Q3 2023 Fox Factory Holding Corp Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by walking through the Fox Factory Holdings Corporation third quarter 2023 earnings conference call at.
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 and now like turn the conference over to your host if you like.
But cooney.
Senior director of Investor Relations and business development. Thank you Sir Please go ahead.
Thank you good afternoon, and welcome to Fox Factory's third quarter 2023 earnings Conference call.
I'm joined 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'll then open the call up for your questions.
By now everyone should have access to the earnings release, which went out today at approximately four five eastern time.
If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at Investor that right 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 within the meaning of federal Securities laws and management may make additional forward looking statements in response to your questions. So.
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.
Factors and risks that could cause or contribute to such differences are detailed in the company's latest Form 10-Q and in the company's 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, when 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.
Earnings per diluted share adjusted EBITDA and adjusted EBITDA margin. As you 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 Bea good afternoon, everyone and thank you for joining us on our third quarter 2023 earnings call.
Today, 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 the call for questions.
While Fox as near term results are clouded by the ongoing inventory recalibration and SSG and the impact of the UAW strike on both P V G and a agee's results at a strategic level, our three pillars of growth continue to prove powerful and resilient.
One our industry, leading high performance brands continue to win market share to our research and development teams continue to innovate generating a deep and disruptive product development pipeline.
And three our one plus one equals three growth mindset continues to drive topline and bottom line improvement.
Innovation and brand strength to the heart of our company and core to our go to market success as our technology Engineers continue to challenge the impossible and lead in the never ending pursuit of maximum performance by.
By focusing on the world's best athletes and surpassing their demands our team continues to outperform the competition launching of award winning products and designs that propel champions Fox athletes across the globe to new Heights.
S. S G Fox athletes, leveraging the highest quality products to the most extreme environments.
Eliminated the enduro and World Cup D. H race season, winning 18 races, and taking 89 podiums more than any other suspension company.
And it's not just Fox products that are winning recently race face as turbine wheel was named bicycle magazine's best Mountain bike wheel for 2020 three.
In our powered vehicles group the speed of innovation is accelerating as we commercialize 15, new vehicle suspension packages in 90 days.
Over the last two quarters, we have launched more than 28, new packages not only outperforming our nearest competitor, but far surpassing our own internal targets.
We were at the top of our game in the results from Fox athletes around the world are the proof.
But our work is never done and we will continue to invest in innovation and disruptive technologies to enable Fox athletes and their relentless drive to win that same innovation is leveraging dramatic gains for us within and across our AG portfolio as we drive our one plus one equals three growth thesis when we purchased custom wheelhouse we.
New we were buying a superior brand with the best wheels in the business, but.
But what we didn't know was how quickly their products will be integrated into the AG family of businesses the.
The award winning method wheels aren't being integrated into our premium packages and systems across Bds right tax and powered vehicle divisions, leading to better performance aesthetics and higher profitability.
Our ability to find companies that act and operate with the same level of innovation enthusiast loyalty and our culture to drive a never ending pursuit of maximum performance are the keys for our strategic growth and profitability.
That's why I could not be more pleased to announce today that we signed a definitive agreement to acquire marucci sports.
And industry, leading innovator designer manufacturer and distributor of highly engineered premium performance aluminum composites and wood baseball bats, as well as other diamond sports products Marucci checks all the boxes as we combine two leading brands that are disrupting their respective industries through innovation and.
<unk> technology.
Building on the tradition of winning and creating the best performing products for the most demanding athletes marucci is unmatched as its halo brands Borocce Invictus wood bats drive more than 56% market share with major League baseball pros.
Marucci is a continuation of our diversification strategy, expanding our business away from Oes and into the aftermarket and it is the epitome of a one plus one equals three strategy, having made several acquisitions, including lizards skins and bomb bats.
That are creating exponential growth vectors within their portfolio.
We see a significant tam opportunity from rucci and potential to unlock new growth vectors expanding far beyond Diamond sports.
Not only do we expect mucci to be accretive to Fox as growth and EBITDA margin, but we are also excited about the synergy potential in metallurgy manufacturing and supply chain.
While there is so much to be excited about with this deal what inspires me. The most is the similarities in our cultures.
Having spent considerable time with emerging team its authenticity is undeniable and it was founded by and led by a collective group of former elite athletes and coaches.
Walking the hallways and meeting employees I honestly felt like I was in a Fox factory, we're winning is everything and challenging the impossible happens every day.
Turning to our operating highlights sales in S. S. She had a low watermark in the third quarter as expected only contributing $72 million in revenue as Oh, He's continued to focus on depleting inventory through discounts and promotional activities.
Actual sales were lower than our estimate for the quarter by approximately $25 million as we saw slower buying patterns, especially in September as consumers adjust to an environment of higher interest rates and cost coupled with macroeconomic uncertainty.
Both P. B G N a G experienced growth year on year of 12% and 8%, respectively, but declined sequentially by 12% and 13% respectively as the UAW strike impacted both groups.
Legacy P. B G was impacted by reduced shipments given O E manufacturing site closures and O E supply chain disruptions as well as a delayed launch of a new model just prior to the strike.
A a G was impacted sooner than expected as dealers were prioritized for chassis deployment over our operating group. In addition, we also received a weaker mix of chassis, which caused us to miss higher value content in vehicles in exchange for lower content at lower price packages.
Between a G N P V. G. We estimate a reduction in sales of approximately $45 million in Q3 2023 versus our outlook.
While we continue to address the near term pressure on the topline we delivered strong adjusted EBITDA margins of 19.2% with lower revenue, marking the third consecutive quarter, where our adjusted EBITDA margins exceeded 19%.
Our strong and consistent bottom line performance and our ability to manage an exceptional balance sheet fuel our ability to allocate capital to unlock our one plus one equals three growth and diversification strategy.
This.
<unk> financial performance also resulted in our board of directors approving a share repurchase plan up to $300 million, providing us with another strategic use of our cash returning value to shareowners authorization of a share buyback plan of up to 8% of our outstanding shares demonstrates our belief in the strength in our operating model.
And growth plans.
With the UAW strike nearing a formalized settlement our customers in a G. N. P. G are enthusiastic about the future given the innovative product offerings and go to market strategies that we are delivering.
However, businesses and a G. M. P. B G were impacted throughout October and we expect residual impacts in November as Oh, he's worked to restart supply chains and ramp manufacturing.
And S. S. G. We continued to see softness as the channel works through inventory, we recently met with the Ceos and executive teams of our largest and most important by school customers.
While they remain optimistic about the future, especially the acceleration of E bike across various categories. They acknowledge that the past in new models and technology will be modestly delayed as they work their way through excess inventory in the channel. Additionally.
Additionally, we are seeing consumers grappling with a higher cost environment and our distributors cope with a higher interest rate environment by scaling back on inventory levels.
Given these impacts we are reducing our full year guide with a low end of 1.67 billion to $1 7 billion to 1.3 billion to 1.47 billion.
While we continue to work through the channel inventory Recalibration in SSG and returned to a more normalized run rate our year to date growth in PV, G&A AG of 35% and 16% respectively give us confidence in our growth thesis the strength of our brands, our unrivaled history of innovation and discovery.
The strong growth in automotive in powered vehicles and the one plus one equals three tam expanding acquisition or merger.
Put us on a trajectory to accomplish our 'twenty twenty-five vision of 2 billion sales and 25% EBITDA margins.
To conclude we acknowledge the challenges in front of us but at the same time, we are pleased with top and bottom line performance. Thanks to the power of our brands, our customer loyalty and our incredibly talented and dedicated team members.
As our history has proven no matter what the challenges we have always found ways to grow our business be it through new product categories, adjacencies geographies or manufacturing efficiencies.
And with that I'll turn the call over to Dennis.
Thanks, Mike and good afternoon, everyone I'll.
I'll begin by discussing our third quarter financial results and then move to our balance sheet and cash flows our upcoming acquisition of Meru Chi and our capital structure strategy and then wrap up with a review of our guidance.
Total consolidated net sales in the third quarter of 2023 were $331 1 million a decrease of 19.1% versus sales of $409 2 million in the third quarter of 2022.
The powered vehicles group P. B G delivered a 12, 4% increase in net sales in the third quarter compared to the same quarter last year.
This performance was negatively impacted in the weeks, leading up to and after the UAW strike given O E manufacturing site closures and OE supply chain disruptions as well as a delayed launch of a new model.
Our aftermarket applications group, a a G delivered an 8.2% increase in net sales in the third quarter compared to the same quarter last year.
This growth was driven by sales from custom wheelhouse acquisition, which was completed in March of 2023.
Excluding custom wheelhouse AG sales declined seven 2% as Oems temporarily provided chassis preference to dealers above her up fitting group, resulting in a chassis mix on hand that was associated with lower content and lower price point vehicles.
Net sales in the specialty sports group SSG decreased by 58, 6% compared to the third quarter of 2022 due to the persistent level of high inventory across various channels.
While we still expect Ssg's Q3 performance to be the trough for the year, we expect the inventory recalibration to continue through the first half of 'twenty 'twenty four.
We experienced slower demand across both a E G and S. S G as dealers and distributors pulled back on inventory given higher inventory carrying costs and as consumers adjusted to a rising interest rate and an uncertain macroeconomic environment.
Fox Factory's gross margin was 32, 4% in the third quarter of 2023, a 110 basis point decrease from 33, 5% in the same period in the prior year.
The decrease in gross margin in Q3 of 'twenty twenty-three is primarily driven by a shift in our product line mix and the impact of the UAW strike offset by increased efficiencies at our North American facility.
Our decision to protect our highly skilled workforce during the UAW strike also impacted our gross margins.
Given the temporary short duration nature of the strike. This was the absolute right decision to take.
Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup organizational restructuring expenses and strategic transformation costs decreased 70 basis points to 33.2% versus Q3 of 2022.
The sustainable manufacturing efficiency gains in P. D G, where another key ingredient to Fox as solid gross and EBITDA margin in light of a $78 million decline in revenue.
Total operating expenses were $65 9 million or 19.9% of sales in the third quarter of 2023 compared to 71.9 million or 17.6% of sales in the third quarter of last year.
Operating expenses were lower compared to the same quarter in the prior period due to strong cost controls and continuous improvement partially offset by the inclusion of custom wheelhouse operating expenses of 4.7 million <unk>.
Amortization of acquired intangibles and operating expenses associated with facility expansions.
Adjusted operating expenses as a percentage of sales increased by 180 basis points to 17, 6% in the third quarter of 2023 compared to 15.8% in the same period in the prior year.
The company's effective tax rate was 9% in the third quarter of fiscal 'twenty twenty-three compared to 28% in the third quarter of fiscal 2022.
The change in the effective tax rate was due to a benefit from R&D tax credits.
Net income in the third quarter of 2023 was $35 3 million or <unk> 83 cents per diluted share compared to $58 million or one dollar and 20 cents per diluted share in the same prior year period.
Yeah.
Adjusted net income was $44 8 million in the third quarter of 2023, a decrease of approximately $12 6 million or 22% compared to $57 4 million in the third quarter of last year.
We delivered $1.05 of adjusted earnings per diluted share in the third quarter of 2023 compared to $1.35 in the third quarter up 2022.
Adjusted EBITDA decreased by 25.1% to $63.7 million for the third quarter of 2023 compared to $85 1 million in the same quarter last year adjusted.
Adjusted EBITDA margin decreased by 160 basis points to 19, 2% in the third quarter of 2023 compared to 28% in the third quarter of 2022.
The decrease in the adjusted EBITDA margin in the third quarter of 2023 is primarily due to the change in product mix the impact of the UAW strike and cost increases associated with our facilities expansions to support our continued growth.
Adjusted EBITDA margins were sequentially flat, even while sales decreased in the quarter, given our rigorous cost controls and continuous improvement mindset.
Moving to the balance sheet and cash flows.
Our balance sheet continues to be a source of strength for Fox and underpins our capital allocation strategy.
We decreased inventory by $9 4 million driven by our continuous improvement efforts to further optimize inventory levels across the organization.
These efforts are significant given the addition of 15 million of inventory related to the custom Wheelhouse addition.
Year to date, we generated 127 million and operating cashless $70 million more than the same period last year and a sequential improvement of $129 million.
Our net leverage is 0.5 times with our revolver balance at $190 million as of September 30th.
Our flexible capital structure allows us to efficiently access the accordion feature in our revolver to secure an incremental 600 million and pro rata term loan a debt to finance them or rucci transaction.
The term loan a is coterminous with our existing revolver and the interest rate is 50 basis points higher than our existing revolver.
This incremental borrowing will provide us with significant flexibility to address our capital allocation priorities of investing in growth, both inorganic and organic.
Paying down debt.
And returning value to shareowners.
The merger with Marucci sports represents our largest acquisition to date.
We expect that marucci will be accretive to our revenue and earnings given its strong growth vectors and EBITDA margins of 25%.
Meru Chi is core to our diversification strategy, providing for diversification within SSG with new products and end customers and providing for diversification.
Across our existing businesses as it is a cyclical in nature.
We expect pro forma leverage to be roughly 2.1 times. After the transaction is completed.
Our core investments in R&D continue to support our growth and margin profile and PV Gee, our R&D efforts resulted in 15, new products just this quarter.
In S. S. G. Our investments continue to drive innovation supporting podium winning Fox riders.
And in a a G. We continue to invest in improving content and design for our off road up fitting business and for our new business venture in side by side up fitting where we are designing the premium high performance state of the art prototypes.
Our revolver balance as of September 30th is 190 million versus 200 million as of December 31st 2022.
We paid down 170 million through the third quarter of fiscal 'twenty twenty-three given our strong operating cash flows which more than doubled on a year to date basis.
Our board of Directors recently approved a 300 million share repurchase program.
While we are a growth company at heart, we see sufficient capital to continue investing in innovation and efficiencies, which will drive organic growth in a thoughtful and disciplined approach.
Given the current macro economic environment, and our strong cash flow generation, we believe using a portion of our free cash flow to manage dilution and to Opportunistically repurchase shares is a strategic use of our capital.
Now I'd like to share some select guidance.
While we are pleased that the big three have re you have reached a tentative agreement with the UAW our fourth quarter results have already been impacted both in a a G and in P. B G.
And we expect to see additional impacts as the Oems work through supply chain inefficiencies as they bring up their manufacturing facilities.
Additionally, we are facing headwinds due to the higher interest rate environment and macroeconomic outlook at the consumer level.
And at the dealer distributor level as the cost of carrying inventory is more expensive.
While that's S. G hit trough revenues in Q3, the inventory recalibration is taking longer than anticipated and we expect fourth quarter revenue to be up modestly on a sequential basis.
For the fourth quarter of 2023, we expect sales in the range of 300 million to $340 million and non-GAAP adjusted earnings per diluted share in the range of 75 cents to one dollar.
For the fiscal year 2023, the company expects sales in the range of 1.43 billion to 1.47 billion and adjusted earnings per diluted share to be in the range of $4.20 to $4.45.
Our full year guidance assumes an income tax rate to be in the range of approximately 15%.
We're certainly operating in a dynamic environment, and we'll continue to watch retail and consumer trends to adjust our cost and business model. Accordingly, however, because of our strong and flexible capital structure. We are working from a position of strength during this downturn and investing in growth with new.
<unk> and S S G and PG and content for updating business production capabilities and our outside bands and new side by side facilities and furthering distribution for custom wheelhouse and shock therapy, as we see tremendous opportunity for longer term growth and profitability.
With that I'd like to turn the call back over to Mike.
Thank you Dennis as we closed out a challenging third quarter I am confident in the diversity of our portfolio the capability of the management team and the future of our brands.
I am pleased with our strong financial performance, even with the topline Miss as we weather the impact of the UAW strike and the persistent channel inventory Recalibration and S. S. G.
The relentless drive to win within our culture and buyer people gives me deep inspiration and confidence in our future.
Armed with a strong balance sheet and cash flow a newly authorized share repurchase program and our Tam unlocking technologies and growth vectors.
I remain incredibly excited about our positioning in future.
I would now like to open the call for questions operator.
Thank you Sir at this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question, we will pause for a moment to allow questions to queue.
Our first question comes from Larry Solow.
C J S Securities.
Great. Thanks, Good afternoon guys.
First.
Yes first question, Jeff just on virtually certain certainly a surprise.
A little bit.
I guess in an adjacency for sure.
Is it just simply the enthusiastic enthusiastic culture, the strong brands I know more richer well I know the captain.
So I know a lot about this but I'm just trying to trying to kind of.
Tie the ball there and just you know figure out exactly what what drove you to this acquisition.
Yeah, Larry Good question, you know we've been looking for the right brand the right product in specialty sports for a long time as long as you and I have been talking we've been looking for the right fit what we found with marucci is a bunch of really great things first and foremost it's a highly engineered product is really designed from the top down.
Meaning with the pro athletes down to a little leaguers as he said with the Cat 10. So these are highly engineered products, they leverage aluminum composite and everything but the major league. So obviously, that's what we do for a living and aluminum composite materials for the synergies that we can create and design engineering and manufacturing of a pretty significant on a long term basis.
In addition, when we walk the halls emerging that the leadership team their culture their passion the way they think about the business. The fact that most of them come from major leagues.
Then scouts are college players or softball players.
Gosh, it's literally walks with a different name and so when you think about the product you think about the engineering, we think about the pro athlete first down to a weekend warriors or in this case a little leaguers.
Thinking about the culture and then we think about the financials, which are accretive both from an EBITDA perspective and from a revenue perspective, you look at it and you go you know what this checks all the boxes. This is the best this is the best thing we have seen for specialty sports.
Since I've been CEO.
We were just thrilled to Adam. So this is this is a great day for us.
And it looks like if my math right, you're paying about 11 five times trailing EBITDA.
I happened to follow their owner Compass. So that's how I know that.
And.
Is that is that going to be immediately accretive.
It's really good.
Yeah, I'll, let Dennis weigh in here, we will get the financials as youll see kind of how that all gets structured it's in line with most of our our multiples that we pay for the businesses that we bought so yes.
Quite right, but I'll, let I'll, let Dennis.
Dennis speak to kind of the accretive nature I mean, this is definitely accretive for us both on the revenue line on the EBITDA line I mean, we're seeing EBITDA margins roughly speaking around 25% that's higher than our flagship as well. So and then we start getting into the one plus one equals three mentality here. This thing explodes. So this is right or the <unk>.
My other one plus one equals three already right. So when you look at what they've done over the past couple of years, they've brought on Victor's lizard scans bombed that in.
And you wrap those things together you start to grow that business pretty rapidly so.
On the top line and then when I look at the bottom line here Theres. Some vertical integration that really gets me excited as well with the bat wood manufacturing and then on the supply chain side of things, where these guys cranking. It when it came to you.
When it came to the pandemic timeframe when nobody else can deliver their supply chain kicked into gear. They want a lot of shelf space.
That time, so again, another synergistic play for us because we did so well with SSG during the pandemic as well when no one else can deliver.
Got it next year, Yeah got you and if I could just switch gears real fast just onto SSG and obviously.
Called the bottom, obviously, a little bit lower this quarter.
It still feels like there's still some inventory in the channel and still some other issues clearly youre going to grow next year from these levels, but Mike on the last quarterly call. I think you had kind of thought you can get back to 2021 levels right or the or 2022 X that extra $100 million.
I know you don't want to give guidance for 'twenty for now, but any just broad.
Brush color on that would be great.
Yeah, what we're seeing when we talk to the Ceos and executives of the bike companies. Some are in great shape. So I'm actually are growing with US right now, which is kind of hard to believe in the current.
Environment, but those companies that really control their manufacturing most of the manufacturing in house. They have good control of their supply chain and other companies are still projecting that there an inventory glut situation through the first half of next year. So as we look forward, we see kind of the first half being softer than we'd like and then finally kind of kicking it into gear.
In the second half so we're not going to give guidance I still think those long term projections are right.
They had as and when they hit US in 2024, I think we'll have to keep working to figure out and as you know Larry The challenge right now is your vision or your view.
The quarter, we're in or the next quarter that we're willing to use it.
Pretty short it's about 45 days right now so we're still collecting information as we think about Q4 pretty hard for me to give you a really good clarity on Q1 and Q2 just yet.
Fair enough. Okay. Thanks, Thanks, so much I appreciate it guys.
Thanks, Mike.
Our next question comes from Jim Duffy Stifel.
Yeah, Thanks, Hi, guys.
So a big big.
Big lift package was the acquisition was that company.
Still working on it but there has to be a good titles for my note in there somewhere.
Contest.
Do you want to enter our contest.
We're seeing who comes up with the most clever lines.
Yes.
Right.
Quarter of near term aside just for a moment.
Sure It was very strategic level and looking over a multiple year period.
Change with respect to your outlook sure.
Automotive and bike opportunity that says allocation of capital to a totally different business.
It's the best course.
Yeah is the allocation of capital is still has stayed intact for our PV G&A AG business. As you know we're going to continue to be acquisitive and we're going to continue to grow those businesses and we're going to do the same in bike selectively the challenge right now in bike as a lot of the businesses that are open or potentially acquirable.
<unk>.
We are still trying to figure out their own inventory situations are trying to figure out their go to market strategy you know as it within the bike industry box stands out as probably one of the leaders in both top and bottom line performance relative to those other companies most of them are private but yeah. We've got a great business inside of that industry and as you know we've always been.
Try it and trying to diversify and really actually make SFC, what we call. It specialty sports group. So this was the right opportunity the right time to go diversify in that space, but it doesn't take anything away from finding good acquisitions, good target reallocating capital where appropriate in any other business, while the best thing.
Got going for us is a great balance sheet and the opportunity to be selective in those investments and very critical over the investments we make.
Okay.
Again kind of with that longer term view and thinking specific to the upgrading business.
Hi.
You've seen kind of a stall in that business in the near term and I understand the UAW strike impact, but what are the prospects for that business as you look out to 'twenty four 'twenty five what do you see as the incremental drivers what are the things you're really enthused about there and what are the risks to kind of.
Achieving on those opportunities.
Yes, it's a little bit clunky right now as you said so you know, it's just going to be that way for a few months or a quarter. While we work through this the strike impact, but that broader pvt up fitting business as is.
So important to US a couple of things one outside bands, we're getting that new facility up and running for production. So we're still deep in the middle of that process Denis and I were just out there about a week ago meeting with the team understanding where we're at and growing that part of the business. We will then went to Phoenix door side by side up fitting business, which is just getting launched and I'm telling you.
That and I've talked to you about this before I think that side by side up and business is good.
One could just absolutely crushed it in fact.
<unk> in that business like Polaris and in some of our distributor dealer partners.
Are thrilled about what was designed and developed so I think in 2024, that's going to be a major player for US today and then the other thing that we're seeing in that bidding which is really interesting is that while volume of units might be down if we get the right chassis mix. The content on the vehicles is going up and our ability to actually sell higher priced vehicles with more card.
That seems to be much more recession resistant than that on the low end, where we're adding smaller packages packages less content and more than middle market vehicles. So they are really benefits us as we think about the engineering and all the content. We can add to these vehicles to continue pushing that upper end of that upper limit, which is good from both a top.
Line, and a profitability perspective in that business and as you know because.
Because we've talked about it that operating business for US is the higher end of our margin range. So we were we are doubling down.
Nothing else about it we're going to double down on that but we'll keep you on it.
Actually I have to ask one on the factors.
That business just given the pandemic how do you know you are not acquiring a business that you know.
Over earn short period do you have a comparison to 2019.
You can reference to just give us comfort that you have some visibility into that business continuing to grow.
Yeah that business has continued to grow across the little league and and in softball, but it's got a lot of room to run I mean, theres a lot of especially all lived in the college by the way and then you've got some international expansion in Korea, and Japan will be in Taiwan that we think is very interesting yeah. What we saw is that.
There was a definitely a return to baseball and return to baseball grew significantly this year.
We will post Covid World Kids.
Kids are out there and playing more and more of the field and picking up the pad and the price points of these pieces of equipment are also going up very nicely. So when I look forward to the next three or four or five years of what we can actually see in front of US I think this business has really good growth better than our bike business growth, especially obviously now but he's got.
Good growth in the next three to five years, but I think there's a lot. We can go do so.
And I'm more confident in what we're doing.
Business goes I don't think there is literally a COVID-19 bump in baseball.
It's actually the opposite I think it got better postpaid post COVID-19 when people can return to support kind of a mess.
Okay. Thank you so much.
Our next question comes from an accretion B Riley.
Hi, Thanks for taking my question.
I guess touching on SSG or the fourth quarter I think on the last call you talked about expected.
The sequential improvement.
Prepare to launch <unk>.
Yeah.
Our next model year products.
It sounds like that's going to be delayed a bit given.
The level of inventory in the channel is that something we should be expecting in the beginning of 2024, but then you mentioned that.
<unk> expense for the first time, so when should we expect that new product.
We are yeah, and it's a good and it's a good question we are seeing some.
Some customers some are like I said earlier, it's all about better Oems, who have managed inventory very well.
[noise] out their new model years, so that's helping us in Q4, but as Dennis pointed out in his script, it's fairly moderate growth in Q4 over Q3, which is a reflection of other Oems who are struggling more significantly in the quarter and canceling some of their production plans in this quarter that they had committed to earlier in the years.
So that's really the mix shift that's going on in Q4.
Everybody is just trying to get rid of all the old components and products and their inventories.
Everybody knows that if they if they didn't do it 24, they really can't afford to not do a 25. So when we think about when do people really have to be out there with blue bike model. They spring of 'twenty four they have got to have solved this problem as I mentioned earlier in one of the other questions about getting through the inventory by June.
Those things are tied together they have to they have to do a little bit the inventory. They don't Miss another model year as that will be fully that'd be pretty dramatic to the businesses.
Got it thanks, and then touching on the fourth.
Quite a guidance would it be possible to parse out what the UAW impact.
At this time.
Yeah, I mean, we can we can sure try I don't it's going to be fairly significant obviously, what we're finding out is that even though the the tentative strike ended at the end of October. So you think Okay October was the down month and that would give you a pretty finite number.
The challenge and the reason why it hasnt.
It hasnt been to answer it is because it depends on the pace of the restart of these factories.
And it's not linear and it's not real clean. So my opinion is we're going to see the impact of the strikes through November.
And then we're going to get into holidays. So the reason for our Conservative guide in Q4 is because while I think we can get through the implications of the strike in November.
We have one right on the holidays after that and that's just a whole another problem. So we're we're not positive on the automotive OE part of our business in Q4.
Got it.
Just following up there.
Are you expecting that chassis availability will be back.
Back to normal by the end of 2023, Eric Quebec tandem quad play for them.
Generally speaking I think it will get back to normal by the end of the of the year.
There is there is the challenges that we faced throughout the year with getting these new models launched whether it was the bulk of other vehicles, which which we really what I see in our operating businesses business in 'twenty four.
My assumption.
<unk> is going to get through most of this in 'twenty three and it won't be an issue in 'twenty four at all.
And mix.
Okay.
Our next question comes from Mike Swartz Trust.
Yeah.
Hey, good evening guys.
Maybe just to start on them. The Marucci acquisition I think you said that the business is accretive to both gross sorry growth in margins throughout the 25% EBITDA margin could you give us a sense of what the baseline is for revenue there and then what the longer term outlook for growth would be.
On the top line as well.
Yeah, It's a little early for that right now given the fact that we don't we don't have a closing date yet right.
So I'm going to shy away from that a little bit but this is a strong growth vector for us moving forward and these EBITDA margins I mean, we've hit them deep and.
We understand them very very well, they're very real very achievable margins and that's why.
Without without hesitation, we are saying this is accretive from the from the EBITDA margin side for us going forward. They have a fantastic vertical integration strategy right now and then we see synergies down the road with them on the raw material sourcing side supply chain side and manufacturing as well.
Wow.
And needless to say I would assume youre, not reflecting any benefit from merging in your fourth quarter guidance.
That is absolutely correct. There is nothing nothing in the guide from a routine.
Okay great.
And then switching over just to the maybe the impact of the auto strike, obviously, there's a lot of.
Elements of this that should be temporary in nature, but as we think about that.
Our cost structures with the higher labor costs is there any risk that they start getting more aggressive with contractual negotiations and pricing with some with some of their vendors.
Yes, we haven't seen it Mike.
I would question the same thing as you. So I think it's a great question that you're asking it I will tell you, though as our strategy continues with with Oems is to drive innovation and technology and the new dual valve.
We're selling on the upcoming Raptor platform is our most expensive most technologically advanced product that we've ever made so we're going to continue to push those price points up because we're gonna make better and better product versus going down down downstream can make cheaper product and keep in mind. We're the last 50 years for most of these Oems.
Is on those types of vehicles, so there's less pricing pressure for them there than there is probably in the bottom end of their lineup.
So I think we're going to get less pressure.
Just for those reasons.
Okay, great. Thanks.
Our next question comes from Alex Perry Bank of America.
Hi, Thanks for taking my questions here.
Maybe I just wanted to clarify so the impact of the UAW strike in the quarter was in the tune of 45 million did you did you mentioned that and then I know you gave some qualitative context on sort of the <unk> impact.
Of the UAW strike, but is it fair like if we were to take you know how much you've lowered your guidance by is there a way to sort of contextualize, how much of that was sort of SSG and that coming in under what you thought versus.
Quantifying the impact of UAW.
Yeah, No I think Thats a great question, So I think in Q3.
In Mike's prepared remarks, he talked about it being around $45 million impact from the strike and say that was pre strike and posts.
And post strike in the quarter.
When we look to Q4, the way I was pretty much thinking about it is probably got another 25 million or so relative to SSG and just the slowing of that business. There as we continue to grind through that inventory recalibration and working with our distributors and Oems.
And then the remainder are and this is where it gets it gets difficult right because theres the UAW impact all of November was.
Sorry, all of October was essentially impacted some of November is going to be impacted as they start to ramp back up so it's challenging there too to really nail that down but then there's also what I would call the macroeconomic interest rate.
<unk> environment that is causing dealers and distributors to hold less inventory, they're not leaning in as much because the carrying cost of this inventory is that much more expensive. So.
So that's that's how I'm thinking about it but for rough math, I mean that 25 million for SSG.
100, or so is a combined.
W impact and this macroeconomic overhang.
Alex one of the things that Dennis said I wanted to double click on which I think is important to understand is when we think about.
What the interest rate does to us when we get lots of questions. I know you've asked me in the past what's the interest rate due to your buyer of a vehicle or you're a buyer of a bike or your buyer of one of our products.
As always said we are our buyers are typically more affluent and they tend to buy at the high end of the range at least products kind of regardless of the interest rates because they are cash buyers.
Interestingly enough what we saw in.
Kind of post Labor day September and what we're seeing in Q4 is it not.
Obviously, the consumer is under pressure, but just as importantly, whether you're a car dealer or a bike dealer.
Or you have a distributor in our business you are having to finance your inventory in the floor plan.
What we really saw was those interest rates climbing so significantly that nobody wants to hold inventory somebody that would have hold held a quarter's worth of inventory.
Pat maybe they want to hold a month at most so it's a nuance in this weird environment that we're all in that we're all kind of learning about and so Dennis his comments were right in that there's other things also playing out here that we're trying to rationalize and understand.
We're acting no different right I mean think about what I highlighted on the call we talked about drawing taking our inventory down another $9 million right. Why are we doing that the cost of capital is much more expensive today. So you take a look at what we're paying on rates today versus what it was a year in.
A half ago is dramatically different so our focus is on the balance sheet right and rightly so and guess what so what are our distributors and dealers as well and staying with end customers.
Yes, that's really helpful would you say that the impact in terms of the higher rate environment impacting the carrying of inventories is most pronounced in the up fitting versus.
Your bike retailers like is that really where youre seeing the impact like they're only willing to do.
Gary X amount of trucks versus Y last year and then just my second question is just a little more help on on SSG as we move through 2024, I know the sort of long term guy there is mid to high single digits.
It sounds like one H 'twenty four is challenge does that mean.
Up first flight down year over year, what is what does that sort of mean thank you.
Alex I'll give Dennis the second half that I'll take the first half of it is actually pretty much across the board. When we think about yeah. How dealers are responding and one of the things Youll see in bike as an example is that dealers are are taking down their inventories as quickly as they can so they can be more nimble and you also see Oems who are who are trying to flush. This.
Bike inventory through the system and a lot of cases, they're doing it online direct.
And they are discounting heavily so that just that you can kind of see it play out to the dealers don't want to hold the inventory. So the Oems are kind of taking all in their own hands to push it through our big discounts as fast as they can in a direct to consumer fashion.
I do agree with you, though the dealers in automotive Floorplan financing.
It is a significant issue and I would say, it's not just automotive. It's also empower sports and you're seeing some of that play out in some of the comments that we get from our customers in that space as well Dennis do you have the thinking on the on the bike side of things right. As Mike mentioned, we are seeing some OE is doing a really good job here and they are growing with us and they are continuing to.
Grow in the back half of this year and into the first half of next year.
But the way I would contextualize. This is if you take a look at the back half of 'twenty three I'd say, we'd be up modestly in the first half of 2024.
And then this is going to help with bikes business overall as they start to grow and move into those 24 models twenty-five models in the second half of 2024 Thats our expectation.
That's incredibly helpful best of luck going forward.
Thanks.
Just a reminder to ask a question. Please press star one.
Our next question comes from Craig Kennison Baird.
Yes. Thanks for taking my question I wanted to just ask quickly about the quarter itself.
R&D spend was down dramatically I'm wondering if that was a timing dynamic or if that's an area where you elected to cut cost.
Yeah, we are not going to cut costs when it comes to R&D for capex back into the business or with our sales and marketing spend that is going forward. One of the most important things. We can do to continue to grow and command the higher margins down the line so what.
You saw there was basically you'll remember we talked about the tax rate being lower.
In Q3, it was a R&D tax credits coming through.
Yeah, Craig if we're going to if we're going to cut back room to cut back on infrastructure, we will not cut back on R&D and sales those are two key elements of our business.
Get capital allocation before anything else.
So that tax benefit comes through on the R&D line.
What's that again sorry.
Does the tax benefit I'm, sorry does the tax benefit come through on the R&D line well I was just saying that's part of it. There's there were some credits that came through that basically offset some of the spend there in that line.
Okay. Thank you.
And.
As it relates to the <unk> transaction.
Transaction.
Just I guess my question is what can Fox add.
See that business that Cody could not.
Yeah. So we're a manufacturing company and we have a lot of respect obviously, if <unk> got a long history of Cody If you know our story and I know you do Greg.
But one of the things that Elias that I've talked about alliances the CEO of Coty.
Is that while they could help support and guide our company like Lori G.
And Victor and bombed the other companies we can really go after from a manufacturing perspective, and a supply chain perspective, because that's what we do everyday.
And you know.
The biggest percentage of the Bachelor aluminum and your composite which is basically most of our materials as well.
We are a global manufacturer just like just like Mariucci is so there's a lot we can do from them from that perspective.
And then the other side of it we're in the business are working with pro athletes.
Hours of ratio is typically not baseball players, but you know what theres not that much difference in how you use.
Our marketing leverage our marketing strength of our brand strength to go drive.
Incremental benefit and value in that business. So we're excited about that as well and you know we're just a growth engine. So our ability to lean in and work with the with that team is going to be I think really compelling.
There's a there's a lot we can do so.
There is nothing against what <unk> done with that company is fantastic. So I'm really impressed with what they've done in three years they owned them now.
Now that we've got the ball or the bat and ball so to speak.
We're going to crush it.
Im really excited what the next three to five years look like.
Great. Thank you.
We have no further questions in the queue at this time I would now like to turn the call back over to Mike Dennison for any concluding remarks.
Thanks, everybody appreciate the time Tonight, we will see you guys all ballpark.
Sure.
Yeah.
This does conclude the Fox Factory Holdings Corporation third quarter 2020 through your earnings call. You May now disconnect your line and have a great day.
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