Fox Factory Holding Corp. Q1 2023 Earnings Call
[music].
Okay.
Good afternoon, ladies and gentlemen, and thank you for standing by welcome to Fox Factory holding Corp, first quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
Please note. This conference is being recorded I would now.
Now I'd like to turn the conference over to your host the vector Cooney senior director of Investor Relations and business development. Thank.
Thank you Sir you may begin.
Thank you good afternoon, and welcome to Fox Factory's first quarter 2023 earnings Conference call I'm joined today by Mike Dennison, Chief Executive Officer, and Maggie tourists, our interim Chief Financial Officer, and interim Treasurer first Mike will provide business updates.
Maggie will review the quarterly financial results and then the outlook followed by closing remarks from Mike. We will then open the call up for your questions.
By now everyone should have access to the earnings release, which went out today at approximately 405 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 uncertainties many of which are outside the company's control and can cause future result.
Performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward looking statements.
Important factors and risks.
It could cause or contribute to such differences are detailed in the company's latest Form 10-Q, and indeed in order to report on Form 10-K filed with the Securities and Exchange Commission.
Except as required by law the company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information future events or otherwise.
In addition, when 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 more.
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 V and good afternoon, we appreciate everyone, taking the time to join US for today's call I am proud to report that we have started 2023 with a strong first quarter results.
Thanks to the power of our diversified product offerings and the differentiated market position, along with our committed and capable team we executed incredibly well during the first quarter against a volatile economic and changing product mix environment.
As we manage through all of these economic and market changes our top priority is to ensure the long term sustainable growth of our business to achieve this it was important to recognize the shifting requirements for workforce utilization and alignment.
On this front, we instituted cost reductions, which primarily resulted in a reduction of workforce within our specialty sports group.
We are also in the process of rolling out an enhancement to our organizational structure, which is designed to be more aligned with our end customers and drive additional focus on product development.
Our plan includes bifurcate, our existing powered vehicles group into two new product groups that better align with our go to market strategies and product synergies.
These two product groups would consist of firstly, our P V G legacy suspension business and secondly, our portfolio of non suspension aftermarket applications and up fitting.
We will provide quarterly updates regarding our internal organization changes, which we expect to be completed by the end of this year.
Turning to the numbers, our first quarter sales were approximately $400 million, an increase of five 8% compared to the same period last year.
We reported earnings per diluted share for the quarter of 98 cents versus $1 13 in the same period in 2022.
A decrease of 13, 3% quarter over quarter.
We also reported non-GAAP adjusted earnings per diluted share of $1 20 versus $1 32.
A decrease of nine 1% over the same period last year.
This quarter over quarter decrease is primarily driven by a significantly lower effective tax rate in the same period last year.
Let's break down the numbers further beginning with our powered vehicles group.
Q1 marked another remarkable revenue quarter led by a 35% growth in sales versus the same quarter last year.
Driven by strong performance in our OE channel and up fitting product lines.
We delivered a quarterly revenue of $281 million, a fifth consecutive record revenue quarter for our powered vehicles group.
We are pleased with our Q1 momentum thanks to the foundation provided by our Gainesville facility improvements and the continued growth of our outfitted vehicles.
In our outfitting business the end consumer in the premium truck portion of the automotive market is showing continued signs of resilience.
Consequently, we will remain focused on new vehicle development as well as expanding dealer relationships, while monitoring the sensitive balance between consumer financial health and our financial targets.
In addition, we closed our custom wheelhouse acquisition on March 3rd of 2023.
As a result custom wheelhouse contributed $6 9 million to our topline.
For the full year, we expect a revenue contribution of approximately $60 million to $70 million with the margin profile being accretive to Fox as overall margin profile.
Lastly, as I had mentioned in our prior earnings call. The significant change in our revenue mix will continue to negatively impact margins. However, I feel very confident we will offset some of that headwind through the integration of custom wheelhouse.
In addition, I've spoken before about the potential for margin improvement in <unk> of 250 to 350 basis points based on the ramp up Gainesville.
I'm thrilled to report that we saw much of that improvement achieved in the first quarter.
I'm more thrilled to report that we are not done.
As our volume continues to grow on P. B G. We believe we have another 200 to 300 basis points of improvement ahead of us.
While this will not be linear margin expansion it will be tied to volume increases we clearly have a line of sight over the next 12 months to 18 months to keep improving.
Turning to our specialty sports group, we delivered quarterly revenue of $118 9 million a decline of 30% as compared to the same quarter last year.
This is primarily due to the stronger than anticipated seasonality impact in Q1 of 2023.
As you May recall Q4 of 2022 didn't reflect the expected seasonality impact, which consequently made Q1 of 2023, even more dramatic.
In addition, we are continuing to hear about the larger than anticipated inventory glut foreshadowing a longer period of decline before we return to a more normal environment.
Hence, we now expect our specialty sports group to be down over 20% for the full year.
With the worst of the impact occurring in Q2.
Our team is keeping a finger on the pulse of the market and we will continue to update you every quarter as we worked our way through the channel inventory challenges.
Once accomplished we feel confident equilibrium in the bike industry will return to normal as we continue to see positive signs with end customer demand.
To conclude we are happy with the strong Foundation Q1 has provided we are also pleased to see the power of our diversified portfolio, which we have painstakingly built over the last several years.
As we look for signs of stabilization in the specialty sports group, our custom wheelhouse growth will provide us with a reasonable offset in both revenue and margin headwinds.
And finally I want to introduce you to Maggie tourists, who has stepped in to pinch hit as our interim CFO .
Mega has been a key leader in our organization for many years and while she had planned to retire our commitment to this company and this team overrode that decision temporarily.
And I want to take this opportunity to personally thank Maggie for her partnership and leadership.
And with that I'll turn the call over to Maggie.
Thanks, Mike Good afternoon, everyone I'll begin by going over our first quarter financial results and then review our guidance.
Sales in the first quarter of 2023 were $399 9 million, an increase of five 8% versus sales of $378 million in the first quarter of 2022.
Powered vehicles group P V G delivered a 35% increase in sales in the first quarter compared to the same quarter last year, primarily due to strong performance in our outfitting product lines and increased demand in our OEM channels.
Moving on to our specialty sports group sales in SSG decreased by 30% compared to the first quarter of 2022, primarily due to a return to seasonality in the bike business and the impacts of higher levels of inventory across various channels.
Fox Factory's gross margin was 33, 3% in the first quarter of 2023, a 150 basis point increase from 31, 8% in the same period in the prior year.
For the first quarter of 2023 non-GAAP adjusted gross margin also increased by 180 basis points to 34, 1% versus Q1 of 2022.
The increase in gross margin and non-GAAP adjusted gross margin in Q1, 2023 was primarily driven by lower materials and other related costs.
Increased efficiencies at our North American facilities, and strong performance center outfitting product lines.
In addition, non-GAAP adjusted gross margin was favorably impacted by the step up in inventory value as part of the purchase price accounting for custom wheelhouse.
Total operating expenses were $78 6 million or 19, 7% of sales in the first quarter of 2023 compared to $66 1 million or 17, 5% of sales in the first quarter of last year.
The increase in operating expenses in Q1, 2023 was primarily due to higher employee related costs.
And professional fees and higher insurance and facility related costs, partially offset by lower acquisition related compensation and various others.
Looking at non-GAAP operating expenses as a percentage of sales our non-GAAP operating expenses increased by 180 basis points to 17, 6% in the first quarter of 2023 compared to 15, 8% in the same period in the prior year.
Focusing on operating expenses in more detail sales and marketing expenses increased approximately $1 1 million in the first quarter of 2023 compared to the first quarter of 2022, primarily due to higher commissions.
Research and development costs increased approximately $2 7 million in the first quarter of 2023 compared to the first quarter of 2022, primarily due to personnel investments to support future growth and product innovation.
General and administrative expenses increased by approximately $8 1 million in the first quarter of 2023 compared to the first quarter of 2022 due to higher employee head count and benefit related cost of $6 2 million.
Legal and professional fees of $2 5 million insurance and facilities related expenses of $2 million.
Partially offset by lower acquisition related compensation and other costs of $2 6 million.
The company's effective tax rate was 18, 3% in the first quarter of fiscal 2023 compared to four 8% in the first quarter of fiscal 2022.
The change in the effective tax rate was primarily due to the release of our valuation allowance against foreign tax credit carryforwards in the first quarter of fiscal 2022 upon enactment of U S tax regulations.
Partially offset by a decrease in foreign withholding taxes net of foreign tax credits in the first quarter of fiscal 2023.
On a GAAP basis net income in the first quarter of 2023 with $41 8 million or <unk> 98 cents per diluted share compared to $48 1 million or $1.13 per diluted share in the same prior year period.
non-GAAP adjusted net income was $51 million in the first quarter of 2023, a decrease of approximately $4 8 million or eight 5% compared to $55 8 million in the first quarter of last year.
We delivered $1 20 of non-GAAP adjusted earnings per diluted share in the first quarter of 2023 compared to $1.32 in the first quarter of 2022.
Adjusted EBITDA increased by 10, 3% to $79 2 million for the first quarter of 2023 compared to 71.8 million in the same quarter last year.
Adjusted EBITDA margin increased by 80 basis points to 19, 8% in the first quarter of 2023 compared to 19% in the first quarter of 2022.
The increase in adjusted EBITDA margin in the first quarter of 2023 is primarily due to the improvement of non-GAAP adjusted gross margin.
Now focusing on our balance sheet for the first quarter, which ended on March 31, 2023 compared to a 2022 year end on December 30th 2022.
We held cash on hand of 91 9 million compared to $145 3 million.
Accounts receivable was $195 3 million compared to $200 4 million.
Inventory was $379 9 million compared to $356 million.
Prepaid and other current assets was $214 6 million compared to $101 4 million.
Accounts payable was $135 3 million compared to $131 2 million.
Goodwill and intangibles were $389 million and $226 1 million compared to $324 million and 179 million respectively.
And our line of credit with $360 million versus 200 million.
The decrease in cash on hand, and related increase in prepaid and other current assets reflects higher chassis deposits as we return to a seasonal build pattern and ramp up to meet the current year production needs and are up fitting product lines.
The increase in inventory is primarily due to inventory that we obtained in our recent acquisition of custom wheelhouse.
The changes in accounts receivable and accounts payable reflect the timing of customer collections and vendor payments.
Our net property plant and equipment increased to $210 3 million as of March 31, 2023, compared to 202.2 million at the end of fiscal 2022, reflecting capital expenditures of $11 1 million during the quarter.
The increase in goodwill and intangibles reflect our recent acquisition of question Wheelhouse and lastly, our line of credit went up by $160 million again, reflecting the use of proceeds to finance our custom wheelhouse acquisition.
Now turning to our guidance for the second quarter of 2023, we expect sales in the range of 390 million to $410 million and non-GAAP adjusted earnings per diluted share in the range of $1 to $1 20.
For the fiscal year 2023, the company expects sales in the range of 1.67 billion to $1 7 billion and non-GAAP adjusted earnings per diluted share in the range of $5 to $5 30.
Our full year guidance assumes an income tax rate in the range of 15% to 18%.
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 accurately predicting the elements necessary to provide such guidance and reconciliations.
As Mike discussed earlier in this call we remain cautious in our outlook for our specialty sports group in the second quarter.
Additionally, we anticipate continued revenue mix normalization in our powered vehicles group throughout the year driven by a higher percentage mix of OEM sales.
As our understanding of the global business environment evolves, we plan to provide incremental updates each quarter regarding our expectations for 2023.
Lastly, I am pleased to announce that we have hired Brendan Enoch as our first chief accounting officer.
We are confident that Brendan's edition to the team will elevate our global finance and accounting team and align our overall efforts to gain efficiencies strengthen oversight and controls and support future growth.
With that I'll turn the call back over to Mike.
Thank you Maggie to wrap up I'm pleased with the solid start to 2023, but at the same time being very cognizant of the possible macroeconomic trimmers.
As the narration regarding a potential recession has increased the recent tightening of the credit standards has only fueled those fires. However history has shown no matter what the operating or macroeconomic maybe if you have a strong brand you always come out on top.
And besides many other assets a powerful brand as what we have to.
Despite the near term uncertainty, we remain agile and continued to lead moving ever forward toward our mission.
I believe we are well positioned for future and long term growth by making strategic investments to expand manufacturing capacity exploring potential new markets and by continuing our relentless pursuit of product innovation.
Lastly, we are close to finishing our search for our next CFO .
Given the remarkable brand and growth story that we have we attracted a number of high potential candidates and I feel very confident that Maggie will eventually be able to retire later in Q2.
I would now like to open the call for questions operator.
Yeah.
Thank you Sir at this time, if you would like to ask a question. Please press the star and one Keith on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star Q.
Once again that is star one to ask a question.
And our first question will come from Larry Solow with CJS Securities. Your line is open.
Great Thanks, and good afternoon.
Hello.
Hey, Mike just a quick clarification.
For the full year, the same lowered EPS by 15 cents.
Obviously, you're rolling in.
We'll have about $70 million on an annualized basis or about $70 million in this year fiscal 'twenty.
That $70 million in this fiscal year. So as you correctly pointed out very yeah, we think for at least getting through Q2, we're going to hold on the guide on the revenue side and kind of reinforce some of the softening of the SSG in the reduction of the EPS guide to give us kind of a conservative view of the balance of the year and let's see how Q2 goes though.
From there.
Gotcha.
The cost of debt.
Three quarters will be a little bit accretive for you guys right. So absolutely it's accretive obviously on the revenue side clearly and also on gross margin.
Yeah.
Gotcha.
EPS too.
Even with the or not as much a.
A little bit right I, suppose a little bit.
Yeah. Okay, alright, Okay can you just just keeping you guys couple of questions just one on.
One on power vehicle.
Just you mentioned, obviously the inventory glut, nothing new there or maybe just a little deeper.
Just curious you mentioned positive some positive signs of end market demand.
I'm sure it's somewhat anecdotal at this point, but could you anything you can share with us to give us a little light at the end of the tunnel if you will.
Yeah, Yeah for sure you know we are seeing customer demand in certain markets picking back up and that happened kind of late in the quarter. In Q1, So that does give us confidence that the demand is not necessarily gone in a matter of fact, they've all gone in SSG.
Just this massive amount of inventory that is bigger than expected pushing because we knew that right. We've talked about that the last earnings call.
We were hoping that Q2 would show more positive signs and in fact, it's not really showing any improvement and probably some further weakening from Q1. So now we're really looking to the back of the year to really understand what's going to happen in Q3 and Q4. The good news is we're as you know we are it's all about spec and making sure that we maintain our market share and grow it and that in fact happened.
So we feel great about our position, we just feel like we have to wait and let this thing process. So we can back in to get back on the gas.
Pedal Gotcha Gotcha, and then just one quickly on powered vehicle. So obviously, there's a lot of time.
Taryn.
Torch, if you will and really strong growth, we expect from <unk>.
Obviously, your audio auto OEM side on sort of your legacy suspension, but.
I think there were some concern.
The upgrade of the market.
Non suspension.
Is that sort of cater to.
Hi.
Clientele, there, we might start to slow down a little bit, but it doesn't sound like it's really slowing I guess question, one and part two of that could you just.
Remind us sort of where you stand with Tuscany and SCA in terms of.
Dealer relationships and the opportunity to expand into new dealers and then also just what.
Well just vehicles per dealer, because I think that was still pretty low, but not mistaken that's right yeah, and we saw a little bit of softening in the first month month, and a half of the quarter relative to the aftermarket businesses.
Businesses like sport truck and even up fitting but it picked up towards the back half of the quarter and obviously ended very strong. So we're not seeing any weakness related consumer standpoint, right now across our what we call applications business non convention business. So that's a real healthy sign for us and as you can see in our prepaid we've got a healthy balance of debt.
Inventory and chassis to support the ongoing growth of not only revenue or volume growth, but dealer growth to your question.
And unit growth per dealer. So we're staying out of the gas we actually believe that this is the first you're able to actually go grow those dealer counts and we have to start by pulling dealers backend that we couldn't supply. The last two years. So we're doing that work now and we're creating a lot of synergies to our sales force.
In that regard so I do think youre going to see a nice healthy pick up the rest of this year and both dealer count and vehicles per dealer.
Great. Thanks, Mike I appreciate it.
Yep.
Thank you our.
Our next question will come from Jim Duffy with Stifel. Your line is open.
Thank you Hi, Mike Hi, Maggie.
Hey, Jim I wanted to.
I wanted to start with a few questions on the bike business.
Can you comment on the marketplace inventory posture in the differences you're seeing between Europe and North America.
Also curious where E mountain bikes stand as a percent of your order book and then finally, what are the factors you're watching for a sight line to stabilization in the market.
How are the Oes planning model year 'twenty for production is it possible that the down for model year 'twenty three or is it too early to make that judgment.
He was writing that down what was it that was a few questions. So let's start let's start yeah, we kind of go one by one if you like like that's yeah. That's okay I'll start with a geographic question.
It's.
It's pretty balanced frankly, depending on the month and the telephone North America versus Europe can be a little bit different.
Anything kind of puts and takes on that but both of them are really kind of.
Again, not a demand issue as much as.
Just a bulk up of supply in the system. So we believe that that that's going to continue throughout Q2 in both regions.
Yeah, it's hard to it's hard to pick, which which region will actually come out ahead, and I think that might be tied somewhat to the macroeconomic environment in those two regions as well so kind of hard to call. The ball on that they're all fad for the same supply chain. So it's kind of a functional global supply chain itself.
Back into equilibrium.
But I would expect to see U S and Europe kind of trend into that path.
In terms of E bike, Yeah, you bet.
Mike is a strong part of our business.
You know we've been growing that part of the business quite substantially. Unfortunately, it was one of the biggest parts of the supply chain glut, because the things that we couldnt get the complete with our OEM partners couldn't get to complete bikes with motors. So that was a large part of what was stuck in the channel and so we're seeing that is kind of a secondary effect of this issue I think as we come.
Out of this E bike will be it will be on fire that demand is continuing to grow faster than pedal bike demand across every region, especially in Europe . So I think E bike will recover very quickly again. It just has to get through kind of the older oversupply situation, which we've talked about in the past.
Your last question was on stabilization gently remind me what it was.
Yeah, just the factors you're watching for for sight line to stabilization and I'm curious how the Oes are planning model year 'twenty for production when they make determinations on that is it possible model year 'twenty four is down from 23.
I presume that you are watching our sell through in the key north American selling season as an indicator.
So Greg to plan that model year production well, let me know your thoughts there. Please yeah, yeah. It's a great question. So what we're seeing in terms of kind of how theyre thinking about model years is different by OEM.
And what we're finding is smaller more nimble Oems have responded better and had less inventory in the system. So pivoted left foot right foot to get onto model year 'twenty for faster than some of the bigger OEM partners now is good news and bad news. The good news is as we have.
Really good relationships with those smaller boutique Oems that are helping us get the model year 'twenty four more quickly bad news is there's a lot of volume tied up in the bigger guys from the bigger Oems and they are struggling so you will see them need to churn through that model year 'twenty three before they really launch inventory of water year 'twenty four as you can imagine.
If they're pushing the model year 'twenty three bike still into dealers kind of hard to convince them to take model year 'twenty for bikes or vice versa. If they take them out of your 24, you have to discount all of your 23, even greater so it's a bit of a quagmire, Florida, frankly, Jim and they're working through it.
Well, what we're really saying is it took a little while in Q1 to figure out the level of the issue and now Q2, they're getting they're getting very aggressive about how to resolve it. So the good news is they're there they've gotten serious and they know I think there's no exact what they need to go do I think Q2 is going to play out finding out what that looks like which is.
And while they're being a bit conservative in the back half of the year. So we can see what that looks like.
Thank you for that I'll, let someone else jump in.
Thank you.
Our next question will come from Michael Swartz with Truth Securities. Your line is open.
Hey, guys good evening.
Beat the dead horse, but just wanted to stick on SSG for a second and maybe a point of clarification I think the last time, we talked on your fourth quarter call.
Despite challenges are really framed as too much inventory, maybe incomplete inventory in the supply chain with the Oems. It sounds like now there is more at least that's the way I am.
Im reading it theres more of an inventory issue in the retail channel is that the right way to think about it and is that kind of the.
The reason behind Youre lowering the full year outlook for S. G.
No I think it's still more of the former than the latter Mike I think it's still inventory that have built in the supply chain now eventually that has to roll through obviously dealers and distributors to get to the end market. So at some point that.
That paying goes all the way through the snake so to.
Big and so youre going to see it end up in dealers, but that's going to be a bit of a process. So the faster they can get that done by the way the better off we're all going to be.
We'd really like to see that inventory move into dealers' hands in Q2, and whatever discounting they do which doesn't really affect us but needs to get done to get those bikes move the more aggressive line. They take on that and that of course, the better off we're going to be so I'd really like to see these bikes can move through and Theyre starting to but you know.
Again, I think what we're going to see us do and customers wait for model year, 'twenty four or do they take a deal of the model year 'twenty three.
Too soon to tell on that one.
Got you perfect. Thank you.
Second question just on.
First quarter gross margin came in better than than I think any of its where were anticipating so and it looks like per your 10-Q that your mix was actually towards OEM.
So maybe help bridge the gap of.
What maybe came in better than expected during the quarter and then is your guidance implying that there's there's some give back as we work through the year.
Yeah, I'll start the answer of that all the Mega jump in.
You know I don't know if theres give back to get back would be a function of mix versus anything else I think really what we saw in Q1 was the engine really starting to crank up in North America with the optimization of the factories, just had a phenomenal quarter relative to that footprint and getting those efficiencies in.
Prudent that we were looking for so as I've mentioned in the prepared remarks that we thought that would take longer in in 2023 to achieve we nailed it in Q1 and through that process realize yeah right. We're not even close to done yet we've got more room to move so I think youre going to see a non linear basis, you're going to see further.
Margin expansion across the North America footprint.
As we continue to improve and that's across OEM aftermarket it doesn't matter, where in fact that might be improving faster on the OEM side and the aftermarket side just relative to those efficiencies. So.
Yeah, we're really happy with what we're seeing there and that gives us confidence in having a good year this year.
Even with the mix shift, which was as you can imagine as you know.
Early significant in their overall product categories, maybe anything to add there.
I would just add that in addition to the factory efficiencies in our North American facilities. We also had a little lift in fitting product lines, okay, great mix and outfitting that contributed to that and.
Customers will have to be accretive to the gross margin.
Got you and then just quick quick question on custom wheelhouse in the in the quarter I was looking through the Q and it looks like.
It was diluted earnings, but I'm not sure if that's stripping out all the onetime cost, but just on an adjusted EPS basis in the first quarter was it dilutive or accretive.
Yeah. That's a good question on it on a GAAP basis, it's dilutive because of that some purchase price valuation adjustments. So that's $3 million in GAAP net income, but from a non-GAAP basis.
It's accretive.
Okay perfect. Thank you.
Thank you.
And as a reminder, that is star one to ask a question.
And our next question will come from Bret Jordan with Jefferies. Your line is open.
Hey, good afternoon guys.
Ed.
Could you talk a little bit more about the incremental margin potential from Gainesville, I mean, you sort of talked about how there was pretty substantial upside from here with volume, but could you give us maybe a feeling for the scale of that volume that would be required.
It's a little bit it's well it is volume and what we found in Q1 was the volume that we ran in Q1 was very beneficial to margin accretion in the factories. So it doesn't take a lot more volume than we had in Q1, but it takes just pull their utilization of vertical integration against that volume.
The optimization of our assembly process automation et cetera. So it doesn't it's not going to take a lot more.
In terms of revenues like we have to add 30% more or anything to get there. So we can see a good solid line of sight to it. It's just continuing on the track that we started in Q1 and not backing up the reason why I mentioned volume because volume is a significant portion of the foundation to create that Muslim Christian So if volume is inconsistent, let's say weak too.
Week or month to month that can create some lumpiness in how that margin accretion occurs or it comes into play.
I always want to caveat everything what volumes a fundamental factor in manufacturing to drive margin improvement.
Okay, Great and then I guess on the chassis deposits prepaid we're off how do we think about those turning I guess are we at a prepaid level, where current chassis will sell in Q2, and then youll rebuild the inventory or does that build into Q2 to some mid year peak in that investment.
Yeah, I can take that one I think a couple of things on chassis.
Thank them.
We see Q1 as the seasonal peak so our expectation at this point is that we were we will work through our Q1 chassis inventory gradually.
To the end of the year with Q1 being the peak.
And just another thing to underscore on our on our chassis dollar visit there is also a significant mix component. So when we're talking about chassis based on OE.
If we're talking about Jeep and Ram OE then those are the ones that we prepay so the more jeep and Ram the higher the prepaid and.
As it shifts between GM and Ford other Oes, then that can affect the chassis balance as well great.
Great. Thank you and then one last question I guess.
The bike the bike business is obviously challenged by the inventory bulge does that create M&A opportunity or is it just something that you wait for the bulk of the path and don't buy more in that space in the interim.
That's a great question and it does create M&A opportunities because what we found through Covid and a spike in that business was valuations got significantly higher than kind of really out of the range that we were going to pay that coming back in the range out. So we're looking at some very interesting a matter of fact, we picked up a small company even in the quarter.
That was a that is a good fit for our bike business. So we're going to continue to be accretive acquisition in and SSG space and finally, I think we're in a place where we can actually do some good work there without paying crazy crazy multiples.
Great. Thank you.
Alright. Thank you at this time there are no further questions. So I would like to turn the call back over to Mike Dennison for any additional or closing remarks.
Well, thanks, everyone have a good evening and we will talk to you soon bye.
Yeah.
Ladies and gentlemen, this does conclude the Fox factory holding corporations first quarter 2023 earnings call. You may disconnect. Your line at anytime and have a great day.
Yeah.
Hmm.
[music].