Fox Factory Holding Corp. Aktie

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Fox Factory Holding Corp.'s First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the conference over to Mr. Toby Merchant, Chief Legal Officer at Fox Factory Holding Corp. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Fox Factory's First Quarter 2026 Earnings Conference Call. I'm joined today by Mike Dennison, Chief Executive Officer; and Dennis Schemm, Chief Financial Officer.

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.

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 of the company's control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements.

Important factors and risks that could cause or contribute to such differences are detailed in the company's quarterly reports on Form 10-Q and in the company's latest annual report on Form 10-K, 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 on our website.

And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks to everyone for joining today's call. We delivered first quarter revenue of $368.7 million, which was at the high end of our guidance range and adjusted EBITDA of $35.7 million, exceeding the high end of our guidance range. More importantly, the early proof points for the plan we outlined in February are landing as expected.

Phase 1 carryover is flowing through, Phase 2 is on schedule, and we closed the divestiture of our Phoenix, Arizona operations in the quarter as planned. The operating environment remains broadly consistent with the demand backdrop we built our 2026 outlook around.

As I said on our last call, we are not counting on end market recovery or tariff relief in 2026. We are focused on what we control, taking cost out, tightening the portfolio and building the foundation for operating leverage when growth returns.

On cost, we are confident in delivering approximately $50 million of savings in 2026, $10 million of Phase 1 carryover and approximately $40 million of Phase 2 actions identified and in execution. The Board's Transformation committee is engaged with us and the work is on track.

On the portfolio, the Phoenix divestiture, including the Upfit, UTV, Geiser and Shock Therapy businesses closed during the first quarter, consistent with the expectations we set on our last call and proceeds are dedicated to debt reduction.

As I have said before, we will continue to evaluate every business we own against 3 criteria: alignment with our brands, synergy with our core competencies and an ability to deliver accretive margins and durable cash flows. And where a business does not meet these thresholds, we will act.

With that, let me walk through our segments. PVG delivered net sales of $143.4 million in the first quarter, an increase of 17.4% year-over-year. This was a strong start to the year for this segment. Some of this growth reflects timing dynamics I'll cover next, though the underlying performance is consistent with the framework we laid out for the year.

On the automotive side, our premium truck OE business performance was balanced by the timing of shipments against continued supply chain and production issues within our automotive OEMs. Keep in mind that, while demand continues to be more resilient at the high end of the market, the broader consumer is exercising restraint given ongoing macro pressures, including the unforeseen rise in gas prices.

Our powersports business produced a solid quarter as OEM partners have largely overcome channel inventory imbalances. Our broad portfolio of customers and products should help insulate us from the OEM and tariff issues still impacting this market. We remain cautious in our near-term outlook for this business given continuing pressure on consumer discretionary spending. That said, powersports is structurally healthier than it was a year ago, and we believe we are well positioned as growth accelerates.

AAG delivered net sales of $114.8 million, an increase of 2.6% year-over-year. Growth came from our upfitting product lines and solid aftermarket demand, partially offset by the Phoenix operations that exited the segment during the quarter.

In PVD, our portfolio continues to evolve across OEM relationships and dealership expansion. As you recall, in the second half of last year, we announced a new program with an OEM partner to execute their performance upgrades.

In Q1, we announced a similar strategic relationship with another major automotive OEM. This partnership model where our innovation tied to OEM-driven marketing and sales is a differentiated and defendable go-to-market strategy, which should drive long-term growth in upfitted trucks.

We started shipping meaningful volume towards the end of Q1 as our supply chain normalized, and we are making good progress on that program in Q2. These are the kinds of programs that give us more predictable, sustainable revenue over time.

We have significant operational supply chain, product, process and capacity work to be done in PVD. We have made strides in people and structure in Q1, which should enable many of the other work streams to drive top and bottom line improvements towards the end of this year.

One final note. In the actions we have taken so far, we have reorganized sales forces internally and externally and refocused our efforts on dealership expansion, which is a critical long-term growth driver.

In the last 60 days, we have added over 135 new dealers, and we are averaging over 60 new dealers a month as we go forward. Our aftermarket components business held up well in the quarter. Categories like custom wheelhouse, RideTech and Sport Truck continued to show consistent demand and delivered on or above expectations in the quarter, which is a proof point for resilient aftermarket demand where higher interest rates and elevated gas prices are weighing on consumers more broadly.

When consumers can't afford to buy new trucks, they tend to invest in the trucks they already have, and this value-seeking behavior plays to our portfolio. Our product is hitting the right consumer at the right price point, and our channel strategy is helping us stay visible to this consumer as they are making purchase decisions.

AAG margins were down year-over-year due to a combination of factors. The biggest drivers are volume, mix and operational challenges in upfit, as mentioned earlier. The volume and mix issue is directly related to the industry-wide aluminum supply disruption affecting Ford's production, which has constrained availability of the F-150 Lariat and XLT platforms, a predominant upfit chassis across several of our product lines.

The Q1 and Q2 volume tied to that disruption is not expected to be recovered in 2026. However, we do believe back half volumes remain intact. The impact extends into our second quarter and is reflected in the outlook Dennis will walk through.

Margins were also pressured by the delayed deliveries of finished vehicles and OEM outfit program I just mentioned, where shipments were weighted toward the end of Q1. And finally, by the dilutive impact of 2 months of Phoenix operations within the segment before the divestiture closed.

SSG delivered net sales of $110.5 million, a decrease of 8.7% year-over-year. This performance is consistent with what we flagged in our last call. We knew Q1 would be a tough comp for SSG, particularly in bike, given the strength we saw in the first half of the prior year as the industry pulled forward orders in 2025.

The bike environment feels much like last year. Channel inventory has improved but remains volatile and demand signals remain muted as consumers stay cautious. The good news is that we continue to make progress on new customer relationships and product expansion, particularly in categories like e-bikes where we see long-term opportunity.

The changing landscape in OEMs who are winning and losing is both a challenge and an opportunity for POX. We are establishing and winning new relationships and the growth we are seeing from these OEMs is a stabilizing force in our business where the rest of the industry is challenged.

We would expect bike to revert to seasonal norms and improve sequentially in Q2, though we are working through a temporary disruption tied to challenges in the Middle East affecting some of our suppliers and customers. The financial impact of that disruption is largely confined to Q2, and we expect the associated volume to flow through Q3 as conditions normalize.

As I said on our last call, we are not chasing revenue here. We have the financial strength to lead with our brands and the innovation pipeline with new products and customers to protect our margin structure while the industry works through its cycle.

Turning to Marzocchi. Bat industry volumes have continued to trend softly, which supports a deliberate decision in alignment with our retail partners to shift our planned Q2 product launches into Q3. Softball continues to be a bright spot. Our new products are resonating, and we are picking up meaningful share in that category.

Softball has become an increasingly important contributor within the broader Marzocchi business, and it's a place where we continue to see a runway for growth. To provide perspective, our softball business has grown over 500% since 2024, which supports our innovation investments over the last 2 years.

Stepping back across the segments, Q1 came in at the high end of our revenue guide and above the high end of our EBITDA guide. Our cost programs are tracking and the Phoenix divestiture is closed. This performance as well as the operating discipline that is central to our plans gives us the conviction to reaffirm our 2026 outlook today even as the macro environment remains challenging.

With that, I will turn it over to Dennis to walk through our financial details.

Thanks, Mike. I will begin by discussing our first quarter financial results, followed by our balance sheet, cash flow and capital allocation strategy before concluding with a review of our outlook for fiscal 2026.

Total consolidated net sales in the first quarter of fiscal 2026 were $368.7 million, an increase of 3.9% versus the same quarter last year. Gross margin was 28.9% for the first quarter of fiscal 2026 compared to 30.9% in the first quarter last year, with the decrease primarily driven by the unmitigated impact of tariffs and shifts in our product line mix.

While the focus over the past year has been on tariff mitigation, we are also seeing higher steel and aluminum costs across our segments with some pressure building into the second quarter. Our profit optimization initiative is sized and pacing to absorb this impact within the framework we laid out in February.

Adjusted operating expenses, which exclude the impact of amortization of purchased intangibles, restructuring and other discrete expenses were $85.5 million or 23.2% of net sales in the first quarter of 2026 compared to $84.4 million or 23.8% of net sales in the prior year quarter, reflecting the early benefits of our cost optimization actions.

The company's tax benefit was $0.6 million in the first quarter of fiscal 2026 compared to $3.6 million in the first quarter of 2025. Adjusted net income was $7.4 million or $0.18 per diluted share compared to $9.8 million or $0.23 per diluted share in the first quarter last year. Adjusted EBITDA in the first quarter of fiscal 2026 was $35.7 million, exceeding the high end of our guidance range and reflecting the early benefits of our cost optimization work compared to $39.6 million in the prior year period.

Adjusted EBITDA margin was 9.7% in the first quarter of 2026, stable sequentially with the fourth quarter of 2025. Importantly, we expect margin expansion to unfold as we move through the year with the bulk of our Phase 2 benefits and the anniversary of last year's tariff implementation, both falling into the second half.

Moving to the balance sheet and cash flows. Our debt balance increased by approximately $15 million sequentially to $688.2 million at the end of the first quarter. The primary driver is timing related to working capital.

As a reminder, Q1 is seasonally our most demanding quarter from a working capital standpoint with this year reflecting incentive compensation payouts and the cash impact of first half 2026 tariffs.

Deleveraging remains a clear priority, and we are taking action on multiple fronts to strengthen our financial position. Recently, we proactively amended our credit agreement to provide additional financial flexibility and expanded covenant headroom. This step was taken from a position of strength. At quarter end, we remained comfortably within the prior threshold and gives us additional runway as we execute the plan.

We also maintained our disciplined approach to capital spending with the first quarter capital expenditures of $5.4 million or approximately 1.5% of revenues. tracking below our full year target of approximately 2%.

Combined with the EBITDA contribution expected from our cost-out programs and our continued focus on working capital, we expect meaningful progress on debt reduction as we move through the balance of the year.

Now moving on to our outlook. Based on our first quarter performance and the continued execution of our cost-out programs, we are reaffirming our full year guide for 2026. For the full year 2026, we continue to expect net sales in the range of $1.328 billion to $1.416 billion and adjusted EBITDA in the range of $174 million to $203 million. At the midpoint, this represents approximately 200 basis points of adjusted EBITDA margin improvement relative to full year 2025.

Capital expenditures are expected to be approximately 2% of revenues and our tax rate is expected to be in the range of 15% to 18%. On tariffs, when we laid out our 2026 framework in February, we anticipated approximately $15 million of incremental net tariff impact for the full year, with this headwind concentrated in the first half before we anniversary the prior year implementation in the second quarter.

Since that time, the tariff dynamics have shifted with IEPA being replaced by Section 232 framework. Importantly, the Section 232 methodology applies to the value of the aluminum input rather than the full FOB value of the finished product, which results in a meaningfully smaller exposure base for our businesses than we faced under IEPA.

Combined with the pricing pass-through and operational mitigation work we've completed across our segments over the past year, we believe the aggregate impact of Section 232 framework is approximately neutral to our businesses in 2026, excluding Marzocchi.

At Marzocchi, the applicable tariff rate on imported bath has decreased from 22% under the prior framework to 10% under Section 232, a structural improvement going forward. In 2026, however, that benefit is being absorbed by the soft category demand and inventory dynamics that Mike spoke to.

With respect to potential recoveries of tariff costs previously incurred under the IEPA framework, any such recoveries are subject to uncertainty regarding timing, amount and the appropriate allocation across our customer, distributor and supply chain relationships. We have not included any potential recovery in our guidance and will recognize amounts only upon receipt.

For the second quarter, we expect net sales in the range of $343 million to $365 million and adjusted EBITDA in the range of $32 million to $40 million. Our Q2 outlook reflects 2 dynamics. The first and largest is the impact of discrete items shifting from Q2 into Q3, most notably the delayed product launch at Marzocchi and the bike supplier disruption that Mike mentioned.

The second item is lower F-150 unit volume in our upfit business due to the industry-wide aluminum supply disruption. Unlike the timing items, the Q2 volume tied to this disruption is not expected to be recovered, though, as Mike noted, back half F-150 volumes are expected to remain intact. This impact is reflected in our Q2 outlook. Setting these discrete dynamics aside, the underlying demand environment across our businesses remains consistent with the full year plan we laid out in February.

To summarize, Q1 came in at the high end of our revenue guide and above the high end of our EBITDA guide. Our cost programs are executing on plan. Our financial flexibility is stronger after the credit amendment, and we remain confident in our full year 2026 outlook today with margin expansion weighted to the second half, consistent with the framework we laid out in February.

With that, Mike, back to you for closing remarks.

Thanks, Dennis.

In closing, I want to leave you with three key messages. The plan we laid out in February is landing. Phase 1 cost benefits are carrying over and Phase 2 is delivering. And we pushed the Phoenix divestiture across the finish line. We're not waiting for the macro to give us anything.

We're reaffirming our 2026 guidance, remain committed to delivering the approximately $50 million in cost savings this year and the path to approximately 200 basis points of margin improvement at the midpoint is on track. The work we are doing is disciplined and it's a deliberate focus on fundamentals to ensure we continue to win.

Q1 demonstrates the plan is working. We have meaningful work ahead of us in 2026, continuing to execute on profit optimization, advancing our portfolio work and strengthening the balance sheet. And we are doing it against an environment we plan for as much as any company can plan. The team is executing, and we are confident in the path we are on.

I want to thank our team for their hard work and dedication during this period. The level of external distractions seems to grow constantly. Through it all, we remain focused and committed to developing the best products across a broad portfolio to enable our enthusiasts to do what they love, continuing our legacy as the best-in-class enthusiast-driven product company across all of the markets we play.

With that, operator, please open the call for questions.

Certainly, Mr. Dennison. [Operator Instructions] We'll go first this afternoon to Anna Klaskin with B. Riley.

I'd like to start with some of the commentary you gave around fuel prices and how you're positioned to capture the consumer. The auto OEMs appeared at a recent conference and GM talked about how their rule of thumb is that they usually don't see people considering trading down within fuel -- or trade up in fuel economy until fuel prices have stayed up higher for 4 to 6 months. It sounds like you're maybe seeing some shift in consumer behavior, but just wanted to clarify maybe some of that fuel commentary and what you're seeing boots on the ground.

Yes, Anna, this is Mike. So our commentary on fuel prices is really just around the general macro. When we talk about our automotive OEM business, again, it's fairly well aligned to high-end premium vehicles, which tend to attract a more affluent buyer who isn't as focused on what the gas price is on any given day.

So we haven't seen that relative to our volume or demand in the automotive sector. Where it could start to apply is really a benefit to us in the aftermarket sector where people may not be trading in a lower-end vehicle for a higher-end vehicle because of that higher interest rate and gas price. And in those cases, if they're being more conservative, they tend to lend themselves to our businesses with CWH and Sport Truck and RideTech and others where they're going to upgrade, even PVG, where they're going to upgrade in the aftermarket with our products on their current vehicle. That was really where I was going with those prepared remarks, not that we were experiencing any kind of headwind relative to consumer demand on the premium side.

Got it. That's super helpful. And I wanted to follow up on powersports. It sounds like feeling a bit more positive there, though, of course, staying cautious within the overall outlook. One of the OEMs went out and noted that there could be a material increase in their tariff exposure. Maybe talk about the extent to which that could potentially impact order flow as they'd be facing a pretty significant shift in their P&L?

Yes, we're well aware of that, Anna. And it's a challenge that company is working through, and we're working through it with them. That said, we are pretty confident in what we saw in Q1 and what we're seeing in the rest of the year relative to powersports.

The destocking or inventory rebalancing has really taken shape. And the benefit we have is being diversified across all of the major OEMs in that category with several different product sets allows us to kind of pivot from one OEM to another. And we're seeing that shift happen to some degree in Q2 with a shift between where our mix would have been more higher on one OEM and maybe a little bit higher on another. So we're seeing that balance out pretty well for us and gives us some confidence that, that will continue to be strong for the balance of the year.

We'll go next now to Larry Solow with CJS Securities.

I guess first question, just on the implied margin improvement, pretty significant, I guess, right? I think if we kind of take the midpoint of your guidance, it will imply like an exit EBITDA margin like in the high teens. Is that right? 18 -- you can do about 10% in H1, right, and to get to the midpoint, which is about 14%, right, Dennis. So I think you have to have like pretty -- at least exit rate, if not average margin in the back half, about 18%. Is that -- am I doing that math right? And I guess it seems a little aggressive, but maybe just any thoughts on that?

Yes. So great question. And first of all, really strong start to the year, right? Our first quarter exceeded our expectations. We're up about $4 million versus the midpoint. And that's something that we expect to stick. But you're asking a great question along the way, how do we have to ramp up. And that's going to really depend on a couple of things.

One, we're going to see more improvement in AAG. So Mike talked about the improvements that we need to be delivering on in PVD we need to see more improvement, too, within Marzocchi as well. And so we fully expect that with the product launches that we have lined up.

In addition to that, the cost improvement plan is underway. We're seeing the benefits of that already, and we would expect that to be performing in the mid-teens in the Q3s and Q4s. So the back half will be pretty strong there.

So final point, though, we're looking for a 200 basis point improvement year-on-year. I think we did 11% for the full year 2025. So it would be 13% is where we're looking -- come into. Okay?

Got you. No, that's fair. Just second question, just on the Specialty Sports. And yes, you can parse that out a little better. I guess, was Marzocchi down in the quarter? What's your outlook for the year on that one? And I guess, is that still part of kind of the potential strategic alternatives you're exploring?

Yes. So great question. Yes, no problem. So great question. Marzocchi was down in the first quarter, and we talked about that. Again, there's inventory in the channel, and we were having to deal with that overflow in the channel right now. So it slowed things up a bit.

Relative to strategic alternatives, I want to be very, very clear we are running that business hard. We are working with the leadership team there. That leadership team and our teams are fully engaged in making sure that we have the best product launches to the market. And we could not be more excited about what we're seeing, for instance, in softball and these Q2 -- sorry, the Q3 launches that the team has set up. Does that help?

Yes, very much so. I appreciate the color.

We'll go next now to Peter McGoldrick with Stifel.

I was hoping you could talk more about the bike business. Can you give us some guidelines for your expectations around OE orders, market share for model year '27 changeover spec? And then any sizing of the contribution of these newer customers you pointed out?

Yes. Good question. So bike is a very interesting industry. As you know, right now, there's a lot of volatility. A lot of the players in the space are down, down significantly. We're forecasting stable to slightly up, which is a reflection of really 2 things, which will lead to the additional answers in your questions.

One is product diversification. So continue to expand our portfolio to make sure we're getting on as many products that meet our premium category at the different levels between e-bike and normal mountain bikes, as well as expansion into new customers. For the first time, we looked at the charts the other day and saw that in the top 20 we have a fairly significant rotation of new players versus our traditional players.

So it's showing you that, there's disruption happening in that industry, and we're benefiting from our relationship with those new players and the new products that they're creating. So that's giving us a lot of that stability. That gives us a lot of the confidence in the long-term spec.

To your second question, how much share do we get. Share is going to be a function of not only the current or traditional players in the space, but how well do you do with the new players. And in our case, we're doing quite well. So we're pretty excited about it. We're investing in that business and innovation. We're adding engineers in that space as we speak to make sure that we've got the right product and that we're delivering to those new customers.

And then I was hoping you could tell us more about the PVD upfitting partnership model. Is that net new business or a new channel for distribution? And if so, what are the economics of that?

And then unrelated on tariffs, I just want to make sure that I have this clear. Relative to the $15 million net impact embedded in the prior outlook, the core business is a wash and Marzocchi got better. Is that correct? And if so, by how much more -- or what's the current embedded impact from tariffs?

Yes.

Peter, I'll take the first one and Dennis the second one. So on PVD, those relationships with the large OEMs that's an entirely new channel, new partnership structure. We've been with those OEMs in the past for our bailment programs. So that's always been there. This is an entirely new way to go to market, where we're leveraging their marketing, their sales channels, their booking systems to order those vehicles and those vehicles are drop shipped to us for upfit and then sent to the dealer.

So it does a couple of things. One, it relieves us a little bit on the SG&A side relative to marketing and sales pretty significantly actually. And it allows us to actually enter new dealers and create a new relationship that we then can include the rest of our portfolio as we sell into those dealers with our products as well.

The products that we're supporting the OEMs with are really constructive to us on the bottom line level because they don't have that SG&A implication that the rest of our business does. They're also more menu-driven -- the kits that we're providing on those solutions, fairly well defined. They flow through production very quickly.

So from a factory optimization perspective, they work really well. The forecasting process by which we get them, manage them, push them through is much more elegant than maybe a normal structure. So we really like that business, and it also aligns us very tightly to the innovation cycle of these large OEMs who are trying to create these premium custom trucks.

So the doors that opens for us in those conversations all the way up to the executive level in those companies is a huge step forward for us, and the team is very excited about it. So new customer relationship, albeit we already had that relationship just a different way, and therefore, also new channels new ways to go to market and new dealers. Dennis, I'll turn over the tariff question to you.

Relative to the tariff, so yes, we do have that $15 million net impact still in the first half. We felt it clearly in Q1, and we're seeing that in Q2 as well. Relative to the tariff changes, they are largely net neutral to the PVG business and to the AAG business. It's Marzocchi that definitely gets the benefit of that. That rate fell by like 54%.

So as we look out to the year, that full P&L benefit will phase in as the previous tariffied inventory works through what works through the P&L and should become more visible, we should expect to see some sort of tariff relief maybe in the back half of the year, very late in the year, and it would be low single digits at best.

We have now to Scott Stember with ROTH Capital.

I wanted to dig into the PVG a little bit more on the 17% increase. Mike, when you started talking about it, I think you first said that there was some timing benefits that took place. I believe it was a benefit. Could you maybe talk about that a little bit?

It was. And that was expected on our part relative to Q4 to Q1 timing, Q4 of last year to Q1 of this year. So that did help us. But across the board, just to kind of give you a better picture on PVG in general, overall, aftermarket was a very good story for us in Q1. Powersports was a good story for us in Q1. And automotive really held up to its expectations in Q1.

So most of the upside was contemplated and thought about relative to where we thought that business could go in Q1, again, getting some benefit from timing in Q4 to Q1.

Got it. And then -- as far as the $40 million of incremental savings in Phase 2 of the plan, how much of that did we see in the first quarter? Did you mention that already?

Yes. We -- I didn't mention it. So fair question. And again, just to be clear on that, we have a $50 million contribution coming through the year, $10 million of carryover and then $40 million net new. And so we probably saw mid-single digits come through in the first quarter. So we're feeling good about the start of the year, and that will progressively layer up as we move through the year.

Okay. And then on the balance sheet, it looks like you guys have a good plan for delevering. But what was the leverage ratio at the end of the quarter?

I think we're right around 3.77, if I'm not mistaken. So plenty of headroom against the covenant. And then we recently amended our banking agreement to just provide us with more headroom, more flexibility as we move through the year.

And gentlemen, it appears we have no further questions this afternoon. Mr. Dennison, back to you, sir, for any closing comments.

Thanks for everybody's time today, and have a good evening.

Thank you very much, Mr. Dennison, and thank you, Mr. Schemm. Again, ladies and gentlemen, this will conclude the Fox Factory Holding Corporation's first quarter 2026 earnings call. You may disconnect your line at this time, and have a great day. Goodbye.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corp.'s Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

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.

Thank you. Good afternoon, and welcome to Fox Factory's fourth quarter 2025 earnings conference call. I'm joined today by Mike Dennison, Chief Executive Officer; and Dennis Schemm, Chief Financial Officer. 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.

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, uncertainties, many of which are outside of the company's control and can cause future results, performance or achievements to differ materially from the results, performance or achievements expressed or implied by such forward-looking statements.

Important factors and risks that could cause or contribute to such differences are detailed in the company's quarterly reports on Form 10-Q and in the company's latest annual report on Form 10-K, 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 statement 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 on our website.

And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks to everyone for joining our fourth quarter call today. I want to use our time today to do something beyond a traditional quarter recap. While we'll cover our fourth quarter results, the more important conversation is about where this business is headed and the specific actions we are taking to improve profitability. We have a comprehensive plan. We're executing against it, and we want to make sure you leave with a clear understanding of the building blocks and how they translate into meaningful improved margins.

To this end, we've shifted our guidance approach to lead with adjusted EBITDA to better align with the goals we will outline today and importantly, so you can more easily measure our results. Full year sales were $1.47 billion, which was an increase of 5.3% and fourth quarter sales were $361.1 million, which was an increase of 2.3%. While we demonstrated the relevance of our brands and products across our end markets, our margin performance was not where it needs to be.

Revenue growth alone is not the objective. Profitable growth is. And the actions we're laying out today are designed to close that gap with urgency. Ultimately, we are a growth company, and our product pipeline is focused on sustainable long-term growth. However, in the near term and specifically 2026, we must rebuild profitability to establish the appropriate foundation for future growth. We began our initial cost reduction program at the beginning of 2025 with a goal of setting the company on a path to restore our historical adjusted EBITDA margins to the mid- to high teens and accelerate our path to balance sheet improvement.

I'm pleased that we successfully delivered our Phase 1 $25 million profit optimization plan on target and on time. This was a comprehensive effort focused on footprint optimization and continuous improvement across all 3 of our operating segments. We consolidated facilities in our AAG and SSG businesses and completed warehouse consolidation work that has positioned us with a more efficient distribution footprint going forward. We improved our supply chains and utilized our machine shops more effectively. While the unforeseen tariffs masked the underlying savings we've achieved, these proactive actions proved to be a valuable tool to help us accelerate countermeasures and tighten our operations.

We recognize that there are significant savings to capture and that our work must continue. And we are accelerating our efforts to position the business to achieve best-in-class EBITDA margins when cyclical forces abate and our end markets return to growth, which brings me to Phase 2 of our profit optimization strategy. Where Phase 1 was about consolidation and efficiency, Phase 2 represents a fundamental shift in how we are thinking about the business. Focusing on our core high-margin businesses and products to have elevated FOX and its portfolio of brands to be the leaders in their respective industries. We will continue to operate with a continuous improvement mindset. And as part of our Phase 2 efforts, our leadership team has identified specific cost improvement actions to materially improve profitability while strengthening our core and enabling long-term growth.

We have identified critical opportunities across the business, some larger than others and some more complex than others, but all of them lead us to a simpler, more focused and more durable business profile. Dennis will walk you through the financial details around this in his remarks, but I want to take a moment to provide a clear view of the targeted areas of work in 2026.

First, business line rationalization. We're exiting businesses within segments that are not accretive from a margin perspective today. The footprint work in Phase 1 gave us better visibility into true profitability by product line and by business. Now we're acting on that visibility. For example, by the end of the quarter, we expect to have divested our Phoenix, Arizona operations, which were dilutive in our AAG segment margins. The exit of Shock Therapy, Upfit UTV and Geiser is expected to reduce working capital and SG&A, improve margins in both percent and dollar terms and simplify our model. The changes are reflected in our 2026 guidance and are the first examples of our rationalization plans. We are not done.

We are aggressively evaluating all noncore businesses and all product lines across the entire FOX portfolio and we'll pursue appropriate action where the return profile does not meet our expectations. We will look at strategic alternatives for any business that doesn't deliver 3 key elements: aligned with our core brands, synergistic to our vertical offering and has a durable ability to achieve sustainably accretive profit to the enterprise.

Second, supply chain and material cost productivity. We are continuing to evaluate our operations to determine where we have the opportunity for further productivity either through better utilization, reduction of footprint, make or buy optimization efforts and supply chain improvements. Additionally, we are working aggressively to reduce material costs through redesign or actions with suppliers. This work is critical to achieving our margin expectations. However, some of these efforts will necessitate some short-term expense to deliver.

And third, a significant reduction in operating expenses. We have opportunities to reduce spending across sales, marketing and G&A functions. We will address marketing and R&D spend that is not aligned with growth and our profitability expectations. These are difficult decisions. We don't take them lightly, but they are necessary to rightsize our cost structure for the business we are running today.

In aggregate, our actions are targeting approximately $50 million of incremental realized savings in fiscal 2026. These actions will drive meaningful bottom line improvement in our 2026 results and more importantly, return us to the appropriate foundation to build revenue growth in 2027. In conjunction with our Phase 2 profit optimization initiative and towards our ongoing prioritization of balance sheet improvement, we are also reducing our CapEx spending.

We have been in an elevated CapEx cycle where we are spending 3% plus of revenue. In 2026, we're targeting a step down to approximately 2% of revenue. With several years of investment having been made in product capacity and innovation, we have the assets in place to achieve our near- to intermediate-term goals. This shift isn't compromising our ability to grow, but rather is better characterized as a militancy around ROIC metrics and focus, which is driving improved free cash flow generation to help accelerate debt paydown and strengthen our balance sheet. Beyond these management-driven actions, we announced earlier this month that our Board of Directors will be establishing a Transformation Committee focused on operational excellence and margin improvement. The committee will begin its work in the coming month and is expected to advise on the existing Phase 2 actions we have already established as well as unlock additional opportunities that would be incremental to the $50 million target for 2026.

Taken together, this is a comprehensive effort with management and Board aligned that will move with urgency. We're not simply managing through a cycle. We're fundamentally repositioning this company to deliver greater operating leverage as we deliver growth over the next several years. Before I get into our segment performance, I want to address an organizational change.

As we initiate our Phase 2 cost actions and support the Board's Transformation Committee, Dennis will be dedicating his full attention to these efforts alongside his responsibilities as CFO. To that end, I assumed responsibility for AAG earlier this month to drive critical actions. This is a short-term need to execute the critical actions within AAG, such as the expected divestiture of Phoenix operations I mentioned earlier and overhaul our PVD business as well as meaningful actions within the rest of the portfolio. We will revisit the leadership of this segment later this year once this work has been completed.

I want to take a moment to thank Dennis for the work he has done leading AAG. Dennis laid the groundwork for the decisions and actions that are necessary going forward, and I appreciate his time and focus over the last year. While there is much work still to be done in AAG, I believe it will be more efficient and productive short term for me to drive the product line decisions and optimize the operations to support our near-term goals. It's the right time for Dennis to redeploy the same intensity he showed with AAG toward the next phase of our broader cost transformation that will benefit the entire enterprise. Now with that, let me turn to review our segment performance for the fourth quarter.

The PVG segment delivered as expected in Q4, overcoming extraneous challenges with net sales of $116.7 million, with our automotive OE business remaining reasonably stable and predictable throughout the quarter. We benefited from our position on premium vehicle SKUs, which continued to outperform the broader automotive market even in challenging conditions. Importantly, PVG delivered margin improvement in fiscal 2025, demonstrating the benefit of our Phase 1 cost actions flowing through to the segment level. This is the type of execution we expect to see across all segments as our Phase 2 actions take hold.

The aluminum supplier disruption at our OEM customers impacted our volumes as expected in Q4, creating some timing challenges for both our OEM partners and our business. We estimate the disruption impacted our Q4 revenue by approximately $8 million as compared to historical norms. However, I want to emphasize that this is a temporary issue that will be resolved. Despite this headwind, the underlying business momentum remains strong as our customers expand the product platforms that we support.

Our Power Sports business continues to stabilize and improve. We're seeing encouraging signs from our expansion into the motorized 2-wheel space, where growth from new customers is helping offset sluggishness as well as increased content with some of our leading OEM partners, which provides confidence in our ability to drive long-term growth in this space. This diversification strategy is allowing us to navigate through the varying stages of industry and macro cycles across our end markets.

On the product development front, our Live Valve aftermarket launch at SEMA in November was exceptional. Previously, enthusiasts could only access our best technology through new vehicle purchases. Now we're expanding access to our dealer and installer network. This is the most advanced technology available in the off-road aftermarket and early indications suggest strong demand from our enthusiasts.

In addition, our product development work with OEMs has landed us new platforms with Ducati in motorcycle, Airstream across several premium RV models as well as early revenue from 2 large well-known EV brands in both autonomous mobility and performance off-road. These programs are designed to deliver early revenue now while full production will provide real growth in '27 and beyond.

Turning to AAG. As I mentioned, we are taking portfolio actions across the business, and AAG is an area where these actions will have a particularly visible impact in the near term as we divest our operations that were dilutive to the segment's margin profile. These exits will be immediately accretive to AAG's profitability after close. We will continue to evaluate all businesses within the segment against our go-forward return expectations.

With that preface, AAG delivered net sales of $126.2 million, up 12.5% year-over-year and 7.1% sequentially, driven by strong demand across our CWH, Sport Truck and RideTech businesses. Importantly, AAG margins would have been meaningfully stronger when excluding the dilutive operations I just described. As I previously mentioned, additional work in PVD and other areas will enable us to fully capture margins in that business necessary to drive a sustainable margin profile necessary across AAG.

On the OE side, the programs we've been cultivating will underpin AAG's long-term profitable growth. The performance truck program we launched in Q3 with a major OE partner has been an immediate success. Our initial units are sold out, and we have a strong backlog building into 2026. We did encounter temporary supply chain complexities associated with this pivot to a more OEM aligned strategy, which has been identified and is getting the attention it needs for improvement.

During the quarter, these supply chain issues delayed shipments of approximately 300 units to late Q1 and Q2 of 2026. These aren't just one-off builds. They represent a deepening relationship with OEMs who see us as an innovation partner, not just an upfitter. And in Q1, we secured a second similar program with Ford, which was announced at the NADA show earlier this month and is activated for their dealer relationships across the country. These investments further validate our strategy of creating differentiated high-performance vehicles that command premium pricing and provide more predictable and sustainable revenue and profit streams over time.

SSG performed largely as expected in what continues to be a challenging environment across both bike and Marzocchi, with Q4 net sales of $118.2 million, down 5% year-over-year. The bike industry as a whole continues to slowly stabilize amid what remains a complex environment. Tariffs are adding pressure to OEMs and driving inventory levels below historical norms. And we're seeing the rise of disruptive market entrants create new competitive dynamics that have forced some legacy bike brands to reconsider their offerings, consolidate or cease operations.

Against this challenging backdrop, our bike business ended fiscal 2025 slightly above 2024 in an industry experiencing turbulence and challenges across many of our OEM customers. We believe our stability is a meaningful proof point for the strength of our brand and our competitive positioning. And consistent with our broader messaging today, we're not chasing revenue. We have the financial strength to lead with our brands and a discipline to protect our margin structure while the industry works through its cycle.

Our strategy focuses on 3 critical objectives. First, product expansion to leverage the changing mix toward e-bikes and new categories; second, customer expansion to build long-term growth partnerships with the new companies aggressively redefining the sport; and third, continued cost optimization to maintain best-in-class margins even in a flat revenue environment.

Turning to Marzocchi. As expected, Q4 was stronger than Q3. The sequential improvement reflects the shift in our distribution channels toward retail that we discussed last quarter as retailers took inventory of our new products ahead of the holiday shopping period. Nevertheless, this was a departure from the plan we had forecasted at the beginning of the year, and we recognize that profitability remains below historical rates in our recent expectations. This margin compression reflects our long-term strategic growth investments in new categories like softball, in-house engineering capabilities, go-to-market improvements and the impact of tariffs. While we maintain our conviction that Marzocchi is the best business in baseball with the best team in baseball, our strategic review of this business will unlock alternative options for consideration as we drive the focus on our core business mentioned previously.

Before I turn the call over to Dennis, I would like to recap 2026. In the near term, we are focusing our efforts on meaningful margin improvement. As part of our Phase 2 optimization efforts, we're evaluating all businesses within our portfolio to ensure they meet our profitability standards and strategic objectives. In summary, we're not counting on market recovery or tariff relief. Given these macro realities of elevated interest rates, soft labor markets and channel partners' tightening inventory levels, we remain focused on what we can control in 2026.

And with that, I'll turn the call over to Dennis.

Thanks, Mike. I'll begin by discussing our fourth quarter financial results, followed by our balance sheet, cash flow and capital allocation strategy before concluding with a review of our outlook for fiscal 2026.

Total consolidated net sales in the fourth quarter of fiscal 2025 were $361.1 million, an increase of 2.3% versus the same quarter last year. Gross margin was 28.3% for the fourth quarter of fiscal 2025 compared to 28.9% in the fourth quarter last year, with the decrease primarily driven by shifts in our product line mix and impact of tariffs. Total operating expense for the quarter included a noncash goodwill impairment charge of $295.2 million related to our share price. Adjusted operating expenses, which excludes the impact of the goodwill impairment charge, restructuring and other discrete expenses as well as the amortization of purchased intangibles were $82.6 million or 22.9% of net sales in the fourth quarter of 2025 compared to $76.4 million or 21.7% in the prior year quarter, with the increase primarily attributed to the reinstatement of incentive compensation payouts for the current year compared to no bonus payouts for the prior year period.

The company's tax benefit was $33 million in the fourth quarter of fiscal 2025 compared to a tax benefit of $4.1 million in the same period last year with the difference being driven by the impairment of nondeductible goodwill recognized this year. Adjusted net income normalizing for the goodwill impairment was $8.3 million or $0.20 per diluted share compared to $12.8 million or $0.31 per diluted share in the fourth quarter last year. Adjusted EBITDA in the fourth quarter of fiscal 2025 was $35 million compared to $40.4 million in the prior year period. Adjusted EBITDA margin was 9.7% in the fourth quarter of 2025 versus 11.5% in the prior year period.

Moving to the balance sheet and cash flows. We continue to execute on working capital management with improved inventory positions supporting our cash flow generation. We also made progress on balance sheet deleveraging, which remains a key priority, which will also be impacted by our progress with the Phase 2 actions that we laid out today. We paid down $13 million of debt during the fourth quarter for a total reduction of $33 million for the year, bringing fiscal year-end debt to $673.5 million. Looking ahead, the combination of our Phase 2 cost actions, CapEx discipline at approximately 2% of revenues and working capital improvements, they are designed to accelerate free cash flow generation and drive meaningful balance sheet deleveraging in fiscal 2026.

Now moving on to our outlook. We are introducing full year 2026 guidance that reflects a decline in our top line expectation, which is largely a combination of the business divestitures, product line rationalization and a slightly down market while driving meaningful margin expansion through a comprehensive set of actions that span every part of our cost structure. There are a number of moving parts, so I want to walk you through how they come together because we think it's important that you appreciate both the building blocks and how they roll up into our outlook.

We entered fiscal 2026 with momentum from the achievement of our Phase 1 cost program, which delivered $25 million in realized savings in fiscal 2025. We expect approximately $10 million of those actions to carry over as incremental year-on-year benefit in fiscal 2026 as we annualize a full year of footprint and network consolidation savings. Building on that foundation, the Phase 2 elements Mike introduced related to business line rationalization, supply chain and material productivity and a reduction in operating expenses will target our SG&A structure and the complexion of our business portfolio. These actions are expected to deliver approximately $40 million of incremental savings this year in 2026.

In total, Phase 1 plus Phase 2 is expected to generate approximately $50 million in cost reductions this year, supporting the approximate 200 basis points of adjusted EBITDA margin improvement that's implied in our guidance. In the near term, we expect margin pressure to remain visible as we work through our supply chain improvement efforts within the AAG segment. We will also continue to feel the impact from the dilutive Phoenix operations through its divestiture toward the end of the first quarter as well as the ongoing effects of tariffs that won't anniversary until later in the second quarter and represent an approximately $15 million of headwind in the first half of the year.

Looking toward the balance of the year, we expect a material improvement in EBITDA margin and dollars. To summarize clearly, we are taking comprehensive actions that will provide measurable benefits in 2026. This translates into a material positive step change of approximately 200 basis points improvement in adjusted EBITDA margin from our 2025 rate of 11.5%. The collective focus around these initiatives is strong. This is something we are driving at every level of the organization from the Board and executive team through every operating segment.

And as Mike mentioned, the Board's Transformation Committee will begin its work in the coming months, partnering with external advisers to identify further opportunities. Any additional savings that come from that process will be incremental to the approximately $50 million of incremental cost saves from our Phase 1 and Phase 2 profit optimization efforts. Bringing this all together, for the first quarter of fiscal 2026, we expect net sales in the range of $343 million to $369 million and adjusted EBITDA of $27 million to $34 million.

To reiterate my earlier comments, we expect the first quarter to be more challenged due to multiple headwinds that aren't fully offset by last year's Phase 1 carryover benefits, including the full year-on-year tariff impact before we anniversary the Liberation Day implementation and difficult comparisons in SSG Bike given the strength of the first half of 2025. As we move into the second quarter and especially the second half of the year, we expect to improve meaningfully. Tariff comparisons normalize, aluminum supply is expected to be fully normalized and the benefits of our Phase 2 actions should materialize.

With that context, we expect full year 2026 net sales in the range of $1.328 billion to $1.416 billion, which at the midpoint represents a year-over-year decline of approximately 6.5% and is largely a combination of the divestitures, product line rationalization and a slightly down market that we mentioned. We are guiding to adjusted EBITDA in the range of $174 million to $203 million, which represents a margin of 13.7% at the midpoint or approximately 200 basis points of improvement relative to full year 2025. Capital expenditures are expected to be approximately 2% of revenues, and our tax rate is expected to be 15% to 18%.

That wraps up my commentary. Mike, back to you for closing remarks.

In closing, I want to leave you with 3 key messages. First, we're not waiting for markets to improve. The actions we are taking now around Phase 2 objectives as well as capital discipline and working capital improvements are within our control, and our team is executing them with precision and urgency. Second, our fiscal 2026 targets are achievable through self-help. Our outlook calls for material margin expansion on flattish organic revenues. That's our commitment. When markets do recover, we'll be positioned to deliver even stronger results. Third, our business is built to deliver long-term growth, and we will ensure that growth comes with the right margin and leverage by taking aggressive action to optimize the system end to end.

Our performance-defining products continue to resonate with customers. Our operational foundation is stronger following a significant cycle of investment, and our Board and management team are fully aligned on creating value for our shareholders. I'm confident in our ability to demonstrate progress this year toward our goals. I want to thank our employees for their incredible focus and resilience during this time. The decisions we're making today, while difficult, are necessary to position FOX for sustainable profitable growth.

With that, operator, please open the call for questions.

[Operator Instructions] We'll move first to Peter McGoldrick with Stifel.

I appreciate all the detail today. I'd like to dive in on the moving parts on guidance. So I was thinking -- I wanted to ask if -- as we think about the underlying growth profile of your ongoing business, can you talk about the revenue and profitability related to those that are expected to be sold at the end of the quarter and what that means for the organic business?

Well, what we've been doing is taking a look at the overall complexion of the business, looking at those businesses that are dilutive to our overall profile that we've been expecting. So at the end of the day, after we take out Geiser, Upfit UTV and Shock Therapy, which should happen later on this quarter, that's going to result in a couple hundred basis points of improvement there. And then we're going to continue just to look at other businesses along the way. Marzocchi has not been included in any of this as well.

And to be clear, Peter, when we talk about 200 basis points of improvement relative to the Phoenix, Arizona operations, that's for AAG specifically.

It's a great point.

Okay. I appreciate that. And then as we think about the size and the shape of the go-forward business, can you talk about how much of your current portfolio is -- makes up the sort of the core synergistic and accretive criteria that you pointed to that would be a part of your core business and not related to any potential divestitures or changes in the portfolio?

Yes. I think overall, when I think about core and Mike thinks about core, we're thinking SSG Bike is core to our operations. When you look at AAG, core to those operations there are going to be PVD and then your Sport Truck, RideTech, Custom Wheel House and then on PVG, obviously, that is core to who we are as well. Again, though, we're going to be taking a look at everything as we move forward, making sure that it is lining up with the 3 aspects that Mike talked about during his prepared remarks, and that is alignment with our brands and then it's going to be the synergistic nature of that. We've talked about 1 plus 1 equals 3. That needs to continue as well. And then it's got to have the durability of profit generation over the long haul.

We'll move next to Anna Glaessgen with B. Riley Securities.

I'd like -- I'm curious on the thought process behind divesting the Phoenix business, which is focused mostly on Power Sports. I'm curious the extent to which this is a margin play. I don't know the degree to which that was more dilutive than maybe other businesses within the line, maybe a function of the outlook for Power Sports, at least near to medium term. Just any help there as we contemplate maybe what else could be contemplated within the broader portfolio, as you noted, assessing other noncore assets?

Yes, Anna, it's a good question. When we think about that business and the lens that Dennis just described, which I talked about in the earlier remarks, we have to use a lens of these are good businesses. However, at their current size and scale, to get them to be at the scale we need them to be, to be a productive and durable value component of our enterprise, there is heavy investment, and there has been heavy investment and heavy working capital utilization to support that growth curve. And as we look at the next several years, while they're great businesses, they are hard to own in our portfolio because of the draw on capital, the draw on SG&A and the dilution in the margin for that time frame.

So we actually will continue to partner with these companies in product development and innovation in a lot of ways. This is not about us just exiting them in a way that we will never work with them again. That's not the point. The point is in our current portfolio, they just don't fit and the dilution effect over the next 2 years is significant enough that we need to do something different. So this is a well thought out process that we've started in Q4 and, as we've mentioned, executing in Q1.

And then on the guidance, you referenced 3 separate points that are being contemplated in sales, the business divestment, some product rationalization and then thirdly, a down market. Would it be possible to frame up roughly your expectations across the end markets in 2026?

In general here, when we talk about the top line, I mean, essentially, what we're getting at is we are going to scale down the business through thoughtful divestitures and product line rationalization. That will be the bulk of that decrease of about 6.5% at the midpoint. In addition, as we look at SG&A and those expenses, we would be -- we need to consider that if we're going to reduce some of those expenses, they're going to have some impact on the top line. So that's another aspect of it.

And then in general, we're just hedging against a macro environment that's a little weaker. And so while we always expect our products to outperform, we're trying to put a hedge on the overall market there as well. And so I'd leave you in summary with its divestitures, product line rationalization result in the bulk of the decrease, then it would be the impact of the cost-outs on the SG&A line that deliver that 6.5% decrease.

We'll move next to Scott Stember with ROTH Capital.

Can you talk about tariffs? What was the net impact to the business? I don't know if you mentioned it or not in '25? And what is baked into guidance at this point, assuming no material changes with all the happenings as of late?

Yes. So that's a great question. Thanks for that. And so essentially, what we experienced in 2025 was $50 million of gross tariff impact. We were able to offset $25 million of that through cost-out initiatives, et cetera, with supply chain, passing on cost to suppliers and customers, et cetera. And then going forward into 2026, we're estimating an additional $30 million of gross tariff impact, and we expect to mitigate about 50% of that. So leaving a net tariff impact in the first half of 2026 of $15 million.

And we have not [indiscernible] or input from the most recent noise you mentioned. We -- I think it's too early to try to input some sort of benefit from those -- from the statements and from the Supreme Court.

Got it. And then last question on the balance sheet and cash flow. What was the net leverage ratio at the end of the quarter -- at the end of the year? And what are you targeting as far as free cash flow and the leverage ratio by the end of '26?

Yes. So another great question. Balance sheet is obviously a key priority for us moving into 2026 as it was in 2025 as well. We finished comfortably in Q4. We are at 3.74 versus a covenant ratio of 4.5. So we are well within the range there. And as we move forward, cash flow is really going to be primarily a function of the EBITDA contribution that we'll be driving in 2026, along with extreme focus on working capital reductions as well and a reduction in our CapEx. So those are going to be some of the big drivers as we move forward into 2026.

We'll take our next question from Craig Kennison with Baird.

A lot of information to process. I wanted to follow up on Scott's question with respect to tariffs. Do you plan to pursue a refund of your tariff payments?

We will do everything possible to get a refund for sure. Now how that works and how that plays out and when that actually arrives, we are not going to put in the guide because that is a crystal ball we cannot see through.

And then as we look at the businesses that you plan to divest, the way you're speaking about them suggests you have a buyer in place. Can you confirm that's true? And then how would you plan to use the proceeds from any sale?

That's true and debt reduction.

100% debt reduction.

It's pretty simple, pretty straightforward.

And this does conclude the Q&A portion of today's program. I would now like to turn the call back to Mike Dennison for any closing remarks.

Thanks for your time today, everybody, and we will talk to you soon. Have a good evening.

This does conclude the Fox Factory Holding Corporation's fourth quarter 2025 earnings call. You may now disconnect your line and have a great day.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corp.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded.

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.

Thank you. Good afternoon, and welcome to Fox Factory's Third Quarter 2025 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.

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. 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-K, 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 on our website.

And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks to everyone for joining our Q3 call. In the quarter, we delivered net sales of $376.4 million, up 5% year-over-year and adjusted EBITDA of $44.4 million, up 6% year-over-year, led by growth in both AAG and PVG.

Our SSG segment underperformed expectations during the quarter, particularly within Marucci. While we made the right investments in product innovation, including successful new bat launches and category expansion, the impact of those actions were outweighed by a softening of the consumer environment throughout the quarter as our channel partners responded by significantly reduced inventory ahead of year-end. This underperformance is reflected in our updated full year outlook, which we will cover.

Our overall third quarter results demonstrate the power of our strategy even in challenging environments like this. We're executing our product road map with strong innovation across all 3 segments, and we're seeing strategic customer engagement reach new levels. Whether deeper integration with truck manufacturers, expanded platform adoptions in powersports or new bike partnerships, we're becoming more embedded in our OEMs product strategies. These wins reflect years of relationship building and validate our focus on performance-defining innovation.

Our third quarter margins, while improved, continue to reflect investment in product launches with strategic customers. These launches required us to accelerate certain investments and delayed the execution of footprint consolidation activities that were originally timed for early in the third quarter. Those consolidations have since been completed early in the fourth quarter with anticipated benefits to follow.

Despite these timing impacts, our $25 million cost reduction target remains on track for the fiscal year. The strategic investments we're making from new bike platforms to expanding our bat portfolio into adjacent categories like softball are setting the foundation for future revenue and margin expansion. We remain focused on delivering innovation our customers demand while executing the operational improvements that will restore industry-leading profitability.

Let me remind you of the 4 key initiatives that are driving our performance and positioning us for sustainable growth. First, footprint consolidation. This quarter, our efforts were focused within the AAG and SSG segments. We accelerated certain consolidation activities in our AAG upfitting operations and SSG during Q3, creating approximately $2.5 million in onetime costs as we moved equipment and realign production. While this impacted Q3 margins, we made this decision deliberately to position ourselves for upcoming product launches, including significant new OEM strategic moment and to capture long-term margin expansion opportunities as we scale these programs in 2026. Within SSG, we executed warehouse consolidation work in our Marucci business during the quarter that positions us with a more efficient distribution footprint going forward.

Second, portfolio optimization. Our focus on highest performing SKUs and strategic growth categories is showing up in market share gains in AAG aftermarket components, strong performance of new product launches in bike in the first half of the year and operational efficiency improvements in PVG.

Third, working capital management. We've maintained improved inventory positions in PVG and SSG through disciplined supply chain practices, translating into cash flow generation that supports our efforts to improve balance sheet leverage. We've demonstrated this by reducing debt by $17.4 million year-to-date and expect to make additional progress in the fourth quarter.

Lastly, our cost reduction program. As I mentioned, we remain on track for full fiscal year delivery of our $25 million target with footprint consolidation activities now complete and benefits flowing through in Q4. The underlying cost structure improvements we're making are expected to provide operational leverage as we navigate this cycle as consistent revenue growth returns to our businesses.

The progress we're making across all of these priorities demonstrates that where we can control outcomes, whether that be through operational excellence, product innovation or strategic execution, we are delivering results, and I'm pleased to see consolidated revenue grow by 6.3% in the year-to-date period.

However, let me be clear, our work is not done. As we look ahead to 2026, we're preparing to take action on the second phase of our optimization strategy. With the major components of our network consolidation now complete, our work is shifting towards maximizing efficiencies across our global footprint, simplifying our business and focusing on our core products. We are developing further actions to enhance our cost positions toward margin recovery and accelerating our efforts to improve our balance sheet leverage, which will include extracting working capital through targeted inventory reductions, maximizing previous period CapEx investments, which allow us to further reduce near-term CapEx in the future, and driving increased near-term free cash flow. We are in the midst of our budgeting process now and expect to share additional details surrounding this second phase of activity and its impact on 2026 guidance during our fourth quarter call.

Now let me walk through our segment performance in detail. PVG delivered another quarter of strong execution with net sales of $125.9 million, representing 15% growth year-over-year and 2% growth sequentially. The automotive OE business remained reasonably stable and predictable in Q3 as we benefited from our position on premium vehicle SKUs. However, we are seeing some timing of shipment impact associated with the supply chain disruption following the fire at a major aluminum supplier within our automotive customer base. While this is a temporary issue, it is having an impact on our business in the fourth quarter and is captured in our fourth quarter guidance.

Our powersports business continues to stabilize as the industry's dealer inventories improve. Our expansion into the motorized 2-wheel space continues to deliver results. Growth from new customers is offsetting the ongoing softness, albeit stabilized in the off-road powersports products. On the operational front, PVG is executing well, and we expect the improvement to continue through 2026. Our in-sourcing initiatives are reducing costs and helping offset some of the tariff exposure. For example, in conjunction with our OEM partners, we've been working hard to get components in-sourced to our own factory and limiting the amount of tariff expense for both FOX and our partners.

On the product development front, the PVG team continues to deliver above expectations with recent product launches. In Q3, we firmly entered the street performance sector with Stratton Shock solutions tuned for the American sports car market. These new products signal our commitment to improve the driving and overall performance through our aftermarket channels for tens of thousands of enthusiasts. In addition, earlier this week at the SEMA Show, we launched our advanced software-controlled live valve suspension for the aftermarket. Previously, the only way our enthusiasts were able to buy these products was through a new vehicle purchase. Now they can do it through the network of dealers and installers who partner with FOX. Our initial launch includes products for truck, SUV and Jeep customers. This is the most advanced technology available in the off-road aftermarket from any company.

In AAG, we delivered improved top line performance with net sales of $117.8 million, up 17.4% year-over-year and 3.2% sequentially. This was driven by growth in both aftermarket components and upfitting. Our aftermarket components business continues to gain market share. RideTech, Custom Wheel House and Sport Truck are proving resilient, driving double-digit growth in suspension and lift kits even in a challenging consumer environment.

One product highlight worth mentioning is our recent launch of a performance truck program with a major OEM partner. This is a 702-horsepower supercharge V8 enhanced with our complete performance package, FOX shocks, RideTech lowering suspension and wheel solutions. Car and Driver recently featured the vehicle, calling it best-in-class high-performance street truck. This was an immediate success with early units selling out immediately and our backlog growing for 2026.

More importantly, this represents the first time our upfitting team has worked directly with an OEM to build a custom vehicle that is sold through their website as part of their specialty vehicle operation. This approach has allowed us to maximize reach and expand our dealership network rapidly. We launched this program in Q3 and incurred the associated setup costs, but revenue begins flowing in Q4 and is expected to scale through 2026.

To support this and other strategic launches, we made the deliberate decision to delay certain footprint consolidation activities in AAG and accelerate development investments, prioritizing these longer-term growth opportunities. Those consolidation activities have since been completed here early in the fourth quarter.

In our Specialty Sports Group, we delivered net sales of $132.7 million, which was down 11% year-over-year and 3% sequentially. Our bike business continues to perform well in an industry that's working through an assortment of challenges, including recent labor issues causing block shipments and bankruptcies for OEMs and distributors. As we expected, OEM customers moderated purchases in the back half after maximizing the first half to support model year launches. This reflects appropriate conservatism about year-end inventory levels, a discipline we actually view positively even if it creates near-term growth constraints.

New bike products are performing well, and we believe our market share position remains best-in-class. While we're still awaiting signals that would suggest a return to sustained industry growth, we continue to see signs of stabilization and the enduring competitiveness of the FOX brand within the higher-end categories that we play in.

Turning to Marucci and Victus. Our new product launches that debuted late this summer, including both our Victus aluminum bats and premium Marucci RCKLESS line continue to receive strong reviews and positive response in direct-to-consumer channels. However, the broader macro concerns surrounding consumer remain a challenge, which is being compounded by our distribution channel shifting toward retail ahead of the holiday shopping period where retailers have become much more sensitive to their inventory positions.

Further, our warehouse consolidation created some near-term fulfillment friction that is creating temporarily higher costs. The margin impact was compounded by our ongoing investment spending in new categories like softball and footwear as well as accelerating our product development and engineering capabilities. I want to emphasize that while Q3 was disappointing and the near-term consumer outlook is challenged, even our revised guide reflects strong revenue growth at Marucci in Q4. So while it isn't where we would like it to be, the business is still finding ways to deliver growth.

In addition, we believe the investments we've made will continue to strengthen our competitive position over time. We've added world-class product development talent. We've entered fast pitch and slow pitch softball with market-leading products. We now hold the top 1, 2 and often 3 bat positions in key baseball and softball categories.

We've expanded into footwear, and our MLB partnership continues to gain momentum with exceptional visibility during major events, including the World Series. These investments are expanding our addressable market and setting up multiple years of growth opportunity.

Finally, I'll turn to our near-term outlook. For Q4, we are continuing to see an increasingly challenging macro environment, especially where large OEMs and channel partners are taking a more conservative approach to inventories as we head into the holiday season. In PVG and AAG, the fire at that aluminum supplier supporting truck production is expected to impact volumes for at least the balance of Q4 and likely Q1. As a result, we are reducing our Q4 guidance, and Dennis will provide the details.

Looking ahead to 2026, we believe the macroeconomic environment is setting up to be increasingly challenging. Interest rates, while declining, remain elevated and continue to constrain consumer spending and business investment. The labor market has softened considerably with job growth slowing significantly and unemployment rising. These factors, combined with extended decision-making cycles within the various industries we serve are creating headwinds across our businesses.

Given these conditions, we are redoubling our focus on margin enhancement and prudent capital spending through concentrating on our core products and businesses as the primary means of driving free cash flow towards our goal of reducing our balance sheet leverage. As we look ahead, we remain convinced of our strategy to deliver premium performance products and the dedication of our teams to execute our long-term vision.

Our ability to expand revenue and EBITDA year-on-year is evidence that even in difficult times, we can outpace our competition. And our operational foundation is stronger than it was a year ago, highlighted by the great work within our PVG team. As an organization, we're executing with discipline on the things we can control while navigating the external factors we can't.

And with that, I'll turn the call over to Dennis.

Thanks, Mike. I'll begin by discussing our third quarter financial results, followed by our balance sheet, cash flow and capital allocation strategy before concluding with a review of our guidance for the fourth quarter and full year.

Total consolidated net sales in the third quarter of fiscal 2025 were $376.4 million, an increase of 4.8% versus the same quarter last year, reflecting growth in AAG and PVG, partially offset by a decline in SSG.

Our gross margin was 30.4% for the third quarter of 2025 compared to 29.9% in the third quarter last year, primarily driven by favorable shifts in our product line mix. Third quarter margins include the impact of intentional timing shifts related to accelerated strategic customer launches in AAG and facility consolidation activities that have since been completed.

Total operating expenses were $99.4 million or 26.4% of net sales in the third quarter of fiscal 2025 compared to $88.7 million or 24.7% of sales in the same quarter last year. The increase in operating expense on a dollar basis was driven by investments to support strategic customer launches and product innovation that Mike spoke to and ongoing organizational restructuring initiatives. Adjusted operating expenses, which exclude restructuring and other discrete expenses as well as amortization of purchased intangibles, were $85.7 million or 22.8% of net sales in the third quarter of 2025 compared to $75.8 million or 21.1% in the prior year quarter.

The company's tax expense was $2.3 million in the third quarter of fiscal 2025 compared to $0.3 million in the same period last year. Net loss for the third quarter of fiscal 2025 was $0.6 million or $0.02 loss per diluted share compared to net income of $4.8 million or $0.11 per diluted share in the same period last year. Adjusted net income was $9.9 million or $0.23 per diluted share compared to $14.8 million or $0.35 per diluted share in the third quarter last year.

Adjusted EBITDA in the third quarter of fiscal 2025 was $44.4 million, up $2.4 million year-over-year, demonstrating our underlying earnings power despite investments into product and innovation and the impact of tariffs. Adjusted EBITDA margin was 11.8% in the third quarter of 2025, an increase of 10 basis points versus the prior year period.

Moving to the balance sheet and cash flows. We continue to execute on working capital management with improved inventory positions supporting our cash flow generation. Total debt declined to $687.7 million, down $17.4 million from fiscal year-end while maintaining a strong liquidity position. We recently amended our credit agreement with our banking group, extending our maturity through October 2030, which provides us with enhanced financial flexibility as we execute our strategic initiatives.

I'd like to reemphasize that paying down debt remains our top priority for capital allocation, and we remain focused on generating strong free cash flow to continue reducing leverage. Our $25 million cost reduction program remains on track as we expect to deliver that target in full this fiscal year.

Now, moving on to our outlook for the fourth quarter and the full year 2025. For the fourth quarter of fiscal 2025, we expect net sales in the range of $340 million to $370 million, which in approximate terms represents a revision to the bottom half of the implied guidance we provided last quarter. Adjusted earnings per diluted share is similarly being revised down as well to the range of $0.05 to $0.25. The primary thrust of these revisions is the lower-than-expected performance within our SSG segment, where our OEMs, distributors, dealers and retailers are actively managing toward leaner inventories ahead of year-end.

For the fiscal year 2025, we are updating our net sales guidance to the range of $1.445 billion to $1.475 billion from our full year guidance of $1.45 billion to $1.51 billion. We are updating our adjusted earnings per diluted share guidance to a range of $0.92 to $1.12 from $1.60 to $2. We expect a full year adjusted tax rate in the range of 15% to 18%.

We continue to expect a full year 2025 pre-mitigated tariff expense of approximately $50 million. However, we have identified countermeasures to offset 50% of these impacts and believe we can absorb this unmitigated component in our updated guidance for full year 2025. Our strategic focus remains on profitable growth while improving margins and enhancing free cash flow generation through operational excellence initiatives.

As Mike shared, our organization is preparing to advance our efforts with the second phase of actions that will build on work we completed this year. This multi-phased approach is necessary to capture further efficiencies toward our goal of positioning our consolidated business for accelerated margin recovery as our end markets improve as well as further strengthen our balance sheet and create long-term value for our shareholders.

Mike, back to you for closing remarks.

In closing, our third quarter demonstrates the power of strategic customer engagement and performance-defining innovation. We're more embedded in our customer product strategies than ever before. From truck manufacturers to powersports OEMs and bike brands, these deepening partnerships are creating sustainable competitive advantages.

The intentional investments we made in Q3 to accelerate high-value product launches have positioned us to capture significant opportunities and mitigate some of the intensified near-term macroeconomic impacts that we are seeing as we move through Q4 and into 2026.

With our facility consolidations complete, our $25 million cost reduction program on track and additional optimization actions to come, we believe we have the operational foundation to deliver both innovation and profitability. I'm confident in our team's execution, our product road map and our ability to translate this to value creation for our stakeholders.

With that, operator, please open the call for questions.

[Operator Instructions] And our first question will come from Pete McGoldrick with Stifel.

SSG on the bike side, you pointed to moderating orders on the mountain bike side in line with expectations. Can you quantify the year-over-year revenue progression? And then what the outlook for leaner inventory positioning in the channel means as we look into the fourth quarter?

Yes, Pete, this is Mike. Good question. So when you think about the year-on-year compare, it's a little bit tough in bike because the first half of '25 was higher relative to new product launches that you and I have talked about in the past. So a lot more weight towards the front half, a lot less weight in revenue towards the back half.

On the whole, though, think about it, as I've said before, as kind of the stability year. So '24, '25 looking very much the same from a stability perspective, which sets us up for kind of the new baseline into '26. When we think about Q4, really, we're focused on kind of SSG in total, but I'll talk about bike specifically, it's really a retail story.

As we think about the inventory levels associated with a lot of these dealers, distributors and even OEMs, as they go to the end of the year, they don't want to get overburdened with inventory so they can have another robust '26 first half relative to new product launches.

So we're seeing a fairly significant change in the way they order, and that's reflected back again through mainly retail and distribution. So that's why we think about Q4 as really not a product story, but a retail story and how they're thinking about the macro. Does that make sense?

Yes, that's helpful. I also wanted to change gears and talk about the budgeting process as you look to align your cost structure and achieve your free cash flow vision. Can you help us think about what that means, whether in magnitude of cost realignment or the areas of opportunity that we might be considering as we turn the page into 2026?

Yes, it's great because I'm really focused on '26. We have a lot of work to do in Q4, but the work we do in Q4 is really a function of what we deliver in '26, as you know. When I think about '26, I'm really thinking about the investments made in '24 and '25, which were significant relative to product, relative to capacity and innovation. That CapEx story, as you probably remember, was kind of a 3% of revenue story. And while we're not -- it's too early to guide '26, so this is not a guide. But when you think about things like investment in CapEx, think about '25 was kind of a 3%-ish of revenue story. We're built for what we need. So when you think about CapEx in '26, Pete, think about something kind of sub-1. That's a good example of kind of how we think about investments in '26 and what we can do with what we've built versus what we need to go build. I think there's a lot more work to be done.

One thing that I would tell you is hope is not a plan. When we think about '26 and the actions we need to take in Q4 and Q1 to deliver the '26 that we all expect, including yourself, it's a function of not just cost reduction, but true optimization and making these businesses, helping these businesses perform at a profitability level that is commensurate with what we expect.

Our next question will come from Larry Solow with CJS Securities.

It's actually Lee Jagoda for Larry.

We knew it wasn't Larry. So you don't sound like Larry either, but that's okay. Go ahead.

I do my best. Mike, starting on the PVG side, I think you made some comments that the aluminum supplier fire was impacting supply chains and your sales in both Q4 and likely in Q1. Is there any way to quantify that relative to the sort of the miss versus consensus in the guide for revenue in Q4?

Well, I think the best way to quantify it because, again, that's a bit of a moving target. We actually think that resolves itself sometime mid-Q1. Pretty hard to depict exactly where that lands just yet, but it's for sure, a significant issue across Q4. But when you think of Q4, it's really a tale of 2 cities. One is that fire, which not only impacts the PVG OEM automotive business, but AAG relative to chassis. So you have to think about it in both of those camps, and it's not insignificant in either one.

The other half of that change in guide is purely a reflection of the retail environment that I talked about earlier with Pete. So those are really the 2 buckets within the change for Q4. Outside of that, we believe the businesses will perform as they did in Q3 and continue.

Got it. And I guess I'll follow up, Pete, and ask some questions about 2026. I think in your prepared remarks, you made the comment that the macro is increasingly challenging. Can you talk about the various end markets that you're selling and the expectations for growth in 2026? Or -- and if not, kind of why not?

And then on the things that you can control in terms of new product development, new product launches, how should we think about the stuff in your control leading to growth in 2026 outside of whatever the end markets are going to do?

That's a big question. There's a couple of pieces to that. One, think about it from the standpoint of where we have control over the channel in which we sell, think about AAG and upfitted trucks or our relationship with our big OEMs in automotive and powersports. Those are fairly intact. And our ability to drive growth in those markets is easier than it is in retail environments where we need to work within the confines of a major retailer or even a smaller bike retailer who is trying to deal with the implications of the macro and government shutdowns and all the stuff you're aware of.

So when I think about growth, what we can control is ensuring as we did in Q3 and as we'll continue to do to make sure we deliver that premium performance product. We still believe, and I think it's showing itself in terms of Q3 revenue growth, that if we develop the best premium performance product, we will still have an enthusiast who is willing to get -- to spend money to buy our products. So we are very -- we continue to be very fixated on delivering those product launches per our plan.

That aside, when we think about '26, just to kind of give you an early view, I'm focused on profitability, ensuring that we deliver the product launches to make sure our product resonates with those enthusiasts, that's job 1. But job 1.1 is ensuring that we optimize this business to get to the profitability regardless of that top line in 2026. So that's really where the focus is. Again, too early to guide, but you're getting kind of a sense of where I'm going to spend my time and energy.

[Operator Instructions] And our next question will come from Anna Glaessgen with B. Riley.

I think you alluded to it in the prepared remarks talking about labor issues with a key OEM in SSG. We saw reports of an import ban on Giant hitting late in September. To what extent is that being contemplated in the 4Q guide down?

Yes. I mean the labor issues continue to be a challenge for our OEM customers, some specifically that have been reported on. So it doesn't -- it's not a tailwind. It's a headwind. How much of a headwind, I think, is still fairly fluid. We assume it's not going to be insignificant in Q4. I think those OEMs will work through it. However, as one of many extraneous events that causes challenges for that business on a near-term basis. So we'll keep working through it.

The upside of all of it could be defined as -- you've seen the reports, Anna, from a lot of those companies who do report kind of what their industry, what their business is doing relative to the current macro and bike. Being flat year-on-year is predominantly a really strong positive when you look at kind of what everybody else is going through.

So while we don't expect significant growth this year or potentially even next year in bike, the fact that we can remain healthy relative to our product, I think, is what we have to focus on and ensuring that we just continue to optimize that business as best we can.

Got it. And then turning to auto. One of the things on some of the OEM earnings calls a couple of weeks ago, the potential ramifications or tailwinds from listed environmental compliance rules. So potentially suggesting that some of the heavier hitters like Raptor, Tremor, et cetera, might have supply unlocked as they don't have to constrain them as much. Is there any way to think through the possible tailwind as volume is unlocked there?

I think the tailwind is what we've talked about in the past, which is the profitability for these vehicles in the premium sector of automotive tend to outrun the general pace of automotive typically. And so while we play in that space and continue to grow in that space, I think the unlock for us is significant, which is why we're so positive on PVG. The growth rate in Q3 was a significant step up for them. And while it's a little bit lumpy because we're defining and developing product for 2, 3, 4 years out. So it's not always incredibly completely linear. In total is a good growth story for us. So I actually agree with you. I think those products tend to do better in a tough macro, and we're on the right products.

Got it. And then just one more, if I could, kind of trying to tackle the macro question in a different way. In the past, you've talked about how the premium trucks within upfitting are selling a lot better than maybe in the $60,000 range. Is that still the case? And any more color you can provide on the various segments within the auto upfit business to understand the macro impact?

If you deliver the right product, and again, a good example is AAG in Q3 that grew over 17%. If you deliver the right product at a more premium class than kind of the common meat and potatoes of that business, you'll win. And so the growth was a direct reflection of delivering the right product at the right price points, which are more premium than the average truck on a lot.

At this time, I would like to turn the floor back over to Mike Dennison for any concluding remarks.

Thanks for the time today, and we look forward to talking to you soon.

This does conclude the Fox Factory Holding Corporation's Third Quarter 2025 Earnings Call. You may now disconnect your line, and have a great day.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Toby Merchant, Chief Legal Officer at Fox Factory.

Thank you. Good afternoon, and welcome to Fox Factory's Second Quarter 2025 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.

By now, everyone should have access to the earnings release, which went out earlier this afternoon. If you have not had the 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, uncertainties, many of which are outside of the company's control and can cause future results, performance or achievements to differ materially from 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 quarterly reports on Form 10-Q and in the company's latest annual report on Form 10-K, 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 on our website.

And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thanks, Toby, and thanks to everyone for joining our Q2 call. We delivered solid progress in the second quarter with $375 million in net sales, representing growth across all 3 segments. Further, consolidated adjusted EBITDA margin continued to improve this quarter to 13.1%, which is the highest level for Fox Factory in nearly 2 years.

We achieved growth through the first half of the year in a turbulent market as a result of our relentless pursuit of innovation, which is illustrated by our product launches and commitment to the road map. Our focus on R&D and product innovation during these macro challenges is allowing us to not only deliver results today, but position ourselves for continued market share gains and wins over the long term as we emerge from these industry cycles.

Let me begin by providing a status update on the 4 key initiatives we've been communicating throughout the year. First, our footprint consolidation efforts continue to advance. In SSG, the benefits from our Taiwan consolidation are now flowing through the P&L. In AAG, we recently took the action to further consolidate manufacturing operations into our primary facility in Indiana, allowing us to leverage our existing operations and R&D teams, which we expect to deliver cost savings going forward. We are also consolidating smaller operations in Arizona to drive profitability as our businesses there grow.

Second, our portfolio optimization work is gaining momentum as we make targeted improvements to our product mix, focusing resources on our highest performing SKUs and strategic growth categories. This action is being taken across all of our product lines as we focus on simplicity and customer impact. Third, our working capital management initiatives are showing results through continued improvements in our supply chain practices and inventory optimization, particularly in PVG and FSG, which is paving the way for enhanced cash flow generation and balance sheet improvement. We are on track to achieve our expectations in debt reduction, which is a clear focus for us in 2025.

And fourth, our $25 million cost reduction program is delivering on schedule with approximately 30% of the benefits realized so far and those benefits beginning to impact results and accelerating in the back half of the year. While these efforts are being offset by tariffs currently, we are better positioned than peers and competitors to retain and improve growth and profitability even in the current macro, which has the additional benefit of positioning us ahead of competition when the extraneous noise subsides and business returns to a more normal environment.

All of the actions we're taking are focused on exerting control, whether that be on growth opportunities with our product road map or mitigating costs through footprint consolidation and supply chain adjustments. I'm pleased with the progress we've achieved through working closely with our suppliers and customers to navigate this environment. We have a great deal of hard work ahead of us, but we're executing on the plan we laid out and the continued sequential and year-over-year improvement in our results clearly reflect our militant focus. We remain a growth company at our core. And as the consumer discretionary environment stabilizes, we expect this combination of operational excellence and innovation-led growth, particularly in our higher-margin product lines to support the enhanced profitability we've been methodically building toward.

And now turning to our segment performance. In our Powered Vehicles Group, second quarter net sales were $123.5 million, representing an increase of 4.9% over the prior year. This growth was primarily driven by the expansion of our motorized 2-wheel business, which more than offset continued softness in the powersports OE business. Notably, we delivered sequential PBG adjusted EBITDA margin improvement of 150 basis points to 13.3%, which is the third quarter in a row of improvement and demonstrates the impact of our ongoing cost reduction initiatives and operational improvements, while we invest heavily in product road map and new technologies, which will further distance us from competition.

Building on the momentum we discussed last quarter, our return to motorcycles has resulted in a deepening relationship with our marquee customers, and we're actively expanding these relationships while pursuing new opportunities, including EV and hybrid vehicles. This strategic expansion represents the enduring strength of the Fox brand across performance categories and represents the halo effect that we often mention. On the operational front, we're making meaningful progress on our supply chain optimization initiatives. We've implemented successful cost-sharing arrangements with our OEM partners and have price increases in place that are helping to partially offset the tariff-generated inflationary pressures.

We are also working closely with our OEM partners and supply chain initiatives to align our collective interest, whether that be relocating supply to more favorable regions or in-sourcing elements of our manufacturing processes. In fact, we have increased our in-sourced parts by 20% over last year to help improve utilization and reduce external costs, which helps mitigate tariff exposure while also strengthening our ability to serve customers with greater agility. Our customers are obviously highly motivated to partner on these efforts given the long-term benefits. And importantly, this work represents one of our biggest cost-out opportunities in the second half of the year.

While tariffs are a significant issue for PVG's customers and a challenge that we are spending considerable time to mitigate, we believe we are well positioned against our competition given our predominantly U.S. manufacturing footprint and the operational agility that we have delivered in this business. Looking ahead, while consumer softness is expected to persist in the near term, we remain confident in our ability to drive growth in PVG through our product road map.

In our Aftermarket Applications Group, we delivered strong top line growth with net sales increasing 6.5% to $114.1 million from $107.1 million in the prior year period. This growth was driven by increased demand for aftermarket products such as wheels, lift kits and components, where we are gaining market share and improved upfitting sales, demonstrating the underlying strength of our diversified platform. As I have stated in prior calls, we strive for equilibrium between vehicle and a more affordable entry points of our aftermarket components business. This represents a strong value proposition for a broader range of consumers who are reacting to high interest rates, high vehicle costs and macroeconomic conditions. AAG segment adjusted EBITDA margin experienced some compression sequentially due primarily to an increase in tariff rates on imported wheels and tires from Asian suppliers, which has impacted our margins to a greater degree as tariff conditions worsen. Excluding these tariff headwinds, margins would have been consistent with Q1 levels.

We also elected to delay certain consolidation actions that pushed our savings to later in the year and created an additional margin headwind in Q2. In our upfitting business, our chassis mix is better aligned with the needs of our dealer partners and their customers, which is enabling a wider assortment of products in the market. Although we continue to face specific chassis availability challenges on certain models, our broader diversification and optimization efforts show signs of future strength, and we expect this to translate to continued tangible improvements in our results during the second half of the year and into 2026.

Our aftermarket components business continues to show strong performance with sustained growth in wheels and suspension kits. The 1 plus 1 equals 3 strategy continues to enable AEG to deliver best-in-class products to enthusiast customers across a growing number of vehicle platforms, as demonstrated by our Ridetech lowering kit solutions which support the growing consumer demand for lowered high-performance on-road trucks. This is a great example of how our team is leveraging our core strength to expand our opportunity set across both the aftermarket and our outfitted vehicles.

Looking ahead in AAG, we are focused on continued improvements in our upfitting business across product, chassis management and sales as well as further improvements in footprint optimization and tariff mitigation and market share growth in our aftermarket business with lift kits, lowering kits and wheels. In short, we will deliver on our internal objectives while the external markets stabilize and improve eventually.

In our Specialty Sports Group, we delivered solid top line growth with net sales increasing 11% to $137.2 million from $123.6 million in the prior year period. SSG segment adjusted EBITDA margin improved 280 basis points sequentially to 22.1%, driven by strength in our bike business and realization of cost savings from our Taiwan facility consolidation. Our bike performance through the first half of the year has been a bright spot with the overall industry stabilizing. Our year-to-date growth is largely due to accelerated model year timing, which should moderate in the second half of the year. However, the net effect of this dynamic is positive, and we now expect to drive modest growth for the full year.

All of these factors give us added confidence in a more normal industry outlook. Our product road map continues to underpin our strategies with new product launches resonating well with customers and our market share remain best-in-class. In addition, our performance-defining technology continues to expand our addressable market with our solutions in the entry premium segment and ongoing product innovation developed for e-bikes.

In our Marucci business, it's all about product launches and where they land within the calendar year. We faced a difficult comparison in the first half due to last year's CATX2 launch in the second quarter of 2024. Consequently, the flow of revenue this year is inverted from last year and aligned to product launches occurring in Q3. These launches include Victus aluminum bats at an accessible midrange price point and our high-end Marucci RCKLESS line launching direct-to-consumer now with retail coming later in the fall. The early response to our new launches in the DTC channel, followed with our retail launches in the second half support our forecasted growth expectations for this business.

I am proud of the work the team has done to become a top-notch product development organization, mirroring what we do in broader Fox. The addition of world-class talent has allowed us to reenter fast pitch and slow pitch softball in a meaningful way with market-leading products. Reentering this space with the right product enables us to build a growth trajectory over the next couple of years, supporting our long-term revenue expectations.

Our MLB partnership continues to gain momentum. It has been a year of learning, adjusting and building. Along the way, we're enjoying increased visibility through major sporting events like the recent All-Star Game, which we dominated. We might even say it was a walk-off home run.

Our Marucci and Victus brands continue to dominate with the pros and have expanded beyond bats. For instance, we now have approximately 40 MLB players using our footwear, which is helping us leverage the halo effect we create from bats. This is a strategy we've successfully employed elsewhere across our businesses, as you know. We're working with the MLB to grow and evolve the game of baseball, and we love the long-term potential as this partnership matures each year. On the tariff front, our costs have increased relative to our initial expectations due to changes in exemption status for baseball, which is impacting our SSG segment margins in the short term.

We're continuing to work on developing and implementing mitigation strategies where we can, including moving our bat finishing and paint to the U.S. But our largest offset to combat tariff costs will be top line growth. And fundamentally, that's where we remain focused.

Further, I also want to call out that the significant investments we have made in the business are nearing completion across softball, apparel and people. While these investments, combined with the incremental tariffs are creating near-term margin pressure, our business remains well positioned with leading market share in bats and growing market share in adjacent products and categories such as softball. This business has a very attractive financial profile, and we believe that we are well positioned for our growth in both top and bottom line.

Finally, I'll share some high-level views of the second half, which Dennis will provide more detail on momentarily. Absent any sustained change to macro trends, the base case underpinning our second half forecast is predicated on our current improved order book, product launches and ongoing sales strategies which support an acceleration in consolidated top and bottom line performance as we progress through the year. Consequently, we are taking this opportunity to raise our full year sales expectations to incorporate our outperformance through the first half. However, in alignment with our commentary on the increasing volatility and growth of tariff rates, we are updating our EPS guidance to reflect the ongoing incremental headwinds by tightening our expectations on EPS within the original guidance range.

Our team continues to demonstrate resilience and adaptability, and I'm confident in our ability to control the controllable. We continue to have confidence in our product launches and innovation pipeline, which will not only drive second half results, but will enable us to win in any market going forward.

And with that, I'll turn the call over to Dennis.

Thanks, Mike. I'll begin by discussing our second quarter financial results, followed by our balance sheet, cash flow and capital allocation strategy before concluding with a review of our guidance for the third quarter and full year.

Total consolidated net sales in the second quarter of fiscal 2025 were $374.9 million, an increase of 7.6% versus the same quarter last year, reflecting solid growth in all 3 segments. Our gross margin was 31.2% in the second quarter of 2025 compared to 31.8% in the second quarter last year, primarily due to shifts in our product mix. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, was 31.3% compared to 31.9% in the prior year period. Sequentially, gross margin and adjusted gross margin increased 30 basis points and 40 basis points, respectively, supported by the progressive realization of our cost reduction initiatives.

Total operating expenses were $98.5 million or 26.3% of net sales in the second quarter of fiscal 2025 compared to $92.4 million or 26.5% of sales in the same quarter last year. The increase in operating expense on a dollar basis was mainly due to higher R&D and sales and marketing expenses associated with investments to support future growth and product innovation. Additionally, costs related to our organizational restructuring initiatives drove an increase in general and admin expense.

Adjusted operating expenses, which exclude the restructuring and other discrete expenses as well as the amortization of purchased intangibles, decreased 20 basis points year-over-year to 22.3% in the second quarter of 2025. The company's tax expense was $2.8 million in the second quarter of fiscal 2025 compared to a slight tax benefit of $0.4 million in the same period last year. The tax effect associated with the unfavorable impact of stock-based compensation exercises during the second quarter caused our effective tax rate to grow to nearly 51% as compared to the 21% federal statutory rate.

Net income for the second quarter of fiscal 2025 was $2.7 million or $0.07 per diluted share compared to net income of $5.4 million or $0.13 per diluted share in the same period last year. Adjusted net income was $16.6 million or $0. -- per diluted share compared to $15.9 million or $0.38 per diluted share in the second quarter last year, with the primary adjustment being the add-back of expenses associated with our various cost reduction and restructuring initiatives. The tax effect associated with the unfavorable impact of stock-based compensation exercises resulted in almost $0.05 of negative impact to the adjusted earnings per share.

Adjusted EBITDA increased 11.8% year-over-year to $49.3 million for the second quarter of fiscal 2025. Adjusted EBITDA margin was 13.1% in the second quarter of 2025, an increase of 40 basis points versus the prior year period and a sequential increase of 190 basis points compared to the first quarter of 2025. The increase in the adjusted EBITDA margin was primarily driven by higher sales, as well as a realization of our cost reduction initiatives.

Moving to the balance sheet and cash flows. Working capital as a percentage of the last 12 months sales improved sequentially by 80 basis points from 31.5% of sales in Q1 to 30.7% in Q2. This improvement is driven in part by lower inventory as a percentage of sales as our strong execution of continuous improvement efforts to optimize inventory levels across the organization, particularly within PVG were partially offset by planned inventory builds to support anticipated demand, the impact from higher tariffs and foreign exchange.

Managing working capital continues to be an area of focus, providing us flexibility to continue paying down debt. As of July 3, 2025, our revolver balance was $157 million, and our term loan balance was $517.5 million net of loan fees. Paying down debt remains our top priority for capital allocation. We are pleased to have reduced net leverage to 3.8x this quarter, and we continue to see a clear path to reducing our net leverage to below 3x by year-end. The key component driving this deleveraging will be the anticipated acceleration of cash flow generation in the second half of the year, which will be positively impacted by improved earnings as well as working capital gains in areas such as inventory reductions in our AAG and PVG segments. We currently expect to generate approximately $80 million in free cash flow for the full year.

Now moving on to our outlook for the third quarter and the full year 2025. For the third quarter, we expect net sales in the range of $370 million to $390 million and adjusted earnings per diluted share in the range of $0.45 to $0.65. For the full year, we are increasing our sales guidance from the original range of $1.385 billion to $1.485 billion to an updated range that brackets the high end at $1.45 billion to $1.51 billion, given the strength of our products and innovation pipeline. However, we are adjusting earnings per diluted share to $1.60 to $2, which narrows the original range of $1.60 to $2.60 towards the lower end, reflecting the incremental unmitigated tariff pressure we have discussed.

While we have proactively engaged with our customers on pricing actions, supply chain optimization and selective manufacturing relocations to mitigate these headwinds, the fluidity of the tariff rate negotiations has created incremental costs beyond what was considered in our initial 2025 estimate of approximately $38 million of pre-mitigated tariff impact, which we provided in early May. Given the latest visibility to tariff rates, our updated guidance now contemplates a pre-mitigated tariff impact of upwards of $50 million for the full year 2025. While we expect to offset approximately 50% of our full year tariff costs through various countermeasures, we have not yet been able to fully offset the remaining margin pressure through pricing increases or other actions. As a result, our updated adjusted EPS guidance considers the tariff associated margin headwind.

Our strategic focus remains on growth while improving margins and enhancing free cash flow generation through operational excellence initiatives. These initiatives position us well to further strengthen our balance sheet and create long-term value for our shareholders.

Mike, back to you for closing remarks.

Thanks, Dennis. In closing, our positive second quarter results reflect the execution and conviction of a team focused on the strategies and objectives we have outlined over quarters and years. We are making meaningful progress on the initiatives that drive long-term value creation.

While we continue to navigate a challenging external environment, the sequential improvements we delivered across adjusted gross margin, adjusted EBITDA margin and balance sheet leverage are the direct result of our strategic execution. I remain confident in our team's ability to control what we can, all while maintaining our commitment to our world-class brands and our product innovation that has made Fox a leader for decades.

With that, Katie, please open the call for questions.

[Operator Instructions] Our first question comes from Larry Solow with CJS Securities.

I guess just on the guidance and the outlook, obviously you're raising sales a little bit. Just curious, is that driven by anything in particular? To me, it looks like Specialty Sports was -- I know you don't guide to the segments, but it looks like Specialty Sports and maybe bike sounds like it had a better than you expected performance this quarter. And maybe I think you mentioned kind of going forward, we could hopefully get back to some more normalized order patterns and growth rates. So just kind of trying to parse out where you see some of the better pieces of the business going this quarter and going forward.

Yes. Thanks, Larry. From my standpoint, we delivered a really solid first half, really delivering to our plan and our commitments. And as we did that, we gained confidence in what we think the back half will be. Keep in mind, the back half is just -- is on plan. So when we talk about the full year, we're right on track with where we expected to be and where we wanted to go. How it shifted quarter-to-quarter is a little bit different. But fundamentally, this is really about just gaining confidence and conviction in the work that the team is doing and how that's delivering to the results. So really no significant change by any one segment or business. It's really the entire enterprise delivering on our commitments.

And Larry, another way to just think about it because whatever -- Mike said it perfectly, but another way to just look at it is we outperformed by about $50 million in the first half. So we effectively just added that on.

Yes, about $50 million.

Yes, exactly. So we just added that on to the full year.

And as you look out over the next few quarters, obviously you have a lot of company-specific initiatives, especially on the bottom line. How about top line initiatives to really invigorate growth considerably more? Or is it going to take the macro and just lower interest rates and an improving consumer to really get things back in gear?

Larry, we love to talk about product. I mean, to me, the reason why we're bucking the trend and actually beating year-on-year comps and sequential growth is a clear function of focus on that top line and product. We know it's all about new product convincing a consumer to spend money today and how laser-focused we are on developing that product road map across every product line is a clear driver of that continued growth. We haven't lost focus with that at all. In fact, we probably doubled down on that. And we're expanding into new OEMs, new customers, new relationships and, frankly, new industries. So we're going to keep the foot on the gas there. And I think that's not only going to set us up for delivering this year. But as the market does return, to your point, we're just like a coiled spring. We've now expanded our relationships and our ability to drive incremental growth as the markets return. So you know me, it's all about product for me. And I think the team has done a fantastic job of staying focused on that, even with this extraneous crazy world we live in.

Our next question will come from Bret Jordan with Jefferies.

Just looking at the higher tariff impact that had been expected going from 38% to 50%, is that mostly within the Marucci mix? Or is this byproduct coming out of Taiwan that you're seeing that impact?

Yes. Bret, great question. This is Dennis. Premitigation back in May, we had it at $38 million. I think we were talking about $9 million AAG, $9 million Marucci, $20 million PVG. Now when we're looking at it, we're up at 50%. And so I'd put AAG rate at $10 million, Marucci at $15 million and PVG at $25 million. So in effect, yes, we're seeing higher rates coming out affecting Marucci and a little bit more affecting PVG as well.

Okay. And then within the PVG, you've talked about motorcycle new -- new business add offsetting some of the weakness in powersports. Are you seeing any directional improvement in powersports? Are we pretty close to the bottom there? Or I guess, how does the second half look for that category?

That's a crystal ball, Bret. But I'll tell you, there is more stability in powersports now than there was probably 6 months ago, 9 months ago. And we see inventories balancing. All those things, I think, are constructive. Really what powersports needs to see to take a leg up is going to be interest rate based. So yes, I see the market getting better. I see the market having a hard time reacting to that improvement without some rate help.

Okay. This is sort of the same question. This isn't the third question. But within that PVG group, I think are there new opportunities for more within powersports or motorcycle or OE light vehicle to expand incremental businesses?

Absolutely. I think we've added -- I'm going off the cuff here, probably 4 or 5 brands to our business in the last year. And as we look at powersports going forward, I think that trend continues. You also see the price points change. The technology that's going in these vehicles today over 2 or 3 years ago is significantly different. It's a lot more connected. We're getting a lot more data from the actual vehicles back to Fox to understand how to even improve those technologies further. As we increase the technology content in a product, we're also increasing the price point. So you're going to get the benefit of both brand extension to new partners and customers and price improvement as those technologies get deployed into product releases.

Our next question will come from Scott Stember with ROTH.

On PVG, you guys didn't really talk about the on-road truck side or the OE side, auto side. Can you just talk about how that performed in the quarter? And yes, just give us an idea on that.

Yes. To be clear, when we talked about on-road in the prepared remarks, we were talking about aftermarket products. I think you knew that, Scott. But just to be clear, that's an aftermarket component that actually makes that truck sit differently on the road. In terms of automotive in general, which I think the basis of your question, we're seeing pretty good consistency. There's a lot of stability in that business for us because -- we're on the premium SKUs. We're benefiting from OEMs' desire to make sure they're driving those premium SKUs through production into the market. That's been a very stable business for us, and we expect that to remain quite stable through the balance of this year. So that stability matters a lot when you're kind of in a world of volatility, and it's performed exactly as we expected it to.

Got it. And then lastly, on Marucci. Previously, I guess we were looking for -- I know you guys don't guide by segment, but the narrative, I believe, was that Marucci would be up this year. And I know that we've had some difficult comparisons, but it sounds like the back half of the year, there's some good stuff going on. Are we still looking for year-over-year growth for Marucci?

Yes, will be up this year. Yes. Marucci, Bret will be -- or Scott, Marucci will be up this year, and it will actually be a record year.

Our next question comes from Peter McGoldrick with Stifel.

I was curious on the bike business. You mentioned year-to-date growth. I was hoping you could size the rate of growth and year-to-date within SSG for the bike business. And then I'm interested in the timing of model year sequencing and the inversion that you referenced in the prepared remarks. Could you just set the backdrop for the comparisons and how visibility to orders are developing?

Yes, Peter, it's a good question, and it's one that's a bit nuanced. So I'll walk you through it. And then if you have questions, come back and hit me again. When you think about the first half of the year, the significant growth came because of the Marucci product launch schedule, which I talked about in the prepared remarks. A lot of that growth in SSG in the first half of the year did come from our bike business, which, getting to your bigger point, was a function of bike OEMs eliminating the prior year product inventory excesses and really focusing on new product for new product launches to really bring that consumer into bike shops to buy bikes. That was a great signal for us to see that these bike companies were getting healthier and stabilizing and getting back on the gas relative, or the pedal, relative to growing their businesses. So that drove a lot of that growth in the first half.

When I talk about the back half moderating, it's actually a positive. And the reason why I say it's a positive is because keep in mind, these OEMs have lived the life of excess inventory that's been incredibly painful over the last 2 years. So as they think about ending '25 on solid footing and being prepared for '26 and new growth with new models, they really want to make sure they don't repeat past mistakes and have excessive inventory in the back half.

What does that do in terms of product or the book of business or to how they think about forecasting? They're going to only buy what they really need to make sure they can deliver to their consumer. So they're going to be much more conservative in their buying practices, which we actually attribute to a good thing. We actually think that's a positive because that will ensure we don't get back to prior days of excess inventory. So when you see that slight moderation in the back half, it's really them gauging how much inventory they want to end the year with and then start next year clean and ready to go again. So that's how it's kind of playing out.

I think we'll see great quarters in Q3 and Q4, but there'll be a slight moderation as they pull so much of that demand into Q1 and Q2 to really be prepared for those product launches for model year '26 and '25, and you know how that cycle works. So that's kind of the story. If that doesn't make sense, I can clarify further.

Yes. I guess I would like to just clarify on that, on the overall bike return to growth or return to normalization. I'm curious on what they have sort of model year '25 and then the ordering visibility to model year '26 as they end the year in a more solid inventory position. How should we be thinking of that maybe on like a 12-month basis?

Yes. So the way I would think about it is this is a growth year for bike for us. This is also a stability year for bike for us. So we're not only going to kind of reset that foundation, so all of you guys can model it correctly on a go-forward basis, but it's actually going to be a growth year as well. So that's positive.

And then as we think about '26, I think it's too early to start calling the ball on what the revenue growth will look like, but I think it will be up from '25. And I think we'll continue to see a more historical growth rate in bike going forward like we used to see kind of pre-COVID and post-COVID. Does that help?

Our next question will come from Craig Kennison with Baird.

Maybe to follow up on the last line of thinking. Are there end markets where you are lapping a big destock in '26? In other words, like if you just shipped 1:1 instead of something far less than that, you would see growth? Or have you kind of proceeded beyond any of that easy comp environment in all of your end markets?

I haven't looked at it, Craig, as an easy comp environment. So yes, I don't see any of that happening. I don't -- there's no layups in this world. I think our growth is coming from solid execution on product and diversification. So we're going to continue to play those cards, and I think that will help us win. But thinking that we'll get an easy path to growth, yes, I don't -- Dennis, you can jump in.

Yes, I don't see that. Yes. I'm thinking segment by segment, business by business. And no, there's not been any excessive destocking and easy comp period that I can think of right now.

Maybe, Craig, the question earlier from Scott was around do we think powersports is normalized? I think in powersports, if we got some market rate -- well, if we got market rate improvement, that's a whole new story across a lot of our business. But if we got interest rate improvement, that might help support a thesis that says powersports could get back to growth. And that's -- for sure, in that product line, that's an easier comp, no doubt about it. And you know…

Yes, that's what I meant to say. I mean you went through the bike industry, there was a massive destock. The year after that, you can grow if you're not destocking anymore even if there's not end market growth. The same happened in powersports. I'm not kind of -- in the easy comps, I'm just saying you're lapping a period of destocking.

Yes, I think that would be true in powersports.

Yes. All right. On Marucci, just maybe give us an update on some of the growth vectors. I know when you acquired that business, you were excited about a number of growth vectors, including shoes, you mentioned that today. But just give us an update on some of the top few vectors where you see create additional value through investment in growth.

Yes. That's a good question, probably a longer answer. So when we think about growth in Marucci, it had several different vectors that we kind of launched when we acquired the business. One of them was global growth. And if you look at Japan, I think Japan is up. I'm going to give you a number that I don't have in front of me, so I'm going to go from my memory. I think it's up about 140% or 150% year-on-year. We think Japan is a significant growth engine for us. So that's really coming through and proving to be true. So you have that geographical growth, not just Japan, but other locations. You've got kind of the growth of diversification in the product lines.

Businesses like Lizard Skins are growing quickly. They're also fairly impacted by tariffs, just to be clear, but those businesses are growing as well. So you're going to see things that are not a bat that are going to benefit from our bat halo brand status continue to grow. I mentioned shoes and getting shoes in the MLB now on the field. That halo effect transitioning from bats or reflecting from bats to shoes is a real positive sign for us. I can't talk enough about things like softball, both fast pitch and slow pitch. I mean we just weren't existent in that market. And we have competitors whose businesses in softball are bigger than our entire business in baseball. So softball for us can't go overstated relative to what it could be and how it could help us grow this business. So we have a number of them.

Frankly, it's a great question because it also kind of reminds us of you can't do all things at all times. And so we have to really focus and prioritize where we're going to put that investment dollar and that people bandwidth to ensure that we're growing in the right areas. And Marucci of all of our businesses has probably more levers to growth than most. And it's up to us to make sure we stay focused on the right ones. But there's a number of them that I just mentioned that I think are significant beyond how we expand our aluminum and composite bats and how we continue to grow with the MLB, which again is an important part.

Our next question will come from Alex Perry with Bank of America.

I just wanted to talk about the EPS guide a little bit with it going down. Is it purely just flowing through the sort of $25 million of unmitigated tariff impact to the gross margin line? Is there anything else going on there in terms of margins or tax that we should be thinking of?

That's a great question, Alex, and thanks for that. And again, just reiterating, this year is largely playing out as expected right now. Given the tariff implication, we went from 38% to 50%. And when we gave guidance back in May, consensus adjusted down to around $180 million. So basically, what we're just doing now is being a little more specific about that tariff impact. And so we're taking that range to $1.60 to $2. And I will tell you, we are really running after this tariff from a mitigation perspective. All the segments are really doubling down on trying to mitigate that impact from supply chain optimization.

I look right back in Custom Wheel House and how they're starting to move from like 3 warehouses to 2 warehouses, right, to really get more efficient in delivery of the product line to end customers. They looked at moving molds to Mexico to start avoiding -- evading or avoiding the tariffs there as well. So making really good progress there. You've got inside PVG tremendous work going on there off in-sourcing raw materials now to get after a better cost position as well. And so all across the board, this company is trying to control what it can control, and that has been that story all along with us is delevering, getting after working capital, taking cost out, mitigating these tariffs as much as we can. So sorry, long answer to a short question.

No, really helpful. It makes a lot of sense. And I just wanted to ask about the motorized 2-wheel business. How much sort of incremental dollars is that business driving? Is it pretty significant year-on-year? And then what sort of margin profile is attached to that? Does that vary versus core PVG margins?

It's generally in line or around the same margin profile as our powersports business. We don't specifically call those out in detail. But think about it as very consistent with the powersports business. And that business has been a significant grower for us. The way I would frame the growth of that business year-on-year is it's more than offset the decline in powersports. So by diversifying back in the motorcycle and really leveraging our 50 years of history in that space, we were able to capture revenue very quickly and new relationships very quickly, which more than offset the decline in what would be traditionally the side-by-side business. So that's how I think about it. On a long-term basis, that business is going to grow in line with the PVG business in general, and we're glad to be back in it, Alex.

It appears we have no further questions at this time. I would now like to turn the program back over to Mike Dennison for closing remarks.

Thanks, Katie. We appreciate everybody joining the call today and the continued interest in Fox. We hope you all have a good evening, and we'll talk soon. Thanks.

This does conclude the Fox Factory Second Quarter 2025 Earnings Call. You may now disconnect your line, and have a great day.