Fox Factory Holding Corp (FOXF) 2015 Q3 法說會逐字稿

Greetings and welcome to the Fox Factory Holding Corp's Third 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 speaker, David Haugen, General Counsel. Thank you. You may now begin.

Thank you. Good afternoon and welcome to Fox Factory's [second] quarter fiscal year 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 third quarter fiscal year 2015 earnings release, which went out today at approximately 04:05 P.M. Eastern Time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company.

Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown 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 earnings release issued this afternoon, and in the Annual Report on Form 10-K filed with the Securities & Exchange Commission. Except as required by law, the Company undertakes no obligation to update any forward-looking or other statements made 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 today's press release which has also been posted on our website.

And with that, it is my pleasure to turn our 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 third quarter results, an overview of our industry and progress on our ongoing strategic initiatives, including our recent announcement of our anticipated acquisition of certain assets of Marzocchi's mountain bike product line. 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 for your questions.

We are pleased with our third quarter 2015 financial performance. Sales were in line with our expectations and our solid gross margin improvement helped us achieve adjusted earnings ahead of our expectations for the quarter. Our topline increased approximately 18% in the third quarter to $106.2 million. This growth was driven by solid demand for our bike and powered vehicle products. Bike products were up approximately 16% and powered vehicle products were up 20%. The increase of bike product sales was primarily due to the inclusion of our recent acquisition and powered vehicle sales reflected higher OEM sales. It's great to see the positive response to our strong product lineups in both our bike and powered vehicle segments. And Mario will provide greater detail on some of the highlights of his remarks.

We continue to look at worldwide macroeconomic conditions, as well as reviewing sell-through estimates to gauge the strength of our end markets. We believe that because of our unique brand position, our business has continued to perform well, in spite of softness in China and certain European markets. Currency exchange rates remain a concern as well. And at this time, we believe that the current conditions will persist well into 2016.

As many of you know, the second and third quarters of the year had been seasonally stronger margin quarters for our business historically. On a non-GAAP basis, third quarter gross margin was up 40 basis points. The increase in gross margin was due to improved efficiencies, as well as cost savings from our ongoing bike product manufacturing transition to Taiwan. Additionally, we are making progress on our US infrastructure and we're continuing to progress on our El Cajon, California facility's transformation into an Automotive Ride Dynamics Center of Excellence. Mario will touch a little more on this initiative in his commentary. Looking ahead, we anticipate remaining on track for continued long-term margin growth.

Turning to the bottom line, we generated non-GAAP adjusted earnings per share of $0.38 in the third quarter, which as I mentioned earlier, was above our expectation of $0.33 to $0.37. Additionally, we generated adjusted EBITDA of $20.7 million in the third quarter of 2015, representing approximately a 14% increase compared to the prior year's quarter. As we end fiscal 2015 and look to 2016, we will continue to work on our operational efficiency initiatives and further benefit from our 2014 acquisitions of Sport Truck and Race Face/Easton.

Going forward, we continue to believe Fox is well positioned for future growth and we expect to benefit from positive long-term industry dynamics. In addition, we continue to believe that as powered vehicles become increasingly more capable, there is strong demand for improved suspension to allow the vehicle to maximize its performance. We believe the business is well positioned to continue its growth trend through next year as the Ford Raptor production is expected to begin in late 2016.

As we move forward, we will continue to look for ways to opportunistically grow our business while at the same time maintaining a focus on managing what we directly control and executing our ongoing strategic initiatives.

I'll now take a moment to review these initiatives and our recent progress. We remain on track with our transition of the majority of our mountain bike product manufacturing to Taiwan, which we continue to expect to be completed by the end of this year. In the third quarter, we produced 79% of our total fork production and 63% of our total shock production in our Taichung facility and are on track to reach 80% to 85% capacity for total forks and shocks by year-end. This transition will also enable us to more efficiently increase our powered vehicle capacity in our California-based facilities.

Next, we continue to focus on increasing our penetration in our existing vehicle categories. Mario will provide an update on some of our new products in each business in his portion of the call. Additionally, we remain 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. We believe that being an industry leader also requires best in class systems. We continue to make progress on our ERP initiative and we are now anticipating going live with the initial phase early next year.

Our Sport Truck and Race Face/Easton acquisitions continued to perform well in the third quarter as we work to expand in the relevant adjacent product categories. One adjacent product synergy of note is a complete suspension lift package that our off-road product team designed and produced with our team at Sport Truck. Tuscany Motor Company who designs, builds luxury 4x4 lifted trucks teamed up with Shelby America to produce a 700 horsepower 2016 Shelby F150 that features this complete lift package and it's currently on display at the SEMA Show in Las Vegas.

In addition, as many of you know, we recently announced a definitive agreement to acquire certain specified assets of Marzocchi's mountain bike product lines. For those of you unfamiliar with Marzocchi, they design and manufacture motorbike and mountain bike suspension products. We continue to expect this transaction to close this quarter. And Steve will provide greater financial details in his remarks.

Assuming the deal closes as planned, we believe the Marzocchi business will create a good opportunity for Fox to further expand the penetration of our bike suspension products across more price points. The Marzocchi team has a long history in performance suspension and we believe that this highly complementary transaction will allow for increased growth of Marzocchi bike products worldwide. We expect this transaction will bring together and strengthen two highly complementary product lines and allow us to leverage our marketing, engineering, distribution and supply chain resources to drive increased topline growth and profitability over time.

In summary, we had a very good third quarter performance. Our team remains committed to product innovation and these ongoing operational improvements. 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. On our last call, I mentioned how pleased we are with the performance of our latest additions to the Fox Family, Sport Truck USA and Race Face/Easton Cycling. As Larry mentioned, the Shelby F150 project, the first of a list collaborative efforts between Sport Truck and Fox, is now being shown at SEMA in Las Vegas.

BDS is also offering a complete suspension lift kit package for the Chevy Colorado. The steering and suspension geometry, as well as the tune of the Fox shocks was a collaboration between the BDS and Fox engineering teams, utilizing the experience from both teams to end up with a better collective result. Additional packages are planned for development to offer this type of systems approach for other [shock] makes and models.

In our legacy bike business, we continue to gain brand momentum with the performance of our model year 2015 Factory Series 36. With model year 2016 reviews just beginning, the model year 2015 36 continues to receive outstanding reviews. In mid-October Enduro Mag said, almost overnight The 2015 Fox 36 RC2 became the fork of choice for the top racers. Enduro Mag chose the 36 over all other tested competitor offerings during the model year 2015 Enduro fork roundup, rating it best in test.

Our model year 2016 product lineup is following suit: BikeRadar rounded up the six best mountain bike air shocks and our FLOAT DPS with EVOL air sleeve took the crown with their Editor's Choice Award. Their verdict, more sensitivity, more control and more adjustability, particularly in the open mode puts Fox back into the pole position. We are pleased with our legacy Fox product spec positions in model year 2016 with momentum expected to continue into model year 2017, as the OE selling season is in full swing and our planned product line is being met favorably by our OEM customers. Additionally, our new suspension fork, aimed at one price point below our traditionally served markets is still on track for production in mid-2016.

Our anticipated acquisition of certain assets of Marzocchi bike is expected to extend their product offerings and allow us to reach deeper into this segment of the market. Tenneco announced their plans to get out of the two-wheeled vehicle business in July of 2015 and their present business reflects the response to such an announcement. The Marzocchi brand has a strong history in the bike industry and their current 380, 350 and 320 series forks carry on the brand attributes of durability and solid value their reputation was built on. We are in the process of evaluaing specific impact overlap in the Marzocchi and Fox product lines will create and we will work to harmonize our collective distribution internationally. As this is purely an asset purchase and not the purchase of an ongoing business, we'll integrate the customer fulfillment activities for the Marzocchi product line into our Taichung operations. Steve will explain the near and mid-term financial impact in his remarks.

The 2015 bike race season was successful for us with our athletes consistently reaching the podium. Four championship titles were recently captured. Rachel Atherton and Laurie Greenland took world championship wins for Women's Pro Downhill and Men's Junior Downhill respectively. Richie Rude and Tracy Moseley were crowned Men's and Women Enduro World Series Champions. Overall, on the major race circuits worldwide for 2015, Fox-supported athletes won 51 downhill events, 26 Enduro events, 27 cross country events and 7 free ride events.

Now, I'll move on to our powered vehicle business. In our El Cajon, California facility, we produced the highest ever volume from that facility in Q3, while in parallel, we continue to transform it into our ISO 9001 Certified Automotive Ride Dynamics Center of Excellence. And as previously mentioned, the new Ford Raptor products will come online out of this facility in late 2016. The [Heyday] Snow Industry Kickoff event took place September 12 and September 13. We utilized this event to launch our model year 2016 snowmobile product line to the media and consumers. The product line was very well received and orders for these products began shipping last month.

As mentioned on previous calls, we have been enjoying favorable media coverage for our new Quick Switch 3 technology, allowing riders to intuitively choose between three modes of suspension performance. With the media backing and OEM spec wins with Polaris, Yamaha and Artic Cat, we anticipate a great snow selling season. We're also very pleased to be included as the OEM suspension solution supplier for Yamaha's first entry into the sport side-by-side market, with the YXZ1000R. The YXZ1000R features are Podium RC3 Shocks with Bottom-Out Control technology, providing 17 inches of travel in the rear and 16.2 inches travel upfront. Early indicators look favorable for this vehicle being a viable competitor in the ultra-competitive sport side-by-side market.

I'll conclude with our recent race results in the powered vehicle segment. We continue our circle track domination with over 719 wins and 51 titles to-date, this year. We consistently dominate UTV racing in the desert with our Internal Bypass technology. Most recently, one of our UTV dealers, Cognito Motorsports, won the Best in the Desert, BlueWater Desert Challenge and Vegas to Reno race. We also won the SCORE Imperial Valley Race with Wayne Matlock.

I would now like to 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 third quarter results and then review our guidance.

Sales for the third quarter of 2015 were $106.2 million, an increase of 17.8% from sales of $90.1 million in the third quarter of fiscal 2014. As Larry mentioned, this increase reflects a 19.8% increase in sale of powered vehicle products and a 16.3% increase in sale of bike products. The increase in bike product sales was primarily due to the inclusion of Race Face/Easton sales. The increase in powered vehicle products was due to higher OEM sales as compared to the prior year.

Gross margin was 32.8% for the third quarter of 2015, a 110 basis increase from gross margin of 31.7% in the prior year period. This was attributable to improved efficiencies, as well as cost savings from our ongoing transition of bike product manufacturing to Taiwan, partially offset by changes in product and customer mix. Additionally, the gross margins for the third quarter of 2015 and 2014 include certain purchase accounting adjustments associated with the Company's acquisitions. Excluding the purchase accounting adjustments, gross margin for the third quarter of fiscal 2015 increased 40 basis points as compared to the prior year.

Total operating expenses were $21 million or 19.7% of sales in the third quarter of 2015, compared to $14.6 million or 16.2% of sales in the third quarter of the prior year. Moreover, non-GAAP operating expenses stated as a percentage of sales were 15.3% for the quarter, bringing our year-to-date non-GAAP operating expenses to 16.2%, which is consistent with the previous guidance we have provided. The increase in operating expenses was primarily due to the inclusion of Race Face/Easton's operating expenses, including acquisition-related expenses within the Company's consolidated results for the three months ended September 30, 2015, as well as expenses to support the growth of the business and the brand. Within operating expenses, our sales and marketing expenses increased to $6 million in the third quarter of 2015, compared to $5.3 million in the same period of 2014. The $0.7 million increase was primarily due to Race Face/Easton.

Research and development expenses increased [to 4.6%] in the third quarter of this year compared to $3.5 million in the same period last year, primarily due to the Race Face/Easton acquisition and the timing of investments in new products and technologies to maintain our premium position in the marketplace and enter new markets. As a reminder, investment in R&D is a critical component of our business and investment might fluctuate in certain years and quarters depending on product development cycles and other factors.

For 2015, we continue to expect R&D expenses to remain relatively consistent with prior year, stated as a percentage of sales.

Our general and administrative expenses in the third quarter of 2015 were $5.9 million compared to $4.2 million in the prior year period. The increase was primarily due to Race Face/Easton related expenses, higher payroll and related costs, including stock compensation, as well as approximately $300,000 related to our ERP project.

On a GAAP basis, our net income in the third quarter of 2015 was $10.6 million compared to $10.3 million in the prior year period. Earnings per diluted share for the third quarter of 2015 was $0.28 compared to $0.27, calculated on weighted average diluted shares outstanding of approximately 37.9 million shares for both years.

Non-GAAP adjusted net income in the third quarter of 2015 was $14.5 million compared to $12.2 million for the third quarter of the prior fiscal year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2015 was $0.38 compared to $0.32 for the third quarter of 2014.

In the third quarter of 2015, adjusted EBITDA was $20.7 million compared to $18.1 million in the same quarter last year. Adjusted EBITDA margin was 19.5% compared to 20.1% in the prior year quarter. The decline in EBITDA margin was largely attributable to timing of research and development expenses, spending on our ERP project and other public company costs. 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, the reconciliation of the non-GAAP financial measures referenced today to the most directly comparable GAAP financial measures is included in today's earnings release, which is available on our Investor Relations website.

Now turning briefly to our results for the first nine months of 2015. Sales for the nine months of 2015 were $271.1 million, an increase of 16.5% compared to the same period in 2014. Sales of powered vehicle and mountain bike products increased 16.6% and 16.5% respectively for the first nine months of 2015 compared to the prior year period. Adjusted EBITDA increased 9.2% to $47.4 million compared to $43.4 million in the first nine months of the prior year period.

Now, focusing on our balance sheet. As of September 30, 2015, cash on hand is $5.1 million. Total debt was $59.9 million compared to $50 million as of December 31, 2014. The increase in debt was due to financing of seasonal working capital needs, and the initial Sport Truck earnout.

I like to turn the call back over to Larry.

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

(Operator Instructions) Scott Stember, CL King.

Can you maybe talk on the bike business, it seems that most, if not all the growth came from the acquisition you guys made late last year. Could you maybe just talk about the core bike business, what the rough organic growth, whether it was slightly down or slightly up and maybe just talk about with the new products hitting, just loosely speaking for 2016, what your expectations would be on a very high level basis there?

Yes, Scott. We don't break out our legacy bike business specifically. But I would tell you that after a tough year last year we're on track, it's meeting our expectations. We believe, we will be up in the model year over last year and we feel pretty good about that. Again, we think it's tracking to what we would have thought it would do. Does that help?

Yes, that's good. And maybe just obviously the trajectory heading into 2016, just given the commentary about the positive reviews and so forth, I image would be somewhat higher for next year, even though you guys aren't guiding here for 2016?

Yes, we are not guiding next year, but we would certainly anticipate next year to be better, and I think as we indicated, probably starting last year when we were a little bit disappointed with our growth that we had some strong products coming out over the next few years, we introduced good model year 16. We think model year 17 is going to be very good also, and we expect -- our expectation is we will continue to get back some of that spec position we may have lost a year ago and we will get back on the growth cycle.

On the powered side, you pointed most of the growth to increased OEM business. But as well we know that on the powered sports side, notably in the side-by-side and the ATB space things have slowed down a little bit there. Can you just maybe talk about how you've been able to grow, maybe just point to some of the other areas that are picking up steam, whether it's market share gains or any other particular areas that are picking up either?

Well, yes. Let me take it, and I'll let Mario put some color on it. I think we've had the benefit of being on some-- getting on some pretty popular vehicles that have been introduced recently. I think that's helped us. But outside of OEM, our aftermarket replacement shock business continues to go very well, in conjunction with Sport Truck. I think that's helped fuel the growth. And while we think side-by-sides probably aren't going at the rate they have been, they probably as I think you read for many of the OEMs earnings reports, probably the category slowed up a little bit. We continue to think that the innovation is going to fuel that. That category over time will continue to do well. And again, we're looking at bringing out product aimed at increasing the performance of these vehicles and ultimately that will drive it. We're not worried about that category having a precipitous decline. I don't think that'll be the case. And as you know, we don't do much in utility side-by-sides, we're getting a foothold there now and we expect that'll help fuel our growth outside of the recreational side-by-side business.

Well, I would mirror that and note that the utility side-by-side portion of that overall market is larger. And as Larry said, we're just entering that now. So as a category, we feel good about it going forward.

And just last question on the International side, with currency being somewhat of a headwind, can you maybe just talk about how your products, I guess the end product is doing in the international marketplace and what your general expectations are going forward?

Well, I think two things. As we've mentioned for a number of calls that there is pricing pressure on us, in that our products have become more expensive internationally. We're just now starting to see the beginning impacts of sell through. And so far no unexpected surprises. In addition to that, recently this year, we started selling in Taiwanese NT. And so as the dollar strengthened Q3 versus Q2 that has had a -- and you directly translate those sales into US dollars -- that has an impact and has reduced some of the bike revenue that we're reporting herein.

As we said, Scott, in our comments, we were watching the macroeconomic situation around the world. We indicated we do see some softness in select markets, notably China and certain Western European markets. It's obviously something we keep an eye out. So far so good as they say though. I think we continue to do pretty well in spite of that environment.

Larry Solow with CJS Securities.

Just a couple of follow-ups on the bike side of things. So fair to say, I think you guys had talked -- you spoke about sales in terms of model year and a return to sort of mid single-digit growth in 2016. Sounds like you're still in line for that target, plus or minus, is that fair to say?

I think that's fair to say.

And on the powered vehicle side, I know the Indian brand obviously has been doing very well. Is that still pretty small for you guys or is that enough to move the needle or obviously it's driving a lot of sales for Polaris. But is that something that is actually benefiting you, without quantifying it, is it material?

It's not material, it's something we're excited about. We think that the category can move the needle for us and it's one of the ways that we think we achieve our double-digit growth rate in the powered vehicle overall, even in the face of, for example, the side-by-side market slowing down. It's some of these other powered vehicle markets that were less penetrated in.

But in the near term, I don't think -- I know you spoke about that you feel double-digit growth is sustainable on the powered vehicle side, you are not relying on a lot of major pickup on the -- for the motorcycle piece of that yet?

It's part of the test.

Yes, part of the story. I wouldn't say we're expecting a sea change suddenly in our motorcycle business, but I think it's something that we full well expect to continue to improve every year here ongoing. We have more and more opportunities that we're trying to exploit. Certainly very pleased to have that Indian business, though, and I think that helps validate what we can do for a large V-Twin onroad motorcycle.

On Sport Truck USA, obviously you guys -- there has been a couple of earnout payments. So things are clearly going very well. I think when you had acquired it we thought it was a high single-digit grower. But is it perhaps kept up with the category, even growing in that double-digit range since acquisition? Can you give any color on that?

Firstly to clarify, we've made one earnout payment to them so far. If they earn the next earnout payment that would be next year, we will be making that payment and when we acquired them we said that they would grow double-digit, consistent with our powered vehicle business and they have done that.

Shifting to gross margin, last quarter there was a little bit of an issue. I think [we view ]more as just the acceleration to Taiwan, create a little more inefficiencies in the short run. Have you run through that or is that -- was that less of an impact this quarter and part of the reason for the bigger and expected year-over-year gain, at least what I was expecting?

Well, I think just to call attention to it, the year-over-year gain if you strip out the purchase accounting adjustments is 40 basis points. That 40 basis, which is consistent with what we had signaled, and yes, we're pretty much out of the woods on costs that we incurred in Q2 here.

Just lastly, ERP expense, I think you said it was $300,000 in the quarter that was in non-GAAP numbers, is that right?

Yes, in other words we didn't add it back. We didn't add it back --

Right, you kept that in as an operating expense. Is that number -- I don't know what it's been to-date. I don't know recall it being called out. Yes, I know you qualitatively talked about going forward, but is that number something we should expect going forward to get larger as we look out into 2016?

We're at the stage that much of our -- we have -- there are certain people in the organization that's spend a part of their day doing ERP kinds of things and they did something else prior to the ERP that's in our run rate. Okay. Then, most of our consulting costs at this point were at the part of the project that those things get capitalized. There is a certain amount, as you get into training and things like that when you actually implement, there's a certain amount of those things that will show up in OpEx, but I wouldn't call that a run rate. I wouldn't think that that $300,000 was a run rate and we're kind of -- we shouldn't have too much of it between now and the end of the year.

Jon Berg, Piper Jaffray

Congrats on a nice quarter. I guess first just looking at your Sport Truck area, certainly new car and truck sales have been really strong this year, again in October. I guess how should we think about how that impacts that Sport Truck business? I mean, are truck owners more likely to modify their trucks right after the purchase, or typically does it take a little while for them to do so?

Well, I guess, it's a little of both. You've got -- certainly people that buy a new truck with the objective of going out and spending money on it, and lift kits are clearly one of the things they spend on. You also get people I think that retrofit their vehicles after a time or change the lift or change the tires and wheels, you've got all those. I think the team at Sport Truck has done a great job, because while I think the new truck sales have been very good, they've also had some headwinds in some of the oil patch markets. I would note Western Canada and Texas in particular, which have been traditionally strong markets, have probably softened up a little bit for them, but they've been able to plow right through that and still deliver pretty good performance.

And then, I guess, it's still really early in the season, obviously, but assuming we end up having kind of a milder winter, maybe a little less snow maybe, can you remind us of how the business might balance itself out? I mean, typically, in winters where we may have less snow in areas where you need it, I guess you typically see stronger ATB sales or just how should we be thinking about the puts and takes there?

I think because of all the different types of vehicles that we're in, as you say, if you have a light snow year, something else is going to sell well, mountain bikes, other wheeled, powered vehicles. But we know there's talk of El Nino coming in. So we don't get particularly worried about it because we're in enough things that it tends to balance out with the puts and takes, like you mentioned.

And then if I could just sneak one last one in here on the marketing spend. It actually looks like, I think it came down from Q2 just slightly. Are we at a point where sales and marketing may start to level out here for a little while or would you anticipate growth there still for you?

I think the way to think about it is, our non-GAAP expenses, which I think were around 16.2% or something of that nature, if that's the run rate we guided to last year as an exit rate for the overall business, you're going to see some seasonality in our business and some in that spending, so you are going to see it moderate up and down in the quarter. But we think that's roughly the level that we were running this business as of now. A little bit of operating leverage next year, but not too much. And one think I'd point out is, we still have some of the spend associated with the hiatus of our Ford vehicle for example, whether that be building out the facility in El Cajon or keeping folk on to support the new ramp-up. So that's on our -- so for that reason you might see a little bit of leverage when we get Ford back into our numbers in 2017. But that's kind of how I think of OpEx as opposed to what percent of sales and marketing is going to run this quarter versus some other quarter. Lot of seasonality in the spend.

Andrew Burns, D A Davidson

I was hoping you could spend a little time just on the military opportunity with the JLTV program being awarded to Oshkosh, what else is out there that you could address or help develop that business?

Yes, Andrew, first of all, Oshkosh got the award but then it was protested by Lockheed. And so, we don't quite know where that's going to come out yet. We're obviously anxiously awaiting that to see what might happen. And again, keep in mind, there is the main vehicle, which is certainly the biggest part of it, the center is a trailer that goes with that. And depending on who is the ultimate winner, we could have one or the other. So we're waiting to see how that protest resolves itself. The big opportunity I think in the military that is still out there is any retrofit on the Humvee, which I think as this budget works its way through and the JLTV protest works its way through, we're anticipating that there'll be some amount of that work that would certainly be available to us. Aside from that we're on the GMV 1.1, which was kind of our first OEM vehicle, if you will, in the military. We think that that's going into its initial phases for us now. There could be some foreign allies coming in, buy that vehicle. That's something we're looking forward to. And then outside of that we will continue to do a lot with the light desert vehicles for special forces that we retrofit. We're on the Polaris Dagger, which is another example of business. Again, I think it's a business that we anticipate that we will slowly build up, absent us getting on one of the larger programs, such as JLTV or a Humvee retrofit program.

And just a follow-on of the international markets. You've highlighted in past quarters, in this one China and in some European markets, was hoping you could give us some more color there, whether you started to see some stabilization at weaker levels in those markets, or if they continue to deteriorate. Just trying to [work] directionally, which way they are going.

I would say, I don't have the exact numbers in front of me, but I think it would be fair to say that we've seen a little bit of stabilization. I think we started down a quarter or two ago and obviously we hope we don't keep stepping down. But I think we've seen continued softness. I don't think it's -- it's continuing to decline, but it's still not at the level that it was running a year ago in those markets.

And last, just on the Watsonville facility, as the bike business largely moves to Taiwan, can you just highlight the capacity ramp there for powered vehicle, what are the early opportunities you look to address, as that powered vehicle capacity expands in that location?

Yes, I think the way you have to think about it, in Watsonville right now, we've got the remainder of bike and actually three power sports lines. We're building -- Ford is starting up and a lot of our automotive stuff we're ramping up down in El Cajon. I think the way to think about it is Taiwan will continue to take that bike capacity and then we're going to balance -- we've got our operations folks deep into this now. The balance between what we do in Watsonville and what we do in El Cajon to optimize that. And that's ongoing. And I think as we continue to get the bike off that facility, it enables us to put the kinds of processes we need, absent bike into both El Cajon, which we've got the advantage of green fielding and we've reconfigured Watsonville now, although we've got a little bit more work there to do as bike, this quarter continue some of that capacity to transfer. So it's going to be that balance that our folks work on.

Mike Swartz, SunTrust.

Just wanted to touch on the guidance real quick and looking at the revenue guidance specifically, I mean your third quarter revenues was in line with expectations and then you're taking a full year up $5 million to $10 million. So my question is what's changed in the past two or three months since you've provided the -- I guess since you provided second quarter guidance for the topline?

Well, we've had a number of vehicles that we've had some vehicle wins and if you look -- and they're doing well. There was a little bit of uncertainty about bike, we feel good about bike.

Certainly said the order book has changed. I mean that's what we're looking at.

I mean I don't think there is a change in the fundamental thesis to the business. I mean, the things that we've talked about, there's more certainty around it now because we're seeing results of it with orders and sell-through and so forth.

And then just in terms of maybe the mix, I think in the second quarter, you talked about the aftermarket slowed a bit between China and Europe and that's a higher margin business. Are we starting to see that stabilize, is that coming back, is that part of the reason why guidance is looking a little higher, just help me with that?

I wouldn't attribute it to aftermarket. I think the mix, I mean the mix is similar to what we thought before, I wouldn't attribute it to one particular market versus another.

And then just with -- I think in the last call you had mentioned with gross margin you expect it to be relatively flat year-over-year. Is that still the way to think about it here given your gross margin was up [40 basis points] in the quarter?

What we said is we expect it to be up year-over-year -- I'm sorry, flat year-over-year as you [pro forma-ed] out the West Coast port impact for Q1, which would imply in order to do that we needed to be up a little bit.

But no change to that in other words?

No change to that.

And then finally with the Marzocchi acquisition, it sounds it's not going to be accretive for another year, year and a half. Could you maybe give us a broader sense of just the strategy and your thought process with that? Is this part of a plan to provide a good-better-best product offering over the next couple of years?

Yes. So we're considering this as an expansion to our product line. It's going to help us reach deeper into the portion of the market that we traditionally haven't served with our legacy Fox product line. It fills some holes for us. We may have a little bit of overlap. In my comments we talked about we're currently evaluating where the two product lines are going to live, how they're going to co-habitat and how we are going to use each of them to kind of maximize our opportunities to more effectively compete against some of the folks in this space.

Is it safe to say that Marzocchi brand will continue on, this isn't going to re-christened to the Fox product?

That's our plan. It's got a good history to it, continues to have a following and it's going be part of our story.

Jim Duffy, Stifel.

First question is a clarification on the last question around Marzocchi, clearly gets you a brand with history, is there IP and technology you are interested in as well, will some of their products continue to live on?

Yes, some of the products will continue to live on and as part of the assets that we have acquired and have access to our IP and designs, yes.

And so I guess, as I think about you may slot those in as part of an overall brand positioning with the Fox family to try to cover more price points?

Well, exactly. If you think about, we're going to have an expanded product line offerings and some of those products will continue to say Fox and some new ones will say Marzocchi and we're in the midst of figuring out how that line is going to lay out to help us be more competitive. So we're excited about it.

And then staying on the bike segment, as we approach the one-year mark for the Race Face/Easton business, any updates on opportunities to leverage integration of those brands to the bike platform, is there more interoperability planned as you look out to the next model year or is it really business as usual with those platforms?

Well, as we've done with Sport Truck, we will continue to look at these sort of synergistic opportunities. The two engineering teams work together to bring expertise to things that we're doing. We talked about a few thing there, we talked about a composites expertise that we wanted to have access to, we talked about wheels and we talked about the sort of system synergies. So Fox is helping the Race Face/Easton cycling folks with things that we've traditionally had expertise in. And they're helping us with things that, particularly in the composites area that we were looking forward to their help on. And following that you'll start to see some of the systems work.

And then the last question I guess maybe for Zvi, any tactical risk management strategies we should be aware of, as you bring the ERP live early next year, should we anticipate any shifts in revenue or expenses between quarters or are you really see it as business as usual?

We talked about how we're going to manage it and we think the way we're managing it, business as usual. We're starting with our El Cajon, soon to be ISO 9001 certified which we are targeting for next year. And so we're choosing to implement it in a phased approach and if it doesn't go as quickly as we want, we'll just delay the implementation. But we're not going to jeopardize revenue.

Rafe Jadrosich, Bank of America Merrill Lynch.

I think the inventory is up a lot on a year-over-year basis, can you just give a little color on what's driving that and then when should we expect that kind of inventory growth rate to be more in line with sales?

Well, I think there's a number of factors driving it. First of all, we of course purchased Race Face/Easton and we are talking -- are you comparing versus December or September, I guess that would be the first question.

Just on a year-over-year, for 3Q, September.

Yes, so in Q3 in September, we did not own Race Face as an example. Right. So that would be a reason for the increase. And then we are now having another plant in both Taiwan and the US, requires a higher level of inventory. We've got some of our big customer wins that we've had, don't necessarily have the same kind of inventory profile. For example, [up a lot on] year-over-year OEM. Well, that's the body inventory to support some of those commitments to the OEM. So I mean, we don't think there is any issues and we think by and large the inventory is higher to support the higher sales, albeit, I know it's higher, it's up more than the sales are up.

Just I know you're not providing broader guidance on 2016 yet, But can you comment on the input cost outlook for next year?

The input costs look good. I mean we've all seen commodity costs come down and of course commodity costs are a big input for what it is that goes on our product. We still do have some presence in California here and we're seeing the labor input cost go up on the other side of the equation. What lifts increases of minimum wages and the benefits cost that ObamaCare and so forth. On balance, I think we feel good about that and we think that of course these things ebb and flow. Going the other way, the dollar now is strong -- so that helps you on the commodity cost. But as I mentioned earlier, Taiwan, the revenue we have in Taiwan, now the dollar is higher. So that's going in the other direction. On balance, I think we feel fine with everything, we expect that we're going to be able to hit our gross margin targets and I don't think this accelerates it in a meaningful way, but we're planning on taking advantage of it.

And then just last question, on that gross margin long-term, kind of gross margin target. I think you said mid-30s in like core Fox [other three] business in the past which is excluding the acquisitions. Just how should we think about -- has there been any changes to the drivers of that target? Maybe some of these -- can you talk about the impact of the acquisitions and then any comments on sort of the timing and how we ramp up to that target over time would be helpful. Thank you.

Yes, I don't think there's any big change, but of course if the mix changes, for example mix cost is 30 basis points this quarter here, as you get more OEM revenues. We aim to keep the mix balanced over time. But in any given quarter or year it can change. We feel like it's fairly linear over the next couple of years here, in terms of the margin improvement.

Craig Kennison, Robert W Baird.

With respect to Marzocchi on the acquisition there, you already had a strategy to pursue let's say the price point below where you currently operate. How will this change the strategy you had in place?

I think Craig I would put this under the heading that we're being somewhat opportunistic. When this asset became available, we're pretty excited. I think as Mario indicated, we're looking at how we take this with the plan we had and optimize the two of those things. As I think we've said, our rhythm fork is out and we're selling it this model year, but I think we're looking this to help us expand maybe deeper faster into that range, cover some more of those price points that we're interested in. We also think we've got a brand here with a following as Mario said and clearly we're looking to take advantage of that. As Mario said in his comments, Tenneco announced that they were shutting this business down in July. So as you can imagine, we're in the process of purchasing it in November. Not a lot of good was happening in that time and so, in spite of that, we think it's an asset we can use to help us and we believe we'll get some growth just out of that Marzocchi following also. If I get this thing up, and as we indicated it's going to cost us we think a little bit of money to get it stabilized and started up, but I think in 2017 and obviously, we're going to try to do it before that. But I think by 2017, we will have this thing going up a ramp.

And can you give us a feel for the assets that you did acquire here, what are key assets that you've acquired?

Well, I think we've acquired the names, inventory, the IP, the trade secrets, the knowhow, the customer relationships --

Some test equipment, vendor relationships.

But very little in the way of physical assets, is that fair?

The only physical assets we've acquired are inventory and fixed assets, little bit. Mostly inventory physical assets.

And I think, Craig, obviously, this is not a landscape changing deal for us. It's pretty small, but we wanted to be opportunistic, we do think it has some advantages, and I think the thing that Mario mentioned that you want to keep in mind is, we are going to be operate it out of Taichung. That's where its operations will be. They have traditionally been in Italy and so we have a plan in the process of putting it over there and we think that would benefit that business longer terms.

And then just my final question related to that, are there opportunities outside of the mountain bike category you think you could exploit with that brand?

Well I guess, at this stage, I would say that flock is not lost on us. I don't think it's a brand that we believe has some cache. There is still the motorcycle or motorbike portion of it that will likely either be shut down or end up in someone else's hands that we're mindful of. But we do think there are some opportunities for that brand outside of what they're being used on today.

Jon Anderson, William Blair.

You have a couple of exciting events coming up I guess in 2016 and 2017, one being the introduction of a lower price point fork, the other being the return of the Rafter. Just any color you can provide on how we should be thinking about the contribution of those two activities or those two events as we get into 2016 and 2017? And it may be too early, if that's the case, okay. But just any kind of color, so we can kind of put some shape around that. Thank you.

Yes, let me take it and then I'll let Mario and Zvi fill in on any thoughts they have, but I would say the first on the lower price point fork we didn't got on with that, we gotten it out, people have being riding. We think it's going be pretty well received. It doesn't hit the entire price point initially, but we think that will help contribute to our short or long term mid single digit forecast for bike here over the next few years, it will definitely contribute. We're just probably yes with everyone else. We are going to see how it's received. We know it's going to be good, initial impressions are good. we're right now, as you can imagine, Mario and our guys in bike are spending some time figuring out the Marzocchi piece of this thing now. We haven't closed yet, so that's going to play into it. I don't know that we'll see a lot -- I'm pretty sure we are not going to see much next year from that. That may play in, in some future years again to help keep that growth rate going. For record, we can't wait. We've missed it. I can tell you that and right now we're thinking it's late next year that it begins production and again, we based on the vehicle that that we see, we think it's going to be very well received and we'll just have to see how it sells. But we would anticipate that it will be at least as good as the existing Raptor.

Ladies and gentlemen, we've reached the end of our Q&A session. At this time, I'd like to turn the floor back over to Larry Enterline for closing comments.

Thank you. Thank you all 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 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 concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.