Fox Factory Holding Corp (FOXF) 2016 Q3 法說會逐字稿

Greetings and welcome to the Fox Factory Holding Corporation Third Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr. David Haugen, General Counsel. Thank you, sir, you may begin.

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

By now, everyone should have access to the earnings release, which went out today at approximately 4:05 PM 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 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 third quarter 2016 results and provide an update on our ongoing strategic initiatives. Mario will then discuss some of our recent business highlights and Zvi will review the financial results in more detail and discuss our guidance. After that we will open the call for your questions.

We are pleased with our team's solid execution in the third quarter, which reflects the diversification of our product offerings and end markets. Our top-line increased approximately 3% to $109 million in the quarter which was in line with the midpoint of our guidance of $106 million to $112 million. We had another solid quarterly performance in our bike business despite a challenging industry backdrop in Typhoon Megi, which resulted in the closure of our Taiwan operations for two days during the last week of the quarter.

We have also continued our brand building efforts for bike products to increase momentum for key product launches and to strengthen dealer relationships. Mario will provide more detail in his part of the call.

On the powered vehicle side we experienced solid demand for on and off-road suspension products with sales up 7% driven particularly by aftermarket on-road replacement shocks in the automotive OEM growth. While gross margin declined due largely to a shift of product and customer mix, we were able to maintain expense control and benefited from our global tax initiative. As a result, we generated non-GAAP adjusted earnings per share of $0.44 in the third quarter which exceeded our guidance of $0.37 to $0.41. Additionally, we've generated adjusted EBITDA of $20.9 million in the third quarter of 2016. 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 profit results.

Given our year-to-date performance and our outlook for the fourth quarter, we are pleased to be raising our annual guidance for fiscal 2016 which Zvi will review in detail. As many of you know and we have mentioned throughout the year, 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 in the global economic backdrop to ascertain any potential impact on our business.

In addition, as many of you know, this year we've experienced a more challenging environment for off-road powered vehicles and side-by-side sales as compared to prior years. While we are not immune to macroeconomic or industry-specific issues that may occur, we believe our differentiated market position and diverse end markets give us the ability to continue to deliver our long-term growth targets.

Our innovative designs and technologies have fueled the continued success of product lineups in both bike and powered vehicles and we expect the success for model year 2017 to carry on through model year 2018. Specifically our recently introduced new lower price point fork is being well received by OEMs. Additionally, we continue to 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 as well as continuing to explore potential new markets and we believe that our continued commitment to product innovation will keep Fox in an industry leadership position.

We're also pleased to have commenced production for Ford and Toyota, which Mario will further detail in his comments.

In the quarter we continued to work on gaining efficiencies across our global manufacturing platform resulting from transitioning our bike fork and shock production to our Taichung facility. We continue to optimize our manufacturing facilities for better efficiencies including the reconfiguration of our California facilities. As we mentioned last quarter, our Watsonville facility will focus primarily on power sports production and our El Cajon facility is focused on automotive and military production.

In summary, we are pleased that we see sufficient strength in the business to enable us to raise our full-year guidance. Our Global Team has done a great job of executing our key objectives and we believe we are well positioned to have a successful end to 2016.

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 begin with our bike business. As I mentioned on previous calls, our brand building efforts continue to increase in momentum with favorable media reviews and awards, successful key product launches, strengthened dealer relationships and race wins.

Our latest accolade is from Enduro Magazine where Fox was named as the best rear shock brand by its audience of more than 22,000 bike enthusiasts. We continue to believe this will be reflected in consumer demand in the aftermarket which we believe helps to drive future demand with OEMs. We are pleased with our products' spec positions in model year 2017 and we expect to continue to gain spec in model year 2018 as our planned product line is being met favorably by our OEM customers.

The 2016 bike race season was a successful one for us with our athletes consistently reaching the podium. Rachel Atherton continued her history-making win streak ending the season with 15 consecutive wins and capturing the Women's Downhill World Championship title and winning the World Cup Downhill Series overall.

Aaron Gwin is the men's World Cup Downhill Series overall champion and Danny Hart took the One-Day Downhill World Championship title.

The World Cup Cross Country Series ended with Catharine Pendrel and Julien Absalon being crowned Overall Champions. Richie Rude won his second Enduro World Series Championship in a row and the Fox sponsored Rocky Mountain Team won the Team Championship. Brett Rheeder took top box in the Crankworx Red Bull Joy Ride Slope Style.

Overall on the major race circuits worldwide in 2016 Fox-supported athletes have won 36 cross country events, 17 Enduro events, 8 free ride events and 47 downhill events.

Now, I'll move on to our Powered Vehicle business. In our El Cajon, California plant we have begun production for the new Ford Raptor 3.0 internal bypass shocks and the 2.5 internal bypass shocks for the 2017 Toyota Tacoma TRD Pro. We are excited to have these vehicles reach the dealers showrooms.

BRP recently announced their next generation Can-Am Maverick side-by-side lineup including their flagship model, the Maverick X3 X rs. The X3 X rs will ship with our 3.0 podium RC2 bypass shocks with 22 inches of front wheel travel and 24 inches of rear wheel travel.

I'll conclude with a few of our recent race highlights in our powered vehicle segments. Our Circle Track race drivers have won -- have over 800 wins and 50 championships this season. Rob MacCachren clinched two pro titles in the LOORRS short course series. In the Torque Short Course Series Fox drivers won all PRO 2, PRO 4 and PRO light races in Chicago, Elk River, Park River and Charlotte.

In Crandon, CJ Greaves backed up his PRO 2 and PRO 4 championship wins in 2015 by repeating that performance in 2016. Jason Shipman took first overall at ULTRA 4 Badlands. Fox-sponsored athletes and teams have won over 70% of the off-road races entered in 2016.

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

Thanks, Mario. Good afternoon, everyone. I'll focus on our third quarter results and then review our guidance. As detailed by Larry, sales in the third quarter of 2016 were $109 million, an increase of 2.7% versus sales of $106.2 million in the third quarter of 2015. While our growth this quarter was below our longer-term targets due to challenging industry dynamics in the bike sector since vehicle introduction timing differences in powered vehicles, we remain confident about our long-term growth targets and would note that on a year-to-date basis the segments are both performing to our expectations.

Gross margin was 32% for the third quarter of 2016, an 80 points decline from 32.8% in the prior year period. The decline in gross margin was primarily due to a shift in product and customer mix, higher acquisition related inventory cost in 2016 and the cost of our recently announced product recall. Also worth noting, Taiwan experienced a severe Typhoon at the end of the quarter requiring us to shut down for a few days which impacted the business.

On a non-GAAP basis which excludes acquisition related costs, gross margin for the third quarter of 2016 decreased 40 basis points to 32.1% as compared to the third quarter last year for the reasons noted above.

Total operating expenses were $19.8 million or 18.2% of sales in the third quarter of 2016 as compared to $21 million or 19.7% of sales in the third quarter last year. Non-GAAP operating expenses stated as a percentage of sales were 15.7% versus 15.3% in Q3 of last year. The decrease in operating expenses is a result of a reduction in amortization of certain purchased intangibles as well as fair value adjustment of contingent consideration and acquisition related compensation partially offset by $800,000 of expense associated with continuing patent litigation activities involving a bike industry competitor. We remain confident in our position on these matters.

Additionally, we continue to invest in strategic initiatives such as our ERP system, the Marzocchi Mountain Bike product line and our global tax initiative.

As a reminder, we expect our non-GAAP operating expense as a percentage of sales will be approximately 17% for the full-year of 2016. Focusing on expenses, our sales and marketing expenses increased to $6.4 million in the third quarter of 2016 compared to $6 million in Q3 of 2015. The increase was largely due to $0.3 million increase in our employee and related expenses including Marzocchi.

Research and development expenses increased slightly to $4.7 million in the third quarter of 2016 compared to $4.6 million in Q3 of 2015 in line with prior year period as a percentage of sales.

Our general and administrative expenses in the third quarter of 2016 were $7.1 million compared to $5.9 million in the prior year period. The increase was primarily due to $0.8 million of additional vehicle expenses as previously mentioned and $0.2 million of additional stock based compensation with most of the balance coming from additional expenses for our strategic initiatives such as ERP and global tax.

Other expense was $48,000 for the third quarter of fiscal 2016 as compared to $240,000 in the third quarter of fiscal 2015. The decrease is largely due to lower FX related expenses. In the third quarter of 2016 our tax rate was approximately 9% compared to 22% in last year's third quarter. The improvement in the effective tax rate was primarily due to the reorganization of our foreign entities and permanent reinvestment of foreign earnings in jurisdictions with lower tax rates.

Notably, excess tax benefits from the exercise of options and vesting of restricted stock awards contributed approximately $0.2 million to our adjusted earnings per diluted share. The timing of option exercises and the amount of excess tax benefits generated from such exercises cannot be reasonably predicted. As such, the impact of these exercises were not considered in our previous guidance.

On a GAAP basis our net income in the third quarter of 2016 was $13.7 million compared to $10.6 million in the prior year period. Earnings per diluted share for the third quarter of 2016 were $0.36 compared to $0.28 in Q3 of 2015. Non-GAAP adjusted net income was $16.6 million, an increase of 14.9% compared to $14.5 million in the third quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2016 were $0.44 as compared to $0.38 in the third quarter of 2015. In the third quarter of 2016 adjusted EBITDA was $20.9 million as compared to $20.7 million in the same quarter last year.

Adjusted EBITDA margin was 19.2% as compared to 19.5% in the prior year period. We believe non-GAAP adjusted net income, non-GAAP adjusted gross margin, non-GAAP effective tax rate and adjusted EBITDA are useful metrics that better reflect the performance of our business on an ongoing basis. You will find a reconciliation of all non-GAAP to GAAP financial measures in our earnings press release issued today.

Now, turning briefly to our results for the nine months of 2016, sales for the nine months of 2016 were $291.5 million, an increase of 7.5% as compared to the same period in 2015. Sales of bike and powered vehicle products increased 6.8% and 8.5% respectively for the first nine months of 2016 as compared to the prior year period. Adjusted EBITDA increased 7.8% to $51 million compared to $47.4 million in the first nine months of the prior year period.

Now, focusing on our balance sheet, as of September 30th, 2016 we had cash on hand of $15.7 million. Total debt outstanding was $72.6 million compared to $47.9 million of debt outstanding as of December 31st, 2015.

Inventory was $78.1 million as of September 30th, 2016 compared to $68.2 million as of December 31st, 2015.

Our cash receivable was $58.6 million as of September 30th, 2016 as compared to $43.7 million as of December 31st, 2015. Accounts payable was $41 million as of September 30th, 2016 as compared to $32.1 million as of December 31st, 2015. The changes in accounts receivable, inventory, accounts payable are primarily attributable to business growth and our normal seasonality.

Turning now to our outlook, for the fourth quarter 2016 we expect sales in the range of $104 million to $110 million and non-GAAP adjusted earnings per diluted share in the range of $0.28 to $0.32. For the full-year we are raising our prior guidance and now expect sales in the range of $395.5 million to $401.5 million and non-GAAP adjusted earnings per diluted share in the range of $1.19 to $1.23. Included in our guidance we expect the resumption in Q4 margin improvement versus the prior year despite unfavorable channel and customer mix and the cost associated with the preparation of our El Cajon facility for the automotive ramp up.

We also 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 approximately 17%. Also, please note that as we have previously stated in our voluntary product recall press release, we do not believe this recall will have any material adverse effect on our financial results or current financial guidance.

We expect our 2016 effective annual tax rate excluding the favorable audit resolution to be in the high teens to low 20s. I would like to note that 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 adjustment, acquisition related complication expense including related foreign currency transaction gains or losses, litigation expenses, certain acquisition related adjustments, favorable tax audit resolution and offering expenses. These adjustments are more fully described in the tables included in our press release which have been posted on our website.

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

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

(Operator Instructions). Our first question comes from Jon Berg with Piper Jaffray.

My first question is just on the bike business. I know there's been kind of a challenging backdrop you guys have dealt with there the last several quarters and it looks like the growth rate decelerated some this quarter again. Just curious if you could give us some more detail either by geography or specifically where you're seeing the weakness at this point.

Yes, Jon, I'd say that we see things probably a little bit better now in terms of inventory overall that's out there. It's been a challenge for the bike industry overall. I think we see high end mountain where we primarily participate as holding up quite a bit better than that. I think there's some evidence that the lower price points in mountain are getting touched up a little bit more. We're pretty pleased with the way we're holding in.

In terms of markets, I think Europe had some weather issues. I think a lot of people have referenced that early in the year. I think that turned around as it's likely to do with weather and inventories have come back into line there. The US I think is going okay. We're -- we see both from an OEM standpoint we think it's pretty solid. I think aftermarket has been pretty good here. China and Asia have been clearly probably the most impacted. That's not a lot of our sales fortunately but we did have some great growth over there that we've seen flatten.

Okay great thanks and then secondly, just on the getting the Ford Raptor now ramped up and the Toyota Tacoma shock production, how long do you think it's going to be until you're fully ramped up? I realize in the fourth quarter you're ramping and by the end of the first quarter would you be kind of fully ramped up to where those manufacturers have their production targets?

Yes we don't obviously comment on individual's -- customers, but I, what I would tell you is we believe that during this quarter that ramping will be complete and likely we will start next quarter at rate.

Okay great; well, good luck in the fourth quarter.

Mike Swartz, SunTrust.

Hey, Zvi, just in terms of the quarter, remind me what were you -- what was your guidance predicated upon in terms of tax rate?

Well, I think the normal tax rate I guess what I would say is that things that were kind of extraneous or unusual and unpredicted were the $0.02 that I referenced from tax benefits related to stock option exercise and RSU vest. All of the rest of it is kind of within the normal rate of our tax rate which, as you recall, is typically lower in Q3 because of the reversal of about $1.4 million of Fin 48 so we had told in the beginning of the year we had provided guidance the tax rate would be in the mid 20s in the beginning of the year. We've been trending better than that. Part of the trend, a lot of the trend we're now telling you guys it's probably going to be between high teens and low 20s for the entirety of the year.

Is that helpful, Mike?

Yes and is that the way to look at the tax rate going forward or --?

Well, it's a little early --

(inaudible).

It's a little early to give guidance about next year. We would tell you it's going better than we have initially indicated. We do think that it's lower. Whether we can continue to maintain a high teens I'm not sure but we're feeling pretty good about low -- at least low 20s.

Okay and how -- and I asked the question because I am trying to get at EPS for the quarter came in at $0.44 but it looks like there's $0.02 for this option, stock option benefit, which was hard to predict and then versus at least where our expectations were was about another $0.06 from just a lower base tax rate so if I look at it that way I am coming --

No, Mike, I don't think that's right. I think where you need to look at it last year it was like 22% I think and if you take, basically you take the normal rate. You take that 9%; we ran 9%. If I simply add the Fin 48 or the way I think about it is you take the normal rate of the low 20s or whatever through the year. You have to factor in that $1.4 million reversal for Fin 48, which is always going to have a lower tax rate for Q3 than the balance of the year, so I just think your forecast probably didn't reflect that accurately.

As to the $0.02 from the stock options, yes we don't include it in our guidance but of course we do have the expense in the other part of our P&L so I mean the fact that we're a little conservative and don't predict it because it's hard to know exactly when it's going to materialize doesn't make it any less real.

Right no that's fair. Thanks for the color there. And then just in terms of the typhoon that came through Taiwan towards the end of the quarter, I mean is there any way to quantify the cost or maybe the delay, any delay in shipments that you saw associated with that?

Yes look, we're not going to exactly break it out. There was clearly an impact to our business, both on the top line and then frictional costs related to the typhoon and for that matter for the recall but we're not going to break it out.

Okay and then just finally, in terms of the eMountain bike market, hearing more and more about this. Could you just quantify or give us some sense of the how big that market is right now and I guess how much you participate in it?

Yes, hey this is Mario, so it's definitely a bright spot in the industry in terms of an exciting segment. We believe that there's incremental units coming by way of the eBike and there's also -- you also have to factor in that it does do some cannibalization to the standard pedal bike portion of an OE's product line. We do participate in it. We have eBike specific product in terms of stiffer chassis and damping and spring curves for the slightly heavier and more capable and different tire profile, that these things are coming across with. We haven't broken out how big that category is. It's been one of the fastest growing areas of development for the bike industry for the last few years and very -- that's very readily apparent when you go to EuroBike where it's kind of leading the charge in Europe and we're just -- it's probably trailing a bit here in the US.

Okay great. Thanks for the color. That's it for me.

Craig Kennison, Baird. Thanks for taking my question, or good afternoon. You mentioned some momentum at the low end of the bike market where you launched some additional product. Could you just add a little color to what you're doing there and maybe give us a feel for what's driving that momentum?

Yes so a little bit of a clarification. The momentum that Larry mentioned in his portion of the call was about our product that addresses a lower price point for us. In model year 2016 we've had such a product and that's 2017, sorry, and we expand the offerings going into model year 2018 and the customers have responded well to that so it was less about the lower end portion of the market, Craig, and more about the incremental pickups that we're getting with our new product offerings.

Yes I should have framed that question better. Clearly it's driven by your own work in that category. And then what about Marzocchi and what your plans are there, whether it's in at lower price points or just to extend the use of that brand, what are you thinking? What are your thoughts there?

So what we've been doing with Marzocchi is spending a lot of time on how it's going to be positioned versus Fox and narrowing the product offering so that we're really targeted and kind of going from there. It's part of our total product portfolio going into model year 2018 and when we talk about our lower -- a Fox branded lower price point, we call that our Rhythm product and Marzocchi will live slightly below where we're planning to -- where we have and plan to continue to roll out Rhythm product.

That's helpful. And, Mario, you mentioned that your early conversations with OEMs suggest that you could gain share of spec in 2018. That's a little earlier than you talked about spec in the past I think and wondering what the early signals are you're getting from those OEMs that give you the confidence you're about to gain more share?

Yes so it's pretty typical that we have -- it's about when we've talked about it in the past so we're on the other side of EuroBike and at EuroBike, which we've discussed in the past, Craig, it's where we have a lot of the -- a lot of meetings about what our next model year is firming up to be so that's happened. What we're planning has been received well and gives us cautious optimism about how those specs are going to finalize and carry out into next year.

And finally, do those OEMs give you any early indication for what their volume expectations might be relative to 2016?

No not at this point, Craig. This is -- as we've spoken about in the past, typically when you talk about share it's spec position share so those are the conversations right now is what are the models that we're appropriate for and how are we looking against those?

Good, well, congratulations.

Andrew Burns, D.A. Davidson.

Good afternoon and congrats on year-to-date results. A couple of questions here, looking across your manufacturing facilities, is it possible to quantify how much margin expansion potential there is once all three facilities, Watsonville, El Cajon, Taichung are fully optimized?

Well, I think the way to think about it is we believe over the next several years there's a couple hundred -- assuming that customer and product and channel mix was constant, which may or may not be the case right, we think there's a couple hundred basis points of improvement. It's not going to be linear and we've seen that over the last few years. This particular quarter I mentioned our margins are down which was anticipated when we gave guidance. I think we actually mentioned that the margins would be slightly down this quarter but we think there's still a fair bit to go over the next several years here.

Great thanks and it's encouraging that the on-road aftermarket business is doing well. Clearly that's a discretionary purchase for many consumers. Are you seeing anything from your sport truck customers that would make you think differently or more cautiously on that business as you look forward?

Well, I think the thing we have seen and we referred to it in past quarters clearly the oil patch areas, Western Canada and Southwest Texas in particular, have seen some impact in our business. Now we've been fortunate also in that new truck sales have been good and that's helped, certainly helped offset that, but again it's something we look at. Right now I would say outside the oil patch things look okay.

Thanks and one last one, just with regards to Race Face and Easton, coming up on two years of ownership. As you look at 2017 and 2018, any ideas in terms of product innovation or more complete ride dynamic solutions on the mountain bike side?

Let's see, so Race Face and Easton are innovation and technology driven just as we are, which is where the great fit and the synergies come from. We would tell you that for 2017 we've had a little bit of -- we had some kind of front end marketing synergies. We were all together at EuroBike with a pretty nice booth presence which was received well. Sea Otter in the spring was kind of our first putting the brands together also received well. We're doing some colors and graphics that tie the fork, shocks, seat posts, crank bars, grips together so it's on track. There's plenty of innovations coming out of Race Face, Easton and Fox to be seen as we roll these product lines out to the public. But I would say we're on track with the impact that we wanted to have by putting these together here close to the two-year mark.

Thanks and good luck.

Jon Andersen, William Blair.

Thanks for the question. First, on the guidance for the fourth quarter and I guess implicitly the full-year, it does imply double-digit sales growth at the midpoint of the range in the fourth quarter, which would be a nice acceleration from what we just saw in the third quarter, which was also a solid result but could you talk a little bit about some of the drivers of that acceleration as you kind of see them as you look at the fourth quarter now?

Yes, Jon, great question, yes we're -- we've got a couple of different things that we look at. As I tell people, first and foremost the thing that gives me confidence is our own order book and I think what we see in both bike and powered vehicles enables, has enabled us to raise that guidance. I think we -- as we look out we clearly have contribution from Ford and Toyota this quarter that we haven't had. We think that aftermarket on-road replacement shock business is going to continue to do well. As we mentioned, bike even in challenging conditions I think we've done well with product. We see that being a pretty good contributor across the product lines. Some of our new products there, seat posts have been well received.

That's helpful. Most of my questions have been asked already. I guess one other quick one on gross margin, Zvi you referenced product and customer mix a few times. Is there any more specificity on what that is and is that something you perceive as kind of an ongoing headwind and/or something that's just more of a near term type of thing? Thanks.

I mean I don't look at it as a headwind at all. In some regards just because the margin is lower, the ultimate profitability to the bottom because they have different SG&A profiles is different as well but it is different right? It has been different in Q3 and Q4 and the difference from just a pure mathematical margin point of view is unfavorable. As to last year, we're still in the process of developing our plans for next year. We do expect to see fairly good growth consistent with our -- what are really our long-term targets as of right now. And as we've said before, there's no structural reason that one business should have a different margin than another business. It just comes down to different customer, product and channel mix.

Fair point, yes I'd always take gross margin dollars over gross margin rate if given the choice so fair point. Thanks for your help, guys. Good luck going forward.

Rafe Jadrosich, Bank of America.

It's Rafe; thanks for taking my question. Just to follow up sort of on that last question, when you look at the fourth quarter guidance, if you kind of back out the benefit of Ford and Toyota, are you still seeing an acceleration in the underlying business?

When you say back out Ford and Toyota, we think that the powered vehicle business remains healthy. The bike business has some of those challenges. We believe we're outperforming. We think we've picked up market share. If you look at the news it's not been exactly sterling and we think we've outperformed the broader market so it seems good to us.

And then can you just follow up a little bit on some of your comments about having confidence in the 2018 bike spec? Can you just call out some of the specific drivers to that? Is there specific products or --?

Yes so it would be expanding our Rhythm line, which we've been talking about. Model year 2017 was our sort of entree into going after lower price points compared to ourselves. We expand that. There's the -- our transfer post, our seat post line, which we've talked about as a growth driver will continue to impact favorably model year 2018. The eBike specific products that we have and the dynamic that the industry has in general with eBikes kind of we've been talking about the kinds of things that drive the bike division long-term growth thesis for quite a while, Rafe, as we've been talking about these things and model year 2018 is one of the ones where we're feeling pretty good about those drivers. So while nothing is bagged yet, we've had the presentations with customers and things have been received pretty well and we think in my portion of the call where we talked kind of the brand momentum we think it's a favorable one/two punch.

And then the, just final question, on the brand building does it -- when you talk about investing more in that is that just taking marketing spend up a little bit or do you feel comfortable with where you are now? Thank you.

We didn't say increasing marketing spend. It's -- it always leads with product, right, and we're happy where the product is and we've taken a little bit of a different strategy within the spend that we've sort of historically done. We haven't taken it up to try to build brand. We've invested in product; that's always where we'll go first and we've changed up a few things that we've done within the spend that we've typically had and those things have been received very well.

Great, thank you.

Larry Solow, CJS Securities.

Hey thanks, it's Chris Moore for Larry. Most have been answered but maybe we could just talk a little bit further about the bike market dynamics and specifically is have you seen additional competition in IN space or any reaction to your entry into kind of the modest or lower price points or is that something some of the people in the higher end space are looking at as well or any thoughts there?

Yes I think your question is competitive reaction. Again, we're -- we got into that space here this year with kind of our first foray. We're going to be rounding that out so we -- our intention is to continue to penetrate deeper into that part of the market. From a dynamic standpoint I don't think we've seen a lot different from a competitor either reaction or new competitors. I don't think there's been anything that I would say is remarkable in that stance. I mean we've got good competition and we like that, bring it on.

I think from just kind of what's going on now, and if you read the blogger bike industry reports, it's a tough environment for bike overall. I think what we would point out consistent with what we've said before is we do believe the high end where we principally participate had held up quite a bit better and we would say that we believe we have been outperforming in that segment vis-a-vis our competition.

Got you, okay. Yes everything else was answered. Thanks, guys.

Scott Stember, CL King.

Maybe we could talk about the bike business, I guess related to the fourth quarter. It's obvious you guys are expecting some growth in that segment in 4Q. Maybe just talk about how much of it is a possible improvement of the inventory situation industry wide, whether it's affecting you directly or not and maybe just talk about with the reversal I guess or resumption of sales after the issue, the typhoon, maybe talk about that as well.

Well, yes first of all, I'll take the last part first. The typhoon caused us to have to shut our operation down for a couple days. It was obviously the last week of the quarter; that is not helpful to results but that's something we got over pretty quickly in terms of shipments to our customers so I wouldn't attach necessarily a lot of longer-term import to that event at all. It was short-term right at the end of the quarter.

I think when you look at Q4 and what I would say is we like the way our order book looks in bike right now. That's clearly a result of on the OEM side of those customers being somewhat confident at this point in how they're selling through so we think that probably is a reflection of how they see channel inventory, good news.

Again, I think we try to look at both our own performance against that industry backdrop if -- I don't -- I try not to get too frightened when I read scary things. But we believe we're holding up just fine in this environment. We do think that based on things that we read and they're the same things that you can read, that the bike industry is probably in a better position now overall from an inventory standpoint than they had been earlier this year and so we hope obviously that bodes well clearly for the fourth quarter and into next year.

Got you and as far as the Raptor, the recent announcement by Ford for production cuts, notably on their F-150 pickup truck line, is that having any impact whatsoever on what you thought you would be getting as far as orders or is -- should the Raptor just be thought of a different bird altogether than the stock F-150?

Well, I can't, obviously can't comment on anything that Ford is announcing in particular. I think what I can tell you is the Raptor has proceeded on the plan that was laid out and at this point I don't see any deviation to what we've been told.

Got it and just the last question, Zvi, on the gross margin, you indicated that there would be a firming up I guess or year-over-year expansion if I heard you correctly. Could you -- is that volume related or is there any other thing going on like a notice of any synergies or product mix or is there anything else going on?

Well, we've had a number of operational efficiency initiatives over the last few years that have been very successful for us and you're going to -- we've had neg -- from a gross margin point of view, negative customer channel and product mix that affected us in Q3 and is affecting us in Q4 as well. Even despite that the efficiencies will more than offset what we expect to see in Q4 so our expectation is that you're going to see gross margin percentage improve because of the various efficiency initiatives we've got ongoing.

What I would also say, Scott, back on the Raptor is anecdotally and this is anecdotal we hear that the end market reception for the vehicle is pretty good.

We're hearing the same thing on our end too but just wanted to double check. Thanks for taking my questions, guys. That's all I have.

Trevor Young, Jefferies.

Thanks for taking my questions. Could you maybe comment on how the Rhythm fork line as well as the new transfer posts are performing versus your original outlook?

Okay, hey this is Mario, so I would say they're performing on track and that's what gives us some, a little bit of confidence going into model year 2018 and kind of the pickup that we alluded to including expanding the product offerings within what we call Rhythm.

Okay great and then as it relates to Marzocchi, I think you had commented that that may be at an even lower price point than Rhythm. Could you give us any color as to how large of a unit TAM that could be and what the margin profile might look like given that it is a lower price point offering?

So it is a little bit lower than the Rhythm product branded Fox but we're not really commenting at this time about TAM. It's within -- when we've spoken in the past about the addressable unit pickup that we could -- that we can get by going into a lower price point end bike price point, Marzocchi is still in that thesis.

If I could just add one thing, when we purchased Marzocchi's assets we indicated it was a couple million dollars in sales and this was kind of a multi-year thing. We don't expect meaningful contributions from Marzocchi for a while.

Okay great, that's helpful. And then last one for me, have you guys been negatively impacted at all by some of the ongoing recalls at one of the larger power sports OEMs or is that kind of being picked up by some of the new offerings at their competitors?

Again, we don't comment on any specific customer. Clearly there have been issues in the industry. On balance what you see in our guidance encompasses all of that activity both from customers that may have recall issues or customers gaining and losing share. All of that is encompassed.

Okay great. Thanks so much, guys.

Thank you. At this time I would like to turn the call back over to Mr. Larry Enterline for closing comments.

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 these results. I would also like to express my gratitude to our customers and suppliers for their continued support. Together we will continue to pursue Fox's future growth opportunities. We look forward to speaking with you again on our fourth quarter and full-year earnings call. Have a good day.

Thank you. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.