Fox Factory Holding Corp (FOXF) 2018 Q4 法說會逐字稿

Greetings, and welcome to the Fox Factory Holding Corp. Fourth 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, you may begin.

Thank you. Good afternoon, and welcome to Fox Factory's Fourth Quarter and 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 may involve a number of known and unknown factors, 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 and related items, 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 and 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, Larry Enterline.

Thank you, David. Good afternoon, everyone. We appreciate you joining us on today's call.

To start, I will discuss 2018 business and financial highlights. Mike and Chris will then provide a more detailed update on the respective businesses and brand development. Zvi will then review the fourth quarter financials and discuss our 2019 guidance. After that, we will open the call for your questions.

Before I review our performance, I want to spend a moment on the announcement we also made today about my decision to retire from my role as CEO at the end of the second quarter of 2019. Mike Dennison, our president of powered vehicles group, will succeed me as CEO on June 29th. Mike's vast international operating experience and deep understanding of Fox, our people and diverse end markets make him uniquely qualified to lead Fox into the next phase of our growth.

I look forward to continuing to work with Mike, the board of directors, and our entire Fox team on strategy and business developed initiatives in my new role as executive chairman. Under Mike's leadership, Fox will continue to execute our shared strategic vision for growth.

Now on to our earnings. We had a strong end to 2018, with record financial results. We benefitted from consistent execution and favorable business fundamentals in our powered vehicles group and in our specialty sports group. Our broad-based growth led to annual sales and profitability well above our initial expectations. Our 2018 sales of $619.2 million increased 30% compared to the prior year. It was also a record year for profitability, with non-GAAP adjusted earnings per diluted share of $2.22 and adjusted EBITDA of $124.6 million.

Fox's differentiated market position continues to fuel our growth in new and existing categories. It's a privilege to lead our dedicated team, and I appreciate their consistent passion and enthusiasm for the Fox brand. This translates into the strong relationships we have with our athletes and OEMs, reinforcing the value of our brands across the diverse end markets we serve. We believe Fox remains well positioned for future growth. The underlying fundamentals of our business and end markets remain strong.

Accordingly, we are initiating strong guidance for 2019, which Zvi will detail in his portion of the call. Based on our strong operational and financial results, as well as our outlook for 2019, we continue to opportunistically make strategic investments to expand our manufacturing capacity, primarily in our U.S. operations, to better support the needs of Fox's growing business over the next several years.

We are diversifying our manufacturing platform, while providing additional long-term scalable growth for our powered vehicles group. We completed the relocation of our Fox corporate headquarters from Scotts Valley, California, to our existing offices in Georgia at the end of 2018. These are important strategic actions to help further diversify our manufacturing platform and provide additional long-term capacity to support growth over the next several years.

In summary, we had a strong finish to 2018. Our team remains confident about our opportunities for continued growth in 2019. We believe Fox's differentiated market position will continue to fuel our expansion in the diverse end markets we serve.

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

Thank you, Larry, and good afternoon, everyone. First off, on behalf of our entire team, I'd like to thank Larry for his tremendous contributions to Fox. He is an exceptional leader who has guided Fox through extraordinary growth and will continue to play an important role as executive chairman.

Larry developed a foundation for long-term success, building an enduring international brand and an outstanding team that's poised to continue delivering superior performance. I am honored to have the opportunity to succeed Larry as CEO, and I look forward to continuing to work closely with him during this transition and in the future with his role as executive chairman.

Fox is a unique company, and it's been my pleasure to work alongside such high-performing teams who care about delivering best-in-class performance-defining products with an authentic brand experience. I'm confident we're going to build upon our existing accomplishments to generate sustainable growth and value for our shareholders.

Now focusing on fourth quarter results, in the fourth quarter, sales of powered vehicle products were up 47.7% compared to the fourth quarter of 2017, and our fiscal year 2018 sales were up 46.5% compared to prior year. These strong results are due to continued high growth across our product lineup, particularly with our off-road capable on-road suspension products. In addition, sales of [offsetting] products from our Tuscany division further contributed to this strong growth. We remain focused on the off-road capable on-road vehicle market, and we're excited about the prospects of our automotive OEM customers, Ford, Toyota, and Jeep.

In fact, one of our latest platforms is the all new, highly anticipated 2020 Jeep Gladiator Rubicon that debuted at the Los Angeles Auto Show in November. And at this month's Chicago Auto Show, Toyota unveiled the 2020 Sequoia TRD Pro, featuring Fox shocks. It's the fourth model in the TRD Pro lineup, all of which ride on Fox.

We also introduced shock and steering stabilizer packages for the 2018 and 2019 Jeep Wrangler and Ford Super Duty models. And we added a performance series [2 auto] iQS, or Intelligent Quick Switch, shock application to fit the 2007 and 2018 Jeep Wrangler. We believe the popularity of our OEM vehicle products validates both the market's appetite for such vehicles and the customers' desire for performance-defining products. As an example, the Ford Raptor Ranger has been very successful in Southeast Asia and Africa and recently won the 4x4 of the year at the Australian Motoring Awards.

We are driving product expansion in our Tuscany and Sport Truck USA businesses as well. In February, Tuscany unveiled the officially licensed 2019 F-150 Harley Davidson edition at the Chicago Auto Show. The autoblog.com editors wrote, "The list of custom exterior features is massive, but one sticks out. Tuscany gave the 150 some pretty sweet 22-inch milled aluminum wheels that are a direct visual link to wheels seen on the Fat Boy."

In order to support this tremendous growth, and as Larry mentioned earlier, we're ramping up our Georgia presence, including significant additional manufacturing capacity in Hall County. Once operational in the first half of 2020, this will help optimize our manufacturing and supply chain footprints.

Now let's move on to some racing highlights. Racing is in our DNA, and partnering with race professionals who are at the top of their sports helps define the Fox brand. On the off-road racing and winter extreme sports circuit, Fox drivers swept the top five overall at the 51st SCORE International Baja 1000, with one clinching the 2018 SCORE International Trophy Truck Championship. UTV racer Wayne Matlock won the Baja 1000 Pro UTV Forced Induction Class and the 2018 Pro UTV F-1 Championship. He also helped his team capture the overall SCORE Series Championship title, a first for UTVs.

In his first Dakar Rally, Casey Currie finished fourth and earned the Rookie of Dakar award. At the 2019 Best in the Desert Parker 425, Fox athletes scored the overall win in three class victories. Jason Scherer won the 13th Annual King of the Hammers Race, becoming the first back-to-back champ and only the second to win it three times. Fox athletes finished first and second in the Desert Invitational held during King of the Hammers week. And finally, our Fox athletes took home seven medals at the 2019 Winter X Games. Our race program has a great future. Like it has throughout our history, racing will remain the center of the Fox 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 talk about a few of our recent specialty sports group's business highlights.

In the fourth quarter, sales of bike products were up 11.9% compared to the same period in fiscal 2017 and continued the record performance we delivered last quarter.

For the fiscal year, sales of bike products increased 14.9% compared to prior year. The specialty sports group's momentum continues on the back of a strong model year 2019 portfolio. Our products are being well received by our OEM and aftermarket customers.

Additionally, after extensive research by our leadership team, we relocated our U.S. aftermarket distribution, sales, service, and operations from California to Reno, Nevada, to better service our customers.

Our model year 2020 is being well received, and our OEM customers and athletes are optimistic about our overall spec position. Our bike product continued to win media accolades. Some 2018 highlights include Fox Grip2 Damper Cartridge, Pinkbike Suspension Product of the Year; Fox Live Valve, Design & Innovation Award 2019, Off-Road Components; Fox best-rated brand 2018, ENDURO Mountain Bike Magazine readers' survey; Fox rated number one dropper post, number one fork, number one rear shock to buy in the 2018 Vital MTB readers' survey awards; Race Face rated #1 crank set and #1 [machinery] to buy in the Vital MTB readers' survey awards; Marzocchi Z1, best value in test, ENDURO [fork], ENDURO Mountain Bike Magazine; Race Face Next R31 carbon wheelset, editor's choice, best mountain bike wheels, OutdoorGearLab. In their review, the OutdoorGearLab editor wrote, "The Next R31 impressed our testers and takes home the Editors' Choice Award for best overall mountain bike wheelset. The combination of excellent ride quality, freehub engagement, lightweight, impressive durability, and good value make this our favorite wheelset in this review."

Earlier in the year, we introduced our GRIP2, our next-generation sealed cartridge [pit] damper. Trev Worsey with ENDURO Mountain Bike Magazine, editor, reviewed the GRIP2 and wrote, "The new Fox GRIP2 damper takes everything that made the Fit4 RC2 damper the one to beat and adds more control to the rebound circuits and reduces friction. On the trail, this results in blisteringly fast performance."

As Mike said, racing is a key part of our DNA, and Fox athletes help validate innovative technologies and products through the demands on the race course. They also create excitement around the Fox brand, which helps expand our customer base and stimulate the Fox brand loyalty. Here are a few highlights from our 2018 race season.

Fox-sponsored athletes took 8 of the top 10 spots in the Men's Downhill UCI World Championship, won the women's Downhill UCI World Championship, earned 6 of the top 10 overall spots in the Men's Cross Country UCI World Cup, won the FMBA Slopestyle World Championship and the coveted Red Bull Rampage. Racing has always been an integral part of our R&D and brand-building strategy, and we look forward to continuing to build our race program success.

At this point, I'd like to turn the call over to Zvi to review our financials.

Thanks, Chris. Good afternoon, everyone. I'll focus on our fourth quarter results, then review our guidance.

Sales in the fourth quarter of 2018 were $156.8 million, an increase of 29.5% versus sales of $121.1 million in the fourth quarter of 2017.

Gross margin was 32.5% in the fourth quarter of 2018, a 20 basis point increase from 32.3% in the prior year period, while our non-GAAP gross margin percentage was unchanged at 32.5%. The improvement in GAAP gross margin was primarily due to acquisition-related inventory adjustments in 2017 that did not reoccur in 2018. Q4 non-GAAP gross margin was flat due to some short-term operating inefficiencies to support the volume growth in certain parts of our business and in preparation for incremental growth in 2019.

Total operating expenses were $28.1 million, or 18% of sales in the fourth quarter of 2018, compared to $23.1 million, or 19.1% of sales in the fourth quarter last year. The increase in operating expenses on a dollar basis is primarily the result of the inclusion of a full quarter of expenses from our Tuscany subsidiary that was acquired in 2017, in December, and investments in R&D to support future growth, partially offset by lower acquisition-related expenses.

We saw some improvement in our operating leverage on the increased sales volume. Non-GAAP operating expenses, when stated as a percentage of sales, were 16%, compared to 15.4% in Q4 of last year.

Focusing on expenses in more detail, sales and marketing was up $1.8 million, primarily due to $1.2 million of costs incurred at our Tuscany subsidiary. R&D was up approximately $1.7 million, primarily due to increased personnel investments to support new product innovation as well as prototyping and equipment costs. As we've 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 fourth quarter of 2018 were $10.6 million, compared to $9.7 million in the prior year period. The change was primarily due to $300,000 in expenses associated with Tuscany, along with growth in other areas of our business, including personnel, facilities and depreciation, partially offset by decreases of $400,000 in stock-based compensation and $200,000 in ongoing litigation-related expenses.

For the fourth quarter of fiscal 2018, our effective tax rate was 7.3% compared to [81.3%] in the fourth quarter of fiscal 2017. The fourth quarter of fiscal 2017 includes the onetime impact of $9.3 million related to the Tax Cut and Jobs Act. Excluding the impact of the act, the company's adjusted effective tax rate was 20.4% in the fourth quarter of 2017. The reduction in rate from 20.4% to 7.3% is primarily due to benefits associated with our international restructuring efforts as well as lower U.S. corporate tax rates resulting from tax reform.

Adjusted EBITDA was $29.8 million for the fourth quarter of 2018, compared to $23.6 million in the same quarter last year. Adjusted EBITDA margin was 19%, compared to 19.5% in the prior year quarter. The decrease in adjusted EBITDA margin is primarily due to lower stock-based compensation as a percentage of sales, offset by increases in the other operating expense categories to support the growth of our business.

2018 was an extremely strong growth year for sales. As we've consistently mentioned, in higher growth years, operating expense growth can lag the growth in sales. We did see some of the [cat run] of investments spending occur in the fourth quarter. For the full year, we were pleased with our EBITDA margin of 20.1%, which exceeded the guidance we provided at the beginning of the year.

On a GAAP basis, net income attributable to Fox in the fourth quarter of 2018 was $21.1 million, or $0.52 per diluted share, compared to a net income of $2.8 million, or earnings of $0.07 per diluted share in the prior year period.

Non-GAAP adjusted net income was $22.5 million, an increase of $7.6 million compared to $14.9 million in the fourth quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the fourth quarter of 2018 were $0.58, compared to $0.38 in the fourth quarter of 2017.

Now focusing on our balance sheet, as of December 28, 2018, we had cash on hand of $28 million. Total debt outstanding was $59.4 million, compared to $98.6 million as of December 29, 2017. Inventory was $107.1 million, compared to $84.8 million at the end of 2017. Accounts receivable was $78.9 million, compared to $61.1 million as of December 29, 2017. And accounts payable was $55.1 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.

Now turning to our outlook, for the first quarter of 2019, we expect sales in the range of $150 million to $158 million and non-GAAP adjusted earnings per diluted share in the range of $0.44 to $0.49. As previously mentioned, we did experience some -- we did experience additional operating inefficiencies in Q4, and we expect some of those costs to continue into Q1.

For fiscal 2019, we expect sales in the range of $695 million to $715 million and non-GAAP adjusted earnings per diluted share in the range of $2.45 to $2.55. We expect adjusted EBITDA margin percentage to be fairly consistent with 2018. We expect gross margin percentage to be up slightly in 2019, as benefits from efficiency gains and operating leverage will be partially offset by unfavorable mix due to increased revenue contributions from large OEMs. Additionally, we expect non-GAAP operating expenses to increase to approximately 16% as we continue to invest in the business to drive our future growth.

I would like to point out that for the next few years, we expect non-GAAP operating expenses to run between 16% and 16.5% percent of sales. There is no change to our longer-term target of 16.5% to 17% of sales for non-GAAP operating expenses. I would also like to point out that our guidance continues to include the impact of tariffs and higher input costs based on current conditions.

In addition to our Q1 guidance, we wanted to review our 2019 quarterly cadence. We expect our sales seasonality in 2019 to be similar to 2018. Accordingly, growth will be a few percentage points higher in Q1 and Q2 versus the back half of the year. Seasonality can vary from year to year based on timing of new product introductions and other factors.

We expect CapEx for 2019 to be in the range of 5.5% to 6.5% of sales, which reflects the impact of our operations expansion announced last year. We would note that this guidance is higher than the 5% to 6% we previously guided, as some of our planned 2018 expenditures are expected to shift into 2019. Beyond 2019, we expect long-term capital expenditures to return to our longer-term model of 3% to 4% of sales.

For 2019, we expect sales growth for bike to be in line with its mid-to-high single digits long-term target, and we expect powered vehicle to exceed its long-term target of low double-digit growth. There is no change to our longer-term growth target rates for both bike and powered vehicles.

Our guidance assumes a non-GAAP tax rate of 15% to 19% for 2019. For Q1, our tax rate is projected to be between 11% and 15%. We continue to expect some quarterly fluctuations in tax rate to occur during the year due to the timing of certain variables, such as stock option exercises and stock prices that are difficult to predict.

I would also 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 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. Matt?

(Operator Instructions) Our first question is from Larry Solow from CJS Securities.

First, congratulations to both Larry and Mike on the announced succession plans. Just on -- actually, obviously, you've come off a great year, great quarter, and good outlook. Just on the powered vehicle side, the sort of above long-term growth rates that your outlook incorporates, sounds like broad-based, but maybe specifically really a sort of acceleration on the success side with -- on the automotive on the off-road capable on-road and maybe some better growth of Tuscany. Are those sort of the bigger drivers, or a little more color on that would be great?

This is Mike. Why don't I start, and then I'll let Zvi and Larry jump in as well. It was broad-based, Larry. You called it correctly. We did see some really good growth in both the aftermarket space and the OE space, and we see that continuing on into our 2019 and throughout the rest of the year.

I kind of highlighted, as you know, on the call the things that I thought were probably the most specific relative to Tuscany and our off-road growth with Ford, Jeep, and Toyota. So those continue to play out really well for us, and what I like about it is we've got a pretty good diversified portfolio, so we expect that to maintain throughout the year.

I mean, the only thing I would add is we're obviously pleased that we exceeded our long-term target growth rates in 2018. We're also pleased that our expectation for 2019 is above long-term target rates for powered vehicles and in line with -- for the [SSG] business. There is no change to our longer-term outlook, but it is our job as a management team to try to beat our targets, and we plan on continuing to attempt to do so.

Absolutely, and then on the powered vehicle side, on the [semi tractors], any contributions expected from those, any material contributions in '19 or...

We'll see that business continue to grow for us in '19. We don't expect it to be a major part of our business in the year because there is a lot of work to do, and as you know, we tend to start in aftermarket and build that capability before we go into the -- a bigger space like OE. So we're going to do it methodically and be very thoughtful about how we grow that business, and as it grows, I'll spend more time talking about kind of the size and scope. But for now, we think that will just continue to evolve throughout the year.

Yes, just to add to what Mike said, we're very optimistic about the prospects for that business longer term. We do think it's an important part of how we get to that low double-digit growth target on a longer-term basis. Initiatives such as that, other white space opportunities, but if you were just going to look at it from how meaningful it is in 2019, it's not terribly meaningful from a pure numbers point of view. We do think it's meaningful, however, for the future of the business.

Certainly qualitatively, I'm sure. Okay, just a follow-up just on the gross margin outlook. It sounds like some modest improvement expected in '19, or at least in your guidance. Is the transition to Georgia and sort of capacity expansion in powered vehicles, is that sort of a -- will that sort of a similar drag on margin in the short term, sort of similar to your move to Taiwan in the bicycle or specialty product division was a few years back?

Yes, we don't think that that's a big -- there is some cost in there. We don't think it's a huge impact to margins. The bigger impact, we have some pretty exceptional improvement in gross margin in 2019, and we've done that over the last few years. We are seeing a little bit of a shift to larger OEMs in 2019, so there's a little bit of a drag with mix in 2019 that offsets some of the benefits we expect to receive from our efficiency initiatives and higher operating leverage.

Yes, and that said, on a long-term basis, though, we do believe through the footprint, development, and supply chain innovation that we'll do as a part of the process of moving to Georgia, that long term, this is a very good thing for us from a profitability standpoint.

Yes, I mean, one of the things we've been contending with is there's always, when you grow quickly, you're always faced with the tradeoff between capacity and efficiency. And when we get faced with that choice, we're trying to of course satisfy customer demand. What we think Georgia allows us to do is to grow more elegantly and to realize some of the efficiencies you'd expect with the higher volumes. So we think also in California of course, as we've grown, we've contended with things such as minimum wage increases and things of that nature. So we're now just going to have a more diverse North American platform and be able to make decisions about where the extra capacity goes as we grow elegantly.

Right, and the shift sort of a little bit back towards larger OEMs, I think the business had been actually transitioning the other way to parts acquisitions, but is that really related to some new wins on the powered vehicle side, particularly on the auto side? Is that fair to say?

Well, I mean, we would tell you, obviously, that the powered vehicle growth we expect in 2019 is higher than the longer-term targets and it's higher than SSG next year. So obviously, in powered vehicles, we have a fair bit of business with OEMs that are large both in power sports and automotive. We'd really not like to comment more specifically about which customers or which segments.

And we believe aftermarket is also going to provide good growth for us this year. I mentioned the Harley Davidson launch, which was a great success for us at the Chicago Auto Show, and we're expecting to (inaudible) as a business, too.

Yes, I mean, it is broad-based. It is broad-based, but the mix with the powered vehicle business growing faster than the SSG part of the business, and some of that is coming from the aftermarket side but as well from the OEM side on the powered vehicle side.

Your next question is from Craig Kennison from Robert W. Baird.

Larry, congratulations as you finish an excellent run as CEO. Mike, as you transition to that role, will you continue to run powered vehicles, or is that a role you're going to want to sell as well?

We're working through that transition right now. Ultimately, we'll fill that role, and we've got a great team. So we'll look internally and externally, but we've got a great team here, and I think Larry and I are both confident that that transition will go very smoothly.

Then a question for Chris, or anybody, really, that wants to respond, but it's on the specialty sport market. What are your thoughts on any opportunities to grow in wheels or even adjacent markets that have nothing to do with ride dynamics? I know that's come up recently.

Well, with wheels, we probably already have a lot to do with ride dynamics. But we have two full-time wheel machines on board now. We are producing wheels both domestically and internationally. We have multiple programs that we'll be rolling out over the next 24 months, so we see a lot of opportunity there. We definitely see it as a space that we're going to grow in.

And I think, as we indicated, Craig, we're actively screening for things that maybe don't hang directly on a bicycle but have a tie to that same passionate end consumer. I think we're working with Chris and his team for what those opportunities might be.

Yes, and on that front, Larry, could you comment on the M&A environment and whether you've made any assumption about M&A with respect to your guidance?

Maybe I'll start with guidance. The guidance does not include any acquisitions for this year. We would tell you that if you look on a longer-term basis, part of the way we achieve our longer-term guidance for bike and powered vehicles is some tuck-in acquisitions from acquisitions. But in terms of 2019 specifically, none of the guidance presumes that we get a deal done.

Yes, and I would just -- to comment overall, I mean, we've -- I think, Craig, as we've indicated before, we run active screens both for specialty sports group and the powered vehicles group. We've got plenty of things on those screens we'd like to look at. A lot of them don't realize they're for sale right now, and that's just a process. As you know, we don't like auctions. I think it's one of those things. If we have a meeting of the minds, we'll obviously announce a deal; if we don't, we won't.

I think in terms of the environment, I think there are things out there. I do think it's cooled down a little bit based on my sense from some of the private equity auctions that were being run, which I think might be a little bit more helpful in putting deals together. But again, we're strategic about it. I think there are certain things that both Chris and Mike are looking for in their businesses. Those are the things we're going to focus on. If we can get them at a reasonable price, we'll put a deal together. If we can't, we believe we have great organic growth opportunities in both businesses.

Our next question is from Brennan Matthews from Berenberg.

I wanted to just ask a little bit about I think the short-term inefficiencies you (inaudible) on the quarter and I think you mentioned might carry into Q1. I mean, are these sort of things like air freight that you're just using to -- just been the kind of outsize growth you're seeing, or is there any more color you can maybe provide on what [moved] this quarter ?

Yes, this is Zvi. It's the usual suspects. It's expedited shipping, it's overtime, it's excess capacity for inventory, kind of the usual suspects you'd expect when you're running to meet strong demand.

Okay, great, that's really helpful. And then, just kind of one other question from me. I wanted to ask about the international opportunity and a little bit more so on kind of powered vehicles. Are you expecting any outsized growth in any kind of international markets this year, and I guess even longer term? I mean, is this something you see as maybe being more kind of driven by OEMs, aftermarket, or even a combination?

It's a combination -- this is Mike. We've already seen growth in overseas in the international markets, especially with things like the Ford Ranger Raptor in Australia and Africa. I had mentioned in my prepared comments that it won the Truck of the Year Award in Australia.

We're also seeing a big expansion of what we call go-fast [overlanding], and that's kind of a weird phrase, but what it basically means is things like these TRD series vehicles from Toyota. There are these huge swings in that side of the market, and that's developing nicely, both on the OE side and the aftermarket side.

So really, the key for us is to still keep focused on that passionate enthusiast and developing that enthusiast base in some of these markets. Things like the Dakar Rally helps get our name out there and helps spread our brand. As that expansion happens, and brand awareness, we are seeing the growth in both aftermarket and OE.

The final comment there is we do see -- we have seen in '18 and I think we're going to continue to see it -- sales of our Tuscany trucks on an overseas basis, too, which is pretty interesting. So yes, we feel real good about it. We think it's going to expand and have an impact in 2019.

Our next question is from Randy Konik from Jeffries.

This is actually Anna on for Randy. I know it's still a bit early, but if you can provide any update on the progress on the commercial trucking segment, that would be really helpful. Thanks.

Yes, and I mentioned this earlier -- this is Mike, Anna. We see that market continuing to build for us. But again, we started out very slow by creating some specific shock solutions that we then put on long-distance trucks and made the trucks go long distances. So we really wanted to test that out and make sure that the right -- we were developing the right products. So you're going to continue to see that kind of beta testing, prototyping, and small production runs throughout the majority of the year.

You'll see growth kind of occurring along the way, but as Zvi mentioned earlier, we don't see it as a meaningful element of our 2019 guidance. We do see it as a very strong element of our long-term guidance and a way for us to grow those double-digit type of [region].

Our next question is from Ryan Sundby from William Blair.

Just wanted to say congrats again to Larry and Mike. That's great to see. Just wanted to ask, I see in the [K] that Europe was down a bit in the quarter. I know that's not a really kind of tough comp, but just wondering if there's anything else kind of going on in that market that --

I'm sorry, you asked -- did you say Europe? Is that what you said?

In Europe, yes.

Look, the way we think about our business, those figures determine where we ship things. That's not necessarily by end customer destination. The mix of our business is a lot different this year versus last year as well. Our powered vehicle business continues to grow. The powered vehicle group tends to be more of a North American based business. So I would tell you there's nothing going on in the business that we think geographically is an indicator of the underlying health of the business. It's just a function of mix.

Got it, no, that makes sense. And then, just I guess with the kind of market pullback in December and then the trade and tariff kind of talks, have you seen your partners behave any differently? Are they managing inventory tighter or maybe not pushing innovation as hard? Just wondering if you're seeing any kind of behavior change there.

I don't think -- broadly, no. I don't think we see, Mike, Chris, anything that we would characterize as unusual. I think clearly, people are paying a lot of attention to their businesses. I mean, I think you've seen a lot of folks announce so far. But no, I think we see it as a pretty normal environment right now.

Yes, we do see some lengthening lead times on certain device -- parts and commodities as we go through this process. Most of that's indirect and it can be mitigated by just -- in the forecast, we know to place the orders correctly. So it's nothing that's having a huge headwind for us in the business.

Our next question is from Jim Duffy from Stifel.

Larry, congratulations, very successful leadership. Mike, congratulations to you as well. Great year, guys. Understandably, the growth could create some inefficiencies. Zvi, any chance you can kind of quantify the impact of those and speak to your sightlines to resolution of that? When are you expecting the gross margins to come back?

We'd rather not quantify the actual dollar impact, but we do think that it's largely going to be a Q1 issue.

Okay. Mike, you mentioned a couple new offerings specific to the Ford Super Duty and the Jeep Wrangler. Can you elaborate on those a little bit, talk about what's new and unique about those? I presume those are aftermarket solutions.

Jeep is a good one to talk about, Jim, because as you know, we're on the move to (inaudible). This is the first time we're on Jeep as an OE platform. And that's just gotten great reviews, and we've seen that really take off, so we like that. That's good for us to develop that relationship with Jeep. And through the process of doing that, we've also built several solutions in aftermarket shocks for Jeep that have had huge demand from the aftermarket, and we think that's going to continue through 2019, especially as you see more of a JL crowd out there, I guess on the streets, and people buy the new JL version versus the old JK version. So we're liking a lot of the new technology that we're putting out there, and we think that's going to continue.

And the rest of the markets, like the 250 side and things like that, it is more aftermarket than anything, but that's great for us. We like those markets, and that kind of leads us to stronger relationships with guys like Ford, which has become very strong for us.

And specific to those aftermarket products, it seems they're designed and tuned for those vehicles. Is there anything that's new and unique to these versions versus prior versions?

The newer technologies, depending on the vehicle, there's lots of different technologies we use. We do tune them to each of -- you're absolutely right, tune them to each vehicle so that that vehicle becomes a higher-performing product. I think we're going to continue to use that aftermarket space to innovate new products. I would call out the F-150 Harley Davidson edition where we developed a shock system for that vehicle and it looks like it's going to have a great success this year.

So you're right, we -- back to your question, we actually build these shocks specifically for the vehicles they're going on in the aftermarket. And because the technology is getting more and more complex, they're pretty purpose built specific to a vehicle.

And then, Mike, last one for you, can you just comment on your thoughts on the side-by-side market looking across 2019?

We've had great success, as you know, in the side-by-side space. As a market, that growth has been talked about pretty consistently from folks like the European [Polaris], so I won't speak to their own businesses and what they're doing. It's a very good business for us. We just announced recently the Honda Talon products, which we're on, as they enter more the race and adventure line of side-by-sides. So we see that growth happening, but in that market you see mix shift happen quite frequently, and so we'll be in that [equation] as volume moves from a Polaris to a BRP to a Honda or beyond. Larry, you want to add anything?

Yes, I think, Jim, to maybe get to your question, I think much as you've read from some of our customers, we think the side-by-side, principally the high-end recreational where we participate, will grow this year, the market. So we view that as a positive, and I think that's echoed by several of these guys. And again, that's good, and we're out there as always, trying to take more than our fair share.

The key for our success is to make sure that we're on the premium high-performance vehicles, which we pretty consistently do. If we can continue to do that, no matter who wins, we win.

Our next question is from Rafe Jadrosich from Bank of America Merrill Lynch.

Good afternoon, and congratulations to both Larry and Mike as well. Just my first question, you've done a really good job over the last few years taking market share in bike, and you have definitely outpaced the overall market. Going forward, where do you see more opportunity? Are there more categories that you can go into? Do you expect the market to continue to grow at a strong rate? Where do you see more opportunity in bike going forward?

Hi, Rafe, it's Chris. Yes, I mean, we clearly have indicated our projected growth rate moving forward. We're being conservative, but we think there's lots of opportunity in the markets that we perform in. We're continually bring out new product categories outside of just suspension, looking at components, wheels, other areas. We're, as Larry mentioned earlier, we're looking at other white space opportunities as well for the specialty sports group.

That's helpful...

I mean, I think the key for Chris and the bike division has been we have innovated, and our innovation has driven us to be able to achieve growth above the industry. There's only so much market share you can take. We feel like we have a pretty strong market share, but we're working on innovation directly in suspension and in some of these other categories that Chris talked about. And then, lastly, again, expanding SSG to things that don't necessarily hang on a bike.

Yes, and I think, Rafe, the other thing I would say is, clearly, the long-term targets that Zvi has indicated for specialty sports group we believe are certainly higher than maybe what the overall bike industry would support. I think we get there several ways. The innovation, Chris's folks are constantly putting out a lot of new products, and as he indicated, a lot of those are outside the sort of legacy Fox suspension business. I mean, we're doing a lot in that area.

I think we're also, though, excited about being able to expand the TAM maybe beyond what might be directly on a bicycle with some product areas that, again, have a tie to that same passionate consumer, but maybe not so directly dependent upon the [end] bike sale.

Rafe, to add to that, we have a pretty diverse portfolio around e-bikes, which is a growing segment in the marketplace, and we think that that positions us well moving forward into '19 and '20.

And then, just Mike, a really broad question. I think over the last few years, Larry has always talked about the huge white space opportunity in powered vehicles, and that has definitely proven out. Can you talk about what makes you most excited, where you see the most opportunity going forward over kind of the long term? And then maybe talk about some of the biggest challenges that you see. Thank you.

Yes, Rafe, good question. In terms of white space, we've spent a lot of time thinking about this in the last several months and where we go and how we get there. On-road, for me, is an incredibly important space for us to get into. It's not in our guidance today, but we have -- we're developing plans, we have plans on how we can be in that space. We think if you're in the premium end of that market through race, aftermarket, and OE relationships, we can grow the TAM of our business significantly.

Beyond that, we're of course working on things like long haul, which you heard about earlier, you heard the talk about, and even things like marine and others. But for me, I really look at that white space, both internationally and in the on-road market as kind of the things to get after right away.

In terms of the challenges, the biggest challenge we have right now is our growth is, as you've seen, it's been pretty significant. That causes two things. That causes manufacturing and supply chain challenges that you have to overcome, and you overcome those through making sure you have the right people and the right organizations and the right processes. So we have to make sure we're delivering to our customers and making sure we're meeting our on-time deliveries at the same time that we're building an organization that can scale and factories and capabilities that can scale. That's what we lay awake at night thinking about and making sure we do right.

Just following up on that, can you talk about how the transition of the headquarters to the Southeast has gone, and then the near-term capacity plan outlook? Do you estimate significant near-term investments just to keep up with demand?

So our Georgia -- the transition to the headquarters went absolutely fine, no issue whatsoever. In terms of the capacity buildout in Georgia, that has gone very well, but that's a longer process. You're talking about a fairly significant campus.

We're green fielding.

Yes, we're green fielding it. So that will be our line, kind of think the first half of 2020, which is a line that's kind of what we estimated, and that's marching to plan today, so we feel really good about it.

In terms of what we need for 2019, we actually have capacity in our current footprint that will get us there, but it's not as elegant as we'd like it to be, and that's some of the benefit of getting to Georgia, so we can actually really construct automation, supply chain, all those kinds of things that will help us be better at growing in the future. So this year, we've got the plans near term to go deliver on what we've got in front of us, with the expectation that early in 2020, we're moving into a kind of a purpose-built, very modern facility.

Great, thank you. This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Thank you, Matt, and thank you all for your questions and your interest in Fox. We look forward to executing on our opportunities for continued growth in 2019. On behalf of all of us at Fox, I would like to thank our customers and suppliers for their support, and I would like to thank our employees for their hard work, all of which will be important to our continued success. Thank you, and have a good evening.

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