Fox Factory Holding Corp (FOXF) 2015 Q1 法說會逐字稿

Greetings and welcome to the Fox Factory First Quarter 2015 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. It is now my pleasure to introduce your host, Mr. David Haugen. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's First Quarter Fiscal 2015 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 first quarter fiscal 2015 earnings release, which went out today at approximately 04:05 P.M. 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. Please note that throughout this call, we will refer to Fox factory as Fox or the Company.

Before we begin, I'd like to remind everyone that the prepared remarks contained 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 and risks that could cause or contribute to such differences are detailed in the company's earning release issued this afternoon and in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, 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 are referenced. It is important to note that these are non-GAAP financial measures. A reconciliation of these non-GAAP financial 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 discuss key highlights of our first quarter results, an overview of our industry and progress on our ongoing strategic initiatives. Mario will then discuss recent highlights from each of our businesses. Zvi will review the financial results in more detail and discuss our guidance. After that we will open the call up for any questions if you may have.

We started 2015 off well, particularly in the light of the anticipated West Coast port headwinds that we discussed on our last earnings call. First quarter 2015 sales, EBITDA and adjusted EPS came in ahead of our expectations. Our team did a great job working through the anticipated inefficiencies related to the port backlog and we're able to meet customer demand that was originally scheduled for the second quarter of 2015 by utilizing alternative shipping methods. While this did impact our gross margin, we felt it was more important to maintain customer satisfaction.

As a result, our topline increased approximately 21% in the first quarter to $67.8 million. This growth was driven by a solid demand for our powered vehicle products, which increased 43.5%, while our bike product sales increased 5.7%. Powered vehicle sales were driven by solid contributions from side-by-side truck, on-road motorcycle, and aftermarket products, while bike benefited from our Race Face/Easton acquisition, which is performing nicely. As we communicated last quarter, we expect the competitive pressures in our bike business to continue through early in the second quarter. However, we are already beginning to see the positive industry response from our model year 2016 products, which Mario will discuss in greater detail. Our team's persistent efforts to most effectively manage our supply-chain in light of the West Coast ports issue allowed us to continue to make progress on our key operational initiatives targeted at improving gross margins over the longer term. Excluding the inventory value adjustment in the first quarter for our Race Face/Easton acquisition, our gross margin would have been 29.3%, which also includes the negative impact associated with the port issue. In addition, as many of you know the second and third quarters of the year are seasonally stronger margin quarters for our business historically, and we do not expect a material impact from the West Coast port situation for the balance of the year as we fully cycle through the remainder of those issues early this quarter. Looking ahead, we remain on track for continued long-term margin growth. Additionally, we generated adjusted EBITDA of $9.4 million in the first quarter of 2015 representing approximately a 9% increase compared to the prior year's quarter.

Turning to the bottom line. We generated non-GAAP adjusted earnings per share of $0.12 in the first quarter, which was above our expectations for non-GAAP adjusted earnings per share of $0.05 to $0.10. In 2015, we will continue to benefit from our operational efficiency improvements in our 2014 acquisitions of Sport Truck and Race Face/Easton. Overall, we continue to feel positive about our long-term industry dynamics as powered vehicles continue to become more capable, there is increased demand for improving suspension. In addition, we continue to believe that premium mountain bikes will exhibit solid growth across geographies in the coming years.

That said, our business faces foreign exchange pressure that could have a near-term impact on our results and some of this is factored into our reiterated fiscal 2015 guidance. We have a strong presence in Europe and while we are excited about our strong product line-ups in both business segments in the back half of this year, we believe there are risks with the uncertainty around exchange rates that may impact sales and gross margins. Looking ahead, we remain focused on managing the controllable aspects of our business and executing our ongoing strategic initiatives. I'll take a moment to review these initiatives on our recent progress. We remain on track with our transition of mountain bike product manufacturing to Taiwan, which we continue to expect to be completed by the end of fiscal 2015. At the end of 2014, we achieved our Ford production capacity goal of 85% and now Ford plant production is customer demand based. This transition reduces production lead times and manufacturing costs and shortens our supply-chain, which will enable continued margin improvement overtime. We also began bike shock production in our Taiwan facility in the fourth quarter of fiscal 2014. We are off to a very good start with initial shock production and our team is focused on further ramping up production throughout 2015, and we're still targeting to exit the year with 80% to 85% of our shock production capacity transition to our Taiwan facility.

In addition, the transition will enable us to more efficiently increase our powered vehicle [full] capacity in our California-based facility. During a visit to our Taichung facility this past March, I was very impressed with our team and excited to see first hand the recent results of their work.

Next, we continue to focus on increasing our penetration in existing vehicle categories. Mario will provide detail on some of our new products in each business. But in general, we are very pleased with customer reception to our recent technology developments and we continue to believe that ongoing investments in R&D will keep FOX in a leadership position.

Expanding the FOX brand and relevant adjacent product categories is another key growth strategy for us. With our 2014 acquisitions, we entered the lift kit market and the high-performance mountain and road bike wheels market.

Our first quarter 2015 results exhibited the early benefits both Sport Truck and Race Face/Easton can have on our business. As we move ahead, we look forward to leveraging our global marketing, engineering distribution and supply-chain resources to collectively develop next-generation high-performance ride dynamics solutions. Our goal of long-term gross margin improvement will be facilitated by our recently announced effort to expand and develop our El Cajon, California facility into an Automotive Ride Dynamics Center of Excellence, coupled with revamping our production facility in Watsonville, California for increased power sports productions.

As part of these activities, we've also launched an initiative to upgrade to a new ERP system that will assist us in the next phase of business process improvement.

In summary, we are pleased with our start to the year, particularly in light of the West Coast port challenges we've experienced. The entire FOX team has done a tremendous job managing through a difficult situation to post solid results, and I want to thank them for their efforts. We remain committed to product innovation and ongoing operational improvements and leveraging the investments that we've made in our business to increase sales and profitability over the longer term.

Now I'll turn the call over to Mario.

Thank you Larry and good afternoon everyone. During my remarks today, I'll walk you through some of our recent business highlights and touch on some industry trends. In our bike business, we are pleased to report that our entire model year 2016 product was officially launched to the public and media during the Sea Otter Classic in Monterey, California held April 16 through April 19. Booth traffic was excellent and buzz around the event about us was strong. Local dealers are telling us that their customers are walking in with photos of our latest offerings taken from Sea Otter and asking when they will be able to get them. As mentioned on previous calls, we've ratcheted up our marketing communications timeline with early exposure for select global media to our model year 2016 products. This early exposure had a focus on the completely redesigned factory series Float 34 suspension fork and our factory series Float rear shock with our new dual piston system and EVOL, extra volume technologies. This resulted in reviews that are getting in front of consumers at the beginning of the season to [TFR] aftermarket product line sales and support the sell-through of complete bikes for our OE partners specking FOX products. The reviews have been glowing with ratings ranging from 4 to 5 stars out of 5, with Mountain Bike Action giving us their highest rating of 5 stars. A rating they equate with perfection and had this to say about both the fork and shock. If these aren't 5 star products, we don't know what it is. With continued positive feedback from the media, international aftermarket distributors, global OEM customers, dealers and consumers, we feel optimistic for a solid model year 2016. Model year 2016 products will begin to ship in volume during the second quarter. We have been working closely with our OEM customers to align their forecast with our production capacity through the early part of the model year 2016 delivery. Looking ahead, our model year 2017 development efforts are well underway. One development to note is the introduction of a new suspension product to begin to address the next bike price point down from the market we have traditionally served. As stated on previous calls, we are targeting initial revenue contribution from this new product to begin in the second half of calendar year 2016. The race season is underway worldwide and we are off to a great start. The UCI World Cup downhill series kicked off in Lourdes, France, a few weeks ago where we took the Pro Men's win. The World Cup XC series has not yet started, but in the US National series, we're currently leading in both the Pro Men's and Pro Women's classes. Of the major race events around the world so far, we've won a total of 12 Gravity, 2 Enduro and 10 cross country races. At the time of our last call, we had just recently announced our plan to redesign our El Cajon, California powered vehicle facility into an ISO 9001 Automotive Ride Dynamics Center of Excellence. We have secured the space required for launch with room for growth and have begun the reconfiguration and expansion activities. We are targeting first production from a reconfigured facility in late fall this year, with certain of our products and with the Ford Raptor products coming online in the second half of 2016.

Our aftermarket V-Twin product that launch in January is selling through at a steady pace and we'll be expanding the application list to that line-up this summer. In military, we've continued shipping suspension for the GMV 1.1 and continue to work on other military programs, which are not currently reflected in our guidance due to the lack of visibility to military program timings. The FOX Edition Polaris XP 1000, that comes stock with our internal bypass shocks has been met with a lot of excitement from the industry and media. UTVUnderground.com said the new FOX Edition Polaris RZR might be the best handling UTV we had ever driven from the factory.

Our race results have resulted in -- our recent race results in powered vehicles have been strong. Circle track kicked-off the year posting 68 wins to date and we took the overall Trophy Truck and UTV wins at the Mint 400, while sweeping the PRO truck events at the TORC Season Opener.

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. I'll focus on our first quarter results and then review our guidance. Sales for the first quarter of 2015 were $67.8 million, an increase of 20.8% from sales of $56.1 million in the first quarter of fiscal 2014. As Larry mentioned, the sales increase reflects 43.5% growth in powered vehicle products and a 5.7% increase in bike product sales in the first quarter of 2015 as compared to the first quarter of 2014.

The increase in sales of Powered Vehicle Products was primarily due to the acquisition of Sport Truck, partially offset by decreases in OEM, off-road product sales as a result of model-year changeover in the Ford Raptor program. The increase in bike product sales was attributable to the inclusion of Race Face/Easton's cycling sales, partially offset by a decrease in mountain bike suspension sales due to various factors including an increased competitive environment in certain bike product categories and continued weaker sell-through of our bike products as we close out the model year 2015 and transition into model year 2016 in our second calendar quarter of the year. Both of our acquisitions continue to meet our growth targets. Gross margin was 27.7% for the first quarter of 2015, a 260 basis point decrease from gross margin of 30.3% in the prior-year period. Gross margin was negatively affected by $1.1 million or 160 basis points and amortization of the inventory adjustment related to the Race Face/Easton acquisition. Additionally, the anticipated inefficiencies caused by the West Coast port slowdown impacted gross margins by approximately $1 million or 140 basis points. Aside from these issues, we believe we are on track with our plan to continue to improve gross margins over the next few years. Total operating expenses were $17.2 million or 25.4% of sales in the first quarter of 2015 compared to $12.3 million or 21.9% of sales in the first quarter of the prior year. The increase in operating expenses was primarily due to the inclusion of Sport Truck's and Race Face/Easton's operating expenses including fair value adjustments and acquisition related compensation of $2.1 million in the first quarter of 2015 with no corresponding charges in the first quarter of fiscal 2014. Within operating expenses, our sales and marketing expenses increased to $5.3 million in the first quarter of 2015 compared to $3.8 million in the same period of 2014. The increase was largely due to the inclusion of $1.2 million sales and marketing expenses from our acquisitions. Research and development expenses increased to $3.4 million in the first quarter of this year compared to $3.1 million in the same period last year. The increase primarily comes from the inclusion of research and development expenses from our acquisitions, partially offset by a slight decrease in various other research and development activities. As a reminder, 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. For 2015, we expect that we will continue to expect at approximately 4.5% to 5% of sales. Our general and administrative expenses in the first quarter of 2015 were $4.6 million compared to $3.9 million in the prior-year period. The increase was due to inclusion of approximately $0.9 million in general and administrative expenses from our acquisitions and $0.2 million of expenses related to the shelf offering filed in March of 2015. These increases were offset by reductions in acquisition related expenses of $0.5 million as well as reductions in various other general and administrative expenses. On a GAAP basis, our net income in the first quarter of 2015 was $0.8 million compared to $2.9 million in the prior-year period. Earnings per diluted share for the first quarter of 2015 was $0.02 calculated on 37.9 million weighted average diluted shares outstanding compared to $0.08 calculated on 37.6 million weighted average diluted shares outstanding in the first quarter of 2014.

Operating income and net income were both negatively impacted by acquisition related expenses and adjustment of contingent consideration liability as well as the West Coast port slowdown. Non-GAAP adjusted net income in the first quarter of 2015 was unchanged compared to the first quarter of the prior fiscal year. Non-GAAP adjusted earnings per diluted share for the first quarter of 2015 was $0.12, which was flat as compared to $0.12 in the first quarter of 2014.

The West Coast port issues negatively impacted non-GAAP adjusted earnings per diluted share by approximately $0.02. In the first quarter of 2015, adjusted EBITDA was $9.4 million compared to $8.6 million in the same quarter last year. Adjusted EBITDA margin was 13.8% compared to 15.4% in the prior-year quarter. We believe non-GAAP adjusted net income and adjusted EBITDA are useful metrics that help to better reflect the performance of our business on an ongoing basis.

As David mentioned, we find a reconciliation of the non-GAAP financial measures referenced today to the most directly comparable GAAP financial measures in today's earnings release, which is available on our Investor Relations website. Now focusing on our balance sheet. As of March 31, 2015, cash on hand is $7.2 million. Total debt outstanding decreased $0.7 million from $50 million as of December 31, 2014 to $49.3 million based on our net repayments as of March 31, 2015.

Inventory was $70.6 million as of March 31, 2015 compared to $59.2 million as of December 31, 2014. Accounts receivable was $31.4 million as of March 31, 2015 as compared to $39.2 million as of December 31, 2014. Accounts payable was $40.7 million as of March 31, 2015 as compared to $30.4 million as of December 31, 2014. The increases in inventory and accounts payable or due to seasonality in our business as we prepare for the spring selling season. The reduction in accounts receivable is also attributable to seasonality. Sales in the first quarter of each year are typically the lowest of the year. We also expanded approximately $3.7 million during the first quarter on share repurchases as part of our Board approved share buyback program authorized in November of 2014. Consistent with our comments last quarter, FOX filed a shelf registration statement on Form S-3 on behalf of certain shareholders with the SEC on March 31, 2015. As you are all aware a shelf is a much simpler and more cost efficient process than a form S-1, accordingly, while FOX has no current plans to conduct an offering, we believe they're having a shelf registration statement on file will provide FOX with greater flexibility, suite our circumstances, plans and our capital needs change.

Finally, turning to our outlook. For the second quarter of fiscal 2015, we expect sales in the range of $90 million to $94 million and non-GAAP adjusted earnings per diluted share in the range of $0.23 to $0.27. For the full year, we continue to expect net sales in the range of $333 million to $357 million and non-GAAP adjusted earnings per diluted share in the range of $0.88 to $1.00 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, certain acquisition related adjustments and expenses, contingent consideration, valuation adjustment and offering expenses. The adjustments are more fully described in the tables included in our press release, which has been posted on our website.

With that I'd like to turn the call back over to Larry.

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

Thank you. With that will now be conducting a question-and-answer session. (Operator Instructions) Larry Solow, CJS.

Hi, good afternoon guys. One of you can maybe just sort of give us a ballpark on how much -- you have an idea on -- what the pull forward was from some of your customers and is it just a timing thing or is demand a little bit perhaps ahead of your initial expectations?

Yes, I think the way to think about it Larry is, you know we given guidance, when we knew, we had a pretty good issue going with the West Coast ports as we indicated last quarter, it was going to impact us. Clearly we had demanded that we didn't think, we are going to be able to meet and I think what you saw was a lot of that, which we had originally pushed out to second quarter because we didn't think we could meet it, we were able to bring it back in. Through the quarter, I would say that in a little bit of that kind of plus or minus a few million that you get at the end of the quarter kind of explains it.

Okay. Fair enough. And was that -- you said there was some impact on margin, was that a material difference by pulling forward, I realize you have no choice, you don't want to offset the customer, but does that sort of maybe offset by a little lower profitability you would have gotten that they have been later in the year?

Well. Couple of things to keep in mind. I'll let Zvi comment exactly on the margin here, but what to keep in mind the West Coast, even if we would have gotten lower revenue, we were going to suffer inefficiency. I mean, we would have suffered cost, had we not gotten the additional revenue. So, it really had less to do with that and more with the turmoil that this created in our operations. Zvi, do you want to?

Yes. It's exactly as Larry said the inefficiencies would have been caused irrespective whether or not we would have achieved those sales and satisfied customers, but the impact is approximately $1 million in the quarter or 140 basis points from the extra friction of dealing with the West Port situation.

Okay. Pretty wide range in guidance, I know last quarter when you would put it out, one of the reasons was sort of the unknown impact of the West, the Port strikes and it sounds like that's been pretty well contained or quantified in terms of what you think it's going to be, and I guess the other reason, which I still lingers is the impact of FX and I guess more on competitive basis, not on a translational issue, is there anything else that or you just decide to keep guidance where it is?

Well. I think for now, we've decided to reiterate, again we -- you hit, I think on the major thing that it's on our minds now which is the foreign exchange potential impact in the back half of the year and I think much as we did last year as we get through the year and I think we get a little bit more clarity on that situation we see demand continues. We see sell-through, we'd be able to narrow that range, going through the back half of the year.

Fair enough. It sounds like you're still comfortable sort of with mid-single digits on the bike beginning in model year 2016, which is, I guess currently. And then sort of low-double digit Ex raptor on their power vehicle side. Fair to say those statements?

Absolutely fair to say that, Larry.

Excellent. Great. Thanks, guys. Appreciate it.

Jon Anderson, William Blair.

Hi guys. How are you doing?

Hi. Good, Jon.

Did you break out, I may have missed it, how much did it raise (inaudible) contribute to sales in the quarter?

You know we did it, and for competitive reasons, we're not going to what we did, we provided some historical financial results for Race Face, when we did the acquisition, we indicated that we were targeting high-single digit growth for that and we did achieve the high-single digit growth that we laid out when we did the acquisition.

Okay. I guess on the model year 2016 reception, everything you said in the prepared remarks, suggest that line has been received extremely well. Are you in a position now to talk a little bit more about your ability or your thoughts on perhaps some spec positions that will drive, will it help, are you expecting some improvement in your OEM spec position based on the reception in the discussions you've had to date. And then the second question around that is, in calendar 2014, model year 2015, there were some competitive issues, there were sell through issues. Do you think standing here today that it kind of sets up -- the kind of competitive environments in the spec position sets you up for kind of a better dynamic in calendar 2015 relative to 2014?

Hi Jon. This is Mario. So the short answer is, yes. We feel good about the spec position going into when we're delivering model year 2016. I would say we feel better about it than we did about model year 2015, a year ago this time, and so we're optimistic. We do have, as Larry mentioned in his part of the call, we have currency and certain things that are outside of our control, but the things that we've been able to control, we're happy with the results of and now we'll deliver and see what happens.

Okay. That's great to hear. Last question I have guys on gross margin. Just kind of based on your commentary, I guess most of the decline or all of the decline was related to the inventory revaluation in the port issue, but if you strip those out, the underlying improvement was about 40 basis points, stripping those out, which is good, but not as, I guess good as it's been in subsequent quarter or previous quarters. Are you happy with that performance. Is that the kind of underlying margin improvement we should be thinking about this year or should that build as more of the shock production moves over to Taiwan?

Without commenting specifically on this year's margin. We're very comfortable with our long-term margin improvement targets, which are getting to the mid-30s on the legacy business by 2017. Keep in mind that this year we also have added challenge of replacing a lot of Ford volume that we no longer have and we're also in the process of retooling our facility, our Center of Excellence in El Cajon, so the combination of that puts a little bit of a challenge on the year-end and -- but I think we feel really good about our long-term margin outlook for the business.

That's great. Really helpful. Congratulations on a good quarter, guys. Good luck.

Thank you.

Mike Swartz, SunTrust.

Hi, guys. Good afternoon. First question, can use remind us when you fully lap the impact of Ford Raptor being discontinued?

So we had Ford Raptor all the way and most of it was through Q2 with some in Q3. Very small amount in Q3 last year.

Right. Okay. And then just in terms of FX, did you, I'm sorry if I missed it, did you quantify the incremental impact to the full year versus when you gave guidance a couple of months ago?

So we're not -- we're not really assuming any FX, a moderate amount of pricing pressure because of FX, but we don't have to, we don't translate a material amount of our sales back that would actually when you compared to last year, so we're not going to have that issue. The biggest issue we have is with the US dollar stronger, the products that we sell in other parts of the world become more expensive.

Right. So you just assuming there's a bit of a -- I guess elasticity to the price points of your products, I guess just given the stronger dollar?

Yes. You've got to keep in mind through, it's our products into the aftermarket, it's also our products through OEMs into those markets.

Right. Okay. And then you did say that the port issue net was about a $0.02 hit to EPS, is that right?

That's right.

Okay. And despite all that you maintain guidance. So, I guess that sounds actually pretty positive. Anything that's giving you I guess that optimism. Is it just -- I think as you see the earlier reaction to some of the model year 2016 product or something else into that?

Well. You know, I think we feel good about where things are positioned certainly in bike as Mario mentioned with model year 2016, we're feeling a bit better than we did a year ago. We see continued momentum in powered vehicles as I mentioned. Our acquisitions are doing well, I think that's all on the plus side. Then clearly we've got some big unknowns sitting out there with what could happen with the currency issues, that I think we'll see in the back half and we have I think put a modest amount of that into our guidance, in the range that we have given. I think those are kind of the pluses and minuses. We are an optimistic lot though.

And finally, did I hear you say you're rolling out an ERP program?

Yes. We're in the process right now of evaluating an ERP solution. We think it's the next step in continuing our operational efficiency improvements and making sure that the business continues to scale up.

Any idea around timing of that project?

We started the evaluation of formal kick-off is later this quarter.

Yeah. Mike, I would say just, just to comment on that, we're not going about this where there's going to be a big flash cut to a new ERP. We've looked at it, it's something we need to do as our business is growing and become more complex. We've outgrown our existing system. And I think our guys have put together a pretty risk reduced plan to implement a new ERP and it will take a little longer, likely cost us a little bit more, but I think it's a greatly risk-reduced way to go about it.

Jon Berg, Piper Jaffray.

Great. Thanks a lot guys. Good afternoon. Just to circle back to the gross margin, I know you don't want to put a hard number out there for the full year, but just thinking about Q2 and looking at the year-end total, I mean, is it still reasonable for each of those scenarios that we could expect gross margin to be up year-on-year, is that not the case?

Yes. I mean again, I think it's reasonable, but it's reasonable, I think we'd like to focus on the longer-term targets and optimizes company's not on a quarter-to-quarter basis, but on a more sustainable long-term basis.

Okay. And then I guess my other questions for Mario, which you guys announcing the new suspension product in 2017, certainly sounds really interesting. Are there going to be other products introduced for the model year 2017, component line ups in that [$1,500 to $2,000] segment as well too or is that going to be the start of it all?

We're starting in 2017, with the product that I talked about in my portion of the call. That's not the only thing that we're doing for 2017, but at this point, it's the first of the of things we're doing to address that price point.

Okay. And you said those other products could be potential in 2017 as well, the model year?

Yes. There are other things that we're working towards for sure.

Okay. Excellent. Thanks a lot guys.

Thank you.

Andrew Burns, D.A. Davidson

Good afternoon. Thanks for taking the questions here. Just on the mountain bike, you had some success with the 36 last year and the reviews for the Float 34 look to be really strong out of the gate. The question is how important is that the revamped Float 34 to the overall mix. It seems like it's a product that addresses a pretty wide range of mountain bikes and has the potential to be a real needle mover if it proves successful, just wanted to gauge how big of a deal it is relative to the overall portfolio?

Well. It's important in a couple of ways. One, the technologies and features and things that have been reviewed so favorably specific to it, as the other products get reviewed and rolled out you'll find that there will be a similar theme to how the 34 is received. For the 34 specifically, yes, it's going to be something that impacts folks that want to build either OEs or custom build, a lighter weight long traveled bike and it also is going to address somebody who wants a little bit more of a robust and stiff chassis in the trail segment. So it's going to be important for us, we're very excited about it and we're also excited that it represents how we believe all the other products in 2016 are going to be reviewed.

Great. And a follow-up on the 2017 model, your introduction of products, the 1,500-2,000 market, do you have any idea how much that expands your addressable market as you roll that product out?

Yes. So, we're excited about hitting a new segment beyond the ones that we've typically addressed. And we think overtime, it opens up -- we've kind of talked about it, you know it could be as much as 50% in units addressable market increase for us, but that's overtime. This is our [entry] into it and we're excited about it and we'll hedge into it and be competitive in that segment like we are in the others that we compete in.

Thanks. And one last one just on the powered vehicle side. I was hoping you could elaborate a little bit about the opportunities that are provided from the Watsonville facility revamp, I understand the Ford Raptor production will roll through there. But with the extra capacity, your other markets, you can target more aggressively with that space, are there areas to improve efficiencies of existing product, as you retool and transition that floor space? Thanks.

Yes. Andrew, this is Larry. Yes, the Ford Raptor production is actually going to be moving to El Cajon. And we're going to take the Watsonville facility, this work has actually started, we're probably 50% of the way through it. But we're reconfiguring it to optimize at around the power sports part of our business. And it gives us a lot of opportunity I think, as you revamp a plant to increase efficiency in terms of the layout and some of the new equipment we could bring in, that's going to help us. So that and the remaining part of bike production is what will go on in Watsonville, as we bring El Cajon. Is that of help, clarified?

It does. Thanks.

David Kelley, BB&T Capital Markets.

Good afternoon, gentlemen. And thanks for taking my questions as well. Just a quick follow-up here on the powered vehicle side of the business. Maybe if you could provide some additional color, I appreciate the color on the loss of the Raptor here and also on the gain on the Sport Truck side of the business. If we were to just look at say the core ATVs and side-by-side, that OEM business for you or how do you describe performance for the first quarter relative to your expectations. Just what you're seeing on the core power sports business?

Well. Maybe I can just start with numbers and perhaps or even before we get there, we didn't lose at the raptor. The first raptor version has gone out of production -- that went out of production last year as we talked about earlier. We're on the new one. We just have this hiatus.

Yes. So in terms of the business, both the legacy FOX Business actually impacted the hiatus on the Raptor and the Sport Truck acquisition both met our double-digit growth targets in the quarter.

All right. Great. Thanks. I apologize for wording on the raptor loss. Thanks for the clarification there. But also a quick follow-up, if we look at expectations going forward, I mean, are we seeing any slowdown in the side-by-side business, I mean, market growth and then talking to the OEMs appeared strong double-digit growth for the first quarter, maybe your thoughts on what we're seeing as we head into the all important spring selling season here?

Yes. I mean, we look at the -- we look at the performance side-by-side, market in the high-single digits going forward, that's how we think about it.

But I will point out, we believe we got some share gains.

Yes. We have share -- we've gotten share gains. There's more share gains to have, but as a category --

All right. Great. Thank you. And then one additional question, I think you briefly mentioned the aftermarket lead plan, saw that your powered vehicle business is ramping up as well and maybe if you could provide just some additional color on -- obviously we're in the very early stages here, but just maybe longer-term expectations of where that could had and maybe an update on the potential OEM business with Harley as well, that I know is [A] targets for you guys in the future?

Yes. I mean, we're pleased, as I think we've just introduced the product for Harley into the aftermarket this year, I think we're seeing nice steady sell-through that we're pleased with. And again, I think that's a longer-term effort and we want to get out there, eventually, I'd like to get Harley's attention obviously, but I can't say that, that's going to happen or when. But I think our goal as it's always been is to put product out there that makes customers -- motorcycle in this case -- perform better and we think if we knew that it's going to get recognized and eventually we get people's attention. And so, I think you're seeing us start that much as we have, and again that's Harley, obviously is the big guy out there, but I think we're pleased with what we see out of Polaris with the Indian. We're on several of those models on the big touring bikes, that business looks good to us. So as a category, it's one we like and we intend to work to expand it over the next few years.

Sure. And just one last follow-up on that as well. If you look at the margin potential on that business, is it -- is there much difference between the core, say, powered vehicle margin what you've been doing historically and what the motorcycle business would provide, is there a much different there?

No. We think it's consistent. As we mentioned about all the thing is the same factors affected, obviously when you have a bigger piece of revenue, the bigger OEMs are going to tend to enjoy better pricing, so if you got Harley or something or Polaris, obviously they're going to get better pricing than some other smaller OEM.

All right. Great. I appreciate you taking my questions.

Thank you.

Rafe Jadrosich, Bank of America Merrill Lynch.

Hi. Good afternoon. Thanks for taking my question. So I know it's kind of early on, can you kind of talk about maybe the early reception from some of your customers on the acquisition of Race Face and then have you had any success or do you see sort of an opportunity to package maybe wheel and fork combinations into OEMs?

Hi, Rafe. This is Mario. So the reception has been good I would say and they kind of understand the desire to do the kinds of things that you talk about in your -- in the second part of your question, which we definitely have plans for it, that's why we did it.

I would say Rafe. Yes, I think overall I think after the first 90 days or so, we're very pleased with Race Face/Easton.

And then just on the West Coast kind of port headwinds. Just -- in terms of the (inaudible) and inventory early, is that just you air freighting in, that's the incremental cost?

There are a number of factors. Factor number one is freight both in and out being expedited. Factor number two is the unpredictable ways and times that the product will get to our facilities; therefore causing labor and efficiency.

Yes. I think an example that Rafe, would be, we would have to stop our production line one week and then work it overtime the next. And when you run -- you just can't run a factory very efficiently doing that. And as Zvi mentioned, it's not just things like air freight, I mean, we were looking at other ports and we were having the truck brings from other ports, I mean, logistically it created a real nightmare for our folks.

As you guys look at the sort of competitive environment. Do you think this created any major issues in the industry, is there a lot of inventory in the channel or is there a lot of discounts, just any color on that would be helpful?

I don't think as we see it, now, I think this West Coast situation impacted different people different ways. I think as we look at the inventory that (inaudible) to us in our channel, we don't see a lasting impact through the back half of the year from the West Coast port situation.

And in terms of the second quarter there should be no hangover as it gets completely cleared out now?

No. I mean we're still dealing with a little of it just because it takes a while to work through, but I think what we've said and as we've (inaudible) good heart look at the quarter, we don't see a material impact to our financials from it.

Okay. And then just a final question here's just -- kind of as you look at based -- the last time you had provided a guidance, sales obviously came a little better, gross margin was a little bit below sort of, can you just talk about how the quarter maybe played out different than your initial expectations (inaudible) and talk about how the pull forward?

I mean I think predominantly the biggest change versus what we expected was in the sales that we had wide guidance range. We expected the efficiencies from the port. No, we weren't sure if there would be one penny or three pennies, but kind of right around where we thought it would be. So I guess it --

Yeah. And I think again I think due to a little bit of good fortune and a lot of hard work from our people in logistics, we manage to get enough material -- that we could meet and satisfy some customers.

I guess I think again doing a little bit of good fortune and a lot of hard work from our people in logistics, you know, we managed to get enough material in here, we can beat and satisfy some customers.

Jim Duffy, Stifel.

Hi, guys. This is Molly on for Jim. There are a couple of questions for you guys. Can you -- I apologize if you've said this before, what percent of your total sales is coming from Europe at this point?

I think we do have it in our queue, why don't we dig it up for a while, if you have any more questions, we'll take that up and give you the exact percentage.

Okay. Yes. And I guess I'm trying to get a feel for is, how the impact from FX is spread throughout the second half, meaning is it going to be a larger negative impact to the third quarter or the fourth quarter, is it about even?

Well. Keep in mind that for us Q1 is our slowest quarter of the year, and for that matter our slowest bike quarter of the year. The part of our business that's got the most European sales is our bike business. So I would tell you that Q2 and Q3 will likely have a greater percentage of European sales than Q1 did. And I think the percentage is approximately 22% the sales were in Europe in Q1.

In Q1, and then -- and so are you about 30% or so for the full year?

I don't want to forecast the percentage for the full year, right now.

Yeah. I don't think -- you don't know what it is.

Traditionally, prior to acquistion of Race Face, it was probably closer to 35%, 36% traditionally.

Okay and then just kind of on a different note the investment in R&D, which you had talked about is being 4.5% to 5% in sales this year. Do you expect that to increase that going forward, given that the landscape is more competitive and perhaps you'd need to pump more dollars into the research side?

I mean I think we continue to look at projects our ROI basis if they make sense. we continue to invest in the business, but we've been running this business for a lot of years and while it's competitive this year, it's been competitive many other years at Fox and we will continue to evaluate invest in R&D because it is critical, but I don't see any change expected in the business model.

Okay. And then I guess

I mean traditionally prior to the acquisition of Race Face, it's probably closer to 35%, 36% traditionally.

Yes. Okay. And then just kind of on a different note, the investment in R&D, which you had talked about is being 4.5% to 5% in sales this year, do you expect to have to increase that going forward given -- the landscape is more competitive and perhaps you need to pump more dollars into the research side?

No. I mean I think we continue to look at projects on an ROI basis, if they make sense then we continue to invest in the business, but we've been running this business for a lot of years and while it's competitive this year, it's been competitive many other years at FOX. And we'll continue to evaluate and invest in R&D because it's critical, but I don't see any change expected in the business model.

From that 4.5% to 5%?

Correct.

Okay. All right. And then lastly, can you guys just kind of give us your updated thoughts on the acquisition landscape and what your appetite is like today given that you're trying to wrap in two recently completed acquisitions?

Well. I would first tell you that we've had Sport Truck for over a year now. And we're very pleased with it. Race Face/Easton, obviously is more recent and we're working with them and as Mario described, we've got a lot of exciting possibilities we think there in the future. I think the landscape, we run as we mentioned in the past, we keep an active acquisition screen. I'm not looking for an investment banker to bring me a deal, I'm looking for very specific pieces. But having said that, then you got to be opportunistic because you got to have a willing seller. I think we're in an environment where you see attractive branded businesses growing at pretty high multiples particularly in the private equity world. And so, what I would tell you, in that environment we're going to be pretty judicious, still we will move out on something that we think is going to help our business, but we're not get in a position where we're going to get a bidding war and pay crazy prices for really anything. Is that help characterize it?

Yes. It does. I appreciate the color. Good luck in this quarter.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you and thank you all 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 am 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.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.