Q3 2021 Fox Factory Holding Corp Earnings Call
Yes.
Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to Fox factory holding corporations third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation and instructions will be given at that time. Please note. This conference is being recorded I'd now like to turn the conference over to your host Vivek. The Cooney director of Investor Relations and business development. Thank you Sir you may begin.
Thank you.
Afternoon, and welcome to Fox Factory's third quarter 2021 earnings conference call I'm joined today by Mike Dennison, Our Chief Executive Officer, and Scott Humphrey Chief Financial Officer, and Treasurer first Mike will provide business updates.
Then Scott will review the financial results for the quarter 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 four O. Five 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 Dark ride Fox Dot 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 and shorten that these many of which are outside the company's control and can cause future results before.
Our 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 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 we didn't have earnings release, you 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.
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 Lee and good afternoon, we appreciate everyone, taking the time to join US for today's call. This past quarter really put our teams to the test as overall supply chain conditions remained challenging.
As these macro obstacles worsened this quarter our team continued to out innovate.
Pace and I think our peers to deliver performance to finding results just like our products I am proud to say our strategies and our execution are rising to meet these challenges as we delivered another record quarterly revenue performance delivering five consecutive record quarters in this current vault.
The operating environment represents what stopped Fox stands for a culture of innovation and commitment to deliver best in class products to our ever growing base of performance driven enthusiasts.
Yeah.
I'm also happy to report that we hosted our inaugural Investor Day on September 21st.
After months of planning, our Investor day message was well received by the Investor community. Our teams came together to showcase what we do best.
A nice performance there.
This included a morning full a results driven and forward looking presentations, a showroom for vehicles and bikes equipped with our products as well as a tour of our new manufacturing center in Gainesville.
In the afternoon, we offer a very unique experience investors have the opportunity to interact with Fox sponsored athletes and pastors and the broader management team tried E bikes and drive off road vehicles to fully understand how our products dramatically improve the way enthusiasts experienced their rights.
Yeah.
Okay.
As you know we've had remarkable growth since our IPO in 2013, but.
But we felt this was the perfect time to host the event. So we can exhibit what we think is the inflection point for our next phase of growth.
The vision of our management team and why we think we can achieve this new target of growth that we call Fox to that of achieving over $2 billion in revenue by 2025.
Moving on to the Q3 numbers, we had a successful third quarter with over 347 million sales, which is over 33% growth versus the third quarter of last year.
Something that I want to highlight here is the double digit revenue growth comes against a very strong compare in Q3 of 2020, which reflected the auto oem's coming back online from Covid shutdowns, a rebound in the economy and an unprecedented strong surge in demand for our products across all channels.
Continuing our growth analysis. This quarter also reflects approximately 6% growth on a sequential basis versus Q2 of 2021.
This outstanding growth was driven by both our SSG N P D G businesses, which grew 48% and 23% respectively versus the prior year period.
Demand across our product categories continues to be strong with no signs of abating, given our own come uncompromising brand and customer loyalty complemented by the fundamental shift in consumer behavior towards the more health conscious and outdoor lifestyle.
All of our businesses performed extremely well posting strong sales increases in the face of a challenging supply chain in an environment of increasing input costs are.
Our non-GAAP adjusted earnings per share increased from $1.07 in the third quarter of 2020 to $1.19 in the third quarter of 2021, I want to acknowledge our team for their phenomenal operational agility, which is which was required to deliver such fantastic results.
Yeah.
Starting with our specialty sports group. This was our sixth consecutive record revenue quarter. It is safe to say the primary reason, we have been able to deliver such staggering numbers quarter over quarter is due to the SSG team's ability to not only anticipate industry demand fluctuations, but also to scale and access.
<unk> production to meet such levels of demand, while managing supply chain inflation and labor challenges.
Continue to optimize our capacity and labor expansion plans in Taiwan as we keep as we keep a finger on the pulse of demand which continues to stay strong.
We believe we are in a strong position and we have a good view of demand throughout 2022 for both OEM and aftermarket orders.
As it pertains to lead times in 2022, and 2023, we are working towards improving capacity expanding supply lines and entering into additional long term supply agreements.
But talking about the current inventory levels and replenishment my comments are similar to last quarter, where the inventory levels continue to remain close to historic lows.
With the current pace of industry demand, we believe it will still take eight to 10 months to meet the current customer demand level and another 12 to 18 months to replenish the depleted inventory channels.
Additionally, we are investing in key areas of our development process to improve our speed to market and continue to grow our service network in terms of capacity and regional coverage.
Okay.
As an example of our team's ability to stay ahead of the competition. We successfully launched the new Fox AWS Fork. Our first purpose built E. S. U V suspension product in the exciting and rapidly growing adventure mobility category. In addition, we had another very successful quarter in the world of racing Fox equipped athletes dominator.
Mountain bike races through the conclusion of the 2021 international race calendar highlight.
Highlights included Greg Minnaar women men and Marian Nicole winning the women's downhill World Championships.
In addition, David Toronto and Linda.
On Fox live valve claimed to metals at the Tokyo Olympics.
Okay.
Shifting to our powered vehicles group Q3 marked another remarkable revenue quarter led by strong sales in the power sports outfitting in automotive OEM product lines as more model year changeovers come online there.
The growth in these product lines as remarkable as our teams are unlocking new ways to mitigate the macroeconomic pressures, we face while leveraging the power of our brand to expand our relationships in both the aftermarket and the OEM sides of the business, we are getting confidence in our ability to continue this growth trajectory and to leverage the efficiency of our.
New Gainesville factory, which allowed us to set minute volume production records again this quarter.
Yeah.
Moving onto our accomplishments in the world of Motor Sports at the Ultra for Black Hills racing searches bond getting junior earn his fourth whereas first career 4400 class win and its Fox equipped Ford performance Bronco.
And Fox took the top three U T D spots at the best in the Desert Vegas to Reno, where our patented live valve technology tacked on another podium.
In short course off road racing Fox racers racked up five ultra for classrooms, and 11 pro class wins and a clean sweep of all southern Pro class points Championships. The Kramden World Championships over Labor day weekend.
Sweeps, where the where the theme of the quarter and continued in bar, where Fox took the top six spots overall and 11 classrooms in total at the score International Baja 400.
To be successful in our vision, we arent, just making investments to meet the historic level of demand.
We have always said product innovation.
It means a key component of our growth strategy.
Even in this inflationary environment, we have not taken our foot off the pedal as we increased R&D spending by nearly $4 million in the third quarter versus the prior year period.
Once again the story on the continuing challenges from labor to input costs freight and supply chain has increased in strength from the prior quarter.
Material costs have been increasing throughout the second half of the year, which has been our biggest headwind.
We may begin to see some easing in the supply chain, starting mid next year, but inflationary challenges might persist longer than that.
We will continue to monitor the impact of these factors on this unprecedented demand environment and there's always remain agile and nimble.
Delivering solid results in the third quarter and raising our guidance to close out the year deserves to be celebrated and I cannot thank each and every single member of our Fox family enough for helping US challenge the impossible every day and with that I'll turn the call over to Scott.
Okay.
Thanks, Mike Good afternoon, everyone.
I'll begin by going over our third quarter and year to date financial results and then review our guidance.
Sales in the third quarter of 2021 were $347 4 million, an increase of 33, 3% versus sales of $260 7 million in the third quarter of 2020.
Our powered vehicles group delivered at 22, 8% increase in sales compared to the third quarter of 2020, primarily due to increased demand in both the OEM and aftermarket channels, including strong performance in our power sports and up fitting product lines.
Moving to the specialty sports group.
SSG delivered 48, 1% increase in sales in the quarter compared to last year.
And by continued high demand and their OEM channels.
On a year to date basis sales were $956 7 million versus $628 2 million in the same period last year, an increase of 52.3%.
This jump in sales is driven by increased demand primarily in the aftermarket channel, including strong performance from our up fitting product lines and the inclusion of a full year of revenue from our S. C. A subsidiary.
Additionally, our prior year results were impacted by production shutdowns at a majority of our P. V. G. OEM partners due to the COVID-19 pandemic.
Okay.
Fox Factory's gross margin was 33, 4% in the third quarter of 2021, and 90 basis point decrease from 34, 3% in the prior year period.
Non-GAAP gross margin also decreased by 70 basis points to 33, 8% versus Q3 of 2020.
The decrease in gross margin was primarily driven by higher inflationary pressures on all fronts, including labor costs input costs and freight costs.
This was marginally offset by favorable product and channel mix led by higher volume sales in our specialty sports group and the strong performance in our power sports and up fitting product lines.
On a year to date basis, both our gross.
And our non-GAAP gross margins increased 120 basis points to 34% and 34, 2% respectively.
The increase in gross margin was primarily due to higher volume sales in our specialty sports group.
And the strong performance of our up fitting product lines as well as favorable product and channel mix.
Total operating expenses were $60 8 million or 17.5% of sales in the third quarter of 2021 compared to $43 9 million or 16, 8% of sales in the third quarter of last year.
The increase in operating expenses was primarily due to higher employee related costs higher commission costs and investments to rightsize our back office infrastructure.
Looking at non-GAAP operating expenses as a percent of sales our non-GAAP opex increased by 150 basis points to.
To 15.5% compared to 14.0% in the prior year period.
On a year to date basis operating expenses were $171 2 million or 17.9% of sales compared to $129 6 million or 26% of sales.
Decrease of 270 basis points year over year.
Our non-GAAP operating expenses as a percent of sales decreased by 20 basis points going from 100 million and 15, 9% of sales in 2022 $150 6 million and 15, 7% of sales in 2021.
Focusing on Opex in more detail sales and marketing expenses increased approximately $3 8 million in the quarter, primarily due to higher commissions of $3 million.
Research and development costs increased approximately $3 $8 million, primarily due to personnel investments to support future growth and product innovation.
<unk> and administrative expenses increased by approximately $9 2 million due to higher employee related costs of $4 5 million as well as increases in various other costs as we continue to right size our administrative support functions.
On a year to date basis sales and marketing spend increased by approximately $13 9 million, primarily due to commissions eight of $8 $7 million employee related expenses of $3 5 million and various other expenses.
But as a percent of revenue the spend decreased by 60 basis points versus the prior year.
Research and development dollar spend increased by approximately $8 6 million due to personnel investments to support future growth and product innovation.
Never again as a percent of revenue this decreased by 40 basis points versus the prior year.
Lastly, general and administrative dollar spend increased by $16 8 million, but was lower as a percent of revenue by 128 basis points versus the prior year.
The increase in dollar spend is due to higher employee related costs of $15 5 million as well as various other investments of $9 8 million as we continue to right size our administrative support functions.
These increases were partially offset by lower acquisition related costs of $9 4 million and lower litigation expenses of zero point $9 million.
This year to date performance highlights how the management is focusing on becoming more efficient while growing our revenue base.
For the third quarter, our effective tax rate was 18, 2%. This rate is in line with our previous long range guidance of 15% to 19%.
The increase in the rate versus the first half of 2021 is primarily due to reduced benefits from stock based compensation.
Adjusted EBITDA increased by 21.1% to 72 8 million for the third quarter of 2021 compared to $60 1 million in the same quarter last year.
I want to congratulate the team on our third consecutive record quarter of EBITDA generation.
However, adjusted EBITDA margin decreased by 210 basis points to 21% compared to 23, 1% in the third quarter of 2020.
The decrease in EBITDA margin is primarily due to higher inflationary pressures that's discussed earlier, partially offset by the impact of higher sales and favorable product mix.
On a year to date basis, adjusted EBITDA increased by 62.2% to $202 9 million and the adjusted EBITDA margin expanded by 130 basis points to 21, 2% versus the prior year period.
On a GAAP basis net income attributable to Fox in the third quarter of 2021 was $43 8 million or $1.03 per diluted share compared to $38 million or 90 cents per diluted share in the prior year period.
Year to date net income attributable to Fox was $126 1 million or $2.98 per diluted share compared to $58 9 million or $1.46 per diluted share in the prior year period.
Non-GAAP adjusted net income was $50 5 million, an increase of approximately $5 1 million or 11% compared to $45 4 million in the third quarter of last year.
We delivered $1 19 sense of non-GAAP adjusted earnings per diluted share in the third quarter of 2021 compared to $1.07 in the third quarter of 2020.
Year to date non-GAAP adjusted net income was $146 million, an increase of approximately $64 million or 76% compared to $85 6 million in the prior year period.
We also delivered $3 45 of non-GAAP adjusted earnings per diluted share year to date compared to $2.12 in the prior year.
Now focusing on our balance sheet for third quarter, which ended on October 1st 2021 compared to our 'twenty 'twenty year end on January one 2021.
We ended the quarter with cash on hand of $319 3 million.
Accounts receivable was 159 million.
It was $159 5 million compared to $121 2 million.
Inventory was $246 2 million compared to $127 1 million.
Accounts payable was $156 5 million compared to $92 4 million.
The increase in inventory is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and higher input costs.
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 $183 7 million.
As of October 1st 'twenty, 'twenty, one compared to $163 3 million at the end of 2020, reflecting capital expenditures of $40 million in the first nine months of 2021.
The increase reflects investments in our manufacturing facility in Gainesville, Georgia.
Goodwill increased to $299 8 million as of October 1st 'twenty, 'twenty, one compared to $289 3 million as of January one 2021 due to our acquisition of outside van during the second quarter.
Now turning to guidance, we are expecting to close out 2021 on a strong note for the fourth quarter. We expect sales in the range of $315 million to $335 million and non-GAAP adjusted earnings per diluted share in the range of 90 to $1.10 per share.
I'd also like to note that we're not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of actually predicting the elements necessary to provide such guidance and reconciliations.
For our full year tax guidance, we still expect the tax rate to be closer to the lower end of our previously provided range of 15% to 19% with that I'd like to turn the call back over to Mike.
Thanks, Scott our fifth consecutive quarter of record results continued proof of our deep consumer connections World class team and strong brand momentum.
The recent decline in the Cove adult variant spread is also positive news.
Across the industries, we serve demand remains very healthy therefore, we remain focused and confident in our long term business outlook. We are very excited as we look forward to closing out a strong 2021 and positioning ourselves to accomplish a new multi year ago Fox to Dot O I would now like to open up.
Call for questions operator.
At this time, if you would like to ask a question. Please press the star and one on your Touchtone telephone you may withdraw your question at any time by pressing the pound key once again to ask a question. Please press star and one on your Touchtone telephone, we'll take our first question from Michael Swartz with tourists security.
Your line is open.
Hey, good evening guys.
Maybe just to start out with on the guidance it looks like you're guiding for fourth quarter margins to be flattish with the third quarter and I think Mike your commentary.
Scott it sounded like cost pressures I got worse through the quarter. So how should I think about that being flat is that due to pricing is that due to favorable mix offsetting some of that inflationary pressure.
Yes, Mike This is Mike I'll go first and Scott can add his comments really as you know in Q3 as inflationary costs, where increasingly we're also revisiting pricing and then kind of more dynamic pricing with our channels and customers to try to offset those inflationary costs. So those roll in but there's a natural lag as you know between.
Well the costs, increasing sometimes more prices catching up but I think those prices catch up and start to balance out against the costs that we saw really really grow in Q3. So we feel pretty good about that now that's assuming that things continue on their current track and I think we ought to be aware of inflation is not necessarily a stable or stable.
Environment, So we'll have to watch it closely.
Just a question on materials and then a question on the specialty sports business.
You spoke to material cost I'm wondering was materials availability of challenge in the third quarter as well and do you believe you solve that problem with your inventory investment.
Great question inventory or supply chain continuity of supply challenges continue daily battle for the team to try to make sure that we've got the material at the right time and the right place to deliver our products I do think the investments we've made in inventory help us considerably.
I do I do to worry about things like brown outs, and China manufacturing, where they're cutting energy back to supply those factories and supply is parts. So we have to keep a close eye on that I think Jim we have to keep a close eye on magnesium and magnesium supply but.
But so far the team has handled them well and we continue to to be able to deliver as you can see the.
The results, but I don't think supply chain is getting easier and I think it continues to be a challenge for us for <unk>.
Probably the first half of next year from what I can see so far.
Mike Your comments suggested maybe the challenge is greater for the Taiwan manufacturing demands on materials, then for North America or am I misinterpreting that.
Misinterpreting I was just kind of focused on SSG, maybe because you mentioned it but I think North America is a bit different it's a broader supply chain is a little bit more complicated.
We've added a lot of investment in North America to get our hands around it so I feel pretty good about it but I wouldn't say that North America is in better shape in Taiwan.
Okay, and then especially sports category. It sounds like demand there is such that if you can manufacture and ship. It you can book the revenue.
A new high for quarterly revenue of $160 million or so is there anything unusual in that number related to timing between quarters or is that a good figure for what you believe you can build and ship in a quarter.
Going forward.
Yes.
Even though we you know we keep telling me not to get a really excited about it.
But I think I think we should be kind of where we need to be by you know let's call in the middle of next year and then then we'll start to enjoy some leverage on those numbers.
And then trying to reconnect with insurance or now I can say, we talked about how there's no substantial synergy between now my van and S. S. T maybe speak to any progress in terms of.
Capturing <unk> kind of Marianne the two and the marketing opportunity there.
Yeah, I think what you're referring to is that a lot of our.
Outside van customers that we picked up the Mac physician that they're also enthusiasm on the <unk> I think it's a good marketing opportunity for us with our our broad base of of customers in the mountain biking World.
If they are going to also be enthusiasts saw me outside band side.
But I think we're we're still working on.
Getting outside van.
Indoctrinated into our outfitting business and we will be continuing to develop the marketing plan around that with them next year.
Yeah.
And you know an outside then the demand is pretty significant we're still a year out so so.
Backlog enough I've been is into 2023 now for people, who would like to buy a van so our biggest challenge right now in less than a marketing or about scale. We have to continue to ensure that we can get more of them produced you know on a daily basis. So that's that's doing focus right now I think the team is doing a great job of continuing to dry.
<unk> with the outside then culture, and we're seeing that the genre of customer grow significantly we've got a bill to keep up with it.
Great. Thank.
As a reminder, if you would like to ask a question. Please press star that one on your Touchtone keypad.
Statements before we come to new go quite a lot from what they would normally be at the normal intends for 45 to 60 days, they're not 350 days plus so we're actually able to schedule our factory work and and are purchase orders of our customers pretty pretty consistently and of course, we know how much. We can build you know how much we will build.
We're pretty close to delivering on that.
If if.
William was a better place to be back to 60, they lead times, but I don't see that happening anytime soon so we're not leaving a lot on the table, but we're already pretty booked as you know from prior conversation through the.
All of 2022.
Got it that's all I have.
The next question comes from Alex Parry with Bank of America. Your line is open.
It's actually taking my question and congrats on another shrunk corner just wanted to maybe get a little bit of shaping in terms of next year just in terms of sort of how we should think about the organic growth next year's we sort of bounce a tough comparison and market growth with the backlog on both that.
S. S. G N P b G side of the business. Thanks.
We haven't got it in for 2022 at Alex, but clearly we think the demand signals are incredibly strong and remain strong which means as we add capacity and build out Gainesville, we've added capacity throughout the year in Taiwan, Yeah, I think we're well positioned to handle that incremental growth.
I think we will continue to carry backlog from quarter to quarter, especially entirely vehicles you heard my prior comments on the bikes out of the business that we can kind of schedule. It ended the quarter that will build it but in power vehicles with a lot of aftermarket demand et cetera.
That does create backlog to kerry's quarter to quarter and that's gonna continue through a good chunk in the next year as I tell the team and my brother have backlog then be looking for backlog. So so it will take it we will do our best to try to continue to optimize manufacturing to get it out but yeah. We're gonna, we'll finish Q4 with backlog and will be.
Go into next year.
A good book of business to to go you know drive on top of the 2021 numbers.
It's really helpful. I mean, just to follow up on the S. S. She said the business the inventory backlog that you cited did not change at all versus three months ago. So maybe can you comment on sort of you know where the channels stands and turn it in terms of rebuilding inventory levels and.
You know where the choke points in the supply chain. It I think you mentioned last time that that you guys were not the chokepoints suggest maybe a little more commentary there would be great.
Thank you for your participation you may disconnect at any time.
Mhm mhm.
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