Fox Factory Holding Corp (FOXF) 2014 Q3 法說會逐字稿

Greetings and welcome to the Fox Factory Holding Corp. Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 David Haugen, Fox's General Counsel. Please go ahead.

Thank you. Good afternoon and welcome to Fox Factory's third quarter fiscal year 2014 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, President, Business Divisions; and Zvi Glasman, Chief Financial Officer. By now, everyone should have access to the third quarter earnings release, which went out today at approximately 4:05 PM Eastern Time. If you've not have a chance to review the release, it's available on the Investor Relations portion of www.ridefox.com.

Before we begin, we 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 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 Form 10-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 financial 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 third 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.

In the third quarter, we continued to execute on our ongoing strategic initiatives. We generated sales of $90.1 million, an increase of 9.5% compared to the third quarter last year, and in line with our guidance range. Our sales growth reflects strong top line growth from our powered vehicle products which increased 50.5% in the quarter. This was partially offset by a decline in our mountain bike product sales of 8.1%. I will provide some background on both segments in a moment.

We are pleased to report that our third quarter gross margin improved by 90 basis points to 31.7% bringing the year-to-date gross margin improvement to 160 basis points. This underscores our team's continued successful execution on our operational initiatives to improve manufacturing and supply chain efficiencies as well as execution on our product design for manufacturability program.

We generated non-GAAP adjusted net income of $12.2 million or $0.32 per diluted share, in line with our expectations. Before I provide a brief update on our business and some of the overall trends we're seeing, I am pleased to report that today we announced that our Board of Directors authorized a share repurchase program for up to $40 million of our common shares outstanding. We view the repurchase program as an additional opportunity to return value to our shareholders and underscores our confidence in our business, growth strategies and ability to drive long-term profitability.

Overall, we had a positive quarter in many areas of the business and we continue to make progress on our key initiatives and our growth strategy. While we are pleased with this progress, we did face some additional challenges in the quarter in our mountain bike product line. On our last call, we discussed that we were facing certain supply chain issues that were unrelated to Fox and these issues did indeed persist throughout the quarter.

Additionally, while the customer reception to our model year '15 products was positive, during the third quarter, our revenue was weaker than we initially anticipated. This decline was attributable to the aforementioned supply chain issues, a more challenging competitive environment for certain products and weaker sell through. While this is certainly disappointing to us, we remain focused on our product development roadmap and are excited about the next model year's selling season. We will be looking to improve our spec position and sell-through for our model year '16 products. We remain optimistic that the premium mountain bike segment will continue to outperform the overall bike industry in the long-term.

Mario will provide additional commentary on our products, but I would like to highlight that we received mountain bike actions highest field test rating of perfection for our totally redesigned factory Series 36 float suspension fork underscoring our ability to deliver high performing products. Turning to our powered vehicle products, I would like to start by mentioning that as previously disclosed, during the quarter, we completed our production for a certain OEM that is undergoing a model year changeover on their product line. Despite this loss of revenue, we delivered year-over-year growth of over 50% in the third quarter. This growth was driven by strong performances in a number of markets including snow, off-road and trucks. We also benefited from our Sport Truck USA acquisition, which continues to perform to our expectations.

We believe market demand for premium suspension products continues to grow and Fox remains well positioned to deliver customized solutions that offer true performance enhancements. Our strong performance in the peak selling season is a testament to our team's ability to stay ahead of industry demand and capitalize on growth opportunities in several of our key markets and maintain our position as a preferred partner to our key powered vehicle OEMs.

Moving forward, our focus remains on the same key strategic initiatives and multi-faceted growth strategy that we previously discussed. I'll now take a few minutes to review these initiatives in our progress.

First, I'd like to highlight the improvement to our operating and supply chain efficiencies. This is an area where we were especially pleased with the improvements we've made over the past few quarters. As I mentioned earlier, our gross margin has increased by 160 basis points through the first nine months of fiscal 2014 and we are confident that there is room for further improvement going forward. Over the past year, we've been working hard on moving our mountain bike production to Taiwan. In the third quarter approximately 50% of our total bike finished fork production occurred in our Taiwan facility and we are on track to complete this move by the end of 2015.

Benefits from the transition include reduced production lead times and reduced manufacturing costs, as well as a shortening of our supply chain. As the majority of our mountain bike capacity shifts to Taiwan, we are taking advantage of this opportunity to optimize our manufacturing platform for powered vehicles here in the United States. We expect this effort will continue throughout 2015 as mountain bike transition concludes and once completed will better enable us to meet growing powered vehicle customer demand, while further improving operating efficiencies.

Second, we continue to focus on increasing our penetration in existing vehicle categories. Mario is going to discuss some of the products that we have launched and are in the pipeline, but I'd like to highlight our upcoming launch in the after-market of a rear shock for certain 1984 to 2015 model Harley-Davidson Touring motorcycles. This will further expand our product line offering within the on-road motorcycles segment, which we believe holds promise for future growth. Third, we are committed to capitalizing on opportunities to penetrate new vehicle categories. Right dynamics continues to play a role in many large end markets and our team is continuously looking for ways to leverage our technology and expertise to these different markets. We have a number of activities that are underway and in various stages of development.

For example, our success in circle track racing has led to new opportunities in the on-road and racetrack segments. Lastly, to complement our business in our core markets of North America and Europe, we are focused on evaluating opportunities to capitalize on growing middle class consumption in emerging markets as part of our long-term growth strategy. During the quarter, we added additional business development resources in the Asia-Pacific region, focused on those markets. Meanwhile, we continue to invest in our international infrastructure and recently have established a direct presence in Austria.

In summary, although we had some challenges in our mountain bike business during this quarter, we are pleased with the overall progress we've made on our multifaceted growth strategy. Our powered vehicle category continues to gain momentum, and we are taking steps to enhance our operating efficiency and improve the overall foundation of our business. The acquisitions and investments that we made this past year are already having a positive impact on our results.

We look forward to continuing to capitalize on the robust opportunity for our products as we begin the final quarter of 2014.

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

Thank you, Larry, and good afternoon everyone. 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 were just beginning our model year 2016 spec season. We're now in full swing and receiving great feedback on the new product line.

Currently, our team is in Taiwan, for the ride on Taichung, Bike Week show and continuing to meet with our OEM partners, both in the office and out on the trails showing off our latest and greatest. While we were successfully launching our model year 2015 flagship 36 enduro race fork to the aftermarket last spring, our product development team was hard at work, finishing up the development of our model year 2016 product line.

Well, I can't yet reveal what we have in store; I can let you know that the product line is being warmly received. I can also point to products that are currently under our racing applications development umbrella. Certain industry media invitees were given a sneak peek of at the final stop of the Enduro World Series in Finale, Italy. Our racing applications development program is where we develop new technologies and features with our top athletes on the world's toughest terrain and courses.

Oftentimes these technologies and features are integrated into upcoming model year product lines. So allowing the media to experience [Rad] products as an opportunity to get feedback on future product plans. We took the opportunity in Finale, Italy to show off some trail fork and trail shock technologies and here's what they had to say. Enduro magazine, at the end of the session I had been really impressed with the high performance of the shocks, so much so that it was very sad to see them get taken off and go back in the secret box. I'm sure we will start to see this technology filter down into the production range soon, and when it does Fox is sure to have some popular products on their hands. From Pinkbike, there's also no doubt in my mind that the Rad suspension I rode is a step forward from Fox's production offerings. These will likely make production in some form or another and Fox is likely going to impress some people when that happens.

From MTB magazine. Yes, suspension performance is always getting better and yes, the new 34 FIT cartridge is probably going to be another landmark product. The 2014 race season is under our belts and we've pulled off our first sweep of the men's and women's world championship titles in both cross-country and downhill. We followed that up by winning both men's and women's titles in the first year of the Enduro World Series.

On the major race circuits worldwide for the season, Fox athletes won 35 downhill events, 17 Enduro events, 32 cross country events and 8 free ride events.

Now, on to our powered vehicles business. I'll kick this off with some exciting news on our circle track racing efforts. Fox took its first NASCAR title in the 2014 (inaudible) Series and Fox backed drivers and teams have now racked up over 324 wins in 2014. The wins are proving our technologies' legitimacy in the sport on both the dirt and asphalt circuits. The wins combined with excellent track side support continued to take drivers and teams from other competitors in this space. Our work on the race circuit is also helping us in new on-road, and asphalt track modified car segments. We started testing within the Miata specialty performance shop Flyin' Miata, this summer.

Together, we've developed an aftermarket spec for the 2006 to 2014 Miata models. Their Fox offerings will be for sale at the beginning of 2015. Here are a few paraphrased bikes from their website describing the new relationship Flyin' Miata has teamed up with Fox to bring a new generation of suspension to Miata. One thing that both Flyin' Miata and Fox share is the understanding that suspension technology is important to maximize performance.

And lastly, of course, all of this suspension technology isn't any good if it's not set up well, that's why we're working with Fox to dial-in and [dampened] perfectly with on-track and on-road testing. And something that is unique Fox, if you don't like the valving, they will revalve it for free within the first 90 days.

During our last call, our sales and engineering teams were traveling to our OEM side by side customers on a technology road show. During these visits, we let our customers experience internal bypass technology. This is the technology found on the Ford Raptor, new shock architectures and our electro mechanical ride dynamic solutions.

The reaction by [All] was very positive and we'll continue to update them as our advanced product team continues to hone the use of these technologies. Our snow business is driving and we recently launched our 2014, 2015 snow season product at Hay Days to the media and to the public. Hay Days is down to the official kick off to the snow season in the industry and is held in North Branch Minnesota. Media attending the event have been placing orders for the new mountain and trail segment new products so they can get testing when the snow starts flying. An early indicator for the season's success is that we are seeing high demand for our [crisper and] signature series, backcountry snowmobile packages, which sold out minutes after he announced the first shipment that was in stock on his Facebook page. Pre-orders are currently being taken for his next shipments.

The big powered vehicle show for fall is SEMA and is currently underway in Las Vegas. Our on and off-road truck and side-by-side sales and marketing teams are there in full force, both in our booth and helping support our many partners displaying our product at the show. We're also proud to be standing shoulder to shoulder with Sport Truck USA, the newest member of the Fox team. Right after to SEMA, our off-road race support team will be finishing up final preparations for the Pinnacle off-road race of the year, The Baja 1000.

I'll conclude with our recent championships in the two major off-road short core series. In the TORC series, father and son team Johnny and C. J. Greaves won the Pro 4 and Pro 2 classes respectively, with Jerett Brooks taking the Pro Lite. In the Lucas Off Road Racing Series, Brian Deegan won the Pro 2 class and Sheldon Creed is the Pro Lite champion.

And with that, I would like to now turn the call over to Zvi Glasman, our CFO to review our financial results. Zvi?

Thank you, Mario. Good afternoon, everyone. Before I begin with our third quarter financial results, as Larry mentioned earlier, our Board authorized a $40 million share repurchase program. We believe that with our balance sheet strength and cash flow, we have more than ample liquidity to fund our organic growth initiatives and future potential acquisition opportunities.

Now, I'll focus on our third quarter results and then review our guidance. Sales for the third quarter of 2014 were $90.1 million, an increase of 9.5% versus sales of $82.3 million in the third quarter of 2013. As previously mentioned by Larry, the sales increase reflects a 50.5% growth in powered vehicle products and an 8.1% decrease in mountain bike product sales.

Our powered vehicle growth was positively impacted by our Sport Truck acquisition. The decline in our mountain bike product sales was greater than we had expected, due to industry wide supply chain issues and a more competitive environment in certain product categories and weaker sell-through of our products as Larry described during his remarks.

Gross margin was 31.7% for the third quarter of 2014, a 90 basis point increase from gross margin of 30.8% in the prior year period. The improvement in gross margin reflects the successful execution of our operational initiatives targeted at improving manufacturing and supply chain efficiencies along with continued execution of our overall product design for manufacturability program. It is important to note that excluding the acquisition related inventory value adjustment for Sport Truck, our gross margin improvement would have been 130 basis points for the quarter and 190 basis points for the year respectively.

Total operating expenses were $14.6 million or 16.2% of sales in the third quarter of 2014 compared to $10.6 million or 12.8% of sales in the third 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, acquisition and integration costs, higher stock-based compensation expense, as well as the costs incurred associated with operating in a public company.

The increase in operating expense as a percentage of sales is also due to investments in infrastructure, brand, technology and our international presence to support our business growth. For the near term, we expect that we will generally continue invest at current levels excluding non-recurring items. Within operating expenses, our sales and marketing expenses increased to $5.3 million in the third quarter of 2014 compared to $3.6 million in the same period of 2013. The increase was largely due to the inclusion of $0.8 million of Sport Truck sales and marketing expenses in our results and the remaining balance was due to additional personnel promotional activities and outside services as we continue to invest in promoting our Company and brand.

Research and development expenses increased to $3.5 million in the third quarter of this year compared to $2.5 million in the same period last year, due largely to increased personnel and product development related expenses. We continue to opportunistically invest in new and innovative technologies as market opportunities present themselves. We would expect some fluctuation in R&D spending, as we continue to execute our growth plans. Investment in R&D is a critical component of our business, and while investment might fluctuate in certain years and quarters depending on product development cycles, and other factors. In the future, we expect that we will generally continue to invest at current levels, expressed as a percentage of year-to-date sales.

Our general and administrative expenses in the third quarter of 2014 was $4.2 million compared to $3.1 million in the prior year period. The increase was due to approximately $300,000 in corporate expenses related to Sport Truck acquisition, which closed earlier this year; approximately $400,000 of higher stock-based compensation expenses and the remaining balance was due largely to public company infrastructure costs. On a GAAP basis, our net income in the third quarter of 2014 was $10.3 million compared to $9.9 million in the prior year period. The improvement reflects our higher sales, improved gross margin and lower interest expense, which were partially offset by higher operating expenses.

Earnings per diluted share for the third quarter of 2014, was $0.27 calculated on 37.9 million weighted average diluted shares outstanding compared to $0.27 calculated on 36.4 million weighted average diluted shares outstanding in the third quarter of 2013. Non-GAAP adjusted net income was $12.2 million compared to $12.1 million in the third quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2014 was $0.32 compared to $0.33 in the third quarter of 2013.

In the third quarter of 2014, adjusted EBITDA was $18.1 million compared to $17.3 million in the same quarter last year. Adjusted EBITDA margin was 20.1% compared to 21% in the prior year quarter. We believe non-GAAP adjusted net income and adjusted EBITDA are useful metrics that better reflect the performance of our business on an ongoing basis. You'll find a reconciliation of the GAAP measure, net income to non-GAAP adjusted net income and the calculation of non-GAAP adjusted earnings per share at the end of the press release we issued today. You'll also find a reconciliation of the GAAP measure net income to adjusted EBITDA in the earnings release that we issued today.

Now, turning briefly to our operating results for the first nine months of 2014. Sales for the first nine months of 2014, were $232.6 million, an increase of 12.1% compared to the same period in 2013. Sales of powered vehicle products increased 40.8% and mountain bike product sales decreased 2% for the first nine months of 2014 compared to the prior year period.

Adjusted EBTDA increased 12% to $43.4 million in the first nine months of fiscal 2014 compared to $38.7 million in the first nine months of the prior year period. Adjusted EBITDA margins decreased 100 basis points -- 10 basis points to 18.6% compared to 18.7% in the comparable period of fiscal 2013.

Now focusing on our balance sheet, as of September 30, 2014, we had cash on hand of $1.9 million. Total debt outstanding was $30.8 million compared to $8 million of debt outstanding as of December 31, 2013. The increase is due to borrowings for acquisition of Sport Truck. Inventory was $54.9 million as of September 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 seasonal growth patterns. Accounts receivable was $40.6 million as of September 30, 2014 as compared to $33.8 million as of December 31, 2013. Accounts payable was $24.8 million as of September 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.

Finally, turning to our updated outlook. For the fiscal 2014 fourth quarter, the Company expects sales in the range of $69 million to $75 million and non-GAAP adjusted earnings per diluted share in the range of $0.15 to $0.20. For the full year, we are updating our annual guidance, we now expect net sales in the range of $302 million to $308 million and non-GAAP adjusted earnings per diluted share in the range of $0.85 to $0.90 based on approximately 38 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 offering expenses, contingent consideration valuation adjustments, certain acquisition related adjustments and expenses and a one-time tax benefit, net of costs. The adjustments are more fully described in the tables included in our press release which has been posted on our website Larry?

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

Thank you. (Operator Instructions) Larry Solow, CJS Securities.

Hi, good afternoon.

Hi, Larry.

How are you guys doing. If you could help us just in terms of the shortfall on the mountain bike side, if you could help bucket sort of you mentioned three things, supply chain, competitive environment and a weak sell through. Sort of all the supply chain, has that gotten worse than you thought and sort of give me approximately, what had the greatest impact of those three challenges.

With regards to the supply chain, I think it persisted throughout the quarter and that we actually see it going into this quarter which we are obviously hoping not to do and I think the deeper it gets into the quarter, clearly you got to start being mindful that you may lose a turn of those sales. I think it's based on our -- talking to our customers, I think it's stably planned for, obviously the impact on all of these things is contained in the guidance we put out for Q4.

So, while it's -- I think it's disappointing, as we got into the third quarter and we saw some of the weakness developing in-bike. I'm not sure we can break it out for you exactly the contribution for each of those three things, but what I think we can tell you is all of them are contained in the guidance.

Okay. And for the guidance for Q4, I know you don't normally guide by segment or by product line but is -- can we assume mountain bikes are down year-over-year again in Q4?

Yeah, we can assume that they might be slightly down in Q4, but we don't actually break out the guidance by segment, you're right.

Okay. And then just switching gears real fast -- quickly to the aftermarket product you announced for the -- some of select Harley Touring motorcycles. How does that work, is that something you guys are doing on your own or you are doing it with Harley-Davidson, are you doing it with a different distributor, any color there will be great. Thanks.

Well that's in the aftermarket. So, we're obviously doing it with testing on Harley-Davidson motorcycles. But we're not, it's not something we're doing through Harley.

Okay.

It will be in the aftermarket through some of the guys that specialize in distributing those kind of products to Harley customers.

And how did that come about, just that you think there is enough demand from customers that asked you forward enough and what not that you feel it's something that is worthwhile?

No, we do. Again I think, Larry, this is an example of us looking at a need in the market and us having technologies we think we can bring to bear. So yeah, we're pretty excited. I mean, in and of itself, it's not an enormous market, but there is a lot of Harleys manufactured every year, something I think this past close to 275,000 bikes. So, we feel that years of that provide a pretty vibrant after market and I think Harley owners do spend in the aftermarket on upgrading their bikes.

Right. Obviously, if Harley could -- if it does well enough Harley can take note and maybe inevitably, you can get (technical difficulty).

And you can rest assured I am certainly going to try to get the CEO's attention.

Yes. Absolutely. Okay, thanks very much.

Jon Anderson, William Blair.

Hey, good afternoon everybody.

Hi, Jon.

Hi, Jon.

I wanted to come back to the mountain bike question, if I could. The supply chain issues that you talked about last quarter, understandable, I guess that issue has persisted, but with respect to the commentary around the competitive environment more challenging and then weaker sell through, I'm just hoping you can talk a little bit more about that in terms of the timing. When you kind of saw that having an impact, and what your expectations are with respect to those two issues going forward.

I mean supply chain issue, it sounds like it's going to carry on into the fourth quarter but presumably that could be something that's -- the impact ebbs beyond that timeframe. But the competitive environment and the weaker sell through are things that I guess I have less understanding of and visibility into so, could you provide some more color around those?

Yeah, let me -- I could have Mario tell you about some of the things that we're doing in the product categories. But I think here as we get into Q3, which is really when you look at how the model year cycle works is when we really start seeing the bikes that we're on versus the bikes that our competition might be on and how they sell-through. And I think it's not that it's huge numbers, but it certainly impacted what we -- a deviation from what we had initially anticipated. I think a combination of some of the plus and minusing on spec and then the sell-through of those bikes, did give us, I think a negative outcome from what we were expecting.

Is the sell-through component of this -- is this category or price point segment softness or is it specific to models that Fox's [expect on].

No, no, I think it's specific. I mean I think, we think that the category, the premium mountain bike category is still growing. It's not going at the 15% it probably had in some of the past years, but we do think it's going up -- it continues to go up. I think this is related to bikes we're on and again we've had model year '16 developments. We had a lot of improvements and -- that Mario can tell you a little bit about what we have done with the product line. But, our expectation is, this is something we're going to see this model year, but then our expectation is to improve our spec position and share in the next model.

Okay.

I think these issues we firmly believe they are in our control.

Okay. And then shifting over to powered vehicles, which was quite strong and ahead of what we had modeled. Can you tell us what the contribution from Sport Truck was in the quarter and I guess that's the first question on the power vehicle side.

This is Zvi, John. So the sales for the quarter were approximately 10 million bucks. But I think as we've mentioned to you before, not all of those sales were incremental as prior to our acquisition to Sport Truck. They were a customer of ours and subsequent to the acquisition sales and we would have sold to them no longer show the sales are getting eliminated in consolidation. Additionally, as we mentioned before on previous calls, one of the reasons we acquired Sport Truck was to avail ourselves of their distribution channel and some of the sales that show up in that $10 million, $10.5 million number I just gave you might otherwise be reported as Fox.

I think I would tell you that across our powered vehicle product portfolio the sales were strong. We do have a certain OEM that as Larry mentioned, has stopped production as they change over the product line. But if you exclude that we think that the performance along our powered vehicle lines was strong this quarter. And we're pretty optimistic that we can continue to grow that at some of the target rates that we've been talking about to the investor community.

That's helpful. Just, to be clear about the OEM customer that you referenced the auto OEM, is that -- did that business contribute sale in the third quarter or was it kind of offline for the entire third quarter?

Very, very modest, significantly lower than the run rate.

Okay. And I guess the last question I had for now is on the gross margin, which the improvement was strong clearly on a year-over-year basis. So a little -- not quite as strong as we had modeled and I suspect that has to do with the mountain bike sales in the quarter. I think you've talked in the past about a couple of 100 basis points of gross margin improvement for the full year. Is that something you still expect to achieve or do we need to kind of rethink that?

I think we point out that we're up 190 basis points year-to-date if you exclude the acquisition related adjustments. We're still achieving all of our margin targets. Clearly there is an element of gross margin that relates to volume. So should we be on the lower side of the guidance we gave, it wouldn't be as good as if we were on the higher side of the guidance, but I don't think that you need to rethink the margin targets long-term. We would tell you, just we've talked about getting to the mid 30s in the next few years. We think that's still an appropriate target for the legacy non-Sport Truck business where when we acquired that we weren't contemplating future margin expansion for them.

So, we would tell you that we're well on track, we're very pleased with our margin improvement efforts. And we were able to achieve the margin on lower volume that we (technical difficulty) envisioned. Had we had higher volume, maybe we'd have beat our numbers this year.

Okay, that's helpful. Thank you guys and good luck.

Thanks, Jon.

Craig Kennison, Robert W. Baird.

Yes, good afternoon. Thanks for taking my question. Maybe I'll follow-up on that margin question, Zvi. And I think as part of the IPO process, you talked about one factor in your margin expansion plan being an increase in price using your brand and leveraging that to raise price, but then you've also cited competitive pressure today. And I'm wondering what the nature of that competitive pressure is and whether that changes your thinking on the ability to raise price.

I think that our philosophy on price is unchanged. We feel like the targets we've gone after for gross margin improvement, should we also get pricing improvement, we could have probably beat those a little bit more upward pressure. In any given year, our philosophy is to put upward pressure on pricing, but we don't see a change to that core philosophy, strategy or tactics. We will of course be responsive to the market in any given year though.

Thanks. And then --

Did I get your question, Craig.

Yes, definitely, thank you for responding. And then just on the inventory front, obviously if you have sell-through that is weaker than expected, it can result in excess inventory at the dealer level and also maybe at the OEM level. And I'm wondering whether you have any visibility into the level of inventory at each stage in the channel.

I think overall, Craig, we're still comfortable again the weakness that we've seen is not huge absolute numbers, but clearly disappointing to us. But I don't think we see is there is any big inventory issue that is developed because of this.

Got it. Thank you.

Jim Duffy, Stifel.

Thanks. Hi guys. Hope you are all well.

Hi, Jim.

Hi, Jim.

Couple of questions. Follow-up on Jon's question about the new call out on increased competitive environment in certain categories. Which categories are you seeing this in and is it pricing or functionality that's resulting in the pressure?

Yeah. I think, Jim, it's again, we got some good competitors out there and I think whether it's a fork or a shock, we got guys that can come up with pretty good ideas. I think it's mainly functionality based. The guys put out some pretty good product and again that's why we've amped up our efforts on model year '16.

Okay, makes sense. That's helpful. And then is that concentrated in the OEM business or you are seeing that in the aftermarket by sales as well?

You see it in both.

I think we are seeing that. Again, I think it does impact both of those categories.

Very good. And then forward-looking question here. Due to change in dynamic with the key power sport OEM these issues in the bike segment, growth this year a little shy of initial expectations based on your current visibility to specs and perhaps a stub period benefit from Sport Truck. Anything to say about preliminary thoughts on revenue growth for '15 or you are not ready to go there yet?

I think what we're ready to say is that we believe that the long-term target growth in the powered vehicle segment which I think is what you're asking about is consistent with our expectations. We don't see any change to the fundamental story or our plans for growth.

Yeah. And I think on bike, as I indicated, our expectation is to do better next year.

Great. Thanks so much guys.

Thank you, Jim.

(Operator Instructions) Rafe Jadrosich, Bank of America Merrill Lynch.

Hi, good afternoon. Thanks for taking the question. Just to kind of stay on the competitive environment question, kind of what, can you just give a little color on what gives you confidence sort of 2016 will trend better, is there just -- just any color there on kind of -- [obviously you talk about] what the specific categories were a little bit softer and then maybe who has been trending a little bit better recently.

Well, I think what gives us some confidence is clearly we got a good look at how things were selling through, we've done some analysis obviously on competitive products before that. And we had started our model year '16 development program quite some time ago and knowing that information. I think we're given some confidence by the early reception that those model year '16 products are getting by some of the product managers at the OEMs, as well as end users who ride competitive products.

Yeah. Larry, I would also add the race results that we demonstrated in 2014 through the racing applications development efforts and those features and technologies that are going to be incorporated into '16.

Good point, Mario.

Confidence inspiring.

Has there been any new kind of technology that came out in '15 that you might have been out of position for that you will be adding for '16.

Mario, you want to describe a little bit about what we -- the philosophy we've taken in the model year '16 development.

Well, yeah, model year '16 we're addressing, as you know there is several different categories of mountain bike at the high end. They each in full suspension take a fork and a shock and we're addressing weight, we're addressing friction, we are addressing damping, we're addressing types of spring technologies that we are using. So we're going after pretty aggressively.

Okay. And then, that's helpful. Thank you. And then just in terms of the gross margin, can you sort of help us parse out maybe the benefit from the product design for manufacturability versus the benefit from the transition to Taiwan, is it -- is that still a drag or is that neutral right now?

So we would tell you, Rafe, that it may be probably 50-50 is a way to think about it, maybe 50% of the improvements that we get come from Taiwan and the rest from the other improvement initiatives that we have. In terms of whether it's a drag or not, we would say now it's probably breakeven for Q3. So going into the year with a 100 basis point drag or so and now with the Q3 production, there won't be a drag. Q4 is a seasonal quarter. So it's always a lower gross margin quarter for us Taiwan or not Taiwan or no Taiwan. So, we always have a little bit more inefficiency in Q4 for our business.

When will that go from being neutral to a benefit?

Next year.

Thank you.

Mike Swartz, SunTrust.

Hi, good afternoon gentlemen. This is actually [Mitch] for Mike. Just a couple of housekeeping questions, most of my questions have been answered. Was there any impact of FX in your new guidance versus your prior outlook?

No.

Okay. And then I assume you'll be able to saw repurchasing the shares immediately.

We're not going to disclose exactly, when we -- we're obviously subject to the rules and regulation about volume restrictions and insider information we might have et cetera, but we've got the authorization and we're going to work with our teams to figure out the best way to execute that.

Okay, thank you guys.

Thank you.

There are no further questions at this time, I would like to turn the floor back over to management.

Thank you and thank you for your questions and your interest in Fox. We look forward to continuing to execute on 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 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 conference. Thank you for your participation. You may disconnect your lines at this time.