Fox Factory Holding Corp (FOXF) 2017 Q1 法說會逐字稿

Greetings, and welcome to Fox Factory Holding Corp. First Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, David Haugen. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Fox Factory's First Quarter Fiscal 2017 Earnings Conference Call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, Executive Vice President and Chief Technology Officer; and Zvi Glasman, Chief Financial Officer and Treasurer.

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 gross margin, non-GAAP operating expenses, 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 first quarter 2017 business and financial highlights. Mario will then provide an update on our business. Zvi will review the first quarter financials in greater detail as well as discuss our guidance. After that, we'll open the call for your questions.

We achieved sales and profitability above our expectations in the first quarter of fiscal 2017, driven by solid momentum across both our bike and powered vehicle product offerings. Sales of bike products were up 16% and powered vehicle products were up 54%. We are pleased with the results of our new bike product introductions and favorable model year spec placements with OEMs.

In addition, for powered vehicles, we experienced continued high demand for on- and off-road suspension products, including increased OEM sales. This strong start to the year fueled our $106.3 million in sales, an increase of 33% compared to Q1 of last year. Our product innovation has helped drive the success of product lineups across bike and powered vehicles. We continue to believe the diversification of our product offerings and end markets have helped to consistently set us apart in the industry and continue to position us well for future growth.

During the first quarter, we had continued success with our brand-building efforts for bike products, around key product launches, and we further strengthened dealer relationships. In bike, we had strong demand, and additionally, we benefited from some clearing of inventory in certain sales channels.

On the powered vehicle side, in addition to strong demand, there was some increase in distributor inventory levels to support the demand of our products in key categories across certain aftermarket geographies.

The 2017 Ford Raptor and the 2017 Toyota Tacoma TRD Pro programs continued to do well, and we believe they've been well received by consumers. During the quarter, we had solid execution across our business, which allowed us to generate non-GAAP adjusted earnings per diluted share of $0.35 for Q1, above our guidance of $0.24 to $0.28. As a result of our strong start to the year, we are raising our guidance for fiscal 2017, which Zvi will discuss in more detail.

Our differentiated market position and diverse end markets help drive momentum, and we believe these attributes will give us the ability to continue to deliver our long-term growth targets. Going forward, we remain 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.

In summary, we started 2017 off with positive momentum and solid operational execution, allowing us to achieve better-than-expected financial results. Going forward, we believe FOX is well positioned to generate future growth and enhance shareholder value.

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

Thank you, Larry, and good afternoon, everyone. During my remarks, I'll discuss some of our recent business highlights. I'll begin with our bike business.

Our brand building efforts continue with the successful launch of our model year 2018 products at the Sea Otter Classic in Monterey, California, held April 20 to 23. The festival is a time for us to walk dealers, consumers and the media through our new product line. As a result, our initial U.S. dealer orders are coming in strong, with very positive consumer and media reactions.

Our updated trail, all mountain and enduro race fork platform, the Factory Series 36 float, had already been in the media's hands for testing, leading up to the Sea Otter, but under an embargo. The embargo was lifted just ahead of the event and has received very favorable initial reactions by such publications as Pinkbike.

We also launched complimentary FOX and Eastern products aimed at the emerging drop bar adventure and gravel segment at the Sea Otter Classic. The new products include a 40-millimeter travel suspension fork and a wheel-set with the durability to withstand the demands of the trail. These products expand the East and Ax lineup and is a first for us in suspension for this category. The initial feedback has been positive, and we expect long-term reviews to continue with that enthusiasm.

The 2017 bike race season is underway, and to date, FOX supported athletes have won 9 cross-country events, 2 enduro events and 15 downhill events worldwide.

Now I'll move on to our powered vehicle business. We had our first solo corporate presence at an on-road motor event during Bike Week in Daytona, March 10 through 19th. At the event, we offered apparel and shocks for sales, with complimentary installations and setups on site, along with product education. We experienced a high volume of booth traffic from attendees who are very familiar with FOX, because they either own or have our products on other vehicles or grew up during the time that Bob launched the original FOX air shocks.

During follow-up with the customers who bought shocks at the event, we experienced very positive customer satisfaction. One customer thanked us for the shocks and had this to say: "I'm trying to hit every pothole and railroad track I can find and I can't believe how good the ride is, it's a whole new bike."

We also launched our new Rusty Butcher signature series shocks at the tracker cross event in Riverside, California that occurred April 28 through April 30. Thereinafter market factory rate series podium QS3-R for the Harley-Davidson Sportster that offer 3 wide-range compression settings, along with rebound adjustment.

I'll conclude with a few of our recent race results in the powered vehicle segments. At the 2017 Mint 400, Rob MacCachren won the overall for the first time, with our Off-Road Race Manager, Wayne Israelsen, codriving. Also at the Mint 400, Jay Leno won the 7300 class in a Camburg Tacoma TRD Pro. Dodge Poelman won the UTV naturally aspirated class and FOX drivers took the top 6 spots in 1000 class.

16-year-old, Eliott Watson, swept the opening round of the Lucas Oil Off-road Racing Series in his FOX-branded #3 Pro Buggy in Chandler, Arizona. Brett Hearn earned his 24th DIRTcar National win and 8th DIRTcar National title. Nick Hoffman won 5 Gator features and claimed his second consecutive, third career, Gator National Championship.

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 first quarter results, and then review our guidance. As Larry stated earlier, sales in the first quarter of 2017 were $106.3 million, an increase of 32.6% versus sales of $80.2 million in the first quarter of 2016. Gross margin was 31.7% for the first quarter of 2017, a 40-basis-point increase from 31.3% in the prior year period. The improvement in gross margin was primarily due to manufacturing efficiencies. Excluding acquisition-related costs, non-GAAP gross margins for the first quarter of 2017 expanded 30 basis points as compared to the prior year.

Total operating expenses were $21.3 million, or 20% of sales in the first quarter of 2017, compared to $19.4 million or 24.3% of sales in the first quarter last year. The increase in operating expense is primarily a result of additional investments to support the growth in the business, and approximately $900,000 of expense associated with our previously disclosed ongoing patent litigation activities. Non-GAAP operating expenses stated as a percentage of sales, were 16.9% versus 20.3% in Q1 of last year.

Focusing on expenses in more detail. Both our sales and marketing and research and development expenses were relatively unchanged versus prior year in terms of dollars. Spending was lower, stated as a percentage of sales, due in part to a shift in timing of approximately $1 million in investments, which moved from Q1 to later in the year.

As we've previously stated, the timing of R&D and promotional expenses often changes between quarters and years, depending on a number of factors, including product launch cycles, and we expect to continue to run at levels consistent with our fiscal year 2016 rate, stated as a percentage of sales for the full 2017 fiscal year.

Our general and administrative expenses in the first quarter of 2017 were $8 million -- $8.1 million compared to $5.9 million in the prior year period. The increase was primarily due to the additional legal expenses I mentioned earlier, higher payroll and related expenses due to investments and personnel required to support our growth and meet our needs to comply with the Sarbanes-Oxley Act as we expect to exit emerging growth company status in 2017 as well as $500,000 of stock-based compensation.

In the first quarter of 2017, our tax rate was approximately 6.7% compared to 26% in the last year's first quarter. The improvement in the effective tax rate was primarily due to the impact of excess benefits from the exercise of stock options.

Excluding the benefit of the option exercises, the first quarter of 2017 effective tax rate was 28.2%. While we believe such benefits will be recurring in nature, that timing of option exercises is not in our control and is difficult to predict.

Adjusted EBITDA was $19.3 million for the first quarter of 2017 compared to $11.5 million in the same quarter last year. Adjusted EBITDA margin was 18.1% compared to 14.3% in the prior year period.

On a GAAP basis, net income in the first quarter 2017 was $10.5 million compared to $3.3 million in the prior year period. Earnings per diluted share for the first quarter of 2017 were $0.27 compared to $0.09 in Q1 of 2016. Non-GAAP adjusted net income was $13.6 million, an increase of $7.6 million as compared to $6 million in the first quarter of the prior year period.

Non-GAAP adjusted earnings per diluted share for the first quarter of 2017 was $0.35 compared to $0.16 in the first quarter of 2016. We believe non-GAAP adjusted net income, adjusted EBITDA, are useful metrics that better reflect 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 press release issued today.

Now focusing on our balance sheet. As of March 31, 2017, we have cash-on-hand of $43 million. Total debt outstanding was $65.8 million compared to $66.7 million of debt outstanding as of December 31, 2016. Inventory was $79.5 million as of March 31, 2017 compared to $71.2 million as of December 31, 2016. Accounts receivable was $50.4 million as of March 31, 2017 as compared to $61.6 million as of December 31, 2016. Accounts payable was $40.7 million as of March 31, 2017 as compared to $36.2 million as of December 31, 2016.

The changes in accounts receivable, inventory and accounts payable are primarily attributable to business growth and the company's normal seasonality. Accrued expenses decreased to $24.8 million as of March 31, 2017, from $34.4 million as of December 30, 2016, primarily due to the final scheduled earn-out payment related to one of the company's 2014 acquisitions.

Turning to our outlook. For the second quarter of 2017, we expect sales in the range of $113 million to $119 million and non-GAAP adjusted earnings per diluted share in the range of $0.32 to $0.38. For fiscal 2017, we are raising our previous guidance and now expect sales in the range of $435 million to $455 million and non-GAAP adjusted earnings per diluted share in the range of $1.36 to $1.46.

Additionally, as we indicated in the last quarter, the growth of our powered vehicle business and the transition of our bike manufacturing to Taiwan have changed our expected 2017 business seasonality. As a result, we expect sales to be more evenly spread across Q2, Q3 and Q4, with both Q2 and Q3 sales slightly higher than Q4. We expect -- we'll continue to expect non-GAAP operating expenses to remain at levels relatively consistent with 2016 stated as a percentage of sales.

We believe that our tax rate will be at the low end of our previously stated guidance of 18% to 20%. I'd also like to note that we are not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts because the difficulty of accurately predicting the elements necessary to provide such guidance and reconciliation.

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 adjustments, acquisition-related compensation expense, including related foreign currency transaction, gains or losses, certain acquisition-related adjustment and operating expenses. These adjustments are more fully described in the tables included in our press release, which has 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?

(Operator Instructions) Our first question comes from Mike Swartz with SunTrust.

Could -- Larry, I think you had mentioned something, in the preamble, just about the aftermarket side of the business in powered vehicles seeing some inventory build going on, some of the -- some of your channels or partners. Could you talk about what's driving that? Is it something structural that's changing in terms of market share? Or is there something more timing, seasonal behind that?

No. I tell you, Mike, what we think it was mainly in the quarter was to some parts of the oil patch. You have distribution. After a couple of years of really letting things wind down, they actually started ordering again, and I think that's a good sign, probably relating to a belief that oil prices are -- maybe more stable than they have been seen.

Well, that's good news. And then Zvi, talking about the operating leverage in the quarter, I think you said -- was it $1 million in marketing or R&D shifted out in the quarter? I mean if that's the case, it was still pretty strong operating leverage, so you're reaffirming your operating margin guidance, even given that improvement in the quarter?

Yes, we're reaffirming that our operating expenses stated as a percentage of sales for the full year should be more like the 17% they ran last year. And as we've indicated on previous press releases, there's often shifts in timing of R&D in sales and marketing expenses for a number of different factors. And this year, just because of the magnitude of it, we thought it was worth calling out, specifically, the amount of the shift.

Our next question comes from Larry Solow with CJS Securities.

Just a quick follow-up, and then a couple of other questions. On the inventory build, on the oil patch distribution, I guess, that would be on the utility side on the market. So I thought most of your sales there were recreation, so I guess I'm mistaken? Or is there sort of...

Yes. Larry, this was primarily on our off-road capable, on-road vehicle stuff. That's lift kits, that's shocks, things like that going into the aftermarket.

Got it. Okay. Somewhere on the accessory side. Got you. Okay. And it sounds like, just doing the math, just to clarify, it looks like you beat your midpoint or whatever by $8 million, $9 million, and you've raised guidance by about $5 million? So it's fair to say there was about a $3 million or so inventory build, plus or minus?

Yes, plus or minus that math would be correct.

Got you. So it sounds like that was mostly on the powered vehicle side. On the bike side, a pretty good quarter. I know you mentioned that was mostly inventory clear outs. I guess, basically, you had some good follow through at the end of the '17 selling season, right?

Yes.

Okay. And I think you had mentioned, on the last call, you sort of thought or growth on bikes might be sort of at the lower end or at least that's how I interpret it. The lower end of sort of historical growth ranges? Do you -- is that sort of still in your expectations? Or has the industry headwinds changed at all in the last few months?

We believe that the bike growth rate this year, after having seen the strong beginning of the year and the reception of our products, will be more in line with its long-term growth targets for 2017. Obviously, if you do the math and backed that out, you can see that the powered vehicle side of the business will be in excess of our normal long-term growth rates for 2017.

Yes. I would say, Larry, the way to think about that few million we had of sort of inventory build, a part of that was in bike, just in certain areas. It's not huge, but that's a good sign. And we would comment that we probably feel a little bit better about the bike industry overall, based on some of the recent industry announcements. Then, certainly, it was looking like a couple of quarters ago.

Got it. Great. And just, lastly, just any update on the expansion of El Cajon? Is that still, I guess, somewhat of a drag on performance?

No, I would tell you, it's not a drag now. I mean we kind of at run rate now for the off-road OEM business that we have with Ford and Toyota, and so I'd tell you it's probably more like steady state right now.

Our next question comes from Andrew Burns with D.A. Davidson.

I was hoping you could spend a little more time on Sport Truck. I think it was running at around $34 million in revenue back in 2013. It's clearly grown very nicely since then. Could you talk about the growth you're seeing there, both in FOX products as well as their sub-brands? And given how important the on-road aftermarket opportunity is for you, are there areas of investment you can make that further elevate growth there?

Well maybe I can start with the financials and hand it off to Larry. So when we bought them, they were at the number you referenced. They have consistently demonstrated good reliable growth in line with our overall powered vehicle's growth targets. We're not going to break out the actual sales that they contributed, but they continue to be an important part of the business. And there -- as you noted, there is a lot of collaboration technologically speaking and market -- on a marketing basis versus what I would call a legacy FOX Business.

Yes, I would also point out, Andrew, that Sport Truck with lift brands are very important distributor of a lot of FOX shocks. So there's great synergy there as they pull those shocks through. And we don't spend a tremendous amount of time trying to separate that, right? That's all part of that same aftermarket business where we're satisfying a very passionate customer with a full suite of products in that area.

Great. And just a quick one, any comments on the small recall that was recently announced relating to the Harley aftermarket thin-loop materials? Any incremental thoughts, additional to the press release?

Yes. So this is Mario. We'll be providing a more detailed account of where we're at. We've got an investigation going on. And at this point, we can't really say much more than...

Yes, other than what was in their word, it obviously, is a very small population. We'll be coming out with another announcement here in the next little bit on the details of the recall for our consumers. Clearly, not something we like to have happen. It does happen in this business from time to time, not a huge issue fortunately for the company. But as we do with all these things, we have a postmortem afterwards, and because we don't really want to repeat them.

Our next question comes from Craig Kennison with Baird.

The first one, just how would you characterize retail trends in mountain bikes and in the power sports markets, excluding kind of Raptor and Tacoma?

Well, Craig, we think aftermarket activity and bike kind of is the canary in the coal mine for how the rest of the OE business is going to flow out. And there was good attendance at Sea Otter, lots of enthusiasm. Our product line was received well. And we see a pretty vibrant aftermarket, and we expect that to flow through with complete bicycles as well. I think inventory is in pretty good shape and are ready to accept in our segments. I think we're in pretty good shape inventory-wise, ready to accept all the exciting new models. And on a powered vehicle standpoint, I think you said outside of Raptor and Tacoma, it really depends on the brand. We see some challenging pockets, and we also see some things selling through quite nicely, and we can't really comment on a customer to customer basis, but we would tell you that it probably depends on the brand and the model, but things are selling.

Your performance in mountain bikes confirms, I guess, what you've been saying all along, which is that, that premium segment of the category is performing very well. What do you think it is about that premium segment that makes it immune to some of the other issues that have plagued other bike categories?

Yes, I would, first of all, say, Craig, I don't think it's immune, I would say resistant. Clearly, it's going to be -- our segment is going to be subject to sort of macroeconomic swings. But I would tell you, I think that the folks that are buying those bikes are very passionate consumers, tends to be their activity of choice. I mean, that's what -- this is what they do. And in many cases, it's who they are. And so I do think they continue to spend maybe through a down cycle, when other consumers may be pulled back a little bit. I think the other thing that helps us as we have a strong market share, and we would view, frankly, any weakness in the market as a chance take more share.

Is there any early evidence with launch of FLOAT that you'll see a better upgrade cycle as people look to capture that pretty exciting technology?

Well, I think that's one of the other things in our segment. We like to believe that we lead with innovation, but I think in these price points, where the industry is giving that enthusiast a reason to go out and keep buying a bike every year or 2. In our case, aftermarket cycles with the float that you referenced. So yes, I think we're excited about that doing well and providing a halo for the other products that we have and that we focus on in the aftermarket.

Final question, just Zvi, on the Q2 tax rate, did you mention what you thought that might be?

No. What we said is, we had given 18% to 20% guidance for the entirety of the year. And so, we -- I'd now just indicated that it's more like the lower end of that 18% to 20%. The -- to remind you that quarter that tends to be the outlier is Q3. That's the quarter where we have the FIN 48 reversal. But even though I haven't given guidance on this yet, I'll tell you that Q3 is expected to be in that 18% to 20% range as well, and again, on the low end of that.

Our next question comes from Jon Andersen with William Blair.

I wanted to ask about the category, the Raptor slash kind of Tacoma segment, which obviously, is helping drive the powered vehicle segment at the moment. Are you seeing more potential in that category? And I'm thinking opportunities with other OEMs given the success of the Ford and the Tacoma products so far?

Well, we -- we've obviously been believers in that category for a number of years. We think -- and certainly, we believe and hope there are more entrants in the future. As to when, I don't know, but you took -- it took a long time to get the second win in there, so we'll just have to see, but we think it's based -- and I think the proof of it is how these vehicles are selling through. It appears to be going very well, and we're hoping that stimulates more interest in the category. And obviously, we would not mind if more OEMs get involved.

And how does the -- as you think about the trajectory of that business, just with Ford and Toyota, maybe we stick with those, I think Zvi, you might have mentioned that, you feel like you're kind of at run rate levels now, but do production volumes continue to ramp on a -- not maybe -- on a year -- on a year-over-year basis as you look out over the next couple of years, I mean, if the vehicles are selling well, and the macro background cooperates, is there an ongoing production ramp that's possible here that allows those OEMs to represent a bigger portion of your business 2 years from now than it sits here today?

Jon, we can't, obviously, comment on what any specific customer is doing. I would point out a couple of things. I think both of these vehicles are designed to be relatively in the grand scheme of automotive, relatively smaller run vehicles. What they might do in the future, I don't think we can comment on. We're just very pleased by the fact that they're showing a lot of success in their markets.

Okay. Fair enough. On the execution side, you talked about manufacturing efficiencies being the principal driver of gross margin improvement in the quarter. Can you talk a little bit, give a status update on where you are, big picture-wise, in terms of the supply chain optimization effort and the Watsonville and El Cajon facilities, I guess, specifically at this point?

Look, it's been a multiyear exercise. We've been pleased with the progress we've made over the years in improving our efficiencies. And it -- we view it as an ongoing continuing improvement effort. And we're pleased, while we've got some good margin improvements, we'll tell you -- we'll caution you guys that it's not always linear, but we feel confident that over the next few years, it will continue to get more efficient and have increased profitabilities as a result of that.

Okay. Last one for me is, balance sheet and a very solid shape here from a leverage perspective. You've talked about, obviously, growing with your existing customer base and categories, but also expansion into adjacencies. To what extent, at this point, do you think the application of cash for acquisitions -- is this something that's front burner in terms of your consideration set? Is it back burner? If you could just talk a little bit about the pipeline, and how you're thinking about the need or the desire to do M&A going forward?

As we have said, since we've gone public, we're not going to do a deal just for tonnage, right? We'd like to get an acquisition that would meet our strategic and financial requirements. It is not -- it is a frothy market out there, and we're going to continue to be disciplined. So if there's a good deal to be had, willing dance partner at the right financial price that has a good fit for FOX, we would be interested. And that is why we're preserving our balance sheet liquidity right now. If -- we clearly have enough opportunity to leverage up the balance sheet over the 0.9 that we're running right now on a TTM EBITDA basis. But we're going to be patient and keep our eyes open.

Our next question comes from Rafe Jadrosich with Bank of America.

Guys, it's Rafe. Larry, I just want to clarify on your earlier comments. On the bike side, did you say that there was some inventory clearance that drove upside there? Can you just clarify that?

Yes. I mean I think it's part of that few million that Zvi talked about, it's not certainly major, but I think we felt a little bit better, and that we saw some parts of the channel putting some inventory in.

And then, as you think about sort of lapping the strong or the return of the Raptor program, how do we think about that next year in the anniversary of it? Is there sort of pent-up demand that is pulling sales forward, that will make it difficult to anniversary? Or should we just expect the kind of steady ramp going forward?

Look, I think we would not tell you that there is any pent-up -- we don't think, given our previous experience with a vehicle, that there's "pent-up" demand that is driving the revenue rate this year above next year. In terms of what kind of growth we can get next year, that depends on a couple of factors. So far as everybody, based on all the media reports out there and everything we can see anecdotally, demand has been good. The vehicle is very well received. So it's a question of: a, will demand continue to exist? No reason to believe that's not the case; and b, our customer strategies about how many of these they want to make available. And so I couldn't comment about growth next year, but I wouldn't expect that the revenue rate would decline next year.

Yes, I would also keep in mind, Rafe, one of the things that we think is a major advantage is, when you look at having the lapped Raptor sales, it's not just Raptor that helps us do that. We have this diverse set of products, diverse applications, diverse end markets that combine to give us a growth rate. So we don't necessarily focus on -- we're very happy to have Raptor beyond that vehicle, but we've got many, many other growth drivers to help us when we do make that lap.

And having said that, we have said from time to time that growth will bounce around our long-term targets because of things such as the Raptor and the introduction thereof. Over the long-term, we feel confident with the double-digit growth rate. So if this year's higher, don't expect the same rate this year, necessarily next year.

Yes, I wouldn't -- I think what Zvi is trying to say, Rafe, is don't take that 54% in Q1 and make it linear.

All right. That's really helpful. And then, just on -- Zvi, the Tony's dollar has strengthened quite a bit here. Can you just remind us how that, given you have a lot of sourcing over there, can you just remind us how that flows to the P&L? And then, what sort of hedging you have set up for that? That would be helpful.

Yes, so 2 things. First of all, in terms of, there was about $0.5 million of FX loss in the quarter, similar to what it was last year. That reflects the change in the NT from the year end, and the net balance sheet exposure we have in Taiwan. So the only hedging we do is kind of a natural hedge when we can, where we try to sink up their assets and their liabilities in such a way so as not to have assets denominated in such a way. Where possible, that would retranslate the balance sheet and flow through the P&L. We don't do any hedging -- any other direct hedging, but we have a natural hedge and that a lot of our costs are in Taiwan and our revenues are in Taiwan, but we go through a pricing exercise with our customers at the beginning of the year. When we do that, we look at the exchange rates. That's one of the factors we look at. And so it's not necessarily a change versus last year. It's a change versus what we priced with our customers at the beginning of the year. And there has been a little bit of that since we've done it.

(Operator Instructions) Your next question comes from Scott Stember with CL King & Associates.

Can you, maybe, talk about, for the 2018 products, you talked about possibly adding some new product in the lower price segment for forks. Maybe talk about how that's been received? And maybe, also, talk about Marzocchi where we stand. It's been about a year, I guess, since you acquired them. Maybe just talk about how things are coming along on that front?

Sure. So, as you know, in model year '17, we came out with a product we called the 34 Rhythm. That was well received, and we are happy how that performed throughout that model year. We've added to that, and we said we would be rounding out that rhythm family, which would do in model year '18 in a 32-platform, which historically has been a little bit higher volume for us than the 34. That's been received well. We're excited about it. And we positioned the Marzocchi brand going forward to come in at just under where we are with the rhythm. So we keep expanding into a little bit lower price points, still within the premium mountain bike.

Okay. Maybe talk about, also, about this new sand suspension you talked about on the Easton brand? Maybe talk about how that all fits in, and just the general reception to it, and the potential there?

Yes. So that's called a gravel bike. So it's a road-based bike, with a little bit larger, more comfortable cross-section tires. In this case, a FOX suspension fork, new set of wheels that Easton's introducing, along with some stems and handlebars. And so it's a more comfortable road bike with some more durable components on it that you can take it on sort of dirt rails, to trails, and fire roads, and things like that. So it's a category that's emerging. And we're kind of right on the leading edge of that trend.

Is this your first product in that segment?

Yes. The fork that we launched at Sea Otter is our first product. For Easton, it's an expansion of their product line in that area.

Okay. Good. And one last question. You've talked about white spaces, and other areas to possibly grow into. Maybe just give an update on some of the new markets that you could be looking at? High-level if you could, just give us an idea where we stand there?

I would say we've got interest in a few. I think the ones that are probably closer in, where we actually have product in test now on vehicles, I mean on-road testing or commercial trucks and recreational vehicles. Still early. I mean, we're -- again, we've got those levers. We're kind of pacing those things to the other activity that we're involved in, which, as you could guess, is considerable.

There are no further questions. I would like to turn the floor back over to management for closing comments.

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.

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