Fox Factory Holding Corp. (NASDAQ:FOXF) Q4 2023 Earnings Call Transcript
Fox Factory Holding Corp. (NASDAQ:FOXF) Q4 2023 Earnings Call Transcript February 22, 2024
Fox Factory Holding Corp. misses on earnings expectations. Reported EPS is $0.48 EPS, expectations were $0.83. Fox Factory Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I'd now like to turn the conference over to your host Vivek Bhakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. You may begin.
Vivek Bhakuni: Thank you. Good afternoon, and welcome to Fox Factory's fourth quarter and full year 2023 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer and Dennis Schemm, our Chief Financial Officer and Treasurer. First, Mike will provide business updates and then Dennis will review the quarterly and full-year financial results, and then the outlook followed by closing remarks from Mike. We will then open up the call for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4:05 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 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 uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ materially from the results performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's latest Form 10-Q and in the company's latest Annual Report on Form 10-K, each 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, 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 press 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.
Mike Dennison: Thank you, V. Good afternoon, everyone, and thank you for joining us today on our fourth quarter 2023 earnings call. Today, I will discuss our strategy, operating highlights and business activity. Dennis will then provide additional details on our financial results, balance sheet and outlook. After our prepared remarks, we'll open the call for your questions. For the fourth quarter, we delivered $332 million in revenue, which included approximately $17 million in revenue contribution from Marucci. The fourth quarter was a quarter which saw wins and achievements as well as significant headwinds exhibited with the ongoing OE challenges, which we began to see after Labor Day, and our current view is these will persist in the first half of 2024.
As we have previously highlighted three main factors created new challenges in near-term results. One, the ongoing inventory recalibration in bike; two, the impact of the UAW strike on PVG and AAG; and three, higher interest rates causing customers to be more conservative in their purchasing practices. The successes we've provided partial offsets within the quarter included year-on-year growth in our aftermarket components businesses such as Wheel, Lift Kits and aftermarket Shocks as well as e-commerce growth within our Bike business. While these product lines and channels grew, they were unable to offset the declines in OE impacted areas of our business. In the Powered Vehicle Group, net sales were $118 million, down from $133 million in the prior year quarter due to the direct impact of the UAW strike on our production and the indirect impact of the strike on original equipment manufacturers, who ramped slowly as expected following the strikes conclusion.
This combination of direct and indirect influence from the strike resulted in lower production, which led to lower sales. Some of it is recovered by the end of November, while others exhibited sharp declines in order volume through the end of the quarter. Based on our consistent long-term growth within the PDG business and the importance of retaining a highly trained and skilled workforce to make our technologically advanced products, we elected not to lay off or shut down any facilities during or after the strike. Consequently, the costs associated with these actions had a significant impact on profitability. Powersports also saw less demand slow ease as their distributors and dealers worked through elevated inventory levels and seasonality factors including a warm winter driving down sales in the snowmobile market.
To further complicate the problem high interest rates continued to cause conservatism due to inflated floorplan financing costs. On a positive side for PVG even with the external headwinds just mentioned this business grew organically for the year by 21% over the prior year illustrating the growth of our market share and the power of our product portfolio. In a year with so many businesses in this space exhibiting reduced revenue we grew significantly. In aftermarket applications group, sales rose to $121 million from $117 million in the prior year quarter. The primary contributor to the increase was our custom warehouse business, which delivered nearly $20 million in revenue in the quarter. In addition, record quarters in Sport Truck and overall expanded e-commerce solutions contributed to the growth.
However, the UAW strike had a significant impact on our upfitting business, primarily due to aluminum chassis availability and chassis mix caused by production delays as factories were shut down due to the strike. As we saw in powersports the high interest rate environment put pressure on floorplan financing, and as a result dealer seeking more conservative position on inventory. Positively, dealers are reducing existing aged inventory ahead of the release of a slew of new redesigned model year vehicles which are expected to launch throughout the year. These model year changes will be an exciting opportunity for us as we develop and launch new packages in conjunction with these new models. Expansion in our kid sales is also driving future growth in our outdoor business.
Customers are remaining resilient on fresh new product releases and higher contented vehicles especially the Shelby and Harley Davidson branded trucks. In SSG with respect to bike OE continuing to work down the inventory levels. Our OE partners have begun to place new orders for model year 25 product which is a positive sign that we will begin returning to a normal environment in late Q2. In the quarter bike generated $77 million in net sales less than half of the $159 million of revenue in the fourth quarter of 2022. The OE 2025 model year launches remains scheduled to begin midyear and we are excited as our innovative new products have maintained and gained spec share across our customers. While it is too early to articulate the volume of model-year 25 bikes that will ultimately be ordered we are excited by our share of whatever volume that will eventually be.
The Marucci acquisition closed on November 14. Marucci generated $17 million in net sales following the completion of the acquisition. These results were better than our expectations for both the top and bottom lines especially since the prior year period included the CapEx that launch. The key drivers from Marucci revenue were strong, new product sales driven by direct to player and team sales plus additional product launches in Japan led by aluminum and wood bats. Like our other businesses we are inspired by the level of execution in the Marucci team and their ability to have an incredible product road map across all product lines throughout 2024. Reflecting in the full year 2023, which was clearly a tale of two halves, the first half of the year generally on plan and as expected in the back half of the year especially after Labor Day were previously discussed headwinds grew significantly.
Overall, we delivered $1.46 billion in net sales down 9% from 2022. All of the year-on-year decrease is attributable to Specialty Sports Group were our bike business was down $309 million year-on-year or 45% as always dealt with a massive inventory glut. We continue to have confidence that this is a fixable problem for these companies and that the back half of 2024 will begin to return to a more normal operating environment bike is well positioned as always turned to new model launches and product expansion some of which are already in our back half forecast. In the face of Q4 sales were below expectations and expected soft first half of 2024, we are laser focused on the key elements of our brand and product development which make us best in class and are the keys to our long-term success.
Those elements are maintaining our brand relationship where we have gained spec share across customers ensuring that we will grow with these customers as they regain their health mean while remaining vigilant to not dilute our brand four easy revenue pickup. Investment in research and development with two objectives. First support model-year 25 releases that we believe will introduce innovative and best in class products and thereby expand our share of the market. And second new launches within our aftermarket components where margins are typically higher than sales to OE.s or through dealers and distributors. A bright spot was our recently expanded e-commerce business that expanded on 2023's record high direct-to-consumer sales which were 3.6% of sales last year up 260 basis points from 2022.
And finally the ongoing growth of our e-bike category which we continue to believe will expand the demographic of riders and drive growth within the industry. On to PVG which delivered $524 million up 21% year on year, due to multiyear momentum gains with Toyota and Ford and strong mix improvement as high end vehicles in automotive and power sports upgraded to more technologically advanced FOX suspension products. Our recent product launches included the most advanced suspension product ever developed for a vehicle. The dual valve system currently being utilized by Ford on their upcoming Raptor R platform. AAG was up 13% year-on-year to $551 million mainly on the customer real House acquisition and strengthen our upfit business despite the impact of dealer floor plan financing and the UAW impact.
However, we are encouraged that the higher end of it continued to see strong consumer demand and interest. We continue to have confidence in our upfitting business which this year will expand into TVs and high-end side-by-sides beginning in late Q1. We believe these high contented vehicles will perform well with the affluent customer base that wants unique customized high-performance vehicles. As we move to 2024, we remain confident in our diverse and differentiated business model, all of which is focused on delivering the highest level of performance-defining products and the growth that it can deliver for the full year of 2024 we see revenues growing to $1.53 billion to $1.68 billion inclusive of energy. Our conservatism in this guide is a direct reflection of the conservatism exhibited by our OE customer forecasts across all of our businesses which we will not second guess when their forecasts improve.
Our guide will improve We also believe 2024 will be the inverse of what we saw on two in '23 with the first half of 2024 continuing to be impacted by the same macro pressures that affected the third and fourth quarter continuing to weigh on our business. Again this is directly aligned with our OEM customers forecasts as well. Consequently, we expect the first half of 2024 to be down year over year with the second quarter being sequentially stronger than the first quarter. In the second half of 2024, we expect to see growth driven by easing macro pressures and improved consumer outlook with expected interest rate easing. While this is likely the case we cannot be sure of timing or magnitude of these rate reductions. We also believe bike O. is turning the corner from discounting to launch in model year 2025 releases.
And finally chassis availability and mix improvement in our upgraded truck product lines. To conclude we acknowledge the near-term exogenous challenges in front of us yet. At the same time, I am very pleased with our strategic positioning. We have diversification across three growing groups in a GPB GNSSG. anchored by industry leading aspirational brands deep-rooted customer loyalty driven by the pro athletes and robust pipeline of innovative market disrupting products and our incredibly talented and dedicated team members. And with that I'll turn the call over to Dennis.
Dennis Schemm: Thanks Mike and good afternoon everyone. I'll begin by discussing our fourth quarter and full year financial results and then move to our balance sheet and cash flows, capital structure strategy and then wrap up with a review of our guidance. Total consolidated net sales in the fourth quarter of 2023 were $332.5 million, a decrease of 18.6% versus sales of $408.6 million in the fourth quarter of 2022. Powered Vehicles Group, PVG delivered a 10.7% decrease in net sales in the fourth quarter compared to the same quarter last year. This performance was negatively impacted in October during the UAW strike given OE manufacturing site closures and for the remainder of the year on a slower ramp-up given OE supply chain disruptions.
Strike along with the slower than anticipated ramp-up also delayed upcoming development programs with OEs which we expect will impact first half sales for 2020. PVG also had reduced sales in power sports given dealer and distributor conservatism with inventory. We expect this conservatism to continue into the first half of 2024. Our Aftermarket Applications Group, AAG delivered a 3.5% increase in net sales in the fourth quarter compared to the same quarter last year. This growth was primarily driven by sales from the Custom Wheel House acquisition and aftermarket lift kits and suspension sales, partially offset by lower sales in the up-fitting business because of reduced chassis availability, mix in dealer and distributor conservatism, by holding lower inventory due to higher interest rates.
Net sales in the Specialty Sports Group decreased 41.4% compared to the fourth quarter of 2022 due to the persistent level of high inventory across various channels and therefore fewer new model year launches. This result also includes a $16.8 million positive revenue contribution from the Marucci acquisition. Excluding the impact of Marucci, SSG sales declined by 52%. On a full year basis sales were $1.46 billion versus $1.6 billion in 2022. The decrease in full year sales is driven entirely by the decline in SSG's bike sales. The decline in SSG's bike overshadows significant accomplishments in PVG and AAG which grew over 21.2% and 12.7% for the full year. Even when taking into consideration the UAW strike the slow ramp-up after the strikes conclusion and the mix of chassis allocation decline that impacted our up-fit business.
While we address the dealer conservatism, chassis allocation mix impact in model year changeovers which are delaying sales. I think it's important to note that our upfit business has grown more than 40% over the last two years. Fox Factory's gross margin was 27.7% in the fourth quarter of 2023, a 430 basis point decrease from 32% in the same period in the prior year. The decrease in gross margin in Q4 2023 is primarily driven by a shift in our portfolio mix with lesser sales from high-margin biking upfitting. The impact of the UAW strike as we absorb less costs given our decreased production and our decision to maintain our manufacturing workforce offset by increased efficiencies at our North American facilities. Adjusted gross margin which excludes the effects of amortization of acquired inventory valuation markup, organizational restructuring expenses, and strategic transformation costs decreased 300 basis points to 29% versus 32% in Q4 of 2022.
On an annual basis both gross and adjusted gross margin decreased by 150 and 60 basis points respectively. The decrease in gross margin was primarily due to a shift in the portfolio mix offset by increased efficiencies at our North American facilities. Total operating expenses were $81 million or 24.4% of sales in the fourth quarter of 2023 compared to $74.2 million or 18.1% of sales in the fourth quarter of last year. Operating expenses as a percentage of sales were higher compared to the same quarter in the prior period due to the inclusion of custom warehouse and Marucci operating expenses and the amortization of intangibles, partially offset by cost controls and continuous improvement. Adjusted operating expenses as a percentage of sales increased by 440 basis points to 20.6% in the fourth quarter of 2023 compared to 16.2% in the same period in the prior year.
On an annual basis, total operating expenses were $304.7 million or 20.8% of net sales for fiscal year 2023 compared to $284.6 million or 17.8% of net sales for fiscal year 2022. Operating expenses increased by $20 million primarily due to the inclusion of Custom Wheel House and Marucci operating expenses of $15 million and $6 million, respectively. Amortization of the additional acquired intangibles and operating expenses associated with facility expansion partially offset by strong cost controls. Adjusted operating expenses were $268.1 million or 18.3% of sales in the fiscal year 2023 compared to $257.1 million or 16% of net sales in the prior year. The Company's effective tax benefit was $3.1 million in the fourth quarter of fiscal 2023 compared to an effective tax expense of $0.2 million in the fourth quarter of fiscal year 2022.
The decrease in the company's income tax expense was primarily due to a decrease in pre-tax income. For the full year, the company's effective tax expense was $17.8 million versus $28.5 million in the prior year period due to a lower pre-tax net income. Net income in the fourth quarter of 2023 was $4 million or $0.10 per diluted share compared to $53 million or $1.25 per diluted share in the same prior year period. Adjusted net income was $20.3 million in the fourth quarter of 2023, a decrease of approximately $40.6 million or 66.7% compared to $60.8 million in the fourth quarter of last year. We delivered $0.48 of adjusted earnings per diluted share in the fourth quarter of 2023 compared to $1.43 in the fourth quarter of 2022. On a full year basis, net income was $120.8 million compared to $205.3 million in the prior fiscal year.
Earnings per diluted share for fiscal year 2023 were $2.85 compared to $4.84 in fiscal year 2022. Adjusted net income in fiscal year 2023 was $167.5 million or $3.95 of adjusted earnings per diluted share compared to $232.7 million or $5.49 of adjusted earnings per diluted share for the prior year. Adjusted EBITDA decreased by 49.5% to $38.8 million for the fourth quarter of 2023 compared to $76.8 million in the same quarter last year. Adjusted EBITDA margin decreased by 710 basis points to 11.7% in the fourth quarter of 2023 compared to 18.8% in the fourth quarter of 2022. The decrease in the adjusted EBITDA margin in the fourth quarter of 2023 was primarily due to the change in the portfolio mix, the impact of the UAW strike and the slow ramp-up after the strike ended, the decision to keep our highly trained workforce and cost increases associated, with our facilities expansion to support our continued growth.
Adjusted EBITDA decreased to $261 million in fiscal year 2023 compared to $321.8 million in fiscal year 2022. Adjusted EBITDA margin decreased to 17.8% in fiscal year 2023 compared to 20.1% in fiscal year 2022. Moving to the balance sheet and cash flows. Our balance sheet continues to be a source of strength for Fox and underpins our capital allocation strategy. The increase in inventory of $21.2 million is driven by the inclusion of $52.5 million of inventory from Marucci and $13.5 million from Custom Wheel House. Excluding Marucci and Custom Wheel House, we decreased inventory by $44.7 million driven by lower sales and by our continuous improvement efforts to further optimize inventory across the organization. The increase in goodwill and intangibles reflects the Custom Wheel House and Marucci acquisitions.
Our net leverage is 2.3 times as of year end, and in line with our expectations. Our flexible capital structure gives us the ability to invest in growth through R&D, CapEx and sales and marketing and provides the optionality to repurchase shares and pay down debt. Our revolver balance as of December 29, 2023 is $370 million versus $200 million as of December 30, 2022. Our term loan A balance is $380 million. We drew $400 million from our existing revolver and $400 million from our new term loan during 2023 to finance our purchase of custom wheelhouse in March 2023 and Marucci in November 2023 and to support our working capital. These withdrawals were partially offset by $230 million in payments on our revolver and $20 million in prepayments on our new term loan.
In the third quarter of 2023, our Board of Directors approved a $300 million share repurchase program. During the fourth quarter, we repurchased $25 million in shares at an average purchase price of $58.80 per share. CapEx spend for the quarter was $14.8 million, up 81.8% versus the prior year quarter of $8.1 million. CapEx for the full year was $46.9 million, up 7.2% versus the prior year spend of $43.7 million. The increase in CapEx spend in the fourth quarter is due to SSG by testing innovation lab upgrades to BBG.s machine shops and that's powersports of the capacity. Additionally, we stayed true to our capital allocation tenants and invested back into our core. In R&D, we invested $13.8 million. And in sales and marketing we invested $25.8 million, representing 4.2% and 7.8% of sales versus 3.8% and 5% respectively in the prior year period.
For the full year, we invested $53.2 million in R&D and $100.5 million in sales and marketing, representing 3.6% and 6.9% of sales respectively versus 3.5% and 5.7% respectively in the prior year period. In PVG, our R&D efforts resulted in 141 new SKUs during the year and we are looking to introduce north of 160 in 2024 and SSG's bike. Our investments continue to drive innovation supporting podium winning FOX riders in both suspension and in components. We are proud that we continue to gain in spec share as well. And we are advancing exciting new releases in the e-bike space. And in AAG, we are focusing on multiple growth vectors. We continue to invest in improving content and design for our off-road upfitting business and in our new business venture in side-by-side updating, where we are designing premium, high-performance state-of-the-art models to cater to different price points.
And lastly, we are heavily investing in expanding our e-commerce capabilities across all of our business groups. Now I would like to share some select guidance. We continue facing headwinds in AAG. and PVG due to the higher interest rate environment and macro economic outlook at the consumer level and at the dealer distributor level as the cost of carrying inventory is more expensive. While SSG's bike hit trough levels in the fourth quarter. We expect to see further declines in the first half with the first quarter of 2024 being the lowest since the destocking began as the inventory recalibration is taking longer than anticipated and consumer demand is expected to decline year-over-year but will be partially offset by new product launches and growth in e-commerce.
For the first quarter of 2024, we expect sales in the range of $315 million to $350 million and non-GAAP adjusted earnings per diluted share in the range of $0.17 to $0.27. Our net sales and EPS are lower year-on-year in Q1, given the continuation of bike OE destocking overhang from the UAW strike that impacted chassis availability and mix, model year changeover timing which is delaying dealer purchases and weaker demand from powersports and PBG. We expect to see sequential improvement into the second quarter as Bike Wheels prepare for model year 2025 releases, chassis mix and availability improve model year change for Ram has launched and the expectation that the interest rate environment improves. As a result, we expect the first half of 2024 to decline year-over-year for expanding to growth in the second half of 2024.
For the fiscal year 2024, the Company expects sales in the range of $1.53 billion to $1.68 billion and adjusted earnings per diluted share of $2.30 to $2.60. Our full year guidance assumes an income tax rate to be in the range of 15% to 18%. Our belief is that this race will be won by the innovator. And given our robust pipeline of innovative products, industry-leading market share and best-in-class brands. We believe our product roadmap supports our 2025 vision of $2 billion in sales. However, our vision of $2 billion in sales and 25% EBITDA margins will depend on several factors including, uncertainties on volume and product mix since we are largely tied to OEMs, the larger macro environment including interest rates and our exit rate in Q4 of this year.
As a result we will revisit 2025 aspirations, in the second half of this year when we have more visibility. We're certainly operating in a dynamic environment. And we'll continue to watch retail and consumer trends to adjust our costs and business model accordingly. However because of our strong and flexible capital structure, we are working from a position of strength during this downturn and investing in our future. With that, I would like to turn the call back over to, Mike.
Mike Dennison: Thank you, Dennis. As we start the New Year, we recognize that we're still managing through some of the same challenges that we faced last year. However, I have never had more conviction in this business or this team based on a number of product launches, new customer relationships, exciting developments around EV platforms, the ability to sustain and increase our pricing based on innovation and advanced product development and our international expansion. There is much to be proud of our accomplishments. And I'm energized by a future where we are shifting into a higher gear across the enterprise. The team remains galvanized on winning, as we prove every day, in every way. Armed with a strong balance sheet, cash flow and our One Plus One Equals Three Strategy, I could not be more excited about our positioning and our future. I would now like to open the call for questions, Operator?
See also 30 Safest Countries In the World in 2024 and 20 Fastest Growing Biotech Companies in the US.
To continue reading the Q&A session, please click here.
