Fox Factory Holding Corp.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holding Corporation’s First Quarter 2021 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, Vivek Bhakuni, Director of Investor Relations and Business Development. Thank you, sir. You may begin.

[Vivek Bhakuni:]

[Mike Dennison:]

Thank you, Vivek, and good afternoon. We appreciate everyone taking the time to join us for today’s call. For our first quarter results, I’m proud to report the highest quarterly revenue in our company’s history, powered by record-breaking performance in both divisions. The credit for this success can be attributed to the dedication, agility, and adaptability of our incredible team, which continues to maneuver through the endless challenges associated with the current environment. Our team has executed remarkably while making sustained continuous improvements operationally. This consistent performance also reflects the continued strength of our leading brand portfolio, and our team’s commitment to deliver high-performance products to our valued customers, while still managing dynamic supply chain realities.

[Scott Humphrey:]

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 2021 were $281.1 million, an increase of 52.5% versus sales of $184.4 million in the first quarter of 2020. The Specialty Sports Group delivered an 85.5% increase in sales in the quarter compared to the same period last year, driven by high demand in both the OEM and aftermarket channels. Our Powered Vehicles Group delivered a 35% increase in sales compared to the first quarter of 2020, primarily due to higher growth in the Powersports business and a full quarter of SCA, which we acquired in March of 2020. Looking sequentially, SCA revenue grew over 40% compared to Q4 of 2020. Excluding the impact of the SCA acquisition, revenue in PVG increased 8.8% year-over-year, driven by strong demand in the aftermarket channel. Fox Factory’s gross margin was 34.8% in the first quarter of 2021, a 410 basis point increase from 30.7% in the prior-year period. Non-GAAP gross margin also increased by 410 basis points to 35% versus Q1 of 2020. The increase in gross margin during Q1 was driven by a shift in channel mix primarily from a full quarter of SCA in the results, as well as, lower COVID-related costs this year, offset by duplicative costs due to the Georgia facility transition. Total operating expenses were $52.1 million or 18.5% of sales in the first quarter of 2021 compared to $45 million or 24.4% of sales in the first quarter of last year. The increase in operating expenses on a dollar basis was primarily due to the inclusion of a full quarter of SCA’s operating expenses and higher employee-related costs, including incentive compensation. At the end of Q1 2020, we drastically reduced our bonus accrual for the year due to pandemic-related shutdowns. The increase in operating expenses was partially offset by lower acquisition-related costs. Looking at non-GAAP operating expenses as a percentage of sales, our non-GAAP operating expenses decreased by 60 basis points to 16.1% compared to 16.7% in the prior-year period. Looking at OpEx in more detail, sales and marketing expenses were up by $4.8 million primarily due to a full quarter of SCA costs and increased personnel costs, primarily driven by higher sales commissions and incentives. In addition, R&D costs were up by $1.9 million to support future growth and product initiatives. G&A expenses were down approximately $2 million driven by lower acquisition-related costs. For the first quarter, our effective tax rate was 9.5%. This rate is lower than our previous long-ranged guidance of 15% to 19%, primarily due to excess benefits related to stock-based compensation and the release of our excess tax reserve, offset by an increase in valuation allowance of foreign tax credits.

[Mike Dennison:]

Thank you, Scott. I’m very excited about our early momentum in 2021. The tectonic shift created in the consumer demand by the pandemic seems more tangible than just a transitory bubble. The demand for our products in both PVG and SSG continues to be strong. We expect the challenges related to the supply chain and commodity price inflation to continue, but we believe we have processes in place to mitigate the majority of these headwinds. I’m hopeful that pandemic-related challenges will continue to subside in the foreseeable future as vaccinations progress here and around the world. Our team has quickly incorporated those lessons learned in the past year into delivering three consecutive quarterly revenue records. In addition, to further extend our competitive edge and to lay the foundation for the next phase of growth, we are bolstering our management team. We have created three new positions to amplify and complement our existing organization. First, we promoted Tom Fletcher to be the President of PVG business and Corporate Strategy. Tom brings a wealth of engineering, sales and strategic experience, which will extend PVG’s leadership team, and allow Rich Winters, President of PVG to focus exclusively on the operational and supply chain fundamentals of the business. Second, we promoted Jackie Martin to be the new Chief Purpose & Inclusion Officer as she aims to elevate inclusion, diversity and engagement as well as ESG. She will also re-change management and workforce development efforts at FOX. And finally, we hired Toby Merchant to be our new Chief Legal Officer. Toby has a wealth of experience in both the public and private sectors on a variety of matters ranging from corporate governance, securities, as well as domestic and global acquisitions. Thus, I feel very confident about our team, our plans, and our execution capabilities to deliver maximum value to our shareholders, our consumers, partners and employees. I would now like to open the call for questions. Operator?

[Operator:]

And we’ll take our first question from Larry Solow with CJS Securities. Please go ahead.

[Larry Solow:]

Great. Good afternoon, guys. And thanks for taking the questions. Just – I guess...

[Mike Dennison:]

Good afternoon, Larry.

[Larry Solow:]

You sort of – you mentioned, sort of a tectonic shift, I think you called it. Certainly with 85% growth in Specialty Sports, pretty tectonic indeed. Could you maybe just discuss – it’s the same drivers, I guess, but maybe delve into a little bit more. What are you seeing at – sort of on from e-bikes, any other new categories? And lower price points, is that helping you guys more or is – are you even starting to see some maybe the entrance back into the category that maybe didn’t start on FOX that are maybe shifting already to a higher price point and better bike?

[Mike Dennison:]

Yes, Larry, I think it’s a bunch of things that are kind of lending itself to this dynamic that we’re in right now. One, of course, is just the restocking which continues to be a significant part of the process. Most of our distribution centers are empty. So what we build, we sell all the way through the channel to an end consumer. So, we haven’t really started that restocking process to get distribution centers back to some sort of realistic inventory levels. So, you’ve got that going on. At the same time, the demographic of the consumer continues to change and grow, led by e-bikes as I’ve talked in the past and the expansion of that product line in Europe and the U.S. specifically. As well as what I’ve said before to you and others around e-SUV bikes, which are these new bikes that really kind of fit between a city bike and a mountain bike that can do kind of all things possible. The growth of that this year has been phenomenal. So it’s not any one thing, it’s a number of things that continue to drive with significant demand cycle. And we see this continuing through 2021 and a good portion 2022 at this point. So, too early to call for 2023, but for now everything we see points to demand that’s going to continue to outsize the supply.

[Larry Solow:]

And your ability sort of to meet this demand. It sounds like that’s a key competitive advantage. Are you taking material market share as you’d sort of leverage your relationships and the broader base continues to expand so rapidly?

[Mike Dennison:]

I do believe we’re taking share. It’s a little early to comment on share specifically, because that’s really in process right now for model year 2023 as you know. But I do believe we’re taking share based on responsiveness to supply chain, as well as product innovation. So, we’re going to leverage both of those two elements to try to maximize our OEM and distribution relationships. And I think so far it’s proving itself to work quite well.

[Operator:]

Next question from Rafe Jadrosich, please go ahead, with Bank of America.

[Rafe Jadrosich:]

Hi, good afternoon. Thanks for taking my question. To start, your – it’s obviously a great quarter. But you’re raising the guidance by more than you’re beating by. Can you just talk about what’s giving you confidence about the second, third and fourth quarter that you didn’t see maybe three months ago that’s giving you the confidence to raise guidance by a lot more than the beat?

[Scott Humphrey:]

Yes. I think a couple of things, Rafe. I think the bike business continues to look strong and as we said last quarter, there was a lot of uncertainty around supply chain and our ability to get chassis. And that we would update our guidance each quarter as the picture sort of became a little bit more clear. I think we’ve seen that in – we talked in the prepared remarks about SCA being up over 40% sequentially versus Q4. So we’ve been able to get chassis for out-fitting business. As I mentioned, first the bike business continues to look strong. And as Mike just said earlier, the restocking doesn’t really feel like it’s happening yet. We’re still looking at meeting demand and not restocking shelves. And so, we are gaining more confidence as we look forward to the rest of this year into our outlook. Is that helpful? We lost Rafe? Okay. Operator, next question maybe?

[Operator:]

Next to Mike Swartz with Truist Securities. Please go ahead.

[Mike Swartz:]

Hey, guys. Good afternoon. Just – had a few questions. One pertaining to, I mean, everything we’ve heard about the auto supply chain, the chip shortage and you’re talking about a mile of your changeover that appears to be delayed now. So, just in terms of the integration of the Georgia plant, is that holding things up, or you kind of on track there to gain some of the efficiencies and synergies we’ve talked about?

[Mike Dennison:]

Yes, Mike, good afternoon. No, it’s not holding us up at all relative to Georgia. We do kind of adjust the majority of transitions or timelines relative to the product line needs. But that’s really not an issue with any delays or chip shortages. And really not a function of automotive at this point. It’s really a function of Powersports which is moving from Watsonville. So, we feel pretty good about it. The chip shortage thing is obviously an ongoing challenge for us and for the automotive guys. And as you mentioned, it does kind of challenge some of the launch dates. But I still feel great about automotive for the full year. And I still think on a full-year basis it’s at or above our long-term guidance for PVG.

[Operator:]

Next question from Jim Duffy with Stifel. Please go ahead.

[Jim Duffy:]

Thanks. Hello, guys. Good afternoon.

[Mike Dennison:]

Hey, Jim.

[Jim Duffy:]

A couple of questions for me. I wanted to start on the Specialty Sports business and the yearly inventory deficiency in distribution centers and so forth. Is there a way to frame the magnitude of the channel inventory deficiencies? You’ve been turning inventory at about 4 times, is that a good metric to use to calculate the necessary inventory catch-up? How do you guys think about that?

[Mike Dennison:]

Yes. I think the way to think about that – Jim, good question. Usually, there’s going to be between five and eight months of inventory in distribution centers on a normal basis. Today’s basis is about as fast as they can get it through the center out the back door. So, call it less than two weeks. So that means you’re potentially eight months from having a restock inventory center – distribution center if you didn’t sell anything.

[Jim Duffy:]

Makes sense. Super helpful, Mike. And then I wanted to shift gears on power vehicle. So what’s the latest on access to the chassis? How are you positioned for that SCA and Tuscany business as you look into the back half of the year and maybe even further?

[Mike Dennison:]

We feel really good about what we did in Q1, obviously. And that was a function of a lot of work done late in Q4. And as I mentioned, the Q4 earnings call, we felt good about Q2. We do. So we’re in good shape this quarter. And we feel pretty confident about Q3 and we’re still working in Q4. Most of the automotive guys have talked about kind of some back half of the year relief in terms of getting chassis out the door. They said that publicly. So that helps us. That gives us some confidence. So, I guess my general perspective is, Q2 is great, Q3 is pretty good. So working to make sure it’s great. And then Q4, it’s a little early yet for us to have Q4 locked out.

[Operator:]

We’ll move next to Rafe Jadrosich from Bank of America with a follow-up. Please go ahead.

[Rafe Jadrosich:]

Hi. Thanks. The gross margin expansion was pretty strong in the quarter despite the raw material shipping and container shortages that you referenced. Can you talk about – you mentioned mix shift, but are there other things that are helping you to offset some of those import cost pressures? And then how do we think about this gross margin going forward? This is definitely a higher level than what we’ve seen in the past. Is this a level that’s more sustainable going forward?

[Scott Humphrey:]

Yes. I’ll talk to gross margin first, Rafe, I guess. We talked about last quarter the benefits that we see once Georgia is fully up and transitioned. And so, I’d love to tell you. Yes, we feel great about gross margin here and even higher going forward. But the mix definitely had a positive effect on gross margin in Q1 when you think about where we had really strong quarters in the OE business, that PVG being a little lower from a growth standpoint because of the model year changeovers, which tends to be a little bit lower margin. And so, everything kind of played perfectly from a gross margin standpoint. So this really had nothing to do with the changeover to Georgia. And so, hopefully we can be at these levels going forward, but it will be more of a transition offsetting negative mix shift back toward where we normally would possibly play with a little bit higher OE percentage. But, I think back to your original question, yes, we had a lot of positive mix shift in Q1. Maybe Mike wants to elaborate on that a little bit.

[Mike Dennison:]

Yes, Scott, I think that’s right. The only other thing I’d add Rafe is that, productivity in Q4 in North American facilities was pretty hampered by COVID issues and redundancy in workforces to handle COVID absentees and et cetera. And we didn’t experience that issue in Q1 in a large degree. And I think that helps from a productivity and efficiency perspective in the North American facilities, which obviously as we move forward and hopefully get more of the pandemic in our rear view mirror that will be a more of a consistent message we can give you.

[Operator:]

We’ll take a follow-up from Mike Swartz with Truist Securities. Please go ahead.

[Mike Swartz:]

Hey guys. Just a follow-up question on I think gross margin. The – I think you had about $2 million in cost that you called out for the quarter related to COVID and some productivity issues. One, am I right in saying that hasn’t been added back to your adjusted EPS and EBITDA? And then two, does your guidance reflect any further productivity issues related to COVID?

[Scott Humphrey:]

Yes. The COVID – I think we have some add-backs last year, Mike. I think It was $1.8 million yes, last year, but nothing that I’d recall material this year that would have been added back. And Mike, what was the second part of your question? Maybe we lost Mike again. Operator?

[Operator:]

We’ll take our next follow-up from Larry Solow with CJS Securities. Please go ahead.

[Larry Solow:]

Great. Thanks. You mentioned Mike the mix shift. I am assuming that mix shift is more on the power vehicle side and I suppose on the aftermarket side. So that question kind of leads me into, is that really the driver, is that sort of the SCA and some of the more interesting things you’re doing in the up-fitting market.

[Mike Dennison:]

Yes. Good question. I apologize, guys. I think you’re getting limited to one question and the system is kicking you out and making you get back in line. So, I apologize for that. And in terms of the mix shift, yeah, you are right. It’s a couple of things. It’s not only shifting between different product lines, but also different channels. And what you saw in Q1 was not a large up-fitting business for us, which was great to see. But also an aftermarket business in sort of a more legacy product line that was significantly larger than we’ve experienced in the past. And not to mention the fact that we – as we did last quarter, this quarter in Q1 we had backlog into the next quarter. So, we’re able – again the demand just outstripped supply and we came in the Q2 between $10 million or $15 million of backlog in aftermarket. So we’re just seeing a really robust demand curve in aftermarket, as well as up-fitting. As I mentioned on the call, Powersports continues to be incredibly strong with our large customers in that space.

[Larry Solow:]

Got it. Thanks.

[Operator:]

And we’ll move next to Scott Stember with CL King. Please go ahead.

[Scott Stember:]

Good afternoon. And thanks for taking my questions.

[Mike Dennison:]

Hey, Scott.

[Scott Stember:]

Just a little bit hop back over to the see bike business. You talked about just general strength across the board. Is it fair to assume that aftermarket and OEM went above off the charts? Is there one that’s stronger than the other, or it’s just everything just going gangbusters right now?

[Mike Dennison:]

They’re both incredibly strong. So one wasn’t necessarily better than the other. I would say that we had some container shortages at the end of the quarter that actually pushed a little bit in the Q2 some of our soft goods and other aftermarket type products. So, that was just again a function of getting logistics to support the demand more than trying to find demand. I do think the aftermarket and OEM business is strong. And I know your question is really around, was some of that growth driven by the lower cost product offerings, et cetera? And the answer to that, I should have answered it then, was – is no. We’re still focused on our high-end premium products. That’s what our customers want necessary supply today. And so, that’s what we’re focused on.

[Scott Stember:]

All right. Just a last question on the commercial vehicle, the suspension application that you have there. I know it’s been working its way into the aftermarket. Could you talk about any successful proliferation toward any OEMs at some point?

[Mike Dennison:]

Yes. We’re still working in the aftermarket use. And so we’re still trying to fulfill the demand at the owner-operator level, as well as, driving aftermarket business into the category and some of the other product categories that we talked about in the past. We will work toward that OEM solution. But I think that’s still ways in the future. We’ve got a lot of growth in front of us before we get there. And we’re working on new designs, new product offerings, et cetera along the way to be – to probably better positioned for OEM application when we’re ready.

[Scott Stember:]

Got it. Thank you.

[Operator:]

Question from Anna Glaessgen with Jefferies. Please go ahead.

[Anna Glaessgen:]

Hi, good afternoon. Thank you for taking my question. I saw you recently spoke on the Jeep Performance Parts Lift Kit for a hybrid vehicle. Could you maybe speak to the opportunity from this segment within PVG?

[Mike Dennison:]

Anna, what was the Jeep Performance part you’re talking about?

[Anna Glaessgen:]

Recently, there was a lift kit that they announced?

[Mike Dennison:]

Yes. So really all of those aftermarket type applications used to expanding the portfolio. One of the things that we really tried to do is diversify across as many platforms as we can and that was just another example of expansion and trying to deliver more products in the different spaces. So, looking at those kinds of initiatives on an ongoing basis, especially, as we tend to see more electrification in the space and the opportunity for aftermarket parts on electrified vehicles.

[Anna Glaessgen:]

Okay. Great. Thank you.

[Operator:]

To Craig Kennison with Baird. Please go ahead.

[Craig Kennison:]

Yeah. Thanks a lot. I appreciate it. And congratulations. So a year ago you raised a little bit of capital and then in the last year, you’ve just generated a ton. I wondered if you’d give us an update on your capital priorities? And maybe shed some light on what the M&A environment looks like if you have an appetite for that.

[Scott Humphrey:]

Yes. Craig. This is Scott. For sure, we have an appetite for the M&A market. I think you know and when we did the equity raise, we felt like we were doing it to go on offense. I don’t think at the time we envisioned the valuations to be where they had been at for the past close to a year. And so, while we’re very interested in continuing to look at M&A moving forward, we’re not going to do anything that – we’re not going to pay too much I guess, in our minds. And so we haven’t found the right thing at the right price yet. But absolutely, I completely understand and I’m acutely aware of the capital structure issues that we have currently. And I’d love to go spend some of that cash on the right business. We just need to find the right one.

[Operator:]

And it does appear there are no further questions at this time.

[Mike Dennison:]

Okay. Well, thanks everyone for joining us. We appreciate your interest in Fox Factory. Thank you.