Fox Factory Holding Corp Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Fox Factory Holding Corporation's Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I'd now like to turn the conference over to your host, Vivek Bhakuni, Senior Director of Investor Relations and Business Development. Thank you, sir. You may begin.

Thank you. Good afternoon, and welcome to Fox Factory's fourth quarter 2021 earnings conference call. I'm joined today by Mike Dennison, our Chief Executive Officer; and Scott Humphrey, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Then Scott will review the quarter and full-year financial results and then the outlook, followed by closing remarks from Mike. We will then open the call up for your questions. By now, everyone should have access to the earnings release, which went out today at approximately 4:05 Eastern Time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at investor.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown uncertainties, many of which are outside the Company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the Company's latest Form 10-Q and in the Annual Report or Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the Company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, where appropriate in today's prepared remarks and within our earnings release, we will refer to non-GAAP financial measures to evaluate our business as we believe these are useful metrics that better reflect the performance of our business on an ongoing basis. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's press release, which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mike Dennison.

Thank you, V, and good afternoon. We appreciate everyone taking the time to join us for today's call. We all thought 2020 was a remarkable year, but 2021 was equally challenging, if not more. And Q4 presented one of the most intense operating environments of the year. We experienced pronounced supply chain challenges and lost production hours, along with being required to shut down one factory in North America due to COVID cases. These challenges kept us from achieving our sixth consecutive record revenue quarter and consequently carried an increased level of backlog into Q1. That said, I'm pleased to report fourth quarter sales of $342.3 million, an increase of 30.5% compared to the fourth quarter sales of last year. The Fox team worked tirelessly and creatively to deliver phenomenal revenue growth. In the fourth quarter, we reported earnings per diluted share of $0.89 versus $0.75 in the same period last year, an increase of 18.7% quarter-on-quarter. We also reported non-GAAP adjusted earnings per diluted share of $1.06 versus $0.90, an increase of 17.8% over the fourth quarter in 2020. We continue to prove that our collective resiliency and strength carry us through during these unique times. I am really proud of how the Fox team has demonstrated perseverance, dedication and adaptability in this dynamic operating environment to deliver a near 46% annual year-on-year revenue growth rate, the highest ever since we went public in 2013. We finished the year with annual revenue just shy of $1.3 billion, making it our first calendar year where we eclipsed $1 billion in annual revenue. As these macro obstacles worsened in the fourth quarter, our team continued to out-innovate, outpace and outthink our peers to deliver performance-defining results just like our products. I am happy to report that we also completed the acquisition of Shock Therapy at the tail end of the fourth quarter. Shock Therapy is a provider of high-performance suspension tuning services to the off-road industry. Their services are unique due to their extensive research and testing, which results in the best possible system for each application, whether it's in racing or off-road recreation. In addition, we anticipate Shock Therapy will extend Fox's competitive edge by bringing a strong direct-to-consumer channel for parts and ride improvement systems. We expect this acquisition will help us increase our services business by creating a meaningful and personalized ecosystem around our enthusiasts and end consumer. Let us take a closer look at the business, starting with Specialty Sports Group. This was our seventh consecutive record revenue quarter, as it delivered a 46.7% revenue growth on a quarter-over-quarter basis. The primary reason we have been able to deliver such staggering numbers quarter-over-quarter is due to the team's ability to not only anticipate industry demand fluctuations, but also to scale and accelerate production while managing supply chain inflation and labor challenges. We continue to optimize our capacity and labor expansion plans in Taiwan, as we keep a finger on the pulse of demand, which continues to stay very robust. As I have mentioned in the prior calls, we have a good view of demand through 2022 for both OEM and aftermarket channels, which provides a reasonable confidence on our current outlook. We are starting to see a slight improvement in inventory levels and increased replenishment in certain geographies and at certain price points. In our current view, we believe it will take five months to eight months to meet the existing customer demand level and another nine months to 12 months to fully replenish depleted inventory levels. We continue to invest in our development process to improve upon our innovation and speed-to-market capabilities as Fox, Marzocchi and our Race Face products continue to lead the industry. A couple of highlights of innovation. The newly launched FOX 34 won the Suspension Product of the Year by Outside Magazine. Fox was also the #1 brand for purchase intent for both front suspension and rear shocks as rated in the two largest North American media sites, as well as two of Europe's premier media outlets, eMTB and Enduro MTB. Shifting to our Powered Vehicles Group. Q4 marked another remarkable revenue quarter led by an 18.6% quarter-over-quarter growth in sales, driven by our upfitting business and the aftermarket channels. Our order book continues to grow. However, the ongoing supply chain challenges continue to affect our ability to meet the increased demand for our products by our end users. We are optimizing and unlocking new ways to mitigate the macroeconomic pressures we face, while leveraging the power of our brand to expand our relationships in both the aftermarket and the OEM side of the business. We remain confident in our ability to continue this growth trajectory and expect to leverage the efficiencies created by our Gainesville facility, as previously discussed. I am also pleased to report the facility transition from California to Georgia is complete, and the final closure actions of our Watsonville, California operations are underway now. Turning to OEM partnerships. In the last couple of months, we have released several innovative solutions for our OEM partners, which reinforce the exclusivity of our brand. In the world of powersports, Polaris launched RZR Pro R and Turbo R Ultimate, which feature our Live Valve X2 shocks. These are the most capable dampers in the off-road industry. In addition, we had some exciting new launches in automotive, starting with the much-anticipated Bronco Raptor. We are thrilled to expand our relationship with Ford. Bronco Raptor features our Live Valve shocks derived from Fox's desert-racing winning heritage. In addition, Ford also introduced our Live Valve Internal Bypass for the new Ranger Raptor, which is slated to launch around the world in 2022 and make its US debut in 2023. In addition, we expanded our relationship with Toyota, where our FOX 2.5-inch Internal Bypass features in all the new TRD Pro Tundra and Sequoia platforms. And lastly, in the motorcycle space, we recently expanded our relationship with Indian motorcycles. In the upcoming 2022 Indian Challenger and Indian Pursuit, we are introducing Fox Electronics preload shock technology, which delivers dynamic control over shock adjustments, delivering both comfort and performance to the rider. Moving on to our accomplishments in the world of motorsports. Our Live Valve technology earned another overall win with Justin Lofton at the Best In the Desert race in October. At the Baja 1000, Cameron Steele put Live Valve on the podium with a third-place finish overall. And Rob MacCachren and Luke McMillin teamed up to claim the overall win, making a clean sweep of all four major Baja races in 2021 for Fox, and the second consecutive Baja 1000 win for Luke McMillin. The duo's win was also enough to clinch the SCORE Trophy Truck points championship. In addition, Phil Blurton claimed the Pro UTV Turbo and overall Series Points Championship, and extra special congratulations to our very own Director of Motorsports, Bobby Smith and his navigator, Motorsports Mechatronics Engineer, Isaac Chapluk, on winning the Pro UTV naturally-aspirated class with Team Honda. To be successful on our vision, we aren't just making investments to meet the historic level of demand. We have always said product innovation is a cornerstone of our growth strategy. Even in this inflationary environment, we have not taken our foot off the pedal, increasing R&D spending by nearly $4 million in the fourth quarter versus the prior year. Once again, the story on the continued challenges from labor to input costs, freight and supply chain have increased in strength from the prior quarter. Material costs continue to increase throughout the fourth quarter, and we did our best to keep up with inflation through pricing changes, and we'll continue to evaluate our pricing strategy to minimize margin compression. Looking forward, we hope to see easing in the supply chain during the second half of the year, but inflationary challenges could persist longer. Finally, we are constantly looking for ways to improve. The fact that we delivered 46% year-on-year revenue growth in such a volatile operating environment deserves to be celebrated. I thank each and every single member of the Fox family to help us challenge the impossible every day. And with that, I'll turn the call over to Scott.

Thanks, Mike. Good afternoon, everyone. I'll begin by going over our fourth quarter and full-year financial results and then review our guidance. Sales in the fourth quarter of 2021 were $342.3 million, an increase of 30.5% versus sales of $262.4 million in the fourth quarter of 2020. Our Powered Vehicles Group delivered an 18.6% increase in sales compared to the fourth quarter of 2020, primarily due to increased demand in their aftermarket channels, including strong performance in our upfitting product lines. Moving to the Specialty Sports Group. SSG delivered a 46.7% increase in sales in the fourth quarter compared to the same quarter last year, due primarily to increased demand across all channels as well as capacity expansion. On a full-year basis, sales were $1,299.1 million versus $890.6 million in the same period last year, an increase of 45.9%. This jump in full-year sales is driven by increased demand across all of our product lines. PVG's growth is primarily driven by strong performance from our upfitting product lines, the inclusion of a full year of revenue from our SCA subsidiary, and increased demand in our aftermarket channels. Additionally, our prior year results were negatively impacted by production shutdowns at a majority of our PVG OEM partners due to the COVID-19 pandemic. Fox Factory's gross margin was 31.3% in the fourth quarter of 2021, a 50 basis point decrease from 31.8% in the same period in the prior year. For the fourth quarter of 2021, non-GAAP adjusted gross margin decreased by 40 basis points to 31.6% versus Q4 of 2020. The decrease in gross margin was primarily driven by higher inflationary pressures on all fronts, including labor, material, and freight costs. This was marginally offset by favorable product and channel mix compared to Q4 2020, led by higher volume sales in our Specialty Sports Group and strong performance in our powersports and upfitting product lines. On an annual basis, both our gross margin and our non-GAAP adjusted gross margin increased 80 basis points to 33.3% and 33.5%, respectively. The increase in full-year 2021 gross margin was primarily due to higher volume sales in our Specialty Sports Group, strong performance from our upfitting product lines, the inclusion of a full year of SCA's results in our Powered Vehicles Group, as well as favorable product and channel mix. Total operating expenses were $64.2 million, or 18.8% of sales in the fourth quarter of 2021, compared to $45.8 million, or 17.5% of sales in the fourth quarter of last year. The increase in operating expenses in Q4 2021 was primarily due to higher employee-related costs, increased commission costs, and investments to right-size our back-office infrastructure. Looking at non-GAAP operating expenses as a percentage of sales, our non-GAAP operating expenses increased by 170 basis points to 16.7% in the fourth quarter of 2021, compared to 15% in the same period in the prior year. Focusing on operating expenses in more detail, sales and marketing expenses increased approximately $4.8 million in the fourth quarter of 2021 compared to the fourth quarter of 2020, primarily due to higher commissions of $3 million. Research and development costs increased approximately $3.6 million in the fourth quarter of 2021 compared to the fourth quarter of 2020, primarily due to personnel investments to support future growth and new product innovation. General and administrative expenses increased by approximately $9.2 million in the fourth quarter of 2021 due to higher employee-related costs of $2.5 million, as well as increases in various other costs as we continue to right-size our administrative support functions. On a full-year basis, operating expenses were $235.4 million, or 18.1% of sales, compared to $175.4 million, or 19.7% of sales in the same period in the prior year, a decrease of 160 basis points. Our non-GAAP operating expenses as a percent of sales increased by 30 basis points, going from $139.4 million and 15.7% of sales in 2020 to $207.8 million and 16% of sales in 2021. On a full-year basis, sales and marketing spend increased by approximately $18.7 million compared to the same period in the prior year, primarily due to commissions of $11.8 million. But as a percentage of revenue, the spend decreased by 40 basis points in the full year of 2021 versus the prior year. Research and development dollar spend increased by approximately $12.3 million for the full-year 2021 as compared to the same period in the prior year, due to personnel investments to support future growth and product innovation. As a percentage of revenue, however, research and development spend decreased by 30 basis points in 2021 versus the prior year. Lastly, general and administrative dollar spend increased by $25.9 million in full-year 2021 as compared to the prior year, but was lower as a percentage of revenue by 50 basis points. The increase in dollar spend in fiscal year 2021 is due to higher employee-related costs of $18 million, as well as various other investments of $5.1 million. These increases were partially offset by lower acquisition-related costs of $9.3 million and lower litigation expenses of $1.1 million. For the fourth quarter of 2021, our effective tax rate was 9.6%. This rate was lower than our estimated full-year 2021 range in guidance of 15% to 19%. The decrease in the rate versus our earlier expectation was primarily due to the benefit from a lower tax rate on our US foreign-derived earnings. On a GAAP basis, net income attributable to Fox in the fourth quarter of 2021 was $37.7 million, or $0.89 per diluted share, compared to $31.8 million, or $0.75 per diluted share in the same period in the prior year. For the full-year 2021, net income attributable to Fox was $163.8 million, or $3.87 per diluted share, compared to $90.7 million, or $2.22 per diluted share in the prior year period. Non-GAAP adjusted net income was $44.8 million in the fourth quarter of 2021, an increase of approximately $6.6 million or 17.2%, compared to $38.2 million in the fourth quarter of last year. We delivered $1.06 of non-GAAP adjusted earnings per diluted share in the fourth quarter of 2021 compared to $0.90 in the fourth quarter of 2020. On a full year basis, non-GAAP adjusted net income was $190.8 million, an increase of approximately $67 million or 54.1%, compared to $123.8 million in the same period in the prior year. On a full-year basis, we delivered $4.50 non-GAAP adjusted earnings per diluted share compared to $3.03 in the same period last year. Adjusted EBITDA increased by 19.1% to $61.1 million for the fourth quarter of 2021, compared to $51.2 million in the same quarter last year. However, adjusted EBITDA margin decreased by 170 basis points to 17.8% in the fourth quarter of 2021, compared to 19.5% in the fourth quarter of 2020. The decrease in EBITDA margin in the fourth quarter of 2021 is primarily due to higher inflationary pressures as discussed earlier, partially offset by the impact of higher sales. On a full-year basis, adjusted EBITDA increased by 49.7% to $263.9 million as compared to the same period in the prior year, and the adjusted EBITDA margin expanded by 50 basis points to 20.3% versus last year. Now focusing on our balance sheet. For the fourth quarter, which ended on December 31, 2021, compared to our 2020 year-end on January 1, 2021, we ended with cash on hand of $179.7 million compared to $245.8 million. Accounts receivable was $142 million compared to $121.2 million. Inventory was $279.8 million compared to $127.1 million. Prepaid and other current assets was $123.1 million compared to $87.9 million. And accounts payable was $100 million compared to $92.4 million. The increase in inventory as of year-end is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and higher input costs. As we see the supply chain pressures beginning to ease, we will work on reversing this trend to facilitate better free cash flow generation. The increase in prepaid and other current assets as of year-end is primarily driven by deposits for securing chassis for our upfitting business, which has been experiencing significant growth. The changes in accounts receivable and accounts payable reflect business growth, as well as the timing of vendor payments. Our net property, plant and equipment increased to $192 million as of December 31, 2021, compared to $163.3 million at the end of fiscal year 2020, reflecting capital expenditures of $54.8 million for the year. The increase primarily reflects investments in our manufacturing facility in Gainesville, Georgia. Goodwill increased to $323.3 million as of December 31, 2021, compared to $289.3 million as of January 1, 2021, primarily due to our acquisitions of Outside Van in the second quarter and Shock Therapy in the fourth quarter. Now turning to guidance. For the first quarter of 2022, we expect sales in the range of $325 million to $340 million and non-GAAP adjusted earnings per diluted share in the range of $1 per share to $1.20 per share. For the fiscal year 2022, the Company expects sales in the range of $1,435 million to $1,465 million; adjusted EBITDA margin in the range of 20% to 22% and non-GAAP adjusted earnings per diluted share in the range of $4.90 to $5.20. For our 2022 full-year tax guidance, we expect our tax rate to be in the range of 11% to 15%. The low end of the tax guidance is due to changes in international tax law, which went into effect in the month of January. We are currently evaluating this potential benefit, which would result in a lower tax rate in Q1 related to our foreign tax credits. In addition, we continue to expect some quarterly fluctuations in tax rate to occur during the year. We expect CapEx for 2022 to be in line with our long-term range of 4% to 5% of sales. I'd also like to note that we're not providing guidance on GAAP EPS, as it cannot be provided without unreasonable efforts due to the difficulty of actually predicting the elements necessary to provide such guidance and reconciliations. Finally, as we all know, the business world is adapting to the new normal. We continue to work closely with our suppliers and our customers to overcome the evolving challenges presented by the inflationary macroeconomic environment. As positive as we may feel about our prospects in 2022, we remain cautious in our outlook as we see lingering signs of some cost pressures in the first half of the year, along with revenue mix normalization. As our understanding of the global business environment evolves, we plan to provide incremental updates each quarter regarding our expectations for 2022. With that, I would like to turn the call back over to Mike.

Thank you, Scott. We are incredibly proud of the way our team has delivered stellar results in 2021 through their sheer perseverance, commitment and impeccable execution. As we celebrate our success, we completely acknowledge the multi-dimensional challenges ahead of us, be they from pandemic or macroeconomic factors. Hence, we will continue to make significant investments in products, people, and technology, all while maintaining a fortress balance sheet. We believe our world-class team, financial discipline, and our relentless focus on delivering best-in-class products to our ever-growing base of performance-driven enthusiasts will enable us to continue delivering against our consumers and shareholders' expectations. I would now like to open the call for questions. Operator?

We'll take our first question from Larry Solow with CJS Securities.

Yes. It's Pete Lukas for Larry. You discussed price increases in the latter portion of 2021 to keep up with inflation. How have these been received by customers? And do you think it was enough considering the acceleration that you have seen in inflation?

Yes, Pete, that’s a good question. This is Mike. From my perspective during the third quarter and parts of the second quarter, we began implementing price increases, which took effect in the third and fourth quarters across all our product lines. At that time, we believed these increases would offset the inflation we were experiencing in various areas of our business. I think we managed it well. It’s always a matter of how much our customers are willing to accept price increases. Ultimately, we achieved all the price increases we aimed for. So, the answer is yes; we were successful in that regard. It covered the inflation we observed at the time, but inflation persists. Whether we need additional price increases in the first quarter is an open question that remains to be seen. Some segments of our business are more sensitive to price changes than others, so we will have to carefully consider where to apply any price increases early this year. As I've mentioned in previous earnings calls, the current dynamics may require us to consider quarterly price increases rather than just annual ones, and we are prepared to do so if necessary. There's often a delay between the inflation costs we face in our factories and implementing pricing adjustments for our customers to cover those costs. I expect this situation will continue as we monitor inflation going forward.

Can you discuss the ongoing capacity expansion in Taiwan for specialty sports? Also, can you provide an update on the transition to manufacturing power vehicles? Is most of that heavy lifting completed? Do you believe this will provide a benefit for you moving into 2022?

I believe both Taiwan and Gainesville are experiencing positive momentum as we head into 2022. In Taiwan, much of the capacity expansion was accomplished in the latter half of last year and is now coming online. There are still productivity goals that the team is working towards. The growth rates of SSG demonstrate that we have not only met capacity deadlines but have also positioned ourselves to outpace many competitors in the industry. We are well-prepared for 2022 with the added capacity in Taiwan. In Gainesville, as I noted earlier, we completed the transfer of operations from Watsonville to Georgia during the quarter. This transition posed significant challenges due to high demand, which contributed to the backlog we noticed at the end of the quarter as we moved into Q1. The final lines have been relocated, and we are now focusing on completing the necessary tasks in Watsonville, setting us up well for our goals in Gainesville. As Scott and I have previously discussed, this will lead to a margin expansion of 250 to 350 basis points in our legacy business. We are excited to see this through; the process was tough, but we have successfully achieved our objectives and are ready to move forward.

Great. And one last question from me. Considering the rapid growth in sales and employees over the past 18 months amidst a challenging labor market, could you provide an update on our current status? Is most of the hiring complete? And what have you observed regarding any increases in attrition and turnover, if applicable?

Yes. Both of those answers are somewhat geographical. In Taiwan, we have significantly increased our workforce to achieve the results we've seen, and this growth is quite sustainable and predictable. The team has done an excellent job in a country with very low unemployment rates, nearly at zero. Our capacity expansion involves diversifying our operations in Taiwan to access new labor pools, which the team has effectively managed. Therefore, I feel confident about our labor situation in Taiwan. However, there is a risk associated with potential COVID variants like Omicron. Taiwan has largely avoided the challenges faced by the rest of the world in this regard, but we must remain cautious as this could become a significant issue if it worsens. On the other hand, hiring in North America, particularly in Gainesville, has been more difficult over the past year. The situation hasn't deteriorated, but the challenge persists with people’s willingness to return to work. As you're aware, the Omicron variant at the end of Q4 and beginning of Q1 hindered operations at large factories. Therefore, I would say that the impact of COVID on workforce stability in North America has been much more significant than that of normal employment turnover.

The next question comes from Anna Glaessgen with Jefferies.

I believe in the prepared comments, you said looking forward to easing in the back half on supply chain headwinds. I guess could you put a finer point on what's embedded in the 2022 guidance around this? Are you embedding meaningful improvement or maybe more moderate? Any perspective would be helpful.

Yes, Anna, we're embedding pretty moderate improvement. I don't think we're going to assume that the improvement happens until we actually see it. I think Scott and I both believe and the team believes that we'll see that easing in Q2, but that's not really forecasted into our numbers at this point. So if we saw more easing, if we saw an increased pace of easing, I think that would just help us. But we tend to run fairly conservative in our estimates and our estimates are a reflection of kind of what we see today versus what we hope to see sometime in Q2.

Great. And then turning to the inventory growth, pretty significant in the quarter. Could you maybe unpack this growth, maybe how much is related to cost inflation versus higher units compared to last year?

Yes, Anna, this is Scott. It's a combination of factors, and I don't have specific percentages. However, if you refer to our 10-K, our backlog increased by nearly $100 million since the end of last year, indicating strong demand. We have also been increasing our inventory levels. We've managed to overcome some supply chain challenges from the past six months regarding product delivery. Additionally, we are facing some material inflation contributing to this inventory increase. A part of this also involves the transfer of Powersports inventory from Watsonville, as we prepare to get operations running smoothly in Gainesville. So, there are several factors contributing to this significant inventory growth, and you are correct that we have observed some increases in material costs.

I would add that the port congestion everyone faced in late Q3 and especially in Q4 has made it more challenging to maintain a consistent supply. This situation requires us to be more cautious in our supply chain management and likely leads to increased inventory levels due to trying to navigate through ports that are heavily congested, with many ships waiting and limited space available. I believe this was a significant factor in Q3 and Q4, but it appears to be improving now. We should see this situation getting better in the latter part of this quarter and heading into Q2.

The next question comes from Rudy Yang with Berenberg.

I think in your prepared remarks, you mentioned it will now take about five months to eight months to fully meet demand, whereas in previous quarters, I think that number was eight months to 10 months. Is that a factor of demand strength decelerating at all? Or is it just kind of due to higher capacity on your end or just kind of being able to move more of your backlog?

That's a good question, Rudy. This situation is influenced by industry dynamics, so it's not solely about us; other players in the industry also need to deliver their components to meet the demand. When I mention the timeframe of five to eight months, it reflects an improvement from the previous estimate of eight to twelve months. We have made progress over the last quarter, and I anticipate continued improvement in this timeframe throughout 2022. This suggests we are on track for a healthy recovery in the industry. Our success in SSG can be attributed to the additional capacity we've implemented and our ability to maintain a consistent supply of goods. Overall, I believe we are performing better than most in this regard, ensuring we are not the bottleneck for our customers needing to assemble their bikes.

Got it. That's really helpful. And then I know it's kind of an unfortunate and kind of a recent situation. But could you maybe just talk to your thoughts on how the whole Ukraine situation could possibly impact your business? I think from my understanding, Ukraine is a large exporter of neon gas, while Russia sources a large amount of palladium, which are both used in the creation of chips. So just curious any thoughts you could share on discussions around the potential impact?

I believe the situation is quite serious and unfortunate. The effects on us seem to be more indirect since we currently don't have relationships in either country. The indirect impact on commodities is still to be assessed, but I don’t expect it to significantly affect our core business areas like aluminum and steel. Our main concern is the possibility of cyberattacks and related risks that could impact our operations. Nevertheless, I don't anticipate any major challenges regarding demand or our capacity to meet that demand.

We'll go now to Ryan Sundby with William Blair.

Mike, something with the plant changeover and then the COVID shutdown, you had some backlog that carried over into Q1. Any way to help us kind of understand how big that was? And does that all just get worked out in Q1?

We've carried over more than $220 million in backlog from Q4 to Q1, which is likely a record for us and indicates that demand is exceptionally strong. However, I don't believe we can address all of that backlog in Q1. We will make every effort to manage it over the next few quarters while maintaining strong communication with our customers. This backlog is substantial, and while it's beneficial to have it due to the confirmed purchase orders from our customers, it also increases the pressure on the Gainesville productivity implementation that we are working on this year.

Got it. That's helpful. Regarding Shock Therapy, can you provide any information about the size and growth of the overall business and how it may align with Fox? Additionally, I have a broader question about acquisitions. You've made a few smaller ones outside the main brands. What is your strategy for choosing targets in terms of size? Do these smaller deals seem to be the most sensible options at this time?

Yes. I'll address the last question first, Ryan. When we seek acquisitions, we typically aim for larger ones. However, in our business, we often receive interest from smaller companies that believe they would be a good fit for Fox and that they could add value to our operations. In the case of Shock Therapy, their innovation, tuning, and products in powersports, as well as their approach to servicing that market, actually create a more substantial aftermarket business than we previously had in that category. We are gaining valuable insights from them. This has proven to be a great acquisition, even though it's still early days. In terms of size, it's not a large acquisition; think of it as a business generating around $20 million annually, growing at or possibly exceeding current PVG growth rates. So, it has good growth potential with us. It's not about size; rather, we see the technology and ideas from Shock Therapy that can be beneficial across our business. From a margin standpoint, it is not dilutive, which is favorable for us. Overall, we view this positively. When considering acquisitions, we generally aim for larger targets. As I’ve mentioned before, I prefer major acquisitions over smaller ones, though occasionally these smaller opportunities align very well with our strategic direction.

Got it. Makes sense. Last one for me. Just to follow up on Pete's question, Mike, I think in the script, you understated that you were open to maybe evaluating your pricing strategy. I just want to make sure I fully understood that. Was that just in terms of being more nimble, pricing more often? Or is there something bigger picture that you're referring to?

It's really around being more dynamic, so that we can actually adjust our pricing to reflect market events or macroeconomic events, things that occur, that require us to be as fast and responsive in that area as we can. Historically, this business hasn't had to be that nimble or that dynamic. And I just think we're kind of in a new world. So building the skills, processes, and systems to be able to do that as part of the stuff the team is working on every day. So, that was what I was getting at with Pete.

We'll go now to Scott Stember with C.L. King.

It sounds as if in the power vehicle side, that I guess the upfitting and the aftermarket businesses did really, really well. But it sounds like the OEM side, whether it was with the on-road/off-road stuff, that was probably a little bit less than you wanted to supply chain. Can you just maybe talk about how that performed? And how that dynamic or narrative should change as we get into '22 and we move throughout the year?

Yes. Good question, Scott. So when we think about the issues around our automotive OEM business, don't think about it relative to necessarily our continuity supply or our ability to produce. It's really around the rest of the components they need to put on a truck to get a truck sold. So as you probably heard from other press reports and insights, those companies are still struggling to get their supply chains to effectively respond to the demand, and we felt that in Q4. So it really wasn't a function of us. It was just a function of kind of continuing ongoing chronic challenges they were facing, which caused their demand signals to us to change. I think the upside is, as I mentioned in my prepared remarks, we're launching new vehicles, new platforms. Folks, partners of ours are expanding their product portfolios to a more global sales channels, which is great for us. So that expands volumes. And I think, eventually, these guys will figure out how to get their supply chains working more effectively, and that will help us. So, do I expect that to happen in Q1? To some extent. But I think that's going to be an ongoing battle that we'll face for the first half of the year. And hopefully, they see the same easing of the supply chain that we expect to see somewhere midyear.

Got it. As for the timing of the launches of some of these products, including the Bronco Raptor, can you provide an idea of when you plan to start shipping the product? Is it expected in the third or fourth quarter of '22? Also, what about the Toyota products?

Yes. The best way to probably couch that is when you hear about when they believe they're going to have vehicles produced and in dealers, you back that up six months or so, and that's when we start producing product to supply that demand signal, maybe a little bit less than that. But you can always back those up. If it's a '23 Bronco Raptor, that means we're going to be shipping product this year, for sure.

All right. And then just last question related to guidance. You gave a lot of puts and takes. But how should we think of the gross margin within the context of your guidance? Just trying to effectively model to get down to the number.

Yes. Now that we have completely transitioned from Watsonville, we expect to see improvements in PVG margins on the legacy side of the business as everything is consolidated. This will be beneficial. As Mike mentioned earlier, our guidance tends to be conservative at the beginning of the year. He also noted that we have accounted for some supply chain and inflation-related cost pressures in those numbers. When considering our guidance, it will likely resemble the figures from 2021. We provided EBITDA guidance for the entire year of 20% to 22%, with expectations for the end of this year just above 20%. Therefore, our guidance will probably be similar to what you observed for the full year this year.

Our next question comes from Alex Perry with Bank of America.

Congrats on a strong quarter. I guess just first, can you give us a bit more color on the revenue guidance and how you're sort of thinking of growth between PVG and SSG? What are you seeing in the end markets? And do you think that there will be a divergence between sort of end market growth and sort of sell-in in 2022?

I'll start the answer to that, Alex, and then I'll let Scott jump in too. When we think about historical growth rates, we always talked about mid- to high single digits in SSG as kind of the expectation. Right now, we're kind of living in a world where it's low double-digit growth rate in how we look forward. That will probably eventually return to mid- to high single digits. But for now, you should be thinking kind of low double digit. And in PVG's case, we used to always say low to mid-double-digit growth and we've been higher than that. So, they will continue to probably be higher than that for the foreseeable future and at some point probably return to a more normalized growth rate. But based on all the product launches and based on the efficiencies in Gainesville and the backlog, which we mentioned earlier at $220-plus million, that growth rate is going to be pretty substantial.

Yes. And I think the one other thing that I mentioned in prepared remarks was you saw a big increase in Q4 for chassis that we brought into our upfitting businesses. And last year, at this time, we were scrambling for chassis. So feeling really good about their potential growth in 2022 as they continue to grow really rapidly. Yes. As Mike mentioned earlier, our thinking remains unchanged. With the factory now running at capacity, we expect to provide updates over the next couple of quarters as we assess the metrics in place. Regarding your question about gross margin for the year, Mike noted that we are being fairly conservative. We have been experiencing cost inflation in stores, which is still affecting us in Q1. We anticipate improvements in the latter half of the year, possibly even sooner, but we want to see progress before making any commitments to that.

We have no further questions in queue at this time. I would like to turn the program back over to Mike Dennison for any additional or closing remarks.

Thank you. And thanks, everyone, for taking the time and having the interest in Fox Factory. We look forward to another quarter. And we'll report to you in the next 90 days, give or take. And with that, have a good evening.

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