Fox Factory Holding Corp (FOXF) 2023 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to FOX Factory Holding Corporation's Second Quarter 2023 Earnings Conference Call. (Operator Instructions) 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 Second Quarter 2023 Earnings Conference Call. I'm joined today by Mike Dennison, our Chief Executive Officer; and Dennis Schemm, our Chief Financial Officer and Treasurer. First, Mike will provide business updates. Then Dennis will review the quarterly 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 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 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 latest Form 10-Q and in the company's latest annual report on Form 10-K, each 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 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 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. Good afternoon, everyone, and thank you for joining us for our second quarter 2023 earnings call. Today, I will discuss our strategy, operating highlights and business activity. Dennis will then discuss additional details on our financial results, balance sheet and outlook. After our prepared remarks, we will open up the call for questions. Before I discuss our strategy and key operating highlights, I'd like to take this opportunity to introduce Dennis Schemm as our new Chief Financial Officer. Dennis has a strong track record and a wealth of experience in financial planning, M&A and in driving strategic organizational transformation through financial discipline and operational excellence. Perhaps more importantly, Dennis' leadership traits align well with FOX's core values, it will help us accelerate our growth journey.

Having spent time with dentists over the last 2 months, including visiting many of our operating facilities, I can already see how his leadership in communication has energized the organization. This competitive yet warm spirit fits the culture at FOX, and we are excited to have him on our winning team. The strength of our diversification and organic and inorganic growth strategy is on full display in our second-quarter results. Strong sales growth in Powered Vehicles Group, or PVG, and the Aftermarket Applications Group, AAG, coupled with continued efficiency gains in our North American facilities enabled us to deliver on net sales and to exceed our expectations on adjusted EBITDA and adjusted EBITDA margin despite the ongoing softness in the Specialty Sports Group. Sales for PVG and AAG were up 33% and 26%, respectively, effectively offsetting the 41% decline in SSG. SSG continues to be soft as dealers and distributors work through their inventory. The increase in PVG is due to strong demand for our products in the OEM channel as we continue to introduce next-generation solutions.

In addition, AAG grew from strong performance in our operating product lines as innovation and vehicle development continue to drive strong customer demand and also from our custom wheelhouse acquisition. To further capitalize on the strength of our diversification strategy, we recently realigned our PVG business into Powered Vehicles Group and Aftermarket Applications Group to align with the company's end customers and drive additional focus on product development.

This realignment will accelerate go-to-market strategies, better address customer needs, accelerate the pace of innovation and optimize product development. For example, as a market leader in off-road and power sports, this realignment enhances PVG's focus on innovation and speed to market to deliver superior suspension solutions to our customers, while AAG innovates around performance packages and customer engagement capabilities. In this quarter alone, we launched 13 new products surpassing last year's annual total and on the field achieved overall podium wins in 3 of the toughest off-road races, including the Baja 500, the San Felipe 250 and tax bank in Australia.

Turning to our earnings. We have strong company-wide adjusted gross margins exceeding 34% while absorbing the decrease in SSG sales. Our success is primarily driven by the optimization of our North American manufacturing footprint across AAG and PVG. In particular, our Gainesville facility continues to drive significant operating leverage through our continuous improvement initiatives. We are also seeing strong supply chain improvements across both PVG and AAG as material constraints are eradicated. We achieved strong double-digit EBITDA margins of 20% while absorbing the decline in SSG, which demonstrates the earnings potential of the business.

Overall, our customers in AAG and PVG remain positive on the trends in the second half of the year. In SSG, we continue to see softness as the channel works through inventory. As we have said in prior calls, we expect that softness to eventually abate into the strength of our product expansion, as well as e-bike growth trends, return to a more normal growth rate in the near future. Based on our latest customer orders, we expect FSG to be down slightly from the second quarter before recovering in the fourth quarter as the OEMs begin seeding the market with new-year models. Given the strength in our AAG and PVG groups, we are reaffirming our full-year guide of $1.67 billion to $1.7 billion in revenue, but we expect to be at the lower end of the range given the elongation of the SSG recovery. We will continue to advance our organic growth strategy by developing new products and leveraging our brands to expand into new end markets. In addition, we will remain steadfast in our commitment to our continuous improvement initiatives by advancing operations and supply chain efficiencies.

Just as importantly, we will leverage our strong cash flows and the strength of our balance sheet to evaluate various acquisition targets that will further our diversification and growth strategy. To conclude, we acknowledge the temporary challenges in front of us, but at the same time, are very pleased with the top and bottom line performance, thanks to the power of our brands, our product diversification and our customer loyalty. As our history has proven, the matter of the challenges the amazing team at FOX has always found a way to grow, be it through new products, new markets or manufacturing optimization. And with that, I'll turn the call over to Dennis.

Thanks, Mike. Good afternoon, everyone. It is great to be joining you today on my first earnings call as FOX's CFO. Since joining the company in June, I've had the opportunity to walk through and spend time at many of our state-of-the-art facilities, experience firsthand or performance-defining products and work alongside extremely talented FOX teammates. I'm excited to be part of the FOX team and look forward to helping FOX continue to challenge the impossible and lead in never-ending pursuit of maximum performance. I'll now review our second-quarter financial results and then review our guidance. Total consolidated net sales in the second quarter of 2023 were $400.7 million, a decrease of 1.5% versus sales of $406.7 million in the second quarter of 2022. PVG, which is comprised of sales to OE off-road and power sports manufacturers and aftermarket businesses where we sell our shocks directly to dealers and distributors delivered a 32.6% increase in sales in the second quarter compared to the same quarter last year.

This growth is primarily due to strong demand in our OEM channels. AAG, which is comprised of our aftermarket applications businesses, including lift kits, wheels and updated trucks, delivered a 26.2% increase in net sales in the second quarter compared to the same quarter last year. This growth was driven by sales from the Custom Wheel House acquisition, which was completed in March of 2023 and the continued strong performance in our upfitting product lines. Net sales in SSG decreased by 41% compared to the second quarter of 2022, primarily due to the higher level of channel inventory.

FOX Factory's gross margin was 32.9% in the second quarter of 2023, a 220 basis point decrease from 35.1% in the same period in the prior year. The decrease in gross margin in Q2 2023 is primarily driven by amortization of the acquired inventory valuation from Custom Wheel House acquisition and a product mix shift, offset by increased efficiencies at our North American facilities. Adjusted gross margin, which excludes the amortization of the inventory step-up decreased by 90 basis points to 34.4% versus Q2 of 2022, showcasing our strong continuous improvement initiatives, which partially offset the product mix shift. Total operating expenses were $79.2 million or 19.8% of sales in the second quarter of 2023 compared to $72.5 million or 17.8% of sales in the second quarter of last year.

The increase in operating expenses in Q2 2023 was primarily due to the inclusion of Custom Wheel House, the amortization of intangibles obtained from our custom Wheel House acquisition and facility expenses investments. Adjusted operating expenses as a percentage of sales increased by 140 basis points to 17.7% in the second quarter of 2023 compared to 16.3% in the same period in the prior year due to custom wheelhouse and facility expansion investments to support our future growth.

The company's effective tax rate was 16.9% in the second quarter of fiscal 2023 compared to 18.9% in the second quarter of fiscal 2022. The change in the effective tax rate was due to the recently finalized U.S. tax regulations, which resulted in the ability to use certain foreign tax credits. This was partially offset by a decreased benefit related to foreign-derived intangible income. On a GAAP basis, net income in the second quarter of 2023 was $39.7 million or $0.94 per diluted share compared to $53.5 million or $1.26 per diluted share in the same prior period.

Adjusted net income was $51.4 million in the second quarter of 2023, a decrease of approximately $7.2 million or 12.4% compared to $58.6 million in the second quarter of last year. We delivered $1.21 of adjusted earnings per diluted share in the second quarter of 2023 compared to $1.38 in the second quarter of 2022. Adjusted EBITDA decreased by 9.9% to $79.4 million for the second quarter of 2023 compared to $88.1 million in the same quarter last year. Adjusted EBITDA margin decreased by 190 basis points to 19.8% in the second quarter of 2023 compared to 21.7% in the second quarter of 2022. The decrease in the adjusted EBITDA margin in the second quarter of 2023 is primarily due to the change in the product mix and cost increases associated with Custom Wheel House and the facilities expansions to support our continued growth.

Moving to the balance sheet. The increase in inventory is primarily due to inventory that we obtained in connection with our recent acquisition of Custom Wheel House. Excluding the impact of the custom wheelhouse inventory, our inventory was down $11.9 million. The increase in goodwill and intangibles reflect the Custom Wheel House acquisition. Our revolver balance is at $325 million versus $200 million at December 31, 2022. During the first quarter of fiscal 2023, we incurred additional debt to support the acquisition of Custom Wheel House and working capital. Because of our strong operating cash flows, we have paid down $35 million of our revolver balance. And since the end of June, we have paid down another $30 million, leading the revolver balance below $300 million.

Now I would like to share some select guidance. For the third quarter of 2023, we expect sales in the range of $390 million to $410 million and adjusted earnings per diluted share in the range of $1 to $1.20. We expect SSG to be down sequentially from Q2 as the channel continues to recalibrate inventory. For the fiscal year 2023, we expect sales to be at the low end of the range of $1.67 billion to $1.7 billion as SSG recovers as OEMs introduce new models into the channel. We also expect adjusted earnings per diluted share to be at the low end of the range of $5 to $5.30. Our full-year guidance assumes an income tax rate to be in the range of 15% to 18%. With that, I would like to turn the call back over to Mike.

Thank you, Dennis. As we close out the first half of 2023, I am very pleased with our operational and financial results. This success is not just a testament to our individual talents but a reflection of our United Spirits and shared vision. While we celebrate our achievements, we remain cognizant of the challenges and evolving market dynamics that lie ahead. We understand the importance of adaptability and agility in these kinds of uncertainty. Armed with our solid foundation, strategic vision and our forward-thinking mindset, we are prepared to navigate the future with confidence, proactively embrace change and continue to deliver value to our stakeholders. I would now like to open the call for questions. Operator?

(Operator Instructions) And our first question will come from Larry Solow with CJS Securities.

I guess first, just a question. Mike, it seems like the weakness in specialty sports is filled that back in with the aftermarket application group. Is that like powered vehicles that was -- you have some pretty good visibility there, where the aftermarket? I know things were good, but it feels like things were better there. Is that a perfect equation, but the way to summarize just the revenue trends?

Yes. I'd say 2 things, very good attacking. One is, for sure, AAG stepped up and really helped deliver the offset to the SSG softness. We knew SSG was getting stocked. We didn't expect it to be quite this soft, as you can imagine. Secondly, aftermarket in PVG is actually up significantly year-on-year. If you recall over the last several years, you've got a hard time keeping up with the backlog in the aftermarket PVG. By getting the efficiencies in Gainesville, we've really been able to unlock that growth. So aftermarket stepped in real nicely as well. So I see those are the 2 major drivers that help back at SSG that we didn't know about. To your point, OEM was as strong as we expected it to be.

And just on the SSG. I think people were probably concerned. I think directionally probably not a surprise that we support with a long-term downturn. Can you just speak to -- I know different a lot of OEMs have been delaying their 2024 model. Can you speak to that dynamic? Does that potentially skew your sales even for the next few quarters? And I guess that's question one. And I guess part of the question is what gives you that confidence that you can rebound and get some growth as you look out into next year?

There's a couple of things happening there. One is on the spectrum of all of our customers and partners who are launching next year models, it's a pretty wide range. And so some folks are still not in a position when they can do that, which gives us this elongation of Q3. And in some cases, we've got customers who have been clean or fairly clean through the course of this last quarter, and they're putting their foot on the gas pretty quickly, and they want to get into those new model years as fast as possible.

So you're getting a pretty wide spectrum, and we're been through the diversity of those answers to get to the outcome that we're suggesting now in Q3 and Q4. We have seen demand actually stay strong. As you know, and we have talked about this, the demand actually hasn't been the problem. And we continue to see demand through our e-commerce show, our demand is up significantly year-on-year over 100%. So we're not seeing an end customer. We're just seeing this big buildup of bikes continue to get flushed through, and that's just going to take us through Q3 to get there. But we do see modest improvements in Q4 that lead us to strengthen for 2024.

Our next question comes from Jim Duffy with Stifel.

I wanted to ask a question on the shape of the guidance. The fourth quarter implies a sharp acceleration. Can you help us with some current visibility into the fourth quarter that gives you confidence to maintain that low end of the revenue guide and embed that acceleration into the fourth quarter?

Sure, Jim. A couple of things going on and one we just talk about SSG for Larry's question. So SSG improved in Q4 based on what we're seeing now. The second thing is, you've got new product launches happening as we speak that are going to continue to drive into Q4. The move forward range of Raptor, the U.S. model is -- actually you can build it now for the model truck online. So we think that's going to be a significant -- actually we're seeing that increase the forecast for product for that. I mentioned aftermarket earlier. That continues to strengthen through the balance of the year.

We're not seeing any slowdown in our upfitting business relative to sell-through of trucks and trucks (inaudible) et cetera, on lots. We've got a couple of new launches actually in the fourth quarter relative to updated vehicles that we're bringing to market that we're pretty excited about. So there's a whole number of things. It's not just one that gives us comfort in that Q4 time frame, which is why even with the downturn in our Q3 expectations in FSG, that we're still comfortable with the overall year.

And to add to that, Mike, we really saw some significant pickup in the plant efficiencies, and that's enabling unlocks that Mike talked about earlier with the aftermarket growth in PVG especially. And when you get to the aftermarket applications group, outside Vans is also poised to double their business and Custom Wheel House is continuing on its growth charge as well. So we feel like we've got a lot of levers to pull to hit that low end of the guide.

Okay. Very helpful. And Mike, I'm glad you brought up the upfitting business. We've seen that end-market demand is strong. Can you speak to what you're seeing from dealer demand and chassis availability to support the growth in the back half of the year?

Yes. The demand is strong, Jim. And the chassis availability is still spotty. Some OEMs are better at delivering the chassis that we want than others. As you know, we've [been] pretty well to get chassis where we need. One of the other things, and we'll give us some numbers on this. So one of the things we're seeing is not only is volume strong, but content is up. So we're actually selling the vehicles for more than we have in the past.

And what we're finding is the buying community, the people that want to buy our trucks have a lot of elasticity on the high end. So like I mentioned earlier, the truck that we're going to launch in Q4 of this year. That truck price point is above 170,000, Jim, and we're seeing strong demand for that vehicle. So things like that, where we can increase content, increase the engineering and the components of putting these vehicles and really attracting that high-end buyer is going to help us lift the revenue even when volume stays about constant.

Great. Maybe last quick one, Dennis, because you brought it up. Can you give us an update on the integration of Custom Wheel House? Have you secured capacity to support growth and utilization of the customer loss in the updating line?

Yes. So customers come along really nicely. It remains accretive on a year-to-date basis as well. So we had a good strong Q2. And then we're opening up some distribution centers as well to really unleash some additional growth. So I've been really pleased with this acquisition so far. And the synergies... You talked about the front end and the synergies, Jim, on Customer Wheel House. As we just mentioned, we're unlocking some new distribution. But really, the upside is getting those into our kits that we're selling those with kits and shocks as well as getting them on our upfit trucks, which we haven't done yet. So as that unlocks, the accretion value of that acquisition is going to be even better.

Our next question will come from Anna Glaessgen with B. Riley.

I guess as far as turning back to SSG. Obviously, modeling this segment has been pretty dynamic given the inventory corrections. I guess when are you expecting channel inventories to normalize to have confidence that demand or selling should be a little bit more normal as OEMs are launching products back in 4Q? And to what extent is the channel is going to be ready at that point?

Yes. I think you still see some bumpiness in the channels through the balance of this year. The reason why Q4 expected just new product launches that actually finally start to hit. But I think you really see the bumping continue. 2024 is literally see that come back to a more normal environment, right? So we're not expecting any great miracle cure this year.

Got it. So I guess, from 3Q to 4Q, there is an implied sequential improvement. So the channel should at least recover to a point that is able to accept those new product launches in 4Q?

Yes. That's really around getting new product into the model year '24 cycle with civil to OEMs. That's less about a lot of aftermarket improvement or existing inventory improvement. That's really around the OEMs have gotten clean and their inventory challenges and are ready to get back to setting new bikes. As you know, Anna, one of our challenges is not really in customer band, but we sold products last year, we're building through the market this year. As that continues, that's the headwind in Q3 starts to abate in Q4, but it will be bumpy depending on the OEM that we're talking about, and you really get the pickup from the OEMs are cleaner and build new bikes.

Got it. And would it be possible to disclose how much Custom Wheel House added to the quarter on revenue?

It was $20 million.

Our next question will come from Michael Swartz with Truist Securities.

Maybe just as a follow-up on Anna's last question, maybe as it pertains to guidance. Did your outlook for Custom Wheel House change in guidance? Or is it similar to what you provided before?

That's pretty similar. It might be immaterially up, but it's pretty similar.

Okay. And then on the bike business, just to maybe flesh this out. I think you said in the fourth quarter, you expect SSG to be up. But I just wanted to clarify, is that up year-over-year or just up sequentially versus the third quarter? I'm just trying to figure out...

It will be up sequentially from Q3, and it will be up sequentially from Q2 as well. So it's a modest recovery. It will be above what Q2 did above the $1.05 that we did.

Okay. So it sounds like in terms of your full-year SSG outlook, I think, Mike, the last time we spoke, you said would be down year-over-year at 20% plus. It seems like now the guidance would be down maybe 30%, 35%. Does that sound right?

Yes, with what we're seeing in Q3 and the larger softness in Q2 than we originally expected. That's about right.

Okay. And then pertains, I know we're working through some inventory in the channel, and then some of the issues that the bike OEMs are having or just supply of certain components and batteries or one of those for e-bikes. Maybe just give us a sense of what the supply chain of the channel looks like in a little more detail as we sit here today?

I think most bosses are done, Mike. I didn't really know it or pushing through the banks. We're not seeing any surprising issues on our side. So this is really a function of just assembling the parts and deciding when you want to build the bikes or sell the parts individually at the OEM level or the assembler level as it were. So for the most part, I think all the supply chain issues are really corrected themselves.

(Operator Instructions) And our next question comes from Alex Perry with Bank of America.

This is [Mattie] on for Alex Perry. Just first, can you talk about whether you think this is the peak of SSG declines? And then secondly, how should we think about adjusted gross margins for the balance of the year? Should we be thinking they will continue to be down year-over-year?

[Mattie], I'll let Dennis take the gross margin question, and I'll tackle the first one first. I think Q3 is the peak of the decline or the trough of valley. I'm not sure peak is the right word I would use it. But yes, you're correct. Q3 should be the worst.

And from a gross margin outlook perspective, we normally don't do that, right? But for the most part, I think we're going to see strong gross margins continue. We delivered a 34% gross margin, down only 90 basis points year-on-year, 20% EBITDA margin, while our bike business was down 41%. That was the high watermark last year too, for bikes. So this is pretty significant margin delivery for FOX. And on a year-to-date basis, we delivered a 20% EBITDA margin down 60 basis points only with bike performing as idea. So I think the big message coming out of this is look at the delivery of these results with bike being down, it really speaks to the diversification power of FOX and the business that the team has built here.

The other thing, [Mattie], too, to Dennis' point, which was great, is we talked before about the 250 to 350 basis points of improvement caused by the optimization or driven by the optimization of North American factories. And then we talked about the fact that we had more room to run in that regard with another – we basically double that again. And to Dennis' point, the confidence we get in the back half of this year is a function of the continuing optimization work that's being done. And I think there's plenty of upside in that for the back half and in the first half of next year, at least.

Our next question comes from Scott Stember with ROTH MKM.

Coming out of the first quarter, we were talking about SSG and inventory. It wasn't just what was happening, I guess, with the dealers, but it was also – so the OEMs had a lot of unfinished bikes, which was leading them to sell some of their aftermarket parts competing with you guys. Can you talk about that part of it? With supply chain starting to clean itself up, is that going away?

Yes. I mean that's the majority of the movement through the channel is actually the assemblers and OEMs completing these bikes and getting out to the dealers. The dealers are still asking for more high-end bikes and then line up. They're still looking to try to offset the over inventory they have on the low end, which we don't know got supply. It's the high end they're trying to get and the high end is what's moving through.

Now a lot of the high-end, even though it's probably more in demand, it's still getting discounted to dealers. And we're okay with that. At this point, we'd like to see the discounting happen, it doesn't really affect our margins. It's really about just getting those bikes through the system. But to your point or your question, it was really about the bike of respect assembly and at the OEM level that we wanted to see get pushed through because that was the big surprise, I think, for everybody at the beginning of this year was how much inventory you're seeing at their level, not at the sales point.

And following up on that, to this point, at least as you stand right now, if you had to just frame out how much better things are or less bad versus the last quarter? Just trying to get a gauge of how much improvement there is and how much time there is left for us to get there.

Yes. I mean we're all trying to gauge how much time it takes to get through, and that's why we get that comfort in Q4 is based on what we're seeing happening in Q3. Really, the biggest thing too is we're seeing the clarity of direction and action at the OEM level to get this taken care of. So the heavy discounting you're seeing out there now is a sign that they recognize the issue they're room to deal with the issue and they're dealing with it.

So we get more comfortable as we see that discounting happen because it means that people are serious about dealing with the problem. Again, it doesn't really affect us other than it just cuts back on our revenue, our sales because they're selling stuff we sold last year. But as we see them get more aggressive, we know they're getting closer to getting this taking care of. And we're getting pretty good feedback from all of our major customers. We have a couple that are very transparent with us and giving us a lot of insight as to what they're seeing in trends in markets and things like that. So that starts to give us some confidence as well.

All right. Just last question just from what the dealers are seeing. Could you just frame out -- when you say the demand is still strong for the high end, what you're seeing at retail? Is it up? Is it down slightly? And maybe just broader, what the bike dealers are seeing from the overall market, how weak things are there?

Yes. We've looked at this over the last couple of quarters. And our assumption is it's down slightly over 22%. So when we talk about -- in a prior answer to a prior question, we're talking about being down 30%, give or take. I think Mike Swartz was asking about that. That's the supply chain issues versus the end-customer demand. But I'd say if you really had to call out, this is a bit of Mike Dennison's opinion. I'd say the industry is probably down 10% to 15%. And the rest of the supply chain issues make up the difference.

[The] 15% is everything or the air that you guys operate in?

Yes. It's really everything because it's hard to really split out high end versus low end, and we know the low end, a lot of people in the COVID period went and bought by -- they really are not our biker or enthusiasts. There are just people who have nothing else to do on world bike. That's down because those people are just replacing those base and then you're not out (inaudible), et cetera. So I'm talking about the industry more in general.

Our next question comes from Alice Wycklendt with Baird.

Just on SSG, thinking through the new model you're coming out, are there any big changes in terms of pricing in model yea '24 versus model year '23 bikes?

What you're seeing is companies who can get out model year '24 are trying to get back to retail pricing. One of the challenges is a great question. One of the challenges they're facing doesn't really affect us against this isn't about a margin discussion within FOX or how we think about our sell-through. The challenge they're having is they might be launching a model year '24 bike against a discount model year '23.

And at the innovation or the changes on that OEM platform isn't enough, and it's very different by OEM. If the changes aren't significant enough, that buyer might want the person, the end user who's buying a bike wise, I say, "You know what, I can [use] that $10,000 bike for 30% less if I buy a model year '23, maybe I'm not so interested in the model year '24. So that's some of the complexity that our customers have to work through. And they're thinking about model year '24 is how do they launch the bikes and how do they get back to retail versus the discounting that's happening in Q2 and Q3. So we think that starts to improving in Q4. But as you can imagine, when we sell products in Q4, it's not going to hit the dealer until probably Q1, early Q2 of next year. So the guide at a runway. And I'm just trying to get out in front of that.

Okay. Great. That's helpful. And then just on capital allocation, you took your revolver down by $35 million this quarter, another $30 million after the quarter. Is further debt reduction of priority from here? Or how should investors think about capital allocation?

Well, it's 100% a priority. And we're paying as much as we are on interest, it is clearly a priority for this company. And the balance sheet and the balance sheet strength is a priority because that's what gives us all that ability and firepower to go out and do more deals and acquisitions. So yes, it will be a focus going forward.

Thank you. At this time, there are no further questions. So I'd like to turn the floor back over to Mike Dennison for any closing remarks.

I just want to thank everyone for taking the time to go through the earnings with us for Q2, and we look forward to talking to you soon. Have a good evening.

Ladies and gentlemen, this does conclude the FOX Factory Holding Corporation's Second Quarter 2023 Earnings Call. You may now disconnect your line, and have a great day.