Fox Factory Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 8 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's First 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'd now like to turn the conference over to your host Vivek Vakuni, Senior Director of Relations and Business Development. Thank you, sir. You may begin.

Speaker 1

Thank you. Good afternoon, and welcome to Fox Factory's Q1 2023 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer and Maggie Torres, our Interim Chief Financial Officer and Interim Treasurer. First, Mike will provide business updates, Then Maggie 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.

Speaker 1

By now, everyone should have access to the earnings release, which went out today at approximately 4:0:5 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.

Speaker 1

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 are detailed in the company's latest Form 10 Q and in the annual report on Form 10 ks 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 Through 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, Vi, and good afternoon. We appreciate everyone taking the time to join us for today's call. I am proud to report that we have started 2023 with strong Q1 results. Thanks to the power of our diversified product offerings and the differentiated market position, along with our committed and capable team, We executed incredibly well during the Q1 against a volatile economic and changing product mix environment. As we manage through all of these economic and market changes, our top priority is to ensure the long term sustainable growth of our business.

Speaker 2

To achieve this, it was important to recognize the shifting requirements for workforce utilization and alignment. On this front, We instituted cost reductions which primarily resulted in a reduction of workforce within our Specialty Sports Group. We are also in the process of rolling out an enhancement to our organizational structure, which is designed to be more aligned with our end customers and drive additional focus on product development. Our plan includes bifurcating our existing Powered Vehicles group into 2 new product groups that better aligns our go to market strategies and product synergies. These two product groups would consist of firstly, our PVG legacy suspension business and secondly, our portfolio of non suspension aftermarket applications and upfitting.

Speaker 2

We will provide quarterly updates regarding our internal organization changes which we expect to be completed by the end of this year. Turning to the numbers, a decrease of 13.3 percent quarter over quarter. We also reported non GAAP adjusted earnings per diluted share of $1.20 versus $1.32 a decrease of 9.1% over the same period last year. This quarter over quarter decrease is primarily driven by a significantly lower effective tax rate in the same period last year. Let's break down the numbers further beginning with our Powered Vehicles Group.

Speaker 2

Q1 marked another remarkable revenue quarter led by a 35% growth in sales versus the same quarter last year, driven by strong performance in our OE channel and upfitting product lines. We delivered a quarterly revenue of $281,000,000 a 5th consecutive record revenue quarter for our Powered Vehicles Group. We are pleased with the Q1 momentum, thanks to the foundation provided by our Gainesville facility improvements and the continued growth of our upfitted vehicles. In our upfitting business, the end consumer and the premium truck portion of the automotive market is showing continued signs of resilience. Consequently, we will remain focused on new vehicle development as well as expanding dealer relationships, while monitoring the sensitive balance between consumer financial health our financial targets.

Speaker 2

In addition, we closed our Custom Wheelhouse acquisition on March 3, 2023. As a result, Custom Wheelhouse contributed $6,900,000 to our top line. For the full year, revenue contribution of approximately $60,000,000 to $70,000,000 with the margin profile being accretive to Fox's overall margin profile. Lastly, as I had mentioned in our prior earnings call, the significant change in the revenue mix will continue to negatively impact margins. However, I feel very confident we will offset some of that headwind through the integration of Custom Wheelhouse.

Speaker 2

In addition, I've spoken before about the potential for margin improvement in PDG of 250 basis points to 3.50 basis points based on the ramp of Gainesville. I am thrilled to report that we saw much of that improvement achieved in the Q1. I am more thrilled to report that we are not done. As our volume continues to grow in PPG, we believe we have another 200 basis points to 300 basis points of improvement ahead of us. While this will not be linear margin expansion and will be tied to volume increases, we clearly have a line of sight over the next 12 to 18 months to keep improving.

Speaker 2

Turning to our Specialty Sports Group, we delivered a quarterly revenue of $118,900,000 a decline of 30% as compared to the same quarter last year. This is primarily due to the stronger than anticipated seasonality impact in Q1 of 2023. As you may recall, Q4 of 2022 didn't reflect the expected seasonality impact, which consequently made Q1 of 2023 even more dramatic. In addition, we are continuing to hear about the larger than anticipated inventory glut foreshadowing a longer period of decline before we return to a more normal environment. Hence, we now expect our Specialty Sports Group to be down over 20% for the full year With the worst of the impact occurring in Q2, our team is keeping a finger on the pulse of the market and we will continue to update you every quarter as we work our way through the channel inventory challenges.

Speaker 2

Once accomplished, we feel confident equilibrium in the bike industry will return to normal as we continue to see positive signs with end customer demand. To conclude, we are happy with the strong foundation Q1 has provided. We are also pleased to see the power of our diversified portfolio, which we have painstakingly built over the last several years. As we look for signs of stabilization in the Specialty Sports Group, our custom wheelhouse growth will provide us with a reasonable offset in both revenue and margin headwinds. And finally, I want to introduce you to Maggie Torres, who has stepped in to pinch hit as our Interim CFO.

Speaker 2

Maggie has been a key leader in our organization for many years. And while she had planned to retire, her commitment to the company and this team overrode that decision temporarily. And I want to take this opportunity to personally thank Maggie for her partnership and leadership. And with that, I'll turn the call over to Maggie.

Speaker 3

Thanks, Mike. Good afternoon, everyone. I'll begin by going over our Q1 financial results and then review our guidance. Sales in the Q1 of 2023 were $399,900,000 an increase of 5.8% versus sales of $378,000,000 in the Q1 of 2022. Our Powered Vehicles Group, PVG, delivered a 35% increase in sales in the Q1 compared to the same quarter last year, primarily due to strong performance in our upfitting product lines and increased demand in our OEM channels.

Speaker 3

Moving on to our Specialty Sports Group, sales in SSG decreased by 30% compared to the Q1 of 2022, primarily due to a return to seasonality in the bike business and the impacts of higher levels of inventory across various channels. Box Factory's gross margin was 33.3% in the Q1 of 2023, a 150 basis point increase from 31.8% in the same period in the prior year. For the Q1 of 2023, non GAAP adjusted gross margin also increased by 180 basis points to 34.1% versus Q1 of 2022. The increase in gross margin and non GAAP adjusted gross margin in Q1 2023 was primarily driven by lower materials and other related costs, increased efficiencies at our North American facilities and strong performance in our upfitting product lines. In addition, non GAAP adjusted gross margin was favorably impacted by the step up in inventory value as part of the purchase price accounting for Custom Wheelhouse.

Speaker 3

Total operating expenses were $78,600,000 or 19.7 percent of sales in the Q1 of 2023 compared to 66,100,000 were 17.5 percent of sales in the Q1 of last year. The increase in operating expenses in Q1 2023 was primarily due to higher employee related costs, legal and professional fees and higher insurance and facility related costs, partially offset by lower acquisition related compensation and various others. Looking at non GAAP operating expenses as a percentage of sales, Our non GAAP operating expenses increased by 180 basis points to 17.6% in the Q1 of 2023 compared to 15.8% in the same period in the prior year. Focusing on operating expenses in more detail, Sales and marketing expenses increased approximately $1,100,000 in the Q1 of 2023 compared to the Q1 of 2022, primarily due to higher commissions. Research and development costs increased approximately $2,700,000 in the Q1 of 2023 compared to the Q1 of 2022, primarily due to personnel investments to support future growth and product innovation.

Speaker 3

General and administrative expenses increased by approximately $8,100,000 in the Q1 of 2023 compared to the Q1 of 2022 due to higher employee headcount and benefit related costs of $6,200,000 legal and professional fees of 2,500,000 Insurance and facilities related expenses of $2,000,000 partially offset by lower acquisition related compensation and other costs of 2,600,000 The company's effective tax rate was 18.3% in the Q1 of fiscal 2023 compared to 4.8% in the Q1 of fiscal 2022. The change in the effective tax rate was primarily due to the release of our valuation allowance against foreign tax credit carry forwards in the Q1 of fiscal 2022 upon enactment of U. S. Tax regulations, partially offset by a decrease in foreign withholding taxes, net of foreign tax credits in the Q1 of fiscal 2023. On a GAAP basis, net income in the Q1 of 2023 was 41,800,000 or $0.98 per diluted share compared to $48,100,000 or $1.13 per diluted share in the same prior year period.

Speaker 3

Non GAAP adjusted net income was $51,000,000 in the Q1 of 2023, a decrease of approximately $4,800,000 were 8.5% compared to $55,800,000 in the Q1 of last year. We delivered $1.20 of non GAAP adjusted earnings per diluted share in the Q1 of 2023 compared to $1.32 in the Q1 of 2022. Adjusted EBITDA increased by 10.3 percent to $79,200,000 for the Q1 of 2023 compared to $71,800,000 in the same quarter last year. Adjusted EBITDA margin increased by 80 basis points to 19.8% in the Q1 of 2023 compared to 19% in the Q1 of 2022. The increase in adjusted EBITDA margin in the Q1 of 2023 is primarily due to the improvement of non GAAP adjusted gross margin.

Speaker 3

Now focusing on our balance sheet. For the Q1, which ended on March 31, 2023, Compared to our 2022 year end on December 30, 2022, we held cash on hand of $91,900,000 compared to $145,300,000 accounts receivable was $195,300,000 compared to $200,400,000 Inventory was $379,900,000 compared to 350,600,000 Prepaid and other current assets was $214,600,000 compared to 101,400,000 Accounts payable was $135,300,000 compared to $131,200,000 Goodwill and intangibles were $380,900,000 $226,100,000 compared to $324,000,000 $179,000,000 respectively. And our line of credit was $360,000,000 versus 200,000,000 The decrease in cash on hand and related increase in prepaids and other current assets reflects higher chassis deposits as we return to a seasonal build pattern and ramp up to meet the current year production needs in our upfitting product lines. The increase in inventory is primarily due to inventory that we obtained in our recent acquisition of Custom Wheelhouse. The changes in accounts receivable and accounts payable reflect the timing of customer collections and vendor payments.

Speaker 3

Our net property, plant and equipment increased to $210,300,000 as of March 30 onetwenty 23 compared to $202,200,000 at the end of fiscal 2022, reflecting capital expenditures of $11,100,000 during the quarter. The increase in goodwill and intangibles reflect our recent acquisition of Custom Wheelhouse. And lastly, our line of credit went up by 160,000,000 again reflecting the use of proceeds to finance our Custom Wheelhouse acquisition. Now turning to our guidance. For the Q2 of 2023, We expect sales in the range of $390,000,000 to $410,000,000 and non GAAP adjusted earnings per diluted share in the range of $1 to $1.20 For the fiscal year 2023, the company expects sales in the range of $1,670,000,000 to $1,700,000,000 and non GAAP adjusted earnings per diluted share in the range of $5 to $5.30 Our full year guidance assumes an income tax rate in the range of 15% to 18%.

Speaker 3

I'd also like to note that we're not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of accurately predicting the elements necessary to provide such guidance and reconciliations. As Mike discussed earlier in this call, we remain cautious in our outlook for our Specialty Sports Group in the 2nd quarter. Additionally, we anticipate continued revenue mix normalization in our Powered Vehicles Group throughout the year, driven by a higher percentage mix of OEM sales. As our understanding of the global business environment evolves, we plan to provide incremental updates each quarter regarding our expectations for 2023. Lastly, I am pleased to announce that we have hired Brendan Enick as our 1st Chief Accounting Officer.

Speaker 3

We are confident that Brendan's addition to the team will elevate our global finance and accounting team and align our overall efforts to gain efficiencies, strengthen oversight and controls and support future growth. With that, I'll turn the call back over to Mike.

Speaker 2

Thank you, Maggie. To wrap up, I'm pleased with the solid start to 2023, but at the same time Being very cognizant of the possible macroeconomic tremors. As the narration regarding a potential recession has increased, The recent tightening of the credit standards has only fueled those fires. However, history has shown no matter what the operating or macroeconomic may be, If you have a strong brand, you always come out on top. And besides many other assets, a powerful brand is what we have.

Speaker 2

Despite the near term uncertainty, we remain agile and continue to lead, moving ever forward toward our mission. I believe we are well positioned for future and long term growth by making strategic investments to expand manufacturing capacity, exploring potential new markets and by continuing our relentless pursuit of product innovation. Lastly, we are close to finishing our search for our next CFO. Given the remarkable brand and growth story that we have, we attracted a number of high potential candidates and I feel very confident that Maggie will eventually be able to retire later in Q2. I would now like to open the call for questions.

Speaker 2

Operator?

Operator

Thank you, sir. And our first question will come from Larry Solow with CJS Securities. Your line is open.

Speaker 4

Great. Thanks and good afternoon, Just a quick clarification. So your revenues for the full year are the same, lowered EPS by 0.15 Obviously, you're rolling in the custom wheelhouse. Is that $70,000,000 on an annualized basis or is that $70,000,000 in this Your fiscal 'twenty three?

Speaker 5

That's $70,000,000 in this fiscal year. So as you correctly pointed out, we think for at least getting through Q2, we're Hold on the guide on the revenue side and kind of reinforce some of the softening of the FSG and the reduction of the EPS guide.

Speaker 6

To give

Speaker 5

us kind of a conservative view on the balance of the year and we'll see how Q2 goes and we'll go from there.

Speaker 4

Got you. So I suppose that custom wheel is that 3 quarters will be a little bit accretive for you guys, right?

Speaker 5

Absolutely. It's accretive obviously on the revenue side clearly and also on gross margin and the non

Speaker 4

Got you. And EPS too or even with the or not as much? A little bit, right? A little bit. Yes.

Speaker 4

Okay. All right. Okay. So just chipping here, a couple of questions. Just one on SSG and 1 on Power Vehicle, number 1.

Speaker 4

You mentioned obviously the inventory glut, nothing new there, maybe just a little deeper. But just curious, you mentioned some Positive signs and end market demand. I'm sure it's somewhat anecdotal at this point, but can you anything you can share with us to give us a little Light at the end of the tunnel, if you will.

Speaker 5

Yes, yes, for sure. We are seeing customer demand in certain markets Picking back up and that happened kind of late in the quarter in Q1. So that does give us confidence that the demand is not necessarily gone, It isn't gone in FSG. It's just this massive amount of inventory that is bigger than expected pushing through. And we knew that, right?

Speaker 5

So we talked about that The last earnings call. And we were hoping that Q2 would show more positive signs and in fact it's not really showing any improvement and Probably some further weakening from Q1. So now we're really looking to the back of the year to really understand what's going to happen in Q3 and Q4. The good news is Larry, as you know, It's all about fact and making sure that we maintain our market share and grow and that's in fact happening. So we feel great about our position.

Speaker 5

We just feel like we have to wait and let this day process through, so we can get back on the gas or pedal. Got

Speaker 4

you. And then just one quickly on Powered Vehicles. So obviously, that's carrying the torch, if you will, and really strong growth. We expected it from Obviously, the auto OEM side and sort of your legacy suspension, but I think there were some concerns in updating market and other So non suspension areas for you guys that sort of catered to a high, clientele there might start to slow down a little bit, but Doesn't sound like it's really slowing, I guess, question 1. And part 2 of that, could you just remind us sort of Where you stand with Tuscany and SCA in terms of dealer relationships and the opportunity to expand the new dealers and also Just vehicles per dealer because I think that was still pretty low if I'm not mistaken.

Speaker 4

Thanks.

Speaker 5

That's right. Yes, and we saw a little bit of softening in the 1st month and a half of the Quarter relative to aftermarket businesses, businesses like sport truck and even upfitting, but it picked up towards the back half of the quarter and obviously ended very strong. So We're not seeing any weakness from an end consumer standpoint right now across our what we call applications business, non suspension business. So That's a real healthy sign for us. And as you can see in our prepays, we've got a healthy balance of inventory and chassis to support the ongoing growth of not only Revenue and volume growth, but dealer growth to your question and unit growth per dealer.

Speaker 5

So we're staying on the gas. We We believe that this is the 1st year we're able to actually grow those dealer accounts and we have to start by pulling dealers back in where they couldn't supply the last 2 years. So we're doing that work now We're creating a lot of synergies through our sales force in that regard. So I do think you're going to see a nice healthy pickup the rest of this year In both the account and vehicles per beer.

Speaker 6

Great. Thanks,

Speaker 4

Mike. I appreciate it.

Operator

Thank you. Our next question will come from Jim Duffy with Stifel. Your line is open.

Speaker 2

Thank you. Hi Mike. Hi Maggie. Hi Jim. I wanted to start with a few questions on The bike business.

Speaker 2

Mike, can you comment on the marketplace inventory posture and the differences you're seeing between Europe and North America? I was also curious where e mountain bikes stand as a percent of your order book? And then finally, what are the factors You're watching for sightlines to the stabilization in the market. How are the OEs planning model year 2024 production? Is it possible that's down from model year 'twenty three or is it too early to make that judgment?

Speaker 5

It was right and I There's a few questions. So let's start

Speaker 4

with the

Speaker 2

Yes, kind of 1 by 1 if you like, Mike.

Speaker 5

Yes, it's okay. I'll start with the geographic question. It's pretty balanced, frankly. Depending on the month and the timeframe, North America versus Europe can be a little bit different. And we've seen kind of puts and takes on that, but both of them are really reeling from kind of again not a demand issue as much as Just a bulk up of supply in the system.

Speaker 5

So we believe that That's going to continue throughout Q2 in both regions. And it's hard to pick which region will And I think that might be tied somewhat to macroeconomic environments of those 2 regions as well. So kind of hard to call the ball on that. They're all fed from the same supply chain. So it's kind of a function of doing the supply chain itself back in equilibrium.

Speaker 5

But I would expect to see U. S. And Europe kind of trend in similar path. In terms of eBike, Yes, eBike is a strong part of our business and as you know, we've been growing our part of our business quite substantially. Unfortunately, it was one of the biggest parts of the supply chain glut Because the things that we couldn't get to complete or OEM partners couldn't get to complete bikes was motors.

Speaker 5

So that was a large part of what was stuck in the channel. And so we're seeing that as kind of a secondary effect of this issue. I think as we come out of this, e bike would be on fire. That demand is Continuing to grow faster than pedal bike demand across every region, especially in Europe. So I think e bike will recover very quickly.

Speaker 5

Again, it just has to get through kind of an oversupply situation, which we talked about in the past. Your last question is on stabilization, Jim. Remind me what it was?

Speaker 2

Yes, just the factors you're watching for Sightline's stabilization. And I'm curious how the OEs are planning Model year 'twenty four production, when they make determinations on that, is it possible model year 'twenty four is down from 'twenty three? I presume that they're watching sell through in the key North American selling season as an indicator It's great to plan that model year production. Let me know your thoughts there please.

Speaker 5

Yes, it's a great question. So what we're seeing in terms How they're thinking about model years is different by OEM. And what we're finding is smaller, more nimble OEMs have Spotted better and had less inventory in the system. So pivoted left foot to right foot to get on to model year 'twenty four faster than some of the bigger OEM partners. Now There is good news and bad news.

Speaker 5

The good news is we have really good relationships with the smaller boutique OEMs that are helping us get to model year 24 More quickly, bad news is there's a lot of volume caught up in the bigger guys, in the bigger OEMs and they are struggling. So you will see them need to Through that model year 'twenty three before they really launch inventory of model year 'twenty four. As you can imagine, If they're pushing 9 of your 23 bikes still into dealers, kind of hard to convince you guys to take 9 of your 24 bikes or vice versa, if they take the 9 of your 24, you have to discount 9 of So it's a bit of a quagmire form frankly Jim and they're working through it. What we're really seeing is it took While you want to figure out the level of the issue and now Q2 they're getting very aggressive about how to resolve it. So the good news is They've gotten serious and they know I think they certainly know exactly what they need to go do.

Speaker 5

I think Q2 is really played out finding out what that looks like,

Operator

Thank you. Our next question will come from Michael Swartz with Truist Securities. Your line is open.

Speaker 7

Hey, guys. Good evening. Not to beat the dead horse, but just wanted to stick on SSG for a second and maybe a point

Speaker 5

of clarification.

Speaker 6

I think the

Speaker 5

last time

Speaker 7

we talked on your I

Speaker 4

think the last time we talked on

Speaker 7

your Q4 call, the flight challenges are really framed as too much inventory, maybe incomplete It sounds like now there's more at least just the way I'm reading it, there's more of an inventory issue in Retail channel, is that the right way to think about it? And is that kind of the reason behind you're lowering the full year outlook for SSG?

Speaker 5

No, I think it's still more of the former than the latter, Mike. I think it's still inventory that's half built in the supply chain. Now eventually that has to roll through dealers and distributors to get to the end market. So at some point that paid the level through the snake, So to speak. And so you're going to see it end up in dealers, but that's going to be a bit of a process.

Speaker 5

So the faster they can get that done, by the way, the better off we're all going to be. We'd really like to see that inventory move into dealers hands in Q2 and whatever discounting may do, which doesn't really affect us, but needs to get done to get those bikes moved, the More aggressive line they take on that course, the better off we're going to be. So I'd really like to see these bikes get moved through And they're starting to, but I don't again, I think what we're going to see is do end customers wait for a model year 'twenty four or do you take a deal in a model year 'twenty 2 things on that one.

Speaker 4

Got you.

Speaker 7

Perfect. Thank you. And then second question, just on 1st quarter gross margin came in better than I think any of us were anticipating. So and it looks like for your 10 Q that your mix was actually Towards OEM, so maybe help bridge the gap of what maybe came in better than expected During the quarter and then is your guidance implying that there's some give back as we work through the year?

Speaker 5

Yes, I'll start to the answer and then I'll let maybe jump in. I don't know if there's give back. The give back would be a functional mix I think really what we saw in Q1 was the engine really starting to crank up in North America with the optimization of the We just had a phenomenal quarter relative to that footprint and getting those efficiencies and improvements that we're looking for. So as I mentioned in the prepared remarks that we thought that would take longer in 2023 to achieve. We nailed it in Q1 and through that process realized, you know what, we're not even close to done yet.

Speaker 5

We've got more room to move. So I think you're going to see on non linear basis, you We'll see further margin expansion across the North America footprint as we continue to improve. And that's across OEM, aftermarket, doesn't matter. In fact, we might be improving faster on the OEM side than the aftermarket side just relative to those efficiencies. So we're really happy with what we're seeing there and that gives us confidence in Meghan, anything to add there?

Speaker 3

I would just add that in addition to the factory efficiencies in our North American facilities, we also had a little Lift in our upfitting product lines, that's a great mix in upfitting that contributed to that and Custom Wheelhouse being accretive to the gross margin.

Speaker 7

Got you. And then just quick question on Custom Wheelhouse in the quarter. I was looking through the Q and it looks like It was dilutive to earnings, but I'm not sure if that's stripping out all the one time costs. But just on an adjusted EPS basis in the Q1, was it Dilutive or accretive?

Speaker 3

Yes. That's a good question. On a GAAP basis, it's dilutive because of Some purchase price valuation adjustments, so that's $3,000,000 in GAAP net income, but from a non GAAP basis, It's accretive.

Speaker 7

Okay, perfect. Thank you.

Operator

Thank you. And our next question will come from Bret Jordan with Jefferies. Your line is open.

Speaker 6

Hey, good afternoon, guys.

Speaker 5

Hey, Bret.

Speaker 6

Could you talk a little bit more about the incremental margin potential from Gainesville. I mean, you sort of talked about how there was pretty substantial upside from here with volume. But could Give us maybe a feeling for the scale of that volume that would be required?

Speaker 5

It's a little bit it's well, it is volume. And what we Found in Q1 was the volume that we ran in Q1 was very beneficial to margin accretion in the factory. So it doesn't take a lot more Volume than we had in Q1, but it takes just further utilization of buildup integration against that volume, further optimization of our assembly process and Automation, etcetera. So it doesn't it's not going to take a lot more in terms of revenue. It's not like we have to Add 30% more or anything to get there.

Speaker 5

So we can see a good solid line of sight to it. It's just continuing to track that we started in Q1 and now back up. Reason why I mentioned volume is because volume is a significant portion of the foundation to create that margin accretion. So if volume is inconsistent, Let's say week to week or month to month, that can create some lumpiness in how that margin accretion occurs or it comes into play. So I just always want to caveat everything with volume is a Fundamental factor in manufacturing to drive margin improvement.

Speaker 6

Okay, great. And then I guess on the chassis deposits, the prepaids were up. How do we think about those turning? I guess, are we at a prepaid level where current chassis will sell in Q2 and then you'll rebuild the inventory? Or does that build into Q2 Due to some mid year peak in that investment.

Speaker 3

Yes, I can take that one. I think a couple of things on chassis. I think We see Q1 as the seasonal peak. So our expectation at this point is that we will work through our Q1 chassis inventory gradually through to the end of the year with Q1 being the peak. And just another thing to underscore On our chassis balances, there's also a significant mix component.

Speaker 3

So when we're talking about chassis based on the OE, If we're talking about Jeep and Ram OE, then those are the ones that we prepay. So the more Jeep and Ram, the higher the prepaid and As it shifts between GM and Ford's other OEs, then that can affect the chassis balance as well.

Speaker 6

Great. Thank you. And then one last question, I guess, the bike business is obviously challenged by the inventory bulge. Does that Create M and A opportunity or is it just something that you wait for the balls to pass and don't buy more in that space in the interim?

Speaker 5

That's a great question. It does create M and A opportunities because what we found through COVID and a spike in that business was Valuations got significantly higher and kind of really out of the range that we were willing to pay. That's coming back in the range, John. So we're looking at some very interesting matter of fact, we picked up a small company in the quarter. We picked up a small company even in the quarter that was a good fit for our So we're going to continue to be accretive in the SSG space.

Speaker 5

And finally, I think we're in a place where we can actually Do some good work there without paying crazy multiples.

Speaker 6

Great. Thank you.

Operator

Thank you. At this time, there are no further questions. So I would like to turn the call back over to Mike Dennison for any additional or closing remarks.

Speaker 5

Well, thanks everyone. Have a good evening and we'll talk to you soon. Bye.

Operator

Ladies and gentlemen, this does conclude the Fox Factory Holding Corporation's Q1 2023 Earnings Call. You may disconnect your line at any time and have a great day.

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