Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Fox Factory Holding Corp.'s Second Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. And now I would like to turn the conference over to Toby Merchant, Chief Legal Officer at Fox Factory Holding Corp. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Fox Factory's Second Quarter 2024 Earnings Conference Call. I'm joined today by Mike Dennison, Chief Executive Officer; and Dennis Schemm, Chief Financial Officer. First, Mike will provide business updates, and then Dennis will review the quarterly results and outlook. Mike will then provide some closing remarks before we open up the call for your questions. By now, everyone should have access to the earnings release, which went out earlier this afternoon. 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 within the meaning of federal security laws, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's quarterly reports on Form 10-Q and in the company's latest annual report on Form 10-K, each filed with the Securities and Exchange Commission. Investors should not place undue reliance on the company's forward-looking statements, and except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate in today's prepared remarks and within our earnings release, we will refer to certain non-GAAP financial measures to evaluate our business, including adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted net income, adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin, as we believe these are useful metrics that allow investors to better understand and evaluate the company's 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 earnings 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.

Thanks, Toby. Good afternoon, and thank you for joining us today. As anticipated, our second quarter results demonstrated continued sequential improvement in both net sales and profitability. For Q2, we delivered $348.5 million of revenue, a sequential increase of 4.5%, and adjusted earnings per share of $0.38. Our focus and actions enabled adjusted EBITDA margin improvement to 12.7% from 12.1% in the prior quarter. Since the fourth quarter of fiscal 2023, our adjusted EBITDA margins have improved approximately 70 basis points, the result of a continued focus on expense controls and productivity optimization. Furthermore, our results have stabilized due to our enhanced equilibrium between our OEMs and our aftermarket channels. When we first became a public company in 2013, our aftermarket business was 19% of sales. In 2021 through Q2, we were at 47% and today, we stand at 57%. Diversification of our business is an essential component of our long-term strategy as it mitigates risk and enhances optionality with demand, both of which are crucial in the current macro environment. At the same time, diversification across business segments, products, markets and geographies within those segments provides incremental opportunities for growth. When combined with our history of successful acquisitions, which have unlocked incremental growth opportunities, we believe we have positioned Fox as an industry leader across the categories where we compete. Our launch of Upfit UTV, our expansion in the entry premium mountain bike product and our accelerated growth internationally are perfect examples of us putting this strategy to work. While the market remains incredibly difficult to forecast, we are encouraged by the stabilization we're seeing in bike, where revenues grew 52% sequentially, lending more confidence that we are in the late stages of channel destocking. However, macroeconomic dynamics continue to weigh on the speed of the recovery in consumer…

Thanks, Mike, and good afternoon, everyone. I'll begin by discussing our second quarter financial results and then move to our balance sheet and cash flows, capital structure strategy and then wrap up with a review of our guidance. Before we dive into the quarter, I want to build upon Mike's comments about my new responsibilities. I'm honored to lead the AAG segment as its next President. Since joining Fox last year, I've had the pleasure of working closely with Mike and the leadership across all 3 segments. This includes a focused effort on improving our operational efficiency, streamlining our internal processes and enhancing execution capabilities, both within our organization and in our interactions with partners and customers. I believe we have a very strong foundation to build upon in AAG. In fact, we have an opportunity to take our brands and leverage the power of the portfolio that the team has created. I'm convinced that 1 plus 1 is not quite adding up to 3 right now, and I'm eager to deploy a fresh perspective to the business and accelerate the execution of the strategy, and work with the team to unlock our full potential within AAG. I'd also like to recognize our Chief Accounting Officer, Brendan Enick for his solid leadership of our finance team, including accounting, financial planning and analysis and treasury, and his aptitude for methodically working to integrate our acquisitions in an efficient manner. Particularly his hard work with Marucci, including his involvement in the term loan deal given its size and scale. As many contributions to our broader finance team have prepared him well to take on the role of Treasurer, which frees up capacity for me to focus on our AAG business. I look forward to our continued partnership and making sure that Fox…

Thanks, Dennis. While we remain grounded in the realities of the current macroeconomic dynamics and the current challenges facing our large OEM customers, I'd like to reiterate that we're entering the second half of the year very well positioned with leading market share in a product portfolio that is better than it's ever been. Our diversified business model, premium brand positioning and commitment to innovation have us prepared to capitalize on improving market conditions and deliver value to our shareholders. I would like to thank the entire Fox team for their commitment to our company, our culture and our customers. I would now like to open the call for questions. Operator?

[Operator Instructions] And we'll go first this afternoon to Larry Solow of CJS Securities.

A lot to unwrap there. Can you maybe, I guess, as far as just the revised outlook. It sounds like you're not rising SSG too much, sounds like that, that seems pretty good, but you did throughout the kind of caution there, too. But it feels like most of that's coming from SSG to the PVG and AAG. And then I guess the second part of that question is sort of the confidence you have that the recovery will continue through '25. Do you need -- does that -- do you need consumer demand and interest rate environment to improve also to kind of continue that growth trajectory for the next several quarters?

Yes, Larry, this is Mike. So from our perspective, SSG, which is combining both bike and Marucci are both meeting plan and on, on plan for the balance of the year. So they're intact with what we've thought through for the year so far. In terms of the takedown in the back half of the year, it is a function of AAG and PVG, and it's really around those large OEMs, especially in the automotive space, which are seeing such a significant impact caused by interest rates and quality issues in some cases, and other challenges they have in their supply chain. So that's the significant portion of that back half takedown. In terms of what we see going into 2025, we're focused on driving product and product innovation, and we think that outweighs a lot of these headwinds, but not all. So as we see sequential growth continue into Q3 and Q4, it's a function of that. And we think that same scenario plays out in 2025.

Okay. And on the powered vehicle side, yes, the -- in PPG, the powered vehicles, the auto OEMs, I guess that's probably the biggest surprise to me or that it feels like the biggest change. And not so much the -- is it the economic tough hindering? Obviously, that's a portion of it, but how much of it is -- it may be hard to quantify that, how much of it is just these quality issues, lack of supply, stuff which hopefully can improve versus underlying demand that is a big question mark?

Yes, it's a great question. When we think about the automotive OEMs at the tail of 2 cities, in Ford and Toyota, where these are premium products, usually limited addition, demand isn't the problem. And I've talked about that in the past, these trucks are typically presold. These vehicles are presold or highly sought after. That's not a demand problem, that's a quality issue. And those supply chains continue to kind of be a headwind for both Toyota and Ford. In Stellantis and Jeep and Ram, it's a different story. In those cases, there is an inventory issue. It's an excellent share to dealers, which is a function of both product and interest rates. And that's probably a harder challenge to solve than the quality issues as you mentioned in the supply chain [indiscernible]. So you can kind of break into those 2 pieces, and it's pretty clear for us where they land.

Got you. And if I can just squeeze one more, just on cost management. I guess there's only so much you can do. So what are some of the initiatives? And are you actually trying to manage headcount? Or I know you expect growth to come back, but maybe not so fast as that? Or do you start to manage headcount as well?

It's a great question. And my job as CFO is all about protecting margin, given the lack of absorption that we're seeing in our plans. I'm super proud of the team for the decisions that they're making right now to really curtail on cost. And like let me break it down for you in like 3 different buckets of where I'm seeing these cost actions, because I think it's really important. Corporate OpEx is one, and you can see this right on our press release. We are down $3.5 million in our corporate OpEx year-over-year, year-to-date. OpEx in general, we are down year-to-date $15 million when excluding Marucci. That is significant. That's over 11 -- almost 11% decline. And so it's really, really hard to keep your operating leverage when you're having revenue decreases that are much more significant than that. But to take out that amount of cost very, very significant. And then I wanted to talk about some COGS actions as well, because these are some things that we just took decisions on here recently and one is in the AAG Group, we've decided to close our Colorado facility. That is going to give us some basis point improvements in the future on year-over-year basis. And then also in AAG, we also took an action on one of our manufacturing facilities in outside vans. And so we did like a consolidation move there, which will also save COGS dollars moving forward. But I think what I'm most excited about on the operating leverage standpoint is the following. Remember, we had discussed with you guys about our ability to flex up that costs are going to lag revenue growth. And you've got to look no further than bike to see that take shape here in the second quarter. As they move from Q1 to Q2, we saw that 50% increase in revenue, but our COGS add was very, very insignificant. So our operating leverage there went from 25% to 17%. This is what gets me extremely exciting. This is what Mike was talking about early days. When we start to turn the corner and these businesses come out of the trough, we are going to be well positioned to see some great, great leverage.

[Operator Instructions] We'll go next now to Mike Swartz at Truist.

I just wanted to follow-up on the commentary. I think you talked about the sequential growth through the back half of the year and then kind of the expectation as that continues through 2025. If we look at the guidance, the implied revenue guidance for the fourth quarter, which I think brackets right around $400 million or so. Is that the right baseline to use to say we grow off of that quarter in, quarter out through 2025?

Yes. I mean it's too early to guide 2025 today. But that's where we see our product and our product mix going in 2025. And keep in mind, we have a lot of things that are going to come tailwinds very quickly for us in 2025, like our license agreements with the MLB. So we've got a lot of good tailwinds starting the beginning of the year, that we think are going to be meaningful for us. We can't predict the economy, and we don't want to try to predict that yet, but we can tell you that we have set up everything we can to see sequential growth off of that $400 million thereabouts into Q1 and Q2 of next year.

Okay. Great. And I think on the first quarter call, you kind of -- you gave a little color around backlog and order books in the bike business. Do you have any updates on that as we're sitting here kind of almost midway through the third quarter, what we're seeing for third quarter? And I guess whether there's any visibility in the fourth quarter right now at all?

We're seeing limited visibility in Q4 this early. But Q3 is trending like we saw in Q2, where Q3 is above Q2 and looking strong. So it's pretty positive. Like I said in my comments to Larry, our back half predictions and projections for both the bike business and our Marucci business is on plan. They're doing very, very well.

Okay. Great. And then within -- just final question within the Marucci business, you got the CATX2 launch. I guess what's the cadence of that launch? And was there any destocking of retail that need to be done just with prior generation inventory before that hits the channel?

No. We didn't see any destocking required. But one of the things we're doing with our Marucci business in the way that we see product launches and product innovation, as you know within Fox is we're more aggressive on that front. So you may see more product launches, more quicker going forward with Marucci and Victus and the other brands than we've probably seen in the past. So we think it's important to continue to provide new products and new technology to the enthusiast and consumer base. So that's why we're driving that so hard.

We go next now to Alex Perry at Bank of America.

2 sort of like modeling questions here. I guess, just first, what is sort of embedded in the growth by segment in the guide or sort of sequential recovery by segment? And then what is the expected Marucci contribution in the back half?

Yes. So the way I'd look at this is when we're thinking about the second half, Mike talked about bike and Marucci basically being on track. So really no changes there from the guide perspective on those 2. The real change in the back half is essentially PVG and AAG. And essentially, the 2 of them combined are coming off around $100 million to $120 million. I think from a modeling perspective, I think it'd be fairly safe here to say kind of flattish going forward like for the full year, PVG is right around that $120 million mark. I think it's fine to be right around there for PVG, and I would probably put AAG similar to the first couple of quarters with an inflection in Q4. That's probably our main driver in Q4 as AAG starts to flex up. Does that help?

Great. And then any commentary on Marucci and how we should be thinking of that in the back half?

Well, I mean, Marucci is a growth story the entire year. We're looking at seeing strong double-digits here for the full year. So I think last year, they did right around $184 million. And I think from a conservative standpoint, putting them around $200 million plus would be good modeling. Again, we're thinking that they're going to be around 10% up year-on-year.

Yes. Our current order book with Marucci is pretty exciting to see. When you're in an economy that's deflating across most consumer discretionary goods, Marucci will literally have a record quarter every quarter this year.

[Operator Instructions] We'll go next now to Jim Duffy with Stifel.

I'm going to try to take a big picture view on bikes and upfitting, 2 of your higher margin businesses. They've also been 2 of the more volatile recently. And I know you want to stay away from guiding to 2025, but I'm hoping you could help us take a bottoms-up approach, try to anchor those businesses to 2019 levels. Encouragingly, the bike business in 2Q is back to the 2Q '19 run rate. Bikes was a $300 million business in '19. If I understand it correctly, since that time, you have pricing, you've got the addition of e-bikes. You also have capacity to expand into lower priced bikes, when you think about OEM units and content per bike. What should be thinking about relative to that $300 million figure in 2019?

Yes. You've got it right, Jim. Well said, when we look at 2025, as you said, we're not guiding 2025 yet, but we believe that number gets back north of $400 million in bike. And we think that's a very positive sign that, that recovery has occurred in the industry. And then it gets down to, as you said, product, product mix, innovation, pricing, power, expanding our portfolio, all those things are helping us. Those are all tailwinds for us this year, which is why we're kind of bucking some of the trends in bike as you can see our results. We think that continues to be a tailwind for us in 2025 as we emerge out of this destocking scenario. So we think that's our view of 2025.

I'm going to represent this is a follow-up question, but shift of upfitting. I think with the Colorado facility out of the equation, you're probably between 10,000, 15,000 units capacity. Can you help us like in 2019, before you acquired that business, what type of vehicle volume was that business doing on an annual basis? Maybe that's a good directional indicator of kind of normalization or baselining of the marketplace?

I'd have to go back and pull the data on that, Larry, but I'm going to give you a range, just so I can be accurate. I would say it was between 8,000 and 11,000 pre kind of in that 2019 time frame. So it was -- but here's the difference. One of the things that we've been talking about relative to upfit vehicles is the increase in content. And the average price per vehicle from 2019 is significantly higher. So we think we can run a really strong business, when we put the right pieces together, and with Dennis's support and leadership in that area to even on a lower volume base in 2025 to drive a significant improvement in revenue off of 2024. It really comes down to product content and our relationships with our dealers.

We'll take our next question now from Scott Stember of ROTH MKM.

Questions on the SSG side, bike business. Last quarter, you had talked about seeing some encouraging signs for the '25 model year product that's going out, I think you said mainly over in Europe. What are you seeing here in the U.S.? Maybe just give us an idea of the size or how big this launch will be versus the previous 2 or 3 years?

Yes. I mean, keep in mind, when we launch products, we're launching it to OEMs. We sell products across all continents. So these OEM launches cover both Europe and U.S., even European OEMs sell bikes into the U.S. And we're seeing European customers and the consumer in Europe doing better with the destocking of that region. So that's been helpful. The U.S. is lagging, but it'll catch up. And I think the U.S. will be strong by the time we get to the end of this year going into 2025, but it still has work to do in terms of getting the inventory through the system and the final cleanup. But I think we're late stages around most of our product mix. Again, we're at the premium level of the product anyway. So that's benefiting us in both U.S. and Europe. It's going to be the balance this year to get it cleaned up, and we're going to see that in our numbers.

And I think that's the real positive of the story of our entry into entry premium, is that -- in years like this, you're not growing TAMs, right? That total addressable market is probably E2, or if not declining. And here, we are doing very, very well on those entry premium segment launches. And so, we feel like we must be taking share. And that would not surprise me because of our innovation track record and how we continue to invest in R&D and what the customer is looking for.

Got it. And then last question on Marucci, the Major League Baseball contract. Could you maybe just frame out how big that could be? How lucrative it will be in the '25 and then '26?

Yes. It's a little bit early as we work with MLB to think about 2025. It's probably a little bit early to start putting financial numbers to it. But just think about the number of doorways, the number of storefronts that we gain with all the MLB stadiums in 2025 as the exclusive partner, and the ability to really represent our relationship with the players, which we really couldn't do before, now as a partner with those players in launching new bat lines, and in using our customization capabilities, and taking what we do in the MLB all the way down into the little league. So we actually think there is a significant step-up and a huge part of our ability to go double this business in the next 3 to 5 years is going to come from these partnerships like the MLB. So a little bit too early to call out numbers for 2025, but it's significant. It was a really important part of this business relationship, and we've been working on this since the day we started talking about Marucci.

We'll go next now to Craig Kennison at Baird.

I think you've addressed most of my questions, but I wanted to make another run at the upfitting business. I mean in the past, you had characterized that as an opportunity to grow with and grow the number of dealers, but also the number of trucks per dealer. And I'm just wondering, Dennis, as you step into that role, if you might resize that opportunity for the long-term.

Yes, thanks for the question, and I couldn't be more excited about getting involved with the AAG team and in specific, the PVG upfitting business because we offer a fantastic product. And so, when I'm going in, I'm going in wide tide open, but there are 4 things I'm really going to be paying attention to, and that's going to be customer and making sure that we're meeting the customer on how he or she wants to buy. We got to be showing up in a great way with the dealer. Product is going to be extremely important for us moving forward to and ensuring we have a product road map that looks well around the corners here, so that as the market is changing, we're changing with it. And then cost going to be an emphasis. This is why we've got to make sure that we have the right level of focus on our cost structure, and it can be about people. And from my days at Danaher, something is always stuck with me, and that's been that best team wins. I think we got the best team in AAG and with a great team in PVG. And I think we're going to put this together, and we're going to win. But those are going to be my focuses get going in, in the first 30, 60 days.

Could it be a situation where maybe you shrink to grow, in other words, just partner with dealers that are anxious to carry your product. And then from there, build the base as maybe rates and other economic pressures go away?

I think we have some great relationships right now with our dealers. I think it really is about execution. And it's really making sure that we've got the product. And then again, it's meeting the customer on how he or she wants to buy. I think we need to do a better job there, too. But again, I've got to get in there and start working with the team. I know the team has a lot of great ideas. And we'll be reporting back out on this for sure, next quarter on what we're seeing as the opportunities.

Yes. And Craig, I'd just add on to that. I think we had to shrink. You've seen that shrinkage now this year in getting the right chassis and the right dealer lineup settled, if you will. Once we've got that work done, getting the right product into the dealers, we'll be the turning point to see growth in AAG and PVG specifically. So I think some of that shrinkage, if you will, has occurred -- partially caused by just chassis mix and what we had available to sell and partially caused by having the right product to offer these dealers. When we think about Fox Factory Truck, we're adding new dealerships by adding that halo vehicle in our lineup. So if we provide the right product, we will continue to increase dealerships or add dealerships going forward. But it's a combination of a lot of things that Dennis needs to go focus on, and we'll focus on to make sure that we've got the right dealers, the right product and the right focus in the market.

And gentlemen, it appears we have no further questions this afternoon, Mr. Dennison. I'll hand things back to you, sir, for any closing comments.

Thank you. I want to thank everyone for taking the time and their interest in Fox Factory. We hope you guys have a good evening. We'll talk soon.

Thank you, Mr. Dennison. Again, ladies and gentlemen, that will conclude today's conference call. Again, thanks so much for joining us everyone. We wish you all a great evening. Goodbye.