Fox Factory Holding Corp. (FOXF) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Fox Factory Holding's Third 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 speaker. David Haugen, General Counsel. Thank you. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's second quarter fiscal year 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 third quarter fiscal year 2015 earnings release, which went out today at approximately 04:05 PM 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 today's press release which has also been posted on our website. And with that, it is my pleasure to turn our 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 third quarter results, an overview of our industry and progress on our ongoing strategic initiatives including our recent announcement of our anticipated acquisition of certain assets of Marzocchi's mountain bike product line. 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. We are pleased with our third quarter 2015 financial performance. Sales were in line with our expectations and our solid gross margin improvement help us achieve adjusted earnings ahead of our expectations for the quarter. Our topline increase approximately 18% in the third quarter to $106.2 million. This growth was driven by solid demand for our bike and powered vehicle products. Bike products were up approximately 16% and powered vehicle products were up 20%. The increase of bike product sales was primarily due to the inclusion of our recent acquisition and powered vehicle sales reflected higher OEM sales. It's great to see the positive response to our strong product line ups in both our bike and powered vehicle segments. And Mario will provide greater detail on some of the highlights in his remarks. We continue to look worldwide macroeconomic conditions as well as reviewing sell through estimates to gage the strength of our end market. We believe that because of our unique brand position our business has continued to perform well in spite of softness in China and certain European markets. Currency exchange rate remain a concern as well and at this time, we believe that the current conditions will persists well into 2016. As many of you know, the second and third quarters of the year have been seasonally stronger margin quarters for our business historically. On a non-GAAP basis third quarter gross margin was up 40 basis point. The increase in gross margin was due to improved deficiencies as well as cost savings from our ongoing bike product manufacturing transition to Taiwan. Additionally, we are making progress on our US infrastructure and we're continuing to progress on our El Cajon, California facilities transformation into an Automotive Ride Dynamics Center of Excellence. Mario will touch a little more on this initiative in his commentary. Looking ahead, we anticipate remaining on track for continued long-term margin growth. Turning to the bottom line, we generated non-GAAP adjusted earnings per share $0.38 in the third quarter, which as I mentioned earlier was above our expectation of $0.33 to $0.37. Additionally, we generated adjusted EBITDA of $20.7 million dollars in the third quarter of 2015 representing approximately 14% increase compared to the prior year quarter. As we end fiscal 2015 and look to 2016, we will continue to work on operational efficiency initiative and further benefit from our 2014 acquisition of Sport Truck and Race Face/Easton. Going forward, we continue to believe Fox is well positioned for future growth and we expect to benefit from positive long-term industry dynamics. In addition, we continue to believe that as powered vehicles become increasingly more capable. There is strong demand for improved suspension and to allow the vehicle to maximize its performance. We believe the business is well positioned to continue its growth trend through next year as the Ford Raptor production is expected to begin in late 2016. As we move forward, we will continue to look for ways to opportunistically grow our business, while at the same time maintaining a focus on managing, what we directly control and executing our ongoing strategic initiatives. I'll now take a moment to review these initiatives in our recent progress. We remain on track with our transition and majority of our mountain bike product manufacturing to Taiwan, which we continue to expect to be completed by the end of this year. In the third quarter, we've produced 79% of our total Ford production and 63% of our total shock production in our Taichung facility and are on track to reach 80% to 85% capacity for total forks and shocks by year end. This transition will also enable us to more efficiently increase our powered vehicle capacity in our California based facilities. 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 and each business in his portion of the call. Additionally, we remain very pleased with customer reception to our recent technology development. And we continue to believe that ongoing investments in R&D will keep Fox in a leadership position. We believe that being an industry leader also requires best-in-class system. We continue to make progress on our ERP initiative and we are now anticipating going live with the initial phase early next year. Our Sport Truck and Race Face/Easton acquisitions continued to perform well in the third quarter, as we work to expand in the relevant adjacent product categories. One adjacent product synergy of note, is a complete suspension lift package that our off road product team designed and produced with our team at Sport Truck. Tuscany Motors Company who designs and builds luxury four-by-four lifted trucks teamed up with Shelby America to produce a 700 horsepower 2016 Shelby F-150 that features this complete lift package and it's currently on display at the SEMA Show in Las Vegas. In addition, as many of you know we recently announced a definitive agreement to acquire certain specified assets of Marzocchi's mountain bike product line. For those of you unfamiliar with Marzocchi, they design and manufacture motor bike and mountain bike suspension products. We continue to expect this transaction to close this quarter and Zvi will provide greater financial details in his remarks. Assuming the deal closes as planned. We believe the Marzocchi business will create a good opportunity for Fox to further expand the penetration of our bike suspension products across more price points. The Marzocchi team has a long history and performance suspension and we believe that this highly complementary transaction will allow for increased growth of Marzocchi bike products worldwide. We expect this transaction will bring together and strengthen two highly complementary product lines and allow us to leverage our marketing engineering distribution supply chain resources to drive increased topline growth and profitability overtime. In summary, we had a very good third quarter performance. Our team remains committed to product innovation in these ongoing operational improvements. Now I will 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. On our last call I mentioned how pleased we are, with the performance of our latest additions to the Fox family Sports Truck USA and Race Face/Easton Cycling. As Larry mentioned the Shelby F-150 project. The first of a list of collaborative efforts between Sports Truck and Fox is now being shown at SEMA in Las Vegas. BDS is also offering a complete the suspension lifted package for the Chevy Colorado. The steering and suspension geometry as well as the tune of the Fox shots was a collaboration between the BDS. and Fox engineering teams. Utilizing the experience from both teams to end up with a better collective result. Additional packages are planned for development to offer this type of systems approach for other Chuck [ph] makes and models. In our legacy bike business, we continue to gain brand momentum with the performance of our model year 2015 Factory Series 36. With model year 2016 reviews just beginning. The model year 2015 36 continues to receive outstanding reviews. In mid-October ENDURO Mag said almost overnight, the 2015 Fox 36 RC2 became the fork of choice for the top racers. ENDURO Mag chose the 36 over all other tested competitor offerings during the model year 2105 ENDURO fork line up round up. Rating it, best in test. Our model year 2016 product line up is following suit by grade are rounded up six best mountain bike air shocks in our float BPS with evolve air sleeve took the crown with their Editor’s Choice Award. Their verdict more sensitivity, more control and more adjustability particularly in the open mode, puts Fox back in the full position. We are pleased with our legacy Fox product spec positions in model year 2016 with momentum expected to continue it's a model year 2017 as the OE selling season is in full swing. And our planned product line is being met favourably by our OEM customers. Additionally our new suspension fork aimed at one price point below our traditionally served markets is still on track for production in mid-2016. Our anticipated acquisition of certain assets of Marzocchi bike was expected to extend our product offerings and allow us to reach deeper into this segment of the market. Tenneco [ph] announced their plans to get out of the two wheeled vehicle business. In July of 2015 and their present business reflects the response to such an announcement. The Marzocchi brand has a strong history in the bike industry. And their current 380, 350 and 320 Series forks carry on the brand attributes of durability and solid value through reputation is built on. We are in the process of the revaluing specific impact overlap in the Marzocchi and Fox product lines will create and we will work to harmonize our collective distribution internationally. As this is purely an asset purchase and not the purchase of an ongoing business. We will integrate the customer fulfilment activities for the Marzocchi product line into our Taichung operations. Zvi will explain the near and midterm financial impact in his remarks. The 2015 bike race season was successful for us, with our athletes consistently reaching the podium. Four championship titles were recently captured. Rachel Atherton and Laurie Greenland took world championship wins for women's pro downhill and men's junior down no respectively. Richie Rude and Tracy Moseley were crowned men's and women ENDURO World Series Champions. Overall in the major race circuits worldwide for 2015. Fox supported athletes won 51 downhill events, 26 ENDURO events, 27 cross-country events and seven free ride events. Now I'll move onto to our powered vehicle business. In our El Cajon, California facility, we produced the highest ever volume from that facility in Q3. Well in parallel, we continue to transform it into our ISO 9001 Certified Automotive Ride Dynamics Center of Excellence. And as previously mentioned, the new Ford Raptor products will come online out of this facility, in late 2016. The Haydays snow industry kickoff event took place September 12 and 13. We utilize this as an, to launch our model year 2016 Snowmobile product line to the media and consumers. The product line was very well received and orders for these products began shipping last month. As mentioned on previous calls. We have been enjoying favorable media coverage for our new Quick Switch 3 technology. Allowing rider to intuitively choose between three modes of suspension performance. With the media backing and OEM spec wins with Polaris, Yamaha and Arctic Cat, we anticipate a great snow selling season. We are also, very pleased to be included as the OEM suspension solution supplier for Yamaha's first entry into the sport side-by-side market with YFZ 1000R. The YFZ 1000R features our Podium RC3 shocks with bottom out control technology providing 17-inches of travel in the rear and 16.2-inches of travel up front. Early indicators look favorable for this vehicle being a viable competitor in the ultra-competitive sport side-by-side market. I'll conclude with our recent race results in the powered vehicle segment. We continue our circle track domination with over 719 men's and 51 titles to-date this year. We consistently dominate UTV Racing in the desert with our internal bypass technology. Most recently, one of our UTV dealers Cognito Motorsports won the Best In The Desert, Bluewater Desert Challenge in Vegas 2 Reno race. We also won the score Imperial Valley race with Wayne Matlock. I would now like to turn the call over to Zvi Glasman, our CFO to review our financial results. Zvi?

Thank you, Mario. Good afternoon, everyone. Our focus in our third quarter results and then review our guidance. Sales for the third quarter 2015 were $106.2 million, an increase of 17.8% from sales of $90.1 million in the third quarter of fiscal 2014. As Larry mentioned, this increase reflects 19.8% increase in sale of powered vehicle products and a 16.3% increase in sale of bike products. The increase in bike products sales was primarily due to the inclusion of Race Face/Easton sale. The increase in powered vehicle products was due to higher OEM sales as compared to the prior year. Gross margin was 32.8% for the third quarter of 2015, a 110 basis increase from gross margin of 31.7% in the prior year period. This was attributable to improved efficiencies as well as cost fade-ins from our ongoing transition of bike product manufacturing to Taiwan. Partially offset by changes in product and customer mix. Additionally, the gross margins for the third quarter of 2015 and 2014 includes certain purchase accounting adjustments associated with the company's acquisition. Excluding the purchase accounting adjustments, gross margin for the third quarter of fiscal 2015 increased 40 basis points as compared to the prior year. Total operating expenses were $21 million or 19.7% of sales in the third quarter of 2015 compared to $14.6 million or 16.2% of sales in the third quarter of the prior year. Moreover, non-GAAP operating expenses stated as percentage of sales were 15.3% for the quarter bringing our year-to-date, non-GAAP operating expenses to 16.2%, which is consistent with the previous guidance, we had provided. The increase in operating expenses was primarily due to the inclusion of Race Face/Easton operating expenses including acquisition related expenses within the company's consolidated results for the three months ended September 30, 2015 as well as expenses to support the growth of the business and the brand. Within operating expenses, our sales and marketing expenses increased to $6 million in the third quarter of 2015 compared to $5.3 million in the same period of 2014. The $0.7 million increase was primarily due to Race Face/Easton. Research and development expenses increased to 4.6% in the third quarter of this year, compared to $3.5 million in the same period last year, primarily due to the Race Face/Easton acquisition and the timing of investments and new products and technologies to maintain our premium position in the market place and enter new market. As a reminder, investments in R&D is a critical component of our business and investment might fluctuate in certain years in quarters depending on product development cycles and other factors. For 2015, we continue to expect R&D expenses to remain relatively consistent with prior year stated as a percentage of sales. Our general and administrative expenses in the third quarter of 2015 were $5.9 million compared to $4.2 million in the prior year period. The increase was primarily due to Race Face/Easton related expenses, higher payroll and related cost including stock compensation as well as approximately $300,000 related to our ERP project. On a GAAP basis, our net income in the third quarter of 2015 was $10.6 million compared to $10.3 million in the prior year period. Earnings per diluted share for the third quarter of 2015 was $0.28 compared to $0.27 calculated on weighted average diluted shares outstanding of approximately 37.9 million shares for both years. Non-GAAP adjusted net income in the third quarter of 2015 was $14.5 million compared to $12.2 million for the third quarter of the prior fiscal year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2015 was $0.38 compared to $0.32 for the third quarter of 2014. In the third quarter of 2015, adjusted EBITDA was $20.7 million compared to $18.1 million in the same quarter last year. Adjusted EBITDA margin was 19.5% compared to 20.1% in the prior year quarter. The decline in EBITDA margin was largely attributable to timing of research and development expenses, spending on our ERP project and other public company cost. We believe non-GAAP adjusted net income and adjusted EBITDA are useful metrics that help the better, reflect the performance of our business on an ongoing basis. As David mentioned, the reconciliation with a non-GAAP financial measures reference dated the most direct with comparable GAAP financial measures is included in today's earnings release, which is available in our Investor Relations website. Now, turning briefly to our results for the first nine months of 2015. Sales for the nine months of 2015 was $271.1 million, an increase of 16.5% compared to the same period in 2014. Sales of powered vehicle and mountain bike products increased 16.6% and 16.5% respectively for the first nine months of 2015 compared to the prior year period. Adjusted EBITDA increased 9.2% to $47.4 million compared to $43.4 million in the first nine months of the prior year period. Now, focusing on our balance sheet. As of September 30, 2015 cash on hand is $5.1 million. Total debt was $59.9 million compared to $50 million as of December 31, 2014. The increase in debt was due to financing of seasonal working capital needs and the initial Sport Truck earn-out payment. Inventory was $78.4 million as of September 30, 2015 compared to $59.2 million as of December 31, 2014. Accounts receivable was $57.1 million as of September 30, 2015 as compared to $39.2 million as of December 31, 2014. Accounts payable was $49.4 million as of September 30, 2015 as compared to $30.4 million as of December 31, 2014. Contingent consideration liability decreased to $13.3 million as of September 30, 2015 compared to $21.3 million as of December 31, 2014 due to the initial Sport Truck earn-out payment as well as valuation adjustments. The increase in accounts receivable inventory and the corresponding increase in accounts payable are due to seasonality and to support increased sales. Next, I'll highlight few of the financial aspects of the expected Marzocchi transaction. We expect sales of Marzocchi product to generate annual revenues of a $2 million in 2016 and a negligible amount of sales in Q4, 2015. We expect that Marzocchi will generate, an operating loss of approximately $0.01 per share in Q4, 2015 and $0.01 per share operating loss in fiscal 2016, as we ramp up the business in Taiwan and our guidance reflects the Marzocchi impact. We believe, Marzocchi will be equated [ph] to our results in 2017. Finally, turning to our outlook. For the fourth quarter of 2015, we expect sales in the range of $87 million to $93 million and non-GAAP adjusted earnings per diluted share in the range of $0.21 to $0.25. the expect non-GAAP adjusted earnings per diluted share include approximately $0.08 of operating loss associated with Marzocchi's mountain bike product line. We are raising our guidance for the full year. We now expect net sales in the range of $358 million to $364 million and non-GAAP adjusted earnings per diluted share in the range of $0.97 to a $1.01 versus previous guidance for sales of $347 million to $363 million and non-GAAP adjusted earnings per diluted share of $0.91 to a $1 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 applicable tax. Amortization of purchased intangibles, certain acquisition related adjustment and expenses and contingent consideration valuation adjustment. The adjustments are more fully described in the tables included in our press release, which has been posted to our website. With that, I'd like to turn the call back over to Larry.

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

[Operator Instructions] our first question comes from Scott Stember with CL King

Can you maybe talk on the bike business? It seems there that most, if not all the growth you're seeing from the acquisition you guys made late last year. Can you maybe just talk about the core bike business - what the rough organic growth. Whether it was slightly down or slightly up and maybe just talk about with the new products hitting just loosely speaking for 2016, what your expectations would be on a very high level basis there?

Yes, Scott we don't break out our legacy bike business specifically. But - I would tell you that, after a tough year last year. We're on track and it's meeting our expectations, we believe will be up in the model year over last year and we feel pretty good about that and again, we think it's tracking to what we would have thought it would do. Does that help?

Yes, no that's good and maybe just. Obviously the trajectory heading into 2016 just given the commentary about the positive reviews and so forth. I mentioned would be somewhat higher next year, even though you guys aren't guiding for 2016.

Yes, we're not guiding next year. But we would certainly anticipate next year to be better and I think as we indicated probably starting last year, when we were a little bit disappointed with our growth, that we had some products coming out over the next few years. We introduced had a good model year 2016, we think model year 2017 is going to be very good also and we expect - our expectations will continue to get back some of that spec position, we may have lost a year ago and will get back on the growth cycle.

Okay on the powered side, you pointed most of the growth to increased OEM business. But you know it's widely known that on the powered sports side, notably in the side-by-side and the ATV space, things have slowed down a little bit there. Can you just maybe talk about, how you've been able to grow and maybe just point to some of the other areas that are picking up steam, whether it market share gains or any other particular areas that are picking up for you there.

Well, yes let me take, I'll let Mario put some color on it. I think we've had the benefit of being on getting on some pretty popular vehicles that have been introduced recently. I think that's helped us. But outside of OEM, our aftermarket replacement shock business continues to go very well, in conjunction with Sport Truck, I think that's helped fuel the growth. While we think, side-by-side probably aren't going at the rate they have been. And they're probably as I think you read for many of the OEMs earnings reports. It's probably the category slowed up a little bit. We continue to think that innovation is going fuel that category overtime will continue to do well and again, we're looking at burning out product team [ph] at increasing the performance of these vehicles and ultimately that will drive it. We're not worried about that category having a precipitous decline. I don't think that will be the case. And as you know we're - we don't do much in utility side-by-sides. We're getting foothold there now and we expect that will help fuel our growth outside of the recreation of side-by-side business.

Well, I would mirror that and note that the utility side-by-side portion of that overall market is larger and as Larry said, we're just entering that now. So as a category, we feel good about it going forward.

Got you and just last question on the international side, with currency being somewhat of a headwind. Can you maybe just talk about how your products, I guess the end product is doing in the international marketplace and what your general expectations are going forward?

Well I think, two things. There has been - we've mentioned for a number of calls that, there's pricing pressure on us and that our products have become more expensive internationally. We're just now starting to see the beginning impacts of sell through, so far no, unexpected surprises. In addition to that, recently this year we started selling in Taiwanese NT and so as the Dollar strengthened Q3 versus Q2, that has had and you directly translate those sales into US Dollars that has an impact and has reduced some of the bike revenue that we're reporting year-end.

Yes, as we said Scott in our comments. We are watching the macroeconomic situation around the world, we indicated. We do see some softness in select markets and notably China and certain western European markets. It's obviously something that we keep an eye out, so far so good as they say. I think, we continue to do pretty well in spite of that environment.

Got you. Great job and thanks for taking the questions.

Our next question comes from Larry Solow with C.J.S Securities

Just a couple of just follow ups on the bike side of things. So fair to say, I think you guys had talked, you spoke about of sales in terms of model year and the returns are soft of mid single-digit growth in 2016. It sounds like you're still in line for that target plus or minus, is that fair to say?

I think that's fair to say, yes.

Okay and on the power vehicle side. I know the Indian brand obviously is been doing very well. Is that still pretty small for you guys or is that enough to even move a needle or obviously, it's driving a lot of sales for Polaris. But is that something that, is actually benefitting you, is that quantifying you but is it material?

It's not material, it's something we're excited about, we think that the category can move the needle for us. And it's one of the ways, that we, one of the ways that we think we achieve our double digit growth rate for the powered vehicle overall, heated in the face for example these side-by-side market is slowing down, it's some of these other powered vehicle markets that were less penetrated in.

Right, but in the near term. I don't think, I know you've spoken about pretty that you feel double-digit growth is sustainable on this, on the powered vehicle side. You're not relying on, above major pick up in the motorcycle piece of that yet?

It’s part of the.

Yes part of the story. I wouldn't say, we're expecting a sea change suddenly in our motorcycle business. But I think it's something that we will expect to continue to improve every year here ongoing. More and more opportunities that we're planning to exploit. Certainly very pleased to have that Indian business, I think that elevate what we can do for a large V-twin on road motorcycle.

Absolutely, hopefully they're out there noticing because I know, their numbers haven't been so great. So on and they can probe use your help.

I was trying not to say that Larry, but.

I didn't, no manes were mentioned, don't worry. Just on the Sport Truck USA obviously you guys, there's been a couple earn-out payment. So things are clearly going very well. I mean, I think - when you had acquired it, we thought it was a high single-digit grower, but is it perhaps camped up with the category and even grow them you know in the double-digit range since acquisition, can you give any color on that?

Firstly to clarify, we've made one earn-out payment to them so far.

Okay.

If they earn the next earn-out payment that would be next year we would be making that payment and when we acquired them, we said that they would grow double-digit consistent with our powered vehicle business and they have done that.

Okay, shifting to gross margin last quarter there was a little bit of an issue, I think view more as just, the acceleration to Taiwan and create a little more inefficiencies in the short run. Have you run through that, was that less of an impact this quarter and part of the reason for the bigger than expected year-over-year gains, not is what I was expecting?

Well I think, just to call attention to year-over-year gain, if you strip out the purchase accounting adjustments it's 40 basis points. 40 basis points is consistent with what we had signalled and yes, we're pretty much out of the woods on costs that we incurred in Q2 here.

Okay, just lastly ERP expense. I think you said it was $300,000 in the quarter that was in non-GAAP numbers, is that right?

Yes, in other words we didn't add it back, we didn't add it back.

Right, you kept it as an operating expense, is that number. I know what it's been to-date. I don't think, I don't recall being called out. Yes, I know you qualitatively talked about it going forward. Is that number something we expect going forward to get larger as we look out into 2015?

We're at the stage of much of our, we have our, there are certain people in the organization that spend part of their day doing ERP kinds of things, right and they did something else prior to the ERP, that's in our run rate. Okay. Then most of our consulting cost at this point, we're part of the project that those things get capitalized. There is a certain amount, as you get into training and things like that, when you actually implement there is a certain amount of those things that will show up in OpEx but I wouldn't call that a run rate, I wouldn't think that $300,000 is a run rate and will kind, we shouldn't have too much of it between now and end of the year.

Got it, okay. Great, thank you very much.

Our next question comes from Jon Berg with Piper Jaffray

I guess first, just looking at your Sport Truck area. Certainly new car and truck sales have been really strong this year again in October. I guess, how should we think about how that impacts that Sport Truck business. I mean, our truck owner is more likely to modify their trucks right after the purchase or typically, does it take a little while for them to do so.

I think it's a little of both. You've got, certainly people that buy a new truck with the objective of going out and spending money on it and look at your, clearly one of the things they spend on. They also get people, I think that retrofit their vehicles after a time or change the lift or change the tires and wheels. Either you've got all of those. I think the team at Sport Truck has done a great job because they, well I think the new truck sales have been very good. They've also had some headwinds in some of the oil patch markets. I would, note Western Canada and Texas in particular which have been traditionally strong markets have probably softened up a little bit for them, but they've been able to flower right through that still deliver pretty good performance.

Okay, thanks for that and then. I guess, it's still really early in the season. Obviously, but assuming we end up having kind of milder, winter maybe a little less. Now maybe, can you remind us of how the business might balance itself out. I mean typically, in winters were we may less snow and in areas where you needed. I guess, you typically stronger ATV sales or just how should we be thinking about the puts and takes there?

Well I think because of all the different types of vehicles that were in as you say, if you have a light snow year, something else is going sell well, mountain bikes other wheel powered vehicles. But we, the stock of El Niño coming in, we don't get particularly worried about it because we're in enough things, that it tends to balance out, with the puts and takes like you mentioned.

Okay, great. And then if I could just sneak one last one in here, on the marketing spend. It actually looks like I think it came down from Q2 just slightly. Are we at a point where sales and marketing may start to level out here for little while or we're being anticipate growth, there are still three [ph].

I think the way to think about it is, as our non-GAAP expenses which I think were around 16.2% or something of that nature. That's the run rate we guided to last year as an exit rate for the overall business. You're going to see some seasonality in our business and some seasonality in that spending. So you're going to see it, moderate up and down in the quarter. But we think that's roughly the level that we are running this business as now, a little bit of operating leverage next year, but not too much. And one thing I would point out is, we still have some of the spend associated with the hiatus of our Ford vehicle for example, whether that be building out the facility out in El Cajon or keeping fork on to support the new ramp up. So that's all in our, so for that reason you might see a little bit of leverage when we get Ford back into our numbers in 2017, but that's kind of how I think of OpEx as oppose to what percent of sales and marketing is going to run this quarter versus some other quarter. There's lot of seasonality in the spend.

Okay, thanks good luck in the fourth quarter.

Our next question comes from Andrew Burns with D.A. Davidson

Was hoping, you could spend a little time to expand the military opportunity with the JLTV program being awarded to Oshkosh, what else is out there. You could address or help developed assets.

Yes, Andrew. Well first of all, Oshkosh got the award but then it was protested by Lockheed. And so we don't quite know where that's going to come out yet. We're obviously anxiously awaiting that to see, what might happen and again keeping in mind, there is the main vehicle which is certainly the biggest part of it. Then there's a trailer goes with that and depending on who is the ultimate winner, we could have one or the other. So we're waiting to see, how that protest resolves itself. The big opportunity I think in the military that is still out there is, any retrofit on the Humvee, which I think it's as this budget works its way through in the JLTV protest works its way through anticipating that there will be some amount of that work that would certainly be available to us. Aside from that, we're on the GMV 1.1 which is kind of our first OEM vehicle if you will in the military. We think that's going into in its initial phase as far as now, there could be some foreign allies.

Allies coming in.

Yes, allies coming in by that vehicle that some were looking forward to and then outside of that, we'll continue to do a lot with light desert vehicles, Special Forces that we retrofit, along the Polaris Dagor, which is another example of business. Again, I think it's a business that we anticipate that will slowly build up absent us getting on one of the larger programs such as JLTV or Humvee retrofit program.

Great, thanks the detail and just a follow-on of the international market. You've highlighted in past quarters and this one China and some European markets. I was hoping you could give us some more color there, whether you started to see some stabilization at weaker levels in those markets or if they continue to deteriorate just trying to look directionally, which way they're way they're going.

I would say, I don't have the exact numbers in front of me, but I think it would be fair to say that we've seen a little bit of stabilization. I think, we started down a quarter two ago. And obviously, we hope we don't keep stepping down. I think we've seen continued softness, I don't think it's continuing to decline but it's still not at the level that it was running a year ago in those markets.

Okay, thanks and last just on the Watsonville facility as the bike business largely moves to Taiwan. Can you just highlight the capacity ramp air for powered vehicle, what are the early opportunities you look to address, does that part vehicle capacity expands that location.

I think the way you have to think about it in Watsonville right now, we've got the remainder of bike and actually three power sports line. We're building - Ford is starting up and a lot of our automotive stuff are ramping up down at El Cajon and I think the way to think about is, Taiwan will continue to take that bike capacity and then we're going to balance, we got our operations folks deep into this now. The balance between what we do in Watsonville and what we do in El Cajon to optimize that. And that's ongoing and I think as we continue to get the bike off that facility, it enables us to put the kinds of processes we need absent bike in the both El Cajon, which we got the advantage of green fielding and we've reconfigured Watsonville now, although we've got a little bit more work there to do as bike [ph], this quarter continues some of that capacity transfer. So it's going to be that balance that our folks work on.

Thanks a good luck.

Our next question comes from Mike Swartz with SunTrust

I just wanted to touch on the guidance real quick and looking at the revenue guidance specifically. Third quarter revenue is in line with expectations and then you're taking full year $5 million to $10 million. So just my question is, what's changed in the past two or three months, since you've provided the or I guess since you provided second quarter guidance for the topline.

Well we've had a number of vehicles that we've had some vehicle wins and they're doing well, right. There was a little bit of uncertainty about bike, we feel good about bike.

Yes simply said, the order book has changed. I mean that's what we're looking at.

I mean, I don't think there is change in the fundamental thesis, to the business. I mean, the things that we've talked about, there is more certainty around it now because we're seeing results of it, with order sell through and so forth.

Okay and then just in terms of in the mix and I think, in the second quarter you talked about the aftermarket flow to bid through in China and Europe and that's a higher margin business. Are we starting to see that stabilized, is that coming back? Is that part of the reason why guidance is looking a little higher, how is that?

I wouldn't attribute it to aftermarket, I think the mix. I mean the mix is similar to what we thought before. I wouldn't attribute to one particular market versus another.

Okay and then just with, I think in the last call, you had mentioned with gross margin you expect it to be relatively flat year-over-year. Is that still the way to think about you're - given your gross margin was up 40 basis points in the quarter.

What we said, is we expected to be flat year-over-year as you performed [ph] out the West Coast port impact for Q1. Which would imply in order to that, we need to be up a little bit?

Okay, but no change to that, in other words.

No change to that.

Okay and then finally with the Marzocchi acquisition, it sounds like it's not going to be accretive for another 1 year, 1.5 year. Could you maybe give us a broader sense of, just the strategy and your thought process of, [indiscernible] is this part of a plan to provide a good and better, best product offering over the next couple of years?

Yes, so we're considering this as an expansion to our product line. It's going to help us reach deeper into the portion of the market that we traditionally haven't served with our legacy Fox product line and fill some holes for us. We may have a little bit of overlap and that's you know in my comments we talked about, we're currently evaluating where the few product lines are going to live, how they're going to co-habitat and how we're going to use each of them to kind of maximize our opportunities to more effectively compete again some of the folks in the space.

It's safe to say that Marzocchi brand will continue on, this isn't going to become a regress into the Fox product.

Well that's our plan. It's got a good history to it, continues to have a following and it's going to be part of our story.

Okay, great. That's all for me, thanks guys.

Our next question comes from Jim Duffy with Stifel

First question is, clarification on the last question around Marzocchi. Currently get to a brand with history, is there IP in technology or interested in as well? Will some of their products continue to live on?

Yes, some of their products will continue to live on, as part of the assets that we have access to, our IP and designs, yes.

Okay and so, I guess as I think about you may swap those in as part of an overall brand positioning with the Fox family to try to cover more price points.

Well exactly, if you think about we're going to have an expanded product line offering and some of those products will continue to stay Fox and some new ones will stay in Marzocchi and we're in the midst of figuring out, how that line is going lay out to help us be more competitive and we're excited about it.

Okay, great and then, staying on the bike segment. As we approached the one year mark for the Race Face/Easton business. Any updates on opportunities to leverage integration of those brands to the bike platform? Is there more interoperability plan as you look out to the next model year or is it really business as usual with those platforms?

Well, as we've done with Sport Truck, we will continue to look at these sort of synergistic opportunities. The two engineering teams work together to bring expertise to things that we're doing. We talked about a few things there, we talked about our composite expertise that we wanted to have access to, we talked about wheels and we talked about sort of system synergies. So Fox is helping the Race Face/Easton Cycling folks with things that we've traditionally had expertise in and they're helping us with things that, particularly in a composite area that we were looking forward to their help on and following that, you'll start to see some of the systems work.

Okay, that's helpful. And then the last question, I guess maybe for Zvi. Any tactical risk management strategies, we should be aware of you, as you're bringing the ERP live early next year, should we anticipate any shift in revenue or expenses between quarters or you really see this business as usual.

We talked about, how we're going to manage it and we think the way think the way we're managing it, business is usual. We're starting with our El Cajon, soon to be ISO 9001 certified which we're targeting for next year and so we're choosing to implement in a phased approach and if it doesn't go as quickly as we want, we'll just delay the implementation, but we're not going to jeopardize the revenue.

Okay, fair enough. Thanks guys.

Our next question comes from Rafe Jadrosich with Bank of America Merrill Lynch

I think, the inventory is up a lot on year-over-year basis, can you just give a little color on what's driving that and then when should we expect that kind of inventory growth rate, to be more in line with sales?

Well, I think there is a number of factors driving it, first of all. We've of course purchased Race Face/Easton and well, we're talking. Are you comparing versus December or September? I guess that would be core of question.

Just on a year-over-year. Yes for 3Q September.

Yes, so in Q3 in September, we did not own Race Face/Easton as an example, right. So that would be a reason for the increase and then, we're now having another plant in both Taiwan and the US requires a higher level of inventory. We've got some of our big customer wins that we've had, don't necessarily have the same kind of inventory profile. For example, up a lot on year-over-year OEM, well we have to buy the inventory to support some of those commitments to the OEM. So I mean, we don't think there is any issues and we think buy in large the inventories hire to support the higher sales. Albeit, I know it's higher it's up more than the sales are up.

Okay, thanks that's helpful and then, just I know you're not providing broader guidance on 2016, yet. But can you comment on the input cost outlook for the next year.

Well the input, I mean the input cost look good. Right, I mean, we've all seen commodity cost come down and of course commodity cost were a big input for what it is that goes in our product. We still do have some presence in California here and we've seen the labor input cost go up on the other side of the equation, right. With increases of minimum wages and benefit costs, that Obamacare and so forth. On balance, I think we feel good, we feel good about that and we think that, of course these things ebb and flow go in the other way. The Dollar now is, I mean so that helps on the commodity cost, but as I mentioned earlier. The revenue we have in Taiwan now the Dollar is higher, so that's go in the other direction. On balance I think, we feel fine with everything. We don't, we expect that we're going to be able to hit on a gross margin targets and we don't think this accelerates it, it any meaningful way. We're planning on taking advantage of it.

And then just last question, on that long-term and a gross margin target. I think you've said, mid-30s and core Fox Factory business in the past, excluding the acquisition. Just how should we think about, have there been any changes to drivers to that target. Maybe some of the, can you talk about the impact of the acquisition and then, any comments on sort of the timing on how we ramp up to the target overtime, would be helpful. Thank you.

Yes, I don't think there is any big change. But of course, if the mix changes for example mix cost us 30 basis points this quarter here, as you get more OEM revenue. We aim to keep the mix, balanced overtime, but in any given quarter, here it can change. We feel like it's fairly linear over the next couple of years, here in terms of the margin improvement.

Great, thanks.

Our last question comes from Craig Kennison with Robert W. Baird

So with respect to Marzocchi in the acquisition there. You already had a strategy to pursue let's say the price point below, where you currently operate. How will this change the strategy you had in place?

I think, Craig I would put this under the heading that we're being, somewhat opportunistic when this asset became available. We're pretty excited, I think as Mario indicated, we're looking at how we take this with the plan, we had and optimize the two of those things. As I think we said, our Rhythm [ph] Fork is out, we're selling it this model year. But I think, we're looking this to help us extend maybe deeper, faster into that range. Cover some more of those price points that we're interested in. We also think we got a brand here with a following as Mario said and clearly we're looking take advantage of that. As Mario said in his comments, Tenneco announced that they were shutting this business down in July. So as you can imagine, we're in the process of purchasing it in November. Not lot a good was happening in that time. And so, in spite of that, we think it's an asset we can use to help us and we believe, we'll get some growth just out of that Marzocchi following also, by getting this up. And Zvi indicated, it's going to cost us, we think a little bit of money to get it stabilized and start it up. But you know I think in 2017 and obviously we're going to be trying to do it before that. I think by 2017, we'll have this going up the ramp.

And Zvi, can you give us a feel for the assets that you did acquire, one of the key assets you've acquired?

Well I think, we've acquired the names, inventory, the IP, their trade secrets, the know-how, the customer relationships.

Some good test equipment, vendor relationships.

But very little in the way, physical assets, is that fair?

The only physical assets we've acquired are inventory and fixed assets.

Like little bit.

Right little bit. Mostly inventory physical aspects.

And I think Craig, obviously this is not a landscape changing for us. It's pretty small, but we wanted to be opportunistic we do think it has some advantages and I think the thing that Mario mentioned, that you want to keep in mind. We're going to operate it out of Taichung, that's where it's operations will be. And they've traditionally been in Italy and so we're, we have a plan in the process of putting it over there and we think that will benefit that business longer.

And then just my final question related to that. Are there opportunities outside of the mountain bike category, you think you could exploit with that brand?

Well, I guess at this stage, I would say that thought is not lost on us. I don't think, it's a brand that we believe has some cache. There is, still the motorcycle or motorbike portion of it, that will likely either be shut down or end up in someone else's hands, we're mindful of. But we do think, there are some opportunities for that brand, outside of what they're being used on today.

Great. Okay, thanks a lot.

Yes, we do have one more question from Jon Anderson with William Blair

I applaud you for keeping the energy level up, more than an hour into the call, so I'll be just brief. You have a couple of exciting events coming up I guess in 2016 and 2017. One being introduction of lower price point for the [indiscernible] return of the Raptor. Just any color you can provide on, how we should be thinking about the contribution of those two activities or those two events as we get into 2016 and 2017 and it may be too early, if that's a case, okay. But just any kind of color, so we kind of put some shape around that? Thank you.

Yes, I would let me take it. And then I'll let Mario and Zvi fill in on any thoughts they have. I would say, first in the lower price point fork. We're getting going with that, we've got it out, people have been riding it. We think it's going to be pretty well received. It doesn't hit the entire price point initially, but we think that will help contribute to our sort of long-term mid single-digit forecast for bike over the next few years. It will definitely contribute, we're just probably as with everyone else. We're going to see how it's received. We think it's going to be good initial impressions are good. We're right now, as you can imagine Mario and our guys in bike are spending some time figuring out, the Marzocchi piece of this thing now, which we haven't closed yet. So that's going to play into it. I don't know that we'll see a lot. I'm pretty sure, we're not going to see much next year from that. That may play in and some future years again to help keep that growth rate going. Ford Raptor, we can't wait, we're, we've missed that. I can tell you that and right now, we're thinking it's late next year that it begins production. Again based on the vehicle that we see, we think it's going to be very well received and we'll just have to see, how it sells. But we would anticipate that it would at least as good as the existing Raptor.

Perfect, thanks a lot guys. Thanks for squeezing me in and good luck going forward.

Ladies and gentlemen, we reached the end of our Q&A session. At this time, I would like to turn the floor back over to Larry Enterline for closing comments.

Thank you. Thank you all for your questions and your interest in Fox. We look forward to continuing to execute our plans and updating you on our progress as we go forward with these quarterly earnings calls. I'm also thankful for the support of our customers and suppliers and the hard work of our great group of enthusiastic employees all keys to our continued success. Thank you and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.