Fox Factory Holding Corp (FOXF) 2016 Q1 法說會逐字稿

Greetings, and welcome to the Fox Factory Holding Corp's first quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to David Haugen, General Counsel, for opening remarks. Thank you, sir; please begin.

Thank you. Good afternoon, and welcome to Fox Factory's first quarter fiscal 2016 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, President, Business Divisions; and Zvi Glassman, Chief Financial Officer.

By now, everyone should have access to the earnings release, which went out today at approximately 4.05 p.m. Eastern time. If you've not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company.

Before we begin, I'd like to remind everyone that the prepared remarks 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 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 first quarter 2016 results and provide an update on our ongoing strategic initiatives. Mario will then discuss some of our recent business highlights, Zvi will review the financial results in more detail and discuss our guidance; after that, we will open the call for your questions.

We started the year with solid momentum. Our top line increased approximately 18% to $80.2 million in the first quarter, which was above our guidance of $73 million to $77 million.

This growth was driven by both our bike and powered vehicle products. Bike products were up approximately 27%, and powered vehicle products were up approximately 9%.

The increase in bike product sales was primarily due to the continued success of the Company's model year 2016 product lineup, particularly in the OEM channel, and a shift in the timing of approximately $3.5 million of certain customer orders from the second quarter into the first quarter of fiscal 2016.

Powered vehicle product sales reflected higher demand for suspension products in both on- and off-road vehicles.

From a profitability perspective, we generated non-GAAP adjusted earnings per share of $0.16 in the first quarter, which was at the high end of our guidance of $0.12 to $0.16.

Additionally, we generated adjusted EBITDA of $11.5 million in the first quarter of 2016, representing approximately a 22% increase compared to the prior year's quarter.

The strength of our diversified product portfolio across both bike and powered vehicles, along with our team's continued execution of our strategic initiatives, helped us achieve these solid results.

Our innovative products have helped fuel the continued strong sell-through of our model year 2016 product lineups in both bike and powered vehicles.

Additionally, the initial feedback on bike model year 2017 has been very favorable, although it is still too early to gauge retail market sell-through.

Consistent with what some OEMs have been reporting, we believe the North American side-by-side market may be seeing signs of a recovery, and sales could improve in the second half of 2016.

In addition, our new price point fork is being well received by OEMs specking their 2017 product lineups.

We are committed to increasing our penetration in our existing vehicle categories, and we believe that our continued commitment to product innovation will keep Fox in an industry leadership position.

At the same time, we are always mindful of the global economic backdrop, particularly in the markets where we operate. As many of you know, and as we've communicated the last few quarters, certain markets are experiencing headwinds, and we will continue to keep track of the potential impact to our business.

Recently, reports from other suppliers in the bike industry have indicated headwinds in certain segments and geographies. While we remain optimistic about our bike business given our strong product lineup and brand position, we will continue to closely monitor industry developments.

At Fox, we believe our differentiated market position and diverse end markets give us confidence in our ability to deliver consistent growth over the next several years.

In 2016, continued execution of our strategic operational initiatives will enable us to gain efficiencies across our business.

We are very pleased with the efforts of our international operations team. As we stated last quarter, we have reached our 85% capacity goal for fork and [track] production in our Taichung facility, and we are now assessing the optimal production mix across our worldwide factories.

Additionally, we are in the process of reconfiguring our US plants for powered vehicle production, which Mario will touch on in greater detail.

Finally, late in the first quarter we launched our new ERP system in our El Cajon facility. Subsequent implementations are presently scheduled for later this year, but their exact timing will depend on the final completion of the El Cajon (inaudible).

In summary, we had a strong first quarter and are well on track to meet our guidance for fiscal 2016. We are intently focused on growing our business and committed to enhancing shareholder value.

From a capital allocation perspective, we will continue to invest in our organic growth and strategically review incremental future M&A opportunities to further diversify our product portfolio.

At the same time, we believe our stock repurchase program provides us with an additional opportunity to strategically return value to our shareholders.

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

Thank you, Larry, and good afternoon, everyone. During my remarks today, I'll touch on some industry trends and discuss some of our recent business highlights.

I'll begin with our bike business. Our brand-building momentum continues with the successful launch of our model year 2017 products at the Sea Otter Classic in Monterey, California, from April 14th through the 17th. The festival is a time for us to walk dealers, consumers, and the media through the product line. As a result, our initial US dealer orders are coming in strong, with very positive consumer and media reactions.

Our flagship cross-country fork, the Factory series 32 Step-Cast, had been in the media's hands for a couple of months under an embargo. The embargo was lifted just ahead of the Sea Otter and the fork has received very favorable reviews.

Bicycling Magazine had this to say -- remarkably, it seems like Fox was able to pull a significant amount of weight out of its premiere cross-country fork with no penalty. Though it's pitched towards an increasingly niche arm of the sport, the 32 SC's manners are so good it's impressive outside the confines of a race course, too.

And Bike Radar's first impression -- the fork is certainly light, comparing well to previous iterations and also when compared to other cross-country forks. We found the front wheel stuck doggedly to the ground, offering an impressive grip and control, even with slightly higher tire pressures than we might usually run.

We also launched our new race face Next SL G4 crank at the Sea Otter Classic. Building upon the success of our lightest Next SL crank, the G4 increases stiffness while shedding even more weight. Initial sales to dealers have been strong, and we believe sell-through will follow suit based on the market success of the Next SL model.

Integration of Marzoochi mountain bike products is on track. We are establishing global after-market sales and after-sales service support through a combination of leveraging current Fox distributors and utilizing certain dedicated Marzoochi distributors. Model year 2017 Marzoochi production is happening under the Fox umbrella, and model year 2018 new features and products are now integrated into the overall Fox product development plan.

Our new price point fork product has successfully launched as part of our model year 2017 product offering. We are calling this product line extension the Rhythm Series. In 2017, it is based on our 34 millimeter [tube] family of forks, with 27.5- and 29-inch wheel offerings, which travel up to 150 millimeters.

Rhythm forks feature an all new recirculating damper technology that offers superior performance at these price points. We are pleased that the new 2017 Rhythm 34 has taken spec in its intended applications.

The 2016 bike race season is well underway, and to date Fox-supported athletes have won 17 cross-country events, six Enduro events, one free ride event, and 21 downhill events worldwide. We're currently leading the men's and women's UCI Downhill Golden Cup series, and the men's Enduro world series.

Now I'll move on to our powered vehicle business. We're prepared for the production of the new Ford Raptor 3.0 internal bypass shocks in El Cajon later this year along with, though on independently and completely separate production lines, production of the 2.5 internal bypass shocks for the 2017 Toyota Tacoma TRD Pro.

On the after-market product side, we've launched a new price point OEM replacement shock line, the Adventure series, that includes a 2.0 smooth body IFP shock and a 2.0 smooth body IFP steering stabilizer. These products will be produced on a new highly automated production line in our El Cajon facility.

We've also introduced our latest intraction bar technology with our new patent-pending sport truck USA DDS recoil traction bars. They are designed for bolt-on installation on many full-sized trucks, improving performance on street, track, and trail terrain. The design uses tunable dual-stage compression springs for easily adjustable resistance and a floating design that doesn't bind up like traditional traction bars.

I'll conclude with our recent race results in the powered vehicle segment. Our circle track efforts continue to bear fruit, with over 60 wins to date this season. We consistently dominate UTV racing in the desert with our internal bypass technology.

Branden Sims took the honors as first overall UTV, finishing first in the pro UTV turbo class at the Mint 400. Justin Lofton defended his 2015 Mint 400 overall championship title, establishing himself as the first driver to earn back-to-back overall Mint 400 wins and marking the fourth consecutive Mint 400 overall title for Fox.

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 first quarter results and then review our guidance.

As detailed by Larry, sales in the first quarter of 2016 were $80.2 million, an increase of 18.3%, versus sales of $67.8 million in the first quarter of 2015.

Gross margin was 31.3% for the first quarter of 2016, a 360 basis point increase from 27.7% in the prior-year period. The increase in gross margin was primarily due to favorable product and customer mix as well as manufacturing efficiencies.

Additionally, gross margin improved due to the nonrecurrence of costs associated with the West Coast port slowdown in the first quarter of 2015 and lower inventory adjustments related to acquisitions.

Excluding the acquisition-related costs, non-GAAP gross margin (inaudible) expanded 210 basis points as compared to the first quarter last year.

We believe non-GAAP gross margin is a useful metric that better reflects the performance of our business on an ongoing basis. You will find a reconciliation of all GAAP to non-GAAP financial measures in our earnings release issued today.

Total operating expenses were $19.4 million, or 24.2% of sales, in the first quarter of 2016, compared to $17.2 million, or 25.4% of sales, in the first quarter last year. Non-GAAP operating expenses stated as a percentage of sales were 20.3% versus 18.5% in Q1 last year.

We believe the increase in operating expenses reflects a slight seasonal shift in timing of development and promotional spend ahead of the model year 2017 pre-launch phase versus last year.

Additionally, the Company continued to invest in strategic initiatives such as the TRP system and the Marzocchi mountain bike product line.

As a reminder, we continue to expect non-GAAP OpEx as a percentage of sales to be approximately 16.7% for full-year 2016.

Focuses on expenses in more detail -- within operating expenses, our sales and marketing expenses increased to $6.6 million in the first quarter of 2016 compared to $5.3 million in Q1 of 2015. The increase was largely due to a $300,000 increase in promotional expenses to support the growth of our brand, $0.3 million increase in wages and related expenses, and $0.3 million increase in professional fees for outside services.

Research and development expenses increased to $4.4 million in the first quarter of 2016 compared to $3.4 million in Q1 of 2015 primarily due to investments in new mountain bike and power vehicle products and technology.

Timing of R&D and promotional expenses often changes between quarters and years depending on a number of factors, including product launch cycles.

Our general and administrative expenses in the first quarter of 2016 were $5.9 million compared to $4.6 million in the prior-year period. The increase was primarily due to $0.6 million increase in professional fees associated with the secondary public offering, which closed on March 16, 2016, as well as professional fees associated with our global tax initiatives and audit fees; $0.4 million increase in stock-based compensation expense and payroll and related expenses; and nominal changes in various other general and administrative categories.

Other expense was $1.3 million for the first quarter of fiscal 2016 as compared to $0.3 million in the first quarter of fiscal 2015. This increase was primarily due to foreign currency transaction losses, including the impact of currency from the earn-out payment made in connection with one of our recent acquisitions.

In the first quarter of 2016, our tax rate was approximately 26% compared to 37.1% in the last year's first quarter. Our Q1 tax rate is consistent with our expectations based on the changes we made in 2015 to our international tax structure. We continue to expect our future tax rate will be in the mid-20%s for the full year.

On a GAAP basis, our net income in the first quarter of 2016 was $3.3 million compared to $0.8 in the prior-year period.

Earnings per diluted share for the first quarter of 2016 were $0.09 compared to $0.02 in Q1 of 2015.

Non-GAAP adjusted net income was $6 million, an increase of 36% compared to $4.4 million in the first quarter of the prior-year period.

Non-GAAP adjusted earnings per diluted share for the first quarter of 2016 were $0.16 compared to $0.12 in the first quarter of 2015.

In the first quarter of 2016, adjusted EBITDA was $11.5 million compared to $9.4 million in the same quarter last year.

Adjusted EBITDA margin was 14.3% compared to 13.8% in the prior-year quarter.

We believe that non-GAAP adjusted net income and adjusted EBITDA are useful metrics that better reflect the performance of our business on an ongoing basis. You'll find a reconciliation of all GAAP to non-GAAP financial measures in our earnings release issued today.

Now, focusing on our balance sheet. As of April 1, 2016, we have cash on hand of $9.3 million.

Total debt outstanding was $57.2 million compared to $47.9 million of debt outstanding as of December 31, 2015.

Inventory was $75 million as of April 1, 2016, compared to $68.2 million as of December 31, 2015.

Accounts receivable was $33.9 million as of April 1, 2016, as compared to $43.7 million as of December 31, 2015.

Accounts payable was $40.4 million as of April 1, 2016, as compared to $32.1 million as of December 31, 2015.

The changes in accounts receivable, inventory, and accounts payable are primarily attributable to business growth and our normal seasonality.

Accrued expenses were $12.8 million at the end of the first quarter, a decrease of $10.4 million compared to year end primarily due to a scheduled earned-out compensation payment related to one of our recent acquisitions.

Additionally, during the quarter we repurchased 500,000 shares at $15.89 per share, for an aggregate price of $7.9 million. The repurchase was in connection with the offering and sale of our common stock by selling stock[holders] pursuant to our registration statement [long] form.

Turning to our outlook, for the second quarter of 2016 we expect sales in the range of $95 million to $101 million and non-GAAP adjusted earnings per diluted share in the range of $0.25 to $0.30.

For the full year, we are reiterating our prior guidance and continue to 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.

We expect to continue to invest in our strategic initiatives, and as a result, for the full year we expect non-GAAP operating expenses stated as a percentage of sales to be approximately 16.7%, as we've previously communicated.

And as I mentioned earlier, we continue to anticipate our annual effective tax rate to be in the mid-20%s.

Finally, as a reminder, non-GAAP adjusted earnings per diluted share exclude the following items net of tax -- amortization of purchased intangibles; contingent consideration valuation adjustment; acquisition and related compensation expense, including related foreign currency transaction gains or losses; certain acquisition-related 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'd like to now turn the call back over to Larry.

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

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

I like that -- Soslow -- that's fun. It's Solow, actually. (Laughs) Good afternoon, guys. Maybe give us a little --

Hey, Larry.

Sounds like you had an encouraging start to the model year spec performance. Can you maybe give us a little more color on that? Are you guys running ahead of last year? Are you running ahead of your internal expectations?

And then, more industry-specific question, a little more color. You mentioned there was some headwind. Is that more geographical? Are suppliers seeing that on the mountain bike side, too, or is that more of a general statement for bikes?

Hey, Larry, this is Mario. I'll address the spec position question. Yes, we're excited about how 2017 has been received and we do feel like we've picked up spec positions versus model year 2016. And like we've communicated in the past, that's part of the story. The rest of the story is sell-through, which we're still monitoring as the season rolls out.

And Larry, I would say on the other suppliers, it certainly looks to us like it's broader-based. We don't think it specifically impacts the segment of mountain bike that we operate in. But certainly when you see the kind of news that's come out over the last week, it causes us just to monitor it carefully.

Again, we believe our brand position and kind of the diversity of the end markets we serve do give us a little bit of insulation but it's something we feel is worth keeping an eye on.

Okay, great. If I could just follow up with one more. You mentioned in the press release there was some pull-forward in sales. Can you maybe quantify that or give us a little more color on that? And was that for model year 2017 suspension that some of the providers wanted early, or what was that? Thanks.

Larry, I think as our Larry has communicated many times over the years since we've been public, it's not unusual for customers to schedule an order that was previously scheduled to be in the beginning of one quarter to shift into another quarter. That happens kind of every quarter. And oftentimes, we won't even mention -- if it's a couple of dollars, we won't even typically mention it. It doesn't necessarily signify any change in end-market demand, and this fits squarely into that kind of an explanation.

In terms of the magnitude, we'd say -- well, it is about $3.5 million. It's bike and it's all the previous model year, not our new model year.

Okay, so some sales normally do ship in Q2 for the prior year, too, then. It's sort of a mixture in Q2 and then Q3, I guess, goes mostly to the forward year?

Correct.

Got it. Okay, great; thanks a lot.

Mike Swartz, SunTrust.

Hey guys, how are you?

Good, Mike; how are you?

Good, good. Hey Larry, just wanted to touch on your comments, I think you said around, like, the side-by-side and off-road vehicle market -- seeing some positives there over the past couple of months. And expectation maybe in the back half of the year that could be a little better than expected.

I guess, how does that fit within the prior kind of outlook you had when we last talked back in January? I think you had said kind of flat to up 10 for that market. Is that still the right way to look at it?

Well, let me comment on a little bit of what we saw specifically in side-by-sides and what we're seeing in off-roads. Then I'll let Zvi relate that to how we guided.

What we said is we -- I think we -- early in the quarter we started seeing a little bit of slowing in our own order book that kind of coincided with what you were hearing from our OEM customers. We think we saw that. I think during the first quarter we saw a little bit more positive news in that. And it leads us to believe -- I think you could see a little bit more strength in the second half of the year.

The one thing I would caution is that is still kind of contained within our guidance range. We didn't anticipate that side-by-side sales were going to go down and stay down and keep going down, so we did envision, as we said, that it would be probably be flat to maybe slightly down. And I think we might see a little bit better than that; but again, it wouldn't cause me to change our guidance.

Yes, I think as Larry said, when we put together our guidance this year we kind of envisioned a flattish side-by-side market. One of the strengths of the Fox business is the diversity of our markets serviced. And when you hear about some of these potential headwinds from the news from our industry suppliers, we have a lot of puts and takes within our product portfolio. And at this point, given that we haven't even seen sell-through yet in bike, it's too early for us to change our guidance. But we are encouraged by some of the early signs we're seeing of strengthening in that segment.

Yes. And Mike, I would point out that we've -- our kind of on-road replacement shock business -- I think on one hand the oil prices kind of hurt a lot of the oil patch geographies that we sell into.

On the other hand, people are buying a lot of new trucks, and I think it's helped that. On balance, that business has continued to go pretty well for us, and consistent with our thinking.

Okay, thanks. And then, second question. Just in terms of the supply chain, I know in the past we've had some issues or hiccups with just the production calendar -- talking specifically about bike. And I'm wondering if, with the earthquake in Japan recently, if you've seen any kind of supply chain issues that give you pause, whether it's from the OEMs or whether it's from other component manufacturers.

Again, you've had a few, I think, events like that. I think at this point we would tell you we don't see a dramatic -- any kind of big impact on our business from that specific event nor any of the other ones you may have heard about.

Okay, thank you.

Scott Stember, C. L. King and Associates.

Good evening.

Hi, how are you?

Good, good; thank you. Can you talk about -- again, on the powered vehicle side, you guys have been putting up fantastic numbers -- well, organically. And I know there's some new categories that you guys have been moving into in sport truck as well. Could you maybe just give us a little more color into what's driving these very significant sales growths that we're seeing right now?

Well, yes. As you know, we don't break out numbers among the various categories. But I would say that certainly the on-road replacement shock business has been going good. Lift has done well for us. Snow, because of the weather, was a little bit muted this year.

Side-by-sides -- probably given the slowness, I think we were a little bit surprised there year over year. It held up maybe a little bit better than what we were thinking. We continue to make, albeit still a small part of our business, progress in on-road motorcycles. I think our military -- again, small but continues to move right along.

So in general, I think fairly broad-based. I don't think we were necessarily surprised to the down side on any of those categories, albeit snow certainly -- we projected to be slow because of the snow and it did come to pass.

Okay, thanks. And with regards to the Raptor, which I believe is coming up on line in the fourth quarter, can you just maybe share what your initial thoughts are on the overall success of that model versus the previous model?

And maybe also talk about the Toyota product that you'll be making -- basically how big is it in relative size compared to the Raptor business?

Well, we're obviously very anxious for the new Raptor to come on line. It's a much more capable vehicle than the first version. We think it's super; can't wait to get it going. We're looking at that it'll be at least as well received, hopefully better, than the first version. A lot of great press on it.

And again, I think the thing we would leave you with is we're just excited to get it going and see what that market reception is.

I think at Toyota, we feel great because it's validation of the off-road-capable on-road vehicle. We're happy to see a second entrant in there. Again, we think it's a great vehicle. Obviously, our guys helped [tune] it and we would hope it's well received.

And the size of it compared to the Raptor? Just high-level --

It's a much smaller truck.

Okay, so look at it that way; okay. (Laughter) And just last question --

Look, we're not going to comment on a specific customer, but I will tell you that if you go back to how we started out with Ford, these things tend to ramp up over time.

Right; got you. Okay. And just the last question on international sales -- could you talk about how that's holding up and maybe talk about your after-market business as well, and then that's it for me.

Well, let me take international. Again, I think you've got -- as you look around the world it's probably no surprise; you've got areas that are more challenged than others. I think we've commented on that in prior quarters. And again, that's still consistent.

I think we probably saw a little bit of recovery in China in our bike business, which was good to see because that had been challenged most of last year.

Europe, you've got pockets of strength in the bike business. You've got also still some areas that have a little bit more challenging time.

We believe that a lot of South America, we don't do a lot there now; we think that's still opportunity for us. But clearly you've seen in the bike industry a little bit of slowness there.

I think in the first quarter we were pretty pleased in both bike and powered vehicles with our after-market business. I think both segments showed some strength. And again, I think that's always good for us to see as it relates directly to our passionate end consumer.

I've got you. That's all I have; thank you so much for taking my questions.

You bet; thank you.

Jon Berg, Piper Jaffray.

Great. Thanks a lot, guys; good afternoon.

Good afternoon.

First, I guess, on Race Space Easton. I guess you guys are now lapping your first full quarter of owning that company. How did that company perform in the quarter versus your expectations? And maybe how did it grow versus some of your more recent acquisitions?

We're not going to comment specifically on performance of our segments. We will tell you that Race Space, since the time we bought it, has consistently grown well. Because it has less market share -- it doesn't have the market share that Fox has in suspension -- its long-term growth rate is higher than the bike industry -- or, it has the ability to grow faster than the bike industry and on the higher end of our growth rate.

As you know, we settled out their earn-out for the maximum because they were performing so well.

Okay, great. And then, as far as -- you've got two big, I guess, launches coming in the second half on the powered vehicle side with the Raptor and then the Toyota. Should we be thinking about any inventory build or anything with the balance sheets ahead of those launches? Or is it going to be pretty seamless and we should continue to expect inventory days to be down?

There's always some of that; there's always some of that. The seasonal factors probably are -- the seasonal nature of our business far outweighs that. But as you can appreciate with our business -- again, the diversities we have, we have a fair bit of product launch scattered throughout the year depending on the business, depending on the segment.

Okay, great. Thanks a lot, guys.

Craig Kennison, Robert W. Baird.

Good afternoon; thank you for taking my questions as well.

Sure.

First question just has to do with anything you can share with respect to the channel on the mountain bike side on the retail front or inventory at the OEM or dealer level. I know your visibility is limited there, but interested in what you could share.

Well, yes, let me start and then I'll see if Mario wouldn't like to add some specific color. But again, I'm sure you've read some of the reports that are out. Some of those reports touch on some inventory in certain mountain bike segments. So while we read that, I would tell you broadly in the segments we serve we don't see a major inventory issue at this point.

I think we're probably more concerned about the -- just that macro industry environment that we've read about, same as you. It's something I think we just need to monitor for any further developments.

At this point in time, I would tell you we're still feeling pretty good about our bike business for the year.

Yes, and to reiterate what Larry said, a lot of the information that's out there is inventory across the entire industry. And we don't see anything really markedly different in our specific segments.

And Mario, to the extent you have conversation (multiple speakers) -- to the extent you have conversations with your dealer partners -- I grant you, it's not a huge sample yet. But to what extent are you seeing strength at retail that would refute any concerns about excess inventory at the dealer or OEM level?

Well, we view -- our after-market is fairly real time, and we utilize that as sort of our canary in the coal mine, and our US dealer after-market reception and orders have been strong. So while that isn't -- the enthusiast end consumer seems to be speaking with those strong after-market orders, and we think that will follow suit into model year 2017 bikes, which are just starting to get put together over the next -- through the second quarter.

So we use that as an indication. We think the end consumer is pretty excited about what the industry's going to offer to it. And like Larry said, the reports that you read are about the entire -- all of the segments of the bike industry, and we feel pretty good about our specific portion of it, in the enthusiast mountain bike segment.

And could you comment on the e-bike market and whether you're seeing any traction there as you make progress?

Yes. Well, we're making traction within it. The e-bike category is one that is growing; it's been growing for a while. It's an exciting category for the industry, particularly the e-mountain bike, which our current product line is well suited to serve. It primarily has been a European phenomenon but we do see it coming more and more into the US and more and more OEs developing some pretty nice products around it.

Thanks. And finally, Zvi, with respect to your EPS guidance, what does it assume with respect to share repurchase activity?

Yes, we don't forecast our share repurchase because there's so much uncertainty around it. So it assumes the same guidance we gave in the beginning of the year about share count.

Just to clarify, does it include the buyback that you had completed in the quarter?

No.

Okay, thank you.

Thanks, Craig.

Jon Andersen, William Blair. Mr. Andersen, your line is live. (Operator Instructions)

Yes, hi; good afternoon, guys.

Hey, Jon.

Hi, Jon.

Hi. The first question, the timing -- the pull-forward, I guess, of some shipments into Q1 -- just want to understand. Is that kind of a typical thing that can happen from time to time, or what basically drives that? Is that incentive-driven to kind of clear model year 2016 inventory or is it indicative of strong sell-through at this point in time at retails (inaudible)?

No, Jon, as we tried to relate, around the end of any quarter orders can shift around. And they can -- the customer can say, hey, I know I had it shipping early the next quarter; I'd really like to either get it on a container ship or for some other reason. It can be just a small shift in time, but it's a big shipment.

You can have them go the other way -- you can have a couple million dollars that's sitting waiting to get picked up that the truck breaks down and it doesn't make it that day, and therefore you get a couple million going up -- This kind of activity isn't unusual. It's not related, that we can see, any particular demand dynamic, no change in the business fundamentals. It's more related to something that a particular customer was doing.

I would say that generally we will not comment on it if it's a few bucks because you've got this happening all the time. If it gets to be a significant percentage of our performance we like to point it out so that you guys have a feel -- hey, we had a great quarter whether it was in there or out of there. We want to let you know that that did come out of Q2.

Okay, that's what I thought. I just wanted to make sure. So I guess -- the second question is, you had a very strong quarter, obviously, particularly on the top line. It sounds like [technical difficulty] you've kind of got a little bit more constructive outlook on some other segments of power vehicles as you move through the year. And then with kind of Raptor and Tacoma coming, that'll be additive as well.

So would it be fair to say that while you didn't raise your revenue guidance for the year, your kind of overall comfort level or your position within the range you're feeling pretty good about right now relative to where we were a quarter ago?

Yes, let me comment and I'll let Zvi follow it up, Jon. Again, you're got a lot going on in the world right now. I'd probably feel a lot better if I didn't read the papers, as they say. I mean, we've known about the Tacoma and Raptor, obviously, when we forecast the year. So our estimates of those late in the year are already in that guidance.

I think it's still early on. We're waiting to see sell-through on bike; we feel good about spec at this point but we're waiting on the sell-through. You've had side-by-sides slip a little bit; now that looks like it might be firming up. But I don't think that's going to be a runaway in terms of it's suddenly going to start to accelerate. But I think it could firm up in the second half.

So you've got good things offset by -- as you look around, you've still got a lot of macro uncertainties in various parts of the world. So on balance, we think it's still probably a little early to do anything with guidance for the year.

We would hope, obviously, as I think every company would like to do, we would like to outperform and be able to raise guidance, but I don't think we feel we're in a position to do that now.

Well, I'll just reiterate what Larry said. We look at the Company performance and our execution about the controllable aspects of our business; we feel great. But if currency -- depending on what happens with currency or demand in the Far East or inventory in segments of other mountain bikes we're not in and that in turn affects dealers -- dollars to buy, those macro industry and economic factors are the things that give us pause.

But we're quite encouraged by where we came out with spec and the product lineup and the reception by our customers and the execution on our operational initiatives. All that stuff makes us feel really good about the long term and if the macro cooperates with us, then we can be in a position to raise.

Great. That's extremely helpful, and it's a prudent thing to do this early in the year; I understand that.

Shifting gears, on the lower price point mountain bike forks, could you just remind me -- that's model year 2017 and is this for OEM spec or after-market only, and what are your kind of expectations out of that particular product maybe over the next year and over the next few years?

Yes. So over the next few years, Jon, we'll be rounding it out into more and more models. And as I said in my portion of the call, we're calling this our Rhythm series. We brought it out in our 34 millimeter platform; we'll, over subsequent years, bring it out in our 32 millimeter platform, likely our 36.

Now, it is a 2017 in a 34 version. We'll bring out 32s and other platforms in subsequent years. We're happy with the reception. It's very clearly a best-in-class for the segment that it addresses, and we picked up some new specs with it and -- from the competition. So we're happy with it. We've been talking about it for a little bit; this is our first entry into it and we'll follow up with more models in model years to come.

Excellent; congrats on that. The last question I had was on the supply chain. So it sounds like the production move to Taichung is largely complete now. And the benefits are accruing from that. But I think there are some other benefits, incremental benefits, perhaps, in terms of your kind of retrofitting of the Watsonville plant in the El Cajon area.

Is that the right way to think about this, that there are some incremental benefits here that have yet to be realized, given some of the optimization you can do back here in the states?

Yes, Jon, good question. We've always envisioned, I think as we said as we embarked upon the program to take bike production to Taichung, that there would be another phase where we looked at optimizing our facilities here around powered vehicles.

So I would tell you there's two things that are going on. Now that we've got kind of that 85% of capacity over in Taichung, we're looking at what is the optimum mix between that factory and the US factory producing bike? We picked 85% at a point very early, back in 2011 when we were planning this, based on kind of how we saw the best logistical separation of production.

We're getting a chance to re-look at that now and to optimize that. So that's one program that's going on. So whether that's 85% or 82% or 93%, our folks have a chance to improve our business by looking at that more closely, and we're in the process of doing that.

Separately, that gives us -- now that that amount of bike is out of our US facilities, we've greenfielded the plant in El Cajon that we're centering around our automotive and military business. We've got power sports still up in Watsonville. So it's giving us a chance to now look at those two facilities in light of the fact that they don't have to produce nearly as much bike.

So you have both of those going on and those things are things that we had planned, they're envisioned in that improving gross margin profile we've talked to you about, and we're excited about getting to that work.

Great. Thanks so much, and congrats on a great start to the year.

Thank you.

Rafe Jadrosich, Bank of America Merrill Lynch.

Hi, good afternoon and thanks for taking my questions.

Hi Rafe.

Hey, Rafe.

Hit on the gross margin first. It came in really strong this quarter. Can you talk about how much of that was from just kind of lapping the port slowdown from last year? And then, what's sort of the outlook for the rest of the year?

Yes, we estimated that the port impacted us by about $1 million last year -- so I think it works out to about 150 basis points, more or less, off of last year's numbers. We continue to think that we can get to the legacy Fox business in the mid 30%s, which works out to a blended around 33% over the next few years here. And we think we're well on track to execute against that.

Okay, thank you. And then, in terms of some of the pockets of excess inventory that you have been referencing that you're hearing about around the world. Can you talk about sort of how that will be played out at retail? How do the retailers kind of deal with that?

And then, did that impact kind of how you're planning pricing if at all, or how your competitors are acting?

Well, I wouldn't be nearly as concerned if I didn't read Bicycle Retailer. That's where I'm reading about a lot of this excess inventory. I mean, I think it's broader-based. We do not see, at this point, in the segments that we serve any -- you've always got pockets here and there of inventory.

Broadly, we wouldn't be concerned. I think we're -- what's driving our caution is a little bit about what we're reading across the broader bike industry. And if we can just tell [Russ] to be a little bit more vigilant as we look out there in case we do start to see it creep into our segment --

You will always have, I think, given a particular geography in the world or a particular manufacturer bottle that may have an inventory issue from time to time. We just -- I think the thing I would leave you with on the inventory question is we don't see it broadly in the segments we serve.

How does it play out when it does happen? Well, usually the folks in the channel are going to sell what they have before they get some more in. I mean, that's just a function. But again, I don't think we see that in our business today.

And how are you putting pricing -- could you tell me about how your pricing in units are playing out in the bike segment?

I think we're pretty pleased with what we see. Again, we have a pricing philosophy I think that's commensurate with our brand position and the markets we serve. We don't intend to be the guy bringing price down, nor do we have a philosophy of cutting price till we get a certain volume of business.

I mean, I think we tend to use price as a measure of our brand's strength and we don't want to do anything that would be perceived as harming that.

When you look at how we want to enter a segment that's maybe a bit lower, like our new lower price-point fork, we're going to do that with a different design philosophy, again, that's maybe more commensurate with the specifications that that particular segment wants to see. As opposed to just cutting price. Does that help?

Yes, that's really helpful; thank you.

Thank you. We have reached the end of our Q&A session. I would like to hand the floor back over to management for closing remarks.

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

I'm also thankful for the support of our customers and suppliers and 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. This concludes today's teleconference. You may disconnect your lines at this time; thank you for your participation.