Greetings and welcome to the Fox Factory Holding Corp's Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to David Haugen, Fox's General Counsel. Please go ahead.

Thank you. Good afternoon and welcome to Fox Factory's third quarter fiscal year 2014 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, President Business Divisions; and Zvi Glasman, Chief Financial Officer. By now, everyone should have access to the third quarter earnings release, which went out today at approximately 04:05 PM Eastern Time. If you've not had a chance to review the release, it's available on the Investor Relations' portion of our Web site at www.ridefox.com. Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risks detailed in the company's earnings release, annual report on Form 10-K, quarterly reports on Form 10-Q and other company filings filed with the Securities & Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking statements or other statements herein whether as a result of new information, future events or otherwise. In addition, within our earnings release and in today's prepared remarks, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin percent are referenced. It is important to note that these are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures are included in the company's press release which has also been posted on our Web site. And with that, it is my pleasure to turn the call over to our CEO, Mr. Larry Enterline.

Thank you, David. Good afternoon everyone and thank you for joining us today. On today's call, I will provide a brief overview of our third quarter results and an update on our business and progress on our ongoing strategic initiatives. Mario will then go into a little more detail on our products by category and then Zvi will review the financial results in more detail and discuss our guidance. After that, we will open up the call for any questions that you may have. In the third quarter, we continued to execute on our ongoing strategic initiatives. We generated sales of 90.1 million, an increase of 9.5% compared to the third quarter last year and in line with our guidance range. Our sales growth reflects strong top-line growth from our powered vehicle products which increased 50.5% in the quarter. This was partially offset by a decline in our mountain bike product sales of 8.1%. I will provide some background on those segments in a moment. We are pleased to report that our third quarter gross margin improved by 90 basis points to 31.7%, bringing the year-to-date gross margin improvement to a 160 basis points. This underscores our team's continued successful execution on our operational initiatives to improve manufacturing and supply chain efficiencies as well as execution on our product design for manufacturability program. We generated non-GAAP adjusted net income of $12.2 million or $0.32 per diluted share in line with our expectations. Before I provide a brief update on our business and some of the overall trends we are seeing, I am pleased to report that today we announced that our Board of Directors authorized a share repurchase program for up to $40 million of our common shares outstanding. We view the repurchase program as an additional opportunity to return…

Thank you, Larry and good afternoon everyone. During my remarks, I would like to discuss some of our recent business and industry highlights as well as our current divisional initiatives driving short-term and long-term growth. I'll start with our mountain bike business. During our last call, we were just beginning our model year 2016 spec season. We're now in full swing and receiving great feedback on the new product line. Currently our team is in Taiwan for the Ride-On Taichung Bike Week Show and continuing to meet with our OEM partners both in the office and out on the trails, showing off our latest and greatest. While we were successfully launching our model year 2015 flagship 36 Enduro race fork to the aftermarket last spring, our product development team is hard at work finishing up the development of our model year 2016 product line. While, I can't yet reveal what we have in store, I can let you know that the product line is being warmly received. I can also point to products that are currently under our racing applications development umbrella, which certain industry media invitees were given a sneak peek of at the final stop of the Enduro World Series in Finale, Italy. Our racing applications development program is where we develop new technologies and features with our top athletes on the world's toughest terrain and courses. Oftentimes, these technologies and features are integrated into upcoming model year product lines, so allowing the media to experience RAD products as an opportunity to get feedback on future product plans. We took the opportunity in Finale, Italy to show off some trail fork and trail shock technologies and here is what they had to say. Enduro Magazine, at the end of the session I had been really impressed with the…

Thank you, Mario. Good afternoon, everyone. Before I begin with our third quarter financial results as Larry mentioned earlier, our board authorized a $40 million share repurchase program. We believe that with our balance sheet strength and cash flow, we have more than ample liquidity to fund our organic growth initiatives and future potential acquisition opportunities. Now, I'll focus on our third quarter results and then review our guidance. Sales for the third quarter of 2014 were $90.1 million, an increase of 9.5% versus sales of $82.3 million in the third quarter of 2013. As previously mentioned by Larry, the sales increase reflects a 50.5% growth in powered vehicle products and an 8.1% decrease in mountain bike product sales. Our powered vehicle growth was positively impacted by our Sport Truck acquisition. The decline in our mountain bike product sales was greater than we had expected due to industry-wide supply chain issues and a more competitive environment in certain product categories and weaker sell through of our products, as Larry described during his remarks. Gross margin was 31.7% for the third quarter of 2014, a 90 basis point increase from gross margin of 30.8% in the prior year period. The improvement in gross margin reflects a successful execution of our operational initiatives targeted at improving manufacturing and supply chain efficiencies along with continued execution of our overall product design for manufacturability program. It is important to note that excluding the acquisition related inventory value adjustment for Sport Truck, our gross margin improvement would have been 130 basis points for the quarter and 190 basis points for the year respectively. Total operating expenses were $14.6 million or 16.2% of sales in the third quarter of 2014, compared to $10.6 million or 12.8% of sales in the third quarter of the prior year.…

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

Thank you. At this time we will be conducting a question and answer session. (Operator Instructions) First question is from Larry Solow of CJS Securities. Please go ahead.

I wonder if you could help us just in terms of the shortfall on the mountain bike side, if you could help bucket sort of the -- you mentioned three things supply chain, competitive environment and the weak sell-through, sort of follow the supply chain, has that gotten worse than you thought? And sort of give me approximately what had the greatest impact of those three challenges?

Well, with regards to the supply chain, I think it persisted throughout the quarter. We actually see it going into this quarter which we are obviously hoping not to do and I think the deeper it gets into the quarter, clearly you got to start being mindful that you may lose a turn of those sales. I think it's -- based on our talking to our customers, I think it's stably planned for, obviously the impact on all of these things is contained in the guidance we put out for Q4. So while it's, I think, it's disappointing as we got into the third quarter and we saw some of the weakness developing in bike. I'm not sure, we can break it out for you exactly the contribution for each of those three things, but what I think we can tell you is all of them are contained in the guidance.

And then for the guidance for Q4, I know you don't normally guide by segment, but -- or by product line, but is -- can we assume mountain bikes are down year-over-year again in Q4?

Yes, we can assume that they might be slightly down in Q4, but we don't actually break up the guidance by segment, you're right.

And then just switching gears real fast, quickly to that the aftermarket product you announced for the some of the select Harley touring motorcycles, how does that work? Do you -- is that something you guys are doing on your own or you're doing it with Harley-Davidson? Are you doing it with a different distributor? I mean, any color there would be great. Thanks.

Well that's in the aftermarket, so we're obviously doing it with testing on Harley-Davidson motorcycles, but we're not -- it's not something we're doing through Harley. It'll be in the aftermarket through some of the guys that specialize in distributing those kind of products to Harley customers.

And how that come about just that you think there's enough demand from customers that asked you for it enough and what not that you feel it's something that is worthwhile?

N:

Right. And obviously, if Harley could if it does well enough Harley, Harley can take note and maybe inevitably you can get, incorporate a deal...

I and you can rest assured; I’m certainly going to try to get it to the CEO’s attention.

Absolutely, okay, thanks very much.

The next question is from Jon Andersen of William Blair. Please go ahead.

Hey, good afternoon, everybody.

Hi, John.

Hi, John.

I wanted to come back to the mountain bike question if I could, the supply chain issues that you talked about last quarter, understandable, I guess that issue has persisted, but with respect to the commentary around the competitive environment, more challenging and then weaker sell through, I’m just hoping you can talk a little bit more about that in terms of the timing when you kind of saw that having an impact and what your expectations are with respect to those two issues going forward. I mean, the supply chain issue, it sounds like it was going to carry on into the fourth quarter, but presumably that could be something that’s the impact ebbs beyond that timeframe. But the competitive environment and the weaker sell-through are things that I guess I have less understanding of and visibility into. So, could you provide some more color around those?

Yes. Let me I could have Mario tell you about some of the things that we’re doing in the product categories. But I think here as we got into Q3, which is really when you look at how the model of your cycle works is when we really start seeing the bikes that we’re on versus the bikes that our competition might be on and how they sell through. And I think it’s not that it’s huge numbers but it certainly impacted what we a deviation from what we had initially anticipated. I think a combination of some of the plus and minusing on spec and then the sell-through of those bikes did give us, I think, a negative outcome from what we were expecting.

Is the sell through component of this, is this category or price point segment softness, or is it specific to models that Fox is specked on?

No. No. I think, it’s specific. I mean, I think we think that the category, the premium mountain bike category is still growing. It’s not growing at the 15% it probably had in some of the past years. But we do think it’s going up, continues to go up. I think this is related to bikes that we’re on. And again, we’ve had model year 2016 developments. We had a lot of improvements. And again Mario can tell you a little bit about what we’ve done with the product line. But our expectation is this is something we’re going to see this model year. But then our expectation is to improve our spec position and share in the next model year.

Okay. That’s helpful.

I think these issues we firmly believe they’re in our control.

Okay. And then shifting over to powered vehicles, which was quite strong and ahead of our what we had modeled. Can you tell us what the contribution from Sport Truck was in the quarter? And I guess, yeah, I guess that’s the first question on the powered vehicle side?

Well, this is Zvi, John. So, sales from Sport Truck were approximately 10 million bucks but I think as we’ve mentioned you before, not all of those sales were incremental as prior to our acquisition of Sport Truck, they were a customer of ours and subsequent to the acquisition sales and we would have sold to them no longer show the sales are getting eliminated in consolidation. Additionally, as we mentioned before in previous calls, one of the reasons we acquired Sport Truck was to avail ourselves of their distribution channel and some of the sales that show up in that $10 million and $10.5 million number I just gave you might otherwise be reported as Fox. I think I would tell you that across our powered vehicle product portfolio the sales were strong. We do have a certain OEM that, as Larry mentioned, has stopped production as they change over the product line, but if you exclude that we think that the performance along our powered vehicle lines was strong this quarter. And we’re pretty optimistic that we can continue to grow that at some of the target rates that we’ve been talking about to the investor community.

That’s helpful. Just to be clear at the OEM customer that you referenced the auto OEM. Is that, did that business contribute sales in the third quarter or was it kind of offline for the entire third quarter?

Very, very modest, significantly lower than the run rate.

Okay. And I guess the last question I had for now is on the gross margin, which the improvement was strong clearly on a year over year basis. So little not quite as strong as we had modeled, and I suspect that has to do with the mountain bike sales in the quarter. I think you've talked in the past about couple of hundred basis points of gross margin improvement for the full year. Is that something you still expect to achieve or do we need to kind of rethink that?

I think we point out that, we're up 190 basis points year-to-date, if you exclude the acquisition related adjustments. We're still achieving all of our margin targets, clearly there's an element of gross margin that relates to volume. So should we be on the lower side of the guidance we gave, it wouldn't be as good as if we were on the higher side of the guidance. But I don't think that you need to rethink the margin targets long-term. We would tell you just, we talked about getting to the mid 30s in the next few years. We think that's still an appropriate target for the legacy non-Sport Truck business where when we acquired that we weren't contemplating future margin expansion for them. So, we would tell you that, we're well on track, we're very pleased with our margin improvement efforts. And we were able to achieve the margin on lower volume than we had initially envisioned. Had we had higher volume, maybe we'd beat our numbers this year.

The next question is from Craig Kennison of Robert W. Baird. Pease go ahead.

Good afternoon, thanks for taking my question. Maybe I'll follow up on that margin question Zvi and I think as part of the IPO process you talked about one factor in your margin expansion plan being an increase in price, using your brand and leveraging that to raise price. But then, you've also cited competitive pressure today. And I'm wondering, what the nature of that competitive pressure is and whether that changes you're thinking on the ability to raise price?

I think that our philosophy on price is unchanged. We feel like the targets we've gone after for gross margin improvement, should we also get pricing improvement, we could have probably beat those a little bit more upward pressure. In any given year, our philosophy is to put upward pressure on pricing, but we don't see a change to that core philosophy, strategy or tactics. We will of course be responsive to the market in any given year though. Did I get your question, Craig?

Yes, definitely. Thank you for responding. And then just on the inventory front, obviously if you have sell-through that is weaker than expected it can result in excess inventory at the dealer level and also maybe at the OEM level. And I'm wondering, whether you have any visibility into the level of inventory at each stage in the channel?

I think overall Craig, we're still comfortable again, the weakness that we've seen is not huge absolute numbers, but clearly disappointing to us. But I don't think we see as there is any big inventory issue that has developed because of this.

The next question is from Jim Duffy of Stifel. Please go ahead.

Couple of questions. Follow up on Jon's question about the new call out on increased competitive environment in certain categories. Which categories are you seeing this in? And is it pricing or functionality that's resulting in the pressure?

I think Jim, it's, again, we got some good competitors out there and I think whether it's a fork or a shock, we got guys that can come up with pretty good ideas. I think it's mainly functionality based. The guys put out some pretty good product and again that's why we've amped up our efforts on model year '16.

Makes sense, that's helpful. And then is that concentrated in the OEM business, are you seeing that in the aftermarket bike sales as well?

You see it in both. I think -- seeing that. Again, I think it does impact both of those categories.

And then forward-looking question here, due to changing dynamic with the key power sport OEM, these issues in the bike segment, growth this year a little shy of initial expectations, based on your current visibility to specs and perhaps a stub period benefit from Sport Truck, anything to say about preliminary thoughts on revenue growth for '15 or are you not ready to go there yet?

I think what we're really ready to say is that, we believe that the long-term target growth in the powered vehicle segment which I think is what you are asking about is consistent with our expectations. We don't see any change to the fundamental story or our plans for growth.

Yes, and I think on bike is as I indicated our expectation is to do better next year.

(Operator Instructions) The next question is from Rafe Jadrosich of Bank of America Merrill Lynch. Please go ahead.

Good afternoon, thanks for taking the question. Just to kind of stay on the competitive environment question, kind of what -- can you just give a little color on what gives you confidence sort of that 2016 will trend better, is there just, what specific categories were a little bit softer and then maybe who has been trending a little bit better recently?

Well, I think what gives us some confidence is clearly we’ve got a good look at how things were selling through. We’ve done some analysis obviously on competitive products before that. And we’d started our model year 2016 development program quite some time ago and knowing that information, I think we’re given some confidence by the reception, the early receptions those model year 2016 products are getting, by some of the product managers at the OEMs as well as end-users who ride competitive products.

Yes, Larry, I would also add the race results that we that we demonstrated in 2014 through the racing applications development efforts and those features and technologies that are going to be incorporated into 2016, that’s all...

Good point, Mario.

Confidence inspiring.

Has there been any new kind of technology that came out in 2015 that you might have been out of position for that you will be adding for 2016?

Mario, you want to describe a little bit about what we, the philosophy we’ve taken in model year 2016 development.

Well, model year 2016 we’re addressing, as you know, there is several different categories of mountain bike at the high-end. They each in full suspension take a fork and a shock. And we’re addressing weight, we’re addressing friction, we’re addressing damping, we’re addressing types of spring technologies that we’re using. So we’re going after pretty aggressively.

Thank you. And then that’s helpful. Thank you. And then just in terms of the gross margin, can you sort of help us parse out maybe the benefit from the product design for manufacturability versus the benefit from the transition to Taiwan. Is that kind of is that still a drag or is that neutral right now?

So we would tell you, Rafe, that it may be probably 50%-50% is a way to think about it, maybe 50% of the improvements that we get come from Taiwan and the rest from the other improvement initiatives that we have. In terms of whether it's a drag or not we’d say now it's probably breaking even for Q3. So going into the year with a 100 basis points drag or so and now with the Q3 production, it won’t be a drag. Q4 is a seasonal quarter. So it’s always a lower gross margin quarter for us Taiwan or not Taiwan or no Taiwan. So you always have a little bit more inefficiency in Q4 for our business.

When will that go from being neutral to a benefit?

Next year.

Okay. Thank you.

Next question is from Mike Swartz of SunTrust. Please go ahead.

Hi. Good afternoon, gentlemen. This is actually Mitch in for Mike.

Hi, Mike.

Hello.

Just a couple of housekeeping questions. Most of my questions have been answered. Was there any impact of FX in your new guidance versus your prior outlook?

No.

Okay. And then I assume you'll be able to start repurchasing the shares immediately?

Yes. What I can disclose exactly when we – we're obviously subject to the rules and regulation about volume restrictions and insider information we might have et cetera, but we are we’ve got the authorization and we're going to work with our teams to figure out the best way to execute that?

Okay. Thank you, guys.

Thank you.

There are no further questions at this time. I would like to turn the floor back over to management.

Thank you. And thank you for your questions and your interest in Fox. We look forward to continuing to execute on 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. Thank you for your participation. You may disconnect your lines at this time.