Fox Factory Holding Corp (FOXF) 2014 Q2 法說會逐字稿

Greetings and welcome to the Fox Factory second quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. David Haugen, General Counsel for Fox Factory. Thank you. You may begin.

Thank you. Good afternoon and welcome to the Fox Factory's second quarter fiscal year 2014 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, President Business Division; and Zvi Glasman, Chief Financial Officer.

By now, everyone should have had access to the second quarter earnings release which went out today at approximately 4:05 pm Eastern time. If you've not had a chance to review the release, it's available on the investor relations portion of our website at www.ridefox.com.

Before we begin, I'd 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 risks and 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 that could cause or contribute to such differences include risks detailed in the Company's earnings release, annual report on Form 10-K, quarterly reports on Form10-Q, and other Company filings filed with the Securities and Exchange Commission. Except as required by law, the Company undertakes no obligation to update any forward-looking statements or other statements herein whether as a result of new information, future events, or otherwise.

In addition, within our earnings release and in today's prepared remarks, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA, and adjusted EBITDA margin percent are referenced. It is important to note that these are non-GAAP financial measures.

A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures are included in the company'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, Mr. Larry Enterline.

Thank you, David. Good afternoon, everyone, and thank you for joining us today. On today's call I will provide a brief overview of our second quarter results and an update on our business and progress on our ongoing strategic initiatives. Mario will then go into a little more detail on our products by category and then Zvi will review the financial results in more detail and discuss our guidance. After that, we will open up the call for any questions that you may have.

We are pleased to report another solid quarter. In the second quarter we generated sales of $86.4 million, an increase of 22.8% compared to the second quarter last year which exceeded the high end of our expectations. The increase reflects growth in both vehicle categories as sales of powered vehicle products increased 52.6% and mountain bike products increased 7.4%.

Our financial results benefited from our Sport Truck USA acquisition which closed at the end of the first quarter of this year. Sport Truck performed to our expectations and we remain excited about the synergies and long-term contributions of this acquisition going forward.

We are also pleased to report continued improvements in our gross margins which increased 220 basis points to 31.2%. This underscores our execution on a number of operational initiatives to improve factory and supply chain efficiencies, as well as continued execution of our overall product design for manufacturability program. We generated non-GAAP adjusted net income of $9.8 million or $0.26 per diluted share, in line with our expectations.

Overall, the second quarter was a good quarter operationally for Fox. Our continued execution on our ongoing strategic initiatives improves the foundation of our business and has us well-positioned to achieve our previously stated long-term goals.

Now I'd like to take a moment to provide a brief update on our business and some of the overall trends we are seeing. Starting with mountain bikes. When we spoke on last quarter's call we were in the middle of our launch of model year 2015 products. Customer reception to our products has been very enthusiastic.

In the near-term, we believe that supply chain issues, unrelated to Fox, could potentially lead to shipments being delayed from Q3 to Q4. As a result, we have widened our revenue and EPS guidance range for the third quarter while keeping the year's guidance intact. Overall, we believe premium mountain bikes continue to buck industry trends and should continue to benefit us over the longer term.

Turning to powered vehicles. As I mentioned earlier, we delivered year over year growth of over 50% in the second quarter. We believe market demand for premium suspension products continues to grow and Fox is well positioned to deliver customized solutions that offer true performance enhancements. Over the past few years the powered vehicle industry has undergone a significant amount of change in evolution and Fox has done a good job staying in front of demand. While we are pleased with our spec wins in both bike and powered vehicles, we continue to closely monitor sell-through in our distribution channels to be properly prepared for the order activity throughout the balance of this fiscal year.

As we begin the second half of fiscal 2014 our focus is on the same key strategic initiatives and multifaceted growth strategy that we had previously discussed. I'd like to take a few minutes to provide an update on our progress. First, we remain focused on increasing our penetration into existing vehicle categories, both through sales with our existing OEMs, as well as with new OEMs. We continue to introduce new products on a regular basis and OEMs continue to express their satisfaction with our premium products.

While Mario will provide more detail on our newest products in our pipeline, I'd like to highlight that we recently launched a new entry-level OEM bolt-on replacement mono-tube shock for the on-road truck market. This new price point product allows us to bring the Fox brand head to head against similar products from other competitors. Additionally, with the acquisition of Sport Truck, after market solutions have been an increasingly important aspect of our business and we're an important contributor to our growth in the powered vehicle category in the second quarter.

Our second key growth strategy is expanding our business through new adjacent product categories. Our Sport Truck acquisition also represents progress on this initiative by bringing lift-kit solutions into the Fox product portfolio. Long term, we believe there is significant opportunity to leverage our technology and expertise, to develop new products internally for adjacent categories, along with opportunities to expand our product categories through future strategic acquisitions.

Third, we're focused on evaluating and capitalizing on opportunities to expand our international presence. To complement our business in our core markets of North America and Europe, we are focused on evaluating opportunities to capitalize on emerging middle-class consumption as part of our long-term growth strategy. A few countries we've identified as target markets include China, South Korea, Australia, Brazil, Argentina, and Chile. In addition to our acquisition in Germany, we recently have expanded our direct presence in Austria and are looking to add additional business development resources in Asia.

And, lastly, we continue to focus on opportunities to improve our operating and supply chain efficiencies. This is an area where we've made meaningful improvements over the past year and we still believe there is room for further margin enhancement. In addition to the margin growth I mentioned earlier in my remarks, we also improved our adjusted EBITDA margin by 120 basis points underscoring our ability to achieve leverage in our business and implement additional operating efficiencies. As an important part of this effort, our team is continuing to work on moving the majority of our bike production to Taiwan and we expect to complete the move by the end of 2015.

During the second quarter we shipped over 30% of our finished forks from our Taichung facility. This fiscal year we have begun realizing margin improvements associated with the move with the full benefit, of course, to be recognized after the transition is complete. The new facility will enable us to reduce our lead time with the Taiwan-based manufacturers who are building the majority of high-end mountain bikes.

In summary, we are pleased with our performance in this first half of 2014. This month marks the completion of our first year as a publicly traded company and during this time our team has continued to execute on our initiatives and has delivered strong financial results across the board.

With that, I'll now turn the call over to Mario.

Thank you, Larry, and good afternoon, everyone. As Larry stated, we are pleased with our solid first half of the year. During my remarks, I would like to discuss some of our recent business and industry highlights, as well as our current divisional initiatives driving short- and long-term growth. I'll start with our mountain bike business.

During our last call we had just wrapped up key media launches in North America and Europe for our new flagship all-mountain enduro fork to 36. We've now moved beyond the first look interviews and have started seeing solid reviews of the fork, now that the media has had time to experience it on their own trails. The feedback has been favorable and we continue to hear accolades like this one from Vital MTV, a prominent online mountain biking site: Small bumps all but disappear under your weight and we noticed a marked improvement in front-wheel traction around bumpy off-camber corners. The fork transformed our test bike into one that could be ridden with abandon into the unknown trusting that we'd be able to handle whatever the trail threw at us.

We are getting similar feedback from our network of brand ambassadors in retailers. Here is what Cycles in Salt Lake City, Utah, texted to their Fox sales rep: tossed the new 36 on my pivot mock six and have (inaudible) it around for a few days. Holy bleep. That thing is rad. It is insane how much better that thing is than anything I've ever written. Keep up the solid work.

The 2014 race season is also at its halfway point and we're seeing great success in reaching podiums around the world. Our racing applications development program is a key component to our R&D efforts typically leading the technology and feature development for the following year's product line. These results bode well for upcoming product lines.

On the major rates circuit worldwide Fox athletes have won 28 downhill events, 14 enduro events, 28 cross country events, and 5 free ride events. While the model year 1536 is exciting in and of itself, the most exciting thing to me about the model year 2015 effort, is that the features and technologies developed from the 36 program were integrated into the balance of the product line. Therefore, Fox customers are benefiting from greatly improved performance across all of our platforms.

The model year 2016 OEM spec season is in its beginning stages. Our sales team is introducing model year 2016 technologies and products to our global customers via scheduled test sessions throughout the summer. Official product specs will be released at the upcoming Eurobike and Interbike trade shows. Production and tent samples are then provided after the trade shows with final spec negotiations and tuning happening throughout the fall.

We're confident our model year 2015 products will continue to gain momentum on the race course and local trails, contributing to a positive reception of our model 2016 product lineup. One last note on model year 2015 spec season. We are pleased with the model mix our customers chose us for and are encouraged by the strong orders that came through to kick off the model year.

Now, on to our powered vehicle business. I'll kick this off with some exciting news on our circle track efforts. Fox-backed drivers and teams have now racked up over 156 wins in 2014. Our circle track efforts have been concentrated on various asphalt and dirt modified classes from Wisconsin to Delaware to upstate New York. These wins have come by way of four core product offerings, plus optional features for each. The demonstrated performance combined with excellent track side support continues to take drivers and teams from other competitors.

We're also very pleased to share two new Polaris side-by-side spec wins with our 2.0 Podium X shocks on the new 60 inch high-performance RZR S900 and the 55 inch trail RZR XC 900.

Our business units have distinct OEM sales approaches on how we sell products. In our bike business we present the product lines. In our powered vehicle business we present a technology portfolio. Our sales and engineering teams have been traveling to customers this summer on what we call a technology road show. We have been reinforcing the merits of internal bypass, introducing new shock architectures, and demonstrating our electromechanical ride dynamic solutions.

In parallel to the technology road show, we have also been giving key industry influencers and key media the opportunity to test side-by-side vehicles with their stock shock technology versus Fox internal bypass shocks. The format for these engagements has been to allow the driver to drive the vehicle in stock trim over typical rough and fast off-road terrain, then Fox technicians swap the stock suspension out for internal bypass shocks and the driver goes for a second trip across the same terrain.

The following is a quote from the administrator of a key RZR forum, that upgraded from the stock shocks on his RZR XP 1000, through this back-to-back experience just described. Quote. With the stock suspension, I felt like the car was a little unpredictable and skaty. The rear end came up a few times unexpectedly. The Fox Podium internal bypass shocks added stability and allowed me to carry a lot more forward speed through the rough sections, even on some of the spots where I thought the vehicle might give me a problem, it just floated right through, and they kept the rear end of the vehicle planted. We expect similar positive feedback to come from the media and influencers as we continue to provide this back to back test experience in the coming weeks and months.

On the race side of things, we are having a great year in many classes of desert racing. To highlight a few recent victories, in the Baja 500, Bryce Menzies won the trophy truck and his third Baja 500 win in four years; and in the side-by-side class we swept the Podium with internal bypass technology. Down under at the Finke Desert Race of Australia, Shannon Rentsch, won the buggy class overall and we chalked up another Side-by-Side win on internal bypass technology with a team of Philip Swindell and Matt Costello. In the works Side-by-Side series, Ryan Piplic is winning over the favored RJ Anderson. Ryan is also running internal bypass shocks. And with that, I would like to now turn the call over to Zvi Glasman, our CFO, to review our financial results. Zvi.

Thanks, Mario. Good afternoon, everyone. I'll primarily focus today on our second quarter financial results and then review our guidance.

Sales for the second quarter of 2014 were $86.4 million, an increase of 22.8% versus sales of $70.3 million in the second quarter of 2013. The sales increase reflects 52.6% growth in powered vehicles, products and 7.4% growth in mountain bike products.

As previously mentioned by Larry, our powered vehicle growth was positively impacted by our Sport Truck acquisition. Gross margin was 31.2% for the second quarter of 2014, a 220 basis point increase from gross margin 29% in the prior-year period. The improvement in gross margin reflects the successful execution of operational initiatives targeted at improving factory and supply chain efficiency along with continued execution of our overall product design for manufacturability program.

Total operating expenses were $15.2 million or 17.6% of sales in the second quarter of 2014 compared to $10.2 million or 14.5% of sales in the second quarter of the prior year. The increase in operating expenses was primarily due to the inclusion of Sport Truck's operating expenses in our consolidated results and higher stock-based compensation expense, as well as significant corporate transactions, including the recently completed secondary offering of our common stock, as well as transaction and integration costs, associated with our Sport Truck acquisition that closed on March 31.

Within operating expenses our sales and marketing expenses increased to $5.1 million in the second quarter of 2014 compared to $3.5 million in the same period of 2013. The increase was due to additional personnel, promotional activities, and outside services as we continue to invest in promoting our company and brand; and was also due to the inclusion of $800,000 of Sport Truck sales and marketing expenses in our results.

Research and development expenses increased to $3.6 million in the second quarter of this year compared to $2.6 million in the same period of last year, due largely to increased personnel and product development-related expenses, as we continue to invest in new and innovative technology. Investment in R&D is a critical component of our business and while investment may fluctuate in certain years and quarters, depending on product development cycles and other factors, we expect that we will generally continue to invest at historical levels expressed as a percentage of sales.

Our general and administrative expenses in the second quarter of 2014 was $4.8 million compared to $2.8 million in the prior-year period. The increase was largely due to the inclusion of approximately $700,000 of Sport Truck's operating expenses, $600,000 of higher stock-based compensation, and $800,000 related to significant corporate transactions as fully described in our 10-Q and press release, and $500,000 of incremental costs associated with operating as a public company.

Please note that our GAAP results included a $3.8 million one-time tax benefit due to the reapportionment of income. As we previously discussed, we periodically evaluate our global tax structure for opportunities to enhance our tax efficiency. The tax benefit included in our results reflects a positive outcome of these efforts.

On a GAAP basis, our net income in the second quarter 2014 was $11.6 million compared to $5.7 million in the prior-year period. The improvement reflects our higher sales and improved gross margins as well as the aforementioned one-time tax benefit. Earnings per diluted share for the second quarter of 2014 was $0.31 calculated on $37.8 million weighted average diluted shares outstanding, compared to $0.17 calculated on $34.7 million weighted average diluted shares outstanding in the second quarter of 2013.

Non-GAAP adjusted net income was $0.8 million compared to $6.7 million in the second quarter of the prior year. (sic - see press release, "$9.8 million") Non-GAAP adjusted earnings per diluted share for the second quarter of 2014 was $0.26 compared to $0.19 in the second quarter of 2013. In the second quarter of 2014, adjusted EBITDA was $16.6 million compared to $12.6 million in the same quarter last year. Adjusted EBITDA margin was 19.2% compared to 18% in the prior-year quarter.

We believe non-GAAP adjusted net income and adjusted EBITDA are useful metrics that better reflect performance of our business on an ongoing basis. You'll find a reconciliation of the GAAP measured net income to the non-GAAP adjusted net income and the calculation non-GAAP adjusted earnings per share at the end of the present release issued today. You'll also find a reconciliation of the GAAP measure net income to adjusted EBITDA in our earnings release.

Now, turning briefly to our results for the first six months in 2014. Sales for the six months of 2014 were $142.5 million, an increase of 13.8% compared to the same period in 2013. Sales of powered vehicle and mountain bike products increased 35.2% in 2.3% respectively for the first six months of 2014 compared to the prior-year period. Adjusted EBITDA increased 18% to $25.3 million in the first six months of fiscal 2014 compared to $21.4 million in the first six months of the prior-year period. Adjusted EBITDA margins improved 60 basis points to 17.7% compared to 17.1% in the comparable period of fiscal 2013.

Now, focusing our balance sheet. As of June 30, 2014, we had cash on hand of $1.9 million. Total debt outstanding was $45.4 million compared to $8 million of debt outstanding as of December 31, 2013. The increase is due to borrowings for our acquisition of Sport Truck. Inventory was $63.1 million as of June 30, 2014, compared to $42.8 million as of December 31, 2013. The increase is primarily due to the inclusion of Sport Truck's inventory along with normal growth and preparation for the peak summer selling season.

Accounts receivable was $39.3 million as of June 30, 2014, as compared to $33.8 million as of December 31, 2013. Accounts payable was $30.5 million as of June 30, 2014, as compared to $24.3 million as of December 31, 2013. The changes in both accounts receivable and accounts payable are primarily driven by the normal seasonality of our business and the acquisition of Sport Truck.

Before I move on to our guidance, I'd like to mention we announced last month we completed a public offering of 5.75 million shares of our common stock held by certain stockholders including Compass Group Diversified Holding, LLC. Fox did not sell nor did we receive any of the proceeds from the offering. All the proceeds were received by the selling stockholders. As a result of the secondary offering encompasses ownership falling below 50%, we anticipate incurring increased ongoing costs related to financial reporting and internal controls.

Finally, turning to our outlook. As Larry mentioned earlier, due to supply chain issues unrelated to Fox, we have widened our guidance for Q3 to allow for the possibility of shipments being delayed from Q3 to Q4. For the fiscal 2014 third-quarter, the Company expects sales in the range of $88 million to $94 million and non-GAAP adjusted earnings per diluted share and the range of $0.30 to $0.36.

For the full year we are reaffirming our annual guidance that we provided on a last conference call. We continue to expect net sales in the range of $300 million to $320 million and non-GAAP adjusted earnings per diluted share in the range of $0.85 to $0.95 based on 38 million to 39 million weighted average diluted shares outstanding. As a reminder, non-GAAP adjusted earnings per diluted share exclude the following items: net of applicable tax, amortization of purchased intangibles, secondary operating expenses, certain acquisition-related adjustment and expenses, and a one-time tax benefit net of cost. The adjustments are more fully described in the tables included in our press release which have been posted on our website. Larry.

Thank you, Zvi. With that, we'd like to open the call up for questions. Operator?

(Operator Instructions)

Mike Swartz, SunTrust.

Could you maybe provide us just a little more color on I guess the timing of shipments or the supply chain changes that you had pointed out for third quarter, fourth quarter I guess in the mountain bike business? What exactly is going on there?

Mike, what we hear, there other suppliers' pushing of deliveries. We have gotten a little bit of that noise. We've seen a little of it and, again, we're allowing for the fact that we could see some of that rolling from the third quarter to the fourth. We don't think it's loss of sales, we don't think it's to that extent, but we do believe we could see some of it crossing the quarter.

Okay. And I guess just in context of one of your larger OEM customers had a conference call today and was just talking about, in the independent bike channel, about a little bit of heaviness with some inventory there. Is that something you're seeing as well or is that kind of a comment limited that to that company?

Again, I don't know the exact issue that you're speaking of. We run independent checks and clearly we talk to our customers and again I think you -- within bike you've got and even within mountain bike you've got to separate the segments from where we operate from overall mountain bike, and so at this point I don't think we see any major issue with sell through or inventory in the part of the channel we're concerned with. Clearly that is -- as I indicated though, we do keep our eye on that. That's something that can change quickly, but I think right now the difficulty we see, if any, is attributable to just supply chain and they can't get product to complete bikes.

Okay. Thank you for the color.

Larry Solow, with CJ Securities

Just give us a little color on anything on Sport Truck. You had it, I guess, in your hands now for a few months. I know you obviously were pretty well -- you know those guys already but anything, any positive surprise, any negative surprises? And can you tell us what the organic growth was in the quarter in sales?

We don't separate out the organic growth, I don't think. Can we give him a feel for that?

We don't break it out but we do provide in our 10-Q the actual sales they had. We would tell you it's -- even when we report the actual sales keep in mind that we eliminate sales of ourselves, they were previously a distributor of ours, so those got eliminated. We can tell you that it's consistent with the growth targets. We've been telling you that it's going to be a solid double-digit grower, it is, and we expect some of those, the loss sales on consolidation and maybe a little bit of competitive loss, but it is performing at or better than our expectations.

Yes, I would say, Larry, we're very pleased with how we've done both the top line, and I think as we expected they would they've done a good job managing their business on the bottom line. Again, I would tell you right now we're very pleased.

Okay. And you still sort of expect sort of a neutral to maybe slightly positive on a cash EPS in 2014 and then more benefit in 2015? Is that a good way to characterize your outlook for Sport Truck?

I think you guys know what the earnings estimate we had out there were prior to Sport Truck and then after. We're not going to break out separately the actual EPS contribution, but it is performing at or better than our expectations.

Great. On to the gross margin, nice, consistent with your outlook, a little over 250 bps improvement. I thought you mentioned Taiwan actually turned accretive this quarter, is that correct? I know it has been a little bit of a drag.

I would not say that. Taiwan -- we think by the end of the your on a full-year basis it becomes neutral. Accretive in the year as compared to last year, we had a drag going into the year.

Okay. So, I just wanted to clarify that. So, it was still a drag this year and then next year is when we should get some full-year accretion. Is that correct?

It was a drag last year, by the end of this year it's neutral, by next year you actually get accretion.

I think a good way to think about it, and the way we look at it, is every quarter it's certainly getting a lot better for us, right, as we move more production in there, get better utilization. And I would tell you that's something that probably a little bit ahead of the internal targets we have for it.

Got you. And then just lastly, I realize it's still a small piece of your business and it's mostly potential more than anything else at this point until the government starts to spend. Any anecdotal updates or anything in terms of progress on the military side?

Yes, I would say it's about the same as it's been. I still don't think there's a lot of clarity. I think we are hearing that we may know something on JLTB early next year.

Okay. Great. Thanks, guys. I appreciate it.

Rafe Jadrosich with Bank of America.

Just as you look at the revenue outlook for the back half of the year, can you just give us a little bit of color on drivers between mountain bike and then power vehicles and then maybe just talk about kind of how power vehicles are growing excluding the Sport Truck acquisitions?

I'm sorry, can you repeat it one more time? We're having a hard time hearing you. Sorry.

Sure. Can you could just in terms of the revenue outlook for the back half of the year, can you just talk about get a little color between mountain bike and powered vehicles, and then just can you talk about how you expect powered vehicles to grow excluding Sport Trucks, and then any color you can give on that OEM factory transition, if there is any update there would be helpful?

I think we tend to talk about our long-term growth targets for bike and powered vehicles as opposed to particular quarters. We mentioned that certain OEM it was disclosed in the secondary offering that we have a certain OEM who is undergoing a model year changeover.

That continues to be the case. We expect to have virtually no revenue from them in the back half of the year. And then we would tell you that we tend to focus, we have the issue, potential issue on the supply chain that Larry talked about which could influence the growth rate, the contribution for bike versus power vehicle in the back half of the year.

Yes, the way we tend to think about it is certainly by this time we know what spec we've won in both powered vehicle and mountain bike and we closely are monitoring sell through now, back to some of the questions on inventory, both to see how well the models we are selling or we are [spec] on are selling versus ones we maybe didn't [spec] on as well as overall kind of conditions in both of the categories. And I think those are probably the fundamental drivers outside of the couple things you mentioned with the major OEM dropping off and Sport Truck.

Maybe just one more thing to keep in mind. We do have Sport Truck but we do have the sales that we used to previously recognized from them being a distributor of ours that we no longer get to recognize, so that's another headwind which we considered in our guidance when we acquired them, right?

Also, when we acquired them we considered in our guidance the fact that we were selling some of their competitors so we're allowing for some of those sales to competitors as well during the transition year and ultimately stabilize that whole thing. There's a lot of moving pieces. I know not giving a terribly crisp answer, but there's a fair bit of moving pieces here.

That's really helpful. And then just in terms of the gross margin, you came in at 220 basis points for the quarter and for the full year you guys are expecting it to be up 200 basis points. Should we expect the back half of the year to be running at that higher rate or is there any kind of -- can you just give the puts and takes of what to kind of go right there to drive it higher and where Taiwan is trending versus your expectations?

First of all, we think we've got some aggressive targets internally but we think it's prudent that we are targeting around 200 basis points a year in aggregate for at least this year. Things are going according to plan. We're making great progress on our operational efficiency initiatives.

Were also making great progress in our Taiwan transition. I think we've shipped, I don't if we've disclosed how many, Larry has comments I think --

Over 30%.

Yes. So, but, no, we wouldn't urge anybody to model higher gross margin contribution as a result of the outside performance in Q2.

Thank you. That's helpful.

[John Anderson] with William Blair.

Just a quick followup on Taiwan. When that program is complete late 2015, will you do all of the production of mountain bike products in Taiwan or will you retain some capacity domestically for strategic purposes, I guess?

We will produce approximately 85% of our bike products in Taiwan. The reason it is 85% is we're doing this to improve the supply chain with our customers. Well, we have some very important and influential customers that actually produce here in the US. I won't name names, but the last thing we want to do is disadvantage them and disadvantage other customers, so we would tell you it's probably going to be around 15 -- and then we have after market business here as well in the US, so we will tell you it probably gets to about an 85% number by the end of that year you mentioned.

Okay. That' s helpful. Let's see. I guess just, I don't want to beat a dead horse, but with respect to the supply chain issue, can you just talk a little bit more -- this is a business that -- this is just a shift that you see. How comfortable are you at this point that it's a shift and not potentially lost sales because of some of these other vendor issues?

Again, I think we're reporting what we see today and if I have to look at what we're hearing we believe it is just a shift, could cross the quarter. At this point we don't anticipate it being a lost business for our OEM customers.

Okay. Fair enough. And then I guess on the SG&A line, by my math I guess taking out some of the one-timers, the run rate in the quarter was a little over $14 million and I guess that reflects the addition of the Sport Truck operating expenses. Is that the way to think about kind of the run rate for SG&A going forward or are there some other puts and takes we need to consider?

I think that's reasonable. We are going to -- we are, as we mentioned in my comments, now that we are a public company that is no majority-owned, a little bit more higher public company costs that we were incurring before, and as I mentioned as well, we're not necessarily going have a linear kind of relationship with first of all the seasonality on the revenue line of our business whereas you don't have the same seasonality and expenses. A person that you hire, with the exception of the direct workforce putting profits together doesn't go away in a lower revenue quarter, so I don't kind of think of it as a percentage of sales for any particular quarter, but I think it's fairly representative but it could migrate a little bit here and there.

Okay. I guess the last question just a little bit bigger picture on some of the growth drivers in -- excuse me, on the mountain bike side of the business. You've talked in the past about category adjacencies and even price point adjacencies. Is there any update on kind of initiatives around, say, bike seats?

Also, the $1500 to $2000 price point, any color there would be helpful. Thanks.

Mario, why don't you go ahead and take that?

Sure. John, so first on the things that we've talked to you in the past, new price point, that is solidly under way I would say. We're anticipating sort of at the earliest having some after market effect towards the tail end of next year. The bigger play for that product is likely to be OEM and we think that comes on for model year -- let's see, we're model year 2015 now, model year 2016, model year 2017 is where that would start to come into play which would be calendar year 2016. So that's the new price point.

We've also spoken to you about rounding out our seat posts which we currently have one into a family of seat posts. I can tell you that those activities are underway as well. So, in terms of initiatives that we've spoke about, growth opportunities for bike, the new price point, rounding out a family of seat posts, continuing to pay attention to and make sure that our current mountain bike products are compliant with the mountain bike, eBike movement, which continues to build momentum and also a design for the category exercise of getting into the commuter and urban eBike category which is the fastest growing category in the industry. All of these things are under way.

Great. Great. One followup, if I might. Just on the OEM in question on the powered vehicle side of the business it sounds like you're not expecting little or no sales in the second half of the year. Is there any more visibility on when that business may resume or what we should be -- how we should be thinking about that in terms of our modeling?

We think best case scenario it will come back in the back half of next year. We don't have complete visibility. It is possible it takes as long as the back half of the following year.

So, it's anywhere from earliest we get sales recurring or returning next year in the back half of the year and in the worst-case scenario it's the back half of the following year. That's consistent -- that's been consistent for quite a while here. We've had -- we just still don't know for sure.

That's helpful. There were sales though so in Q2, those will just kind of go away beginning in Q3?

I'm sorry. Could you say that again, John, please?

There were sales to that OEM in Q2, the recently completed quarter?

Yes.

Okay. Thanks, guys. Very helpful.

Craig Kennison with Robert W. Baird.

Mario -- sorry for the background noise. I wanted to ask Mario just about sell through trends if you could contrast North America and Europe in particular, given recent sort of economic events?

Craig, I will tell you that we were encouraged so as you know we work with a global set of OEMs in the bike business. They were and remain to be positive about the model year 2015 startup. As I said in my prepared comments, we were encouraged by how the year has started off. Larry mentioned that we're happy with the sort of spec position that we've been given the opportunity to have with the OEs and now related to your question we're following the sell through.

Consistently across North America and Europe I would say that for our category, again premium mountain bike, we believe that we and others in that space continue to buck sort of not only mountain bike overall as a category but bike overall as a segment. So we're cautiously optimistic and increasing things that give us some confidence.

Yes, you do see, Craig, and we've -- you get anecdotal evidence, we've certainly got some direct evidence of events, for instance our distributor in Israel think it's probably a pretty poor time to launch any promotions. So, I think you're going to see some of that kind of activity, but we don't -- right now we wouldn't see any of that's being a major impact. Obviously we don't have a lot directly going on in the Ukraine, but that would be an issue, but I think other than isolated spots like that it probably feels okay at this point.

And to follow-up on that, we've done some checks and it appears like the $2,000 price point and above where you operate is operating a little different than the rest of the market. There may be some resistance to further price increases. How comfortable are you that you can push price as you get more innovation into your product?

Well, again, given our brand position, we clearly are a premium price and we clearly have that strategy. We like to use innovation and get price per function.

So, we like to get price with we're bringing more value through performance and features of the product and I think we have the capability to do more of that. I think that's been a consistent driver.

In other words, I don't know if there's a place that innovation continues that you run up against any absolutes here in price. Now, we're also very conscious of not creating huge price umbrellas that people can get underneath.

So, that does moderate, I think, some of what we might be able to do in short term. It might not be a good idea in the long term and we do keep that in mind. Does that make sense?

That makes sense. Thanks for taking my questions, guys.

(Operator Instructions)

Sean Naughton with Piper Jaffray.

So, if we think about your performance in Q2 you had that 7.4% growth in mountain and just kind of following up on the last question on pricing. How should we think about that growth kind of as we think about the unit mix kind of ASPs, how would you -- just talk about that 7.4% number?

I would tell you it's predominantly units. There's always some mix but -- I'm sorry, yes, it's predominantly units. There's always some mix things, but not a lot of -- I would say we do try as a philosophy to concentrate on price per function but not a lot of pricing there.

Okay. That's helpful. And then, Larry, just going back to something you said in the beginning. You talked about some new country opportunities. I think you talked about targeting countries that have an improving middle class and improving spending.

Obviously, that makes a lot of sense, but can you just described a little bit of -- are you doing any business here today in those areas and are those really opportunities to take back distributors or is this after-market business? Just trying to understand a little more about what that international growth opportunity could look like for you guys?

Yes, we are -- we do have activity today in those areas. We believe we can improve in a couple areas, Sean. One is getting resources on the ground that understand those local markets and can be there with customers both after market as well as in some of the places you have indigenous OEMs we are interested in.

We think those -- the markets that we have identified are ones where we believe there is an appetite for what we do and I think we believe we're limited in terms of how we've gone about distribution and promotion in those markets. So, we think that is some pretty good opportunity for us.

Okay. And then I guess just lastly I think you talked about a couple side-by-side wins. I think on the RZR, I just wanted to clarify, is that an additive program or is that just replacing some of the spots that you guys had today?

Mario?

Yes, so those are for Polaris. Those are replacing their current RZR900 products that they've had in place which we were on. So, they were newly developed vehicles for Polaris and they've been excited to have us be part of that -- those new developments.

Okay. Thank you, and best of luck in the third quarter.

Thank you.

Jim Duffy with Stifel.

Question on the bicycle segment. Mario, perhaps best for you. Where does the channel stand with respect to 26-inch wheel product? Is it still occupying a lot of floor space or is the channel largely clear of that inventory at this point?

That's a great question, Jim. It's a bit spotty. I think for the most part the customers that we have in their respective channels and the price points that we occupy, we're pretty early in switching over to 29 and now the 27-1/2 inch wheel.

In our price points, 26 inch is essentially dead. And in those price points all the way through to retail, we think that we're in pretty good shape. Now, so mountain bike in general, if there's any stagnation, is probably related to 26 but in our price points which tend to be the enthusiast price points and the early adopters of technology, kind of flush through 26 pretty well though spotty depending on region.

My sense is your models are selling well. What I'm wondering I guess is, is there a chance that 26-inch wheel bikes are just occupying space, needing retail or capacity to take new inventory that's limiting their reorders of some of the better selling bikes?

Yes, and like I was saying, I think it can be spotty depending on region. Parts of Germany, for instance, depending on some of the domestic brands that are there might have been a little bit heavier on 26 and a little bit later into the adoption cycle of 27 and 29. But an indicator for us on how the OEs have started off model year 2015 gives us some cautious optimism that the channels prepared for these new models which are predominantly 27-1/2 and 29.

Very good. Thanks. And then, Zvi, Sport Truck question. I guess I'm going to ask you to be a little more specific. You now have better visibility on potential near-term impact to run rate revenue from consolidation.

You had a $34 million revenue run rate business when it was acquired. Would that improve visibility? Can you put some numbers behind what might be lost or redundant revenue?

Well, we disclose in our queue, I think we disclosed $12 million or so from Sport Truck. That's the Sport Truck revenue without regard to any of the revenue that was lost by the sales of us to them. If you were trying to put a run rate on it, it would be south of that.

We're not going to make a habit of disclosing the impact overall for competitive reasons, but if you try to -- I was just looking at our run rate, it's maybe a little bit shy of $10 million-ish a quarter. Keep in mind one more comment, their business is somewhat seasonal. The Q2 is typically their strongest quarter, so run rate wise --

The other thing to keep in mind is Sport Truck does act -- they both package our product in with their lift-kit offerings. They also act as a distributor of our product and I think what Zvi has referenced in the past, that kind of gets muddy as we go forward because we can just move more product through them as a distribution channel that replaces product we would have moved through another distribution channel when we didn't have it.

Yes, so if you took the revenue they had last year, right, and the revenue last year was call it $34 million and you put a 10% growth on it, that would be 37-1/2, right? That's $9 million. So, $10 million-ish is probably a run rate when we're all kind of done with maybe a little shy of 10 when you consider the impact of what Larry just talked about.

Okay. Got it. And that's helpful, particularly the comments around the seasonality. Thanks for that.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you for your questions and your interest in Fox. We look forward to continuing to execute our plans and updating you on our progress as we go forward with these quarterly earnings calls. I'm also thankful for the support of our customers and suppliers, and particularly the hard work of our great group of enthusiastic employees, all keys to our continued success. Thank you and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation and have a great day.