Fox Factory Holding Corp (FOXF) 2016 Q2 法說會逐字稿

Greetings and welcome to the Fox Factory Holdings Corp second-quarter 2016 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.

I would now like to turn the conference over to David Huagen, General Counsel. Thank you, and you may now begin.

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

By now, everyone should have access to the earnings release, which went out today at approximately 4:05PM 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'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 of 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 hear in, 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 second-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'll open the call for your questions.

The momentum we started the year off with continued into the second quarter. The strength of our diversified product portfolio drove our financial performance with quarterly results for both sales and profitability above our expectations. Our topline increased approximately 5% to $102 million in the second quarter, which was greater than our guidance of $95 million to $101 million.

Both our powered vehicle and bike products drove this growth. Powered vehicle products were up approximately 10% and bike products were up approximately 2%. As a reminder, we experienced a shift in timing of approximately $3.5 million of certain bike customer orders from the second quarter of this year into the first quarter of fiscal 2016.

The increase in sales of powered vehicle products was primarily due to continued higher demand for on- and off-road suspension products. The increase in bike product sales was due to the ongoing success of our bike product lines, which continue to be well received by customers. Mario will provide more detail in his part of the call.

Our team's continued execution of our operational efficiency initiatives as well as product and customer mix resulted in a gross margin expansion of 90 basis points, which contributed to our profitability increase for the quarter. As a result, we generated non-GAAP adjusted earnings per share of $0.32 in the second quarter, which exceeded our guidance of $0.25 to $0.30.

Additionally, we generated adjusted EBITDA of $18.6 million in the second quarter of 2016, representing approximately an 8% increase compared to the prior year's quarter. We believe the strength of our diversified product portfolio across both bike and powered vehicles along with our team's consistent execution of our strategic initiatives helped us achieve these better than anticipated results.

Given our year-to-date performance and our outlook for the second half, we are raising our annual guidance for fiscal 2016, which Zvi will review in detail later. As many of you have read, there are certain areas both from a product and geographical standpoint across our broader industries, including the overall bike industry, that have experienced headwinds. We continue to monitor these markets and the global economic backdrop to ascertain any potential impact on our business.

To this point, we are also evaluating the recent events in the UK and the EU. While we believe our differentiated market position and diverse end markets give us the ability to deliver our long-term growth targets, like most companies, we are not immune to macroeconomic or industry-specific issues that may occur.

Our innovative products have help fuel the continued success of product lineups in both bike and powered vehicles. Additionally, we have now made initial shipments of our bike model year 2017 lineup and remain optimistic about its success in the marketplace. As always, we will continue to closely monitor retail sell-through as we move into the fall.

Additionally, our recently introduced new lower price point fork is being well received by OEMs. As we look ahead to the second half of this year, we expect increased sales year over year from automotive OEMs as well as our aftermarket on-road replacement shock business.

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.

In 2016, we expect to continue to realize incremental efficiencies across our global manufacturing platform as we benefit from moving our bike, fork, and shock production to our Taichung facility, and our team works to achieve the optimal product mix across our worldwide factories. In addition, this enables us to reconfigure our California facilities. Our Watsonville facility will focus primarily on power sports production, and our El Cajon facility is focused on automotive and military production.

As we mentioned on our earnings call last quarter, we launched our new ERP system in our El Cajon facility late in the first quarter. We are continuing to work through the implementation of the phase one rollout, and we will finalize the phase two rollout schedule once this work is complete.

In summary, we continue to perform at a high level across our business. Our global team has done a terrific job of executing our key objectives, and we are well positioned as we head into the second half of fiscal 2016. Our management team remains committed to enhancing shareholder value, and our capital allocation strategy will continue to focus on investments in our organic growth. And at the same time, we will strategically review incremental M&A opportunities to further diversify our product portfolio.

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

Thank you, Larry, and good afternoon, everyone. During my remarks, I'll talk about some industry trends and touch on a few of our recent business highlights. I'll start with our bike business.

Our brand-building efforts continue to increase momentum with favorable media reviews and awards, successful (inaudible) product launches, strength in dealer relationships, and race wins. We believe this momentum will be reflected as consumers upgrade their equipment on both their current bikes as well as new bike purchases. We believe this will be one of the positive future OEM spec indicators as we enter the model year 2018 selling season.

One of our recently launched products is an all new adjustable height seat post, the Transfer, as a successor to the D.O.S.S., which had been on the market for four years and earned the reputation as being one of the most reliable on the market. Reliability is one of the most important factors for customers in the market for an adjustable height post. We've experienced strong initial sales in the after market since its launch and favorable media reviews.

Here's what PinkBike had to say about it: ''With the discontinuation of the ultra-reliable D.O.S.S. and the fact that other companies are now producing some pretty good options, Fox's Transfer dropper post needs to be a home run. While my time on it has been limited, it seemed as though Fox has managed to hit this one out of the park.''

And Enduro Mountain Bike Magazine's first impression: ''With its cable-operated simplicity, stunning looks, and faultless performance, it's certainly a class-leading post. It's early days to comment on durability and longevity, but in terms of performance, ergonomics, and ease of fitting, the Fox Transfer is unbeatable. If the long-term reliability proves equally as good, then the Fox Transfer is the best dropper post on the market.''

Our X2 shock technology continues to rack up accolades with the press. The Float X2 bike rear shock recently took home the 2016 Bike Radar Award for the Most Wanted Suspension Product category. We're just getting into the initial throws of the model year 2018 OEM spec season, and we'll be heading to Eurobike at the end of August where our efforts really ramp up. As I mentioned on our last call, integration of Marzoochi mountain bike products is on track and is part of our overall model year 2018 lineup.

The 2016 mountain bike race season is rapidly coming to a close, and we're pleased that, to date, Fox supported athletes have won 27 cross-country events, 13 Enduro events, 4 free ride events, and 38 downhill events worldwide. We're currently leading the men's and women's UCI Downhill World Cup Series and the men's Enduro World Series.

Now we'll move on to our powered vehicle business. As discussed on previous calls, we believe our automotive OEM production will start ramping up in El Cajon on completely separate lines for the new Ford Raptor 3.0 internal bypass shock in the third or early in the fourth quarter along with production of the 2.5 internal bypass shocks for the 2017 Toyota Tacoma TRD Pro.

Yamaha recently announced their next generation side-by-side, the 2017 YXZ 1000R SS. The vehicle will shift with our 2.5 Podium X2 shocks with 16 inches of front-wheel travel and 17 inches of rear-wheel travel. Our X2 shock platform, which is used in both our bike and powered vehicles products, introduces a unique position-sensitive damping design, which provides excellent control, quick hydraulic response, and four-way adjustors that can be tuned to any terrain.

I'll conclude with a few of our recent race results in the powered vehicle segment. Our circle track race drivers have over 400 wins to date this season. We consistently dominate UTV racing in the desert with our internal bypass technology. Wayne Matlock and Justin Lambert took the top two spots in the turbo UTV class at the SCORE Baja 500. And finally, at the Tatts Finke Desert Race in Australia, Glenn Owen won overall in the pro class and Sam Barnes took the pro-lite buggy win.

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

Thank you, Mario. I'll focus on our second-quarter results and then review our guidance. As detailed by Larry, sales in the second quarter of 2016 were $102.3 million, an increase of 5.3% versus sales of $97.2 million in the second quarter of 2015. As a reminder from our Q1 earnings call, approximately $3.5 million of shipments, which were originally anticipated to ship in the second quarter of 2016, shipped in the first quarter of 2016.

Gross margin was 31.6% for the second quarter of 2016, a 90 basis point increase and 30.7% from the prior-year period. The improvement in gross margin was primarily due to benefits associated with our manufacturing efficiency initiatives, and to a lesser degree, favorable product and customer mix. Additionally, gross margin improved due to the non-recurrence of costs associated with the 2015 ramp-up, reconfiguration and the logistics of the bike rear shock production transfer to Taiwan, and the subsequent reconfiguration of our other facility.

On a non-GAAP basis, which excludes acquisition-related costs, gross margins for the second quarter of 2016 increased 100 basis points to 31.7% as compared to the second quarter of last year.

Total operating expenses were $21 million or 20.6% of sales in the second quarter of 2016 as compared to $19.3 million or 19.9% of sales in the second quarter of last year. Non-GAAP operating expenses stated as a percentage of sales were 16.4% versus 15.4% in Q2 of last year.

Included in GAAP operating expenses was $1.1 million of expense associated with recent patent-related litigation activities involving a bike industry competitor. While we are confident in our position, the litigation activities are complex, and we expect to incur additional expenses related to pursuing and defending the involved claims.

Additionally, we continue to invest in strategic initiatives such as our ERP system, the Marzoochi mountain bike product line, and our global tax strategy. As a result, we expect our non-GAAP operating expenses as a percentage of sales will be slightly below 17% for the full year of 2016.

Focusing on expenses in more detail, within operating expenses, our sales and marketing expenses increased to $6.5 million in the second quarter of 2016 compared to $6.1 million in Q2 of 2015. The increase was largely due to a $0.3 million increase in our wages and related expenses, including Marzoochi, with the balance coming from additional promotional activities to support the growth of our brand.

Research and development expenses increased to $4.6 million in the second quarter of 2016 compared to $4.2 million in Q2 of 2015 primarily due to investments in new mountain bike and powered vehicle products and technologies. 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 second quarter of 2016 were $7.1 million compared to $4.9 million in the prior-year period. The increase was primarily due to $1.1 million of additional legal expenses as previously mentioned, $0.3 million of additional expenses for our strategic initiatives, and $0.2 million of additional stock-based compensation.

Other expense was $0.5 million for the second quarter of fiscal 2016 as compared to $0.4 million in the second quarter of fiscal 2015. The increase is largely due to higher interest expense.

In the second quarter of 2016, our tax rate was approximately 16.9% compared to 33.2% in last year's second quarter. This improvement was due to the Company's ongoing global tax initiative, tax credits, and a benefit of $0.5 million related to favorable resolution of tax audits. Our tax rate, excluding the favorable tax audit resolution, which is also excluded from non-GAAP adjusted net income, was 21.4%. We continue to expect our tax rate, excluding the audit resolution, will be in the mid 20s% for the entire fiscal 2016.

On a GAAP basis, our net income in the second quarter of 2016 was $8.9 million compared to $6.8 million in the prior-year period. Earnings per diluted share for the second quarter of 2016 were $0.24 compared to $0.18 in Q2 of 2015.

Non-GAAP adjusted net income was $11.8 million, an increase of 20.4% compared to $9.8 million in the second quarter of the prior-year period. Non-GAAP adjusted earnings per diluted share for the second quarter of 2016 were $0.32 compared to $0.26 in the second quarter of fiscal 2015.

In the second quarter of 2016, adjusted EBITDA was $18.6 million compared to $17.3 million in the same quarter last year. Adjusted EBITDA margin was 18.2% compared to 17.8% in the prior-year quarter.

We believe non-GAAP adjusted net income, non-GAAP gross margin, 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 press release issued today.

Now, turning briefly to our results for the first six months in 2016. Sales for the first six months of 2016 were $182.5 million, an increase of 10.6% compared to the same period in 2015. Sales of bike and powered vehicle products increased 11.3% and 9.7% respectively for the first six months of 2016 compared to the prior-year period.

Adjusted EBITDA increased 12.9% to $30.1 million compared to $26.7 million in the first six months of the prior-year period.

Now, focusing on our balance sheet. As of July 1, 2016, we had cash on hand of $10.1 million. Total debt outstanding was $75.3 million compared to $47.9 million of debt outstanding as of December 31, 2015.

Inventory was $80.9 million as of July 1, 2016 compared to $68.2 million as of December 31, 2015. Accounts receivable was $56.7 million as of July 1, 2016 as compared to $43.7 million as of December 31, 2015. Accounts payable was $49.6 million as of July 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 business seasonality.

Accrued expenses were $20.5 million at the end of the second quarter, a decrease of $2.7 million compared to year end primarily due to a scheduled earn-out compensation payment related to one of our recent acquisitions as well as business growth and our normal seasonality.

Turning to our outlook. For the third quarter of 2016, we expect sales in the range of $106 million to $112 million and non-GAAP adjusted earnings per diluted share in the range of $0.37 to $0.41.

Over the full year, we are raising our prior guidance and now expect sales in the range of $387 million to $402 million and non-GAAP adjusted earnings per diluted share in the range of $1.10 to $1.19. We expect to continue to invest in our strategic initiatives, and as a result, for the full year we expect non-GAAP operating expense stated as a percentage of sales to be slightly below 17%.

In addition, while we expect continued annual improvement in non-GAAP gross margin, it is worth pointing out that due to changes in customer and product mix coupled with the preparation of our El Cajon facility for the automotive business ramp-up, we expect non-GAAP gross margin in Q3 will be slightly lower versus Q3 of 2015. And for Q4, we expect some year-over-year improvement.

And as I mentioned earlier, we continue to anticipate our annual effective annual tax rate excluding the favorable audit resolution to be in the mid 20s%. I would like to note we are not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of accurately predicting the elements necessary to estimate.

Finally, as a reminder, non-GAAP adjusted earnings per diluted share exclude the following items net of applicable tax: amortization of purchased intangibles, contingent consideration valuation and adjustment, acquisition-related compensation expense including related foreign currency transaction gains or losses, certain acquisition-related adjustments, favorable tax audit resolution, and offering expenses.

Additionally, non-GAAP adjusted earnings per diluted share excludes the tax benefit related to the resolution of audits by taxing authorities. These adjustments are more fully described in the tables included in our press release, which have been posted on our website.

I'd 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. At this time, we'll be conducting a question and answer session. (Operator instructions)

Mike Swartz, SunTrust.

Good afternoon, guys. Just starting off with a housekeeping question. Zvi, just around the tax rate, did I hear you correctly in saying that there's been no change to your full-year outlook in terms of the tax provision?

Correct. Mid-20s%.

Okay. So just trying to get a sense, in that event, of what's really driving your expectations higher for the full year. And I say this with the backdrop of, obviously the ORV industry has been a little weak here, and there's a lot of buzz around, on the bike side of things, that there's elevated inventories as we moved through the spring, and we're starting to see some restructuring from some of the major OEMs and component manufacturers. So I guess, what gives you comfort in your business?

Well, I think a couple different things, Mike. Certainly, we serve a lot of different end markets. We have a great diversity there that I think helps us ride through difficulties in any one of them. We are geographically pretty well dispersed also now in our business, so when the oil (inaudible), for instance, not been strong for ORV or truck-related parts of our business, but new truck sales have been very good. So I think that's a lot of it.

But fundamentally, our philosophy is to keep coming out with innovative product that is going to give people and end consumers a reason to buy Fox. And I think that also helps bring us through any individual market weakness.

Now, having said that, I will tell you we are cognizant of everything you referred to. We read the same papers, and we're keeping a close eye on these kind of macro and industry-specific developments for any impact it might have to kind of be ahead of that. But our guidance kind of contains the second-half view that we see as well as encompassing our first-half performance.

Okay, and then just maybe one final question for Mario. I think you had mentioned the new Rhythm fork is being accepted fairly well by OEMs, but can you give us a little more granularity around that product in terms of is it opening a new customer base for you?

Well, it's not a new customer base, so we're talking to all the same customers about this product who have wanted and asked us to participate in this slightly lower price-point served market than we've been in in the past.

We've mentioned on prior calls that we believe this $1,500 to, call it, $2,500 end bike price point in US dollars to represent a 50% by unit addressable market increase for us. And we've also said that in model year 2017, we're just sort of scratching the surface with an initial foray into that, which we'll round out over the subsequent couple model years. For our first entry into it, we're quite happy; albeit, not completely built out, which we'll do over the next couple years.

That's all I had. Thanks.

Jon Berg, Piper Jaffray.

Great. Thanks a lot, guys. Good job on Q2. I guess my first question is just maybe more (inaudible) here on how we're thinking about the guidance. I guess, can you talk a little bit how you're thinking about Q3 guidance versus the implied Q4 guide?

I guess at the top of your EPS range for Q3, it implies a pretty big slowdown in growth followed by a big acceleration in Q4 assuming you hit the top of your range for the full year. Why is the growth in Q3 so muted? And I assume the Q4 growth accelerates as a result of the new product launches, but any color you could give there would be helpful.

I think what you have to keep in mind is we have a lot of different markets we serve. We have a lot of different product introduction cycles. And those are not necessarily the same year over year. So also, it's not unusual for sales to shift between quarters with no underlying difference in the economics of the segment served.

So I would tell you that we think, again, the growth that we've got on a year-to-date basis -- I mean, there's timing involved and so forth -- but our view has gotten better over the course of the year. We've raised guidance and tightened it, and that's in a challenging economic environment.

Okay, great. And then secondly, I guess, I think last time we spoke, I think you guys were maybe expecting that you may see a slight improvement potentially in the back half in the North America side-by-side market. Do you still kind of see that potential recovery in the second half of 2016, or what are your thoughts right now?

Yes, I mean, I think, Jon, we hear that that market is doing okay, I think for particularly a lot of the vehicles we're involved with. Now, there's obviously any one manufacturer our there can have difficulty. There've been product recalls, for instance, that certainly tend to impact this.

But I think our view of it now is that that high-end recreational side-by-side market is probably going to do okay. It's kind of flattish. But within that, because we have vehicle introductions and things like that, we may perform better or worse depending on a given quarter. But I think we're feeling okay about it, setting aside sort of any customer-specific issues that may be going on.

Okay. And then I guess maybe just one last quick one for me. Just given some of the recent cautious commentary, I guess, out of Ford on their Q2 call, are you at all concerned about how you're thinking about your Raptor volumes for 2017? I know it's a great product, certainly a high-margin product for Ford and I see you guys too. But I guess what gives you confidence on your Raptor sell-through for next year?

I think a couple different things in how we're looking at it. Ford, obviously in their announcement, didn't comment on the Raptor specifically. But I think if you look at the demand for the past generation vehicle and where it was selling in relation to the sticker price and the availability of that vehicle, if you combine that with our understanding from doing our own checks of the pre-ordering for the new vehicle, we think it's going to do just fine. And again, keep in mind, this is a relatively small volume vehicle for all of Ford, and I don't know that Ford's general comments apply to this segment.

Okay. Thanks a lot, guys. Good luck in the rest of the year.

Larry Solow, CJS Securities.

Thanks. Good afternoon, guys. Just on the guidance, one last little follow-up. On the increase, is it better on the bike side, better on the powered vehicles side? Is there any way you can characterize that?

Look, I think overall our business is performing well across the board with -- like I said, we've challenged some pretty difficult environments, macro and industry-wide in some of the segments. Some of it's been in the press. In some cases, we've got new product introductions in some of those challenged segments that are helping to make up for it. There's a whole host of things. But I just think in general, we're operating -- we're doing a good job executing.

And just historically, (inaudible) as close to the bike industry as some -- I know your end markets are the mountain bike, especially the enthusiast, has really been somewhat of a dichotomy from the general bike industry, right, not necessarily following the exact trends? Fair to say?

Well, listen, we do think that high-end mountain bike has done better than the overall bike market. That much is clear. Having said that, the same IDD that sells a high-end mountain bike is selling a high-end -- is selling other bikes. So these factors do have an effect on us. We think it has been a little bit more insulated. But as Larry said in his comments, we are not immune to those kind of factors. What we try to do to combat it is put out great product.

Right. Right. And I know you guys have been a little concerned this year especially with the strong dollar impacting some of your international sales. Forget what's happened in the last couple months in London and Europe if you can. That's probably too early to tell. But have you seen any impact -- or it may be hard to measure, but are you seeing any impact from sort of some of their less buying power on the international side?

You know what, what I would say, Larry, we certainly see pockets of weakness depending in geographies. We also see some areas that are going pretty good. Again, we try to be cognizant of these things, but if you got overly focused on all the news that seems to be coming our way -- a lot of it's been mentioned on these questions -- I mean, you could get yourself pretty depressed, right?

I think our philosophy is to kind of look through that, keep bringing out great product, be cognizant of those issues if we do see anything macro. And then we think because of our brand position and the kinds of products we come out and the segments we serve that, whatever the environment is, we feel we'll do better than average.

Right, okay. Fair enough. Just lastly, did your prior guidance -- have you always assumed that you would get some automotive OEM sales in late Q3 or Q4? Has that always been part of the --

Yes, we've always assumed it, and we've not really changed the assumption here. We're not expecting all of a sudden that we're going to have a full run rate ramp-up of our significant automotive customers. It's still a ramp-up as they introduce the vehicles.

Got it. And if I may just squeeze one -- go ahead.

But that's not driving our raise.

Got it. And just one more. On the ERP, do you expect as you go into phase two, does that expenses start to ramp a little bit as the year progresses? Or how do you look at that on what the (multiple speakers) -- go ahead.

Look, you got to remember as you go into an ERP, a lot of those costs are getting capitalized. We're expensing some of those costs and a lot of them are getting capitalized as well. I mean, the expense run rate could go up a little bit next year. But for this year, probably not.

Great. Okay, great. Thanks a lot. I appreciate it.

Scott Stember, CL Kind & Associates.

Good evening. On the powered vehicles side, noting that we haven't seen the Raptor or the Tacoma demand coming in yet, could you maybe just talk about in the quarter OEM demand versus, let's say, sport truck and after-market kind of accessories? And maybe just give us a flavor of what really drove the business in the quarter?

Well, yes, again, without breaking it out, we have obviously a lot of OEM business. I'm not sure we're breaking out OEM versus after market for the quarter.

No, we don't.

Yes. I'll tell you again, depending on the segment, we had some fairly strong after-market segments. One of the better segments during the quarter was our after-market on-road replacement shock business, for example. But we saw some pretty nice business from a lot of our OEMs across both powered vehicles and bikes. I think it's the kind of facts and circumstances beyond that.

Okay. Just going back to the overall macro issues that you brought up on the first-quarter conference call about inventory issues within the channel. And I know you guys have been monitoring that at least within your niche. I think at last quarter you had said that you had, at that point, not seen any issues that you were monitoring it. As we stand today, and noting that obviously you're operating in a challenging market, but have you seen any inventory issues that you have to deal with? Or so far, has it been okay?

I mean, I think we've seen -- again, I would characterize it as not a broad inventory issue across all of high-end mountain bike. I do think we've seen certain models, segments that have had more of an inventory issue than others. I still think we characterize high-end mountain as around flat. Might be down a little bit; could be up a little bit. That's kind of how we think it's going to unfold through the year in spite of any of those inventory issues.

Okay, got it.

And I would tell you, it's not maybe as robust as it was a few years ago certainly right now, and I think that's part of this overall backdrop in overall bike. But again, I think as Zvi indicated, in spite of what you read on the bike industry, we think mountain bike holds up better than that industry average, and we think high-end mountain bike holds up better than mountain bike. And again, I think that's kind of how we're seeing it. Still far from robust right now.

Got it. Last question. Just going back through on the international side maybe with Brexit going on, maybe just talk about how much of your business is in the UK, if you've been able to identify that, or if you'd be willing to share that. And maybe just talk about what you're seeing right now and any major concerns that you have.

We don't break that out. Clearly, Europe is a big part of our bike business, but from what we've seen with our after-market business there, we haven't seen any indications of a slowdown there yet. I mean, I was really keeping an eye on some of those distributors right out of the gate, and it's been remarkably quiet.

And things got less expensive in the UK.

Right. (Laughter) That's all I have. Thanks for taking my questions.

Jon Andersen, William Blair.

Good afternoon, guys. I guess I wanted to ask first, as you introduced your lower price point fork, have you or do you expect any kind of change to kind of the competitive landscape or intensity? Are you seeing or expect to see any kind of response in the market at this point to that move?

Yes, this is Mario. I think the response in the market that we expect to see is for us to add additional models and (inaudible). We have good robust competition, but in each given year -- and this isn't any different -- we've brought out this, we've brought out new shocks, we've brought out the Transfer seat post. So we expect every year to have a robust competitive landscape. And we focus on what we can control, which is our innovation and trying to be strong.

On the Raptor, the foreign business, could you talk -- just remind me how big that business was order of magnitude pre the model year for the body change-over that (multiple speakers) --

Jon, we've never broken it out. It was clearly less than 10% because we'd have been required to break it out. I think there's been a lot of triangulation on the figures by many of you and the analysts in the investor community, and some of those numbers seem like they were in the ballpark. That's all I can say about it publicly. I don't think Ford would really appreciate me commenting on their volume.

And is there any reason to believe that it wouldn't come back at least as strong over time as it was in kind of its previous iteration?

Well, we believe that it will certainly be as strong is our feeling. It's a much more capable vehicle. The last one was very, very popular. And again, we've done some checking around on our own on pre-ordering, and that seems to be going just fine. So we are kind of planning for a level at least equivalent to the previous generation.

Okay, that's helpful. On gross margin, I don't know, Zvi, it sounded like you were cautioning a little bit on the back half, maybe because some of the (inaudible) at El Cajon, et cetera. Is your view a little bit more cautious on gross margin this year? And does that kind of change the longer-term view that you're heading into the 33% range over the next [two] years?

There is no change in our long-term view or thesis for gross margin. We've been making a lot of great progress. This quarter we were up 100 basis points. Q3 is simply a function of customer and product mix as well as the ramp-up in preparation of the OEMs. We have a very robust plan to continue to increase gross margins, and we're really pleased with our progress so far.

Okay. Just a little bit more -- the ERP system, you mentioned phase one coming to completion soon, and then you'll be entering phase two. Can you just describe what's phase one, and what's coming next with phase two and the timeframe around that?

Look, the system is turned up, and we're shipping a lot of product out of El Cajon. But as you can probably appreciate, before you implement a system of this kind of magnitude and put it on the entire company, you want to really just hone it so our business processes are optimized.

And so we are right now in the optimization phase to ensure that this will scale up for the remainder of our business. And we're still looking at that right now as we speak. The biggest mistake one could make is to jam it in, not thoroughly vet the processes, not squeeze the efficiencies out because then what you've done is made a multimillion dollar investment, and you've not gotten what you hope to get from it. And so we're just kind of doing what we expected to do, and it takes a little time. And kind of like we did in our transition to Taiwan, we're going to do this as fast as we can, but no faster.

Okay, great. Thanks for the questions and nice quarter.

Jim Duffy, Stifel.

Thanks. Good afternoon, guys. Nice to see you guys doing so well in the bike category given the backdrop. I'm curious, is after-market strength contributing to your above-market performance in bikes?

I think it is. I think we're pleased. Again, as you noted, the overall market's something less than robust, and we think we're doing well, and certainly after market's been a good contributor to that.

And Mario, maybe this is one for you. I've started to see more e-bikes around. Any comments on consumer uptake of e-bikes and the opportunity? Is that -- would the Rhythm be the solution for the city bike opportunity with that?

Well, so there's e-city bikes and there are e-mountain bikes. We participate in both, but the e-mountain bike category is where we're participating more strongly. The consumer uptake is rapid in Europe; less so in the US, but it's coming. And the Rhythm fork is certainly something that is being considered for the e-mountain bike as well as Marzoochi.

We also have -- all of our products are qualified for an e-bike that is classified as a bicycle. But being that these are heavier vehicles capable of covering more ground or going faster, we do have e-bike-specific fork chassis and damper and spring curve tuning to address that.

Got it. And then within the US, where does it stand from the standpoint of the kind of regulatory -- these bikes being allowed on trails, classified as a bicycle versus a motor vehicle (multiple speakers) --

Yes, I mean, they're classified as a bicycle. I think there's -- this is an I believe -- I think there's some maybe unwarranted angst over what it's going to do to trails. The fact of the matter is, 250-watt and below power assist is classified as a bicycle, and it's purely assisting the power you put in. It's not a throttle. It's not an on-off. You have to pedal to get any benefit from it.

So I don't think it's going to affect the trails much, but it's being studied. And I think it's ultimately going to settle out like it has in Europe, which quite honestly, is typically more stringent and does a little more research about off-road impact than we do here. So I think the uptake's going to be the same or better in the US at some point. But right now, Europe's leading the charge.

Okay. And then my last question is a big picture question maybe, Larry, best addressed for you. Are there any kind of macro indicators you guys would look to in your categories for any evidence of a turn in cycle?

A turn overall? I want to make sure I understand the question.

The genesis of it is many of you are speculating about potential for a softening of the economic cycle, consumer spending, and so forth. What I'm wondering is, are there any indicators you look to specific to your categories for a suggestion that that might be the case?

Yes, I mean, we look at actually several things, Jim, from a macro standpoint. We're certainly looking at the -- and as you know, in the bike industry, there's quite a bit of publicly available data from the component guys, the biggest component guy in particular. We tend to look at that data from a bike industry standpoint. We're looking a lot of automotive numbers, which is historically a cyclic business to see how that end of it may go. We look at a lot of industry-particular data that we can get our hands on.

From a broad standpoint, we tend to look at the same things I think a lot of other people do. We're looking at various employment, the staffing industry. Commercial staffing tends to be an early harbinger of overall economic cycles. We pay a lot of attention to that kind of data.

But again, having been through several cycles in my career, the one thing I've learned is they're tough to predict and get exactly right. You want to be following them. You want to be prepared if you do get into those situations. But you don't want to talk yourself into one either. So I think we kind of philosophically try to be aware, be prepared, but then keep coming out with great product. And we believe that great product and our brand position will help us through whatever that environment turns out to be.

Makes a lot of sense. Thanks for that perspective.

Rafe Jadrosich, Band of America Merrill Lynch.

Hi, good afternoon. Thanks for taking my questions. I was wondering if you could give a little more color on -- since the bike industry's slowed and you guys are obviously outpacing that -- I was wondering if you could give a little more color on who you think the share gains are coming from. Are you seeing industry consolidation? Just any color there would be really helpful.

Again, I'm not sure we can give you anything exact, but we feel in our suspension business that we've done pretty well. We've had some spec gains, as I think Mario said in his part of the last couple calls. We feel pretty good about spec position. I think obviously we're looking to still see sell-through data on the current 2017 model year, and we hope that holds up obviously. I think our Race Face and Easton product lines have continued to do well. Cranks and wheels are being -- I think they're good products for us.

And can you give a little more color on sort of the -- sorry.

Yes, well, I think our focus is obviously to keep selling. I tend not to worry about my competitor's health that much when we're in selling season. But I think we're doing fine against our competition given the overall bike market backdrop we've talked about.

Can you talk a little bit about the strategy for Marzoochi going forward?

Yes, Marzoochi, again, is the -- we try to remind people that it wasn't exactly a transformational acquisition. We kind of bought it, I hate to say, off the bargain bin, but that's probably not far from correct.

What the Marzoochi employees that we brought over who are now Fox employees and our Fox folks in bike -- Mario's been a key part of this -- what we've done now is position the Marzoochi brand going forward. So you'll be seeing that unfold here over the next couple of model years, but we have arrived at what we feel is good positioning where we want to have that brand.

There is sharing of technologies both ways. You're seeing some Fox technology go into Marzoochi traditional product and some vice versa. So I think we're getting the kinds of benefits out of that we wanted to. The full impact of Marzoochi though, we won't feel that until we get that product positioning rolled out, and that's over the next couple of model years.

And then, two more quick ones. Just, can you remind us of what the different mix impacts are to gross margin? Like, what type of customer do you (inaudible) that's higher margin? And then what sort of -- are there any changes to the input cost outlook as we kind of go through the back half of the year and into 2017? Thanks.

I'll take the second part first. We don't see any material change to the input costs. I mean, they've been coming down over the last year as you know with the weakening commodity cost and higher dollar. In terms of a mix, as we've said before, there's nothing structurally different between bike and powered vehicles. And it's [things] like we tend to get more in an after-market sale than in an OEM sale. We tend to -- in bike, we're our own distributor in the US where we go through distribution with powered vehicles. So where we're our own distributor rather than going through distribution, that's higher margin.

When we sell to OEMs, the biggest OEMs of ours are going to tend to get more favorable pricing and it's going to be lower on the volume list. We only sell premium products, but when we're selling the most premium products, they would typically have better margins than what I would call the more introductory priced premium products. And so it's kind of those factors, and those are some of the factors that are hitting us in Q3 or we anticipate to hit us in Q3. But those things tend to be fluid in various quarters and years.

Okay, thank you. That's very helpful.

Thank you. At this time, I will turn the floor back to Larry Enterline for closing remarks.

Thank you. We appreciate your questions and your interest in Fox. As always, I would like to thank our employees for their hard work and dedication in helping us achieve our results. Additionally, I would also like to express my gratitude to our customers and suppliers for their continued support. Together, we will continue pursuing Fox's future growth opportunities. We look forward to speaking with you again on our third-quarter earnings call. Have a good day.

Thank you. This concludes today's conference. We thank you for your participation and you may now disconnect your lines at this time.