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

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holding Corp.'s Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to Toby Merchant, Chief Legal Officer at Fox Factory Holding Corp. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Fox Factory's Second Quarter 2026 Earnings Conference Call. I'm joined today by Mike Dennison, Chief Executive Officer; and Dennis Schemm, Chief Financial Officer. First, Mike will provide business updates, and then Dennis will review the quarterly results and outlook. Mike will then provide some closing remarks before we open up the call for your questions. By now, everyone should have access to the earnings release, which went out earlier this afternoon. If you have not had 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 risks and uncertainties, many of which and 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 quarterly reports on Form 10-Q and the company's latest annual report on Form 10-K, each filed with the Securities and Exchange Commission. Investors should not place undue reliance on the company's forward-looking statements and 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. We believe these are useful metrics that allow investors to better understand and evaluate the company's core operating performance and trends. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's earnings release, which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks to everyone joining the call today. We delivered second quarter revenue of $358.1 million at the high end of our guided range and adjusted EBITDA of $45.5 million, approximately $5 million above the high end of our range. While revenue was at the high end of our expectations, it stepped down sequentially, which was expected and consistent with our guidance, reflecting portfolio optimization associated with the Phoenix operations divestiture as well as the discrete timing of shipments we flagged last quarter and lower F-150 volume tied to the aluminum supply disruption. But the takeaway is significant. Revenue growth is returning, and our outlook for the balance of the year is a continued step-up from original expectations. Our revised view of revenue for the back half will be detailed later by Dennis. Revenue growth is critical, not just for the diversification of partnerships and the addition of new markets, but what it brings to our factories and operations with productivity. Our investment in R&D and product road maps for the last couple of years has negatively impacted results short term but has set us up for a more constructive forecast in the back half of '26 as well as meaningful growth in '27 and beyond. In addition, our profit optimization program is on schedule. We captured more than $25 million of gross savings in the first half, and we remain confident in our expectations to deliver approximately $50 million of gross savings this year, roughly $10 million of Phase 1 carryover and approximately $40 million from Phase 2, consistent with the framework we laid out in February. Profit optimization is necessary in the current macro environment because while we do everything we can do internally, the macro issues continue to work against us. On our last call, I flagged that steel and aluminum costs were moving higher with pressure building in the second quarter. That pressure came in ahead of what we planned. Escalating geopolitical conflict has pushed commodity prices, including fuel, ocean and inland freight rates higher and carrier surcharges as well as added expedite freight and rerouting costs drive friction in our channels. We remain focused on what we control and are pleased with the progress we've made on margin expansion through early realization of these initiatives. From a market served, we are encouraged by the stabilization emerging in powersports and bike, 2 important businesses for FOX. On the portfolio, we continue to evaluate every business we own against the same 3 criteria that led to our decision to divest our Phoenix operations, alignment with our brands, synergy with our core competencies and an ability to deliver accretive margins and durable cash flows. Where a business or program does not meet those thresholds, we are taking action. Any cash proceeds from these activities will go directly to debt reduction. With that, let me walk through our segments. PVG delivered net sales of $124.2 million in the second quarter, a slight increase year-over-year. Sequentially, revenue stepped down from our first quarter that as we flagged in May, benefited from shipment timing in that quarter. As expected, segment margins were down from the first quarter given our forecasted product mix in the quarter. In Powersports, which grew 22.5% in the second quarter and 28% in the first half year-over-year, our OEM customers have worked through much of the channel inventory imbalance that weighed on the industry. We believe we remain well positioned across all of the major OEMs in the category. Although we continue to monitor the underlying retail environment in close collaboration with our customers, we have greater confidence that powersports can continue to be a stabilizing force for us through the balance of the year. On the automotive side, our premium truck OE business performance reflects the timing of shipments against continued aluminum supply chain and production issues that our automotive OEMs are facing. While we anticipated seeing some relief during Q2, aluminum supply remains a constraint for the production of F-150 trucks. In addition, supply chain issues at Toyota also reduced our forecast for high-demand vehicles in the quarter. The most compelling commentary for PVG is not about the puts and takes of Q2. It is about the awards we have won so far this year, which begin to hit our P&L in late Q4 of 2026 and have meaningful upside in '27. As you know, we have been extremely focused on R&D within PVG. These efforts include applications ranging from our traditional light truck market to vehicles that cover rough terrain and space and plenty of applications in between. I want to take a few seconds to talk about what we have achieved. So far this year, we have launched 12 new vehicle fitments, including expansion of our aftermarket Live Valve offerings. Our industrial business unit in PVG is also building a robust pipeline of products and services, which we expect to make public by early 2027. In the UTV sector, Kawasaki announced this week their newest vehicle, the Teryx H2, with our advanced chassis control system, which is a fully integrated electronically controlled linkage solution. The end links working together as one integrated unit in combination with our Live Valve shock package, providing, we believe, the best driving experience from both the performance and safety perspective. The adoption of our proprietary ECU continues to grow as well with 3 distinct OEs now incorporating it into their halo models. This milestone clearly demonstrates our ability to deliver enhanced value beyond what has traditionally been a mechanical passive solution. Earlier this week, Polaris also launched their new RZR Pro R Boost, which utilizes our 3.0 Live Valve X2 series shocks. In automotive, we were awarded a new vehicle with an existing OEM that will drive meaningful volume in 2028, continuing to expand that customer portfolio with FOX in a meaningful way. We also recently received a new award in the electric vehicle market. This is an entirely new automotive OEM for FOX and incorporates our advanced technology on an autonomous vehicle. This represents a significant step in our journey. This product should begin shipping at the tail end of '26 and drive incremental volume in 2027. All of the above supports our belief that we can continue to grow our brand in traditional markets as well as develop novel applications using our software-defined technology, delivering significant incremental revenue over the next several years in PVG. AAG delivered net sales of $109.6 million, a decrease of 4% year-over-year, reflecting an impact of approximately $5.5 million from the divestiture of our Phoenix operations, partially offset by strength in our aftermarket products businesses. Excluding the divestiture impact, the segment grew modestly year-over-year, even with the reduction in Ford F-150 volumes in PVG. AAG adjusted EBITDA dollars were up with the segment margin improving approximately 70 basis points year-over-year and roughly 500 basis points sequentially. Our aftermarket components business grew year-on-year with categories like Custom Wheel House, RideTech and Sport Truck continuing to benefit from product launches and consistent demand. At the current interest rate levels, we are seeing aspirational customers who can't afford to buy new trucks pivot to investing in the trucks they already have, and that plays directly to our diversified aftermarket portfolio. There is still significant work ahead to optimize our legacy upfit business in operations, supply chain, marketing and sales. However, our new OEM-driven customization programs continue to build through the second quarter. As a reminder, this is a new market strategy in collaboration with our OEMs, which utilizes our size and scale to support their aligned objectives in premium semi-custom upfitting. We're able to leverage the OEM's marketing, sales channels and booking systems to support our dealers. This process relieves meaningful complexity and cost for FOX relative to marketing and sales and the kits are menu-driven and well defined so they flow through our production quickly and absorb overhead expenses, It also aligns FOX tightly to the innovation cycle of these large OEMs as they expand their premium vehicle road maps. Further, that program also feeds our ability to target new dealers, which remains a long-term growth opportunity as we work to rebuild this business. Finally, on the industry-wide aluminum supply disruption affecting Ford's F-150 platforms, which is an important chassis across several of our product lines, that disruption continued to weigh on volume in the second quarter. Based on the latest OEM production schedules, we now have planned production, which should hit our factories in early to mid-September. That revised timing is reflected in the outlook Dennis will walk through. SSG delivered net sales of $124.3 million, a decrease of 9.4% year-over-year and an increase of 12.5% sequentially. For bike, we knew this would be a tough year-over-year comp given the order pull forward the industry experienced last year and the sequential step-up reflects the normal seasonal improvement in bike that we expected. Segment margin held essentially flat year-over-year, even with revenue down 9.4%, which speaks to the cost discipline efforts. While we are pleased with the gradual improvement in channel inventory, near-term demand signals are mixed as consumers remain cautious overall, but aggressively pursue new technologies and brands. We continue to make progress on those new customer relationships and product expansion, particularly in categories like e-bike. We're benefiting from our relationships with new players and the disruptive technologies they're bringing to market. which is a stabilizing force in an otherwise volatile market. FOX continues to maintain a leadership position in the premium bicycle suspension market as industry demand stabilizes following several years of elevated inventory and market disruption. Looking ahead, we remain focused on investing in the technologies that we believe will drive the next phase of growth. These include the emerging 32-inch cross-country platform, where FOX has been working closely with industry partners to develop next-generation suspension solutions as well as the rapidly evolving e-mountain bike market. Continued advances in motor, battery and integrated drivetrain technologies are creating new opportunities to improve the riding experience. And we believe FOX is well positioned to capitalize through our premium suspension portfolio and our motor-agnostic integration strategy. While these initiatives are having a major business impact in the immediate term, they reinforce our technology leadership and position the business to benefit as these categories continue to develop. On Marucci, softball continues to be a bright spot. We believe our new products are resonating and softball is becoming an increasingly important contributor to the broader Marucci business, which we believe is directly correlated to the innovation investments we've made over the last -- over the past couple of years. To the obvious question, while we review the strategic path for this business long term, we are running this business hard right now. Our team is fully engaged in our product road map, and we're excited about what's coming in the back half with new product launches. In summary, revenue landed at the high end of our guide. Adjusted EBITDA came in above the high end and our cost programs are tracking. Our militant focus on product development and new markets and core businesses is setting up FOX for meaningful growth and increased profitability as these projects reach production. This performance as well as the operating discipline that is central to our plans gives us the conviction to increase our revenue guidance in the back half and tighten our adjusted EBITDA outlook today, even as commodity, freight and fuel costs stay elevated and step up further in the second half. With that, I'll turn the call over to Dennis to walk through the financial details.

Thanks, Mike. I will begin by discussing our second quarter financial results, followed by our balance sheet, cash flow and capital allocation strategy before concluding with a review of our outlook. Total consolidated net sales in the second quarter of fiscal 2026 were $358.1 million, a decrease of 2.9% sequentially and a decrease of 4.5% versus the prior year period. Gross margin was 30.6% compared to 31.2% in the second quarter last year. The decline reflects 3 drivers: shifts in our product line mix, higher external input costs, including tariffs, commodities, freight and fuel, partially offset by cost savings realization. Non-tariff inflation is the piece that has moved since we set our framework in February. As Mike stated, we are absorbing significant distribution-related expenses to protect customer delivery schedules as well as higher steel and aluminum costs due to the Middle East conflict. In total, incremental input cost inflation is running nearly $20 million above the assumptions in our full year plan. This is not a change in our cost program. It is a change in the environment that program is operating in. Adjusted operating expenses were $78.5 million or 21.9% of net sales, down from $83.5 million or 22.3% of net sales in the year ago period. Compared to the first quarter of this year, we drove a sequential reduction of $7 million or a 130 basis point improvement as a percentage of sales. That includes a sequential reduction in unallocated corporate expense of approximately $1.5 million. We realized significant Phase 2 savings in the quarter, which has us at more than $25 million of gross savings against our approximately $50 million goal halfway through the year. Net realization has been compressed by costs outside of our control. We expect that compression to ease in the second half as we anniversary last year's tariffs and the second half weighting of Phase 2 savings comes through, not because we are assuming commodity, freight or fuel costs come down. Our effective tax rate was 36% in the quarter compared to the 21% federal statutory rate, primarily attributable to the impact of discrete items in proportion to lower levels of pretax income. For the full year, we continue to expect an effective tax rate in the range of 15% to 18% as those discrete impacts normalize against a higher second half pretax income base. Adjusted net income was $15.5 million or $0.37 per diluted share compared to $16.6 million or $0.40 per diluted share in the second quarter last year. Adjusted EBITDA was $45.5 million and included approximately $2 million of IEEPA tariff refunds. Even when excluding these proceeds, which weren't factored into our plan, I'm pleased that we exceeded our guidance range. Adjusted EBITDA margin was 12.7% or approximately 12.2%, excluding the tariff refund, which compares to 9.7% in the first quarter, an improvement of approximately 250 basis points sequentially on an apples-to-apples basis ex tariff refund. Moving to the balance sheet and cash flows. Cash and cash equivalents grew $7 million to $61.3 million compared to quarter 1 end. Total debt was $667.7 million at quarter end, down $20.5 million sequentially from the first quarter and down $5.8 million from year-end. Net debt declined by approximately $9 million year-to-date. As of July 3, our net leverage ratio as calculated under our credit agreement was 3.7x against the 5x covenant established within the amendment we completed in May. I would note that year-to-date net debt reduction is below where we expect to finish the year. The first half reflects seasonal working capital build and the cash impacts of first half tariffs. We improved our cash conversion cycle by approximately 12 days year-over-year and days inventory on hand improved to approximately 136 days from approximately 150 days a year ago. Both metrics demonstrate our efforts to improve working capital efficiency. We also maintained our disciplined approach to capital spending with second quarter capital expenditures of approximately $4.1 million or roughly 1.1% of revenues and the first half capital expenditures of $9.5 million or 1.3% of revenues. Combined with the EBITDA contribution expected from our cost-out programs and our continued focus on working capital, we expect meaningful progress on debt reduction as we move through the balance of the year. Now moving on to our outlook. Based on our first half performance and the continued execution of our cost-out programs, we are raising our full year net sales guidance and narrowing our adjusted EBITDA guidance. We now expect net sales in the range of $1.42 billion to $1.47 billion and adjusted EBITDA in the range of $176 million to $196 million. The mechanics of the net sales raise are straightforward. Our first half net sales of approximately $727 million came in ahead of the plan, underlying the guidance we issued during our fourth quarter call. We are carrying that outperformance through and holding the second half roughly in line with last year's second half, excluding divested operations. On what this does to our margin framework, we are narrowing our adjusted EBITDA dollar range to better reflect the mix and inflation dynamics we've discussed. When taken with our higher sales expectation, the implied full year margin moves to a range of approximately 12.4% to 13.3% compared with the roughly 13.1% to 14.3% implied in February. Our commitment to adjusted EBITDA dollars is essentially unchanged with our $176 million to $196 million range, representing growth of approximately 5% to 16% over fiscal 2025 on roughly flat revenue. Capital expenditures are expected to be approximately 2% of revenues, and our tax rate is expected to be in the range of 15% to 18% for the full year. Looking ahead to the second half of the year, we expect to deliver incremental margin improvement driven by the second half weighting of our Phase 2 cost optimization initiatives, the anniversary of last year's tariff implementation and the pricing and surcharge recovery actions now in motion with our OEM and channel partners. We are reaffirming our cost savings commitment for 2026 of approximately $50 million. On external costs, persistence at current levels is our baseline rather than our downside case. We are not underwriting relief in commodities, freight or fuel any more than we are underwriting an end market recovery. If those costs ease, that is upside to the plan rather than a requirement of it. Both our third quarter and full year ranges assume commodity, freight and fuel costs remain at or near elevated levels for the balance of the year. On top of that, those ranges absorb nearly $20 million of incremental inflation beyond our original plan, approximately $15 million of which we anticipate in the second half. This is the quantification of the pressure we flagged in the first quarter. One related note on tariffs. We may become eligible to recover as much as $8 million of additional tariff costs previously incurred under the IEEPA framework. The timing and amount of any recovery are uncertain. A portion of any amounts recovered may be shared with our commercial counterparties, and we have not included any recovery in our outlook. For the third quarter of fiscal 2026, we expect net sales in the range of $355 million to $380 million and adjusted EBITDA in the range of $46 million to $54 million. That range implies an adjusted EBITDA margin of approximately 13% to 14%, up from the 12.2% we delivered in the second quarter, excluding tariff refunds. Our third quarter outlook reflects the sequential timing benefit of the Marucci product launches that shifted out of the second quarter and a normalization of bike volume tied to the supplier disruption, partially offset by the continued impact of chassis supply constraints in our autos-related businesses. I would note that the Marucci launches also fell in the third quarter last year. So this is a sequential benefit rather than a year-over-year one. On the fourth quarter, which is implied by the full year and third quarter ranges we have given, our outlook reflects the full run rate of our Phase 2 actions, a full quarter of favorable tariff comparisons and the seasonal mix of our portfolio. That build through the back half is delivering and it is what our cost program was designed to deliver. To summarize, our cost programs are executing on plan and our balance sheet health is improving. We remain confident in our full year outlook with margin expansion weighted to the second half. With that, Mike, back to you for closing remarks.

Thanks, Dennis. In closing, I want to leave you with 3 messages. First, the plan is working where we can control it. Two quarters in, we have taken $7 million of adjusted operating expense out sequentially, expanded adjusted EBITDA margin 300 basis points sequentially and captured more than $25 million of gross savings against a $50 million commitment. Second, we are committed to offsetting higher input costs, including commodities like aluminum, freight and fuel and supply chain issues like the F-150 chassis, which have continued to challenge us year-to-date. We have sized both, and we have absorbed them in our outlook. Third, we are raising our revenue outlook and tightening our adjusted EBITDA commitment consistent with the view from our customers and our end markets. I want to thank our team for their execution and discipline through a demanding period. We remain focused on developing the best products across our broad portfolio to enable our enthusiasts to do what they love. With that, operator, please open the call for questions.

Our first question today comes from Peter McGoldrick with Stifel.

Congratulations on the good results. I was hoping you could give some more airtime to the upfitting business. As we think about the change towards the new model, can you help us think about the mix of business between the legacy upfitting and the new business? And how should we think about the volumes moving through the system and your expectations as we look into the back half?

Yes, Peter, it's Mike. Good question. So when you think about the mix, it's -- our primary business model is still the core upfitting business that we've ran for a number of years. So that is still our primary go-to-market strategy. The benefit of these relationships with OEMs in a different format is what they bring to us from dealer engagement because the marketing and sales effort is actually driven by the OEM, not by FOX. It's also the absorption in our factories. So while that volume has less content typically on it versus what we would normally do in our custom upfit business, it drives a lot of absorption, a lot of productivity through the factory and allows us to unburden some of the costs associated with go-to-market that we would normally have in our custom business. So the mix is still going to be heavily weighted towards custom and what we've always done, our traditional business, if you will. The new business provides a lot of dealer growth, a lot of dealer engagement that we would otherwise do on our own and allows us to absorb in our factories. So it's an important part of the business, even though it's a smaller part of the mix.

Okay. And then, Dennis, I've got one for you. At the midpoint of guidance, we're still looking at a steep ramp in the EBITDA margin into the fourth quarter as implied by your guidance. You pointed to some visibility to the easing cost, the Phase 2 cost-out, surcharge recovery. But can you help bucket the items that matter as we bridge to get to the fourth quarter EBITDA margin guidance?

Yes. That's a really good question, Peter, and thanks for that. Yes, as we start to step up, we're going from that 12.2% to 13.6% in Q3, and then from Q3 to Q4, it's around a 15.6% EBITDA margin where we end the year. Relative to that, I mean, clearly, one of the bigger drivers is the net release of the cost savings programs. And so as we anniversary those tariffs in the first half of the year, we get more of the fall-through. This was exactly how this was designed. And so that fall-through is a big part of that in Q3. And then including revenue contributions and margin contributions from Marucci's bat launch, which was delayed from Q2 to Q3. So we're really excited about that, as well as we had bike timing delays on the supply chain issues that we suffered in Q2. And so then when you move from Q3 into Q4, you're really dealing now with PVG recovery in the sense of those F-150 chassis really coming in into play, further margin from Marucci as well into that hot season for Q4 and the Christmas time frame. So those would be your other drivers moving into Q4.

Our next question comes from Anna Glaessgen with B. Riley Securities.

I'd love to start with bikes and disaggregating that within SSG. You gave a lot of helpful color on the call. But maybe could you unpack what's embedded in guidance to the back half? Should we be expecting bikes to be growing? And I know on the one hand, you talked about stabilization in the business but also talked about some mixed demand signals as we're still in the recovery phase. I guess if you could characterize what inning of recovery we're in and how far away you think we are from seeing more reliable growth within the industry?

Great question, Anna. Relative to bike, what we are absolutely pleased about is the durability of this business, it continues to perform year after year now being very stable. And so we're expecting it to be extremely stable with prior year. So not expecting growth, but we're expecting strong margins there for the entire year essentially. And so we should see a pickup in Q3 relative to the bike side of things and then just leveling off as normal seasonality would go in Q4.

Yes, this is Mike. I would -- I think that was good. And I think I would add, one of the benefits of our bike business because we're in the premium space is it creates more predictability. So as we come through the process of all the last years of volatility and inventory issues that you're well aware of, that predictability driven by the premium nature of our product offering has enabled us to really stabilize the business, as I mentioned in my prepared comments, and gives us a better view of Q3 and Q4, which we're really happy to see. In addition, one of the things that's volatile in the business in a good way is that the new product launches, especially around e-bike and drivetrain technology, battery technology, motor technology, customers and partners that we're engaged with has enabled us to attract new consumers, new entrants into the space and drive demand. So in a lot of these cases, this product is sold out, which is something we haven't seen in bike for quite some time. So the benefit of seeing demand in some of these product offerings gives us a lot of optimism relative to where this business is going and the predictability and stability of the business helps us really understand the forecast.

Got it. And then following up on that, you've been breaking out the margins by segment for a couple of years now. And we know, obviously, bikes historically have been really high margin, but there's been some noise within the segment as Marucci has been layered on. Could you maybe help us with what the incremental margin could be if we got a little bit more sustainable growth within that segment?

Yes. It's -- as we continue to grow, I mean, clearly, bike and the combination of Marucci both is what we're expecting to see grow during the second half. When we see those 2 come together, those will start to climb and be a very strong margin profile for us going through Q3 and Q4 because we are expecting both to step up here in Q3. And then Marucci will continue to grow into Q4 as well. So we feel really good about SSG moving forward through the second half of the year.

Our next question comes from Craig Kennison with Baird.

You mentioned a new bat hitting in Q3 for Marucci. Maybe just give us an update on the latest in sporting goods in general and how order patterns are looking? I know there was a delay in Q2 orders.

Yes. The delay in Q2 was driven by us to make sure that we could launch the bat with the right level of inventory in the channels with an improved level of inventory in the channels. So we delayed that launch ourselves to really create the best opportunity to have a great bat launch with heavier volume. So as you know, sporting goods is a place where inventory is a problem. New product is your best bet against the inventory challenge. And so getting these launches out really gives us a chance to reach a consumer with a product that's inspiring and motivates them to spend money. So that's why we've pushed out the launch from Q2 to Q3. We want to give it the most airtime it can get, and we're pretty confident what it can do in Q3 and Q4.

Yes. Maybe just, I guess, help me explain if inventory is a problem, I know innovation is the answer, but you still have to let the other stuff clear. Is that not right?

Yes. And we saw a lot of that in Q1 and Q2. We saw it in our margin profiles in discounting and trying to move those bats. So we definitely have to do the hard work of the inventory cleanup while we're doing the work of innovation and driving new bat launches. So you're absolutely right, Craig. It's a blend between the 2 activities. And you got to kind of use the break and gas pedal at the same time to do them both. So it's a tricky environment. We've experienced it before in other parts of our business, and it will take us some time to work through it for sure in the merchant space.