Fox Factory Holding Corp. (FOXF) Earnings Call Transcript & Summary

Greetings and welcome to Fox Factory Holdings Corporation SCA acquisition Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. David Haugen, General Counsel. Thank you. You may begin.

Thank you. Good afternoon, and welcome to Fox Factory's conference call to discuss our definitive agreement to acquire SCA Performance Holdings Inc. On the call today are Mike Dennison, Chief Executive Officer; and John Blocher, interim Chief Financial Officer. By now, everyone should have access to our press release, which went out today at approximately 4:05 p.m. Eastern Time. Please note the press release and a supplemental presentation are available on the Investor Relations portion of our website at www.ridefox.com. Please also 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 risks and 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. Within this press release, Fox includes certain forward-looking non-GAAP financial measures, including adjusted EBITDA and non-GAAP adjusted earnings per diluted share. These forward-looking non-GAAP financial measures reflect management's current expectations and beliefs regarding the potential benefits of the proposed transaction. Fox is not able to reconcile forward-looking non-GAAP measures to meaningful comparative GAAP financial measures without unreasonable efforts. These non-GAAP measures should be considered in addition to, not as a substitute for or superior to, net earnings or other measures of financial performance prepared in accordance with GAAP as more fully discussed in Fox' financial statements and filings with the SEC. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, David, and good afternoon, everyone. We appreciate you joining us today at such short notice for the call. We are very excited to announce our definitive agreement to acquire SCA Performance Holdings, a leading specialty vehicle manufacturer for light-duty trucks and SUVs. To start, I'll provide an overview of the SCA business and our strategic rationale for the acquisition. And then John will review the financial highlights of the transaction, the impact to our 2020 outlook and give a brief update on our 2019 guidance. After that, we will open the call for your questions. We believe the acquisition of SCA presents a significant opportunity to further expand our performance-defining aftermarket solutions and continue to drive growth in our Powered Vehicles Group. As noted in today's press release, we signed a definitive agreement to acquire 100% of the issued and outstanding capital stock of SCA Performance Holdings Inc. from Southern Rocky Holdings, LLC for $328 million with the acquisition to be financed through an expanded and syndicated credit facility. We expect the transaction to be accretive to Fox' fiscal 2020 results and fuel continued growth on a longer-term basis. Subject to customary closing conditions, we expect the transaction to close late in the first quarter of fiscal 2020. SCA is headquartered in Trussville, Alabama, a short drive from our Fox headquarters in Georgia. SCA operates under 3 industry-leading aftermarket brands, SCA Performance, Rocky Ridge Trucks and Rocky Mountain Truckworks. SCA currently has 3 manufacturing locations in Alabama, Georgia and Colorado. We believe this acquisition is complementary to our Tuscany business, expanding our North American footprint for manufacturing which can provide incremental efficiencies and capacity utilization as well as allow us to be in closer proximity to our customers. In addition, it will significantly expand our automotive dealer network from approximately 300 dealers nationally to nearly 2,000. This acquisition broadens and diversifies our product offering across instrumental trucks and SUV brands in a growing segment of the automotive industry. The combination of these benefits create a leading platform with significant runway for continued expansion. The acquisition also gives us the opportunity to include Fox' lift kits and suspension products on SCA's vehicles which meaningfully increases Fox' addressable market. The combination of Tuscany and SCA as part of Fox' branded portfolio of products provides us with a leading market position. SCA has an experienced and talented leadership team with a strong track record of growth and operating results. We believe they will complement our team extremely well, and we look forward to working with them. On a combined basis, we expect to drive financial synergies, which John will cover in a few minutes. This transaction is another example of our disciplined accretive M&A strategy to diversify revenue streams and drive growth. We believe Fox' expanded product portfolio will continue to resonate with our customers, demonstrate our commitment to innovation and growth across all Fox brands in both existing and new categories. Before I turn the call over to John, I'd like to touch on a recent announcement from Jeep. Last Thursday, at the Chicago Auto Show, Jeep unveiled its new truck, the Gladiator Mojave, which is designed to take on the extreme desert terrain at high speeds. This model features 6 Fox suspension components, the most Fox products ever on a production vehicle. The vehicle is designed with and incorporates 4 Fox 2.5 internal bypass shocks. It also includes 2 of our bump stops which feature an internal floating piston that increases damping performance and bottom-out control in the last few inches of travel. We are extremely pleased to have worked with SCA to include our performance-defining products on its latest vehicle in the Jeep product lineup. And with that, I'll turn the call over to John.

Thank you, and good afternoon, everyone. As Mike mentioned earlier, we have signed a definitive agreement to acquire SCA for $328 million, excluding vehicle inventory, with an additional $13 million of contingent performance-based retention incentives for key SCA management payable over the next 2 years. The transaction will be funded by an expanded and syndicated credit facility led by Bank of America together with cash on hand. The credit facility is expected to be completed upon closing of this transaction and will include term debt in addition to a revolving credit arrangement. The SCA transaction is expected to be accretive to Fox' fiscal 2020 results. Based on an expected closing date in late Q1, we anticipate SCA to contribute $83 million to $89 million of sales to our fiscal 2020 results. In addition, we expect SCA's contribution to our adjusted EBITDA to be approximately $22 million to $24 million for the remainder of fiscal 2020 as well as non-GAAP adjusted earnings per diluted share in the range of $0.15 to $0.17, net of additional interest and integration expenses. Additionally, looking beyond fiscal 2020, we expect to generate accretive synergies from this transaction in excess of $3 million annually and for SCA's long-term growth rate to be relatively consistent with the company's Powered Vehicles Group long-term growth rate of low double digits. Now turning to our outlook for the fourth quarter of 2019. As we previously reported on October 30, 2019, we expected sales in the range of $175 million to $181 million and non-GAAP adjusted earnings per diluted share in the range of $0.57 to $0.62. We now expect results to be slightly above this previously provided range. We'll be releasing our final 2019 fourth quarter and fiscal year results along with providing our first quarter and fiscal 2020 guidance on Tuesday, March 3, 2020. I'd like to now turn the call back over to Mike.

Thank you, John. We would like to open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of Larry Solow with CJS Securities.

I guess the first question is maybe -- can you just maybe give us a little comparison or what are some of the differences between this and Tuscany other than, obviously, it's a little bit bigger than when you bought Tuscany, margins are a little better. Just sort of what are the differences? And is it the same -- question 2, is it the same business model, where SCA actually gets the chassis from the dealer, uplifts it then gives it back to the dealer who sells it?

Yes, it's Mike. Good to talk to you and good questions. So it's very similar in the structure as Tuscany. It's the same way of go to market, if you will, as Tuscany's. So that stays the same. It does increase the brands that we actually go-to-market with, as you saw from the slide deck. In terms of how it fits in with Tuscany, think about it as basically a menu from kind of premium into maybe one step below premium, which was on the SCA offerings. It allows us to get to a broader demographic of people. So a little bit less adder to the vehicle price in some of the SCA and Rocky Ridge products. So it lets us grow into a broader market. As the slides say, we're expanding from basically several hundred dealers to a couple of thousand, give or take, in this deal. So we're going to get to a much broader audience, if you will, and that allows us to get to kind of a different demographic. The other piece I'd just add on the top of that is Rocky Mountain Trucks, which is -- in the SCA Holdings, is really around overlanding trucking. So it's a little bit of a different approach to the market. It's going to go to a different demographic completely than the rest of the business. So we like that. We think overlanding is a very fast-growing space. And we're excited to see what that can do.

Okay, great. And you mentioned that obviously gave you an opportunity to put some of Fox shocks and lift -- suspension and lift kits. Does SCA use some of your stuff today or no?

Yes. It's very -- Larry, it's very small. So this is a great opportunity for us. And this creates a huge addressable market that we can go expand into. And we're really excited to see what that can do in terms of the lift kits and suspension that we currently offer that's not in the SCA portfolio.

Our next question comes from the line of Mike Swartz with SunTrust.

Just as a point of clarification there on the last question. The revenue that you gave us for the 9 months, 2020, that is net of any elimination from sales you made into them. I know it's small, but I just wanted to confirm that.

Correct. Yes. Yes, Mike. It's John here. Yes, it's net of that stuff. It's pretty small, and it's net.

Okay. Cool. And then just from a -- maybe a 12-month financial basis, I'm just wondering, seasonality of this business, how do we look at that? I mean you're giving us the 9 months, what's the 12 months? And I think we're interested in understanding EBITDA just from a valuation perspective.

Yes. Yes, yes. So on a 12-month basis -- so their seasonality is somewhat similar to Fox' in the Power Vehicles Group, where it's the second and third quarters will tend to be a little bit higher, first and fourth quarters kind of -- are a little lower perhaps. And so I think you kind of take the 9-month projection and kind of relatively extrapolate it to a sales range, an EBITDA range and probably be in the ballpark for it.

Okay. That's helpful. And then just 1 last question. Just in terms of the business, is it -- or how capital-intensive is it? And how much CapEx do they spend in that?

Yes. Mike, good question. So I think you're going to find it's pretty typical to our kind of a legacy Fox business, kind of that 3% to 4% of sales range. Right now, we're -- as we've been saying in the last year or so with the Georgia facility, we're actually kind of running up higher than that, as you know. But I think SCA is kind of more traditional along our long-term CapEx rate.

Our next question comes from the line of Scott Stember with CL King.

Where do you expect your leverage ratio to land once you complete the deal? And what is your plans for schedule of paying down debt after you complete the deal?

Yes. So look, we think -- we'd expect kind of upon closing -- and it's always a little bit of a to and fro here as you kind of go-forward, probably upwards in the -- upwards of 2.5x EBITDA at the close. And we feel between the cash flow from this transaction. And Fox, we'll kind of work that down over time.

And I would just add to that, Scott. We -- as we've said before, we're pretty conservative when it comes to leveraging, and we're going to remain that way. So I wouldn't anticipate a different leverage story from us on a long-term basis than what you've heard in the past.

All right. Just a follow-up question on it, compare and contrast with Tuscany. You said it's a step below. Are we talking a few thousand dollars or below or are we talking significantly below? Because I know the Tuscany product is a very, very high-end product. Just trying to narrow this down a little bit.

It's actually a pretty big range. There's a lot of different trucks in the portfolio. In fact, if you go to NADA Show, if you're aware of the NADA Show at the end of this week, you're going to see kind of that full portfolio of both Fox and SCA vehicles. You'll see that it's a pretty broad range. The really nice thing about this transaction, as you've heard us discuss is even though some of these vehicles sell for potentially -- for a lower price points, they still have a very nice margin profile. So we're really excited about that. That gets us to a broader demographic. It allows us to get our trucks in more people's garages than we're going to do with just a high-end, super expensive premium vehicle.

Our next question comes from the line of Alex Maroccia with Berenberg.

So in terms of capacity from this new deal, how would you expect an uptick in intercompany sales to affect the existing capacity outlook? And then in terms of their current capacity situation, is it similar to what you guys had pre-Braselton facility or is it a little bit better.

Yes. So I'll take the second question first, and then John can jump in, too. But on the second question, they've got capacity, as I said in the prepared remarks in Georgia, in Alabama and in Colorado. That footprint helps us regionalize a little bit, so we can actually get trucks manufactured closer to end markets. So envision a scenario where any truck of -- whether it was a Rocky Ridge Truck or Rocky Mountain Truck or an SCA or Tuscany could be made in a certain manufacturing location, get it closer to the end market it's serving. That's one upside. In terms of capacity, those locations have quite a bit of capacity now. So we don't foresee any need for expanding that capacity in the near term or even in the midterm. We've got a lot of room to run with what we've got. And we go through limited facilities that we consider to be very well equipped. So that gets back to kind of the CapEx question.

Yes. Maybe on the intercompany side of it -- the capacity side of the current legacy shocks business. We feel we have current capacity, just you got to remember that these things take a little time to convert over and get integrated. So there's a little bit of time for that process to happen and then we have to remind everybody we've got Georgia coming up here in just a few more months. So we think we've got the capacity internally to support the transition.

Got it. That makes sense. And then looking into the future now with other M&A opportunities, is there anything else in this space you would look to go after? Or are there any other on-road, specialty vehicle manufacturers that would be pretty lucrative?

There's a couple of ways to think of that. When we think about strategic acquisitions, we think about how they fit into our current business, how the management team fits into our culture and our management structure. This acquisition checks those boxes very handily. We also think about can we get to a #1 or #2 in the market with an acquisition or through organic growth strategy. In this particular case, it gets us to become the kind of what I would call a large or dominant player in the up-fitting market. So we feel really good about that. Do we think that there's other opportunities? Potentially. But we're really happy with what this brings to us. And so we're focused on integrating this one and making this one really produce as planned. So we're happy where we are. I'll put it that way.

Our next question comes from the line of Jim Duffy with Stifel.

I want to start with a couple of real high-level questions. Do you guys view this as a higher-margin way to participate in growth of this market and working with the OEMs?