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

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's Second Quarter 2022 Earnings Conference Call. This is your host, Vivek Bhakuni, Senior Director, Investor Relations and Business Development. [Operator Instructions] 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. Then Scott will review the quarter and full year financial results and then 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 Eastern Time. If you have not had a chance to review the release, it's available on 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, 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, where appropriate in today's prepared remarks and within our earnings release, we will refer to non-GAAP financial measures to evaluate our business as we believe these 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 is my pleasure to turn the call over to our CEO, Mike Dennison.

Thank you, Vivek, and good afternoon. We appreciate everyone taking the time to join us for today's call. I am proud to report that we delivered yet another record quarter with the highest revenue in our company's history. These results were driven by a record-breaking performance in both our Specialty Sports and Powered Vehicles product groups. We also delivered the all-time highest earnings per share by successfully navigating the unpredictable and turbulent macroeconomic and operational environment. Entering 2022, we knew our team had a daunting task ahead with the challenge to deliver continued growth through optimization at our Gainesville facility in a highly volatile macroeconomic environment. I'm happy to report continued progress in our Gainesville facilities output, which produced a record number of units in Q2. Thanks to the dedication and the resilience of the entire FOX team, we crossed the $400 million mark in quarterly revenue, $50 million mark in net income and an $80 million mark in adjusted EBITDA for the first time in our company's history. Taking a deeper look at the numbers, our second quarter sales were $406.7 million, an increase of 23.9% compared to the second quarter of last year. This outstanding growth is driven by both our SSG and PVG product categories, which grew 28% and 21%, respectively, versus the same prior year period. Our commendable quarter-over-quarter beat exemplifies our belief that FOX's expanded portfolio of high-performance products continue to deliver on quality, engineering and service, which consistently resonates with our end consumers. We reported an earnings per diluted share of $1.26, an increase of 20% from the same period last year. On a non-GAAP adjusted basis, we reported an earnings per diluted share of $1.38, increasing 15% in the same period last year. Starting with Specialty Sports Group, Q2 2022 was our ninth consecutive record revenue quarter, delivered approximately $178 million in sales, a 28.1% revenue growth on a quarter-over-quarter basis. We continue to optimize our capacity, our productivity and workforce in Taiwan as well as combat the increased prevalence of COVID on the island and within our factories. With regards to channel inventory, high-end non-bike levels are still below the preferred levels, and the rising popularity of e-bikes is continuing to fuel demand, while supply chains are improving. We are, however, seeing the signs of return to normal, and consequently, we expect SSG to return to more typical growth rates beginning in Q3 and return of seasonality in Q4. Shifting to the Powered Vehicles Group, the second quarter of 2020 marked another record quarter with revenue of $229 million, which represents a 20.9% increase as compared to the same period last year. This is our second consecutive quarter with over $200 million in revenue, led by strong performance in our operating product lines and increased efficiency and output in our Gainesville facility. For the second half of the year, we anticipate the PVG Group will continue to grow at the current rates given the significant backlogs in our auto OE and Power Sport business, along with strong demand in our outfitting product lines. However, we anticipate an increase in OE revenue contribution given the recent OEM launches versus the first half of the year. This translates to a tailwind for our top line, but a headwind for margins. We plan to offset those margin headwinds through further productivity gains in Gainesville. We recognize that we are just beginning our factory optimization journey, and we will continue to make progress over the course of the next several quarters, delivering the 250 to 350 basis point margin improvement, as we have discussed in prior calls. As the world is slowly migrating towards electric vehicles, I'm excited to share some highlights from our electric vehicle racing program with the Extreme E circuit. As you may recall, FOX was named the official shop provider for the extreme E-Series back in early Q2. We just finished our first phase in Sardinia, Italy, and team feedback indicated that drivers and teams were thrilled with the FOX upgraded suspension package. The learning from drivers of the cars finally work as they should. The handling is much more predictable and safer and drivers were much more relaxed and less shaken up. This improvement in performance allow the drivers to push the cars much harder and showcase their driving skills versus just trying to ensure the vehicle survive the course. We are pleased to see FOX right at the forefront of its evolution in From a general economic standpoint, we continue to deal with inflation, labor and supply chain disruptions, and we believe this difficult environment will likely persist well into 2023. What it exacerbates our supply chain issues and lead times in general are the highly engineered precision machine components we require that utilize higher grade aluminum and steel. Consequently, we will continue to leverage dynamic pricing to combat inflationary pressures. Demand remains healthy across most of our diversified portfolio, and we believe that will remain for the balance of the year. We will continue to strengthen our core competencies and be relentless in extending our competitive differentiation. We also believe that the continued optimization of our Gainesville plant will drive some margin improvement as I discussed earlier. The dynamic operating environment has only become more complex as the year has progressed. And still, this team has delivered a 7.6% revenue growth on a sequential basis. Hence, I want to thank each and every member of our FOX family for their continued elevated performance. And with that, I'll turn the call over to Scott.

Thanks, Mike. Good afternoon, everyone. I'll begin by going over our second quarter financial results and then review our guidance. Sales in the second quarter of 2022 were $406.7 million, an increase of 23.9% versus sales of $328.2 million in the second quarter of 2021. Our Specialty Sports Group, SSG, delivered a 28.1% increase in sales compared to the second quarter of 2021, primarily due to increased demand in our OEM channels. Moving to our Powered Vehicles Group, PVG, delivered a 20.9% increase in sales in the second quarter compared to the same quarter last year, primarily due to strong performance in our upfitting product lines. On a year-to-date basis, sales were $784.7 million, an increase of 28.7%. This jump in sales is driven by increased demand, primarily in the SSG OEM channel and strong performance from our upfitting product lines in PVG. Fox Factory's gross margin was 35.1% in the second quarter of 2022, a 120 basis point increase from 33.9% in the same period of the prior year. For the second quarter of 2022, non-GAAP adjusted gross margin increased by 120 basis points to 35.3% versus Q2 of 2021. The increase in gross margin and non-GAAP adjusted gross margin were primarily driven by favorable product mix compared to Q2 of 2021, led by higher volume sales in our Specialty Sports Group and strong performance in our upfitting product lines. Our results were also positively impacted by increased factory efficiencies. The increases in gross margin and non-GAAP adjusted gross margin were offset by higher inflationary pressures on all fronts, including labor costs, input costs and freight costs. Total operating expenses were $72.5 million or 17.8% of sales in the second quarter of 2022 compared to $58.4 million or 17.8% of sales in the second quarter of last year. The increase in operating expenses in Q2 2022 was primarily due to higher employee-related costs, higher commission costs, higher facility-related costs and the impact of higher incentive compensation accruals. Looking at non-GAAP operating expenses as a percentage of sales, our non-GAAP operating expenses increased by 60 basis points to 16.3% in the second quarter of 2022 compared to 15.7% in the same period in the prior year. Focusing on operating expenses in more detail, sales and marketing expenses increased approximately $6.4 million in the second quarter of 2022 compared to the second quarter of 2021, primarily due to higher commissions of $2.4 million. Research and development costs increased approximately $3 million in the second quarter of 2022 compared to the second quarter of 2021, primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $4.1 million in the second quarter of 2022 compared to the second quarter of 2021 due to higher employee-related costs of $2.9 million as well as higher insurance and facility-related costs of $2.5 million. For the second quarter of 2022, our effective tax rate was 18.9%. As anticipated, the rate was higher than our estimated full year 2022 range of 11% to 15%. The higher rate was primarily due to the impact of recently finalized U.S. tax regulations, which limit the amount of newly generated foreign taxes that are creditable against U.S. income taxes and resulted in an increase in foreign withholding tax as well as decreased benefits from lower stock-based compensation. These increases were partially offset by a lower tax rate on U.S. foreign-derived earnings. On a GAAP basis, net income attributable to FOX in the second quarter of 2022 was $53.5 million or $1.26 per diluted share compared to $44.3 million or $1.05 per diluted share in the same period in the prior year. On a year-to-date basis, net income attributable to FOX was $101.5 million or $2.40 per diluted share compared to $82.3 million or $1.94 per diluted share in the prior year period. Non-GAAP adjusted net income was $58.6 million in the second quarter of 2022, an increase of approximately $7.7 million or 15% compared to $51 million in the second quarter of last year. We delivered $1.38 of non-GAAP adjusted earnings per diluted share in the second quarter of 2022 compared to $1.20 in the second quarter of 2021. On a year-to-date basis, non-GAAP adjusted net income was $114.4 million, an increase of approximately $19 million or 19.8% compared to $95.5 million in the prior year period. We also delivered $2.70 of non-GAAP adjusted earnings per diluted share compared to $2.25 in the prior year. Adjusted EBITDA increased by 26.5% to $88.1 million for the second quarter of 2022 compared to $69.7 million in the same quarter last year. Adjusted EBITDA margin increased by 50 basis points to 21.7% in the second quarter of 2022 compared to 21.2% in the second quarter of 2021. The increase in adjusted EBITDA margin in the second quarter of 2022 is primarily due to higher sales, favorable product mix and increased efficiency in our Gainesville plant, offset by inflationary cost pressures. On a year-to-date basis, adjusted EBITDA increased by 22.9% to $159.9 million. However, the adjusted EBITDA margin decreased by 90 basis points to 20.4% versus the prior year period. Now focusing on our balance sheet. For the second quarter, which ended on July 1, 2022, compared to our 2021 year-end on December 31, 2021, we ended with cash on hand of $108.6 million compared to $179.7 million. Accounts receivable was $195.4 million compared to $142 million. Inventory was $349.1 million compared to $279.8 million. Prepaid and other current assets were $267.7 million compared to $123.1 million, and accounts payable was $161.6 million compared to $100 million. The increase in inventory as of July 1, 2022, is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and higher input costs. The increase in prepaid and other assets at the end of the quarter is primarily driven by deposits for securing chassis for our upfitting business, which has been experiencing significant growth. The changes in accounts receivable and accounts payable reflect business growth as well as the timing of vendor payments. Our net property, plant and equipment increased to $194.6 million as of July 1, 2022, compared to $192 million at the end of fiscal year 2021, reflecting capital expenditures of $19.9 million for the year. Lastly, our interest and other expense went up by $2.8 million versus Q2 of 2021. The primary driver of the increase was a $1.9 million write-off of the unamortized loan fees in the second quarter of fiscal year 2022 upon refinancing of our prior credit facility. Now turning to guidance. For the third quarter of 2022, we expect sales in the range of $385 million to $405 million and non-GAAP adjusted earnings per diluted share in the range of $1.15 to $1.35 per share. For the fiscal year 2022, the company expects sales in the range of $1.535 billion to $1.565 billion and non-GAAP adjusted earnings per diluted share in the range of $5 to $5.30. For our 2022 full year tax guidance, we still expect our tax rate to be at the higher end of the previously guided 11% to 15% range. 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'd like to turn the call back over to Mike.

Thank you, Scott. I am pleased with the results our team has produced in the second quarter. I'm also encouraged that our hard work and focus and optimization of the Gainesville facility is starting to show signs of traction. We do, however, recognize this is only the beginning of our journey to deliver world-class manufacturing results. As we enter the second half of the year, we are cognizant of the challenges ahead, arising from the expected change in our product mix, lingering signs of some cost pressures, amplified supply chain obstacles and all the uncertainties related to the macroeconomic environment. Having said that, based on the strength of our financial performance and an incredibly resilient and capable team members, we remain committed to structurally enhance our operating model to better position the company to support sustained delivery against our immediate and long-term goals, thus maximizing value for our employees and shareholders. I would now like to open the call for questions. Operator?

[Operator Instructions] We'll take a question from Mike Swartz of Truist.

I just wanted to touch on guidance, maybe the implied outlook for the back half of the year. It looks like you're expecting your EBITDA margins to deteriorate about 200 to 300 basis points. Is that mostly from the items that you talked about in terms of product mix and some of the supply chain inefficiencies, et cetera? I'm just wondering if there is any type of slowdown in the Georgia manufacturing facility that's embedded in that?

No -- Mike, this is Scott. No, I think as we mentioned, mix is a driver. I'm not sure how you're getting the EBITDA percentage. But I think we'll actually get a little bit of leverage off OpEx as well in the back half of the year. And so that should help with the EBITDA percentage. But yes, we're going to have a headwind in terms of the mix shift to more automotive OE in the back half of the year and continued growth in throughput out of Gainesville, which is a positive.

Okay. Great. And then the second question was just on -- Mike, your commentary around the bike business. I'm trying to decide if that was really any different than what you said before. I think you had said you expected return to seasonal or normal seasonality in the back half. But it sounds like -- what I'm just trying to understand, in the third quarter, we're getting back to kind of the mid- to high single-digit growth. And then what is the normal seasonality means for the fourth quarter? Should we expect that to be down year-over-year?

No, Mike. What I'm really thinking about in Q4 is that you're going to return to -- when you look at the full year of 2022, Q4 is usually not a big quarter in bike. So it will take a step down as a normal in a usual year. As you recall, in 2021, there was basically no seasonality, actually in 2020 as well. So this is just a function of the bike industry tends to have a seasonally lower quarter in Q4 than Q3.

Our next question comes from Anna Glaessgen of Jefferies.

I appreciate the color on the Georgia facility getting better. Previously, you've talked about turnover and competition for labor. Could you comment on how that fits today? And how you expect that to evolve over the year and commentated in guidance?

Yes. The labor force, Anna, this is Mike, has stabilized pretty well. So we're seeing better access to workforce and less turnover in the workforce that we have in engagement. So we see that as net positive as we bring that factory up in efficiency and productivity. Clearly, as you know, we have skilled workers who stay with us and we can train them over a period of time, they will help drive productivity. So we're really happy to see that change from prior quarters to what we saw in Q2 and going into Q3.

Great. And we've been hearing from peers in outdoor recreation more broadly and on the power sports side that premium segments are outperforming with a little bit of softness to the value end. Are you guys seeing that outperforming as far as where your specs in the market? And within your product lines themselves, obviously, you guys speak to the tip of the pyramid generally with the products you sell. But have you seen any dispersion throughout your product lines within that framework?

Yes. As you know, the majority of our product lines are to a fairly affluent demographic in our consumer base. So we're benefiting from that, and we see the demand staying much stronger, the more affluent the product is or the demographic is. In some of our product lines, we see a little bit more softness as you kind of come down that curve into more mainstream-type products, things like Sport Truck and lift kits as an example, but the majority of our products again being at the premium end have definitely weathered this better.

Our next question is from Jim Duffy of Stifel.

Really nice work on the step-up in the gross margin, guys. The factory efficiencies that you referenced, it sounds like that's concentrated in Gainesville or are you also seeing factory efficiencies in Taiwan with the new facility coming online?

Yes, Jim, the efficiencies in Taiwan have been a mainstream for us all year. That team has just performed outstandingly well. And in Q2, as you know, COVID was a problem on the island. And they've found ways to work around it and work for it and still get the job done. So the team is just consistent with doing a great job in Taiwan. The reason why we called out in the commentary was -- around Gainesville was, as you know, that was a bigger challenge for us in Q1. And the step change into Q2 was really good progress for us. So we wanted to call that out. And we'll continue to see that progress continue through the balance of the year. So we have a long way to go, but it's nice to see the progress we met in Q2.

Great. I wanted to ask about the upfitting business as well, a nice margin business for you has shown you've seen a really nice expansion of dealers, strong sell-in. There's good evidence of sell-through. But there is more inventory in the marketplace. Mike, can you comment on the inventory position in the channel for that business? And where that stands relative to what you think the opportunity is? And what you would consider to be a healthy state?

Yes. We have inventory on hand to get us into Q1 of 2022 now. So we're well positioned -- much better positioned than we were at this time last year. The inventory we have is sold. So we have to convert those chassis to the upfitted versions and get them out to the dealers. Our dealers are pushing us to deliver them faster. And what we're seeing is the sell-through on the dealer lot is as goods has been in a long time, if not better. So we're really happy with that business. And we're confident that's going to continue to be a very strong part of our business for the balance of the year. I don't see any decrease in demand in that product line for us.

Great. And then I'm hoping you can share more about the margin profile of that business, maybe directionally, what's the premium to the corporate rate? What's the commission structure there? Is that an offset in the SG&A line? Can you just talk more about the margin and economics of that business, that would be helpful?

Yes, Jim. Well, we don't specifically break out gross margin for the upfitting business, but it is a nice business. And yes, you're correct, there is a split into OpEx of how they do commissions for those sales. And so you'll see like on a percent of revenue, we had an uptick in OpEx percentage this quarter, a small one. And one of the big drivers of that is increased commissions for the upfitting business. So yes, there is a little bit of what it might be benefiting gross margin, it's hurting the OpEx line.

And Jim, I would just add that that's an aftermarket business for us. So it tends to have aftermarket type margins, which we really appreciate. And relative to earlier margins, it's on the higher end.

Our next question is from Alex Perry of Bank of America.

Congrats on strong quarter here. I just wanted to ask, so gross margin came in very strong in the quarter. Maybe could you just give us a bit more sort of quantitative color on how much of a contributor the Georgia factory helped on the PVG side? Is that performing sort of ahead of your expectations now? And then -- are you still sort of expecting a similar margin uplift on the PVG side due to the throughput efficiencies from Gainesville as you've talked to us in the past?