Fox Factory Holding Corp. (FOXF) Q1 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Fox Factory First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Haugen. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's first quarter fiscal 2015 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 first quarter fiscal 2015 earnings release, which went out today at approximately 04:05 P.M. Eastern Time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's earnings release issued this afternoon, and in the Annual Report on Form 10-K filed with the Securities & Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events or otherwise. In addition, within our earnings release and in today's prepared remarks, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin are referenced. It is important to note that these are non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in the company's press release which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mr. Larry Enterline.

Thank you, David. Good afternoon everyone and thank you for joining us today. On today's call, I will discuss key highlights of our first quarter results an overview of our industry and progress on our ongoing strategic initiatives. Mario will then discuss recent highlights from each of our businesses. 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. We stared 2015 off well particularly in light of the anticipated West Coast port headwinds that we discussed on our last earnings call. First quarter 2015 sales EBITDA and adjusted EPS came in ahead of our expectations. Our team did a great job working through the anticipated inefficiencies related to the port backlog and we are able to meet customer demand that was originally scheduled for the second quarter of 2015 by utilizing alternative shipping methods. While this did impact our gross margin we felt it was more important to maintain customer satisfaction. As a result our top line increased approximately 21% in the first quarter to $67.8 million. This growth was driven by solid demand for our powered vehicle products, which increased 43.5% while our bike product sales increased 5.7%. Powered vehicle sales were driven by solid contributions from side-by-side truck, on road motor cycle and aftermarket products, while bike benefited from our Race Face/Easton acquisition, which is performing nicely. As we communicated last quarter, we expect the competitive pressures in our bike business to continue through early in the second quarter. However we are already beginning to see the positive initial response from our model year 2016 products, which Mario will discuss in greater detail. Our teams' persistent efforts to most effectively manage our supply chain in light of the West Coast port issue allowed us to continue to make progress on our key operational initiatives targeted at improving gross margins over the longer-term. Excluding the inventory value adjustment in the first quarter for our Race Face/Easton acquisition, our gross margin would have been 29.3% which also includes the negative impact associated with the port issue. In addition, as many of you know, the second and third quarters of the year are seasonally stronger margin quarters for our business historically and we do not expect a material impact from the West Coast port situation for the balance of the year as we fully cycle thorough the remainder of those issues early this quarter. Looking ahead, we remain on track for continued long-term, margin growth. Additionally we generated adjusted EBITDA of $9.4 million in the first quarter of 2015 representing approximately a 9% increase compared to the prior year’s quarter. Turning to the bottom line we generated non-GAAP adjusted earnings per share of $0.12 in the first quarter, which was above our expectations for non-GAAP adjusted earnings per share of $0.5 to $0.10. In 2015, we will continue to benefit from our operational efficiency improvements, in our 2014 acquisitions of Sport Truck and Race Face/Easton. Overall we continue to feel positive about our long-term industry dynamics. As powered vehicles continue to become more capable, there is increased demand for improving suspension. In addition, we continue to believe that premium mountain bikes will exhibit solid growth across geographies in the coming years. That said, that our business faces foreign exchange pressure, it could have a near-term impact on our results. And some of this is factored into our reiterated fiscal 2015 values. We had a strong presence in Europe and while we are excited about our strong product lineups in both business segments in the back half of this year. We believe there are risks with the uncertainty around exchange rates that may impact sales and gross margins. Looking ahead, we remain focused on managing the controllable aspects of our business and executing our ongoing strategic initiatives. I will take a moment to review these initiatives on our recent progress. We remain on track with our transition of mountain bike product manufacturing to Taiwan, which we continue to expect to be completed by the end of fiscal 2015. At the end of 2014, we achieved our full production capacity goal of 85% and now port plant production is customer demand base. This transition reduces production lead times and manufacturing costs and shortens our supply chain and will enable continued margin improvement over time. We also began bike shock production in our Taiwan facility in the fourth quarter of fiscal 2014. We were off to a very good start with initial shock production and our team is focused on further ramping up production throughout 2015 and we are still targeting to exit the year with 80% to 85% of our shock production capacity transitioned to our Taiwan facility. In addition, the transition will enable us to more efficiently increase our powered vehicle capacity in our California based facilities. During a visit to our Taichung facility this past March, I was very impressed with our team and excited to see first hand the recent results of their work. Next we continue to focus on increasing our penetration in existing vehicle categories. Mario will provide detail on some of our new products in each business. But in general we are very pleased with customer reception to our recent technology developments. And we continue to believe that ongoing investments in R&D will keep FOX in a leadership position. Expanding the FOX brand into relevant adjacent product categories is another key growth strategy for us. With our 2014 acquisitions we entered the lift kit market and the high-performance mountain and road bike wheels market. Our first quarter 2015 results exhibited the early benefits both sport truck and Race Face/Easton can have on our business. As we move ahead, we look forward to leveraging our global marketing engineering distribution and supply chain resources, it collectively develop next generation high performance, ride dynamic solutions. Our goal of long-term gross margin improvement will be facilitated by our recently announced effort to expand and develop our El Cajon, California facility into automotive ride dynamics center of excellence, coupled with revamping our production facility in Watsonville, California for increased power sports production. As part of these activities, we’ve also launched an initiative to upgrade to a new ERP system that will assist us in the next phase of business process improvement. In summary, we’re pleased with our start to the year, particularly in light of the West Coast port challenges we've experienced. The entire Fox team has done a tremendous job managing through a difficult situation to post solid results, I want to thank them for their efforts. We remain committed to product innovation and ongoing operational improvements and leveraging the investments that we made in our business, increase sales and profitability over the longer term. Now, I’ll turn the call over to Mario.

Thank you, Larry, and good afternoon, everyone. During my remarks today, I’ll walk you through some of our recent business highlights and touch on some industry trends. In our bike business, we’re pleased to report that our entire model year 2016 product was officially launch to the public and media during the Sea Otter Classic in Monterey, California held April 16 through the 19. Booth traffic was excellent and buzz around the event about us was strong. Local dealers are telling us that their customers are walking in with photos of our latest offerings taking from Sea Otter and asking when they will be able to get them. As mentioned on previous calls, we’ve ratcheted up our marketing communications timeline with early exposure for select global media to our model year 2016 products. This early exposure had a focus on the completely redesigned factory series flow 34 suspension for in our factories series flow rear shock with our new dual piston system and extra volume technologies. This resulted in reviews that are getting in front of consumers. At the beginning of the season, the TFR aftermarket product line, sales and support the sell-through of complete bikes for our OE partners specking FOX products, the reviews have been glowing with ratings ranging from 4 to 5 stars out of 5 with mountain bike action giving us their highest rating of 5 stars. A rating they equate with perfection and had this to say about both forth and shock. If these aren't 5 star products. We don't know what it is, we continued positive feedback from the media, international aftermarket distributors global OEM customers, dealers and consumers, and we feel optimistic for a solid model year 2016. Model year 2016 products will begin to ship in volume during the second quarter; we have been working closely with our OEM customers to align their forecast with our production capacity through the early part of the model year 2016 delivery. Looking ahead, our model year 2017 development efforts are well underway. One, development of note is the introduction of a new suspension product to begin to address the next bike price point down from the market, we have traditionally served. As stated on previous calls, we are targeting initial revenue contribution from this new products to begin in the second half of calendar year 2016. The race season is underway worldwide; we are off to a great start. the UCI World Cup downhill series kicked off in large France, a few weeks ago where we took the promo and the World Cup activity series has not yet started, but in the U.S. national series, we're currently leading in both the pro men's and production women’s classes. Of the major race rates events around the world so far we won a total of 12 Gravity, two in their own and 10 cross country races. At the time of our last call, we had just recently announced plans to redesign our El Cajon California powered vehicle facility into an ISO 9001 automotive right dynamic Center of Excellence. We have secured the space required for launch, with room for growth, and have begun the reconfiguration and expansion activities. We are targeting first production from a reconfigured facility in late fall this year, with certain of our products and with the Ford Raptor products coming online in the second half of 2015. Our aftermarket between product launch in January to selling through at a steady pace and we'll be expanding the application list to that line up this summer. In. military and we've continued shipping suspension for the GMV 1.1 and continue to work on other Military programs, which are not currently reflected in our guidance due to the lack of visibility to military program timing. The Fox addition Polaris XP 1000, that comes stock with our internal bypass shocks has been met with a lot of excitement from the industry and media, utvunderground.com said the new Fox addition Polaris razor might be the best sandman UTV with ever driven from the factory. Our race results have resulted in a – our recent rates results empowered vehicles have been strong. Circle track kicked off the year posting 68 wins to-date and we took the overall trophy truck and UTV wins at the Men's 400 while sweeping the full truck of assets at the torch season opener. And with And with that I would like to now turn the call over to Zvi Glasman our CFO, to review our financial results. Zvi?

Thank you, Mario. Good afternoon everyone. I will focus on our first quarter results and then review our guidance. Sales for the first quarter of 2015 were $67.8 million, an increase of 20.8% form the sales of $56.1 million in the first quarter of fiscal 2014. As Larry mentioned, the sales increase reflects 43.5% growth in powered vehicle products and a 5.7% in bike product sales in the first quarter of 2015 as compared to the first quarter of 2014. The increase in sales of powered vehicle products was primarily due to the acquisition of Sport Truck. Partially offset by a decreases in OEM off-road product sales as a result of model year change over in the Ford Raptor program. The increase in bike product sales was attributable to the inclusion of Race Face/Easton cycling sales, partially offset by decrease in mountain bike suspension sales due to various factors including an increased competitive environment in ceratin bike product categories. And continued well weaker sell-through of our bike products as we closed out the model year 2015 and transition into model year 2016 in our second calendar quarter of year. Both of our acquisitions continue to meet our growth targets. Gross margin was 27.7% for the first quarter of 2015 a 260 basis points decreased from gross margins of 30.3% in the prior year period. Gross margin was negatively affected by $1.1 million or a 160 basis points in amortization of the inventory adjustment related to the Race Face/Easton acquisition. Additionally the anticipated inefficiencies caused by the West Coast ports slowdown impacted gross margins by approximately $1 million or 140 basis points. Aside from these issues, we believe we are on track with our plan to continue to improve gross margin over the next few years. Total operating expenses were $17.2 million or 25.4% of sales in the first quarter of 2015 compared to $12.3 million or 21.9% of sales in the first quarter of the prior year. The increase in operating expenses was primarily due to the inclusion of Sport Trucks and Race Face/Easton operating expenses including fair value adjustments in acquisition related compensation of $2.1 million. In the first quarter of 2015 with no corresponding charges in the first quarter of fiscal 2014. Within operating expenses our sales and marketing expenses increased to $5.3 million in the first quarter of 2015 compared to $3.8 million in the same period of fiscal of 2014. The increase was largely due to the inclusion of $1.2 million sales and marketing expenses from our acquisitions. Research and development expenses increased to $3.4 million in the first quarter of this year compared to $3.1 million in the same period last year. The increase primarily comes from the inclusion of research and development expenses from our acquisitions partially offset by a slight decrease in various other research and development activity. As a reminder, investing in R&D is a critical component of our business and while investment might fluctuates in certain years and quarters depending on products development cycles, and other factors, for 2015 we expect that we will continue to expect at approximately 4.5% of sales. Our general, administrative expenses in the first quarter of 2015 were $4.6 million compared to $3.9 million in the prior year period. The increase was due to inclusion of approximately $0.9 million in general and administrative expenses from our acquisitions and $0.2 million of expenses related to the shelf offering filed in March 2015. These increases were offset by reductions in acquisition related expenses of $0.5 million as well as reductions in various other general and administrative expenses. On a GAAP basis our net income in the first quarter of 2015 was $0.8 million compared to $2.9 million in the prior year period. Earnings per diluted share for the first quarter of 2015, was $0.02 calculated on $37.9 million weighed average diluted shares outstanding compared to $0.08 calculated on $37.6 million weighted average diluted shares outstanding in the first quarter of 2014. Operating income and net income were both negatively impacted by acquisition related expenses and adjustment of contingent consideration lability as well as the West Coast portfolio. Non-GAAP adjusted net income in the first quarter of 2015 was unchanged compared to the first quarter of prior fiscal year. Non-GAAP adjusted earnings per diluted share for the first quarter of 2015 was $0.12 which was flat as compared to $0.12 in the first quarter of 2014. The West Coast port issues negatively impacted non-GAAP adjusted earnings per diluted share by approximately $0.02. In the first quarter of 2015, adjusted EBITDA was $9.4 million compared to $8.6 million in same quarter last year. Adjusted EBITDA margin was 13.8% compares to 15.4% in the prior year quarter. We believe non-GAAP adjusted net income and adjusted EBITDA useful metrics that help to better reflect performance of our business on an ongoing basis. As David mentioned, the final reconciliation of the non-GAAP financial measures referenced today to the most directly comparable GAAP financial measures in today’s earnings release which is available on our Investor Relations website. Now focusing on our balance sheet. As of March 31, 2015 with cash on hand is $7.2 million. Total debt outstanding decreased $0.7 million from $50 million as of December 31, 2014 to $49.3 million based on our net repayments as of March 31, 2015. Inventory was $70.6 million as of March 31, 2015 compared to $59.2 million as of December 31, 2014. Accounts receivable was $31.4 million as of March 31, 2015 as compared to $39.2 million as of December 31, 2014. Accounts payable was $40.7 million as of March 31, 2015 as compared to $30.4 million as of December 31, 2014. The increases in inventory and accounts payable are due to seasonality in our business as we prepared for this spring selling season. The reduction in accounts receivable is also attributable to seasonality our sales in the first quarter of each year are typically is the lowest of the year. We also expanded approximately $3.7 million during the first quarter on share repurchases as part of our board approved share buyback program authorized in November 2014. Consistent with our comments last quarter, files – Fox filed a shelf of registration statement on Form S-3 on behalf of certain shareholders with the SEC on March 31, 2015. As you all aware, our shelf is a much simpler and more cost efficient process than a Form S-1 accordingly while Fox has current plans to conduct an offering we believe that having a shelf registration statement on file will provide Fox with greater flexibility should our circumstances, plans and/or capital needs change. Finally turning to our outlook. For the second quarter of fiscal 2015, we expect sales in the range of $90 million to $94 million and non-GAPP adjusted earnings per diluted share in the range of $0.23 to $0.27. For the full year, we continue to expect net sales in the range of $333 million to $357 million and non-GAAP adjusted earnings per diluted share in the range of $0.88 to $1 based on approximately $38 million weighted average diluted shares outstanding. As a remainder, non-GAAP adjusted earnings per diluted share exclude the following items net of applicable tax, amortization of purchased intangibles, certain acquisition related adjustments and expenses, contingent consideration valuation adjustments, and offering expenses. The adjustments are more fully described in the tables included in our press release, which has also been posted on our website. With that, I would like to turn the call back over to Larry.

Thank you, Zvi. With that, we would like to open the call up for question. Operator?

[Operator Instructions] Our first question comes from the line Larry Solow with CJS Please go ahead with your question.

Hi. Good afternoon guys

Good afternoon, Larry.

One that can you maybe just sort of give us a ballpark on how much you have an idea on what the pull forward was from some of your customers and is it just a timing thing or is it demand a little bit perhaps ahead of your initial expectations?

I think the way to think about it Larry, is we given guidance, when we knew we had a pretty good issue going with the West Coast ports that as we indicated last quarter, or is going to impact us, clearly we had demand that we didn’t think we are going to be able to meet, and I think what you saw was a lot of that, which we had originally pushed out to second quarter, because we didn’t think we could meet it. We are able to bring it back in, through the quarter, I would say that a little bit of the – that kind of plus or minus of few million that you get at the end of the quarter kind of explain with.

Okay, fair enough. Was that you said there was some impact on margin that was a material difference by pulling forward, do you realize yet matures you don’t want to – also the customer which is that sort of maybe offset by a little lower profitability you would have gotten to happen later in the year?

Well, a couple of things to keep in mind, let me comment exactly on the margin here, but what to keep in mind the West Coast, even if we would have gotten lower revenue, we were going to suffer inefficiency, right I mean we would have suffer cost, that we not gotten the additional revenue. So, it really has less to do with that and more with the turmoil with this created our operation. Zvi you want to…

Yes, its exactly as Larry said, the inefficiencies would have been caused, irrespective whether or not we would have achieved those sales and satisfy customers, but the impact is approximately $1 million in the quarter 440 basis points from the extra friction of dealing with West port situation.

Okay. Pretty wide range in guidance still I know last quarter when you put it out, one of the reasons was sort of the unknown impact of the West Port strike and sound like that’s been pretty well, contained or quantified in terms of what you think it’s going to be and I guess the other reason which are still lingers is the impact of FX and I guess more on competitive basis not on a translational issue. Is there anything else that or you just decide to keep guidance where it is?

Well, I think for now we decided to reiterate you know again we – you hit – I think on the major thing that that’s on our mind now which is the foreign exchange potential impact in the back half of the year. And I think much as we did last year as we did through the year and I think we get a little bit more clarity on that situation we see the demand continues, we see sell-through we would be able to narrow that range, going through the back half of the year.

Fair enough, fair enough. But it sounds like still you’re comfortable sort of with mid single digits on the bike beginning in model year 2016 which is, I guess currently and then sort of low double-digit X raptor on power vehicle side. It's fair to say those statements.

Absolutely, fair to say that Larry.

Excellent, great. Thanks guys. Appreciate it.

Thank you.

Thank you. Our next comes from the line of Jon Anderson with William Blair. Please go ahead with your question.

Hey, guys how you doing?

Good, Jon.

Did you break out, I may have missed it, how much did Race Face/Easton contribute to the sales in the quarter?

You know, we did it and for competitive reasons, we're not going to what we did we provided some historical financial results for Race Face when we when we did the acquisition, we indicated that we are targeting high single-digit growth for that and we did achieve the high single-digit growth that we laid out when we did the acquisition.

Okay. I think I guess on the model year 2016 receptions, everything you said in the prepared remarks suggest that that line has been received extremely well. Are you in a position now to talk a little bit more about your ability or your thoughts on perhaps some spec positions that will drive, will help, are you expecting some improvement in your OEM spec position based on the reception in the discussions you've had to-date. And then the second question around that is, in calendar 2014 model year 2015 there were some competitive issues, there were sell-through issues. Do you think standing here today that it's kind of sets up the kind of the competitive environment in the spec positions sets you up for kind of a better dynamics in calendar 2015 relative to 2014?

Hey, John, this is Mario. So the short answer is yes, we feel good about the spec position going into when we're delivering model year 2015. I would say we feel better about it than we did about 2015, but model year 2015 a year ago this time. And so we're optimistic. We do have, as Larry mentioned, and in his part of the call. You know we have currency and then certain things that are outside of our control, but the things that we've been able to control. We're happy with the results and now will deliver and see what happens.

Okay, that is great to hear. Last question I have guys on gross margin. Just kind of based on your commentary, I guess most of the decline, or all of the decline was related to the inventory revaluation and the port issue but if strip those out. The underlying improvement was about 40 basis points, stripping those out, which is good. But, but not as, I guess good as it's been in subsequent quarters, or the previous quarters. Are you happy with that performance? Is that the kind of underlying market improvement we should be thinking about this year or should that Bill as more of shock production was over to Taiwan?

Without commenting specifically on this on this year's margin. We're very comfortable with our long-term margin improvement targets, which are getting into the mid-30s on the legacy business by 2017, keep in mind that this year we also have added challenge of replacing a lot of Ford volumes that we no longer have and we're also in the process of retooling our facility, our Center of Excellence in El Cajon so the combination of that so it's a little bit a challenge on the year-end and but I think we feel really good about our long-term margin outlook for the business.

That's great really helpful. Congratulations on a good quarter, guys. Good luck.

Thank you.

Our next question comes from the line of Mike Swartz with SunTrust. Please go ahead with your question.

Hey guys, good afternoon.

Hey Mike, hi.

First question, can you just remind us when you fully lap the impact of Ford Raptor being discontinued.

So we had Ford Raptor, all the way most of that was through Q2 with some in Q3. Very small amount Q3.

Okay. And then, just in terms of FX. Did you, I’m sorry if I missed it. Did you quantify the incremental impact to the full year versus when you gave guidance a couple months ago?

So we’re not really assuming any FX a moderate amount of pricing pressure because of FX, we don't have to – we don't translate our a material amount of our sales back and that would actually when you compared to last year and so we're not going to have that issue. The biggest issue we have is with the U.S. dollar stronger the products that we sell in other parts of the world become more expensive.

Right. So you just assuming there is a bit of I guess elasticity to the price points of your products. I guess just given the stronger dollar?

Yes, you are going to keep in mind through, its our products into the aftermarket also our products through OEMs in those markets.

Right, okay and then you did say that the port issue net was about a $0.02 hit to EPS is that right?

That’s right.

Okay. And despite all that you maintain guidance. So, that sounds actually pretty positive. Anything, that's giving you a guess that optimism. Is it just gives you see earlier reaction to some of the model years 16 product or something into that?

I think we feel good about where things are positioned certainly in bike as Mario mentioned with model year 2016, we fell little bit better than we did a year go. We see continued momentum in powered vehicles as I mentioned our acquisitions are doing well. I think that's all on the plus side and then clearly we’ve got some big unknowns out there with what could happen with the currency issues. You know that I think we'll see in the back half and we have I think with a modest amount of that into our guidance and the range, the given those kind of the pluses and minuses, we are optimistic also.

Finally, did I hear you say you're rolling out on the ERP program?

Yes, we're in the process right now of evaluating an ERP solution. We think it's the next step in and continuing our operational efficiency improvements and making sure that the business continues to scale up.

Any idea around timing of that project?

We started the evaluation of formal kickoff is later this quarter.

Okay, great. I will stop there.

Yes, Mike, I would say just, just to comment on that, we're not going about this where there's is going to be a big flash cut to a new ERP. We've looked at it, it's something we need to do as our business has grown and become more complex. We’ve outgrown our existing system. And I think our guys are put together a pretty risk reduced plan that implement a new ERP and it will take a little longer, likely cost us a little bit more but I think it's a greatly risk-reduced way to go about it.

Okay, great, thanks, guys.

Thank you. Our next question comes from the line of Jon Berg with Piper Jaffray. Please go ahead with your question.

Great, thanks a lot guys. Good afternoon.

Good afternoon.

Just to circle back to the, the gross margin just is I know you don't want to put a hard number out there is being for the full year, but I just thinking about Q2 and the remaining and look at the year-end total. I mean is it still reasonable for each of those scenarios that we could expect gross margin to be up year-on-year. Is that not the case?

Yes, I mean again I think it's reasonable, but it's reasonable. I think we like to focus on th longer-term targets and optimize this company’s efficiency are not on quarter-to-quarter basis, but are more sustainable long-term basis.

Okay. And then I guess my other questions for Mario, which you guys announcing the new suspension product in 2017 certainly sounds really interesting, are there going to be other products introduced for the model year 2017 component line in that $1,500 to $2000 segment as well too or is that going to be at the start of the well?

We're starting in 2017, with the product that I talked about my portion of the call and that's not the only thing that we're doing for 2017, but at this point. It's the first of the same we're doing to address that price point.

Okay. And you said those other products could be potentially in 2017 as well, the model year?

Yes. There are other things that were working towards for sure

Okay, excellent. Thanks a lot guys.

Thank you.

Thank you. Our next question comes from the line of Andrew Burns with D A Davidson. Please go ahead with your question.

Good afternoon. Thanks for taking the questions here.

Sure.

I just fuel on the mountain bike you had some success with the 36 last year and in the reviews for the 34 look to be really strong out of the gate. The question is how important is that the rebid for 34 to the overall mix. It seems like it's a product that addresses a pretty wide range of mountain bikes and has the potential to be a real needle mover if it proves successful, just wanted to gauge how big of – obviously it is relative to the overall portfolio?

Well, it's important in a couple of ways. One, the technologies and features and things that have been reviewed so favorably specific to it as the other products get reviewed and rolled out will – you will find that there will be a similar thing to how the 34 is received. For the 34 specifically yes, we – it's going to be something that impacts you know folks that want to build either OEs or custom build a lighter weight long travel bike and it also is going to address somebody who wants a little bit more of a robust and stiff chassis in the trail segment. So it's going to be important for us, we're very excited about it and we're also excited that it represents how we believe all the other products in 2016, are going to be review.

Great. And a follow-up on the 2017 model, your introduction of products, the 1,500, 2,000 market, do you have any idea how much that expands your addressable market as you roll that product out?

Yes, so we're excited about hitting a new segment beyond the ones that we've typically addressed. And we think over time it opens up – we've kind of talked about it, it could be as much as 50% in units addressable market increase for us, but that's over time. This is our entree into it and we're excited about it and we'll hedge into it and be competitive in that segment like we are in the others that we compete in.

Thanks and one last one just on the powered vehicle side. I was hoping you could elaborate a little bit about the opportunities that are provided from the Watsonville facility revamp, I understand the Ford Raptor production will roll through there. But with the extra capacity, your other markets, you can target more aggressively with that space, are there areas to yield improve efficiencies of existing product as you retooled and transitioned that floor space? Thanks.

Yes, Andrew this is Larry. Yes, the Ford Raptor production is actually going to be moving to alcohol, and we're going to take the Watsonville facility with this work has actually started, we're probably 50% of the way through it. But we are re-configuring it to optimize it around the power sports part of our business. And it gives us a lot of opportunity I think as you revamp a plant to increase efficiency in terms of the way out and some of the new equipment we could bring in, that's going to help us. So that and the remaining part of bike production is what we want in Watsonville as we bring alcohol you know. Does that help clarify?

It does, thanks.

Thank you. Our next question comes from the line of David Kelley with BB&T Capital Markets. Please go ahead with your question.

Good afternoon gentlemen and thanks for taking my questions as well. Just a quick follow-up here on the powered vehicle side of the business. Maybe if you could provide some additional color, I appreciate the color on the loss of the Raptor here and also on the gain on the sport truck side of the business. If we were to just look at say the core ATVs and side-by-side, so that OEM business for you, how would you describe performance for the first quarter relative to your expectations. Just what you're seeing on the core power sports business?

Well. Maybe I could just start with numbers and perhaps even before we get to there we didn’t lose the raptor. The first raptor version has gone out of production gains – went out of production last year as we talked about earlier. We’re on in the England, we just have this high units.

So in terms of the business, both the legacy Fox Business, that’s the impact of the high aided some raptor and the Sport Truck acquisitions both met our double-digit growth targets in the quarter.

All right, great thanks and I apologize for voting on the raptor, thanks for the clarification there but also a quick follow-up it is maybe. If we look at expectations going forward. I mean, are we seeing any slowdown in the side-by-side business and market growth and then talking to the OEMs that appeared strong double-digit growth for the first you, maybe your thoughts on what we are seeing as we head into the all important spring selling season here?

Yes, I mean we look at the performance side-by-side, market in the high single-digits, going forward, is that how we think about it?

But what I will point out we believe we’ve got some share gains.

Yes, we have share – we have gotten share gains. There is more share gains to have but as a category hardest categories.

All right, great thank you and then one additional question, I think you briefly mentioned the aftermarket B plan, so how that your powered vehicle business is ramping up? As well and maybe if you could provide just an additional color on, obviously we are in the very early stages here, but just maybe longer-term expectations of where that could had and maybe an update on the potential OEM business, partly as well, but I know it's a eight targets for you guys in the future?

Yes, I mean we are pleased as I think you know we have just introduced product for Harley into the aftermarket this year, I think we can reach. We’re seeing a nice steady sell-through that we are pleased with and again I think that’s a longer-term effort and we want to get out there, you know eventually I would like to get Harley’s attention Obviously, but I can't say that that's going to happen or when. But you know I think our goal has always been is to put product out there that makes customers with motorcycle in this case perform better. And we think if we do that it's going to get recognized and eventually we get people's attention. And so I think you're seeing us start that much as we have – and again that's Harley obviously is the big guy out there, but I think we're pleased with what we see out of Polaris with the Indian and we are on several of those models and big Touring bikes, that business looks good to us. So as a category, it's one we like and we intend to work to expand it over the next few years.

Sure, and just one last follow-up on that as well. If you look at the margin potential on that business, is that so much difference between the core you know say powered vehicle margin what you have been doing historically and what the motorcycle business would provide us a much difference there?

No, no we think it's consistent, as we mentioned the other things same factors affected obviously when you have a bigger piece of revenue – the bigger OEMs going to tend to enjoy better pricing so if you got Harley some or Polaris obviously you’re going to get better pricing some other small OEM.

All right, great I appreciate you – taking my questions.

Thank you.

Thank you. Our next question comes from the line of Rafe Jadrosich from Bank of America Merrill Lynch. Please go ahead with your question.

Hi, good afternoon, thanks for taking my question. And I know it's kind of early on, can you get to kind of talk maybe the early reception from some of your customers on the acquisition of race space and have you had any success or do you see sort of an opportunity package maybe wheel on Ford combinations to OEMs?

Hi, Rafe. This is Mario, so the reception has been good I would say and they kind of understand, the desire to do the kinds of things that you talk about in your second question of your question which we definitely have plans for it, that's why we did it.

I would say, Rafe. I think overall I think after the first 90 days we're very pleased with race season.

And then just on the West Coast kind of good headwinds. Just in terms of the U.S. bringing in inventory early, that just your air freighting in, that's the incremental cost?

Well. There's a number of factors, factor number one is freight both in and out being expedited. Factor number two is the unpredictable ways and times that the product would get to our facilities therefore causing labor inefficiency.

Yes. I think the example of that Rafe, would be we would have to stop a product line one week and then working over time the next. And you know when just can't run a factory very efficiently doing that. We mentioned that it's not just things like Airfreight, I mean we were looking at other ports and we were having the truck brings from other ports. I mean logistically it created a nightmare for our folks.

As you guys look at the sort of competitive environment. Do you think this create any major issues in the industry, there are a lot of inventory in the channel. Is there a lot of discounts, just any color on that would be helpful?

I don’t think it is we see it, I think this West Coast, the situation impact of different people different ways. I think as we look at the inventory that its partner to us in our channel, we don’t see a lasting impact through the back half of the year from the West Coast ports situation.

In terms of the second quarter there should be no hangovers it's completely cleared out now?

No, I mean we’re still dealing with a little low, but just because it takes a while to work through, but I think what we've said as we take a good hard look at the quarter, we don’t see a material impact to our financials front.

Okay. Just a final question here is just kind of as you look at on based on from here – last time you guys provided guidance sales obviously came a little better gross margin was little bit below. So can you just talk about how the quarter maybe played out different than your initial expectations to maybe….

I mean I think predominantly the biggest change versus what we expected was in the sales that we had wide guidance range. We expect to gain efficiencies from the port. We weren't sure if there would be $0.01 or $0.03 kind of right around where we thought it would be. So I guess its…

Yes. I think again I think doing a little bit of good fortune and a lot of hard work from our people in logistics we manage to get enough material in your – that we can meet the satisfy some customers.

Great. Thank you.

Okay. Thank you.

Our next question comes from the line of Jim Duffy with Stifel. Please go ahead with your question.

Hi guys, this is Molly on for Jim.

Hi, Molly.

Hey, just a couple questions for you guys. Can you I apologize if you said this before, 1% of your total sales is coming from Europe at this point?

I think we do have it in our queue, why don't we dig it up for you while. If you have any more questions, we'll take that up and give you the exact percentage.

Okay. Yes. Again, so I’m trying to get a feel for is how the impact from FX is spread throughout the second half meaning is it going to be a larger negative to the third quarter or the fourth quarter is it about even?

No, keep in mind that for us Q1 is a slowest quarter of the year and for that matter our slowest bike quarter of the year. The part of our business that's got the most European sales is our bike business. So I would tell you that Q2 and Q3 will likely have a greater percentage of European sales than Q1 did. And I think the percentage is approximately 22% sales were in Europe in Q1.

In Q1 and then – and so are you about 30% or so for the full year.

I don’t want to forecast the percentage for the full year right now.

I don’t know think that you don’t know what it is.

Yes, I know. Right.

Okay and then I guess…

I mean traditionally prior to the acquisition of race based was probably closer to 35% to 36% traditionally?

Okay and then just kind of on a different note the investment in R&D, which you had talked about is being 4.5% to 5% in sales this year. Do you expect to have to increase that going forward, given that the landscape is more competitive and perhaps you'd need to some more dollars into the research side?

No, I think we continue to look at projects our ROI basis, if they make sense. we continue to invest in the business, but we've been running this business for a lot of years and while it's competitive this year, it's been competitive many other years at Fox and we will continue to evaluate investing R&D critical, but I don't see any change expected in the business model.

From that 4.5% to 5%.

Correct.

Okay. And then lastly, can you guys just kind of give us your updated thoughts on the acquisition landscape and what your appetite is like today given that you're trying to wrap in two recently completed acquisitions?

Well, I would say first half that we've had sport truck for over a year now. We are very pleased with it, race spaced and obviously it is more recent and we're working with them and as Mario described we got a lot of exciting possibilities we think there in the future. I think the landscape, we run as we mentioned in the past, we keep an active acquisition screen. I'm not looking for an investment banker to bring me a deal. I'm looking for very specific pieces. But having said that, then you got to be opportunistic as you got to have a willing seller. I think we're in an environment where you see attractive branded business growing at pretty high multiples particularly in the private equity world. So, what I would tell you, in that environment we're going to be pretty judicious, still will move out on something that we think is going to help our business, but we're not get a position where we're going to get a bidding war and pay crazy prices for really anything. Does it help characterize?

Yes. It does. I appreciate the color. Good luck on this quarter.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you, and thank you all 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 call. 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.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.