Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Fox Factory Holding Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I’d now like to turn the conference over to 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 fourth quarter and full year 2022 earnings conference call. I am 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 and full year 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 4:00 or 5:00 Eastern Time. If you have not had a chance to review the release, it’s available on the Investor Relations portion of our website at investor.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the company’s control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company’s latest Form 10-Q and in the annual report on Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein whether as a result of new information, future events or otherwise. In addition, where appropriate in today’s prepared remarks and within our earnings release, we will refer to non-GAAP financial measures to evaluate our business as we believe these are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today’s press release, which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thank you, Vi and good afternoon. We appreciate everyone taking the time to join us for today’s call. I am pleased to announce that we delivered another record year for both revenue and earnings. We are creating more separation between us and our competition, thanks to the meaningful relationships we have with OEMs and enthusiasts as well as the continued execution of our strategy. This differentiation is propelled by our team’s dedication and tenacity as they capitalize on opportunities while navigating significant challenges throughout 2022. Our consistent strong performance is achieved primarily due to two factors: the power of our brand and the sustainability of our diversified portfolio. As we entered Q4, the macroeconomic and inflationary challenges persisted, but we delivered the best fourth quarter for both the top and bottom line in our company’s history. Besides our team’s ability to be agile, nimble and execute at the highest level, what made this quarterly performance even more gratifying was the continued improvement in our Gainesville, Georgia facility. We delivered the highest number of shocks in the quarter since the facility’s inception in late 2020 and the highest number of shocks for PVG ever. These results as well as less-than-expected seasonality in our Specialty Sports Group supported the impressive results in Q4. Consequently, I am pleased to report fourth quarter sales of $408.6 million, an increase of 19.4% compared to the same period last year. For the fourth quarter, we reported earnings per diluted share of $1.25 versus $0.89 in the same period in 2021, an increase of 40.4% quarter-over-quarter. We also reported non-GAAP adjusted earnings per diluted share of $1.43 versus $1.06, an increase of 34.9% over the prior year. We continue to prove that our collective resilience and strength are able to carry us through these turbulent economic times.…

Thanks Mike. Good afternoon, everyone. I will begin by going over our fourth quarter and full year financial results and then review our guidance. Sales in the fourth quarter of 2022 were $408.6 million, an increase of 19.4% versus sales of $342.3 million in the fourth quarter of 2021. Our Powered Vehicles Group, PVG delivered a 38.5% increase in sales in the fourth quarter compared to the same quarter last year, primarily due to strong performance in our upfitting product lines and increased demand in our OEM channels. Moving to our Specialty Sports Group, SSG delivered a 1.9% decrease in sales compared to the fourth quarter of 2021, primarily due to a return to seasonality in the bike business. On a full year basis, sales were $1.602.5 billion versus $1.299.1 billion in the same period last year, an increase of 23.4%. This jump in full year sales is driven by increased demand, primarily in SSG’s OEM business, strong performance from our upfitting product lines and increased demand in our PVG OEM channels. Fox Factory’s gross margin was 32% in the fourth quarter of 2022, a 70 basis point increase from 31.3% in the same period in the prior year. For the fourth quarter of 2022, non-GAAP adjusted gross margin also increased by 40 basis points to 32% versus Q4 of 2021. The increase in gross margin and non-GAAP adjusted gross margin in Q4 2022 were primarily driven by increased efficiencies in the Gainesville facility and strong performance in our upfitting product lines. On an annual basis, both our gross margin and our non-GAAP adjusted gross margins decreased 10 basis points to 33.2% and 33.3% respectively. The decrease in gross margin and non-GAAP adjusted gross margin were primarily due to increases in factory overhead and materials costs, each of which were…

Thanks, Scott. We are incredibly proud of the way our team has delivered stellar results in 2022 through their sheer perseverance, commitment and execution. As we head into 2023, we acknowledge the multidimensional challenges ahead of us, but at the same time, I am confident that we will continue to capitalize on our strong momentum with Fox’s diversified product portfolio, resilient operating model and strong balance sheet. We believe our world-class team, financial discipline and our relentless focus on delivering best-in-class products to our ever-growing base of performance-driven enthusiasts will enable us to continue delivering in support of our customer and shareholder expectations. I would now like to open the call for questions. Operator?

Thank you, sir. [Operator Instructions] And our first question will come from Michael Swartz with Truist Securities. Your line is open.

Hey, guys. Good evening. Maybe just to start with the guidance, I think if you’re doing the math right, it looks like you’re guiding to EBITDA margins maybe flat to slightly down year-over-year. I think we had talked about and discussed before 2023 being a year for a lot of the synergies and savings out of the Georgia facility to come through. So maybe walk through what the offset is? Is it investment? Is it channel mix or customer mix that’s kind of the negatives?

Yes. Hi, Mike, thank you. Yes, channel mix is the biggest obstacle as we talk about any kind of slower quarters or weakness on SSG side. And we’re talking about all of our growth, Mike mentioned in his prepared remarks, 20% plus in PVG, the vast majority of that is expected to come from our OEM automotive customers. And so we’re having a mix shift that is going to be tough to overcome even though we are seeing benefit from Gainesville and the efficiencies that we’re getting there, it’s being offset by that mix shift and just the makeup of our customer base for 2023.

Okay, that’s helpful. And then just maybe around the SSG business back in November, you guys kind of backed off the longer-term growth algorithm for at least for 2023, now you’re talking about maybe down high singles to down teens for that business. Maybe walk us through what’s changed over the past 2 or 3 months to, I guess, change your temporary outlook a little?

Yes, Mike, this is Mike. So a couple of things. One, we expected Q4 to actually be more seasonal than it was. And I think I mentioned that in my comments earlier, so without the seasonality in Q4, that really pushed into Q1. So you’re seeing a bigger seasonality play in Q1. And there are like – in early in the year, I went to Taiwan now with some of our customers and really witnessed the challenges they were having with half tilt bikes and inventory kind of stuck in the channel. And I think that gave us more concern over Q1 and Q2 at least. So as we kind of see what’s happening, we’re unfolding in almost a real-time basis, we want to be very thoughtful about that and we put it together into our guide, which is what we’ve done. And I think – again, I think that below will take care of itself over a couple – two or three quarters, and we’re expecting the back half to be better. But we’re also pretty conservative until we see the light near that tunnel.

Okay. Just to clarify, the glut that you’re talking about is not retail inventory. It’s just working capital and have completed inventory throughout the supply chain?

Exactly. Yes, you correct.

Okay, thank you.

Thank you. Our next question will come from Larry Solow with CJS Securities. Your line is open.

Great. Thanks, guys, taking the question. Just to clarify on the – Mike, you said the high single digit to high teens drop for the year back-end loaded. Does that assume that Q1 and Q2 are even worse than that or are you kind of just not building in much recovery even in the back half of the year, but hopefully, that will occur? Just trying to figure out I think where we stand there?

Yes, Larry, good question. I think you see the majority of that reduction in Q1 and Q2.

Okay. Okay. So that’s going to drive a lot of inefficiencies too. So whatever margin improvement you’re getting from a high level, you’re going to probably lose that and then the mid-shift in on the powered vehicle side?

Yes, to a certain extent, Larry, but I would caution you to read too much into that because Taiwan is a very variable workforce and they were structured to adjust very quickly. We’ve already taken some of that action earlier. So we will have some headwinds because of the reduced revenue, but it’s a not a mix issue as Scott talked about.

Right. And on Powered Vehicles and PBG, in particular, so 20% is your plus growth. Most of that growth, like you mentioned, is coming from the OEM side. How that just – the outlook for the upfitting market, which has been a real driver for growth for you guys for the last several years and obviously, the acquisition of FCA in 2020 helped that. Is that market itself – just looking at that market, is that – I know some people are concerned that that market will start to slow? How is that holding up?

It’s gone up pretty well. We have seen inventories last a little bit longer. So days of supply has gone up a little bit. But that business has been so nimble to adjust and change dealership structures and add more dealers. We actually see that as a growing business in 2023 as well. So we’re not taking our foot up the gas there with the method we as our customer warehouse acquisition there is even more we can do in that space. So we’re super excited about 2023 and that entire aftermarket applications business.

Okay. And as you mentioned, it sounds like, I know 2025 is getting closer, but it feels like if the SSG recovers, you’re not too – that shouldn’t give point of time contract cover, obviously. And barring a multiyear recession type thing, it sounds like you’re still pretty comfortable certainly on the revenue side and hopefully, you’ve been on the margin side of getting back to sort of your targets within a couple of years or that target, which is a 25% target. Is that fair?

Yes. You said it well. I think we’re still very confident in top line in $2 billion by 2025. And we still have the plans and the actions in place and the objectives to get to the EBITDA expectation of 25%. Obviously, there is some mix issues on a short-term basis that kind of affect us there, but the improvement in Gainesville in Q4 were significant and we think we’re going to realize that 250 to 350 basis point improvement in 2023, so even helping us kind of offset the mix change, yes, Scott and I and the team are very confident in that 2025 year.

Okay, great. I appreciate all the color. Thanks, guys.

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

Thank you. Good afternoon, guys. Few questions for you. I wanted to start on the Power Vehicle Group and assumptions in the guidance you’re expecting strong contribution from OEMs. Maybe speak to the factors contributing to that OEM strength and how that plays across the year, just to help us perhaps get some dimension of how that flows and how the mix influence might play out by quarter?

Yes. It’s great question, Jim. So in the last couple of years, OEM launches, product launches, OEM capacity and supply chain, we’re pretty deemed up, I guess, use the technical term. That’s coming around now. So we are starting to see that in Q4 where the demand and the pull from the OEMs was going stronger, that continued into Q1. And I think you see a fairly linear strength in automotive OEMs throughout the entire year. I think you can see it pick up a little bit in the back half, not necessarily from a demand problem or issue. But from the standpoint that they are like on the bulk or the other supply chain issues get resolved. As those get resolved, we will be pushing even more product out to for other OEMs to support the demand. So I think it’s going to be strong all year, fairly linear could get better in the back half, if they can get some of the other issues results.

Okay, great. And then you spoke to expectations for continued strength from updating maybe touch on what you’re seeing with the Powersports business and then the aftermarket business, including Sport Truck USA?

Yes. Powersports continues to be strong. We’re still in backlog. We expect to be out of backlog. We will kind of caught up in current with our Powersports customers by Q2 sometime in Q2. We think that’s strong throughout the year. There is still a lot of demand for those products and you’re leading those reports as well, Jim. I know so you’re seeing what’s happening with players in DRP, but we feel very comfortable with kind of what we were looking at for 2023 in that space. It will level off a little bit. It was growing so fast that we expect that to come back to a more normal growth curve, but obviously, very strong. I think this is going to be a great year for our Sport Truck business between sport truck and outside vans and not fitting taking advantage of the custom warehouse acquisition. We’re going to have new ways to go to market anywhere a combined product, even shock therapy, on our more recent acquisitions will benefit from the customs warehouse transaction. So I think all this is going to be a good deal for that, what we call kind of aftermarket applications and we will be talking a lot about that business or those businesses this year.

Great. Lastly, I wanted to ask about Custom Wheel House. I recognize you don’t get on the business. You probably don’t want to get too far ahead of yourself. But in the press release, it seemed to suggest that you saw them a reliable supplier for a number of different aspects of your business. I’m just curious about their ability to scale and ramp demand. It seems there is a lot of different avenues for the method wheels product to your distribution channels, how quickly can you get that business to a higher level?

Yes, great question. So we do think there is a lot of opportunity for integration, as I mentioned earlier and we think that this is something that we will get after the date of that deal actually gets transacted and closed. And so we’re going to be talking about that a lot in the next earnings call as we did the business integrated. My perspective on their supply chain, it’s pretty scalable. They are not the manufacturer. They use contract manufacturers, mainly in China, starting to use some in Thailand and other places. So we’re going to go do some more work on that. But we absolutely think that by, call it, the end of this year, we will put the extra capacity in place to provide those wheels through our truck and outside van business and sport truck business and the rest. So it will have an impact this year on the rest of our business. Just not sure exactly how defined we can make that yet until we get the transaction closed.

Understood. Thank you so much.

Thanks, Jim.

Thank you. Our next question will come from Anna Glaessgen with Jefferies. Your line is open.

Great. Good afternoon. Thanks for taking my question. First, I want to touch on any considerations of the margin evolution when you’re specked on a new auto trends, for example, in the first year, are you brought in listing start-up costs? I mean margins ramp in each subsequent year. So for example, you have a lot of new trends layering in the model over this past year and the next year, anything to consider there?

That’s a good question, Anna. What you see in the launch of a new automotive product is you see kind of the inefficiency of the line that’s getting ramped up and people willing to build the product. You guys usually have some lower quality levels. So you’re doing the rework on product as it’s coming off the line. Really, we feel like we’re very mature in product launches, probably 4 to 6 months going on the product after we launched it. So we launched a lot of products in 2022 that are kind of in core production mode now in ‘23. And that’s helping us also with the improvement in Gainesville as we bring those lines, the maturity and get the efficiencies that we made.

And then building on that, are there any, is there any sort of escalator built into the contract with the OEMs, the Raptor is going for 5 years? Is there any step change within that?

Well, most – our contracts with OEMs typically don’t have any kind of cost reduction expectation and requirements in. So as a general note, we don’t get into specifics of any one contract. That is a general way of thinking about it, those efficiency gains that we get are ours to benefit from.

Great. That’s super helpful. And then one of your comments, you said being a little bit more conservative in spending and hiring. Is it fair to read into that and say that you guys feel pretty good about the current labor that you have and particularly at Gainesville, where it was tight, especially over COVID?

Yes. We’re adjusting our labor force in Taiwan as a reflection of kind of the seasonality that I mentioned in my comments and just kind of what we’re seeing in the first quarter or two. In Gainesville is going to be the other side of that story, where we’re adding people fairly consistently and significantly. And we think that workforce is going to continue to grow throughout this year and we having pretty, pretty good luck finding the right people to come work for us.

Okay, great. Thanks.

Thank you. Our next question will come from Alex Perry with Bank of America. Your line is open.

Hi, I just wanted to follow-up on SSG a bit more. It’s a pretty wide range in terms of the guidance. So could you maybe just give us some color on sort of what could drive upside or downside to the range? Does the high end of the range imply that the bloat you’re seeing in the supply chain gets better or is it assuming sort of better end market demand? Maybe just some color on the SSG guide?

Yes. Good question. It’s really about the speed in which the current inventory growth kind of clean itself up. So if that happens majority in Q1 and you see it much better in the range. If you see it happen in Q3, it’s going to be much worse in the range. So it’s not much of, it’s not really as much about demand. And again, as I said in the comments, I think demand is actually more positive than people give a credit for. It’s just that we’ve got a lot of big partners, big companies out there that are trying to chew through some clunky inventory systems and current inventory levels in their supply chains.

That’s really helpful. And then can you just circling back to gross margin, can you just remind us the puts and takes there? So you have the channel mix headwinds from the increased OEM business, Gainesville improvement, presumably some freight tailwinds. But still, like all in, it seems like gross margins are going to be down on a year-over-year basis. Is that the right way to think about that?

Yes, I think so, Alex, we’re going to do our best to mitigate the mix shift and part of that will be absolutely the efficiencies in Gainesville. But it is a big shift in mix for us that we’re going to have to work against. And so we’re going to come out of the gates, as Mike said, conservative in our guide as we see what we can do, especially on the aftermarket with new offerings and doing some things around our new acquisition to kind of offset that.

Perfect. That’s really helpful. Best of luck going forward.

Thanks, Alex.

[Operator Instructions] And our next question will come from Craig Kennison with Baird. Your line is open.

Hey, good afternoon. Thanks for taking my question. You’ve addressed a lot already, but I wanted to ask about the M&A environment. I think you’ve been patient kind of waiting for deals to come your way and trying to stay disciplined on valuation. Should we look at this Custom Wheel deal as a sign that valuations have begun to normalize and you could maybe rekindle some of those dormant conversations?

Good question, Craig. Yes, absolutely. In the powered vehicle space, we see some good opportunities and the multiples are more in line with our historical expectations and what they should be. So we think that’s really good. And even more importantly, we’ve been wanting to do some acquisitions in the SSG space, but those valuations have just gotten crazy with some of the challenges in the supply chain and we take that as an opportunity to grow with some companies that could be very good for us in the SSG world that don’t have as rich evaluation maybe this year as they would have last year. So we think it actually creates some opportunities, and we’ve got a great balance sheet. So we’re going to go use it.

That’s helpful. And then just, I guess, as a follow-up, maybe could you comment on CapEx and maybe working capital as maybe a source of cash or maybe less of a drain on cash going forward next year, that might help you fund some of these deals?

Yes. I think CapEx, we’re expecting something in the 3% to 4% range. On the high end, probably this year, we really have spent a lot of time and energy investing for what we have in place now, which will take us pretty well through 2025 and our expectations on revenue there. We are looking at some additional lower-cost regions for manufacturing in the future, but that’s not going to be a CapEx ran in 2023, specifically. And then, of course, working capital, Scott, you can speak about.

Yes. I think we’ve made a lot of strides on reducing chassis inventory and you’ve seen that pay off over the last two quarters with some good cash flow generation out of working capital reduction. I think for us this year, it’s going to be maybe a little bit of a continuation of that and then trying to keep inventory flat as we grow or work off some of the inventory that we’ve accumulated and potentially even go down a little bit. And so we’ve got some good working capital stories over the last couple of quarters and hoping to continue that through the first half of this year.

Great. Thank you.

Thank you. [Operator Instructions] And at this time, we have no further questions in the queue. So I would like to turn the call back over to Mike Dennison for any additional or closing remarks.

Thanks, Chelsea. And I appreciate really taking the time for today’s call. One comment that I didn’t make in the Q&A period that I probably should have, when we think about the bike business and the bike demand, one of the things we’ve talked about a lot over the prior quarters is the strength of the e-bike business, which – and the change in demographic in biking caused by the innovations happening in e-bikes. That remains incredibly strong. So we are still very bullish on the e-bike side of the business as well, and we think that’s going to help us as we come through this kind of inventory challenge as they get back to growth. e-bike would be a big factor in that. So there is some good news as well in all the commentary on bike and I’d say that’s around how they think about the e-bike and the innovation around that space. With that, we will end the call and have a good evening. Look forward to talking to everybody soon. Thank you.

Ladies and gentlemen, this does conclude the Fox Factory Holding Corporation’s fourth quarter and full year 2022 earnings call. You may disconnect your line, and have a great day.