Q3 2022 Fox Factory Holding Corp Earnings Call
Good afternoon, welcome to Fox Factory Holdings Corporation third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
And the answer session will follow the formal formal presentation. If you would like to ask a question. Please press star one on your telephone keypad. Please note. This conference call is being recorded I would now like to turn the conference over to your host to be vague Bell Creek Senior director of Investor Relations and business development. Thank you you may begin.
Thank you good afternoon, and welcome to Fox Factory's third quarter of 2022 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 Scot will review the quarter.
And full year financial results and then the outlook followed by closing remarks from Mike. We will then open the call up for your questions but.
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 is available on the Investor Relations portion of our website at Investor that 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 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 deep.
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 Denison.
Thank you V and good afternoon, we appreciate everyone, taking the time to join us for today's call <unk>.
I want to take a quick second to give a shout out to all the Fox athletes, who have dominated the downhill an enduro world series season.
I want to also send a congrats a fox driver Bryce Menzies, who scored back to back victories at the Baja 400.
On behalf of Fox factory, we get a tremendous surge in pride every time, we see athletes push the limits with our products and take the podium.
This provides the inspiration that fuels us to continue setting records and challenging the impossible.
Speaking of records, let's turn to our business highlights from the quarter. Our teams delivered the highest revenue of any quarter in our company's history, helping us exceed $1.5 billion in revenue on a trailing 12 month basis.
Was really impressive is the fact that just five quarters ago, we crossed the 1 billion revenue Mark in a trailing 12 month basis.
This exemplifies our team's ability to operate through tough economic train, while staying focused on our mission.
Credit goes to the dedication and resilience of the entire Fox team for sustaining our top line momentum.
These results came from another record performance are powered vehicles product group and a strong quarter over quarter performance in our specialty sports product group, which group over twenty-five percent and 9% respectively versus the same period last year.
Overall, our third quarter sales were 409.2 million, an increase of 17.8% compared to the third quarter of last year. We also reported in earnings per diluted share of $1.20 an increase of 16.5%.
On a non-GAAP adjusted basis, we reported in earnings per diluted share of $1.35, increasing 13.4% from the same period last year.
As you consider the strong results no. This significant momentum is fueled by leaning on our core values leadership collaboration service Trust agility and ingenuity to expand our competitive advantage across the market, while creating a deep connection with our consumers.
Digging a little deeper let's start with the powered vehicles group, which delivered a record $235.2 million in revenue.
This is led by a strong performance interrupting product lines combined with higher revenue from our increased OEM sales.
As I had mentioned in my last earnings call remarks, we anticipate maintaining a similar growth rate for the remainder of the year.
Thinks a strong demand in our upfitting business and substantial backlog in our Powersport, an auto OA products.
Roman operations perspective, Here's a quick update on our Gainesville facility. We are pleased with our efficiency improvements and the resulting higher output. The teams continued passion to streamline our efforts as driving success at this facility and we are applying lessons learned across the business where it makes sense.
Over the next several quarters, we remain committed to delivering the 250 to 350 basis point margin improvement, which we have discussed on prior calls.
Shifting gears, especially sports group in Q3, 20, twenty-two we delivered approximately 174 million in sales.
I am also incredibly proud that we just celebrated the tenure anniversary of our Taiwan operations, all culminating in the team gaining local recognition as being one of the best employers to work for.
With regards the channel inventory high end mountain bikes are still below the preferred levels and the rise in popularity of the bikes is continuing to keep the demand relatively strong and supply chains are improving.
However, as previously discussed we're seeing increased signs of demand normalizing and consequently, we expect SSG performance to return to the typical seasonality in Q4.
Recessionary pressures in the European region significant inflationary pressures and the impact of a strong dollar against the pound and euro are exacerbating the situation.
Since our last earnings the pound and euro currencies have devalued anywhere from 3% to 7%.
Which automatically makes our product relatively more expensive in those markets.
These macro economic headwinds as well as higher energy prices have a direct impact on consumer confidence and behavior.
With no easing of these macro pressures insight we believe they will have an impact on our short term growth expectations.
This difficult environment will likely persist well into 20 twenty-three.
We will continue to monitor the impact of these factors and is always remain agile and nimble on a long term basis and as these headwinds debate, we remain committed to our expectations of mid to high single digit growth.
We will continue to strengthen our core competencies and be relentless in extending our competitive differentiation.
We also believe the continued optimization of our Gainesville plant will drive margin improvement as I discussed earlier.
The dynamic operating environment has only become more complex as the year has progressed and still the team is delivered another record revenue quarter.
This along with raising a revenue 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 everyday and with that I'll turn the call over to Scott.
Thank my good afternoon, everyone.
Three quarters.
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71.9 million or 17.8% off sale and the third order of 2022.
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17.5% of sales in the third quarter of last year.
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Percentage of sale or non-GAAP operating decreased by 38.
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Research and development costs decreased approximately $1.7 million and the third order 20th 20th.
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Net income attributable boxes $153 or.
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<unk>, approximately 6.9 million or 13.6% compared to 50.5 million in the third quarter of last year.
We delivered one dollar and 35 non-GAAP adjusted earnings per diluted share order, 20th you compare to one dollar and the third quarter of 20th 21.
On a year to date.
<unk> Uhm was $171.8 million.
An increase of approximately $25.8 million or 17.7% compared to $146 million in the prior year period.
We also delivered $4.
non-GAAP earnings per diluted share compared to $3.45.
In the prior year period.
Hi, Jeff and EBITDA.
8.9%.
$5.1 million.
A order of 2022.
Compared to 73.8 million a quarter of last year.
At Yahoo Dot margin decreased by 28, 28% in the third.
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Order, which ended on September 30th 2022, <unk> 2021, full year, which added on December 31st 2021.
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<unk> 179 179.
Accounts that people with $194 4 million compared to 142.
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In accounts payable work $131.7 million compared to $100 million.
The increase in inventory at September 30th 2022 is primarily due to higher but.
Receive a long lead time items that had been delayed.
The increasingly prepaid and other assets.
End of the quarter is primarily driven by deposits for security <unk>.
Updating business, which is.
Significant growth.
The changes in accounts receivable account it'll requested <unk> as well as the time the vendor pain.
Our next property plant and equipment increased to 199.8 million as of September 30th 2022, compared to $193 million at the end of the fiscal year 2021.
Capital expenditures of 35.
Nine year to date.
Lastly, our interest and other income and expense went down I 0.3.
Q3 of 2021.
Primary driver of the decrease <unk> $2 million from the sale of a small track Atlanta, Georgia.
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For the fourth quarter of 2022 weeks that failed in the range of 370 million $399 and non-GAAP adjusted earnings per share in the range of one dollar.
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5 billion.
1.585 billion and non-GAAP adjusted earnings per diluted share in the range of $5.
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Our tax rate closer to 16% a year person got <unk>, we got at 11% per.
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I also like to note that we're not providing guidance on that yeah.
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Necessary to provide <unk>. Please.
That I would like someone to call back over.
Thank you Scott once again I am extremely pleased with the results of our team is produced in the third quarter, especially given the tough economic and operational backdrop.
Looking forward, we are cognizant of the rapid changes in the macro environment.
Consequently, the ability to pivot and deliver on or multiple scenarios is more important than ever before.
As we plan ahead for 2023, we are focused on what we can control.
Taking a balanced approach against an uncertain economic outlook.
Our top priorities include increasing inventory turns in the generation of free cash flow driven through decision and production agility.
We are certainly pleased with our robust balance sheet and I believe it to be one of the top defenses against any bumps in the economic environment that we may experience.
We remain committed to continue improvement in our operating model for sustained and predictable performance to our long term goals.
Thus maximizing value for our employees and shareholders.
I'd now like to open the call for questions operator.
At this time, if you'd like to ask a question. Please press the Stein one I a touchtone phone you may remove yourself from the queue at anytime <unk>.
We'll take our first question from <unk> from C. J S Securities.
Thanks, God I guess first question, Mike lots of moving parts you mentioned.
Tori level still remain below normal you back August it sounds like it's still pretty good at least on the power vehicle side and obviously the economy is always continues to get a little bit worse.
Visibility not giving guidance, but how's your visibility like as you look out into twenty-three.
And then the second part of that question is.
With the you know you were about a year ago. You gave your 2025 outlook I think you've put that together like almost two years ago do you feel as good about that outlook today as it did back then.
Yeah, Uhm Oh, sorry. Your second question first we still are confident of 2025 vision, we didn't expect to see the growth we actually in the last two years in N. S. S. G. When we let out that vision. So we got a bit ahead of ourselves probably getting cause that's only 25 number with a with a great success.
Two years, but uhm.
Even with a flattened or diminished F. S. G visit on a short term basis, we still feel comfortable with the long term plan.
Partially because in this kind of gives you the first question.
<unk> sure on R. O M. Vice it has as remain strong and getting stronger throughout the two years. So we're gaining market share that's the positive and negative as to your question about kind of next year is you've just got so many moving pieces from foreign currency inflation around the world.
Faulty in Europe , specifically, there's still Oh, really clunky supply chain bike, meaning you might be able to deliver shocking and force, but somebody else can't deliver drive train or or something else.
You've got lots of parts and pieces of bike sitting out someone will supply chain that need to be configured.
Causing a lot of closeness and a very opaque view of what twenty-three would look like relatively actual net demand.
So we're being pretty conservative about it you know.
You mentioned I'm not Gonna guide total free just yet, but I and also we're not gonna get it just because this stuff is changing daily so by the time, we get to that twenty-three guy will have a pretty clear view, but a lot of change you in queue for probably the last two weeks so.
We contemplated that link and the Guy that described gave you those comments I think we need to give us a couple of months to really get our Android twenty-three, but I would expect that that you know even with the upside of spec wins the downside of market.
Volatility and just the overall economy.
Is gonna is gonna causes to be pretty conservative and what we estimate total creeps up to look like.
Right. So it sounds like it could be below your at least on the S. S. That's what she saw it below sort of that that normal targeted growth.
Yes, it's free side, but on the <unk> side, which we didn't talk about Larry Wirsing significant volume coming through the auto M side and power source is still really strong so the benefit of our business models of diversification right. So even if I feel a little bit of week listen to bike side, what's your first.
Stroke and other parts of the Bible P. D. D is still doing really well.
And will continue to do really well so that that's what I love about the business I think the diversification, they're really helped curious through.
Right, Okay, Great and you know you mentioned, obviously, Georgia continues to you know efficiencies continue approve their.
I guess the question I have is anything you need to re kind of reaffirm you sort of 250 or 300 basis point improvement.
It won't be a linear proven right, but that's sort of you know you expect sort of what we kind of you know.
Accretive mode, now, where we should kind of be adding additional incremental benefits per quarter as they move out.
Yeah, I think you'll start to see that you know we didn't really see it as incremental benefit in Q3, but I think you start to see that now and I think you'll just need to continue throughout twenty-three.
Right at this corner was also been taught that I guess by mix too right.
P O M. P. Six alright, where you know if you you know as well or yeah. There. There is as you move to more of that Otto O M mixed you'll get the benefit of high volume low mix, but you don't get the benefit of some of those margins and you would see in other parts of the business. Okay. Great and then just last question on the balance sheet. Obviously, it's improved the last coupla years.
Would you would you entertain the idea of an acquisition this environment or or might you be a little more cautious and you know hold your you know it keeps some powder dry.
A little bit of both actually we we are looking at some potential opportunities in the space. So we've always looked at opportunities. So we're not we're not stepped away from that that notion of an acquisition, but I I also and we've talked as late as today as a management team.
Let me go into a pretty uncertain economic times next year, we're going to be pretty conservative on how much leverage we want in the business. So.
What that might mean that we do less significant acquisitions, but really you know well targeted acquisitions.
And and you know the good news is as a recession get if there is good news in a bad recession or a bad economy things get cheaper and that's a good time for us to use of a dry powder to pick up things that we think are a longterm valuable to the company.
Okay, great. Okay excellent appreciate all the caller thanks.
You bet.
Our next question comes from Mike switch from choice security.
Hey, guys. Good afternoon, maybe a couple of questions questions here on on guidance you you'd be at the mid point of your third quarter E. P. S guide by about 10, Sancha raising the full year by about seven cents. If you give us some some context to some of the puts and takes I know cause.
<unk> interest rates, we're we're probably headwinds did that but just how should we think about.
That guidance increase.
Yeah, No absolutely Mike I think.
You know, we're we're trying to as always be somewhat conservative in our outlook, but we are we are fighting against a little bit of currency had when we started a hedging program in Q3, which was very successful in helping us mitigate some of that impact that we would have seen otherwise.
And we'd already had a fairly robust interest rate swap program in place to help combat interest rates, but we are not we certainly have not swapped all to fixed and so we are impacted by higher rates a little bit taxes. We've also raised our guidance for the year because.
We had some return to provision.
Adjustments that it'll come through in Q4.
So we have some headwind not to mention you know mixed continuing to materialize as we expected, but but a little bit even more on automotive OA side, which which is Mike. Just said is it makes it tougher for us to overcome with.
With improvements and efficiencies in Gainesville. So yeah, I think just just kind of taking a very balanced approach to our outlook for T for giving me some of the sort of non business things that were faced with I think we're we're still we're still happy with what we see in Q4.
Or from a business perspective, we're just fighting against a whole bunch of other things.
Okay. That's that's helpful and I I noticed on the balance sheet, the prepaid came down sequentially pretty pretty nicely.
Yes, how should we read that in terms of you know either demand or or chassis supply in the up fitting business.
Yeah demand, it's still very strong and chassis supply a actually you should read it as a good thing for chassis supply because we felt comfortable enough in our our relationships and and in our sort of our feedback that we're getting from the <unk> specific.
We we we've talked about how when it hits our balance sheet and prepaid fit that's that's primarily like an F C. A relationship with Ram and G.
That that we felt pretty comfortable that we were going to be able to get access to chassis and so we're during pandemic, we had gone out and bought everything that we could get our hands on we have curtailed that in order to better manage our working capital of it as I mentioned last quarter.
That that was gonna be a big focus for us was getting working capital under control and I you know.
All credit is due to the the team and our our P. B D group and especially over in Birmingham at S. C. A for working to to get that inventory level down so that we're living more unlike six months of chafee's versus 12 to 15 months.
Okay, Great I appreciate that.
Our next question comes from and a question from Geoffrey.
Hi, Thanks for taking my question first I wanted to touch on the upsetting that that great to see the demand is transfer previously we've talked about how you could start to see some macro sensitivity towards the entry level side at that business could you talk about how that business is performing.
Buy pricing tier.
Yeah. This is Mike you know, it's still performing stroller across the entire platform. So so we haven't seen anything kind of fall off I would say in September we saw late at the time on a dealer's lot increased a little bit but still on the historical average pretty pretty good.
So as we as we think about Q for it in the next year, we're pretty pretty bullish on that T V business because it does seem that is weathering somebody's inflationary pressures better than other parts of the business and other other consumer products.
So so so far no.
We're we're we're feeling pretty good about it.
Great. Thanks, and then turning back to S. S. G could you maybe comment on where we stand in terms of channel inventories are is P. L. S matching staff and a little bit better is there still a little bit more to build and how that should shape the expectation into 2023.
Yeah, I think it's getting close to equilibrium you know the challenges as I mentioned.
Larry's question is that you've got a lot of clunkiness still in the unfinished bike. So I have the supply chain cause you've got parts and pieces of bikes, but not for bikes. So we got to see that really flow through hopefully in queue for that like you want to get a really good <unk>, where the volumes are the channels for the high end premium.
<unk>, but.
But I would say there were still a little bit under equilibrium now will look for ways that direction. So we will see that these now. Thank you for we'll see it in Q1 you know those are those are things that I as I said to you before and the others I think that gives us some confidence that we can have a reasonably soft landing in bike because without seasonality.
He kind of feel like you're gonna fall off a cliff and so I feel pretty good that we're gonna start to see that come through for the next couple of quarters.
Great. Thanks.
Mmm once again, if you'd like to ask a question that is star and one we'll take our next question from Jim Duffy from Stifel.
Thank you could I have some new guys.
How about like I wanted to start with a question on the outfitting business Uhm can you speak about the opportunity for additional penetration on dealer lots, where you stand right now relatively opportunity an appetite some incremental dealers to engage with you in that business.
That's a big leather for us if we see if we see sales start to slow in the current dealers roads, it's still gonna challenge or the first two the first three quarters of this year to get enough trucks bass stuff out to the lot to support me dealer engagements that I was starting to get better and I think that's really all opportunity going through the end of the queue.
According to in the next year is too.
<unk> from 20th 200 dealers to 2500 and beyond.
You've heard me talk about it in the past I think that you are getting getting to the consumers across the country in a more efficient way across a broader dealer network is really are are upside opportunity. It does <unk>.
We're close to capacity pvt business. So what are the expanding a little bit of space and and capability to get some more throughput.
Going into next year, but but.
But the dealer the dealer growth is obviously for the top of the line for us.
Great Scott.
Got a couple of questions coming your way there was some encouraging commentary about opportunities to realise margin benefit from Gainesville in 2023, I <unk> realize there's some uncertainty on the top line cause I'm curious <unk> from a gross margin mix standpoint into 2023, just with respect to the <unk>.
<unk> towards powered vehicles and away from Us S T.
Yeah sure Jim I think you know and and certainly I want to go back to you know when you're talking about uncertainty as Mike mentioned I think on the on the P. B G side, we're not seeing any any weakness and in fact are expecting to see growth continue and and so not.
Not a big concern there, but I think you're right in thinking about from a mixed perspective, I mean, that's something that we've talked about many times over the last couple of years as we see that mix change. We're gonna be you know, we're gonna be impacted by that margin mix and then the the the the improved.
Minutes or the efficiencies in Gainesville, well, hopefully help to offset that and and so it may not it may not be showing up is clearly in the in the posted results, but the improvements are gonna be there in in sort of how it had.
Mitigating any of that mix.
Okay, and then Scott can.
You talk more about this opportunity to improve the working capital efficiency it seems like.
<unk> is certainly an opportunity would you expect to see progress with that in 2023 to help cash flows.
And then how should we think about the prepaid account balance from here.
Yeah, we're we're still working to optimize our inventory levels and up fitting in so that that's the prepaid pizza I think we can get a little bit more benefit out of that here in the short term, but like I said before the team has done a phenomenal job in I would say.
Kind of readjusting, they're they're sort of mindset from Covid, we need to take everything we can get our hands on too you know moving to more of what do we need to actually you know meet demand and and moving into that kind of headspace.
I think you're you're dead on inventory as a focus for US right now and will continue to be next year, we've gotta get our turns improve Mike mentioned that in his prepared remarks. It is a huge focus for us next year and and even in queue for how we are managing inventory and and.
Improving our turns in our cash flow related to that.
Thank you.
Okay last question comes from Okay, Craig Kennison from parents.
Hello, Thanks for taking my question as well.
I'm curious what you're seeing on the power sports side with your customers that make a side by side the Tv's snowmobiles.
And other products.
No those channels have had very little inventory give me the pandemic period.
But maybe that's improving I'm curious, what you're saying and I'm curious if your O M customers had begun to taper orders at all as they get through this period of you know a severe shortage.
Yeah, Craig's Mike in terms of the back half of that question, we haven't seen tapering yet you know our customers are pushing a as to their produce more we're getting better quarter on quarter.
The first part of this quarter already we're doing a lot better to get that product out the door, we're still a pretty significant backlog situation with those customers. So we'll we'll work really hard to meet their their their expectations and and <unk>.
Deliver product and I think ultimately Powersports will start a trend like bike, but I don't know if it will see that even in the next year I don't know yet cause it's way too early to call. The ball for the back after next year, but the first half with what looked like this year just more of it so.
My expectation is eventually we'll see some of that kind of equilibrium coming back into power sports, but but what I hear that yet.
And I'm just as a as a follow up if you look at your white space opportunity within power sports specifically what does it look like to you do you have opportunities to win spec sure get on new models are with any new brands, where do you see the biggest opportunity to grow.
On what the industry can provide you.
We have some stuff in process right now Crazy I think is really interesting I don't want to call. It out on the coffee because we're still working through the details of it but there's parts of the business that I can create significant white space for us not just in new technologies or new vehicles, but in new ways of approaching the market aftermarket in that space has been a very small business.
For a long time, yeah, we bought a shock therapy to help us understand it better we've learned a lot and that acquisition, even though the small acquisition and so we're getting ready for some significant changes in 23. They were pretty excited about that I think we can start talking about in the next couple of innings calls that will will show has some good growth even as that.
Mark It starts to get a balance itself out.
Great. Thank you.
Thanks, Craig.
It appears we have no more questions at this time I will now turn the program back over to Mike Dennison for any concluding remarks.
Thanks, We appreciate everyone, taking the time to Jonathan today's column and we hope to talk to you soon have a good evening. Thank you.
This does conclude the Fox factory holding Corporation third correct 2022, I need to call. You may now disconnect your line and have a great day.
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