Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation’s Third Quarter 2021 Earnings Conference Call. [Operator Instructions] 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.

Thank you. Good afternoon, and welcome to Fox Factory third quarter 2021 earnings conference call. I’m joined today by Mike Dennison, our Chief Executive Officer; and Scott Humphrey, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Then Scott will review the financial results for the quarter and then the outlook, followed by closing remarks from Mike. We will then open the call up for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4:05 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.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as FOX or the company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the company’s control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company’s latest Form 10-Q and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate in today’s prepared remarks and within our earnings release, we will refer to non-GAAP financial measures to evaluate our business as we believe these are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their 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, Vivek, and good afternoon. We appreciate everyone taking the time to join us for today’s call. This past quarter really put our teams to the test as overall supply chain conditions remained challenging. As these macro obstacles worsened this quarter, our team continued to innovate, outpace and out thank our peers to deliver performance-defining results just like our products. I am proud to say our strategies and our execution are rising to meet these challenges as we delivered another record of quarterly revenue performance. delivering five consecutive record quarters in this current volatile operating environment represents what Stop Fox stands for, a culture of innovation and commitment to the number of best-in-class products to our ever-growing base of performance-driven enthusiasts. I am also happy to report that we hosted our inaugural Investor Day on September 2021. After months of planning, our Investor Day message was well received by the investor community. Our teams came together to showcase what we do best, maximize performance. This included a morning full of results driven and forward-looking presentations, a showroom full of vehicles and bikes equipped with our products as well as a tour of our new manufacturing center in Gainesville. In the afternoon, we offer a very unique experience. Investors had the opportunity to interact with five sponsored athletes, ambassadors and the broader management team to write e-bikes and drive off-road vehicles to fully understand how our products dramatically improve the way enthusiasts experience their rides. As you know, we’ve had remarkable growth since our IPO in 2013, but we felt this was the perfect time to host the event so we can exhibit what we think is the inflection point for our next phase of growth. The vision of our management team and why we think we can achieve this…

Thanks, Mike. Good afternoon, everyone. I’ll begin by going over our third quarter and year-to-date financial results and then review our guidance. Sales in the third quarter of 2021 were $347.4 million, an increase of 33.3% versus sales of $260.7 million in the third quarter of 2020. Our Powered Vehicles Group delivered a 22.8% increase in sales compared to the third quarter of 2020, primarily due to increased demand in both the OEM and aftermarket channels including strong performance in our powersports and upfitting product lines. Moving to the Specialty Sports Group. SSG delivered a 48.1% increase in sales in the quarter compared to last year, driven by continued high demand in their OEM channels. On a year-to-date basis, Sales were $956.7 million versus $628.2 million in the same period last year, an increase of 52.3% and this jump in sales is driven by increased demand, primarily in the aftermarket channel, including strong performance from our upfitting product lines and the inclusion of a full year of revenue from our SCA subsidiary. Additionally, our prior year results were impacted by production shutdowns at a majority of our PVG OEM partners due to the COVID-19 pandemic. Fox Factory’s gross margin was 33.4% in the third quarter of 2021, a 90 basis point decrease from 34.3% in the prior year period. Non-GAAP gross margin also decreased by 70 basis points to 33.8% versus Q3 of 2020. The decrease in gross margin was primarily driven by higher inflationary pressures on all fronts, including labor costs, input costs and freight costs. This was marginally offset by favorable product and channel mix led by higher volume sales in our Specialty Sports Group and the strong performance in our power sports and upfitting product lines. On a year-to-date basis, both our gross and our non-GAAP gross…

Thanks, Scott. Our fifth consecutive quarter of record results continued proof of our deep consumer connections, world-class team and strong brand momentum. The recent decline in the Cove Delta variant spread is also positive news. Across the industries we serve, demand remains very healthy. Therefore, we remain focused and confident in our long-term business outlook. We are very excited as we look forward to closing out a strong 2021 and positioning ourselves to accomplish our new multiyear goal FOX 2.0. I would now like to open the call for questions. Operator?

[Operator Instructions] We’ll take our first question from Michael Swartz with Truist Securities. Your line is open.

Thanks, maybe just to start out with on the guidance. It looks like you’re guiding for fourth quarter margins to be flattish for the third quarter. And I think, Mike, your commentary and Scott’s sounded like cost pressures got worse through the quarter. So how should I think about that being flat? Is that due to pricing? Is that due to favorable mix offsetting some of that inflationary pressure?

Yes, Mike, this is Mike. I’ll go first, and Scott can add his comments. Really, as you know, in Q3, as inflationary costs were increasing, we were also revisiting pricing and even kind of more dynamic pricing with our channels and customers. to try to offset those inflationary costs. So those roll in, but there’s a natural lag, as you know, between the cost increase and sometimes when the price is catching up. And I think those prices catch up and start to balance out against the cost that we saw really grow in Q3. So we feel pretty good about that. Now that’s assuming that things continue on the current track, and I think we also be aware, inflation is not necessarily a stable environment. So we’ll have to watch it close and see what the pricing initiatives will have to be deployed. But for right now, we feel like we have a pretty good handle on it, and that gives us confidence in that Q4 guidance.

And then just maybe with respect to the specialty sports of the bike business, obviously, a lot of pricing going through seeing it passed off from suppliers to OEMs to consumers. Can you talk about maybe how the OEMs are thinking about contenting? Is there any move to decontent to kind of offset some of the price increases?

We haven’t seen much of that. And the reason why is we see that the consumer willing to pay the higher prices for the better equipment. So we haven’t seen any kind of decontenting so far. And in fact, it might be the opposite of that where customers are looking for those higher end pieces of equipment and willing to pay even extra to get those. So it’s an interesting environment, but we actually see the opposite of decontenting right now.

The next question comes from Jim Duffy with Stifel. Your line is open.

Nice execution guys through a difficult environment. I have a question on materials and then a question on the specialty sports business. You spoke to material cost. I’m wondering, was materials availability a challenge in the third quarter as well? And do you believe you’ve solved that problem with your inventory investment?

Great question. Inventory or supply chain continuity supply challenges continue. It’s a daily battle for the team to try to make sure that we’ve got the material at the right time in the right place to deliver our products. I do think the investments we made in inventory help us considerably I do worry about things like brownouts in China manufacturing, where they’re cutting energy back to supply those factories and supply as parts. So we have to keep a close eye on that. I think, Jim, we have to keep a close eye on magnesium and magnesium supply. But so far, the teams handled them well, and we continue to be able to deliver, as you can see, the results. But I don’t think supply chain has got any easier. And I think it continues to be a challenge for us for probably the first half of next year from what I can see so far.

Mike, your comments suggest that maybe the challenge is greater for the Taiwan manufacturing demands on materials than for North America? Or am I misinterpreting that?

You’re misinterpreting. I was just kind of focused on SSG maybe because you mentioned it. But I think North America is a bit different. It’s a broader supply chain. It’s a little more complicated. We’ve added a lot of investment in North America to get our hands around it. So I feel pretty good about it, but I wouldn’t say that North America is in better shape than Taiwan.

Okay. And then Specialty Sports category, it sounds like demand there is such that if you can manufacture it and ship it, you can book the revenue. new high for quarterly revenue of $160 million or so. Is there anything unusual in that number related to timing between quarters? Or is that a good figure for what you believe you can build and ship in a quarter going forward?

Yes, it’s all figure. There wasn’t any anomalies in the quarter at all. I think we’re doing a great job keeping up with our OEMs and the demand. signal, I think the thing we always get the balance, Jim, is what everyone else is doing. So as much as we can build, everybody else can’t keep up with us. bikes can’t get built. So we have to always keep an eye on that and make sure that we’re not out stretching everybody else, and that might be a bigger giving factor on supply and demand than what we can do in our factories. But yes, no, the numbers we produced this quarter were solid.

The next question comes from Anna Glaessgen with Jefferies. Your line is open.

Hi, Just wanted to touch on the investments to kind of right-size infrastructure, where are we in terms of innings in these investments? And when should we see kind of the year-over-year change to gross

Yes. Anna, this is Scott. I think we’re still putting together our outlook for next year. my guess is we’ll start to see some improvement on the OpEx side toward the end of next year. I think you’re seeing a little bit of it this year already. even though we keep telling me not to get overly excited about it. But I think I think we should be kind of where we need to be by, let’s call it, middle of next year, and then we’ll start to enjoy some leverage on those numbers.

Got it. And then turning to recent acquisitions and a tense day, we talked about how -- There is substantial synergy between outside van and SSG. Can you maybe speak to any progress in terms of capturing kind of marrying the two and the marketing opportunity there?

Yes. I think what you’re referring to is that a lot of our outside Van customers that we picked up in the acquisition that they are also enthusiasts on the SSG side. I think it’s a good marketing opportunity for us with our broad base of customers in the mountain biking world, if they are going to also be enthusiasts on the outside band side. But I think we’re still working on getting outside and kind of indoctrinated into our upfitting business, and we’ll be continuing to develop the marketing plan around that with them next year.

Yes. I would add, Anna, that outside ban, the demand is pretty significant. We’re still a year out. So our backlog in upside ban is into 2023 now for people who would like to buy a ban. Our biggest challenge right now is less about marketing more about scale. We have to continue to ensure that we can get more bands produced on a daily basis. So that’s a big focus right now. I think the team is doing a great job of continuing to drive the outside ban culture. And we’re seeing that genre of customers grow significantly. We’re just going to able to keep up with it.

[Operator Instructions] We’ll take our next question from Scott Stember with CL King. Your line is open.

Hi, good afternoon, guys and thanks for taking my questions. If that On the Powered Vehicle Side, you talked about the, I guess, the OEM model year change has taken place, and I guess that supply is starting to pick back up again. Are you pretty much thinking that this is at least on that side of it with regards to the Fords, the Raptor in that type of business that this is an inflection point and that things should get better from here, obviously, could be slow, but just trying to get a sense of that?

I do think things stabilize. We see it kind of in two sides of the powered vehicle business both in the chassis for our PVD or our upfitting business. that you’re familiar with. So in that business, we see some stabilization, which we think is really good for us, not only for this quarter, Scott, but for next year. And I do believe within our relationship with toward the Raptor business and the models that we support, we’re seeing some stabilization, which I think, especially in next year will be meaningful. I think there’s still a few bumps in the road. And as you know as well, Gadithe OEMs are still struggling with parts of their supply chain ships, issues and otherwise. But for the most part, I think we’re going to see that start to stabilize or to come out of it.

All right. And on SSG related to supply chain, can you maybe talk about how much of the sales are probably being left on the table or getting pushed up to subsequent quarters because of this?

It’s actually – as you know, Scott, we’ve made the lead time statements before where we times have moved out quite a lot from what they would normally be at the normal lead times for 45 to 60 days. they’re now 350 days plus. So we’re actually able to schedule our factory work and our purchase orders with our customers pretty consistently in the quarter. So we know how much we can build, we know which we will build and we’re pretty close to delivering on that. if the world was in a better place back to six to eight lead times, but I don’t see that happening anytime soon. So we’re not leaving a lot on the table, but we’re already prebooked, as you know from prior conversations through the all in 2022.

That’s all I have. Thanks.

Next question comes from Alex Perry with Bank of America. Your line is open.

Hi, thanks for taking my question and congrats on another strong quarter. Just wanted to maybe get a little bit of shaping in terms of next year just in terms of sort of how we should think about the organic growth next year as we sort of balance the tough comparison and market growth. with backlog on both the SSG and PVG side of the business?

We haven’t guided for 2022 yet, Alex. But clearly, we think the demand signals are incredibly strong and remained strong, which means as we add capacity and build out Gainesville. We’ve added capacity throughout the year in Taiwan. I think we’re well positioned to handle that incremental growth. I think we will continue to carry backlog from quarter-to-quarter, especially in powered vehicles. You heard in my prior comments on the bike side of the business that we can kind of schedule into the quarter that we’ll build it. But in powered vehicles with a lot of aftermarket demand, et cetera, that does create backlog that carries quarter-to-quarter, and that’s going to continue through a good chunk in next year. as I tell the team, I’d rather have backlog and be looking for backlog. So we’ll take it, we’ll do our best to try to continue to optimize manufacturing and we get it out. But we’re going to – we’ll finish Q4 and we’ll go into next year knowing we’ve got a good book of business to go drive growth on top of the 2021 numbers.

That’s really helpful. And then just a follow-up on the SSG side of the business, the inventory backlog that you cited did not change at all versus three months ago. So maybe can you comment on sort of where the channel stands in terms of rebuilding inventory levels and where the choke points in the supply chain. I think you mentioned last time that you guys were not the choke point. So just maybe a little more commentary there would be great.

I’ll take the second question first. I do believe that we’ve done a really good job of responding and reacting, which has made us very nimble in the supply chain. So we’ve been able to scale our business and not because the long lead guy in the race. That said, I think the supply chain and the lead times for getting inventory to your first part of the question back into the channels is absolutely still there. while you might see bikes starting to show up in dealer showrooms a little bit more frequently and a little bit better selection. There’s a whole system behind that from distribution to hubs in both region and internationally. That is still fundamentally empty. So like I said in the prepared remarks, I think you’ve got several multiple months of demand just to deliver to preorders I think we’ve got 12 or 18 months of rebuilding of inventory that takes us clearly all the way through 2022 and beyond. And I think our partners and customers still believe that new demand, new fresh demand coming in the system carries even beyond that. I think the way we see and we comment on the out years later, but you’ll see, we think very positively about 2022 and early part of 2023.

That’s really helpful. Best luck going forward. Thank you.

We have no further questions at this time. I would now like to hand the call back to Mike Dennison, CEO, for any additional or closing remarks.

Thank you. And as always, we appreciate your time and attendance for today’s call, and we look forward to seeing you soon, and have a good evening. Thank you.

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.