Fox Factory Holding Corp (FOXF) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Fox Factory Holding Corp. Third Quarter 2018 Earnings Conference 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, General Counsel.

Thank you. Good afternoon, and welcome to Fox Factory's Third Quarter Fiscal 2018 Earnings Conference Call. On the call today are Larry Enterline, Chief Executive Officer; Mike Dennison, President, Powered Vehicles Group; Chris Tutton, President, Specialty Sports Group; 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 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 income tax, 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 that we believe are useful metrics that better reflect the performance of our business on an ongoing basis. 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. We appreciate you joining us on today's call.

As David mentioned, on the call today, along with Zvi and I, we have Mike Dennison, our Power Vehicles Group President; and Chris Tutton, our Specialty Sports Group President. The Powered Vehicles Group includes our legacy FOX Powered Vehicles business, Sport Truck and Tuscany. The Specialty Sports Group is comprised of our legacy FOX bike business, RaceFace, Easton and the Marzocchi brand. We are excited to have both of them join our earnings call to share a little bit more about each business group and the results.

But first, I would like to mention that Mario Galasso who's been on our earnings call since we went public is pursuing a new opportunity outside of FOX in vehicle accessories, and we look forward to having a consulting relationship with Mario and his new venture. Mario has been a key member of our team for 15 years. And on behalf of management and the board, I'd like to thank him for his hard work and dedication to FOX during his tenure.

Now to review our quarterly results. To start, I will discuss our third quarter 2018 business and financial highlights. Mike and Chris will then provide a more detailed update on their respective businesses and brand development. Zvi will then review the third quarter financials and discuss our guidance. After that, we will open the call for your questions.

Our team helped to deliver record quarterly sales, earnings and adjusted EBITDA. We continue to experience broad-based strength across both our Powered Vehicles Group and our Specialty Sports Group offerings. The underlying fundamentals of our business and end markets remain strong. FOX's differentiated market position continues to fuel our growth in new and existing categories. We generated record third quarter sales of $175.8 million, an increase of 38% compared to last year; record non-GAAP adjusted earnings per diluted share of $0.72; and record adjusted EBITDA of $39.3 million. We appreciate the strong and consistent efforts from our dedicated team in helping us achieve these results. The passion for the FOX brand starts with our employees and resonates with our customer base and our athletes, reinforcing the value of our brand across our diverse end markets. We believe FOX remains well positioned for future growth. Based on our strong operational and financial results as well as our outlook for the remainder of the year, we are raising our annual guidance.

Additionally, in light of our current and future growth outlook, we are opportunistically making investments to expand our manufacturing capacity primarily in our U.S. operations. Today, we announced that FOX has agreed to purchase a 23-acre site in Hall County, Georgia, to diversify our manufacturing platform while providing additional long-term capacity growth for our Powered Vehicles Group.

We will also relocate our FOX corporate headquarters from Scotts Valley, California, to our existing offices in Georgia. Additionally, we are relocating our Specialty Sports Group's U.S. aftermarket product distribution, sales and service operations from Watsonville and Scotts Valley California to Reno, Nevada, to better serve our customers. The decision to expand our Powered Vehicles Group's manufacturing and operations, relocate our headquarters and move our Specialty Sports Group's aftermarket sales, service and distribution operations was the result of extensive research by our leadership team.

Our expansion plans will better support the needs of FOX's growing business over the next several years. Zvi will provide more detail on the financial implications of the expansion and our guidance later in the call.

I also want to provide an update on our perspective regarding tariffs. As I've consistently mentioned on our earnings calls this year, we continue to believe that the direct and indirect impact from tariffs and input cost increases are contained in our guidance. However, we continue to monitor and evaluate the possibility of escalating trade tensions, which could have an adverse effect on our business in the future.

In summary, we experienced excellent third quarter and year-to-date financial results, and we remain optimistic about our prospects for the end of 2018. And with that, I'll turn the call over to Mike.

Thank you, Larry, and good afternoon, everyone. During my remarks today, I'll touch on a few of our recent Powered Vehicle Group business highlights.

In our third quarter, sales of powered vehicles products were up 56.6%. Our record sales were driven by high growth in side-by-side vehicles, aftermarket truck categories and our off-road capable, on-road suspension products for OEMs, along with the addition of Tuscany's aftermarket up-fitted, off-road and on-road truck offerings.

The FOX team continues to create opportunities and execute on synergies within the Powered Vehicle Group to collectively develop and bring to market compelling product innovations.

Industry dynamics continues to favor our premium product categories. And we believe the breadth of offerings across our various segments, along with consumer preference for high performance, more capable vehicles, will continue to fuel our long-term growth.

In September, we soft-launched our new aftermarket FOX Racing 3-inch Internal Bypass suspension for the Jeep Wrangler JL. Initial reactions were very positive, and we're excited to bring this kit to market. It takes our off-road capable, on-road aftermarket suspension for the Jeep Wrangler JL to the next level.

This month, we also launched our long-haul suspension for semi-tractors at the California Trucking Show, and we were pleased with the amount of interest shown. We're excited about this new product category and its potential to redefine performance, comfort, safety as well as the lower maintenance cost for independent semi-tractor drivers and commercial fleet companies.

Currently our FOX, Tuscany and Sport Truck sales and marketing teams are all at the SEMA Show at the Las Vegas, highlighting our breadth of aftermarket product offerings. The show started yesterday and runs through November 2. The teams are working together on brand activation activities, busy meeting the current and potential customers and introducing our latest product offerings.

I'll now share a few of the recent race results in our powered vehicle segments. Our Circle Track program continues to deliver solid results, with 4 wins in 6 races at Super DIRT Week, bringing the count to over 700 wins for the year thus far. At Best in the Desert, Vegas to Reno race in August, Johnny Angal earned his first overall truck class win, splitting driving duties with Jesse Jones.

In the UTV Class, Phil Blurton emerged victorious as FOX-equipped Can-Am Maverick. And lastly, we're excited about the potential of the newest performance trends with all-wheel-drive trucks emerging in desert racing that we believe will push the sport to the next level.

At the Best in the Desert Laughlin Desert Classic this month, Christian Sourapas took the win in an all-wheel-drive truck suspended by Fox Shox. After 2 hours of racing over 2 days, Rob has dominated the field consisting mainly of 2-wheel-drive trucks, getting nearly 30 seconds per lap with an overall time 4 minutes faster than second place.

Our ongoing race efforts and FOX's world-class athletes enable our continuous innovation and product development, which drives our best-in-class performance-defining products and increases excitement for our brand. We look forward to a bright future of our race program, which since the beginning has been an integral part of our culture and our success.

With that, I'd like to turn the call over to Chris.

Thank you, Mike. Good afternoon, everyone. During my remarks today, I'll touch on a few of our recent Specialty Sports Group business highlights.

In the third quarter, sales of bike products were up 21.1%, as our Specialty Sports Group business delivered record performance for the period. Our model year 2019 product lineup continues to be well received by our customers, as demonstrated by strength in our OEM and aftermarket sales channels.

The team continues to exceed expectations across the Specialty Sports Group brands to collectively develop and bring to market compelling synergistic product innovations as well as demonstrated by our third -- strong third quarter sales. Additionally, we continue to see progress penetrating the next level price down in the premium mountain bike suspension segment with our expanded Rhythm series and Marzocchi product lines.

In August, we held the media cap to formally launch a semi-active electronic mountain bike suspension system called Live Valve. The system automatically adjusts the fork and shock independently virtually instantaneously as the train changes by using inputs from the sensors that run through an algorithm or process through the controlling valve. This is the same technology we've applied in our side-by-side and the off-road capable on-road truck segments. Richard Cunningham of Pinkbike had this to say about it, "The bottom line is that Live Valve represents the most useful and important suspension innovation to emerge in a decade of boring improvements. It works great, and I don't want to ride without it." Christoph Bayer at ENDURO Mountainbike Magazine had this to say, "Unlike an electric drivetrain, the FOX Live Valve system offers a real advantage and takes mountain biking efficiency to a new level. It made the Rocky Mountain Altitude an even better all-rounder. That, thanks to the system, climbed even more efficiently without sacrificing downhill performance."

In September, our sales team was in Taiwan for Taichung Bike Week. While there, they were busy meeting with our OEM customers and offering a full bicycle product line offerings across the entire Specialty Sports Group brand of portfolios. Initial reactions were positive, and we believe we're well positioned for the model year 2020 step season. Our brand-building efforts continue to strengthen our position in the marketplace, resulting in favorable media reviews, reader survey awards and enhanced customer relationships. We recently received these product accolades in the 2018 Vital MTB reader survey for a FOX and RaceFace brands. FOX brand and products were voted as the #1 dropper post to buy, #1 fork to buy and the #1 rear shock to buy.

And the RaceFace branded products were awarded as the #1 crankset to buy and the #1 chain ring to buy.

As Mike mentioned in the results, our sponsored athletes continue to spur product integrations and excitement for our brand. We'll continue to build upon the success of our race program with the -- since the beginning and has been an integral part of our R&D strategy. I'll conclude by sharing a few of our recent race results in the bike segment.

Martin Maes made history by winning the Enduro World Series at Crankworx and then taking the World Cup Downhill at La Bresse. Rachel Atherton earned her fifth World Championship gold medal in 10 years. Richie Rude totally dominated the last round of the World Series by winning all 4 stages. The Rocky Mountain Race Face Enduro World Series Team finished the season as the top team at the final 2 rounds of the series. Brett Rheeder won the Crankworx Slopestyle World Tour, making his second World Tour win. Rheeder also took the top place at this year's Red Bull Rampage.

I would now like to turn the call over to Zvi to review the financial results.

Thank you, Chris. Good afternoon, everyone. I'll focus on our third quarter results, then review our guidance.

Sales in the third quarter of 2018 were a record $175.8 million, an increase of 38% versus sales of $127.4 million in the third quarter of 2017.

Gross margin was 34.4% in the third quarter of 2018, a 100 basis point increase from 33.4% in the prior year period. The improvement in gross margin was primarily due to operating leverage on increased volumes and improved manufacturing efficiencies.

Total operating expenses were $29.1 million or 16.6% of sales in the third quarter of 2018 compared to $22.2 million or 17.4% in the third quarter of last year.

The increase in operating expenses is primarily a result of the inclusion of expenses from our Tuscany subsidiary, which was acquired in Q4 of last year; higher amortization expenses on acquired intangible assets; higher patent litigation-related expenses; and investments in research and development to support future growth.

Non-GAAP operating expenses stated as a percentage of sales were 14.3% versus 15.5% in Q3 last year, which was slightly better than our guidance due to strong sales.

Focusing on expenses in more details. Sales and marketing was up $2.7 million, primarily due to $2.3 million of cost incurred at our recently acquired Tuscany subsidiary. R&D was up approximately $1.3 million, primarily due to increased personnel investments to support new product innovation as well as prototyping and equipment costs. As we consistently 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.

Our general and administrative expenses in the third quarter of 2018 were $11.2 million compared to $9.1 million in the prior year period. The change was primarily due to a $0.07 -- $0.7 million increase in ongoing litigation-related expenses, $0.5 million of higher professional fees and $0.4 million of expenses incurred at Tuscany.

For the third quarter of fiscal 2018, our effective tax rate was 19% compared to 19.5% in the third quarter of fiscal 2017.

Adjusted EBITDA was a record $39.3 million for the third quarter of 2018 compared to $27 million in the same quarter last year. Adjusted EBITDA margin was 22.4% compared to 21.2% in the prior year quarter.

We were pleased with our record EBITDA margin, but it is worth noting that Q3 EBITDA margins are typically our seasonal high and not reflective of full year EBITDA margins.

On a GAAP basis, net income attributable to FOX in the third quarter of 2018 was $24.3 million or $0.62 per diluted share compared to net income of $16.1 million or earnings of $0.41 per diluted share in the prior year period.

Non-GAAP adjusted net income was $28.1 million, an increase of $10.1 million compared to $18 million in the third quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2018 was $0.72 compared to $0.46 in the third quarter of 2017.

Now focusing on our balance sheet. As of September 28, 2018, we had cash on hand of $32.8 million. Total debt outstanding was $59.4 million compared to $98.6 million as of December 29, 2017. Inventory was $104.8 million compared to $84.8 million at the end of 2017. Accounts receivable was $84.9 million compared to $61.1 million as of December 29, 2017. Accounts payable was $75.8 million compared to $40.8 million at the end of 2017.

The changes in accounts receivable, inventory and accounts payable are primarily attributable to the growth of our business as well as seasonal factors.

Turning to our outlook. For the fourth quarter of 2018, we expect sales in the range of $148 million to $158 million and non-GAAP adjusted earnings per diluted share in the range of $0.50 to $0.56.

For fiscal 2018, we are raising our previous guidance and now expect sales in the range of $610 million to $620 million and non-GAAP adjusted earnings per diluted share in the range of $2.15 to $2.21 per share. Given our year-to-date results and outlook for the balance of the year, we now expect adjusted EBITDA margins to improve relative to our initial guidance and be slightly higher than 2017.

I would also like to point out that our guidance continues to include the impact of tariffs and higher input costs. As we discussed on our last earnings call, we plan on increasing our CapEx for 2018 and 2019 to a range of between 5% and 6% of sales, which reflects the impact of our operations expansion announced this afternoon.

Beyond 2019, we expect capital expenditures to return to our longer-term model of 3% to 4% of sales. At this point, there is no change to our longer-term revenue growth targets of mid- to high single digits for bike and low double digits for powered vehicle.

Our guidance assumes a non-GAAP tax rate of between 11% and 13% for Q4, resulting in a full year of 2008 (sic ) [2018] non-GAAP tax rate of between 17% and 18%. I'd also like to note that we're 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 provide such guidance and reconciliation.

With that, I'd 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 Brennan Matthews, Berenberg.

I wanted to start off by asking a little bit about the long-haul semi-tractor suspension that you guys mentioned. I know it's really early, but if you could maybe talk about how your -- give some more detail on how you're positioning that product? Are you orienting that more towards kind of OEMs or aftermarkets? And when should we think about maybe you to start realizing some potential revenues there?

Yes, thanks, Brennan. This is Mike. Let me talk about that for a second. So the big question is there's a number of unknowns, I'll try to pick them apart. We actually see this as both potential OEM play and an aftermarket play. Clearly, in the early days, we're getting experience and developing some history with the aftermarket side of the business. We have booked orders in that space and working with some smaller more commercial trucking companies. It's early for us to sort of really predict where this thing goes over the next couple of years. So we're real positive about it right now. We think it has lots of opportunities, but we're going to wait and see how things go.

This is Zvi. As Mike said, we're pretty excited about the space, but we would like to point out that this initiative, along with some of the other exciting initiatives we're working on, are contained in our long-term low double-digit guidance target for powered vehicles.

Okay, great. That's really helpful. And I also wanted to ask about the bike category, continue to be up very nicely, I mean, stronger than I was certainly expecting. Can you maybe provide a little bit more color on -- is that just -- is that some of the consumer? Is that really -- are you seeing kind of more kind of demand from OEMs? Just more color there would be really helpful.

Let me start off, Brennan, and I'll let Chris chime in. I mean, first thing, I think as I said in my prepared remarks, is it is broad-based. I think we've been fortunate in picking spec up in the model here. I think we've been then fortunate to be on bikes that have been pretty popular. I think those have contributed. We've had a nice aftermarket effort and we see that market is remaining pretty good for us. So yes, I would say there is no really one thing, I think it's just a combination of all those small drivers that we talk about coming together to give us pretty nice quarter. Chris, any...

I think that covers it. We have had wide-ranging spec, and our aftermarket business continues to be solid globally.

Components, I think, we're happy with what we see?

Components and aftermarket sales have been great in Europe, great in North America.

This is Zvi. It's a similar theme to the entirety of our results. We've got broad-based strength across our product lines, both within the categories and across the categories. Pockets of strength and weakness, but overall, we're pretty pleased.

Our next question comes from Larry Solow, CJS Securities.

Just a follow-up question just on the bike or I guess what's now known as specialty products. I guess, I assume most of the incremental growth of the increased guidance is more aftermarket and follow-through, and I guess, brands that you're one or bikes that you're in are doing better than expected. Is the industry itself, over the last -- year-to-date, has that done better than you would have thought even 1 or 2 quarters ago? Or is it particularly just your brands that are doing better?

Yes, Larry. Well, first, yes, I wouldn't necessarily attribute it to aftermarket. No. I think, again, it was broad-based across a lot of our products, our legacy FOX products, RaceFace, Easton, Marzocchi branded products. I think they have all contributed. I would say that our OEM spec was good, as I think we indicated earlier in the year. I think we've been fortunate to be on OEM models that have had great sell-through. And I think that's been a good contributor. Now with regards to how we performed vis-à-vis the industry, I think if you follow other bike companies who have -- who are public and have announced here over the past a little bit, I think clearly our performance is well in excess of what the industry is doing. And I would tell you, I attribute that to the fact that we principally, not exclusively, but principally play on the high end of mountain. We're getting an increasing e-bike specific offering, I think that's helping. So I think we happen to be in an industry that has maybe not had the best of times. I think it's a little bit better than it's been in the last few years. But clearly, we're outperforming it, because I think we happen to be in great segments. And I think our team has come out with some performance-defining products that people value and they're buying them.

One more thing to add. You'll see in our financial results, we now disclose the OEM versus aftermarket revenue, and you'll see that both are up very solidly year-over-year. Now I will point out that a fair bit of the aftermarket improvement when you look at the year-over-year comparisons includes the Tuscany acquisition. But strength in both channels.

Right. And the name shift to Specialty Sports, does that sort of imply that you may be looking -- not intentionally to diversify, but may be just looking for acquisitions that may not be in the bike space?

Well, I think it's a couple of different things, Larry. Certainly, as I think we indicated with what's contained in the Specialty Sports Group, it's multiple brands, multiple product categories. Now I think beyond that, we -- and I think we've talked about this, we do see opportunities, I think, to sell performance-defining products that maybe don't go directly on a bike to the same passionate customer base. So I think that's part of the strategy in that businesses as we go forward. Does that help?

Yes, absolutely. And on the powered vehicle side, just a similar question. The growth is silly, ridiculously great. So I'm just trying to -- I know you have said that Tuscany in the last quarter seems to be doing a lot better under your umbrella. Obviously, you're getting some new -- a lot of new business wins across categories. Is there anything one thing in particular that's really driving this rapid growth?

Thanks, Larry. Again, it's pretty broad. As I mentioned in my prepared remarks, we've seen it across our off-road business, power sports business is also quite strong, and Tuscany and Sport Truck. So it's really been maybe not silly ridiculous, but a pretty great result this last quarter. We're looking forward to the future.

And just to add to what Mike said, we point out that organically, our growth is well above our long-term low double-digit growth rate as well. But not only is Tuscany doing well, but our legacy FOX businesses and Sport Truck are also doing well. It's broad-based strength.

Yes, absolutely. And just last question. I know you talked about the tractor opportunity. Is this just sort of the next -- obviously, one of your investment thesis is getting into new categories on the powered vehicle side. Is potentially the next whitespace category? Are there other areas that are -- and there are other areas, but are there near-term opportunities? Perhaps I know you talked about commercial 18-wheeler space as well. Any update there?

Yes. We believe that commercial truck business can be a good business for us over a long period of time. We're developing and now starting to slow. We like those white spaces to diversify our portfolio. We'll continue to look for them. And when we find a good one, we will pursue it and see what we can make out of those businesses. We want to stay focus on performance, ride dynamics and performance-defining products and that's the key to the whole thing.

Yes, I think -- Larry, to clarify, I think the long haul product that we've come out is going on to 18-wheeler tractors. So we do see other opportunities and other kinds of commercial trucks, but you can't do everything at once. We're getting a start. And again, I think as Mike said, we like what we see, but it's early. Now if you look at other white space, we talk about things that are coming behind commercial trucks, things like recreational vehicles. We do have other white space product ideas. But again, we're -- I think as we've said for 5 years now, we're trying to be fairly disciplined in our pursuit of those things in order to get the best results for both our customers and our shareholders.

Our next question comes from Scott Stember, C.L. King.

Maybe just going back to the tractor suspension. This sounds like obviously it's more of a -- less of a performance side and more of, I guess, a paid to save kind of deal for fleets. Can you maybe just talk about what a trucking fleet, I guess, whether it's -- I guess, it mostly would be from a safety standpoint and from a fuel economy standpoint, maybe just some of the benefits that this thing gives to trucking fleets? If you could just maybe be a little more granular?

Yes. I mean -- yes, thanks, Scott. It really is starting with kind of comfort and safety. The notion of these trucks are doing long-haul transit across the country and elsewhere, it requires us to constantly look at how we can improve the suspension for the driver, passengers and cargo. So we believe that, that whole notion of developing a higher level of comfort, a higher level of safety in these products is a benefit to the trucking world, and that's the feedback we get when we go to shows and talk about it. So we're going to continue to pursue that. It's not the same -- you're correct, it's not the same as what we're doing off-road for racing per se. But we use some of the technology and innovation that we find in our off-road business and we put it on-road and put it in our commercial trucking business. So it's not the same, but we still leverage this technology.

Yes. I would say that you referenced the spend-to-save proposition. And I do think that, that's very viable here, maintenance interval, fuel cost, tires. There are places where you can have a very quantifiable savings for a user. And so clearly, we want to exploit that. I would tell you anecdotally that what come out of some of our testing is they said they were cracking less dashes with our suspension. So I think there's going to be a lot of different ways to measure that. Something we're excited about. Again, very early, though, in our pursuit of that market.

And just following up on that, this -- I imagine the -- maybe you can just quantify the retrofit opportunity or the aftermarket opportunity versus the OEM opportunity and the timing of it. I mean, clearly, it sounds like the aftermarket would come a lot sooner than an OEM, just given the lead times, right?

Yes. Really independent semi-tractor trailer -- tractor drivers in that part of the world. These guys are out there and they need to find the best solution for their truck at pretty regular intervals. So they're great aftermarket opportunity for us in 2 ways. One, it gives us experience on the road in these trucks and it gets us working with a group of customers that would be otherwise more difficult for us to reach. These guys can come to us. We work with them collectively on what's working and what's not working and continue to improve the products. So we really like that aftermarket space. It works well for us in the early days as we expand in the more commercial truck business.

And I think this is very similar, Scott, to how we enter most markets, is we really go in through the aftermarket initially. And I think we hope to show the viability and the worth of the product in the aftermarket, then get the OEMs' attention and then go to work on it.

All right. And then lastly, we just saw about Live Valve on the bike side. Sounds like it's going into a bike relatively shortly, if it's not in already. Maybe just talk about -- I imagine this would be on the very, very upper end of your bikes, the kind of volume that you would expect out of a product like this? And that's all I have.

This is an ultra-premium product. So you've got to keep in mind that this really touches the top 1% of bicycles. So we are shipping Live Valve. It is out in the field. We're having great performance, great customer feedback, a great sell-through at the bicycle dealer level. As far as unit quantities, to be determined.

Yes, I think it's like a lot of products. Initially, as Chris indicated, at the high end, over time, we would obviously like to see that expand. But certainly at the beginning, it's going to be on the premium end of what we do both, I think regular mountain bikes. E-bikes are a possibility, again, kind of the same thing. But very high on the technology. I think Chris, we had some great feedback out of that launch in Asheville.

Great feedback at the launch and great feedback at the dealers that supported the product in the field.

Yes, some more to follow, but we'd hope to sell more of it in the future, not less, that's for sure.

Our next question comes from Craig Kennison, Baird.

I know there are some new voices on the call today. Maybe just frame for us, Larry, whether we should expect continuity in strategy in your Specialty and Powered Vehicles business? Or are there areas where we might see it evolve?

Well, I think you're going to see a lot of continuity. First, Chris has been with us since we acquired RaceFace, Easton. He's been an integral part of what we've done in the bike business. So I think the strategy will remain exactly the same. I think we are -- as we've indicated, look -- we always look out opportunistically for things that we can provide our customers. And I think in this business, we do think there's some potential to broaden it beyond things that may go directly on a bicycle. But things that we get sold kind of to that same passionate customer base. So I think you can look for a lot of continuity and strategy. I think it's the same on the powered vehicles side. Mike -- I convinced him to come from our board and join us in management also. And so he's been an integral part of how the business is thought about and how it's developed. So yes, I think you can look for a lot of continuity. Mario, we're all -- hey, we're going to have a long relationship with him. We're all good friends of his. And we obviously want him to do well in the future also, and we will pass along everyone's good tidings to him.

With respect to Georgia and that investment, how should we think about the addition to capacity that would represent? And how quickly would that capacity come online?

Yes. Well, Craig, a couple of things. Clearly, our business -- both parts of our business here have done well. We started many years ago and talked to the investment community about our efforts to go to Taichung in bike to get closer to our customers and expand our capacity. I think we did that very successfully. Chris' team has recently integrated RaceFace and the Easton operations in Taichung into the FOX building. So they're together now. So that effort is on that Specialty Sports Group side of our business. I think in powered vehicle, again, as you all have noted, our growth has been pretty good. And so we look to do a couple of different things, and certainly, expanding our capacity is one of them. I think we have referenced getting to a platform that we can more elegantly grow in the future. And I think this effort in Georgia is aimed squarely at that. It not only gives us capacity here now and that facility on the 23-acre site would come online probably in early 2020, I think, Mike. Yes, we are looking for capacity. I mean, every day we don't make announcements, but we're doing a little bit here and a little bit there in the interim, right, to serve the needs of our business. But that really is an effort. It's for the long term, and it's designed to allow us to grow more elegantly in the future. We still have a lot of manufacturing base in California that is going all out, meet customer demand. So we view this right now as a way that we can add capacity, put the platform in a position then to grow over several years, maybe a lot more efficiently than we have here in the past 5 years. Does that help explain it?

Yes, it sure does. And just maybe, Zvi, just to finish with that, I recognize you're not providing guidance for 2019. But how should we think about the investments in Georgia and the P&L impact on it in the sort of short term and long term? Is there any change in your margin outlook in the short term and long term because of that investment?

Yes. As we've indicated, the capital investment from these things, we think that our CapEx for the next 2 years, i.e., '18 and '19 goes from our longer-term guidance of 3% to 4% to more like 5% and 6%. So you can do the math about our extra capital we have based on our guidance for this year and our longer-term growth targets for revenue. The math is pretty easy math. We don't make -- and part of those investments are growth and part of it are maintenance CapEx, right? We obviously don't make big capital investments without believing that we're going to have an ROI come from it. So beyond just meeting our customers' demands, part of these investments are trying to become more efficient, right? As Larry, I think, has said often, when you're growing rapidly, you often make tradeoffs between capacity and efficiency in order to meet customer demand. Well, just like we did in Taiwan and like we did several years back in El Cajon, CapEx will sometimes have a step function. So you can try to get a little bit ahead of it, so you can grow more elegantly and efficiently. So it's our belief that this is an integral part of our plans to continue to march towards longer-term EBITDA margins above 20% and meet our customers' needs. We think this is part of that equation.

Yes, I think there's another element, Craig, to getting to Georgia, and that is diversifying our platform. We clearly have a lot on the West Coast now. And I think this gives us access to a different labor pool, different sub-suppliers that become viable in this kind of a situation. So I think as we indicated, it's -- and the way I would think about this whole effort as it unfolds, it both serves our needs here as we go forward, but I think it allows us to continue to grow again in a much more efficient manner, getting access to both parts, human capital and all the things you need in order to make the business go.

Maybe I'd add one more thing. We do have -- we are initially deciding to fund this out of cash, just due to the extra cash we have on our balance sheet, the low leverage, that is the -- we believe that's a good use of cash right now. But over the long haul, we always have the flexibility to do other sorts of alternative financing, which includes -- could include feels like sales leasebacks, et cetera. So that's something we think about as we look at our capital structure.

And Zvi was getting a commercial truck offering there with the long...

(Operator Instructions) Our next question comes from Jim Duffy, Stifel.

I recognized tariffs and trade issues are contemplated in the guidance. From where you guys sit in the supply chain, is there any evidence that that trade legislation or tariffs are having an impact on timing of shipments? Have you seen any shift in timing of orders or shipments from OEMs, trying to circumvent duties?

Yes. I would say that we haven't seen evidence of that, but it wouldn't surprise me. I know as we look through our supply chain and trying to secure parts and materials, we're cognizant of it. We're not cognizant of it from the standpoint of trying to avoid tariffs. We're more cognizant about it from the respect of -- there's some disruption out there, right? Disruption as other people might be trying to do things to avoid tariffs or to secure future supplies, et cetera. I mean, it's certainly creating some noise, I would say, in the supply chain. But are some of our customers shifting orders to us? We haven't seen it with us. Are they doing with our own suppliers? Perhaps.

Yes. And Jim, this is Mike, to add to Zvi's comment, the one thing we would see in a supply chain as tariffs kind of have their impact in the supply chain itself, more mix may move to onshore suppliers. As that happens, then supply tightens. And once supply tightens, you have some, as Larry mentioned, cost implications and you have some more challenges associated with getting materials. Hasn't been a big factor, but this is a factor we watch pretty close.

Okay. And Larry, you touched on this a bit. But can you talk more about some of the factors behind the selection of Hall County, Georgia and Reno for the new site locations? What's the labor market picture unique to those markets? Is there some sort of SG&A savings opportunity or, Zvi, is there a tax rate opportunity as you move the headquarters?

Yes. Let me take the first part, and I'll let Zvi comment on the financial implications. But yes, I think certainly, any new location that we would go into, the #1 consideration is the labor pool. For manufacturing, clearly, we have a lot of direct labor. We need to make sure we have access to the people that want those jobs. I also think, particularly with the headquarters, obviously, in the future, we want to make sure we have access to the white collar talents that might be involved there. So that's probably both with Reno and the Georgia location, the prime consideration. Clearly, we look to do things in the longer term that are more efficient, not less efficient. So we like to think that we're picking up some economies along the way. But I would tell you that labor availability is probably #1 on the list of things we look at. Zvi, you want to talk a little bit about...

Look, as Larry said, the #1 consideration for us is talent acquisition. Are -- is the cost of living, lower in Georgia than California? Yes, but that was not our principle consideration. In terms of tax rate, not really a big issue for us in terms of tax rate. As you know, a lot of what we ship out of California, you don't pay taxes on this, because the end destination is outside of the U.S. So that was not a big consideration for us. Again, the big consideration for us is diversifying our manufacturing base, as Larry talked about, and talent acquisition.

Jim, I think it's important to note that we will -- we have and will have considerable operations in our -- in here in California in multiple locations. So this is something that's kind of additive, again mainly focused on future growth.

I have some more questions on that, but maybe we can do that on a follow-up. Last question from me, 2018 has been a great year. There's only 2 months left. Presumably, you've got great visibility through year-end. Is it more of the same in 2019, or do you see 2018 setting up as a difficult compare? And then, I guess, specific to the powered vehicles business, I guess, I'm curious if you foresee any change in mix in 2019. Which are the platforms you think are really going to be driving that business forward?

Well, you know, Jim, Zvi has given you the detail, but it strikes me as I think I heard the same question at the end of 2013. It may be the end of 2014 and 2015 also. So I think it's -- we're not going to make a call on 2019. But I think we certainly like the way our business is shaped up here in 2018. And again, the thing is we've had difficult comparison before, right? I would tell you that we're going to keep our teams focused on developing performance-defining products that the passionate customer base that we have wants. I think if we do that, we've got all the kinds of macro noise going on with tariffs, potential downturns, interest rates going up. We're going to worry about what we can control. We're going to be cognizant of the environment. And we're going to keep trying to satisfy those customers. I think if we do that, we're going to be just fine.

Yes. Just to add to what Larry said. I mean, this company has a long record of growing the top line and the bottom line. Just to give you a sense, when I joined 10 years ago, we were in the $100 million range, right? So the company's executed over the long haul. We do that through innovation. We do that through a passionate customer base and a passionate employee base, right? And the basic DNA of the company has not changed. It's one of the reasons we always tell investors that we're going to continue to reinvest in the business in sales and marketing and R&D. Those are the engines of growth. As much as I like to think myself as an accountant, as one of them, I'm not. So with that in mind, this is not a new paradigm in terms of our growth algorithm. Our growth algorithm is long -- low double digits for powered vehicles and mid- to high single digit for bike. Having said that, it's always our goal to beat that algorithm. And we're excited, as you guys hear Mike and Chris and Larry talk about the business. We're excited about the broad-based strength. I had the good fortune of talking to one of our engineers a couple of days ago, and the level of excitement from the guy that actually touched the product couldn't be higher. So with that if we keep doing -- sticking to our knitting and producing great products, the future is bright. As for next year's guidance, we'll tell you guys in 2019.

And we are giving Zvi a reward for every time he works long haul into the conversation.

All right. Understand. I appreciate what you guys do and you've accomplished. And I appreciate what we do in the investment business, what we're trying to understand. The powered vehicle business, any changes in mix, platforms driving things there into 2019? Presumably some visibility is building.

Yes. We're getting some of the visibility. I won't talk about individual vehicles or customers. But we are seeing a continuation of the evolution to intelligent platforms. We talked about Live Valve in the bike business, but we also believe that intelligent platform and ride dynamic system in our vehicles will continue to materialize. It looks very strong. So I'd say our offer looks -- continues to look strong, so does Power Sports. And then we talked about Tuscany earlier, and we're real happy with what we're seeing in that business and we continue to see good things in the future on it. So pretty broad. I mentioned that earlier, it's pretty broad growth and good diversity in our business.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Larry Enterline for closing remarks.

Thank you, and thank you all 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 conference. You may disconnect your lines at this time. Thank you for your participation.