Fox Factory Holding Corp (FOXF) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Fox Factory Holdings Corp. fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Haugen, General Counsel for Fox. Thank you; you may begin.

Thank you. Good afternoon, and welcome to Fox Factory's fourth-quarter and FY15 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 fourth quarter and FY15 earnings release, which went out today at approximately 4:05 PM Eastern time. If you've not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. 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 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 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 gross, 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 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 fourth-quarter and full-year results, and provide an update on our ongoing strategic initiatives. Mario will then discuss recent highlights from each of our business segments. Zvi will review the financial results in more detail, and discuss our guidance. After that, we will open the call for your questions.

We finished 2015 in a strong position. Sales for the year were above our expectations, and adjusted earnings of $1.01 were at the high end of our increased guidance.

Focusing on the fourth quarter of 2015, our top line increased approximately 29% to $95.7 million, which was above our guidance of $87 million to $93 million. This growth was driven by both our bike and powered vehicle products. Bike products were up approximately 23%, and powered vehicle products were up approximately 37%.

The increase in bike product sales was primarily due to the inclusion of our 2014 acquisition of Race Face/Easton, as well as solid performance in our legacy bike business. Powered vehicle product sales reflected higher OEM sales.

While we continue to see a positive response to our product lineups in both our bike and powered vehicle segments, we have seen some indication in our order book of side-by-side sales slowing. This trend is consistent with what our OEM customers have been reporting.

As an international business, our team continues to be cognizant of worldwide macroeconomic conditions. The environment in 2015 was challenging; and while we believe the current conditions will persist in 2016, Fox's unique brand positioning helped us to perform well, in spite of the headwinds in certain of our markets.

In the quarter, our gross margin increased 30 basis points compared to the fourth quarter of last year. Excluding the effects of certain acquisition costs, our non-GAAP gross margin increased approximately 90 basis points. The margin improvement indicates that we've begun to reap the benefits of transitioning bike production to our Taiwan facility, as well as our other efficiency-based initiatives. 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 $0.25 in the fourth quarter, which was at the high end of our increased guidance of $0.21 to $0.25. Additionally, we generated adjusted EBITDA of $16.1 million in the fourth quarter of 2015, representing approximately a 33% increase compared to the prior year's quarter.

In 2016, we remain focused on our strategic operational initiatives to gain increased efficiencies across our Business. We expect to further benefit from our 2014 acquisitions of Sport Truck and Race Face/Easton, as well as our recent acquisition of certain assets of Marzocchi's mountain bike product line. Going forward, we continue to believe Fox is well positioned for future growth, and we expect to benefit from favorable long-term industry dynamics.

In addition, powered vehicles continue to become increasingly more capable, and Fox is well positioned to capitalize on the strong demand for improved suspension to maximize vehicle performance. To this end, we are very pleased with being spec'd on the 2017 Toyota Tacoma TRD Pro, which was unveiled at the Chicago Auto Show on February 11.

Our experienced management team is continuously looking to opportunistically grow our Business, while at the same time maintaining a focus on managing what we directly control, and executing on our ongoing strategic initiatives. I'll now take a moment to review these initiatives, and our recent progress.

We are very pleased with the efforts of our international operations team. With their hard work and dedication, we have completed the transition of a majority of our mountain bike product manufacturing to Taiwan. In the fourth quarter, we produced 81% of our total fork production, and 71% of our total shock production, in our Taichung facility.

As a result, we expect to further improve our US infrastructure for powered vehicle production in our California-based facilities. For example, we are continuing to progress on our El Cajon, California, facility's transformation into an Automotive Ride Dynamic Center of Excellence. We continue to focus on increasing our penetration in our existing vehicle categories.

Additionally, we remain very pleased with customer reception to our recent technology developments. We believe that our continued commitment to R&D innovation will keep Fox in an industry leadership position. Our ERP system upgrade initiative is progressing on track, and we expect to implement the initial phase later this quarter.

In the fourth quarter, our acquisitions continued to perform well. Sport Truck and Race Face/Easton have allowed us to expand into relevant, adjacent and complementary product categories, and have helped to broaden Fox's offerings in critical areas.

We also closed our acquisition of certain assets of Marzocchi's mountain bike product line in the fourth quarter. We are excited about the opportunity to build upon Fox's bike suspension products; and with the addition of Marzocchi, we expand our ability to reach more price points and other segments of the mountain bike market. Our integration plans are under way, and we look forward to leveraging [the] engineering, distribution and supply chain resources to drive increased top-line growth and profitability over the next several years.

In summary, we had a strong fourth quarter, which provides positive momentum as we enter 2016. We remain intently focused on growing our Business, while at the same time continuing to enhance shareholder value. From a capital allocation perspective, we believe there are incremental opportunities available on a global basis for strategic M&A.

We also believe a stock repurchase program provides us with an additional opportunity to strategically return value to our shareholders. To this end, today we announced that our Board of Directors authorized a new $40 million stock repurchase program. This underscores the confidence that our Board of Directors and management team have in our Business, growth strategies, and ability to drive long-term value.

And with that, I'll turn the call over to Mario.

Thank you, Larry, and good afternoon, everyone.

During my remarks today, I'll discuss some of our recent business highlights, and touch on some industry trends. I'll begin with our legacy bike business. Brand momentum continues to build, with the recognized performance of our model-year 2015, 2016, and now early ride experiences of our model-year 2017 products.

Our model-year 2016 factory series FLOAT X2 rear shock won Pinkbike's 2015 Mountain Bike Suspension Product of the Year award. They justified their pick saying, quote, it's the Fox FLOAT X2 that takes the win in 2015, due to its massive and effective range of adjustments, reliable performance, and action that anyone would be hard pressed to tell the difference between it and a coil-sprung shock during a blind test, unquote.

We also received Pinkbike's Innovation of the Year Award for our Live Valve electronic suspension. Live Valve is currently a part of our racing applications development program.

Pinkbike describes this category as the most promising product in development not yet available in the market. Their support for choosing Live Valve is, quote, because it promises to solve the universal dichotomy of the mountain bike's suspension age, how to design a suspension to produce traction and support, and at the same time maximize the efficiency of its wheezing, unbalanced power plant which can barely sustain half a horsepower, unquote.

Model-year 2017 products are being very well received by OEMs and Fox athletes. As discussed on previous calls, our initial product offering into a new front fork price point will be included in our model-year 2017 lineup.

Our acquisition of certain assets of Marzocchi mountain bike products is expected to extend their product offerings, and allow us to reach deeper into the performance mountain bike segment of the market in follow-on model years. We are making headway in the process of harmonizing our collective distribution, service and international support.

The 2016 bike race season is under way; and to date, Fox-supported athletes worldwide have won two enduro events, one free ride event, and five downhill events. We're also currently leading the New Zealand and National downhill series, with Fox athletes taking two out of three wins.

Now we will move on to our powered vehicle business. In our El Cajon, California, facility, we are nearing the first phase of completion in our efforts to transform it into an ISO 9001-certified Automotive Ride Dynamic Center of Excellence. We anticipate this first phase to be completed in the first half of this year. We are pleased that the new Ford Raptor products will be produced in this facility later this year.

As Larry mentioned, we are the OEM suspension solution supplier for the 2017 Toyota Tacoma TRD Pro. The truck is equipped with our aluminum body 2.5 Internal Bypass shocks, with the rear shocks featuring an external reservoir that adds additional fluid, and assists in cooling. Initial media responses after its unveiling at the Chicago Auto Show earlier this month have been very favorable.

We continue to make good strides leveraging Fox and Sport Truck's global marketing, engineering, distribution and supply chain resources to collectively develop next-generation lifted truck ride dynamic solutions. At the 2015 SEMA show in Las Vegas last November, Sport Truck's brand, BDS Suspension, won a Show Stopper Award from Diesel Tech Magazine for their new floating traction bar.

I'll conclude with our recent race results in the powered vehicle segment. The circle track season has just begun, and we have 11 wins to date.

We consistently dominate UTV racing in the desert with our Internal Bypass technology. Wayne Matlock took the 2015 Baja 1000 UTV championship with Internal Bypass. The team of Rob MacCachren and Andy McMillin took the Baja 1000 overall championship, the second year straight, with External Bypass.

And last but not least, Erik Miller took the championship win at the 2016 King of the Hammers race. This is his second King of the Hammers win.

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

Thanks, Mario. Good afternoon, everyone. I'll primarily focus on our fourth-quarter results, briefly recap our annual results, and then we'll review our guidance.

Sales in the fourth quarter of 2015 were $95.7 million, an increase of 29.1%, versus sales of $74.1 million in the fourth quarter of 2014. As previously mentioned by Larry, the increase in sales reflects 37.1% growth in powered vehicle products, and 23.3% increase in sale of bike products, as compared to the fourth quarter of 2014.

The increase in sales of powered vehicle products was due to higher OEM sales. And the increase in bike product sales was primarily due to the inclusion of Race Face/Easton sales, as well as solid growth from our legacy Fox bike business, which were up mid-single digits.

Gross margin was 29.9% for the fourth quarter of 2015, a 30-basis-point increase from a gross margin of 29.6% in the prior year period. The increase in gross margin was due to improved efficiencies, including our now-complete move of the majority of our bike production to Taiwan, offset by changes in product and customer mix.

Additionally, the gross margins for the fourth quarter of 2015 and 2014 include certain acquisition-related costs. Excluding such costs, non-GAAP gross margin for the fourth quarter of 2015 increased 90 basis points, as compared to the previous year.

Total operating expenses were $19.2 million or 20% of sales in the fourth quarter of 2015, compared to $17.7 million or 23.9% of sales in the fourth quarter of the prior year. The increase in operating expenses was primarily due to the inclusion of Race Face/Easton's operating expenses. Non-GAAP operating expenses, stated as a percentage of sales, were 16.5%, bringing our year-to-date non-GAAP operating expenses to 16.2%, which is consistent with the previous guidance we had provided.

Within operating expenses, our sales and marketing expenses increased to $5.8 million in the fourth quarter of 2015, compared to $4.9 million in the same period of 2014. The increase was largely due to the inclusion of $0.7 million of sales and marketing expenses from our acquisition of Race Face/Easton.

Research and development expenses increased to $4.8 million in the fourth quarter of 2015, compared to $3.4 million in the comparable period of 2014, primarily due to investments in mountain bike and powered vehicle product lines, as well as from the inclusion of research and development from our acquisition.

Our general and administrative expenses in the fourth quarter of 2015 were $5.6 million, compared to $4.9 million in the prior year period. The increase was primarily due to the inclusion of approximately $0.5 million from general and administrative costs from our acquisition.

In the fourth quarter of 2015, our tax rate was 26.7%, compared to 36% in last year's fourth quarter. We have changed our international tax structure, and expect our future tax rate will be in the mid-20%s, slightly lower than our Q4 2015 tax rate.

On a GAAP basis, our net income in the fourth quarter of 2015 was $6.8 million, compared to $2.9 million in the prior year period. Earnings per diluted share for the fourth quarter of 2015 were $0.18, calculated on 38 million weighted average diluted shares outstanding, compared to $0.08 calculated on 37.9 million weighted average diluted shares outstanding in the fourth quarter of 2014.

Non-GAAP adjusted net income was $9.6 million, an increase of 44.7%, compared to $6.6 million in the fourth quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the fourth quarter of 2015 was $0.25, compared to $0.18 in the fourth quarter of 2014.

In the fourth quarter of 2014 (sic - see press release, "2015"), adjusted EBITDA was $16.1 million, compared to $12.1 million in the same quarter last year. Adjusted EBITDA margin was 16.9%, compared to 16.4% in the prior year quarter.

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

Now, turning briefly to our operating results for the full 2015 year, sales for FY15 were $366.8 million, an increase of 19.6% compared to FY14. Sales of powered vehicle products increased 21.6%, and mountain bike product sales increased 18.1%.

The increase in powered vehicle product sales was primarily due to the inclusion of Sport Truck, as well as an increase in powered sports product sales, partially offset by decreases in off-road product sales as a result of the model year changeover in the Ford Raptor program. The increase in bike product sales was primarily attributable to the inclusion of Race Face/Easton sales.

Adjusted EBITDA increased 14.4% to $63.5 million in FY15, compared to $55.5 million in the prior year period. Adjusted EBITDA margin decreased 80 basis points to 17.3%, compared to 18.1% in FY14. As a reminder, in 2015 adjusted EBITDA was negatively impacted during the year from the West Coast port slowdown, the model year changeover in the Ford Raptor program, and the expansion of our El Cajon facility.

Now focusing on our balance sheet, as of December 31, 2015, we had cash on hand of $6.9 million. Total debt outstanding was $48.7 million, compared to $50 million of debt outstanding as of December 31, 2014.

Inventory was $68.2 million as of December 31, 2015, compared to $59.2 million as of December 31, 2014. Accounts receivable was $43.7 million as of December 31, 2015, as compared to $39.2 million as of December 31, 2014. Accounts payable was $32.1 million as of December 31, 2015, as compared to $30.4 million as of December 31, 2014. The increase in inventory and accounts receivable reflects the growth of our Business, and the expansion of our manufacturing facilities.

Turning to our outlook, for the first-quarter 2016 we expect sales in the range of $73 million to $77 million, and non-GAAP adjusted earnings per diluted share in the range of $0.12 to $0.16. For the full year, we expect sales in the range of $375 million to $395 million, and non-GAAP adjusted earnings per diluted share in the range of $1.05 to $1.13, based on approximately 38 million weighted average diluted shares outstanding.

Our guidance reflects approximately 1% negative impact on revenue, due to foreign exchange rate impacts. While we believe our long-term growth rate in powered vehicles will be in the low-double digits, we expect 2016 growth to be lower, due to the macro economic environment, as well as a relatively flat side-by-side market, all of which is reflected in the above guidance.

As you think about our 2016 guidance, we want to also remind you that we continue to expect to invest in Marzocchi to strengthen its infrastructure, and maximize the long-term potential of the business and continued investment in our ERP. And as a result, we expect non-GAAP OpEx, stated as a percentage of sales, to be approximately 16.7%, which is slightly higher than 2015. We expect to experience a $0.02 drag on our earnings as a result of our Marzocchi investments, which is incorporated in our guidance for 2016.

This week we announced that our Board of Directors authorized a new share repurchase program for up to $40 million of our outstanding common stock. The new share repurchase program replaces the existing $40 million share repurchase program that was authorized in November of 2014, which expired in accordance with its terms on December 31, 2015.

Our guidance does not include the impact of the $40 million share repurchase, as there can be no assurance regarding the amount and timing of such buyback, as it will depend on a number of factors. And as I mentioned earlier, we anticipate our effective annual tax rate should be in the mid-20%s.

As a reminder, non-GAAP adjusted earnings per diluted share, excluding the following items net of applicable tax -- amortization of purchased intangibles, certain acquisition-related adjustments and expenses, contingent consideration valuation adjustments, and offering expenses. These adjustments are more fully described in the tables included in our press release, which has been posted on our website.

I would now like to turn the call back over to Larry.

Thank you, Zvi.

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

Thank you.

(Operator Instructions)

Jon Berg, Piper Jaffray,

Great. Thanks a lot, guys. Good afternoon.

Hi, John.

Good afternoon.

I guess, just for my first question, I know you have this kind of long-term guidance of mid-30%s gross margin on a GAAP basis, excluding acquisitions. So I think you were up 90 basis points this year, versus that goal. I guess, how are you guys viewing how you are trending, versus how you planned at this point? I know it's not linear, but where are we, as far as what you expected?

We think we are trending on track. We think over the next couple of years, we can achieve our long-term mid-30%s gross margin for our legacy Fox business, which as we've previously described is a little lower on a blended basis.

Okay. And then, I guess, could you, Zvi, if you have it, provide any quantification of the impact that the strong dollar had on sales and EPS in 2015?

Yes. I mean, in 2015, it's a bit hard to quantify, because we didn't own Race Face/Easton, for example for the year, and the Canadian currency really got hammered hard. So I don't think it would be fair to impact our pro forma revenue for that. But I would say, if I exclude Race Face/Easton, it's about 1%.

Okay -- (multiple speakers)

Earnings is a lot lower, because as you know, a lot of our bike-based -- a lot of that is in the bike business, and those costs are also in [NT], so it's a lot lower in terms of earnings.

Okay. Got it. And then just one last quick one. Congratulations on the Toyota win. I guess, when should we expect shipments to begin there? Is that before or after the Ford Raptor? Sorry, if I missed that.

It's also a model year 2017, so we would expect to begin the -- these shipments right before -- early in the fourth quarter.

Great. Thanks a lot, guys. Good luck in 2016.

Jon Andersen, William Blair.

Good afternoon, everybody.

Hey, how we doing?

Hi, Jon.

Hi. First, on the 2016 sales guidance. If I calculated it correctly, the mid point is about 5% growth. Could you talk a little bit about your expectations across the two major end markets, powered vehicles, and mountain bikes, understanding that you've seen some slowing, perhaps in powered vehicle end markets? But could you give us a little bit more color, on maybe the expectations across segments, and how you kind of built the mid single-digit throughout the year?

Well, I'll tell you. We think that the bike business -- we said that's a mid to high single-digit grower long-term, and we think that is right around that mid-single digits for the bike segment for 2016. Notably, we assume that the currency drag doesn't get worse. So if the currency drag gets worse then, of course, we don't achieve that goal. And I think as you just mentioned, you can kind of back into the powered vehicle growth from that.

Okay. And then -- (multiple speakers)

We feel, I think, Jon, we feel pretty good. While I think powered vehicles is a little bit challenged, because of the side-by-side market, we've got the Ford Raptor coming on late this year. The Toyota vehicle, while it's not a high volume vehicle, we will see a little contribution from that. And we think that sets us pretty well up for then for 2017.

That's helpful.

In fact, we'll get better powered vehicle growth.

Yes. No, that's helpful. Could you just clarify a little bit, the timing? I want to make sure I'm clear on the timing of the Raptor return.

I think was kind of a $15 million-plus type business on an annual basis, prior to the model year changeover. When does that come online, and is the expectation that it comes back at levels, similar to where it was, prior to the changeover?

Yes, we don't comment specifically on Ford volumes, obviously. We're thinking that it will be at least equivalent to the last Raptor, but we obviously hope it does a bit better, but that's kind of how we've gauged it. It will start going into the fourth quarter.

We don't yet know how fast it's going to ramp to full production. We've made some estimates, that obviously are included in our guidance. But we would expect by the first quarter of next year, it will be hitting at production rate.

That's really helpful. And on the Tacoma, the Tacoma, is this a similar product to be Raptor, kind of serving the same end market? And how should we think about that, in terms of the size of the opportunity, relative to the Ford opportunity?

Well I'm going to let Mario tell you in little bit about the vehicle, and how it compares to Raptor. But I would just tell you, it's -- the great news for us is that it is validation of the concept of an off-road capable on-road vehicle. So we feel very good about that.

It's a -- I think, as we would view it a relatively low volume vehicle. We obviously hope it does very well. But it's certainly, much as the Raptor started out, I think it's a new entrant for Toyota, and I would expect they would be somewhat cautious.

Mario, you want to talk to some of the specifics?

As Larry said, Jon, we're excited that it's sort of validation to this off-road capable on-road vehicle. But the Tacoma is more of a mid-sized truck than the Raptor, which is built off of Ford's full-size F-150, and we don't want to speculate. We will let the media do the talking between the two vehicles, but we're excited that it's out there.

I would note, we described the shocks in our call here, as 2.5 inch Internal Bypass, and the new Ford Raptor has 3 inch. So it's slightly bigger shock. But we're excited that's out there, and we'll see what the media has to say, between the two of them.

That's helpful. Last one for me guys is, when you think about putting Raptor and Tacoma aside, the balance of the powered vehicle business -- I think Larry you mentioned the side-by-side market specifically a couple of times, as kind of flat, I guess, or slowing. What -- can you talk a little bit about the dynamic there?

I mean, what you think the principal drivers of that deceleration are? Are they more medium-term in duration, short-term in duration? What's kind of happening right now, as you kind of see it, and what are your expectations for that segment? And maybe the other segments out there, ATV or snow at the moment? Thanks.

Well, snow obviously has been challenged, based on weather this year. But I think we view the side-by-side category, as a great place to be over the long-term. I think it's challenged this year. I think it's for a number of reasons. I think oil and agricultural markets have had a bit of an impact on it.

We think that's probably going to clear throughout the first half of this year. And I think we'll maybe be in a little bit a better position in the back half, and hopefully that again, sets up for a more normal 2017 for the category.

But we, I think the great thing about our model that we try to point out is, hey, we like all these segments. We think they're all very viable, and going to be healthy over the long-term. But nothing goes straight up forever, over a period of years, and I think one of the advantages of our model is, we've got a lot of market segments to turn our attention to, if one does happen to go flat for a period of time.

Yes. And that's clear, with the work you're doing with the Ford and Toyota, so it's nice to have that diversity. Thanks guys, for the time.

Craig Kennison, Robert W. Baird.

Good afternoon, guys. Thanks for taking my question. Where are we at in the mountain bike spec cycle this season? And given where we're at, how are your spec -- how is your spec share trending?

Mario, you want to take it?

Sure. So Craig, this week is actually the Taipei Bike Show over in Taiwan, where kind of the final model year 2016 considerations are made. For some of the smaller brands, I would tell you that for most of the bigger guys, both the US and international, we're pretty far along in the spec cycle, and we're pleased so far, with the models that we've been awarded.

And as we've said in the past, all we can control, are our sort of spec positions. And after that, we're a bit along for the ride, to see which of those models sell-in well, and not. But we're pleased, sitting where we're sitting right now, going into the season.

And on a related note, you have a strategy of longer-term to enter some lower price point premium bike markets. Where are you at on that strategy, and maybe how does Marzocchi fit into that, and as you've owned that brand for little while now?

Well, we'll start with the Marzocchi piece which we think is -- was a real nice dovetail into getting us deeper into that segment. Fox branded -- a Fox branded product, we'll start model year 2017 to address -- to sort of be our first foray into those new price points, which we plan to build out over subsequent model years, utilizing both Fox and Marzocchi brands.

Thanks. And then, Mario, do you have a sense for where the retail market concluded in 2015? Just I don't know if you have access to data yet, that suggests the performance of the mountain bike category in 2015?

Well, again, Craig, as you found out, and as we've discussed in the past, bike industry data is hard to come by, and isn't always the most accurate, if and when you do. Our feeling is that 2015 ended up pretty well. We've seen some reports of potential inventory build-up in various other channels. We're watching that.

We don't think it's going to be kind of a model year 2017 buzz kill or anything like that, but we are mindful of it. And when we see reports out like that, we'll talk to customers, and try to get a good handle on where we are. But we think it ended up okay, and we think we're in relatively decent position to start off 2017.

So finally, on that piece, when you're in your discussions on spec position, understanding that you feel like you had a good year from that negotiation standpoint, do you get any sense of order trends this early on in the cycle from your OEM partners, and how they might compare to last year?

It's a little bit early to tell for that. We really don't see -- kind of the end of this quarter, into the beginning of the next, is when we'll start to see trends, for actual orders coming through for model year 2017. We have forecasts, and I think we're cautiously optimistic.

As Larry said, there is some factors outside of our control, sort of macro economically which we try to be cognizant of, sell-in our spec positions to the best we can, and do our diligence to be ahead of any upticks, in which case we kind of prepare some capacity or downward trends, and to try to mitigate anything that might happen there. But so far, I'd say, we're consciously optimistic.

Great. Thanks for taking the question.

Thanks, Craig.

Mike Swartz, SunTrust.

Hey, good evening, guys.

Hey, Mike.

Hey, just a question on Easton Race Face. In November, you guys had put on an 8-K announcing that you guaranteed the full earnout ahead of -- I believe it was a year ahead of time. Can you just talk about the thinking around that, why you guaranteed it a year early?

Yes, the thinking, Mike was, that they were on track to handily exceed it. And so, one of -- the earnouts are very good on one hand, and then they can be complicated on the other hand.

On the one hand, you have a highly motivated target that is moving heaven and earth to achieve their goals, which can be a good from an alignment and interest point of view. On the other hand, you really can't do any of the integration that could be later questioned, if something that might have affected the attainment of the earnout.

So given, that we had a very, very high degree of certainty that they were going to achieve the earnout, this gave us an opportunity to do more of the front-end and back-end integration that we'd otherwise would've had to wait for, for no reason. So we might as well take advantage of the opportunity to work together -- not just that we weren't working together before, but it can be seamless. You can, for example, as we do our ERP, we might decide to move that integration up, than we otherwise would have, right, as an example?

Or as we think about how we're expanding in Taiwan, we can think about how we can better integrate the manufacturer operations. Those discussions become very hard to have, when you are in the middle of an earnout situation. So we put that behind us now.

Okay. And so, I sort have assumed some of the integration activities being -- in other word being pulled forward. Is there any material benefit of that, that we should see in 2016?

Well, I think there's a benefit, but I don't think -- I mean, we've considered it in our guidance. And I think long-term you're going to see some benefits accelerated, but it's probably not meaningful right now.

Okay. And then just -- I wanted to touch a little bit on some of the investment costs that you alluded to in your 2016 guidance. I think you had mentioned El Cajon and ERP and some other projects. Could you maybe just give us -- just scale the size of those investments, maybe versus 2015? I mean, should we see kind of a ramp --?

Well, the main thing I would point out is Marzocchi, right? We bought Marzocchi, and when we announced that we acquired, and we indicated there was a couple of million dollars in sales. You can imagine if [Keneco] had announced that they were closing down the business, and so we had to make a number of investments in order to really reap the rewards, of what we think can be a very good business for us, in the next two years here.

I'd say, that the main one. In terms of the other couple that we have. ERP, I want to say that you probably have an extra $0.5 million of costs over and above last year, for ERP costs that are flowing through the P&L. And I don't have the El Cajon costs handy, but that's not insignificant either.

Okay. All right. Thanks.

Andrew Burns, D.A. Davidson

Thanks, and congratulations on the TRD news. Thank you for the question, or the comments on the retail, some discussion of inventory build on the mountain bike side. Could you perhaps roll that into just a broader view of the mountain bike industry, the health, and the type of environment you're expecting in 2016?

Yes, I'll let Mario, you want to just take it?

Sure. Well, we would tell you that particularly in the price points that we participate in, that it tends to be a very passionate end consumer, where this is their activity of choice. And technology and new features, and excitement around products is really what drives the numbers at retail. And it's a -- 2017 is going to be a very, very good year to be a mountain bike enthusiast.

There's lots of products coming out from OEs, from ourselves that we're excited about. And we think overall, the premium mountain bike segment is alive and well. And when Zvi talks about kind of mid to high single-digits long-term for our bike business, that's what gives us the confidence, is our own and our customers innovation cycles and positioning, and we think 2017 is going to deliver.

Great. Thanks. And the Race Face/Easton acquisition, I remember when it was announced, one of the opportunities was to take this great brands, that have a very good aftermarket business, and perhaps leverage your strength with OEM relationships, and grow that side of the business for a Race Face and Easton. Are you seeing that in this 2017 spec cycle?

We have some -- so we talked about the various synergies that we'll have between the brand going forward. And as you see bikes roll out with Race Face and Fox products, you'll see kind of some branding, primarily in colors and graphics that we've worked with Race Face on, going into 2017. And then we'll start seeing more of the actual engineering and product synergies in follow-on model years.

But the sales teams are aware of each other's offerings, and we've integrated from a branding and marketing strategy kind of look and feel, so that there's a consistency when it is a Fox Race Face equipped bike. And then you'll see more engineering and product synergy start to roll out after that, which are underway, but can't really talk about it at this point

Thanks. And one last quick one, in terms of the El Cajon, the first phase of the manufacturing ramp there, being done first half 2016, do you have capacity to continue to go out, and get more wins like the Raptor and the TRD? Or are you starting to need to go to phase 2 or phase 3? How does that process work, in terms of getting wins and [existing] capacity?

Yes, good question, Andrew. We clearly, as we planned El Cajon, and this notion of an Automotive Ride Dynamic Center of Excellence, so clearly, are looking into the future for what capacity we will need. I would remind you that as bike has transitioned Taichung, it's also opened up some capacity in our Watsonville operation. And our operations team is now in the process of looking at how do we optimize Watsonville and El Cajon, in terms of the longer term capacity and efficiency for powered vehicles.

Thanks, and good luck.

Thank you.

Rafe Jadrosich, Bank of America Merrill Lynch.

Hi, good afternoon. Thanks for taking my questions.

Hey, Rafe.

As you look at the guidance for next year, kind of [4%-ish] EPS growth on the low end, and around 12% at the high end, can you talk about what gets you to the high end of guidance or above it? Or what gets you to the low end, just trying to frame the assumptions that you have baked into that guidance?

Well, clearly, the first thing, I would tell you about the EPS guidance is, it comes from revenue. And so, a lot of it is within that revenue range. As you know it's -- as you put that range, you're trying to put a reasonable bracket around things that could happen. Clearly, we've envisioned some FX effects that will be in there. We've got a lot in transition.

We've got the ramp, as we mentioned, of the Ford Raptor that's a little uncertain. We've got some allowance for that. While we have got 80% to 85% of capacity of mountain bikes in Taichung now, I think our folks are still looking at some optimization of, okay, exactly what should that number be, in the long-term vis-a-vis what we do back here? That's in that range. So there are a lot of factors. But I would say, probably number one is revenue.

Got it. That's helpful. And then over the last few years, the SG&A ratio has been rising. And it looks like this year, it will be -- kind of flat or up again. How do we think about longer term, when you might have an opportunity to get some leverage there?

Well, I think, Rafe, this year's rise is because of the Marzocchi acquisition. And if you look at last few years, there's been a number of facts -- first of all, we've made two acquisitions that have impacted the raise, the increase.

Second of all, we've made a number of investments in the business that affect it. Being a public company, obviously is more expensive, and as you are public a couple of years, you have some more costs than you did before. As we move below 50% from [Compass diversify], we have some more stock costs. As we had this global tax initiative to get our tax rate to the mid 20%s, from the low 30%s, that has a cost in terms of SG&A.

As we've done some of these acquisitions, staffing up and beefing up our biz development group, to execute some of these acquisitions. It has been important for us to make, what we believe are good acquisition, that's been part of this. And of course, not having Ford in the numbers for couple years, that's an impact. So I think, long story short, there's a lot of reasons over the last few years. We think that, starting next year, you should start seeing some leverage.

But I would tell you that, not a lot of leverage. We think that in sales and marketing and R&D, we are going to continue to invest. You just would start seeing a little bit of G&A leverage over the next few years.

Okay. And then, just have the priorities for capital allocation changed at all? And then, maybe can you remind us of what the priorities are, and what's most important to you?

The priorities have not changed. In terms of what's important to us, it's first of all, it's to fund our Company's existing operations. I think I would say secondly to -- in a disciplined model to pursue acquisitions.

And then, I -- the other two things, there's again, we have a Board of Directors that's interested in returning value to our shareholders. And so, we are going to continue to do things such a share repurchases, but we're going to be very disciplined again, as well as on that, in terms of purchase prices that we pay for stock as well. But no real change from what we've done before.

And then last question, and I'm assuming it didn't impact you, because you didn't mention it at all on the call. But the earthquake in Taiwan, was there any disruption from that?

Got my heart rate going (laughter) but no -- nothing material to our operations. We had one supplier down, actually in that region, but no impact that was material.

Great. Thank you.

Jim Duffy, Stifel.

Hi, guys, this is Molly on for Jim.

Hey Molly.

Hello. Just a couple of quick ones from me. First one, how comfortable are you with the visibility, you have to the high end of your revenue guide for FY16?

Well, I mean, I think we're comfortable with the range. I would tell you when we put that range out, that as we sit here today, that we feel good about the range and the target. I would tell you that the order book supports that range. We've got, as you know, a pretty good forecast from both sides of the business, from our customers that again we feel support that.

But I would tell you, it's never what you know that hurts you, when you forecast. It's what you don't know. So I think we put our range out there, that we obviously hope to make. And then, we try to be pretty vigilant with what's happening in the environment, as we go through the course of the year, we'll update you quarterly.

Okay. Okay, thank you. And then with regard to the tax rate, how sustainable is this rate going forward? Is this how you're planning the business, at that mid-20% range beyond FY16?

Yes, it's sustainable for at least the next few years. Should our mix of international versus domestic business change, it will affect it. But as it currently stands with the mix of business, we expect at least for the next couple of years, we do think it's sustainable.

Okay, great. And then finally, you guys talked on the last call, about giving us a further update on the strategies behind Marzocchi. I know the dilution -- I think it's about a $0.01 higher than originally discussed. Are you still expecting it to be accretive in FY17? Will you keep the Marzocchi name, and what other adjacent categories opportunities are there with this business? Thank you.

Well, let me just start with the EPS effect. It's no different than we thought before. We thought it would be $0.01 to $0.02.

Okay.

And as we look at the opportunity to invest in the brand, we think we could run it with less dilution, but we don't that would be doing the brand justice. As for the rest of it, I'll turn that point over to Larry.

Yes, I mean, I think there are several things, Molly, that as we get into it, there's a lot we like. We acquired some intellectual property that we value. I think we've got some human resource assets that we are able to deploy, that we're very, very pleased with. I think the team has done a lot of work so far, with a lot less to do on, where the Marzocchi product is going to play within the strata of price points we hope to get, both now and in the future.

I think you will see the Marzocchi name used in certain places. Again, we'll, again, I don't want to get ahead of ourselves here, but as we roll some of that product out, I think you'll see how we position Marzocchi vis-a-vis Fox. But that is clearly our intent.

Okay. Thank you.

Thank you.

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

Thank you, operator. And thank you for your questions, and your interest in Fox. We look forward to continuing to execute our plans, and updating you on our progress, as we go forward with these quarterly earnings calls. I 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, ladles 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.