Fox Factory Holding Corp. (FOXF) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Fox Factory Holding’s Second Quarter 2015 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] I would now like to turn the conference over to your host, David Haugen, General Counsel for Fox Factory. Thank you. You may now begin.

Thank you. Good afternoon and welcome to Fox Factory's second 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 second 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 Web site 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 otherwise 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 today’s press release which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mr. Larry Enterline.

Thank you, David. Good afternoon everyone and thank you for joining us today. On today's call, I will discuss key highlights of our second 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 are pleased with our second quarter 2015 revenue performance. Sales exceeded our outlook and adjusted EPS came in towards the high-end of our expectations for the second quarter. Our topline increased approximately 12.5% in the second quarter to $97.2 million. This growth was driven by solid demand for our bike products, which increased 23.9% while our powered vehicle product sales, experienced a modest 3% decline. The increase in bike was due to our acquisitions and an increase in mountain bike suspension sales, which is an indication of an early positive industry response to our model year 2016 products. Mario will discuss our bike business later in greater detail. In the second quarter we also posted a return to growth in our legacy Fox mountain bike business while we are pleased with our bike business growth in the second quarter, we remain concerned that macroeconomic factors in China and western Europe could negatively impact consumer sell through of our bike products in the second half of 2015. Powered vehicle product sales were lower year-over-year due to lower off road product sales as a result of a modern year change over in the Ford Raptor program, partially offset by higher sales of other power sports products. Our gross profit dollars were up versus the prior year quarter, gross margin percentage was down 50 basis points from the second quarter of 2014 attributable primarily to changes in the product and customer mix, as well as supply chain and production inefficiencies associated with the logistics of accelerating to ramp-up of bike rear shock production in Taiwan and the subsequent reconfiguration of our Watsonville California facility. We're also making additional infrastructure investments in our El Cajon, California facility to increase production capacity to meet anticipated powered vehicle product demand including the restarting of the Ford Raptor shock production in late 2016. We remain confident with our long term margin improvement goals. Although we experienced gross margin challenges in the first half of this year, we anticipate that our margins will improve slightly in the back half of the year as compared to 2014. Turning to the bottom line. We generated non-GAAP adjusted earnings per share of $0.26 in the second quarter, which as I mentioned earlier was toward the high-end of our expectations for non-GAAP adjusted earnings per share of $0.23 to $0.27. In 2015, we will continue to work on our operational efficiency initiatives and further benefit from our 2014 acquisitions of Sport Truck and Race Face/Easton. Additionally we generated adjusted EBITDA $17.3 million in the second quarter of 2015 representing approximately a 4% increase compared to the prior year’s quarter. Going forward, we continue to feel positive about our long term industry dynamics. We believe that bike products will continue to grow across our served geographies through the next model year, the aforementioned macro-economic factors notwithstanding. In addition as powered vehicles increasingly become more capable, there is strong demand for improved suspension and we believe the business will continue its growth trend through next year as the Ford Raptor production begins in the latter portion of 2016. Overall our team is excited about our strong product line ups in both our bike and Power Vehicle segments in the back half of this year. We will always look to opportunistically grow our business while at the same time maintaining a focus on managing the controllable aspects of our business and executing our ongoing strategic initiatives. I'll take a moment to review these initiatives on our recent progress. We remain on track with our transition of the majority of our mountain bike product manufacturing to Taiwan, which we continue to expect to be completed by the end of fiscal 2015. This transition will further reduce production lead times and manufacturing costs and shorten our supply chain, which will enable future margin improvement overtime. Our bike shock production in our Taiwan facility is going well and our team is focused on further ramping up production in the balance of 2015. During the quarter we made the decision to accelerate our ramp-up of our rear shock production responding to customer requests to deliver product from Taiwan, which caused us to run higher logistics costs than we had anticipated. We believe the customer service is paramount and while this acceleration cost us more in the near term, we believe will pay dividends down the road. We’re currently at 46% of our total shock production from Taiwan and we're still targeting to exit the year with 80% to 85% of our shot 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. We spent significant time during the quarter reconfiguring our Watsonville, California facility for increased powered vehicle production. This will lead to more efficient production and greater capacity going forward. Next, we continue to focus on increasing our penetration in our existing vehicle categories. Mario will provide an update on some of our new products in each business in his portion of the call. That said 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. Our acquisitions continue to perform well in the second quarter as we worked to expand in the relevant adjacent product categories. We believe the lift kit market and the high performance mountain road bike wheel market will be compelling growth categories for us ahead. Our team is already doing a great job of leveraging our global marketing, engineering, distribution, and supply chain resources to collectively develop next generation high performance ride dynamic solutions. As I mentioned on our call last quarter, we launched an initiative to upgrade to a new ERP system that will assist us in the next phase of business process improvement and we are currently nearing the end of the initial design phase. We feel strongly that this effort will also assist us and improving our consolidated gross margins over the next few years. In summary, we had a strong second quarter performance. We remain committed to product innovation and these ongoing operational improvements and while gross margins were a bit below our expectations for the quarter, we will continue focusing on operational improvements to bring them back to a growth trajectory. Thanks to the entire Fox team for their hard work this quarter. 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. I'll start off by saying that we continue to be very pleased by the performance of the latest additions to the Fox family, Sport Truck U.S.A. and Race Face/Easton Cycling. Along with their great performance, we have been steadily integrating them into the larger fold and have a number of exciting collaborative efforts in the areas of engineering and marketing currently in the works. While we can't share specific details during this call, we anticipate the ability to start sharing some of these projects in the near future. In our legacy bike business, product satisfaction momentum continues to build with positive long-term reviews coming in for our model year 2015 factory series 36, and with four- to five-star ratings for our model year 2016 product line. We expect this momentum to continue as we head into our model year 2017 selling season. Our team has done model year 2017 sneak peaks with OE product managers at this stage, with test sessions booked, and product line presentation meetings scheduled during Euro Bike at the end of August. As mentioned on previous calls, one product development initiative 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. We are on track with this initiative and we're still targeting initial revenue contribution from this new product to begin in the second half of calendar year 2016. 2015 race season has been very successful to date with our athletes consistently reaching the podium. Our racing applications development program continues to play a key role in our racing success as athletes test features and technologies to be incorporated into our model year 2017 line-up. Pinkbike just released their exclusive article on our semi-active electro-mechanical live valve system, which is a collaborative effort between our advanced technologies group and racing applications development program. On the major race circuits world-wide, we've won 26 downhill events, 14 Enduro events, 22 cross-country events, and three free ride events. Now we'll move onto our powered vehicle business. The transformation of our El Cajon, California, powered vehicle facility into an ISO 9001 Automotive Ride Dynamics Center of Excellence is well underway and progressing on schedule. As mentioned on our last call, we are targeting first production from the reconfigured facility in late fall of this year. We anticipate that the new Ford Raptor products will come online out of this facility in late 2016. Aftermarket V-Twin products continue to sell through at a steady pace. And we currently have a team at the 75th Sturgis Motorcycle Rally promoting and demonstrating Fox products alongside one of our distributors. While winter is still months away, we're getting ready for the snow industry kick-off event, Haydays, during the second week of September. During the two-day Haydays event, we'll launch our model year 2016 snowmobile product line to the media and consumers and host our annual VIP party which has become an institution at the event. We've already been enjoying favorable media coverage for our new Quick Switch 3 technology that allows riders to choose between three modes of suspension performance. Along with being sold in the aftermarket this fall, Polaris, Yamaha, and Artic Cat has specked Quick Switch 3 for certain snowmobiles in their respective 2016 line-ups. We're also very pleased to be included as the OEM suspension solution supplier for the Polaris RZR XP Turbo EPS featuring our internal bypass shocks, and the RZR S EPS and RZR 900 EPS XC edition featuring our 2.0 Podium X shocks. I'll conclude with our recent race results and powered vehicles. We continue our circle track domination with over 426 wins to date and we took nine out of ten top spots at the Tatts Finke Desert Race in Australia, including the overall win. Also, in recognition of his achievements, Fox driver Shannon Campbell was inducted into the Off-Road Motorsports Hall of Fame. And with that, I would like to now turn the call over to Zvi Glasman, our CFO, to review our financial results.

Thank you, Mario. Good afternoon, everyone. I'll focus on our second-quarter results and then review our guidance. Sales for the second quarter of 2015 were $97.2 million, an increase of 12.5% from sales of $86.4 million in the second quarter of FY14. As Larry mentioned, the quarterly sales increase reflects 23.9% increase in bike product sales partially offset by a 3% decline in sales of powered vehicle products as compared to the second quarter of 2014. The increase in bike sales was primarily due to the inclusion of Race Face/Easton sales as well as a return to growth in our legacy Fox mountain bike business. The decrease in sales of powered vehicle products was due to lower off-road product sales as a result of the model year change-over in the Ford Raptor program, partially offset by robust growth in sales of our powered vehicle -- powered sports products. Gross margin was 30.7% for the second quarter of 2015, a 50-basis-point decline from gross profit margin of 31.2% in the prior year period. This was attributable primarily to changes in product and customer mix as well as supply chain and production inefficiencies associated with ramping up bike rear shock production in Taiwan, and the reconfiguration of our Watsonville, California, facility. Additionally, we made investments in our El Cajon, California, facility to increase our production capacity to meet anticipated future powered vehicle product demand, including the resumption of the Ford Raptor shock production in late 2016. Although we experienced some margin challenges throughout the first half of this year, we anticipate that our gross margins will improve in the back half of the year and be slightly up over the same period last year. However, due to the factors discussed above, we anticipate that our gross margins for the full year will be relatively flat to 2014 after adjusting for the impact of the West Coast port slowdown which we experienced in Q1 of 2015. We remain confident with our long-term margin improvement goals. Total operating expenses were $19.3 million for the second quarter of FY15 compared to $15.2 million in the second quarter of the prior fiscal year. The increase in operating expenses were primarily due to the inclusion of Race Face/Easton's operating expenses within our consolidated results, while the increase stated as a percentage of sales was primarily due to acquisition-related compensation expense associated with Race Face/Easton with no corresponding expense in the second quarter of FY14. Within operating expenses, our sales and marketing expenses increased to $6.1 million in the second quarter of 2015, compared to $5.1 million in the same period of 2014. Of the $1 million increase, $700,000 was due to the inclusion of Race Face/Easton's operating expenses. Research and development expenses increased to $4.2 million in the second quarter of this year, compared to $3.6 million in the same period last year as we continue to invest in new products and technologies to maintain our premium position in the marketplace and enter new markets. As a reminder, investment in R&D is a critical component of our business and investment might fluctuate in certain years and quarters depending on product development cycles and other factors. For 2015, we expect R&D expenses to remain relatively consistent with prior year stated as a percentage of sales. General and administrative expenses in the second quarter of 2015 were $4.9 million, compared to $4.7 million in the prior year comparable period. The increase was due to the kickoff of our recently announced ERP project as well as Race Face/Easton-related expenses offset by decreases in various other general and administrative categories, including offering expenses. On a GAAP basis, our net income in the second quarter of 2015 was $6.8 million, compared to 11.6 million in the prior year period. The results for the three months ended June 30, 2014, reflect a one-time tax benefit net of cost of $3.7 million with no corresponding benefit in the same period in 2015. Earnings per diluted share for the second quarter of 2015 was $0.18 compared to $0.31 in the second quarter of 2014, both of which were calculated on 37.8 million weighted average diluted shares outstanding. Similar to the first quarter in 2015, operating income and net income were both negatively impacted by acquisition-related expenses. Non-GAAP adjusted net income in the second quarter of 2015 was relatively unchanged compared to the same second quarter of the prior fiscal year. Non-GAAP adjusted earnings per diluted shares for the second quarter of 2015 was $0.26, which was unchanged versus the same period in 2014. In the second quarter of 2015, adjusted EBITDA was $17.3 million compared to $16.6 million in the same period last year. Adjusted EBITDA margin was 17.8%, compared to 19.2% in the prior year quarter. We believe non-GAAP adjusted net income and adjusted EBITDA are useful metrics that help to better reflect the performance of our business on an ongoing basis. As David mentioned, a reconciliation of the non-GAAP financial measures referenced today to the most directly comparable GAAP financial measures is included in today's earnings release, which is available on our investor relations Web site. Now turning briefly to our results for the six months in 2015. Sales for the six months of 2015 were $165 million, an increase of 15.8% compared to the same period in 2014. Sales of powered vehicle and mountain bike products increased 14.7% and 16.7% respectively for the first six months of 2015, compared to the prior year period. Adjusted EBITDA increased 5.6% to $26.7 million, compared to $25.3 million in the first six months of the prior year period. Now focusing on our balance sheet. As of June 30, 2015, cash on hand is $6.2 million. Total debt was $68.6 million, compared to $50 million as of December 31, 2014. The increase was due to financing of seasonal work in capital needs and the payment of the initial Sport Truck earn-out. Inventory was $78.8 million as of June 30, 2015, compared to $59.2 million as of December 31, 2014. Accounts receivable was $51.7 million as of June 30, 2015, as compared to $39.2 million as of December 31, 2014. Accounts payable was $44.3 million as of June 30, 2015, compared to $30.4 million as of December 31, 2014. Contingent consideration liability decreased to $13.5 million at June 30, 2105, compared to $21.3 million as of December 31, 2014, due to payment on the Sport Track earn-out. The increase in accounts receivable reflects higher sales in the second quarter. The increase in inventory and corresponding increase in accounts payable are due to preparation for the third quarter which has historically been our peak selling season. Finally, turning to our outlook. For the third quarter of FY15, we expect sales in the range of $103 million to $108 million and non-GAAP adjusted earnings per diluted share in the range of $0.33 to $0.37. For the full year, we now expect net sales in the range of $347 million to $363 million and non-GAAP adjusted earnings per diluted share in the range of $0.91 to $1.00 based on approximately 38 million weighted average diluted shares outstanding. As a reminder, non-GAAP adjusted earnings per diluted share exclude the following items net of applicable tax; amortization of purchased intangibles, certain acquisition-related adjustments in expenses, contingent consideration valuation adjustment, and offering expenses. The adjustments are more fully described in the tables included in our press release which has been posted on our Web site. With that, I'd like to turn the call back over to Larry.

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

Thank you. [Operator Instructions]. Our first question comes from Larry Solow from C.J.S Securities.

Wondering if you could just give us any more color on some of the couple of factors maybe that sort of drove your increased outlook on the revenue side and then narrowing of the range upward on EPS?

Well, I think as we look at the order book we have now both in bike and powered vehicles, and if you look at the guidance we put out for the quarter and the year it kind of naturally lives. We're balancing that off against the macro-economic situations both in China and certain markets in Western Europe. So we tried to weigh some of that in there. We certainly haven't weighed a collapse of those markets, but on balance, I think for where we sit right now in both businesses, we feel pretty good. I think Mario went over a little bit of the reception of our model year 2016 products which we're feeling really good about now that they're out there. And we've seen how they've been specked; obviously still awaiting more sell-through data on those. Again, the indications right now, we feel pretty good for the kind of year that as Zvi described in guidance.

So it sounds like the specs are running even ahead of expectations. Or they're at least coming true to fruition in line with your -- the higher end of your, yes.

Well, we expected -- I think as we indicated some improvement last year and I think we're seeing that come into fruition. I think we had a little bit a headwind on the margin side, but clearly we're able to lift the bottom end of our guidance notwithstanding that. So right now I think we're focused on the execution and make it happen here for the balance of the year.

And the acquisition Sport Truck and then Race Face, are they -- I think when you purchased Sport Truck, you had thought it would be I think a high single digit, double digit grower. Is that living -- it sounds like it's living up to expectations, right? And I think there was actually, yes.

Yes, it certainly is. I think both Sport Truck and Race Face/Easton have certainly met and exceed our expectations in many cases. And I think we're actually beginning to see some of the early signs, as Mario indicated. Nothing we can announce yet but we're pretty excited about some of the collaboration that's going on there that we envisioned. And again, all signs right now are great for both of those businesses.

In terms of gross margin and I will just move on, it seems like it's just some growing pains with some temporary efficiencies. Are you still confident in your sort of mid-30s, it's core business gross margin by '17.

Yes. The thing that I would point out, none of these things go is on a straight line.

Absolutely.

And this probably slows us up a little bit in terms of attaining that. We're very confident in those target margins. That range, whether we hit it exactly in 2017 or it bleeds into 2018 might be subject to a little bit of debate. I think the key thing is we don't see anything. And I think as we've always said, these things don't happen in a straight line, right? Particularly as you add capacity, which is always a great problem to have. But that clearly does impact efficiency as you go, but nothing that would make me think that the targets we've established aren't obtainable. Timeframe could move out but that's an approximation anyway.

Thank you. Our next question comes from Mike Swartz from SunTrust.

Hey, just wanted to touch on the power sports business and maybe get a feel for understanding that the year-over-year comp from Raptor is holding you up a little bit. But just the core underlying business excluding that and I think you've lapped Sport Truck now. Can you give us a better sense of what you're seeing there in terms of growth? Are we still expecting core double digit growth for the full year?

Yeah. We have seen very strong growth in the core powered vehicle business excluding the effect of the Raptor and it is definitely consistent with our double digit long term growth targets.

Yes, I think Mario described some of the recent introductions; pretty exciting vehicles with our stuff on them that we think are going to help continue to fuel that growth.

And some of those new programs and end products that Mario talked about; is that stuff that shipped this quarter? Or is that more of back half shipments?

It's more back half shipments.

And then any way you could give us some sense as to the magnitude of some of the investments? And it sounds like you even inter-quarter stepped up or accelerated some investment in Taiwan. Can you give us just a feel for what maybe the impact was there on gross margin?

Well, the margin was down and we expected margins to fare better than they ultimately did in the quarter. There was a couple of factor. Number one, we did have some mix issues which dragged down our margins. As we've always said, we have different gross margins in the various product lines. We have factors like the size of the customer, the channel, the product line affects that, whether we're selling at the top of the product line or still in the premium part but in the introduction. So, there are a lot of those factors, and mix was a good part of the decline year-over-year. Then in response to customer requests, we transitioned our shock production to Taiwan quicker than we had anticipated. And that resulted in higher logistical costs and complexity. So that hurt our margin somewhat in the quarter. Similarly, in the question you asked, in response to increased customer demand, we increased our capacity both in Watsonville where we reconfigured the facility and in El Cajon where we're gearing up for the resumption of the Ford production next year. In terms of breaking out the exact dollars; which actually I'm reluctant to do that. But again, mix was a good chunk of it year-over-year. And then the rest of those impacts affected our ability to achieve the margin target that we had hoped for.

But it sounds like some of that's rolling off as we move through 2015?

Yes. I think some of that's got rolling off. We don't see the mix necessarily rolling off in the near term. But we do expect some of those frictional costs to ease and moderate and hopefully we won't have to deal with the -- we don't expect we'll have to deal with those next year.

And then just one more question on gross margin; I think you said you expected now the full year to be flattish year over year. I guess that kind of exclusive of the port costs that you faced earlier this year. So I guess that would imply down year-over-year. But are you comparing that to the adjusted gross margin from last year?

I’m talking about adjusted gross margin adjusted for their finished goods and we see the back half of the year actually up modestly versus the back half of last year.

Of course, he reported.

I am talking about adjusted gross margin.

Adjusted for the finished goods. And we see the back half of the year actually up modestly versus the back half of last year.

Thank you. Our next question comes from Jon Berg from Piper Jaffray.

As far as my first question, I guess I wanted to ask about what you're seeing in the international market. I think you mentioned it a few times both China and then also Western Europe. I guess what are you hearing out of those areas? Is it more of a macro-economic type of a situation? Or are you getting maybe some pushback from customers because of foreign exchange rates, that type of thing? Just are your customers just deciding not to buy anyone? Or are they just kind of having a tough time with product out of the US?

I think it's a combination, and again it's market-specific. I would say in China, we've seen a general slowing. And again no secret, they've got stock market issues. They've got all kinds of stuff happening over there. Certainly, again, we're in China for the long haul. So this kind of thing is going to happen. But we've clearly seen some slowing over there. In Western Europe, it's hard to say because it is certain markets that we've actually got some data out of that says things have slowed up a little bit. And so what are the factors behind that? Well, you had Greece that was probably troubling people for a while. And were things really going to blow up. Certainly our products on a dollar basis, they're more expensive, right, I mean, there's the exchange rate from a year ago has moved pretty dramatically. So we think that's had an impact. The thing that I think that gives us a little comfort, it's not every market. But it is certainly some of the larger markets over there. We've seen a little bit of aftermarket softness. We're offsetting that with I think our OEMS -- still feel good about their forecasts as this point. But that's sell-in for us. And I think the reason we put the cautionary note out there is I think as they get bikes out in the channel in these markets, we really want to see how they sell through here as we get into the back half of Q3 and into Q4 before declaring victory.

And then just as my follow up; just circling back to that revenue guidance, obviously, I think you're implying some deceleration in your mountain bike revenue from a really strong Q2. And then just thinking about the powered vehicle revenue, too, as to how that's going to play out the rest of the year. When you look at a year combined, do you think both of those segments can still kind of be up in that low double digit or greater range? Is that kind of the way to think about it? Or is there more variability there?

Yes, I wasn't sure the way you framed what you were saying. The legacy Fox business both in bike and powered vehicles was up, excluding the impact of the Ford Raptor. The bike business we think is on track for this new model year to meet our mid-to-high single digits growth target, probably closer to the mid than the high this year. As for the powered vehicle business, again, we believe that that is well on track to be a solid double digit grower organically and with our acquisitions, exclusive of the impact of the Ford Raptor. And the Ford Raptor, I don't think we had too much revenue in Q3 last year. We had some in the first half of the year but not so much in the back half of the year. So that year-over-year comparison gets easier in the next quarter.

Thank you. Our next question comes from Jon Anderson from William Blair.

My first question is, I'm trying to understand what might account for kind of the variability from quarter-to-quarter in the growth rates across segments, I mean powered vehicles was up 40% plus in Q1 and down 3% this quarter, and I think Raptor was up both of those quarters. So just trying to understand what drives some of that. And I think we kind of have it reversed in Mountain Bike but that's a little clearer given the transition to the new model year.

Oh, yes. So Zvi is looking up -- checking your numbers on the powered vehicles. But on the bike, that was a model year issue which starts to kind of -- that was model year 2015 issue. So it was present in the first quarter, less so in the second. And model year 2016 starts to come out in the second. So that's the variability in bike.

I think you're probably referring to the fact last year in Q1 we didn't have Sport Truck. And this year in Q1, we did have Sport Truck.

Right.

Beyond the impact of the acquisitions, if you want to ask us about the variability of our growth, we obviously had some challenges on the bike business going, exiting the model year. So now that's behind us, now we're in the new model year where we think we can kind of resume our historical growth in bike. And again, I think if you exclude the impact of the Ford Raptor, I think we've consistently grown at our long-term targets for quite some time in powered vehicles.

It sounds like it's the timing in Sport Truck that's maybe making it -- the variability you pointed out sounds like Sport Truck might be a lot of it.

And it might -- and you might also be talking about Race Face/Easton. Now, of course, that is --

It's incremental.

It's incremental sales year-over-year since we bought them mid-December of last year. But beyond that, the core business has been growing consistently, absent those things I just -- factors I just mentioned with our target. So I think if you model those factors out I think you'll find that things are pretty much on track.

Fair enough. On the -- I just again, want to clear -- clarify. I think, Zvi, your comment around gross margin for the year being flat after the West Coast port slowdown. I think that was an issue in the first quarter. I think it affected gross margin by about 140 basis points. So you're not implying that 2015 will be 31, 1 in line with 2014. But it'll be inline after making an adjustment for that dilution that you experienced in Q1 around the West port -- West Coast port issue.

Yes, may be the better way to think about it is the back half of this year compared to the back half of last year, we will be up. Is the helpful?

Yes, that's fair. Okay. Could you talk a little bit more about the Raptor? And I know it's still a ways off but in terms of the expectation for the return, I guess, in earnest of shipments around Raptor. And is there any kind of evidence, given kind of the change in some of the, kind of the change-over there that that business could come back stronger in the future than you kind of left it last year?

Well, I think we would love to have it do better. Now, I think we would tell you and I think our guys that are experts in this area would tell you that the new Raptor is much more capable off-road than the old Raptor. And -- which was already pretty capable. So it's got some great new technology in it. So we're hopeful that it obviously does very well. So that's where kind of we're at. We obviously want it to do well. We think it sets up nicely from a capability and feature standpoint. And we'll be excited late next year to actually get it out there and see how it does. We believe it's going to do pretty well.

Okay, fair enough. Mario, you mentioned the new suspension products at the one price point down. Is that something that will be accomplished in kind of a margin-neutral way? Or is that going to be an incremental kind of headwind to margins that we experience in 2016?

Yes, we expect it to be margin-neutral, Jon. Yes, and that comes on, as I mentioned, we start to get contributions from that in the back half of next year.

And is the right way to think about that, is kind of a multi-year process to kind of build your share or spec position. It's not kind of a big thing.

Yes, we add into it next year. And then we will continue to increase our offerings and edge share up over several years.

Our next question comes from Molly Iarocci from Stifel.

I did join late so I apologize if you have already given these details.

How can we help you?

I appreciate it. Alright, just a couple quick one. Have you or will you give the actual dollar impact to the first half of ’15 from the Raptor, just to kind of help us look at how it normalize next year?

No we won’t do that, I mean Ford has treated that. First of all, we don’t like to comment specifically on customers and not a number of it. Ford has publicized and we wouldn’t want to upset one of our important bike customers. So no we’re not going to give that.

Can you remind us of when Raptor will come back online and hit the P&L?

Late next -- we expect it to come back late next year. It could be as late as Q4 or late Q3. But safely I would say Q4.

And would you expect the positive impact to similar to your historical numbers with them?

We would but we would expect that it would ramp up over time. These things tend to build up to a run rate over time.

Yes, it won't start up day one at its run rate.

Right. Typically it takes a couple quarters to get there.

Okay, and then last one, I just heard -- quite at the end of the detail, you had mentioned that part of the decrease in gross margin was because of mix. Could you just give a little more detail on that negative impact? And since you did say you expect it to continue going forward, is there any way you can break out the basis point impact from this quarter or what you expect going forward?

No, we're generally not going to give that level of granularity. But it's factors that we have explained historically will typically affect our margins. For instance, OEMs tend to carry a lower product margin than aftermarket. When bike, where we're our own distributor and dealer in the U.S. that have a higher margin than powered vehicle where we go through distribution. We'll point out we had some Western -- we did, Larry mentioned some Western Europe issues in aftermarket. Those are in China. Those are going to tend to have a higher margin. So that would be one of the factors. So we had a whole confluence of factors. But there really weren't -- nothing specific. Not one factor that accounted for most of it. It's a lot of different customer, product, region, channel factors.

And then the increase that you're expecting in the second half, mostly consistent across both the third and fourth quarter, for gross margins?

Probably a little more back loaded because as you can probably appreciate, in accordance with GAAP, if you incur -- if you have extra costs, some of those find a way onto the balance sheet and bleed out.

[Operator Instructions] Our next question comes from Scott Stember from CL King.

Could you maybe, just going back to the Raptor, maybe just quantify or remind us when the Raptor officially went offline for you guys last year? And maybe just quantify how much, without giving exact numbers, but just give us an idea of the level of contribution in the second quarter of last year so we could truly get an idea of how much it really hit this quarter?

What was the first part of the question, Scott? I didn't catch it.

When it went offline.[multiple speakers]

Yes, when it went offline for you guys.

Mainly at Q2 we had a little bit revenue bleed into Q3 of last year. But mainly Q2 would be the way to think about it.

So Q2 but -- there were still a full quarter of contribution? Or --

Okay. So there you are -- okay, there you go, all right. That explains that. And maybe on the powered vehicle side, once again. Some of these new products that you talked about the switchback for the snowmobiles and these new shocks for the Polaris RZR units. Maybe just give us an idea of how big these really are, and how this can really contribute to the powered vehicle business and that core, going forward.

Yes. As Zvi mentioned, we really don't break out customer contribution, kind of front-run numbers and projections that our customers haven't done. But they're new technologies that our customers were excited about and we're happy to have those wins and get on those platforms.

Yes, and I think, Scott, the way to think about it, the impact that we see of those things is contained in the guidance that we provide.

And if I might also point out, those impacts are not incremental to our long-term double digit growth rate. They are considered within that rate.

Yes. And a lot of these things, I think, Scott, you're a little bit newer to us. We pointed out in the past that particularly in powered vehicles, these programs are longer term. And we'll become aware of -- that we're going to be on a vehicle a long, long time before it gets announced. And sometimes they get announced, like Ford Raptor announced the new Raptor in January. And we're going to start seeing revenue from it late next year. So these things move over longer periods of time.

Got you. Thanks, that was helpful. And just last, I know you're in the early stages but with an ERP system conversion coming up, can you maybe just give us a little early sneak-peek into maybe the level of cost that you expect from this over the long haul and how that will come into the income statement?

Yes, historically we would tell you that our CapEx was slightly above 2% of sales range. We would tell you over the next few years it's more like in the 3% to 4% percentage of sales range for the next couple years here. And in terms of how they'll come to find their way to the income statement, we think most of them will be capitalized. But we did have some expense in this current quarter, couple hundred thousand dollars, I think, of expense from, we were in the design phase, and not able to capitalize that at all. Also, it's a cloud solution. And so the new GAAP guidance doesn't necessarily allow you to capitalize as much of those costs going into it, and that would be in 2016, not 2015. So we're still evaluating the impact of that with new GAAP guidance and how that's going to affect next year.

At this time we have no further questions. I will turn the call back over for closing comments.

Thank you operator. And thank you all for your questions and your interest in Fox. We look forward to continuing to execute our plans and updating you on our progress as we go forward with these quarterly earnings calls. As always 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. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for participation.