Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I'd now like to turn the conference over to your host, Vivek Bhakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Fox Factory's First Quarter 2022 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer; and Scott Humphrey, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Then Scott will review the quarter 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 4:05 Eastern Time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at investor.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the Company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the Company's latest Form 10-Q and in the Annual Report or Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the Company undertakes no obligation to update any forward-looking, or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate in today's prepared remarks and within our earnings release, we will refer to non-GAAP financial measures to evaluate our business as we believe these are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's press release, which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thank you, V and good afternoon. We appreciate everyone taking the time to join us for today's call. I'd like to open today's call by addressing the conflict and humanitarian crisis in Ukraine. We're deeply saddened by the unprovoked invasion of Ukraine and recognize the profound impact, these events have -- are having on many around the world. Our thoughts are with those impacted by this crisis and we hope peace comes to the region soon. While we have negligible sales in Russia, we have ceased all business activities there. We do not expect this to have a material impact on our overall results. I am proud to report that we have started 2022 with the highest quarterly revenue in our company's history, powered by a record-breaking performance in both our Specialty Sports and Powered Vehicles Product Group. We also delivered the highest earnings per share in spite of the continued global pandemic and volatile macroeconomic conditions, creating numerous challenges within the quarter. We did see a meaningful disruption in the labor availability in North America in early January, as the Omicron variant surged. Throughout the quarter, we experienced significant change in operational disruptions, either within our own facilities or with our customers and suppliers. Despite these adversities, our consistent and elevated performance through the first quarter continues to reflect the strength of our leading brand portfolio and our team's commitment to deliver high-performance products to our valued customers. Turning to the numbers. Our first quarter sales were $378 million, an increase of 34.4% compared to the first quarter of last year. This outstanding growth is driven by both our SSG and PVG businesses, which grew 44% and 28% respectively for the first -- versus the prior year period. What makes me particularly proud about this performance is Q1 of…

Thanks, Mike. Good afternoon, everyone. I'll begin by going over our first quarter financial results and then review our guidance. Sales in the first quarter of 2022 were $378 million, an increase of 34.4% versus sales of $281.1 million in the first quarter of 2021. Our Powered Vehicles Group delivered a 27.9% increase in sales compared to the first quarter of 2021, primarily due to strong performance in our upfitting product lines. Moving to the Specialty Sports Group. SSG delivered a 43.5% increase in sales in the first quarter compared to the same quarter last year, primarily due to increased demand across all channels. Fox Factory's gross margin was 31.8% in the first quarter of 2022, a 300 basis point decrease from 34.8% in the same period in the prior year. For the first quarter of 2022, non-GAAP adjusted gross margin decreased by 270 basis points to 32.3% versus Q1 of 2021. The decrease in gross margin was primarily driven by higher inflationary pressures on all fronts including, labor, material and freight costs. In addition the completion of the planned Watsonville California facility shutdown and move of those production lines resulted in inefficiencies we ramp up to full utilization of our Gainesville Georgia facility. This was marginally offset by favorable product and channel mix compared to Q1 2021 led by higher volume sales in our Specialty Sports Group and strong performance in our upfitting product lines. Total operating expenses were $66.1 million or 17.5% of sales in the first quarter of 2022 compared to $52.1 million or 18.5% of sales in the first quarter of last year. The increase in operating expenses in Q1 2022 was primarily due to higher employee-related costs, higher commission costs as well as higher insurance and facility-related costs. Looking at non-GAAP operating expenses as a…

Thanks Scott. We are very pleased with the way we have started 2022. Our strong start to the year is the continued proof of our deep consumer connections, world-class team, and strong brand momentum. We also acknowledged our Q1 2022 margin performance, which was a point of caution. As we take note of our achievements, I assure you we are looking at the gains in efficiency very closely as gaining a competitive cost structure critical to our success. As much as we are focused on short-term actions, our broader team continues to be laser-focused on our long-term product and operational priorities to extend our competitive positioning. Therefore, in closing, we are executing on our priorities laid out over the last couple of quarters and I'm encouraged by the momentum in our efficiency capture as we enter the fifth month of the year. We will continue to implement on our strategic priorities of market share growth, world-class operations, and cultivating an engaged workforce, all while maximizing shareholder value. I would now like to open the call for questions. Operator?

[Operator Instructions] And we will take our first question today from Larry Solow with CJS Securities. Your line is open.

Hi, it's actually Lee Jagoda for Larry this afternoon. Thanks for taking my questions. Just to start I think you made the comment earlier that you expect bike demand to kind of, start to moderate at the end of this year and into 2023. Could you clarify whether that is -- that means slower growth or a decline year-over-year based on what you're seeing today?

Yes, this is Mike. So, what we're talking about when we talk about moderating demand in SSG is number one return to seasonality. So, think about usually in the winter months, you've got a slower demand cycle from a mountain bike demand perspective. It's a function of model year changes and just weather outside. So, you'll see that start to return which hasn't been the case in the last two years. So, that's the first comment I'd make. The second comment is I think what you'll see in 2023 from our perspective today is returning to the long-term growth rates that we've had or we've held for a number of years which is mid to high single-digits in bikes. So, a bigger base of business, but a more normalized growth rate on top of that.

Okay, that's very helpful. And obviously investors have been generally concerned about the potential economic sensitivity around your products. And these days you're probably more exposed than you were in the last downturn to things like powered vehicles and auto. Can you just remind us how the demand for your products fared in prior economic slowdowns? And sort of what's your level of concern these days in terms of what you're seeing going forward?

So, a couple of comments. One, we haven't seen demand slack off at all in any of our product lines over the course of the end of last year as we've commented before or the beginning of this year. You have to think about this business back in 2008 and 2009 and how different it was. Again, the size of the company was the size of one of our quarters or less on an annualized basis. So, it was a pretty small company back in 2008 and 2009 compared to what it is today. And a lot of that's diversified and I think the diversification helps us. So, yes, clearly we're an enthusiast-driven high cost or high-priced product mix, but what we've seen in our PVD or our operating business, where we're selling vehicles for dealers, hasn't slowed at all with the changes in gas prices or changes in interest rates or anything else. So, I think our consumer our enthusiasts are pretty resilient. I don't want to go as far as saying that a recession would impact us because I'm not saying that I don't think that's true. But I do think that so far it is held to what we believe which is our enthusiasts will use our products or buy our products before they'll do something else in their family spend like a vacation. And if you're a mountain biker, you're going to be a mountain biker regardless of what the economy is doing. So, we feel pretty good about it. We think we're more resistant to recession than a lot of the categories. But again, if we have a big enough recession, it's going to impact us like it impacts everybody else.

That's super helpful. If I can sneak one more in here. Just in terms of the guidance that you gave for 2025 around nine months ago, is there anything in the macro or company-specific that changes that guidance one way or the other sitting here today?

No. We're still committed to that strategic direction and we feel pretty damn good about it.

Great. I’ll hop back in queue. Thank you very much.

And we will take our next question today from Mike Swartz with Truist Securities. Your line is open.

Hey, guys. How are you?

Hey, Mike.

Hey, Mike.

I guess first question for me is, just I want to better understand the gross margin pressures. And maybe -- I don't know what the best way to do this is but maybe bridge last year to this year what were the -- maybe largest impediments that you faced? And then, the second part of that question is, how should we think about the cadence of gross margin over the balance of the year and what's implied in your guidance?

Mike, I'll start and I'll let Scott jump in and answer it as well. Our perspective on the gross margin in Q1 was majority a function of just that Gainesville consolidation. There are some inflationary pressures too, so that's the second piece of it. I'm not sure, I call it, 50-50, it's probably a little bit more to give more consolidation or transition than it is to inflation. So, I think we have to work through that. As I mentioned in the prepared remarks, we have to get that work done. We're still committed to the 250 to 350 basis point improvement that we've talked about before occurring this year. So, it's just a lot of work to get through a lot of stuff, as you know. So, we're going to keep going after that and we feel good about it. But, I think we have to see how everything else plays out. The other thing I'd add too is, we are continuing to see price increases in our business or push through price increases across our product lines and that will help us with the inflationary challenges that might come about for the balance of the year. So, Scott?

Yeah. No, I agree with what Mike said, Mike. I think as far as the cadence goes that you're talking about, I think we said all along we would see sort of incremental improvement each quarter once we got shut down and -- or once we got shut down. Once we shut down Watsonville and that's done. And so, now we need to start showing some of those efficiencies in Q2 and then, I think it gets better in Q3 and then better again in Q4.

Okay. So just build throughout the year. Okay, that makes sense.

Yeah.

And then, just -- maybe another question on pricing ability to take pricing. I guess your comments on dynamic pricing, is that a new kind of program or policy that you're putting in place? And then, to what extent is your ability to price dependent on maybe channel or customer mix in any given quarter?

How we price is a function of the product line. So how we price product in automotive OEM relationships or in our SSG business or in aftermarket or in upfitting, are different in every scenario. I think it's a fairly new dynamic pricing with fairly new orientation was coming had to take with the inflationary pressures and COVID and some of those things. Historically, you'd price something at the -- basically the design point where you're designing it for an automotive customer or a bike OEM or something like that. Now, what we're having to do is to go back and actually increase pricing inside of the model year or inside of the calendar year. We would do aftermarket once a year we're doing it two or three times a year now. So when I say dynamic, it's a reflection of getting an incoming cost components that has an inflationary pressure and adjusting that to an external pricing change and doing that within a fairly quick period of time.

Okay, great. Thanks. That’s for me -- all for me.

And we will move next to Jim Duffy with Stifel. Your line is open.

Thank you. Good afternoon.

Good afternoon, Jim.

Guys, I want to start with a question on the upfitting business, a really nice quarter for shipments. Can you maybe give us a view of where this business stands with respect to dealer penetration and the backlog? Is the backlog you're seeing now reflective of growth from both number of dealers and vehicles per dealer?

We're seeing growth in both of those cases so numbers of dealers and in vehicles per dealer. And we're seeing the sell-through occurring faster. So inventory is not sitting in lots as long as it would have done, let's say, two years ago. So those are really positive signs for us in the business. The reality of the world right now is, before we even build the vehicle and get it sent to the dealer, it's already sold in most cases. So, that's a phenomenon that hasn't decreased. It's actually increased in kind of how we look at the business going forward. So we feel pretty good about upfitting for the foreseeable future. And we feel even better about our chassis control. And as Scott mentioned, we've got a lot of chassis already in hand for the balance of this year. So last year, we had the challenge of getting enough vehicles for -- to meet demand. This year we, at least, can have a pretty good view of plenty of chassis to fulfill the demand as we see it.

That's great to hear. With respect to the OEM business in automotive, is the backlog continue there, or is production improving such that boxes -- I'm trying to communicate this but is...

The OEMs haven't gotten much better. So we're still seeing some lagging ramps to some of the product lines that, we would have expected to have seen improve. So we haven't seen that yet in the numbers. We do expect to see that, at some point in the year. But in Q1, we didn't see much improvement in the automotive OEM side of the business. And on advancing, that's a supply chain issue for them clearly. These are the vehicles they'd like to be selling right now that they just can't build.

Understood. The last one for me, just shifting to the bicycle business for a moment. You had been sharing with us a convention of number of months to meet customer demand and additional months to replenish channel inventory. Is that tracking as you expected? Is it fair to assume that, that's simply reduced by three months since you last communicated it?

That's the way I see it, Jim. I mean, we kind of went off of that kind of definition of terminology just because we can start to see the seasonality return in Q4. So there's going to be a lot easier methodology to communicate kind of where we think we are in the cycle. Again, I think Q4 starts to look more like a normal seasonal quarter. And I think 2023 kind of gets us back to those numbers that you have expected in two or three years ago when you were talking to us then.

Very good. Thanks so much, guys.

Thank you.

Thank you.

[Operator Instructions] We'll go next to Craig Kennison with Baird. Your line is open.

Hey, good afternoon. Thanks for taking my question. It's been a very helpful call. I guess I wanted to ask about Live Valve. Just wondered if you could give us an update on that technology and maybe just frame how far that market has been penetrated and what opportunities still exist? And then maybe, if you could add on to it like what kind of runway is there to that from an innovation standpoint? I feel like that's a core technology?

Live Valve is absolutely a core technology. As I've said in the past, Craig, I think everything becomes smart and connected. And as we start thinking about new vehicle platforms, Live Valve is a key component of that. So it's grown significantly in both our bike business and in the Powered Vehicle business, as you probably heard me comment in most of our power sports customer lines, as well as our automotive lines, have converted to a version of Live Valve in their high-end product category. So I think that's going to continue to expand and grow. We actually announced today, it's a little bit of a segue, but we announced today our partnership with Extreme E, which is electric vehicle off-road racing. It's a global off-road racing category. And we are the supplier and the developer of product for that Extreme E race series going forward. We think that's fantastic. It's going to let us bring things like Live Valve technology ultimately to the e-vehicle platform and in this case e-vehicle racing, just as we've done in Baja 1000 and the race platforms. So we're going to continue to push that. And we think that's a fundamental platform for long-term business growth.

Thank you. And then I wanted to ask about Outside Van, which was a nice acquisition you did last year. I know, you had huge demand for that product and people were paying you upfront to build those vans. And I think you had plans to increase capacity significantly. It is going to be sensitive to maybe RV trends, which we know kept low at least from a production standpoint. Are you seeing any slowdown in that business?

We're not. Again, we're – we have the fortunate or unfortunate problem is just not having enough capacity to meet the demand. So if you saw a slowdown in that side of the business it's we probably still wouldn't feel it, based on the next year's work and the ability to produce. We are trying to add capacity so we can get at that market, because we think it's an important market. But I think it's also a unique part of the RV market overall, where you've got a much younger participation in the demographic. And people who are really just making lifestyle changes versus just having a fifth wheel or a motor home in a driveway. People that are buying outside vans are kind of a different breed than maybe what you're seeing in the overall RV market. So I think we're going to fare better than the broader category. And again, a pretty small part of our business, but we really won't be out of backlog for another year.

Perfect. Thank you.

Thanks, Craig.

Thanks, Craig.

This concludes the Q&A portion of today's call. I would now like to turn the call back over to Mike Dennison for any additional or closing remarks.

Thank you. I'd like to thank everyone for joining today's call, and have a good afternoon and evening. Thank you.

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