------------------------- To your point, we've seen just tremendous demand in the end markets for your product. And then your customers are really desperate to build more units. So I guess I'm wondering, to what extent can you more aggressively flex your capacity to really produce a lot more in the fourth quarter so that some of your customers can catch up? I mean they depend on hundreds of suppliers, so you're not the only one, but I think if they could have more product and build more, they would. But I'm wondering to what extent you can flex your own capacity to meet that demand. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [29] -------------------------------------------------------------------------------- Craig, that's a great question. One of the things we've been doing throughout Q3 will continue to do in Q4 is ad workforce. We've literally done job fairs, in some cases, drive through job fairs because we need to do it because of COVID. We've done job fairs in probably 4 or 5 factory locations in the U.S., including California. We've done it in Taiwan. We're going to continue to do it. It's a function right now of getting enough people into these factories to support the capacity. It's about adding production lines in Georgia, adding production lines in Taiwan, all of which we're doing. Now those things aren't overnight. While we can hire people and get them trained in, let's call it, 2 weeks, Frankly, it's probably more like 60 to 90 days to add lines and staff them and get them up and running with the supply chain. So keep in mind that it's not a digital scenario. But we are -- we've been doing it now for a couple of months, and we're going to continue to be working hard to increase that capacity. These are not big CapEx spend, these are really more about production lines and people. But we are tightly aligned with our largest partners in both SSG and PVG to establish the capacity they need going into 2021. And that relationship alignment is really helping us understand how best to serve their needs and to make sure that we won't stack because when you're find in times like this, is the guy that can be nimble and fast and agile in their factories can achieve spec wins and more volume than other guys can. So as a manufacturing guy, we're pretty focused on that stuff, and we're going to continue to drive that throughout Q4 and take into Q1. -------------------------------------------------------------------------------- Craig R. Kennison, Robert W. Baird & Co. Incorporated, Research Division - Director of Research Operations and Senior Research Analyst [30] -------------------------------------------------------------------------------- I guess a lot of our clients are pretty excited about the e-bike market as a potential commuter option. Could you just shed a little more light on where you see the FOX opportunity in e-bikes? I know, in particular, it's on a higher end mountain bike, which may not be that commuter unit. But how excited should people be about that market and the scheme of all of your -- in the context of all of your opportunities? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [31] -------------------------------------------------------------------------------- I think it's big. I think it's one of the prior growth drivers in our mountain bike business. And I would even say to be on our mountain bike business. Recently, there's an entrance of -- the category that doesn't exist. So I'd tell you this word, it doesn't exist, but it's called eSUV, what we call eSUV or e-SUV in new bike portal. I mean, what it is, is kind of a common entrance with city bike and a mountain bike. It's got, in some cases, full suspension, in some case, front forks. We've seen a huge increase in demand for our Marzocchi product on the e-SUV category. We think that's a very interesting dynamic playing out because it's a mountain capable bike that people ride in the city. And we're seeing price points, $5,000, $6,000, $7,000, especially in Europe, where it's a really popular our motor transportation, where you can load your groceries or your dog, if you will, and head into the town. That category really allows for high-performance mountain biking products used on a road application. Not so dissimilar to what you see like a Ford Raptor. So think about the strengthening and broadening of a category across e-bikes that let us play in ways that we haven't in the past. We've seen significant success coming out of that already. On the premium side, again, those prices get better and better. They get lighter and lighter. And to the extent they're getting better or lighter, we become a prime candidate to supply product into that category, not just in suspension but in wheels and heat pumps and cranes and handle bars. So e-bike is big, and it's a real important part of how we think about our technology road map going forward. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question comes from Alex Maroccia with Berenberg Capital Markets. -------------------------------------------------------------------------------- Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [33] -------------------------------------------------------------------------------- Tagging on to Scott's question on bikes from earlier. Some of your agent partners continue to report somewhat underwhelming numbers when compared to your specialty sports growth, which I'm assuming is all related to supply chain constraints. So can you sort of by growth by an OEM versus aftermarket and how that's compared to store grade? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [34] -------------------------------------------------------------------------------- Are you talking about between aftermarket and OEM and SSG specifically or are you talking about a broader question? -------------------------------------------------------------------------------- Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [35] -------------------------------------------------------------------------------- Just in SSG. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [36] -------------------------------------------------------------------------------- Okay. Yes. So we're seeing growth consistently across both ends of that spectrum. In SSG, a lot of our product is in the OEM category, a lot of our volume is there. So that's where you're seeing some of the supply chain challenges for some of our partners because we're unable to get certain components and we are seeing a tendency for some component manufacturers to move fairly slowly towards capacity expansion. And so that does cause some of those partners larger challenges. That said, in the premium space, not as big of an issue. So probably a bigger issue for more broadline or lower cost type components, not a big an issue for us. We are working hard on our supply chain to make sure we can keep up with our demand signals. Having pretty good luck in that. So there hasn't been a major issue. It's just a full-time event for our teams to manage. But we are seeing strength across aftermarket and OE pretty consistently. Lots of strength in the premium product category. Seeing some of our partners not reflecting the same growth level as we are. And I think, again, that's a function of low-cost versus mid-price point bikes versus high-end premium bikes. And we tend to do well when the high-end premium bikes are in so much demand. -------------------------------------------------------------------------------- Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [37] -------------------------------------------------------------------------------- Okay. That's helpful. And then secondly, you're sitting on a pretty significant amount of cash right now, and we're almost through the George facility. So what would you be prioritizing for internal investments going forward? And then are you seeing any assets in the market right now indiscernible] or PVG that would easily fit into the business at a decent price? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [38] -------------------------------------------------------------------------------- Yes. A couple of comments. Maybe I'll start, Scott jump in on if you want to. So you're right, we are seeing in cash, and we took on that additional cash so that we could be opportunistic and play offense instead of defense, as you remember and we saying before. We're still on offense. The challenge we found both in SSG and in PVG categories is the valuations and some of the price points of these companies are asking for in an acquisition model. And just not in line with our culture, our approach or our view of the business going forward. So we're going to be pretty thoughtful and pretty conscientious about moving forward in a time these multiples that seem to us, at least fairly inflated. That said, we're going to continue to use those dollars to invest in organic growth first and inorganic growth second. So we will keep looking, and we will keep working it. And we have small acquisitions, will occur along the way, immaterial to kind of the broader public, but we'll do those to help vertically integrate parts of our business and to continue to expand our portfolio in a technology space. So we're going to continue to do that. But for us to have a big -- which I would like to see, a nice large acquisition like an SCA, where we want to see these valuations come back into line with what we think the market should bear. So Scott, do you want to take? -------------------------------------------------------------------------------- Scott Randall Humphrey, Fox Factory Holding Corp. - CFO & Treasurer [39] -------------------------------------------------------------------------------- Yes. The only other thing I would add to that is, especially on the PVG side, we're in the midst of a huge transformation with bringing everything across the country from California to Georgia, and so we're weighing any kind of transformational acquisitions on that side of the equation a little bit more heavily in terms of not burdening the business too much when they have so much in their plate from an execution perspective because, obviously, as you can see from our results, they are very busy. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Our next question comes from Ryan Sundby with William Blair. -------------------------------------------------------------------------------- Ryan Ingemar Sundby, William Blair & Company L.L.C., Research Division - Research Analyst [41] -------------------------------------------------------------------------------- Mike, when you look at favorable demand environments like the one you're in and tight supply, that usually creates in a marketplace that's supportive of higher pricing. I was just wondering if you've been able to lean into that this year and maybe take more price than normal just because of its dynamic? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [42] -------------------------------------------------------------------------------- We have to be careful on that. We've got really long-term partnerships with some really great customers. And to go in in a market like this and tried to increase prices just because they're really dying for product and volume from us is not really a good long-term strategy for the partnership. So we try to -- and I know that's probably what you're suggesting, but we try to avoid some areas like that. We do try to drive the innovation and technology and things like that to drive price increases. And as you know and can envision over the years that the price points of our products have consistently gone up year-on-year. So we're pretty focused on that. And we'll use innovation and technology to drive value, which drives product price. And we're pretty focused on going up and sort of down and trying not to be a commodity player. That said, I think our biggest opportunity right now for margin enhancement comes from supply chain management, from expansion in our factories and from becoming more productive. And efficient in the manufacturing process. So not a lot of price increases relative to just supply and demand right now, really more about driving technology innovation to keep our price points higher and reflect the value of going to those customers. -------------------------------------------------------------------------------- Ryan Ingemar Sundby, William Blair & Company L.L.C., Research Division - Research Analyst [43] -------------------------------------------------------------------------------- Got it. Helpful color there. And then just on the innovation front. I guess, when you see your OEM partners starting to keep up with demand and trying to just getting (inaudible) bike back into the store. Does that conversation change with them? Does replenishment become more of a focal point over the next 6 months and maybe innovation becomes less important to them? Or are you still seeing strong appetite (inaudible)? -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [44] -------------------------------------------------------------------------------- We're seeing both. We really see 2 different sides of a partner business, though. The supply guys are absolutely knocking on a door every day asking us to drive more product, create more capacity and get as much volume up there as we can. On the engineering side, all these companies are looking at this as a new renaissance to growth and whether it's automotive or power sports, or in biking. And so they're also doubling down in terms of innovation and technology to try to make sure that they are the winner as we exit this kind of anomaly with the pandemic. So we're really driving both. Like I said, I think in my prepared remarks or after, we have more engineering projects inside the vehicles today directly related to a power sports or automotive customers that we've ever had in our prior past. So it has not slowed down. It's -- in fact, it's increased. We're adding resources to support it. But at the same time, we believe that the supply chain guys are really focused on volume and the design guys are focused on new product launches. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Thank you. There are no further questions at this time. I would like to turn the floor back over to Mike for any closing comments. -------------------------------------------------------------------------------- Michael C. Dennison, Fox Factory Holding Corp. - CEO & Director [46] -------------------------------------------------------------------------------- Yes. Thanks, everyone. We appreciate your participation and questions on today's call. As always, we appreciate your interest in Fox Factory as well. And in closing, we ask everyone to stay safe and have a nice evening. Thank you. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.