Q1 2022 Fox Factory Holding Corp Earnings Call
[music].
Yeah.
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to Fox factory holding corporations first quarter 2022 earnings conference Disappoints are in a listen only mode a question and answer session.
Please note. This conference is to turn the conference over to your host director of Investor Relations and business development.
You said.
Thank you good afternoon, and welcome to Fox Factory Earnings Conference call I'm joined today by Mike Dennison, Chief Executive Officer, and Scott Humphrey, Our Chief Financial Officer, and Treasurer, Mike will provide bids.
This update actual results and then the outlook.
Look followed by closing remarks from Mike. We will then open by now everyone should have.
Access to the earnings release, which went out today at approximately four <unk> 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 reference.
For 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.
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, we are 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 Lee and good afternoon, we appreciate everyone, taking the time to join us for today's call.
I'd like to open today's call by addressing the conflict and humanitarian crisis in Ukraine.
We are deeply saddened by the unprovoked invasion of Ukraine and recognize the profound impact these events have.
Adding many around the world.
Our thoughts are with those impacted by this crisis and we hope piece it comes to the region's soon.
While we have negligible sales in Russia, we have ceased all business activities there we.
We do not expect this to have a material impact on our overall results.
I am proud to report that we have started 2022 with our highest quarterly revenue in our company's history powered by a record breaking performance in both our specialty sports and powered vehicles product group.
We also delivered the highest earnings per share in spite of the continued global pandemic and volatile macroeconomic conditions, creating numerous challenges within the quarter.
We did see a meaningful disruption and labor availability in North America in early January as the overcrowding variance surged.
Throughout the quarter, we experienced significant chain and operational disruptions, either within our own facilities or with our customers and suppliers.
Despite these adversities, our consistent and elevated performance through the first quarter continues to reflect the strength of our leading brand portfolio and our teams commitment to deliver high performance products to our valued customers.
Turning to the numbers, our first quarter sales were $378 million, an increase of 34, 4% compared to the first quarter of last year.
This outstanding growth is driven by both our SSG and PVC businesses, which grew 44% and 28% 28% respectively for the first for the.
Versus the prior year period.
What makes me, particularly proud about this performance is Q1 of last year was also a record quarter for us.
The economy award back from the Covid Lockdown.
Our commendable quarter over quarter beat exemplifies our belief that Fox has expanded portfolio of high performance products continues to deliver on quality engineering and service, which consistently resonates with our end consumers.
In addition, we reported earnings per diluted share of $1 13 versus 90 for the same period last year, an increase of 25, 6% quarter over quarter.
We also reported non-GAAP adjusted earnings per diluted share of $1 32 versus $1 five an increase of 25, 7% over the first quarter of 2021.
Let us take a closer look at the business sorry.
Starting with specialty Sports group Q1, 2022 was our eighth consecutive record revenue quarter.
We delivered a little shy of $170 million and sales of 43, 5% revenue growth on a quarter over quarter basis.
We continue to optimize our capacity efficiency and workforce in Taiwan, as we keep a finger on the pulse of demand.
We are starting to see some level of inventory normalization, especially in entry level bikes.
Inventory levels for high end mountain bikes E bikes remained low at less than two months versus three to four months under normal circumstances.
The demand for mid to high end bikes, along with E bikes continue to be strong supported by a growing enthusiast base.
Our order book remains robust for the rest of 2022 supported by signs of improvement and supply chain capacity.
However, our largest concern of SSG is the rising COVID-19 rates in Taiwan, which have had some impact on our ability to consistently run production in Q2.
We believe that bike demand will begin to moderate as we end this year and enter 2023.
As we worked hard to prepare for the new model launches, we are investing in expanded development and testing, which has received positive feedback from our customers.
Shifting to our powered vehicles group.
Q1, 2022 marked a record revenue quarter as pvt delivered first quarter sales of $208 million, an increase of 27, 9% over the same period last year.
This was a milestone quarter for PPG and crossed $200 million in revenue for per quarter for the first time ever.
Led by strong sales of our upcoming product lines.
So we're certainly happy with our revenue growth, we are not satisfied with the margin performance of our new Gainesville plant.
From Watson Delta George is now complete but the transfer of some production lines created manufacturing inefficiencies, which led to a lower than expected throughput in the first quarter.
However, the positive news is we expect that the challenges can be mitigated.
And corrective measures are being taken to drive margin expansion through improved productivity and vertical integration.
It is worth noting that our output improved throughout the first quarter with March being the highest number of units ever produced from the Gainesville plant.
The challenges from labor to input costs freight and supply chain disruptions continue to persist in the inflationary environment will likely persist for a longer duration as it is clearly not as transitory.
Consequently, we will continue to leverage dynamic pricing to combat inflationary pressures.
We are also confident that optimizing the operational efficiency of our Gainesville plant will drive margin improvement as we have discussed in prior quarters.
We will continue to strengthen our core competencies and be relentless and extending our competitive differentiation.
The dynamic operating environment Hasnt changed much since Q4 of last year.
Phil This team has delivered a 10% revenue growth, even though on a sequential basis versus Q4 of 2021.
And so I want to thank each and every single member of our Fox family for delivering a strong start to 2022.
And with that I'll turn the call over to Scott.
Thanks, Mike Good afternoon, everyone I'll.
I'll begin by going over our first quarter financial results and then review our guidance.
Sales in the first quarter of 2022 were $378 million, an increase of 34, 4% versus sales of $281 1 million in the first quarter of 2021.
Our powered vehicles group delivered a 27, 9% increase in sales compared to the first quarter of 2021, primarily due to strong performance in our up fitting product lines.
Moving to the specialty sports group SSG delivered a 43, 5% increase in sales in the first quarter compared to the same quarter last year, primarily due to increased demand across all channels.
Fox Factory's gross margin was 31, 8% in the first quarter of 2022, a 300 basis point decrease from 34, 8% in the same period in the prior year.
For the first quarter of 2022, non-GAAP adjusted gross margin decreased by 270 basis points to 32, 3% versus Q1 of 2021.
The decrease in gross margin was primarily driven by higher inflationary pressures on all fronts, including labor material and freight costs. In addition, the completion of the planned Watsonville, California facility shutdown and move of those production lines resulted in inefficiencies, we ramp up to full utilization of our Gainesville, Georgia.
<unk>.
This was marginally offset by favorable product and channel mix compared to Q1 2021 led by higher volume sales in our specialty sports group and strong performance in our up fitting product lines.
Total operating expenses were $66 1 million or 17, 5% of sales in the first quarter of $22 1 million or <unk>.
Between 25% of sales.
In the first quarter of last year.
The increase in operating expenses in Q1, 2022 was primarily due to higher employee related costs higher commission costs, as well as higher insurance and facility related costs.
Looking at non-GAAP operating expenses as a percent of sales.
<unk> decreased by 30 basis points to 15, 8% in the first quarter of 2022 compared to 16, 1% in the same period.
In the prior year.
Focusing on operating expenses in more detail sales and marketing expenses increased by product ultimately $5 7 million in the first quarter of 2022 compared to 2021, primarily due to higher commissions and marketing related expenses.
Research and development costs increased $2 7 million in the first quarter of 2022 compared to the first quarter of 2021, primarily due to personnel investments to support future growth and product innovation.
General and administrative expenses increased by approximately $5 2 million in the first quarter of 2022 compared to 2021 due to higher employee related costs of $2 1 million higher insurance and facility related costs of $2 2 million from our increased revenue and expanding manufacturing footprint.
As well as increases in various other costs.
For the first quarter of 2022, our effective tax rate was four 8%.
This rate was lower than our estimated full year 2022 range guidance the lower rate in Q1 was primarily due to the impact of <unk>.
Recently finalized tax regulations, which resulted in the release of our valuation allowance against foreign tax credit carryforwards.
This impact was partially offset by decreased benefits from the effects of stock based compensation and other discrete items.
On a GAAP basis net income in the first quarter of 2022 was $48 1 million or $1 13 per diluted share compared to $38 million or 90.
Per diluted share in the same period in the prior year.
non-GAAP adjusted net income was $55 8 million in the first quarter of 2022, an increase of approximately $11 3 million or 25, 4% compared to $44 5 million in the first quarter of last year.
We delivered $1 32 of non-GAAP adjusted earnings per diluted share in the first quarter of 2022 compared to $1 five.
In the first quarter of 2021.
Adjusted EBITDA increased by 18, 8% to $71 8 million for the first quarter of 2022 compared to $60 4 million in the same quarter last year.
However, adjusted EBITDA margin decreased by 250 basis points to 19% in the first quarter of 2022 compared to 21, 5% in the first quarter of 2021.
The decrease in EBITDA margin in the first quarter of 2022 is primarily due to higher inflationary cost pressures and inefficiencies at the Gainesville, Georgia plant.
Due to the move of the last production lines. After the close of the Watsonville, California manufacturing facility as discussed earlier.
Partially offset by the impact of higher sales.
Now focusing on our balance sheet for.
For the first quarter, which ended on April one 2022 compared to our 2021 year ended on December 31 2021.
We ended with cash on hand of $68 8 million compared to $179 7 million.
Accounts receivable was $177 9 million compared to $142 million.
Inventory was $315 million compared to $279 8 million.
Prepaid and other current assets was two $293 9 million compared to $123 1 million.
Accounts payable was $157 million compared to $100 million and accrued expenses were $103 8 million compared to $112 4 million.
The decrease in cash and cash equivalents, an increase in prepaid and other assets as of April 21, 2022 were primarily due to increased chassis deposits as we work to secure supply for the remainder of the year for our up fitting business.
The increase in inventory as of April one 2022 is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and higher input costs as.
As we see the supply chain pressures beginning to ease we will work on reversing this trend facilitate better free cash flow generation.
The changes in accounts receivable and accounts payable reflect business growth as well as the timing of vendor payments.
Change in accrued expenses is primarily due to decreases in income taxes payable and accrued bonuses, which were partially offset by increases in various other expenses.
Lastly, subsequent to quarter end.
We entered into a new credit facility, which gives us access to a revolver of $650 million, providing us with greater balance sheet flexibility pre.
Prior to this new agreement, we had a term loan of $400 million and a revolver of $250 million.
This change will have a potential negative impact of approximately five cents of EPS in the second quarter, but will provide us with a benefit of <unk>.
Approximately <unk> <unk> of EPS per quarter for the life of the credit facility due to reduced interest expense.
Now turning to guidance for the second 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 a $1 10.
To $1 25 per share.
For the fiscal year 2022, the company expects sales in the range of $1 5 billion to 153 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 expect tax rate to be in the higher end of the previously guided 11% to 15% range as we better understand the impact of the previously mentioned changes in tax laws.
In addition, we continue to expect some quarterly fluctuations in tax rate to occur during the year.
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.
In closing I am very pleased with the phenomenal results. Our team has produced in the first quarter in spite of the inefficiencies in our Gainesville, Georgia facility and the challenges presented by the macroeconomic environment we.
We certainly recognize the importance of driving margin expansion in the coming months.
We are focused on achieving our immediate goals, while remaining cautious in our outlook as we see lingering signs of some cost pressures and continued supply chain obstacles for the balance of the year.
As our understanding of the global business environment evolves, we plan to provide incremental updates each quarter regarding our expectations for 2022.
With that I'd like to turn the call back over to Mike.
Thanks, Scott we are very pleased with the way we have started 2022.
Our strong start to the year as a continued proof of our deep consumer connections World class team and a strong brand momentum.
We also acknowledge our Q1 2022 margin performance, which was a point of caution.
As we take note of our achievements I assure you we are looking at the Gainesville efficiency very closely.
As gaining a competitive cost structure is critical to our success.
As much as we are focused on short term actions are broader team continues to be laser focused on our long term product and operational priorities.
To extend our competitive positioning.
Therefore in closing we are executing on our priorities laid out over the last couple of quarters and I am encouraged by the momentum in our efficiency capture as we enter the fifth month of the year.
We will continue to implement on our strategic priorities of market share growth World class operations, and cultivating an engaged workforce all while maximizing shareholder value.
I would now like to open the 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.
May withdraw yourself at any time by pressing the pound key once again, if you would like to ask a question today, Please press star and one.
And we will take our first question today from Larry Solow with CJS Securities. Your line is open.
Hi, its actually <unk> for Larry This afternoon, thanks for taking my questions.
Just just to start I think you made the comment earlier that you expect bike demand to kind of start to moderate at the end of this year and into 2023.
Could you clarify whether that is that means slower growth.
Or a decline year over year based on what Youre seeing today.
Yes. This is Mike so so what we're talking about we talked about.
Moderating demand in SSG is number one a return to seasonality so think about usually in the winter months, you've got a slower demand cycle.
A mountain bike demand perspective.
Most of model year changes and just whether outside.
You'll see that start to return what hasnt been the case in the last few years. So that's the first comment I'd make the second comment is I think what youll see in 2023 four from our perspective today. His return to the long term growth rates that we've had we've held for a number of years, which is mid to high single digits and bike so bigger base of business, but a more normal.
<unk> growth rate on top of that.
Okay, that's fair.
Very helpful and obviously investors have been generally concerned about the potential economic sensitivity around your products.
And these days you are probably more exposed than you were in the last downturn to things like power vehicles.
In auto.
Can you just remind us how the demand for your products fared in prior economic slowdowns.
And sort of what's your level of concern these days.
In terms of what Youre seeing going forward.
So a couple of comments one we haven't seen demand slack off at all in any of our product lines over the course of the end of last year as we've commented before or the beginning of this year you have to think about this business back in <unk> nine and have different it was again the size of the company was was the size of one of our quarters.
On an annualized basis. So it was a pretty small company back in <unk> nine compared to what it is today and a lot less diversified and I think the diversification helps us so yes clearly.
And then thirdly is driven high high cost or high price product mix, but what we've seen in our <unk>, our upcoming business, where we're selling vehicles for dealers hasn't slowed at all.
The changes in gas prices or changes in interest rates or anything else.
So I think our consumer are enthusiasts are pretty resilient.
Don't want to go as far as saying that risk.
<unk> session will impact us because I'm, not saying that I don't think that's true, but I do think that so far it is held to what we believe which is our busiest will use our products or buy our products before they will do something else in there and their families spend like a vacation.
And if you are a mountain biker youre going to be a mountain biker regardless of what the economy is doing so we feel pretty good about we think we're more resistant to recession and a lot of other categories, but again, if we have a big enough recession will impact us like it impacts everybody else.
Okay. That's super helpful. If I can sneak one more in here just in terms of the guidance that you gave for 2025 around nine months ago.
Is there anything in the macro or company specific than that.
Changes that guidance, one way or the other sitting here today.
No.
We're committed to that to.
To that.
Our strategic direction, and we feel pretty damn good about it.
I will hop back in queue. Thank you very much.
Okay.
And we will take our next question today from Mike Swartz with Trust Securities. Your line is open.
Hey, Hey, guys how are you.
Hey, Mike I guess first question for me is just I want to better understand the gross margin pressures and maybe I don't know what the best way to do this but maybe.
Bridge last year. This year, what were the maybe largest impediments that you faced and then the second part of that question is how should we think about the cadence of gross margin over the balance of the year and what's implied in your guidance.
Yeah.
Michael I'll start and I'll, let Scott jump in and answer it as well.
Our perspective on the gross margin in Q1 was the majority of those loans just at Gainesville consolidation. There is some inflationary pressures, let you answer that.
The second piece of it.
I'm not sure I'd call. It 50, 50, its probably a little bit more to Gainesville consolidation or transfer transition there is inflation.
So I think we have to work through that as I mentioned in the prepared remarks, we've got to get that work done we're still committed to the 250 to 350 basis point improvement that we've talked about before occurring this year. So.
It's just a lot of work to get through a lot of staff.
As you know so we're going to keep going after that.
Forget about it but.
But I think we have to see how it plays out.
That too is we are continuing to see.
Price increases in our business or pushed through price increases across our product lines and that will help us with the inflationary challenges that might come about the balance of the year. So.
Scott, Yes, no I agree with what Mike said, Mike.
I think.
As far as the cadence goes that Youre talking about.
We said all along we would be sort of incremental improvement each quarter. Once we got shut down.
Once we got shut down once we shutdown in watsonville and Thats Dow we need to.
Start showing some of those efficiencies in Q2, and then I think you would get better in Q3, and then better again in Q4.
Okay. So just builds throughout the year, Okay that makes sense and then just maybe another question on pricing ability to take pricing I guess your comments on dynamic pricing is that a new.
<unk> kind of program or policy that you are putting in place and then.
To what extent is your ability to price dependent on maybe channel or customer mix in any given quarter.
How we price as a function of the product lines.
<unk> product in automotive OEM relationships or in and our SSG business oriented aftermarket oriented outfitting are different in every scenario I think it's a fairly new dynamic pricing is a fairly new Oreo.
Orientations as companies have to take with the inflationary pressures on Covid and some of those things historically you'd price something.
Yes, it's basically the design, where you're designing it for an automotive customer.
Our bike OEM or something like that.
Or how do we do if you go back and actually increase pricing inside of our model year or inside of a calendar year, we would do aftermarket.
We're doing two or three times a year now so when I say dynamic it's a reflection of getting there.
Incoming cost component that has an inflationary pressure in adjusting that.
External pricing change and doing that within a fairly quick period of time.
Okay, great. Thanks, that's all for me.
And then we will move next to Jim Duffy with Stifel. Your line is open.
Thank you good afternoon.
I wanted to start with a question on the up fitting business, a really nice quarter for shipments can you maybe give us a view of where this business stands with respect to dealer penetration and the backlog is the backlog youre seeing now reflective of growth from both number of dealers and vehicles per dealer.
We're seeing growth in both of those and both of those cases, the numbers of dealers and in vehicles per dealer.
We're seeing the sell through of occurring faster so inventory is not sitting on lots.
As long as it would've done let's say two years ago. So those are really positive signs for us in the business.
The reality of the World right now is before we even build a vehicle and get it and get it sent to the dealer is already sold.
In most cases.
That's a phenomenon that has decreased its actually increased in it.
And kind of how we look at the business going forward. So we feel pretty good about outfitting.
For the foreseeable future and we feel even better about our chassis control.
As Scott mentioned, we had mentioned we've got a lot of chassis is already in hand for the balance of this year. So last year you know.
We had the challenge of getting enough vehicles for to meet demand. This year. We at least can have a pretty good view plenty of chassis to fulfill the demand as we see it.
That's great to hear.
With respect to the OEM business in automotive is the.
The backlog.
There is.
Production, improving such that boxes.
Hi.
Struggling to.
Communicate this but.
Yes, yes, absolutely.
Thanks for the Oems haven't gotten much better so we're still seeing some lagging.
Ramps to some of their product lines that we would have expected to see an improved so we haven't seen that yet in the numbers we do.
We expect to see that at some point in the year, but in Q1, we didn't see much improvement in the automotive OEM side of the business.
Okay and again, that's advancing that's a supply chain issue for them. Clearly these are the these are the vehicles that would likely be selling right now that they just can't build.
Understood.
Last one for me just shifting to the bicycle business for a moment you had been sharing with US a convention of number of months to meet.
Customer demand and additional months to replenish channel inventory is that tracking as you expected is it fair to assume that that <unk>.
Simply reduced by three months since you last communicated it.
That's the way I see it Jim I mean, we kind of we kind of went off of that kind of definition or a terminology just can lease can start to see the seasonality. We returned in Q4, so there's going to be a lot easier with methodologies and communicate kind of where we think we are in the cycle again, I think Q4 starts to look more like a normal seasonal.
Quarter, and I think 2023 kind of gets us back to vendors or you had expected in two or three years ago. When you. When you were talking to US then.
Very good.
Thanks, so much guys.
Thank you.
Yeah.
And as a reminder, if you would like to ask a question today. Please press the star and one on your Touchtone Keypad. We will go next to Craig Kennison with Baird. Your line is open.
Hey, good afternoon, Thanks for taking my question.
It's been a very helpful call I guess I wanted to ask about why Val.
I'm just wondering if you could give us an update on that technology.
Maybe just frame how far that market has been penetrated and what opportunities still exist and then maybe if you could add onto it like what kind of runway is there to that from an innovation standpoint, I feel like that's a core technology.
<unk> is absolutely a core technology as I've said in the past, Greg I think I think everything becomes smarter connected as we start thinking about.
New vehicle platforms live all of the key component of that so it has grown significantly in both our bike business and in the powered vehicle business as you probably heard me comment in most of our power sports customer lines as well as our automotive lines have converted to a version of live valve in their high end product category.
So.
I think thats going to continue to expand and grow.
We actually announced today, it's a little bit of a segue that we announced today our partnership with extreme which is electric vehicle off road racing into global.
Off Road racing category, and we are the supplier the developer of product for.
That extreme E race series going forward, we think thats fantastic, because it's going to let us bring things like lifestyle lifestyle technology ultimately to.
The E vehicle platform and in this case E vehicle racing just as we've done in Baja 1011 Reis platform. So.
We're going to continue to push that and we think thats a fundamental platform for.
Our long term business growth.
Thank you and then wanted to ask about outside ban, which was a nice acquisition you did last year I know you had huge demand for that product and when people were paying you upfront to build those bands and I think you had planned to.
Increased capacity significantly it is going to be sensitive to maybe out.
RV trends, which we know.
Kept slowed at least from a production standpoint.
Are you seeing any slowdown in that business.
We're not again, we're fortunate or unfortunate problems, just not having enough capacity to meet the demand. So if you saw a slowdown in that side of the business, we'd probably still wouldn't feel that based on the next year's worth of the ability to produce we are trying to add capacity. So we can get at that market. Because we think it's an important market, but I think it's also a unit.
<unk> part of the RV market overall, where you've got a much younger participation and demographic and people who are really just making lifestyle changes versus just having a fifth wheel or a motorola their driveway tubular by us at <unk> are kind of a different breed than maybe what youre seeing in the overall RV market.
I think we're going to we're going to fare better.
And then the broader category and and again pretty small part of our business, but but we won't be out of backlog for another year.
Perfect. Thank you.
Thanks, Craig Thanks, Greg.
This concludes the Q&A portion of today's call I would now like to turn the call back over to Mike Dennison for any additional or closing remarks.
I'd like to thank everyone for joining today's call and have a good afternoon and evening. Thank you.
This does conclude today's program. Thank you for your participation and you may disconnect at any time.
Okay.
Okay.
Okay.
[music].
Okay.
Yeah.
Yes.
Sure.
Okay.
[music].