Fox Factory Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 10 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Fox Factory Holdings Corporation Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I I'd now like to turn the conference over to your host, Vivek Malkuni, Senior Director of Investor Relations and Business Development. Thank you, sir. Please go ahead.

Speaker 1

Thank you. Good afternoon and welcome to Fox Factory's 3rd quarter 2023 earnings conference I am joined today by Mike Dennison, our Chief Executive Officer and Dennis Shem, our Chief Financial Officer and Treasurer. First, Mike will provide business updates, then Dennis will review the quarterly financial results and then the outlook, followed by closing remarks from Mike. We will then open the call up for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4 or 5 Eastern Time.

Speaker 1

If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at investor.wrightfox.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. Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's latest Form 10 Q and in the company's latest Annual Report on Form 10 ks, each filed with the Securities and Exchange Commission.

Speaker 1

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, 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 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.

Speaker 2

Thank you, V. Good afternoon, everyone, and thank you for joining us on our Q3 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.

Speaker 2

While Fox's near term results are By the ongoing inventory recalibration in SSG and the impact of the UAW strike on both PVG and AAG's results, On a strategic level, our 3 pillars of growth continue to prove powerful and resilient. 1, Our industry leading high performance brands continue to win market share. 2, our research and development teams continue to innovate generating a deep and disruptive Product development pipeline and 3, our 1 +1 equals 3 growth mindset continues to drive top line and bottom line improvement. Innovation and brand strength are 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 focusing on the world's best athletes and Passing their demands, our team continues to outperform the competition, launching award winning products and designs that propel champion Fox athletes Across the globe to new heights.

Speaker 2

In SSG, box athletes leveraging the highest quality products for the most extreme environments Dominated the Enduro and World Cup DH 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's turbine wheel was named Bicycle Magazine's best mountain bike wheel for 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're at the top of our game and the results from Fox athletes around the world are the proof.

Speaker 2

But our work is never done And we will continue to invest in innovation and disruptive technologies to enable Fox athletes in the relentless drive to win. That same innovation is leveraging dramatic gains for us within and across our AAG portfolio as we drive our 1 +1 equals 3 growth thesis. When we purchased Custom Wheelhouse, we knew we were buying a superior brand with the best wheels in the business. But what we didn't know was how quickly their products would be integrated into the AAG family of businesses. The award winning Method Wheels are being integrated into our Premium packages and systems across BDS, Ridetech and Powered Vehicle divisions leading to better performance, aesthetics and higher profitability.

Speaker 2

Our ability to find companies that act and operate with the same level of innovation, enthusiast loyalty And the 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, an industry leading innovator, designer, manufacturer and distributor of highly engineered premium performance aluminum composite and wood baseball bats, as well as other Diamond Sports products. Marucci checks all the boxes as we combine 2 leading brands that are disrupting the respective industries through innovation and 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 Marucci 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 our 1 +1 equals 3 strategy having made several acquisitions including Lizard Skins and Bomb Bats that are creating exponential growth vectors within our portfolio.

Speaker 2

We see a significant TAM opportunity for And potential to unlock new growth factors expanding far beyond Diamond Sports. Not only do we expect Muirqi to be accretive to Fox's 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 the Marucci team, its authenticity is undeniable and it's 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 where winning is everything and challenging the impossible happens every day.

Speaker 2

Turning to our operating highlights, sales in SSG hit a low watermark in the 3rd quarter as expected only contributing $72,000,000 In revenue, as OEs continue to focus on depleting inventory through discounts and promotional activities. Actual sales were lower than our estimate for the quarter by approximately $25,000,000 as we saw slower buying patterns especially in September as consumers adjust in an environment of higher interest rates and cost coupled with macroeconomic uncertainty. Both PVG and AAG experienced growth year on year of 12% 8% respectively, but declined sequentially by 12% 13% respectively as the UAW strike impacted both groups. Legacy PVG was impacted by reduced shipments given OE manufacturing site closures and OE supply chain disruptions as well as a delayed launch of a new model just prior to the strike. AAG was impacted We also received a weaker mix of chassis which caused us to miss higher value contented vehicles in exchange for lower contented lower price packages.

Speaker 2

Between AEG and PPG, we estimate a reduction in sales of approximately $45,000,000 in Q3 2023 versus our outlook. While we continue to address the near term pressure on the top line, we delivered strong adjusted EBITDA margins of 19.2% with lower revenue marking the 3rd consecutive quarter where our adjusted EBITDA margins exceeded 19%. To unlock our 1 +1 equals 3 growth and diversification strategy. This consistent financial performance also resulted in our Board of Directors approving a share repurchase plan up to $300,000,000 providing us with another strategic use of our cash, Returning value to shareholders. 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.

Speaker 2

With the UAW strike nearing a formalized settlement, our customers in AEG and PPG are enthusiastic about the future given the innovative product offerings and go to market strategies that we are delivering. However, businesses in AEG and PPG were impacted throughout October And we expect residual impacts in November as OEs work to restart supply chains and ramp manufacturing. In FSG, we continue to see softness as the channel works through inventory. We recently met with the CEOs and executive teams of our largest and most important bicycle customers. While they remain optimistic about the future, especially the acceleration of e bike across various categories, they acknowledge That the path to new models and technology will be modestly delayed as they work their way through excess inventory in the channel.

Speaker 2

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 from the low end of $1,670,000,000 to $1,700,000,000 to $1,300,000,000 to $1,470,000,000 While we continue to work through the challenge recalibration in FSG and return to a more normalized run rate, Our year to date growth in PPG and AEG of 35% 16% respectively give us confidence and our growth thesis. The strength of our brands, our unrivaled history of innovation and discovery, the strong growth in automotive and powered vehicles And the 1 +1equals3 TAM expanding the acquisition of Marucci put us on a trajectory to accomplish our 2025 vision of $2,000,000,000 sales and 25 percent EBITDA margins. To conclude, we acknowledge the challenges in front of 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.

Speaker 2

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.

Speaker 3

Thanks, Mike, and good afternoon, everyone. I'll begin by discussing our Q3 financial results and then move to our balance sheet and cash Our upcoming acquisition of Marucci and our capital structure strategy and then wrap up with a review of our guidance. Total consolidated net sales in the Q3 of 2023 were 331,100,000 a decrease of 19.1 percent versus sales of $409,200,000 in the Q3 of 2022. The Powered Vehicles Group, PPG, delivered a 12.4% increase in net sales in the 3rd quarter compared to the same quarter last year. This performance was negatively impacted in the weeks leading up to and The UAW strike given OE manufacturing site closures and OE supply chain disruptions as well as a delayed launch of a new model.

Speaker 3

Our Aftermarket Applications Group, AAG, delivered an 8.2% increase in net sales in the 3rd 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, AAG sales declined 7.2% as OEMs temporarily provided chassis preference to dealers above our upfitting 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 Q3 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.

Speaker 3

We experienced slower demand across both AAG and SSG rising interest rate in an uncertain macroeconomic environment. Box Factory's gross margin was 32.4% in the 3rd 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 2023 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.

Speaker 3

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 The sustainable manufacturing efficiency gains in PVG were another key ingredient to Fox's solid gross and EBITDA margin in light of a $78,000,000 decline in revenue. Total operating expenses were $65,900,000 or 19.9 percent of sales in the Q3 of 2023 compared to $71,900,000 or 17.6 percent of sales in the Q3 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 $4,700,000 Adjusted operating expenses as a percentage of sales increased by 180 basis points to 17.6% in the Q3 of 2023 compared to 15.8% in the same period in the prior year. The company's effective tax rate was 9% in the Q3 of fiscal 2023 compared to 20.8% in the Q3 of fiscal 2022.

Speaker 3

The The change in the effective tax rate was due to a benefit from R and D tax credits. Net income in the Q3 of 2023 was 30 $1.20 per diluted share in the same prior year period. Adjusted net income was 44,800,000 In the Q3 of 2023, a decrease of approximately 12,600,000 compared to $57,400,000 in the Q3 of last year. We delivered $1.05 of adjusted Earnings per diluted share in the Q3 of 2023 compared to $1.35 in the Q3 of 2022. Adjusted EBITDA decreased by 25.1 percent to $63,700,000 for the Q3 of 20 $23,000,000 compared to $85,100,000 in the same quarter last year.

Speaker 3

Adjusted EBITDA margin decreased by 160 basis points to 19.2% in the Q3 of 2023 compared to 20.8% in the Q3 of 2022. The decrease in the adjusted EBITDA margin in the Q3 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.

Speaker 3

We decreased inventory by $9,400,000 driven by our continuous improvement efforts to further Optimize inventory levels across the organization. These efforts are significant given the addition of $15,000,000 of inventory related to the custom wheelhouse addition. Year to date, we generated $127,000,000 in operating cash flows, $70,000,000 more than the same period last year and a sequential improvement of 129,000,000 Our net leverage is 0.5 times with our revolver balance at $190,000,000 as of September 30. Our flexible capital structure allowed us to efficiently access the accordion feature in our revolver to secure an incremental 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 share owners.

Speaker 3

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%. Marucci is core to our across our existing businesses as it is a cyclical in nature. We expect pro form a leverage to be roughly 2.1 times after the transaction is completed. Our core investments in R and D continue to support our growth In PVG, our R and D efforts resulted in 15 new products just this quarter.

Speaker 3

In SSG, Our investments continue to drive innovation supporting podium winning Fox riders. And in AAG, We continue to invest in improving content and design for our off road upfitting business and for our new business venture in side by side upfitting where we are designing the premium high performance state of the art prototypes. Our revolver balance As of September 30th is $190,000,000 versus $200,000,000 as of December 31, 2022. We paid down $170,000,000 through the Q3 of fiscal 2023 given our strong operating cash which more than doubled on a year to date basis. Our Board of Directors recently approved a $300,000,000 share repurchase Program.

Speaker 3

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 macroeconomic environment and our strong cash flow generation, Now I'd like to share some select guidance. While we are pleased that the Big 3 have reached a tentative agreement with the UAW. Our 4th quarter results have already been impacted both in AAG and in PVG. And we expect to see additional impacts as the OEMs work through supply chain inefficiencies as they bring up their manufacturing facilities.

Speaker 3

Additionally, we are facing headwinds due to the higher interest rate environment and macroeconomic outlook at the consumer level and at the dealer As the cost of carrying inventory is more expensive. While SSG hit trough revenues in Q3, the inventory recalibration is taking longer than anticipated and we expect 4th quarter revenue to be up modestly on a sequential basis. For the Q4 of 2020 We expect sales in the range of $300,000,000 to $340,000,000 and non GAAP adjusted earnings per diluted share in the range of $0.75 to $1 For the fiscal year 2023, the company expects sales in the range of $1,430,000,000 to $1,470,000,000 and adjusted earnings per diluted share to be in the range $4.20 to 4 $0.45 Our full year guidance assumes an income tax rate to be in the range of approximately 15%. We are certainly operating in a dynamic environment and will continue to watch retail and consumer trends to adjust our from a position of strength during this downturn and investing in growth with new products in SSG and PVG, in content for Upfitting business, production capabilities in our outside vans 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.

Speaker 3

With that, I'd like to turn the call back over Mike?

Speaker 2

Thank you, Dennis. As we closed out a challenging Q3, 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 top line miss as we weather the impact of the UAW strike and the persistent channel inventory recalibration in SSG. The relentless drive to win within our culture and by our 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.

Speaker 2

I would now like to open the call for questions. Operator? Thank

Operator

Our first question comes from Larry Solow, CJS Securities.

Speaker 3

Thanks. Good afternoon, guys. Good afternoon, Larry.

Speaker 4

I guess first question, Jeff, just on Marucci, Certainly a surprise, a little bit, I guess an adjacency for sure. Is it just simply the Into this culture of the strong brand. I know Maruti well, I know the Catan.

Operator

So I know a

Speaker 4

lot about this, But I'm just trying to kind of tie the ball there and just figure out exactly what drove you to this acquisition?

Speaker 2

Yes, Larry, good question. We've been looking for the right brand, the right product in specialty sports for a long time. As long as you and I've been talking, we've been looking for the right fit. What we found with Marucci is a bunch of really great things. 1st and foremost, it's a highly engineered product that's really designed From the top down, meaning with the pro athletes down to the little leaders, as you said, with the Cat 10.

Speaker 2

So these are highly engineered products. They leverage aluminum and composite in everything but the major leagues. So obviously that's what we do for a living in aluminum and composite materials. So the synergies that we can create in design, engineering and manufacturing Pretty significant on a long term basis. In addition, when we walk the halls of Marucci and met their leadership team, their culture, Their passion, the way they think about the business, the fact that most of them come from major leagues or being scouts or college players or softball players, It's us.

Speaker 2

It's literally Fox with a different name. And so when you think about the product, You think about the engineering, you think about the pro athlete first down to the weekend warriors or in this case the linoleaguers, and then you think about the culture. And then you think about 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 thing we have seen for Specialty Sports since I've been the CEO And we were just thrilled to add them. So this is a very good day for us.

Speaker 4

Okay. And it looks like if my math is right, you're paying about 11.5 times trailing EBITDA, I happen to follow their owner Compass, so that's how I know that. And is that going to be immediately accretive? I know

Speaker 2

you guys said accretive. Yes, I'll let Dennis weigh in. We'll get the financials out. You'll see kind of how that all gets structured. It's in line with most of our multiples that we For the businesses that we bought, so you may not be quite right, but I'll let Dennis speak to kind of the accretive nature.

Speaker 3

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 1 +1 equals 3 mentality here, this thing So this is they are the epitome of a 1 plus 1 equals 3 already, right? So when you look at what they've done over the past couple of years, They brought on Victus, Lizard Skins, Bombats. When you wrap those things together, you start to grow that business Pretty rapidly.

Speaker 3

So that's just on the top line. And then when I look at the bottom line here, there's some vertical integration that really gets me Excited as well with the batwood manufacturing and then on the supply chain side of things where these guys Craig hit when it came to the pandemic timeframe and nobody else could deliver. Their supply chain kicked it into gear. They want a lot of shelf space during 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 could deliver.

Speaker 3

A lot of good synergies here.

Speaker 4

Yes. Got you. And if I could just switch gears real fast just on to SSG and obviously You guys 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. So you're 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 ex that extra $100,000,000 I know you don't want to give guidance for 'twenty four now, but Any just broad, you know, brush color on that would be great.

Speaker 2

Yes. What we're seeing when we talk to the CEOs and executives of the bike company business, Some are in great shape. Some actually are growing with this 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 is in house, they have good control of their supply chains. Other companies are still projecting that they're in inventory glut situation through the first half of next year.

Speaker 2

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. How they hit us and when they hit us in 2024, I think we'll have to keep working to figure out. And as you know, Larry, the Challenging right now is your vision or your view of the quarter we're in or the next quarter we're going into It's pretty short.

Speaker 2

It's about 45 days right now. So we're still collecting information as you think about Q4. Pretty Okay. It's hard for me to give you a really good clarity on Q1 and Q2 just yet.

Speaker 4

No, it's fair enough. Okay. Thanks so much. I appreciate it guys.

Speaker 2

Thanks, Larry.

Operator

Our next question comes from Jim Duffy, Stifel.

Speaker 5

Thanks. Hi, guys. So the big list package of the acquisition of that company, Still working on it, but there has to be

Speaker 2

a good title for my note

Speaker 5

in there somewhere. Let's check the quarter.

Speaker 6

Contest. Do You want to enter our contest? We're seeing who comes up with the most clever line.

Speaker 5

Well, set the quarter and near term aside just for a moment. From a very strategic level and looking over a multiple year period, What's changed with respect to your outlook for the automotive and bike opportunity that says allocation of capital to a totally different business This is the best course.

Speaker 2

Yes. The allocation of capital still has stayed intact For our PPG and AEG businesses, 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. Yes, the challenge right now in bike is a lot of the businesses that are open or potentially acquirable are Still trying to figure out their own inventory situation. They're trying to figure out their go to market strategy. As it was in the bike industry, FOX stands out as probably one of the leaders in both top and bottom line performance relative to the other companies missing our private.

Speaker 2

But We've got a great business inside of that industry. And as you know, we've always been trying to diversify And really actually make SSG what we call it, Specialty Sports Group. So this was the right opportunity, the right time to go diversify in that But it doesn't take anything away from finding good acquisitions, good targets, capital where appropriate in the other businesses as well. The best thing we've got going for us Great balance sheet and the opportunity to be selective in those investments and very critical of the investments we made.

Speaker 5

Okay. Again, kind of with that longer term view and thinking specific to the upfitting business, 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?

Speaker 5

And what are the risks to kind of achieving on those opportunities?

Speaker 2

Yes, it's a little bit clunky right now as you said. So I'm wondering, it's just going to be that way For a few months or a quarter while we work through this strike impact, but that broader PDVF fitting business is so important to us. Couple of things. One, outside Dan's, we're getting that new facility up and running for production. So we're still deep in the middle of that process.

Speaker 2

Dennis 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 then went to Phoenix to our side by side upfitting business, which is just getting launched. I'm telling you, Jim, that and I've talked to you about this before, I think that side by side upfitting business is going to just absolutely crush it. In fact, our partners in that business like and some of our distributor dealers partners are thrilled about what we've designed and developed. So I think in 2024 that's going to be a major player Well, that's an upfitting.

Speaker 2

And then the other thing we're seeing in upfitting 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 content Seems to be much more recession resistant than that on the low end where we're adding smaller packages, less content and more than middle market Vehicle. So it really benefits us as we think about the engineering and all the content we can add in these vehicles to continue pushing that Upper limit, which is good from both the top line and a profitability perspective in that business. And as you know, Because we talked about it, that operating business for us is the higher end of our margin range. So we're doubling down. Nothing else about it.

Speaker 2

We're going to double down that business and keep growing it.

Speaker 5

Thanks. And I have to ask one on the bath business. Just given the pandemic, How do you know you're not acquiring a business that's over earned for a 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.

Speaker 2

Yes, that business has continued to grow across the Little League and in softball, but it's got a lot of room to run. I mean, there's a lot of room, especially All the way up in the college by the way. And then you've got some international expansion in Korea and Japan, a little bit in Taiwan that we think is very interesting. What we saw is that there was definitely a return to baseball and return to baseball grew significantly this year Post COVID world, kids are out there playing more and more in the field and picking up these facts. And the price points of these Pieces of equipment are also going up very nicely.

Speaker 2

So when I look forward in the next 3 or 4 or 5 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 it's got good growth in the next 3 to 5 years and I think there's a lot we can go do. So I'm more confident where this business goes and I don't think there's necessarily COVID bump in baseball. It's actually the opposite. I think it got better post COVID when people could return to sport kind of a mess.

Speaker 5

Okay. Thank you so much.

Operator

Our next question comes from Ana Guishin, B. Riley?

Speaker 7

Hi. Thanks for taking my questions. I guess touching on SSG For the Q4, I think on the last call you talked about expecting sequential improvement as BOEs prepare to launch next year's for next model year product. 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 channel normalization could extend to the first half.

Speaker 7

So when should we expect that new product

Speaker 2

to set? Yes, Anna, it's a good question. We are seeing Some customers, some are like I said earlier, some are better OEMs who have managed inventory very well, roll out their new model year. 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 year. So that's really the mix shift that's going on in Q4.

Speaker 2

Everybody is just trying to get rid of all the old components and products in their inventories and everybody knows that if they Yes. If they didn't do it 'twenty four, they really can't afford to not do it 'twenty five. So when we think about when do people really have to be out there with new bike models, In spring of 'twenty four, they have got to have solved this problem. I mentioned earlier in one of your questions about getting through the inventory by June. Those things are tied together.

Speaker 2

They have to eliminate the inventory, so they don't miss another model year as that'll be pretty dramatic to our businesses.

Speaker 7

Got it. Thanks. And then touching on the 4th quarter guidance, would it be possible to parse out what the UAW impact Is it fair to be?

Speaker 2

Yes, I mean we can sure try. I don't it's going to be fairly significant obviously. What we're finding out is that even though that the tentative strike ended at the end of October, So you think, okay, October was the down month and that give you a pretty finite number. The challenge and the reason why I'm hesitant to answer it It's because it depends on the pace that they restart up these factories. And it's not linear and it's not real clean.

Speaker 2

So my opinion is we're going to see the impact of new strikes through November and then we're going to go 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're going to run right in the holidays after that and that's just a whole another problem. So we're not real positive on the automotive OE part of our business in Q4.

Speaker 7

Got it. And just following up there, are you expecting that chassis availability will be Back to normal by the end of 2023 or could this extend into 2024?

Speaker 2

Generally speaking, I think it will get back to normal by the end Of the year. There is the challenges that we faced throughout the year with getting the new models launched whether it was the Bronco or other vehicles, If we really want to see in our operating business in 2024, my assumption is that you must miss in 2023 and it won't be an issue in 2024 at all,

Operator

Our next question comes from Mike Swartz, Truist.

Speaker 8

Hey, good evening guys. Maybe just to start on the Maruti acquisition, I think you said the business is accretive to both growth Sorry, growth and margins, you threw out 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?

Speaker 2

Yes. It's a little early

Speaker 3

for that right now, given the fact that We don't have a closing date yet, right? So

Speaker 2

I'm going to shy away from that

Speaker 3

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 hesitation, we're saying this is accretive 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.

Speaker 8

And needless to say, I would assume you're not reflecting any benefit from Maruti in your 4th quarter guidance.

Speaker 3

That is absolutely correct. There is nothing in the guide for Marucci.

Speaker 8

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 their cost structures and the higher labor costs, Is there any risk that they start getting more aggressive with contractual negotiations and pricings with some of their vendors?

Speaker 2

We haven't seen it, Mike. I would question the same thing with you. So I think it's a good question that you're asking it. I will tell you that as our strategy continues with OEMs is to drive innovation and technology and the new dual valve Product that we're selling on the upcoming Raptor platform is our most expensive and most technologically advanced product that we've ever made. So we're going to continue to push those price points up because we're going to make better and better product versus going downstream to make cheaper product.

Speaker 2

And keep in mind, where the elasticity is for most of these OEMs is on those types of vehicles. So the less pricing pressure for them there than there is probably in the Bottom end of the lineup. So I think we're going to get less pressure just for those reasons.

Speaker 3

Okay, great. Thanks.

Operator

Our next question comes from Alex Perry, Bank of America.

Speaker 9

Hi, thanks for taking my questions here. I guess maybe I just wanted to clarify, so the impact of the UAW strike on the quarter was in the tune of 40 $5,000,000 Did you mention that? And then I know you gave some qualitative context on sort of the 4Q impact of the UAW strike. But is it fair, like if we were to take how much you lowered your guidance Spy, 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?

Speaker 3

Yes. No, I think that's a great question. So I think in Q3, In Mike's prepared remarks, you talked about it being around $45,000,000 impact from the strike. And so that was Pre strike and post strike in the quarter. When we look to Q4, the way I was Pretty much thinking about it is probably got another $25,000,000 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 OEs.

Speaker 3

And then the remainder and this is where it gets difficult, right? Because there's the UAW impact All of November was sorry, all of October was essentially impacted. Some of November is going to be impacted as they As they start to ramp back up. So it's challenging there to really nail that down. But then there's also What I'd call the macroeconomic interest rate environment that is causing Dealers and distributors to hold less inventory.

Speaker 3

They're not leaning in as much because the carrying cost of this inventory is that much more expensive. So that's how I'm thinking about it. But for rough math, I mean that $25,000,000 for SSG, 100 or so is a combined UAW impact and This macroeconomic overhang. Alex, one of the things

Speaker 2

that Dennis said I want 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 in the past what's the interest rate due to your buyer of a vehicle or your buyer of a bike or your buyer of 1 of our products. And we've always said, our buyers are extremely more affluent and they tend to buy at the high end of the range at least, products kind of regardless of the interest They're cash buyers. Interestingly enough, what we saw in the kind of post Labor Day September and what we're seeing in Q4 It is not obviously the consumer is under pressure, but just as important whether you're a car dealer or a bike dealer or You're a distributor in our business, you're having to finance your inventory and your floor plan. And what we really saw was those interest rates Climbing so significantly that nobody wants to hold inventory. Some of them would have held a quarter's worth of inventory in the past, maybe they want to hold a month at most.

Speaker 2

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' comments were great in that. There There's other things also playing out here that we're trying to rationalize and understand.

Speaker 3

Yes. We're acting no different, right? I mean think about what I highlighted on the call, we talked about taking our inventory down another $9,000,000 Right. Why are we doing that? The cost of capital is much more expensive today.

Speaker 3

So you take a look at what we're paying on rates today versus what it was a year and a half ago, it is dramatically different. So our focus is on the balance sheet, right? And rightly so. And guess what? So are Our distributors and dealers as well and same with end customers.

Speaker 9

Yes. That's really helpful. Would you say that the impact in The higher rate environment impacting the carrying of inventory is most pronounced in the upfitting versus your bike retailers. Is that really where you're seeing the impact like they're only willing to carry X amount of trucks versus Y last year? And then just my second question is just a little more help on SSG as we move through 2024, I know the sort of long term guide there is mid to high single digits.

Speaker 9

It sounds like 1H24 is challenged. Does that mean Up first like down year over year, what does that sort of mean? Thank you.

Speaker 2

I'll give Dennis the second half of that. I'll take the first half of it. It's actually pretty much across the board. When you think about how dealers are responding, one of the things you'll see in Like as an example is that dealers are taking down their inventories as quickly as they can, so they can be more nimble. And we also see OEMs who are trying to flush this bike inventory through the system.

Speaker 2

In a lot of cases, they're doing it online direct And they're discounting it heavily. So that's just you can kind of see it play out that dealers don't want to hold the inventory. So the OEMs are kind of taking it into their own hands that Push it through with big discounts as fast as they can in a direct to consumer fashion. I do agree with you though that dealers in automotive, Yes, floorplan financing is a significant issue. And I'd say it's not just automotive, it's also in powersports.

Speaker 2

And you're seeing some of that play out in Some of the comments that we get from our customers in

Speaker 1

that space as well.

Speaker 3

On the bike side of things, Right. As Mike mentioned, we are seeing some OEs doing a really good job here and they are growing with us and they're 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 twenty three, I'd say we'd be up modestly in the first half of twenty twenty four.

Speaker 2

So that and then this is

Speaker 3

Going to help with bikes in business overall as they start to grow and move into those 24 models, 25 models in the second half of twenty twenty four. That's our

Operator

Our next question comes from Craig Kennison, Baird.

Speaker 8

Yes. Thanks for taking my question. I wanted just to ask quickly about the quarter itself. R and 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 costs?

Speaker 3

Yes. We are not going to cut costs when it comes to R and 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 remember we talked about the tax rate being lower In Q3, this was R and D tax credits coming through.

Speaker 2

Yes, Craig, if we're going We're going to cut back on infrastructure. We will not cut back on R and D and sales. Those are two key elements of our business Yes, get capital allocation before anything else.

Speaker 8

So that tax benefit comes through on the R and D line?

Speaker 3

What's that again, sorry?

Speaker 8

Does the tax benefit I'm sorry, does the tax benefit come Through on the R and D line?

Speaker 3

Well, I was just saying that's part of it. There were some credits that came through that basically offset some of the spend there in that line.

Speaker 8

Okay. Thank you. And as it relates to the Maruti transaction, I guess my question is what can Fox add to that business that Cody could not?

Speaker 2

Yes. So we're a manufacturing company and we have a lot of respect obviously for Cody, we've got a long history with Cody. If you know our story, I know you do, Craig. One of the things that Elias and I talked about, Elias is the CEO of Cody, is that while they can help support and guide a company like Noruchi And Invictus and Baum, other companies, we can really go after it from a manufacturing perspective and a supply chain perspective because that's what we do every And the biggest percentage of their batch are aluminum and or composite, which is basically most of our materials as well. And we're a gold manufacturer just like Marucci is.

Speaker 2

So there's a lot we can do from them from that perspective. And then The other side of it is we're in the business of working with pro athletes. I mean, ours are racers typically not baseball players, but you know what, there's not that much difference in how you use Our marketing leverage, our marketing strength, our brand strength to drive incremental benefit and value in that business. So we're excited about that as well. And we're just a growth engine.

Speaker 2

So our ability to lean in and work with that team is going to be, I think, really compelling. There's a lot we can do. So there's nothing against what Cody's built, that company is fantastic. So I'm really impressed with what they've done in the 3 years that they owned them. Now that we've got the ball or the bat and ball so to speak, Yes, we're going to crush it.

Speaker 2

I'm really excited what the next 3 to 5 years look like.

Speaker 8

Great. Thank you.

Operator

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.

Speaker 2

Yes. Thanks everybody. Appreciate the time tonight and we'll see you guys all at the ballpark. Talk soon.

Operator

This does conclude the Fox Factory Holdings Corporation Third Quarter 2023 Earnings Call. You may now disconnect your line and have a great day.

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Earnings Conference Call
Fox Factory Q3 2023
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