Fox Factory Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 10 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corp's First Quarter twenty twenty five 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 Toby Merchant, Chief Legal Officer at Fox Factory Holding Corp. Thank you, sir. You may begin.

Speaker 1

Thank you. Good afternoon and welcome to Fox Factory's first quarter twenty twenty five earnings conference call. I'm joined today by Mike Dennison, Chief Executive Officer and Dennis Schemm, Chief Financial Officer and President of the Aftermarket Applications Group. First, Mike will provide business updates and then Dennis will review the quarterly results and outlook. Mike will then provide some closing remarks before we open up the call for your questions.

Speaker 1

By now, everyone should have access to the earnings release, which went out earlier this afternoon. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at investor.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the company. Before we begin, I would like to remind everyone that the prepared remarks contain forward looking statements within the meaning of federal securities laws, and management may make additional forward looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward looking statements.

Speaker 1

Important factors and risks that could cause or contribute to such differences are detailed in the company's quarterly reports on Form 10 Q and in the company's latest annual report on Form 10 ks, each filed with the Securities and Exchange Commission. Investors should not place undue reliance on the company's forward looking statements and except as required by law, the company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate in today's prepared remarks and within our earnings release, we will refer to certain non GAAP financial measures to evaluate our business, including adjusted gross profit, adjusted gross margin, adjusted operating expenses, adjusted net income, adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin as we believe these are useful metrics that allow investors to better understand and evaluate the company's core operating performance and trends. Reconciliations of these non GAAP financial measures to their most directly comparable GAAP financial measures are included in today's earnings release, which has also been posted to our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Speaker 1

Thank you.

Speaker 2

Thanks, Toby, and thanks to everyone for joining today's call. I'm pleased to report that we delivered a solid start to 2025, with first quarter sales coming in above expectations at $355,000,000 representing growth of 6.5% over the prior year and adjusted earnings per share of $0.23 which was in line with our expectations. Importantly, our plan called for meaningful sequential improvements across our businesses, particularly in gross margin. And to that end, I'm pleased that we delivered a 200 basis point sequential increase in gross margin to 30.9%. The operational improvements and strategic cost management initiatives we outlined during the fourth quarter are well underway, with many of the actions completed and starting to deliver results across all three businesses, which was illustrated by continued strong sequential adjusted EBITDA margin improvements in both our PVG and AAG segments.

Speaker 2

This progress, combined with revenue growth on a year over year basis across the segments, underscores the balance between cost management and our relentless focus on new product development. While external market conditions remain uneven across many of our product lines, we're meeting our financial commitments through disciplined execution on the factors within our control. This has become all the more important in the current environment overshadowed by tariffs. Our cost optimization strategy, which began last fall, is helping us be more nimble in addressing near term challenges and positioning us for sustained margin improvement and enhanced free cash flow generation as we progress through the year. And while our near term focus is on financial performance improvement, we remain committed to investing in innovation, which underpins everything we do here at FOX and is the basis by which we are creating meaningful customer engagements with our performance defining race winning products.

Speaker 2

Building on the momentum from last quarter, we're making significant strides in the four key initiatives we have discussed in prior calls, which are driving tangible sequential improvements across our businesses. First, simplifying and consolidating our footprint. We've now completed the closure of one of our three Taiwan facilities, with cost benefits expected to materialize beginning in Q2. This strategic move temporarily impacted overhead absorption in SSG in the first quarter, but sets the stage for improved margins going forward without materially compromising our capacity for growth as the cycle advances. Our teams continue to make progress optimizing our global manufacturing presence with additional footprint consolidation efforts underway.

Speaker 2

Second, portfolio optimization. We're making targeted improvements to our product mix, focusing resources on our highest performing items and strategic growth categories. This disciplined approach contributed to our overall gross margin improvement and is helping us allocate capital more efficiently while maintaining our innovation edge. We continue to launch new products at record levels across our businesses, which is not only supporting near term revenue stabilization, but also setting us up for long term growth and expansion. Third, working capital management.

Speaker 2

We've continued to work on improving our supply chain practices, both in terms of ensuring proper inventory of high demand products as well as our broader sourcing strategies in light of the current tariff dynamics at play. And fourth, our cost reduction program. While the full impact of these actions will progressively build throughout 2025 toward our goal of realizing $25,000,000 of cost savings across G and A and cost of goods within 2025, the actions taken to date give us confidence that more substantial benefits will materialize beginning in the second quarter and carry through the balance of the year. Importantly, these actions represent more than just cost cutting. They're about strategically repositioning our business to operate more efficiently and offset temporary pressures from market conditions and tariffs.

Speaker 2

Combined with our strategic approach to diversify our business across segments, products, channels and geographies, we're creating a resilient organization that can win even while extraneous market dynamics remain challenging. And now turning to our segment performance. In our Powered Vehicles group, first quarter net sales were $122,100,000 representing an increase of 3.4% over the prior year quarter. This growth was primarily due to the expansion of our motorcycle business, which offset lower industry demand in our traditional powersports product lines. We were pleased to see our segment adjusted EBITDA margin improved sequentially by 50 basis points to 11.8%, given strong cost controls and cost improvement actions.

Speaker 2

In the automotive sector, we're seeing signs of stabilization as premium truck OEMs work through model year changeovers. Our premium truck category continues to demonstrate resilience even as the broader market remains cautious. Tariff impacts on future demand are yet to be known. However, we believe the premium vehicle category is more insulated than the broader market. Our return to motorcycles is long overdue and particularly exciting for our team, given this is where it all started fifty years ago with Bob Fox in his garage.

Speaker 2

We already have a greater a great roster of marquee customers with expansion to new customers planned for the future. These new motorcycle relationships are helping offset softness in other areas of powersports and demonstrate the enduring value of the FOX brand as the standard across any performance category. In our aftermarket applications group, we delivered both top line growth and significant margin expansion, while net with net sales increasing 9.9% to $111,900,000 from $101,900,000 in the prior year period. The growth was driven by higher upfitting sales and increased demand for aftermarket products. Like PVG, AAG has also improved adjusted EBITDA margin, delivering 15.2%, which represents a sequential step up of three thirty basis points and a cumulative improvement of five ninety basis points since Q3 of twenty twenty four.

Speaker 2

The progress on margin improvement reflects the hard work of the entire AEG team to stay focused on executing the strategy while delivering improved profitability on our journey to return to best in class profitability. The improvements we are seeing in AEG reflect a more targeted approach with our dealers and improved vehicle mix, which is better aligned to customer demand. While high interest rates and elevated inventory levels continue to pose challenges to the broader market, our ability to drive revenue and margin expansion in this environment speaks to our strategic focus and improved execution. Our aftermarket components business continues to show strong performance with sustained growth in wheels and lift kits, reflecting the strength of our product pipeline and the ongoing work in our sales and marketing programs. Importantly, the one plus one equals three strategy continues to enable AAG to deliver best in class product solutions to our enthusiast customers across all types of powered vehicle platforms, creating sustainable value that builds on the intrinsic strength of our brand portfolio.

Speaker 2

In our Specialty Sports Group, we delivered a top line growth with net sales increasing 6.6% to 121,000,000 from $113,500,000 in the prior year period. Growth was strong across our bike business especially as we are seeing early signs of normalizing inventory levels across the categories that we lead. Our Marucci business was stronger than forecasted as well, lifted by early success with new product launches and increased demand for our torpedo bats. FSG segment adjusted EBITDA margins decreased to 19.3%, which represents a temporary sequential decline from the March '20 basis points. This EBITDA margin compression was anticipated in our outlook and primarily reflects seasonality, lower overhead absorption and investments in product engineering.

Speaker 2

During the quarter, we completed the consolidation of one of our three facilities in Taiwan to improve our utilization and drive lower overhead costs going forward. We expect to begin realizing the financial benefits of this consolidation in Q2. The year over year growth in SSG illustrates the success of our innovation strategy in both bike and baseball, where new products and category expansion are increasing our addressable market by bringing our performance defining technology to more enthusiasts, both seasoned veterans and new entrants. In Marucci, we're making excellent progress as MLB's official bat partner. We're seeing tremendous market interest in products, including the recent fervor over the Torpedo bat.

Speaker 2

All of this in large part because of our relationship with the MLB, who has expanded our outreach capabilities to spread the word on Merci Invictus and our ability to innovate in diamond sports. The Torpedo bat serves as an example of a halo product that creates enhanced consumer awareness for baseball and our brands collectively. People who didn't follow baseball are now talking about baseball and players at all levels want to use what their heroes use, creating a powerful connection between our brand and our customers. While the first quarter didn't enjoy the benefit of a bad launch such as Caddx last year, we continue to build momentum through strategic investments in both baseball and our rapidly emerging softball business. Recently, we launched Azurea, a new fast pitch softball bat, which is taking the market by storm and causing us to be sold out temporarily across numerous models.

Speaker 2

The softball market offers a large new opportunity and we're in the very early innings of creating meaningful market share. By leveraging our combined Fox and Marucci engineering expertise, we're accelerating product innovations across premium performance brands, creating a stronger, more resilient group of businesses that can capture additional growth over the long term. Finally, I'll share some high level comments on our outlook, which Dennis will review in more detail. Based on our first quarter performance, second quarter to date trending results, our latest forecast from our partners across all segments and the current view of tariff implications on our supply chains, we are reaffirming our full year 2025 guidance. While we anticipate continued challenges in the broader market environment, our expectations still provide top and bottom line improvement year on year as we progress through the balance of 2025, with the benefits of our cost optimization initiatives becoming more tangible in the second quarter and building strength in the second half.

Speaker 2

On tariffs, our teams are continuously analyzing the latest developments closely, and we're implementing mitigation strategies across including cost reductions, commodity index based adjustments and price increases where appropriate. While our manufacturing footprint is well positioned relative to these policy shifts, we recognize potential for broader industry impacts and are working hard to be able to adapt accordingly. It is worth mentioning that what may be obvious to many already. We cannot control or predict consumer confidence in general and our guidance doesn't contemplate any potential significant recessionary impacts associated with a longer term tariff headwind nor potential long term disruption of other companies' supply chains as they attempt to adjust their strategies to mitigate these issues. As we look ahead, we remain focused on what we can control: operational efficiency, innovation and strategic growth initiatives that will drive long term value for our shareholders.

Speaker 2

Our team continues to demonstrate resilience and adaptability, and I'm confident in our ability to build on sequential improvements we've delivered this quarter, positioning us to restore our best in class adjusted EBITDA margin profile. And with that, I'll turn the call over to Dennis.

Speaker 1

Thanks, Mike, and good afternoon, everyone. I'll begin by discussing our first quarter financial results and then move to our discussion on the balance sheet, cash flow and capital allocation strategy before concluding with a review of our guidance. Q1 results. Total consolidated net sales in the first quarter of fiscal twenty twenty five were $355,000,000 an increase of 6.5% versus sales of $333,500,000 in the same quarter last year, primarily reflecting growth across all segments. Our gross margin was 30.9% in the first quarter of twenty twenty five, consistent with the same quarter last year.

Speaker 1

Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, was 30.9% compared to 32.3% in the prior year quarter, primarily because of the significant mix shift to powersports and away from automotive OE, offset by our cost reduction initiatives. Our sequential gross margin and adjusted gross margin increased 200 basis points and 170 basis points, respectively, supported by realization of our cost reduction initiatives. Total operating expenses were $360,000,000 primarily impacted by a noncash goodwill impairment charge of $262,000,000 The impairment was triggered by the decline in our stock price. Excluding this impact, our adjusted operating expenses as a percentage of net sales decreased approximately 30 basis points to 23.8% in the first quarter of twenty twenty five compared to 24.1% in the same period last year. The company's tax benefit was $3,600,000 in the first quarter of fiscal twenty twenty five compared to a tax benefit of $1,300,000 in the same period last year.

Speaker 1

Net loss in the first quarter of fiscal twenty twenty five was $259,700,000 or negative $6.23 per diluted share compared to negative $3,500,000 or minus $08 per diluted share in the same period last year, primarily due to the goodwill impairment. Our adjusted net income was $9,800,000 or $0.23 per diluted share compared to $11,900,000 or $0.29 per diluted share in the first quarter last year. Adjusted EBITDA was $39,600,000 for the first quarter of fiscal twenty twenty five compared to $40,400,000 in the same quarter last year. Adjusted EBITDA margin was 11.2% in the first quarter of twenty twenty five compared to 12.1% in the first quarter of fiscal twenty twenty four. The decrease in the adjusted EBITDA margin was primarily driven by the mix shift in PBG from Automotive OE to Power Sports, offset by our continuous improvement efforts.

Speaker 1

Moving to the balance sheet and cash flows. For the first quarter ended 04/04/2025, inventory rose by $4,100,000 or 1% compared to fiscal twenty twenty four year end, driven by purposeful increases to strengthen stocking positions in our aftermarket businesses within AAG to support demand and to build inventory in advance of the tariff impact. While we have driven down our prepaid and other current assets by over $26,000,000 from Q4, largely due to the benefit of our AAG chassis inventory optimization plans, overall working capital increased compared to the prior quarter due to the typical season builds from Q4 to Q1. I'd like to stress that working capital will continue to be an area of focus for us as we continue to focus on improving cash flow. Our revolver balance of 04/04/2025, was $163,000,000 versus $153,000,000 as of 01/03/2025.

Speaker 1

And our term loan balance was $547,000,000 versus $552,000,000 on 01/03/2025, net of loan fees. As we have mentioned during the past few calls, optimizing our capital allocation strategy with a focus on paying down debt is our number one priority for capital allocation. We continue to see a clear path to reducing our net leverage to approximately three times by year end. Now moving to the outlook for the second quarter and the full year 2025. We are reaffirming our guidance for the full fiscal year 2025, which reflects sales in the range of $1,385,000,000 to $1,485,000,000 adjusted earnings per diluted share in the range of $1.6 to $2.6 and a full year adjusted effective tax rate in the range of 15% to 18%.

Speaker 1

Underpinning our full year guidance are several key assumptions that remain unchanged, including continued growth in AAG, a gradually stabilizing environment in PBG and Bike with performance consistent with twenty twenty four levels in terms of absolute dollars, continued momentum in Marucci benefiting from our new MLB partnership taking effect and our upcoming schedule of exciting new bat launches, both in softball and in baseball. Revenue and margin improvement weighted toward the second half of twenty twenty five as OE customers normalize channel inventory and production schedules, and we progressively realized benefits from our $25,000,000 cost out reduction plan. We continue to expect 30% to 35 of the savings to impact our first half earnings weighted towards the second quarter and the remainder coming in the second half. For the second quarter of fiscal twenty twenty five, we expect sales in the range of $340,000,000 to $360,000,000 and adjusted earnings per diluted share in the range of $0.32 to $0.62 Importantly, our guidance includes consideration for the direct effects of net cost impacts from the ongoing tariff developments, though the impact of tariff policies on consumer demand remains uncertain. Overall, new and expanded tariffs will continue to pose significant challenges for our industries.

Speaker 1

We have quantified the potential gross impact of tariffs to be in the range of $50,000,000 on a full year basis, which is approximately 5% of our cost of goods sold. So we clearly have exposure to tariffs, but I would add that our

Speaker 1

hard to identify and action mitigation strategies, many of which, including supply chain mitigation and targeted pricing actions, are already underway. So as you consider our guidance reiteration today, I'd mention that we came into 2025 with a plan that was conservative given the broader macro uncertainty. While tariffs weren't explicitly included in that build, given the uncertainty at the time, the wide range in EPS we provided, particularly at the lower end, incorporated enough flexibility to accommodate various scenarios, including these tariffs effects. Our prudent planning approach, combined with our mitigation strategies and cost reduction initiatives, gives us confidence in reiterating our full year guidance despite these headwinds. While we remain cautious about the near term market environment given ongoing industry headwinds and tariffs, we are encouraged by the sequential margin improvements we've seen in both our AAG and PBG segments.

Speaker 1

These improvements, coupled with top line growth across all three segments and the conviction in our new product launches in Marucci and Victus, give us confidence in our ability to execute our operating plan and deliver on our financial commitments for the year. Our strategic focus remains on improving margins and enhancing free cash flow generation through our comprehensive cost optimization and operational excellence initiatives. These initiatives, along with our commitment to working capital efficiency, position us well to strengthen our balance sheet and create long term value for our shareholders. Mike, back to you for closing remarks.

Speaker 2

Thanks, Dennis. Our first quarter results demonstrate the early benefits of our strategic initiatives across all segments. As Dennis noted, the sequential margin improvements in PDG and AEG, coupled with strong SSG growth, validate our operational focus and execution. Our diversified portfolio provides multiple growth avenues despite uneven market conditions. The cost optimization actions we've taken are already delivering results and will continue building momentum through 2025.

Speaker 2

We remain focused on the core of our business, delivering premium, performance defining products that resonate with enthusiasts while creating sustainable value for our shareholders. In closing, I am incredibly proud of the Fox team. Our people have shown dedication, focus, creativity and endless amounts of energy to continue to deliver on our objectives. With as much market volatility, customer chaos and growing unease as exists today, it would be easy for the teams to lose focus, patience and commitment. In a time when it is incredibly difficult to predict next year, let alone next quarter, we continue to remain resilient and optimistic about our ability to win.

Speaker 2

I couldn't ask for anything more as their leader. With that, operator, please open the call for questions.

Operator

We'll go first to James Duffy with Stifel. Please go ahead.

Speaker 3

You. Hi, nice execution against a really wild backdrop here. I have two questions for you on the demand front and then a balance sheet question. Starting on the demand side, Mike, can you maybe speak to an update of what you're hearing from your bicycle OEM partners with respect to expectations for tariff influence on their business, any sort of pricing actions they might take and what they're hearing from their dealership partners?

Speaker 4

Yes, Jim, good question. It's a spectrum right across our OEM customers in bike from the small folks to the much bigger folks. And it's also a spectrum from American based companies, Asian based companies and European based companies. So we're seeing a pretty wide degree of response to all the macro inventory levels as well as tariffs. And so it's different levels of confidence.

Speaker 4

In general, we haven't seen any of the bike companies take down demand as a function of tariffs or as a function of a lessening consumer appetite for bikes. So the positive is we haven't seen anything to the negative. We do see some companies faring slightly better in the environment as you would. And of course, in Europe, Europe is a whole different answer or discussion than The U. S.

Speaker 4

Is. So on the whole, we're very confident or very positive on what we've seen so far. I think it's still early days. I mean, let's get into Q3 and Q4 to see how the back half of the year looks. But we're benefiting from some great product launches and from some pretty enthusiastic customers right now who are kind of riding that wave.

Speaker 3

Great. I appreciate that perspective. I wanted to ask on the upfitting business, very encouraging to see growth there. Can you call out some of the key drivers and give us an update on what you're seeing with dealer relationships and how you're thinking about prospects for that upfitting business in coming quarters?

Speaker 4

Yes. A lot of that is execution and starts with the product levels and getting the right products in the market. There is consumer demand, you've got and Jim, I've said this before to you, you've got to make sure you're delivering the right products at the right price point in our upfit business and the team has done a great job making sure that we're delivering those products. The dealer count and adding new dealers has also helped us. So we've got a few factors kind of working in our favor as we enter this year.

Speaker 4

And we've gotten a better mix of Shelby's, I'd say as well with better Lariat's out of Ford. So all in all, between product mix, better execution, better sales strategy and better dealer development, we're seeing that in the numbers.

Speaker 3

Great to see and kudos to the team for that. And then Dennis, just one for you. I think both you and I are watching the balance sheet closely. You made great progress on the prepaids. I'm hoping you can speak in more detail to the quality of your inventory.

Speaker 3

Can you maybe size the advanced build contributions and speak to any opportunities for inventory to be potentially be a source of cash in coming quarters?

Speaker 1

Yes, that's a great question. And so working capital is one of my top priorities for 2025. Free cash flow is the other for sure. And so when we are thinking about inventory, we are very, very purposeful, strategic about where those builds would occur. And we were pinpointed in getting more stocking position, favorable stocking positions for our aftermarket businesses, particularly in sport truck, RideTech, custom wheelhouse, and making sure that we have the right levels of inventory to support that demand there.

Speaker 1

As we move forward, we're going to continue to look for opportunities to right size and optimize across the businesses. So I feel really, really good about the focus. And that's one of the things that Mike keeps pointing out is the focus. The teams are more focused than ever before on free cash flow generation and improving EBITDA margin percent. And so it's great to see this showing up in the sequential results.

Speaker 3

Excellent. Thank you, guys. Best of luck.

Speaker 4

Hey, Jim. Hey, Jim. You can't get off the call without us saying congratulations on your retirement. You're going to be missed, my friend. You're going be missed.

Speaker 3

Oh, thank you so much. Yes. It's been a pleasure to work with you. I very much appreciate your support for the franchise. With Peter giving continuity, you can expect Stifel's coverage remains strong.

Speaker 4

Hope to talk to you along the way, so don't be a stranger.

Speaker 3

Very good. I look forward to staying in touch. Thanks, Mike.

Operator

And next we'll go to Larry Solow with CJS Securities. Please go ahead.

Speaker 5

Yes. Hi. It's Pete Lucas for Larry. You guys covered a lot of my questions. Just I guess curious about your efforts outside of The United States.

Speaker 5

A few quarters back, you highlighted some of the international opportunities, in particular on the auto OEM and upfitting side. Just wondering if you had any updates on that front in terms of new product development, OEM partnership or anything we should know about there?

Speaker 4

Yes, I mean a lot of continued development in that area. Obviously we've been focused on what's happening in The U. S. As well. So a lot of focus in The U.

Speaker 4

S. But one of the things that's interesting Peter that as you think about wheels as an example, wheels are a tariff item coming from Asia to The U. S. What's helped us is the fact that our method wheel business and the custom wheelhouse business is an international business. And we can sell wheels both here in The U.

Speaker 4

S. And in Australia, Middle East and other places. So having the ability to expand and grow globally has been a nice step up for us in ability to have diversification geographically. Also one of our biggest growing bike customers is a Chinese company. So expanding our relationships even in China, which is a difficult conversation right now as you can imagine, but expanding those relationships gives us diversity.

Speaker 4

So whether it's an upfitted truck, a wheel, baseball bats in Japan, which are booming or even the bike business in China, we absolutely are leveraging that international growth to help offset any issues here in at home.

Speaker 5

Great. Thanks. And then just one last follow-up. Just wondered any updates on the Gainesville plant, anything special going on there?

Speaker 3

Basically just general updates.

Speaker 4

Yes. One thing I'll call out, it wasn't in the prepared remarks nor one that I had thought of until you just asked the question, one of the things about tariffs is insourcing or resourcing production back to The U. S. Offshore. And one of the things the team in Gainesville has done a fantastic job on is moving that insourcing up by about 1,000 basis points from 6070% on machine parts moved into Gainesville.

Speaker 4

So that ability to move inside our four walls versus doing it outside of our four walls has been a really important not tied to tariffs, it was actually happening naturally and organically before tariffs. But that change over the last year is significant for our ability to respond and support our customers without some of the significance Gainesville is doing well. We recently moved Toyota to Gainesville and it's going fantastic. So from my perspective, it's been a long road getting Gainesville to where it is now, but really proud of the team for making progress.

Speaker 1

Yes. And it's a great point because one of the things that you saw in the numbers, we talked about the significant mix shift and that impact on gross profit. Well, sequentially, however, you saw the team improve 50 basis points quarter to quarter. That is exactly the cost improvement work that Mike is talking about and it's flowing through.

Speaker 5

Extremely helpful. Thanks. I'll jump back in the queue.

Operator

Thank you. And next, we'll go to Michael Swartz with Truist Securities. Please go ahead.

Speaker 3

Hey, guys. Good evening.

Speaker 6

Hi, Michael. Maybe just to touch on the tariff. I know there's a ton of uncertainty, and I appreciate you guys kind of framing the gross impact. But as we look at 2025, just a little more color on your ability to absorb or offset that? I would assume that we're talking probably a half year impact to the maybe $25,000,000 ish on a gross basis.

Speaker 6

Maybe just run through how exactly you're going to go about offsetting that?

Speaker 4

Yes. I mean that's about an hour long conversation Mike. So let me give you the highlights and see if we can cover as much as we can. It's different business. So whether it's PBG, or our custom warehouse business as I mentioned earlier or baseball, you really have kind of three different strategies and probably 20 different actions associated with those different businesses.

Speaker 4

But on the whole, some of it comes down to commodity price index changing, aluminum tariffs are a function of commodity indexing. That flows through our OEMs. We're working with our OEMs to mitigate as much of that as possible and it's not an easy conversation. Don't get me wrong, it's not like we just change the price tomorrow and off we go. But those conversations are happening.

Speaker 4

We're having some good success with those OEMs as we work through that aluminum tariff issue. Some of it's insourcing or resourcing as I mentioned earlier. That work is longer in duration to get done, but obviously it's something that we have started before tariffs and we'll continue to drive. In baseball, we started a manufacturing facility in Taiwan, not us, it's a partner of ours that has We've also moved some finishing of baseball bats in both composites and aluminum to both Baton Rouge and Scottsdale. So we actually moved some of that onshore to reduce some of the impact of tariffs in that scenario.

Speaker 4

In wheels we had already had a strategy to move a good chunk of our wheel business outside of China to other locations in Asia. Wheel manufacturing is predominantly an Asian activity. It doesn't happen here in The U. S. So it would be hard to move that onshore.

Speaker 4

A lot of that work started before the tariffs as I mentioned and we'll continue to drive it going forward. So from a supply chain and manufacturing footprint, again keep in mind most of our manufacturing footprint as you know is in The U. S. Or on the continent, we're not sitting too bad and we've done a lot of really hard work in terms of executing very well against moving as much as they can and mitigating as much as they can. They'll continue to do that.

Speaker 4

We're early innings in this game. As you know we're in the first inning and we need to get through eight more. But so far very positive in what we've accomplished. The second half of the tariff thing is really not about supply manufacturing, it's about how does your brand withstand tariffs, how does that hold up with your set of brands and then how does the consumer demand look. Consumer demand I'm not going to spend much time talking about because as you mentioned and we all know it's pretty hard to call the ball

Speaker 4

We'll have to wait and see what inflationary issues occur, what recessionary issues occur and those kinds of things. We're not going to try to contemplate that. But our brand strength really resonates here in The U. S. With being whether it's Luigi, Victus, Fox or others, very much an American brand story and I think we get the benefit of that American brand story with our enthusiasts and our customers.

Speaker 4

So we're seeing some tailwinds associated with that, as we move through this. So again, yes, at the gross level a pretty big number, not something we take lightly, but a lot of work by a lot of people in this company to try to drive that number down and we'll keep working it and we'll keep you guys appraised of how we're doing quarter by quarter as we go through it.

Speaker 6

That's super helpful. And then second question, just I know I'm going get this question, so I'm just going to ask it. Given that you came in above the high end of your revenue range, did you see any discernible maybe pull forward in the quarter from people trying to buy ahead of tariffs, to buy ahead of price increases?

Speaker 4

Great question. No, not really. I mean we saw a few pull ins, but they were really tight border product launches. We've got a lot of product launches this year and they tend to sometimes fit right around quarters pivoting from one quarter to another. And we saw some of that power happen more maybe in Q1 versus Q2.

Speaker 4

But on the whole, not a lot of buying ahead of anything. So maybe we see that in Q2, haven't seen it yet, but maybe we see that in Q2 as we get closer to kind of that second half of the year and where maybe more tariff impact could be. But so far, no, we're feeling pretty good about where we are.

Speaker 1

Awesome. Thank you.

Operator

Perfect. And next we'll go to Anna Gluskin with B. Riley Securities. Please go ahead.

Speaker 7

Good afternoon. Thanks for taking my question. Touching on tariffs, thinking about the indirect impact for further down the supply chain from you, within the bike business, are you generally within Asia shipping within Taiwan and then therefore subject to that reciprocal tariff down the line or your partners are or is there anything note that's being shipped from China?

Speaker 4

No, nothing significantly shipped from China. In the bike business, we deliver to our OEMs on the island. So then the OEMs typically bring it across either Europe or The U. S. And obviously the tariff conversation is very different when you're talking about Europe or The U.

Speaker 4

S. Where we have a little bit more direct tariff impact would be in our aftermarket businesses. In that scenario we've actually done a pretty good job of building inventory in advance of the tariffs to give us some buffer and all that's factored into our thinking for the back half of this year. But generally speaking we work with our OEMs to help them be successful in this environment more so than a direct impact to us.

Speaker 7

Got it. Thanks. And then within the prepared remarks, talked about improving the product mix and not helping margin. Can you elaborate a little bit more on if that was a SKU rationalization or shifting the mix and if that was concentrated to any one segment?

Speaker 4

It's across the segments. Part of our cost initiatives and as part of our look at the business to make sure we're driving the most profitable parts of our business and allocating capital to the most profitable parts of our business, we spent a lot of time looking at catalogs and different things that we're doing and really focusing on if we're going to innovate and if we're going to spend the money for innovation, let's make sure it's at the right product level and serving the right consumer demand. So it's pretty much across the board. I would say there's some highlights both in PVD and the vehicle makeup in bike. Some of our product launches happening in Q1 and Q2 are at the very high end of the range probably higher than we've been before in some of forks and some of our new technologies.

Speaker 4

So we're really focusing on that kind of ultra premium level right now and that seems to be serving us well. And then just broader expansion of portfolio and things like wheels where we have the raised wheel category now not just the method wheel category. So trying to create a more diversified product portfolio on the higher end of the different brands and platforms giving us some ability to pivot and move as we kind of go through this volatility.

Speaker 7

Great. Thanks guys.

Speaker 1

Thank you.

Operator

Next we'll go to Bret Jordan with Jefferies. Please go ahead.

Speaker 8

Hey, guys. Good afternoon. On the PVG side, think last quarter you called out a lot of motorcycle manufacturers. You're now doing business with maybe BMW and Triumph, I think, Ducati and you'd mentioned the motorcycle business is up. How much of the PVG growth was sort of infill orders with new customers on that motorcycle side versus selling sort of organic sales growth?

Speaker 4

Best way to answer that, Brett, is on the automotive side as forecasted. So we had forecasted a bit of a lower automotive quarter just from a stand not because of tariffs. Obviously, we didn't have tariffs back in our original forecast anyway. But we expected the Q1 to be a little lighter on the automotive side. So you have that piece.

Speaker 4

And then on the powersports side, we expected continued softness and saw it in powersports. So that has not disappointed, if you will, probably the wrong word to use, but that's what I'll use. It's gotten softer as expected. And really motorcycle has offset more than offset some of that softness in powersports. So automotive was kind of right where we thought it would be.

Speaker 4

Powersports was soft as we expected it to be and motorcycle picked up the difference, especially in that space. Aftermarket was up. So our aftermarket businesses, as you can imagine, when interest rates are high and people can't buy new trucks, they tend to fix the trucks they've got. And so aftermarket tends to do well in that. It did well for us in Q1, and we expect it to do pretty well in Q2 as well.

Speaker 8

Okay. And can you remind us on the seasonality of Marucci? I sort of didn't imagine it would sell in as the start baseball season and peak early, but it doesn't seem to be the case that you called out bikes where the strong piece of SSG is Yes.

Speaker 4

You've got seasonality a little bit wrong. Keep in mind, seasonality is a function of kind of the seasons of baseball or softballs it may be, but it's also about the seasonality of product launches. And most of the time you launch like our Azura Bat as an example, is a prelaunch into the direct to consumer space right now. Ultimately, it will be a launch into our retail partners later this year. So most of the big launches through retail brick and mortar happened kind of Q3, Q4 in preparation for the holidays and some of those things.

Speaker 4

Early launches get out there or to get out there in the field, get them in player hands and things like that. That happens in kind of Q1, Q2 and probably majority Q2. So when you think about seasonality, it's not just tied to, hey, the season starting, it's time for a new bat. There is some of that, but it's also tied to when in the year does do you go direct to consumer, when in the year do you go to big box, and those things have probably an outsized impact on your quarterly revenue charts versus just when baseball season starts. And I

Speaker 8

think you're talking a lot about the benefit of being able to market it with MLB as the official bat. And obviously, that MLB marketing would start with the season. It doesn't your sales don't really tie or line up necessarily with that MLB season sponsorship?

Speaker 4

Not necessarily. MLB sponsorship does a lot for us. And that starts obviously early in the season Q1. But that's at the player level, the pro level. We're already very invested.

Speaker 4

We have 56% market share with the pros. So our relationship into the MLB season is fairly baked even before Q1. And what MLB is really helping us is not only create that brand awareness at the MLB level is pushing it all the way down into our little league businesses and even frankly in the softball. So we're using that leverage to help us grow those businesses and as we go through the season of MLB and filling the orders for Bats at the stadium level, a whole different business profile, which is more souvenir based, that starts to pick up steam as we go into the year. So start preseason not so big, you get into the main season Q2, Q3 and then finally in Q4 with October kind of a different conversation.

Speaker 4

But early in Q1 not as big of an effect. What's interesting about and I'll just throw this out there. What's interesting about Q1 was the demand we saw with the torpedo bag almost instantaneously like an overnight all of a sudden there was a whole new ball game. Excuse the pun. That was not expected frankly and we've been pretty hard to fulfill that demand as it came across.

Speaker 4

Obviously we didn't expect the Yankees to do what they did to create that all that positive noise for us but the team did well and pivoted and that did drive some demand in Q1.

Speaker 8

Doesn't make legacy inventory obsolete though, right?

Speaker 4

Does not. And not every player is going to go to a torpedo bat. There's a few that seem to do really well with them, but there's a lot that still uses all the rest of our wood bat.

Speaker 8

All right. Thanks.

Operator

Thank you. And next we'll go to Scott Stember with ROTHMKM. Please go ahead.

Speaker 9

Good afternoon. Thanks for taking my questions.

Speaker 5

Hi, Scott.

Speaker 9

Certainly back to I guess Brett's question I guess trying to parse out SSG in the quarter. Could you just size up which one grew faster maybe give us just some rates? Just trying to get a sense of the direction of each one of them at least coming out of the first quarter.

Speaker 4

Yes. We don't want to give out necessarily rates on each individual product line. But I would tell you that bike both of them actually surprised us to our forecast. So both of them beat the forecast to the upside. Bike had a really good revenue quarter.

Speaker 4

Really impressed with what we saw. And I think that points to Scott some stabilization that we've been looking for a long time. We've talked a lot for a lot of quarters about looking for stability in bike and potentially recovery. Right now, I'm comfortable saying stability is where we are, where we've stabilized and we'll start talking recovery as we get into Q2, Q3 and Q4. But a real good quarter for us on the bike side and the team was smiling.

Speaker 4

It's been a while. So it was really nice to see the team with some positive view over the rest of the year and the product launches that we've got coming. So really impressed with the bike business. And again, Marucci, we expected it to be a down quarter because we didn't have the Cat X launch in the Q1 period. That's a big launch.

Speaker 4

Hard to overcome that. The year on year comp is pretty tough. But with some of other launches they had and with the torpedo bat and some other things, they did a real nice job beating their numbers. And that business continues to grow and expand throughout the year. So we're really optimistic about the Merge business and that team, including Victus and Lizard Skins and BombBat.

Speaker 4

So nothing negative to report there at all, just kind of a difference in timing of product launches.

Speaker 9

And then on the bike side, what are you hearing as far as retail for your, I guess, the higher end mountain bike market? What are you hearing as far as the pull through? And obviously, you guys are getting back to a better sell in situation, but how is that being pulled through?

Speaker 4

Our bike like I said, our bike business in Q1 was good. Our conversations with our OEMs are very positive. Man, I don't want to get out ahead of my skis. I think it's too early to start to call a victory lap on bike. Think too many quarters in the past we thought we were there or thought we were close to there and we weren't.

Speaker 4

So give us the benefit of doubt to have another quarter or 2 in our pocket before we say that we've won the game, so to speak.

Speaker 9

Got it. And then last question on the lower priced

Speaker 4

fork

Speaker 9

that you have in the market, how it's performing? I know this is a pretty big year for that launch, right?

Speaker 4

Yes. I mean that started last year and it's suspension. So it's fork and shocks in the entry premium space. That's done well for expanded our share. We didn't have any share in that space.

Speaker 4

So any growth there is good growth and we're continuing to push forward in that space to expand our relationships with our OEMs. I think you'll see it continue as fairly that was probably more linear in its growth curve than a lot of other businesses because it's the model year picking up a bit more and more spec. So we expect good things out of that part of the business over the course of 2025, model year 2026, and we'll just continue to push them forward.

Operator

And that concludes our question and answer session. I would like to now turn the call back over to Mike Dennison for concluding remarks.

Speaker 4

Thanks everybody. Appreciate the time today and have a good evening and we'll talk soon.

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Key Takeaways

  • Strong top‐line start: Q1 net sales of $355 million rose 6.5% year over year and delivered adjusted EPS of $0.23, while gross margin expanded 200 basis points sequentially to 30.9% through rigorous cost management.
  • Segment momentum: Powered Vehicles grew 3.4% (upfueled by motorcycle sales) with an 11.8% EBITDA margin (+50 bps), Aftermarket Applications rose 9.9% with a 15.2% EBITDA margin (+330 bps), and Specialty Sports climbed 6.6% on strong bike and Marucci bat launches.
  • Cost optimization underway: Fox is targeting $25 million of annual savings in 2025 via facility consolidation (including a Taiwan plant closure), portfolio pruning, working‐capital improvements and broader G&A/COGS reductions, with benefits kicking in from Q2.
  • Tariff mitigation: Anticipated 2025 tariff impact of $50 million (≈5% of COGS) is being addressed through supply‐chain shifts, commodity‐indexed cost passes and selective price actions, supporting reaffirmed full‐year guidance of $1.385–1.485 billion in sales and $1.60–$2.60 adj. EPS.
  • Innovation and brand leverage: Ongoing record‐level product launches—re-entry into motorcycles, MLB‐backed Torpedo bat buzz and sold-out Azurea softball bats—underscore Fox’s commitment to performance-defining R&D and customer engagement.
A.I. generated. May contain errors.
Earnings Conference Call
Fox Factory Q1 2025
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