Q2 2023 Fox Factory Holding Corp Earnings Call
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Good afternoon, ladies and gentlemen, and thank you for standing by.
Welcome to Fox factory, holding corporations second quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Please note this conference is being recorded.
I'd now like to turn the conference over to your host.
The vector Cooney senior director of Investor Relations and business development.
Thank you Sir you may begin.
Okay.
Thank you good afternoon, and welcome to Fox Factory's second quarter of 2023 earnings Conference call.
Joining today by Mike Dennison, Chief Executive Officer, and Dennis Schemm, Our Chief Financial Officer and Treasurer.
Mike will provide business update then.
Dennis 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.
Went out today at approximately 405 eastern time.
You have not had a chance to review the release, it's available on the Investor Relations portion of our website at Investor <unk>, Great 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.
Then the meaning of federal Securities laws and management May make additional forward looking statements in response to your questions.
Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can cause future results performance or achievements to differ materially from the results performance or achievements expressed or implied by such forward looking statements.
Important factors and risks that could cause or contribute to such differences are detailed in the company's latest Form 10-Q and in the Companys latest annual report on Form 10-K, each filed with the Securities and Exchange Commission.
Except as required by law the company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information future events or otherwise.
In addition, where appropriate in today's prepared remarks and within our earnings release, we will refer to certain non-GAAP financial measures to evaluate our business, including adjusted gross profit adjusted gross margin adjusted operating expenses adjusted net income adjusted earnings per diluted share.
Adjusted EBITDA and adjusted EBITDA margin as we believe these are useful metrics that allow investors to better understand and evaluate the companys core operating performance and trends.
Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's 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 <unk> good afternoon, everyone and thank you for joining us for our second quarter 2023 earnings call.
I will discuss our strategy operating highlights and business activity.
Dennis will then discuss additional details on our financial results balance sheet and outlook.
After our prepared remarks, we will open up the call for questions.
Before I discuss our strategy and key operating highlights I'd like to take this opportunity to introduce Dennis Schemm, as our new Chief Financial Officer.
Dennis has a strong track record and a wealth of experience in financial planning M&A, and then driving strategic organizational transformation through financial discipline and operational excellence.
Perhaps more importantly, Dennis his leadership traits aligned well with Fox as core values that will help us accelerate our growth journey.
Having spent time with Dennis over the last two months, including visiting many of our operating facilities I can already see how his leadership and communication has energized the organization.
It is competitive yet warm spirit fits the culture at Fox and we're excited to have him on a winning team.
The strength of our diversification in organic and inorganic growth strategy is unfolding play in our second quarter results.
Strong sales growth in powered vehicles group or PPG and the aftermarket applications group AEG, coupled with continued efficiency gains in our north American facilities enabled us to deliver on net sales and to exceed our expectations on adjusted EBITDA and adjusted EBITDA margin. Despite the ongoing soft.
In the specialty sports group.
Sales for <unk> were up 33% and 26%, respectively, effectively offsetting a 41% decline in SSG.
SSG continues to be soft as dealers and distributors work through their inventory.
The increase in PPG is due to strong demand for our products in the OEM channel as we continue to introduce next generation solutions.
In addition, <unk> grew from strong performance of our operating product lines as innovation and vehicle development continued to drive strong customer demand and also from our customer wheelhouse acquisition.
To further capitalize on the strength of our diversification strategy. We recently realigned our PPG business into powered vehicles group and aftermarket applications group to align with the companies and customers and drive additional focus on product development.
This realignment will accelerate go to market strategies, better address customer needs to accelerate the pace of innovation.
And optimized product development.
For example, as a market leader in off road and power sports. This realignment enhances <unk> focus on innovation and speed to market to deliver superior suspension solutions to our customers.
While AG innovates around performance packages and customer engagement capabilities.
In this quarter alone, we launched 13, new products, surpassing last year's annual total and.
And on the field achieved overall volume was in three of the toughest off road races, including the Baja 500, Samsung pay $2 50, and attach bank in Australia.
Turning to our earnings were.
And our strong companywide adjusted gross margins exceeding 34%, while absorbing the decrease in SSG sales.
Our success is primarily driven by the optimization of our north American manufacturing footprint across AG and PPG.
In particular, our Gainesville facility continues to drive significant operating leverage through our continuous improvement initiatives.
We are also seeing strong supply chain improvements across both PPG and AG as material constraints are eradicated.
We achieved strong double digit EBITDA margins of 20%, while absorbing the decline in SSG, which demonstrates the earnings potential of the business.
Overall, our customers in AG and PPG remain positive trends with second half of the year.
SSG, we continued to see softness in the channel works through inventory.
As we have said in prior calls we expect that softness to eventually abate until the strength of our product expansion as well as E bike growth trends returned to a more normal growth rate in the near future.
Based on our latest customer orders, we expect SSG to be down slightly from the second quarter before recovering in the fourth quarter as the Oems begin seeding the market with new your models.
Given the strength in our AG and Pvz groups, we're reaffirming our full year guide of $1 67 billion to $1 7 billion in revenue, but we expect to be at the lower end of the range given the elongation of the SSG recovery.
We will continue to advance our organic growth strategy by developing new products and leveraging our brands to expand into new end markets.
In addition, we will remain steadfast in our commitment to our continuous improvement initiatives by advancing operations and supply chain efficiencies.
Just as importantly, we will leverage our strong cash flows and the strength of our balance sheet to evaluate various acquisition targets that will further our diversification and growth strategy.
To conclude we acknowledged the temporary challenges in front of us but at the same time are very pleased with the top and bottom line performance. Thanks to the power of our brands our product diversification in our customer loyalty.
As our history has proven no matter the challenges the amazing team at Fox has always found a way to grow.
Through new products, new markets or manufacturing optimization.
And with that I'll turn the call over to Dennis.
Thanks, Mike Good afternoon, everyone.
It is great to be joining you today on my first earnings call as Fox as CFO since joining the company in June I've had the opportunity to walk through and spend time at many of our state of the art facilities experienced firsthand our performance defining products and work alongside extremely talented Fox teammates.
I'm excited to be part of the Fox team and look forward to helping Fox continued to challenge the impossible and lead and never ending pursuit of maximum performance.
Now I'll review, our second quarter financial results and then review our guidance.
Total consolidated net sales in the second quarter of 2023 were $400 7 million a decrease of one 5% versus sales of $406 7 million in the second quarter of 2022 PV.
<unk>, which is comprised of sales to OE off road and power sports manufacturers and aftermarket businesses, where we sell our shocks directly to dealers and distributors delivered a 32, 6% increase in sales in the second quarter compared to the same quarter last year.
This growth is primarily due to strong demand in our OEM channels.
IAG, which is comprised of our aftermarket applications businesses, including lift kits wheels, and updated trucks delivered a 26, 2% increase in net sales in the second quarter compared to the same quarter last year. This.
This growth was driven by sales from the custom wheelhouse acquisition, which was completed in March of 2023, and the continued strong performance in our outfitting product lines.
Net sales in SSG decreased by 41% compared to the second quarter of 2022, primarily due to the higher level of channel inventory.
Fox Factory's gross margin was 32, 9% in the second quarter of 2023.
220 basis point decrease from 35, 1% in the same period in the prior year the.
The decrease in gross margin in Q2, 2023 is primarily driven by amortization of the acquired inventory valuation from custom wheelhouse acquisition and a product mix shift offset by increased efficiencies at our north American facilities.
Adjusted gross margin, which excludes the amortization of the inventory step up decreased by 90 basis points to 34, 4% versus Q2 of 2022, showcasing our strong continuous improvement initiatives, which partially offset the product mix shift.
Total operating expenses were $79 2 million or 19, 8% of sales in the second quarter of 2023 compared to $72 5 million or 17, 8% of sales in the second quarter of last year.
The increase in operating expenses in Q2, 2023 was primarily due to the inclusion of custom wheelhouse.
Amortization of intangibles obtained from our custom wheelhouse acquisition and facility expenses investments.
Adjusted operating expenses as a percentage of sales increased by 140 basis points to 17, 7% in the second quarter of 2023 compared to 16, 3% in the same period in the prior year due to custom wheelhouse.
And facility expansion investments to support our future growth.
The Companys effective tax rate was 16, 9% in the second quarter of fiscal 2023 compared to 18, 9% in the second quarter of fiscal 2022.
The change in the effective tax rate was due to the recently finalized U S tax regulations, which resulted in the ability to use certain foreign tax credits. This was partially offset by a decreased benefit related to foreign derived intangible income.
On a GAAP basis net income in the second quarter of 2023 was $39 7 million or <unk> 94 per diluted share compared to $53 5 million or $1 26 per diluted share in the same prior period.
Adjusted net income was $51 4 million in the second quarter of 2023, a decrease of approximately $7 2 million or 12, 4% compared to $58 6 million in the second quarter of last year.
We delivered $1 21 of adjusted earnings per diluted share in the second quarter of 2023 compared to $1 38 in the second quarter of 2022.
Adjusted EBITDA decreased by nine 9% to $79 4 million for the second quarter of 2023 compared to $88 1 million in the same quarter last year.
Adjusted EBITDA margin decreased by 190 basis points to 19, 8% in the second quarter of 2023 compared to 21, 7% in the second quarter of 2022.
The decrease in the adjusted EBITDA margin in the second quarter of 2023 is primarily due to the change in the product mix and cost increases associated with custom wheelhouse and the facilities expansions to support our continued growth.
Moving to the balance sheet the increase in inventory is primarily due to inventory that we obtained in connection with our recent acquisition of custom wheelhouse, excluding the impact of the custom wheelhouse inventory, our inventory was down $11 9 million the.
The increase in goodwill.
And intangibles reflect the custom wheelhouse acquisition.
Our revolver balance is at $325 million versus $200 million at December 31, 2022.
During the first quarter of fiscal 2023, we incurred additional debt to support the acquisition of custom wheelhouse and working capital.
Because of our strong operating cash flows we have paid down $35 million of our revolver balance and since the end of June we have paid down another $30 million, leaving the revolver balance below $300 million.
Now I would like to share some select guidance.
For the third quarter of 2023, we expect sales in the range of 390 million to $410 million and adjusted earnings per diluted share in the range of $1 to $1 20.
We expect SSG to be down sequentially from Q2 as the channel continues to recalibrate inventory.
For the fiscal year 2023, we expect sales to be at the low end of the range of $1 67 billion to $1 7 billion.
S G recovers as Oems introduce new models into the channel.
We also expect adjusted earnings per diluted share to be at the low end of the range of $5 to $5 30.
Our full year guidance. It assumes an income tax rate to be in the range of 15% to 18%.
With that I would like to turn the call back over to Mike.
Thank you Dennis as we close out the first half of 2023, I'm very pleased with our operational and financial results.
This success is not just a testament to our individual talents, but a reflection of our United spirits and shared vision.
While we celebrate our achievements, we remain cognizant of the challenges and evolving market dynamics that lie ahead.
We understand the importance of adaptability and agility in these times of uncertainty.
Armed with our solid foundation strategic vision and a forward thinking mindset, we are prepared to navigate the future with confidence proactively embrace change and continue to deliver value to our stakeholders.
I would now like to open the call for questions operator.
Yes, Sir.
At this time it was like to ask a question. Please press star one 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.
The charity.
Great. Thank you good afternoon.
Welcome Dan.
Yes.
Question, Mike It seems like the weakness in specialty sports is kind of.
Build that back in.
Aftermarket application group does that contemplate effect because that is really powered vehicles.
That was sort of you had some pretty good visibility there where the aftermarket I know things were good but it feels like things are better there.
Is that kind of.
Well not a part of the equation, but kind of a good way to summarize just a revenue John .
Yes, I would say I'd say two things Larry good to talk to what is for sure AEG stepped up and really helped deliver the offset to the <unk> softness.
That's as soon as we thought we didn't expect it to be quite soft.
As you can imagine secondly, aftermarket and PPG is actually up significantly.
Year on year call for the last several years, we've got a hard time, keeping up with the backlog and the aftermarket PPG.
By getting the efficiencies in Gainesville will really unlock.
Mark that that growth, so aftermarket step along nicely as well so I'd say those are the two major drivers that.
And that will help them with that.
So that we didn't know about it to your point OEM was relatively expected in Japan.
Just firstly I think people were probably concern I think directionally it's modest.
Follow up on elongated.
Kind of downturn.
Can you just speak to right now.
While the Oems are kind of in the line of 2024 models can you kind of speak to that dynamic.
All in all potentially skew your sales even for next few quarters.
So question, one and I guess part of that question is what kind of gives you that confidence that you can rebound and get some growth as we look out into next year.
There's a couple of things happening there one is on the spectrum of all of our customers and partners who are launching next year models, it's a pretty wide range and so some some folks are still not in a position where we can do that which gives us this elongation of Q3.
In some cases, we've got customers, who have been coal or fairly full through the course of the past quarter and theyre, putting their foot on the gas pedal.
Quickly and they want to get into those new model years as fast as possible. So you are getting a pretty wide spectrum and we're able to weed through the worst of it take the diversity of all the answer is to get to the outcome.
We are suggesting that Q4 in Q4, we have seen demand actually stay strong.
I've talked about this the demand actually hasn't been a problem and we continue to see demand like through our E. Commerce channel our demand is up significantly year on year or 100%.
So last thing and end customer loss, what are you seeing with big buildup of bikes.
Totally get flushed through.
And unless it will take us through Q3 to get there, but we do see modest improvement in Q4.
Lucas to strengthen through 2024.
Okay, great. Thanks for that.
Okay.
Yeah.
Thank you.
Our next question comes from Jim Duffy with Stifel.
Thank you good afternoon.
I will ask a question.
I Hope you guys are doing well I wanted to ask a question on the shape of the guidance the fourth quarter implies a sharp acceleration can you help us with some current visibility into the fourth quarter that gives you confidence to maintain that low end of the revenue guide and embed that acceleration into the fourth quarter.
Sure Jim a couple of things one we just talked about SSG Larry's question, So SSG improve in Q4.
Based on what we're seeing now the second thing is you've got new product launches happening as we speak that are and will continue to drive into Q4.
The move forward Ranger Raptor the U S model is actually you can build it now for the model year 'twenty four truck online. So we think thats going to be a significant debt actually seeing that increase the forecast for product for that.
I mentioned the aftermarket earlier that continues historically through the balance of the year, we're not seeing any slowdown in that.
Gross relative to sell through.
Of all trucks, and trucks and jeeps et cetera on lots.
We've got a couple of new launches actual fourth quarter relative to the other.
Vehicles that were below the market, but we're pretty excited about so there's a whole number of things. It's not just one that gives us comfort that Q4 timeframe.
Which is why even with the downturn kind of in our Q2 expectations enough SG that we're still comfortable with the overall year.
Add to that Mike, we really saw some significant pickup in the plant efficiencies and thats, enabling unlocks that Mike talked about earlier with the aftermarket growth in <unk>, especially when you get to the after market applications group.
Outside vans is also poised to double their business in custom wheelhouse is continuing on its growth charge as well. So we feel like we've got a lot of levers to pull.
Two to hit that low end of the guide.
Okay very helpful. Thank you.
Mike I'm glad you brought up the upgrading business. We've seen that end market demand is strong can you speak to what youre seeing from dealer demand and chassis availability to support the growth in the back half of the year.
Yes, the demand is strong.
Chairman the chassis availability is still spot.
Spotty.
Some Oems are better deliverable sauces that we want than others as you know.
Pivoted pretty well to get.
To get chassis, where we need where we are and we'll get you some numbers on that so all of those receivables model is.
Volume strong content to watch so we're actually selling the vehicles for more than <unk>.
Have in the past or final rules, the buying community that people that want to buy our trucks are have a lot of the lost 40 on the high end. So like I mentioned earlier the truck a little launching in Q4 of this year.
Sharp price point above a 170000, and we're seeing strong demand for that vehicle. So things like that where we can increase content increase the engineering and the components of a pooled vehicles and really attractive about how a buyer.
It will help us lift the revenue even when volume stays about constant.
Great and maybe last quick one Dennis because you brought it up can you give us an update on the integration of custom wheelhouse have you secured capacity to support growth and utilization of the customer the house and we are putting on.
Yes, the customer are coming along really nicely.
James accretive on a year to date basis as well. So we had a good strong Q2 and then.
We're opening up some distribution centers as well to really unleash some additional growth. So really pleased with this acquisition so far.
Any of those synergies that you guys can talk about what are the front end.
Jim on comfortable house.
As we just mentioned, we're unlocking some new distribution, but really the upside is getting those.
Into our kits that are still with fixing shocks as well as getting them on our updated trucks, which we haven't done yet so it is as that unlocks.
Accretion value of that acquisition is going to be even better.
Excellent. Thanks, so much ill, let some of them sometime.
Thank you.
Our next question will come from Anna <unk> with B Riley.
Hi, good afternoon.
Taking my question.
I guess turning back.
<unk>.
Obviously modeling this segment has been pretty dynamic 70 inventory correction.
I guess when are you expecting channel inventories to normalize.
<unk> dot.
Hi.
Our selling is said to be a little bit more normalized Oems are launching product.
<unk> Park Hill and to what extent is the channel is going to be ready at that point.
Yes, I think you're still seeing subtle.
Fully bundled listen what channels through the balance of this year. The reason why Q4 weeks that are just new product launches.
Before we start to hit but I think you'll really see the bundle continue 2024, where you see that come back to a more normal environment right. So.
We're not expecting it in great local care this year.
Got it.
Yes.
I mean I'm thinking of course, there is imply sequential improvement.
So.
That channel should at least recover to a point that it's able to accept those new product launches in Park Hill.
Yes, that's really around getting the product until the model year 'twenty four cycle with all the Oems.
Less about a lot of aftermarket improvement or existing inventory improvement, that's really around the Williams and gotten clean of the inventory challenges and are ready to get back to building new bikes and <unk> as you know in one of our challenges is not really end customer demand, but we sold product last year. They are still going through the <unk>.
Market this year.
As that continues that's the headwind in Q3 starts to abate in Q4, but it will be bumpy, depending on the OEM that we're talking about and you really get the pickup from Linda Williams or cleaning and build new bikes.
Got it thanks, Mike.
Would it be possible to disclose how much cut in half.
Added to the quarter.
And right now.
It was it was $20 million.
Hi, Matt.
Thank you.
Thank you.
Our next question will come from Michael <unk> with <unk> Securities.
Hey, good afternoon, guys, maybe just as a follow up on it.
Last question, maybe as it pertains to guidance.
Did your outlook for custom wheelhouse.
Change in guidance or is it similar to what you would you provided before.
This is pretty similar.
Right.
In materially up, but it's pretty similar.
Okay.
And then.
On the <unk> business just to maybe flesh. This out I think you said in the fourth quarter you expect.
<unk>.
But just wanted to clarify is that up year over year or up sequentially versus the third quarter.
I'm just trying to figure out.
It'll be up sequentially.
Q3, and it will be up sequentially from Q2 as well so it'll be a modest recovery it'll be above what Q2 did above the 105 that we did.
Okay. So it sounds like any in terms of your full year SSG outlook I think Mike. The last time, we spoke you said it would be.
Down year over year.
20% it seems like now the guidance would be down maybe 30%, 35% does that sound right.
Yes, it with what we're seeing in Q3 and.
Larger software from Q2 the rule originally expected that's about right.
Okay.
As it pertains to I know I know, we're working through some inventory in the channel that and in some of the issues that the bike Oems are having were supply of certain components that are batteries, where one of those E. Bikes, maybe just give us a sense of what the supply chain of the channel looks like a little more detail as you sit here today.
I think most of those issues are gone like other real losses, while pushing through the banks.
What are they seeing any supply chain issues on our side. So this is really a function of just a similar policy to suddenly you want to build the bikes are solid price individually at the OEM level or the assembler level.
Or so.
Most part I think all of the supply chain issues are really.
And themselves.
Okay, great. Thank you.
Thank you.
And as a reminder, that is star one to ask a question.
And our next question comes from Alex Perry with Bank of America.
Hi, This is Matt on for Alex Terry Thanks for taking our questions.
Just first can you talk about whether you think this is the peak of SSG declines.
And then secondly, how should we think about adjusted gross margins for the balance of the year should we be thinking they will continue to be down year over year. Thank you.
Hi, Matthew I'll, let Dennis take the gross margin question I'll tackle. The first one first I think Q3 is the peak of the decline or the.
Trough of Valley.
I'm not sure Pete is the right word I would use but yes, you are correct that Q3 should be the worst.
From a gross margin outlook perspective, we normally don't do that right but.
For the most part I think we're going to see strong gross margins continue we delivered a 34% gross margin down only 90 basis points year on year, 20% EBITDA margin, while our bike business was down 41%.
That was the high watermark last year or two for bike. So this is pretty significant.
Our margin delivery for Fox and on a year to date basis, we delivered a 20% EBITDA margins down 60 basis points only with bite performing as it is so.
Thank the big message coming out of this is look at the delivery of these results with bike being down it really speaks to the diversification power of Fox and the business that the team has built here.
The other thing that two together at this point, which was great.
We've talked before about the 250 to 350 basis points of improvement caused by the optimization, we're driven by the optimization of North American factories, and then we talked about the fact that we have more room to run in that regard with another.
If we double that again and to Dennis has pulled the confidence we get in the back half of this year is a function of that continuing optimization work, that's being done and I think there is plenty of upside in that for the back half and in the first half of next year at least.
Great. Thanks, that's very helpful.
Thank you.
Our next question comes from Scott timber with broth and Ken.
Good afternoon, and thanks for taking my questions.
Hey, Scott.
Coming out of the first quarter.
We're talking about SSG.
Inventory it wasn't just what was happening.
I guess.
With the dealers, but it was also.
So the Oems have a lot of unfinished bikes, which would lead them to sell some of their aftermarket parts.
With you guys could you talk about that part of it.
Yes.
Supply chain is starting to clear itself up.
Going away.
Yes, I mean thats the majority of the movement through the channel is actually the assemblers and Oems completely bikes and getting out to the dealers. The dealers are still asking for more high end bikes will allow up they're still looking to try to offset the over inventory. They have on the low end, which we don't have euro Scots supply is the high end they are trying to get.
And the high end and what's what's moving through now a lot of that high end, even even though it's probably more in demand is still there with discounted the dealers.
Okay with that at this point, we'd like to see the discounting happened doesn't really affect our margins is really about just getting those bikes through the system, but to your point or your question. It was really about the bikes were stuck at assembly and at the OEM level that we wanted to see get pushed through to that was the big.
The big surprise I think for everybody at the beginning of this year was how much inventory is building up their level not at this point.
And following up on that to this point at least as you stand right. Now if you haven't just frame out how much better things are or less pad versus the last quarter, just trying to get at JJ.
How much improvement there is and how much time, there is left for us to get there.
Yes, I mean, we're all trying to gauge how much time it takes to get through it and Thats why we kind of get that cohort in Q4 is based on what we're so happy with Q3.
Really the biggest thing too is we're seeing the clarity of direction and action at the OEM level to get to.
Taken care of so the heavy discounting you're seeing out there now is a thought where they recognize the issue. They are willing to deal with the issue and are dealing with it. So we get more comfortable as we see that discounting happen because it means that people are serious about dealing with the problem again doesn't really affect us other than just cut back on our revenue ourselves because there's still stuff we sold last.
Year.
But as we see them get more aggressive we know they are getting closer to getting with this taken care of and we're getting pretty good feedback from all of our major customers. We have a couple that are very transparent with us and giving us a lot of insight as to what they're seeing in trends in markets and things like that so that's.
Starts to give us some confidence as well.
All right just last question just from what the dealers are seeing.
Could you just frame out when you say that demand is still strong for the high end.
What youre seeing at retail.
Is it up is it down slightly and maybe just broader what the bike dealers are seeing from.
The overall market how weak things are there.
Yes no.
We've looked at this over the last couple of quarters and our assumption is down slightly over 22, so it's not when we talk about.
Prior answer part of your question without being down 30% give or take and then Mike Swartz was asking about that.
That's the that's the supply chain issues versus the end customer demand, but I'd say, if you really had to call out. This is a bit of microdose as opinion I'd say the industry is probably down 10% to 15%.
And the rest of the supply chain issues make up the difference.
Okay.
Is that everything or the area that you guys operate in.
Yes, it's really.
Every day, because it's hard to really split out high end versus low end below the low end a lot of people in the Covid period went out and bought by the really are not our kind of biker R&D.
People, who had left us to deal with <unk> Bank.
That's down because those people will just replace it with dice and Linda let out riding bikes et cetera, So I'm talking about the industry more in general.
Okay.
Thanks, again, guys I appreciate it.
Thank you.
Our next question comes from Alex <unk> with Baird.
Yes, good afternoon, thanks, guys.
Just on SSG thinking through the new model year coming out are there any big changes in terms of pricing and <unk> 24 versus model year 'twenty three Mike.
What are you trying to what Youre seeing is companies, who can't get out model year, 'twenty, four or trying to get back to retail pricing one of the challenges great question of one <unk>.
Houses are facing doesn't really affect us against this isn't about a margin discussion within Fox or how we think about our sell through the challenge, they're having those where there might be larger multi year 'twenty for bike against a discounted multi year 'twenty three and at the innovation that changes on that OEM is platform. We can now but is there.
Different by OEM, if the changes aren't significant enough that buyer might want personally end user who is buying a bike rides singular I'll get that Tinder road bike for 30% less abide by our model year 'twenty three medium not so interested in model year 'twenty for US is that some of the complexity that we have to all our customers have to work through.
Thinking about volume for us how do they launch the bikes and how do they get back to retail versus the discounting that's happening in Q2 and Q3. So we think that starts to improve in Q4, but as you can imagine when we sell product in Q4, it's not going to hit the ball until probably Q1 early Q2 of next year, so they've gotten better.
One way, we're just trying to get out in front of that.
Okay, Great. That's helpful. And then just on capital allocation you took your revolver down by $35 million this quarter, another $30 million after the quarter.
Is that a further debt reduction a priority from here, how should investors think about capital allocation.
Well, it's 100% of priority.
We're paying as much as we are on the interest.
It is clearly a priority for this company.
And the balance sheet and the balance sheet strength is priority because thats, what gives us all of that ability and firepower to go out and do more deals and acquisitions, so there'll be a focus going forward.
Great. Thanks, guys.
Thank you.
Thank you.
At this time there are no further questions. So I'd like to turn the floor back over to Mike benefit for any closing remarks.
Just wanted to thank everyone for taking the time to go through the earnings with US for our Q2, and we look forward to talking to you soon have a good evening.
Yeah.
Ladies and gentlemen, this does conclude the Fox factory holding corporations second quarter 2023 earnings call.
You may now disconnect your line and have a great guy.
Okay.
Okay.
Yes.
Yeah.